PAKISTAN TOBACCO CO. LTD. VS PAKISTAN
1991 P T D 359
[Karachi High Court]
Before Saleem Akhtar and Husain Adil Khatri, JJ
PAKISTAN TOBACCO CO. LTD.
versus
PAKISTAN through the Secretary, Ministry of Finance, Islamabad and 4 others
Constitutional Petitions Nos.D-571 of 1987 and 1129-D of 1988, decided on 31/01/1992.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 59 & 65---Change of opinion---Question of change of opinion would arise in cases where the income-tax Officer had passed a conscious order of assessment and had not acted in a mechanical manner without investigating into the claims and declaration made by assessee.
1971 PTD 200; (1975) 89 ITR 382 and H.M. Abdullah v. The Income-tax Officer and others C.P.D. 340 of 1988 ref.
H.M. Abdullah v. The Income-tax Officer and others C.P.D. 340 of 1988 fol.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 59 & 65---Where assessment order under S.59 was made without much consideration and without dilating and discussing the claim for depreciation allowance and exemption claimed by the assessee, it would not be a case where question of change of opinion would arise.
(c) Constitution of Pakistan (19713)---
----Art. 199---Income Tax Ordinance (XXXI of 1979), Second Schedule, cl. 122-- Constitutional petition---Maintainability---Where the case involved inter pretation of the provisions of a statute, Court would be liberal in considering the Constitutional petition and not shut out the remedy on technical grounds.
Nawabzada Muhammad Amir Khan v. Controller of Estate Duty PLD 1961 SC 119; Sindh Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and 3 others PLD 1975 Kar. 128; Nagina Silk Mills, Lyallpur v. Income-tax Officer, A-Ward, Lyallpur and another 1963 PTD 633; PLD 1958 SC 437; PLD 1959 SC 177; (1968) 18 Taxation 1; (1969) 19 Taxation 97; 1972 SCMR 556; (1989) 179 ITR 287; (1989) 1 ITR 140; PLD 1979 Lah. 559 and 1985 PTD 465 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., Rr.l, 2, 8 & S.23---Depreciation allowance ---Assessee acquired assets by way of a gift---Depreciation---Deduction---Conditions for admissibility of depreciation allowance---Where an assessee acquires any asset and uses it for purposes of business or profession during the income year he is entitled to depreciation allowance on the "actual cost" to him---Once entitlement is established term "actual cost" should be interpreted in such a manner that a written down value is determined---"Actual cost" to the assessee may be the price paid by him or the price on the date of transfer which he would have been liable to pay for such asset---Fair market value on the date of transfer will be written down value of the asset---Where an assessee becomes entitled to the depreciation allowance but asset in question is acquired by assessee by gift or inheritance, the written down value shall be the fair market value of such asset on the date of acquisition and assessee would be entitled to depreciation---Object of allowing depreciation and mode of its calculation stated.
Depreciation is an allowance given to the assessee for wear and tear caused to the machinery due to user in the normal course of business. If an assessee has used a plant and machinery during the accounting year, then for such wear and tear which may have been caused .to it, a certain percentage of allowance is allowed. Such allowance is fixed by law on the written down value of the machinery under the Income Tax Ordinance. While computing the income under the head income from business or profession allowances and deductions are made.
In cases of machinery and plant an assessee is entitled to depreciation allowance a @10% of the written down value.
Under the scheme of Income Tax Ordinance, 1979, section 23 permits the depreciation allowance in computing the income arising from business or profession. The depreciation is allowed on any building, plant, machinery, furniture and fittings of which the assessee is the owner. The depreciation which is admissible under the Third Schedule to the Ordinance shall be allowed as deduction. The conditions for admissibility of depreciation allowance as specified by the Third Schedule are that the machinery, plant, building and furniture must be owned by the assessee and must have been used for purposes of business or profession during the accounting year. Once the entitlement is proved the depreciation allowance will be calculated as provided by Rule 2. Under Rule 2 (iv) the rate of depreciation is 10% of the written down value. Rule 8(7) defines the expression "written down value" which for purposes of this case means "actual cost thereof to the assessee". Therefore, where an assessee acquires any asset and uses it for purposes of business or profession during the income year he is entitled to 10% of the actual cost to him (assessee). As the term 'actual cost has not been defined it has been subjected to interpretation particularly in a situation where the assessee acquires the asset without payment of any consideration. The assessee's stand was that it had received the machinery as a gift. According to the Income Tax Officer as no cost had been paid by the assessed it was not entitled to any depreciation. Section 23(1)(v) and Rule 1 of the Third Schedule lay down the conditions precedent for claiming depreciation. Once the entitlement is established there remains question of calculation of depreciation allowance in the manner provided by Rule 2 which is a formula for mechanical calculation and has no reference to the conditions of entitlement to claim depreciation. In these circumstances can it be claimed that although the assessee fulfils the requisite condition, he cannot claim depreciation as he has acquired the asset without payment of any price. This cannot be the intention of the legislature otherwise section 23(1)(v) and Rule 1 while prescribing the condition that the assessee must be the owner must have provided that such ownership should have been acquired on payment of consideration. A property can be acquired by purchase, exchange, acquisition, gift, inheritance or will. Except in cases of purchase, exchange or acquisition the new owner does not pay any consideration to its previous owner for acquiring ownership. Once entitlement is established term `actual cost' should be interpreted in such a manner that a written down value is determined. The `actual cost to the assessee' may be the price paid by him or the price on the date of transfer which he would have been liable to pay for such machinery/asset. A fair market value on the date of transfer will be written down value of the: machinery.
Where an assessee becomes entitled to the depreciation allowance but such asset was acquired by him by gift or inheritance, the written down value shall be the fair market value of such asset on the date of acquisition. The assessee, therefore, would be entitled to depreciation.
Commissioner of Income-tax v. E. Solemon & Sons (1933) 1 ITR 324 and Francis Vallabarayar v. C.I.T., Madras (1960) 40 ITR 426 ref.
(e) Income Tax Ordinance (XXXI of 1979)---
----Second Schedule, cl. (122), Ss.23, 14 & 107---Exemption---Claim of exemption in respect of income derived from machinery which was set-up after 1-1-1982---Admissibility---Principles---Industrial undertaking---Scope---Claim of exemption on the income from additional machinery installed during prescribed period in the existing undertaking---Validity of claim.
In the present case the assessee had claimed exemption in respect of income derived from machinery which were set up after 1-1-1982. This claim was made under clause (122) of the Second Schedule to the Income Tax Ordinance. The assessee had installed its factory in the year 1978 and was entitled to exemption. According to the assessee, additional machinery was installed and therefore, it was entitled to claim exemption in respect of the income derived from such undertaking. The Department was of the view that the industry was set up as far back as in 1978 and any addition or expansion made thereafter would not amount to setting up of an undertaking and thus no exemption can be granted.
.
Section 23 enumerates the deductions and allowances which an assessee is entitled while computing profit and gain of a business or profession.
Section 14 of the Ordinance grants exemption to the incomes or classes of income, or person or classes of persons specified in the Second Schedule subject to the conditions and limits mentioned therein.
According to section 14 read with clause (122) of the Schedule the profits aid gains derived from an industrial undertaking established during 1- 7-1980 and 30-6-1988 by an assessee shall not be charged to tax for a period of five years computed from the date of setting up or commencing of commercial production whichever is later. The main condition for grant of such exemption is that the assessee must have `set up' an industrial undertaking during the given period and in the specified area. The assessee had established its factory in the year 1978 but during the year 1982 certain other machineries were installed there. The assessee claimed exemption in respect of profits derived from these newly-installed machinery. The Income Tax Officer by the impugned orders held That the installation of the machinery in 1982 was an expansion of the old factory and does not amount to setting up of an industrial undertaking.
The expression `undertaking' has not been defined in the Ordinance, Literally it means any business or project. But the meaning for purposes of clause 122 has to be understood which reference to the object of the Ordinance and its other provisions. Clause (122) provides for exemption in respect of industrial undertaking established in under-developed areas. The object is to provide incentive for industrialisation in such areas. Therefore to begin with it must require setting up a full-fledged establishment with factory or mill which is capable of manufacturing goods or the subjection of goods or material to such process. The word `undertaking' connotes a wider meaning than mill or factory. An industrial undertaking will mean an organization, establishment or enterprise where organized industrial activity for manufacturing goods is carried on for commercial purposes. It will include office, factory and all other allied components which appertain to and are collectively required to manufacture or produce goods.
For purposes of clause (122) of the Second Schedule the `industrial undertaking' will mean organization or establishment carrying on an organized industrial and commercial activity operating through factory or mill for producing and manufacturing goods. The fact that the income derived from it is exempted indicates that such undertaking should be a compact, self-reliant and independent unit capable of manufacturing goods for commercial purpose. It should not be a part of any existing factory nor should it be an expansion, adjunct or improvement in an existing factory unable to run and produce independently. The expression `set up' also furnishes a clue to the interpretation of clause (122). It means `establish', `start' and `begin'. An undertaking is set up when its foundation is laid or is started. It cannot be set up when it is already in existence. An existing machinery or plant of an undertaking can be modernised, balanced or replaced.
The question was whether the assessee could claim exemption under clause (122). The assessee claimed that the cigarettes manufacturing machines progressively installed constituted industrial undertaking entitling exemption in each year the new machines were installed. The Income Tax Officer, however, maintained that the assessee merely installed three additional machines in the existing undertaking for which if claimed tax credit under section 107 and was not entitled to exemption. If the newly-installed machinery constitutes a completely independent plant capable of manufacturing cigarettes independent of the existing factory, the assessee would be entitled to exemption under clause (122). The Income Tax Officer has treated the newly-installed machinery as expansion without inquiring whether it was independently capable of manufacturing goods. If the finding was in the affirmative the entire treatment given to the assessee's case was to be changed.
The assessee had claimed credit at the rate of 15% of the amount invested in purchasing the plant and machinery against the tax payable by it. According to the Department such claim negates the claim under clause (122.). Such credit could be claimed under section 107 of the Ordinance It was allowed only in respect of investment made during the specified period for purchasing plant and machinery for the purposes of `replacement, balancing or modernising of the already installed machinery and plant". This credit was available where machinery and plant had already been installed and purchases of machinery had been made for modernising, balancing or replacing the existing machinery and plant. This credit would not be available where the plant and machinery purchased was to be installed afresh for the first time. To avail of the benefits of section 107 the machinery and plant should be purchased for absorption in an existing machinery. It was possible that for purposes of modernising, some machinery might be installed but after installation it should be a part of the existing machinery and plant and not an independent unit capable of manufacturing goods.
The controversy between the parties could be decided only if inquiry was made on the lines indicated above for determining whether the machinery and plant purchased by the assessee constituted industrial undertaking.
Commissioner of Income-tax v. Textile Machinery Corporation (1971) 80 ITR 428; Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564; Ahmadabad Textile Industries Research Association v. State of Bombay AIR 1961 SC 484; Murlia Parasad v. Parsanath Parasad AIR 1967 Pat. 191; Koh-i-Noor Chemical Co. Ltd. v. Sindh Employees Social Security PLD 1977 SC 197; Don Basco High School v. Assistant Director E.O.B.I. PLD 1989 SC 128 and St. Jude's Secondary School and others v. Employees' Old Age Benefits Institution PLD 1988 Kar. 473 ref.
(f) Words and phrases---
---- Expression "undertaking"---Meaning.
(g) Words and phrases---
---- Word "set-up"---Meaning.
Mansoor Ahmed Khan for Petitioner.
Shaikh Haider for Respondents.
Dates of hearing: 19th, 20th and 21st November, 1990.
JUDGMENT
SALEEM AKHTAR, J.---The petitioner is a well-known manufacturer of international brands of cigarettes having amongst other places factories at Karachi, Jhelum, and Akora Khatak. The factory, at Akora Khatak was installed in 1976. Being a tobacco leaf cleaning and re-drying factory it was extended during the years 1982-83, 1983-84 and 1984-85. In the assessment years 1983-84, 1984-85 and 1985-86 returns of income were filed and assessments were made under sections 59 (1) and 156. The return for the year 1986-87 was by declaration brought under total audit. Respondent No.5 first issued show-cause notice on 25-2-1987 for reopening assessments in respect of assessment years 1983-84 and 1984-85 which were replied and the allegations contained therein were refuted. Thereafter notice dated 11-3-1987 under section 65 in respect of assessment years 1983-84 and 1984-85 were received. The petitioner stated that the original return and record be deemed to be submitted in compliance with the notice. Accordingly on that basis on 24-3-1987 notice under section 61 was issued. The petitioner repeated the earlier statement and requested for two months time for furnishing documents relating to machinery and construction of buildings. Respondent No.5 was reopening the case on the ground that exemption under clause 122 of the Second Schedule to the Ordinance, Tax Credit under section 107 and depreciation have wrongly been granted. It has been alleged that both these notices under sections 65 and 61 were withdrawn and original was returned to respondent No.5 and photo copies were retained. This has been denied by the respondents. The petitioner did not file these notices and it was during arguments that the photo copies were produced. Respondent No.5 issued similar notices under section 65 in respect of assessment years 1983-84, 1984-85 and 1985-86. The petitioner was required to furnish information and documents in respect of (1) plant and machinery installed during these years at Akhora Khatak in respect of which tax-holiday and tax exemption and depreciation were claimed by the petitioner. The petitioner replied the notice on 18-5-1987. On 19-5-1987 notice under section 61 was received for appearance on 21-5-1987 which was complied. It is alleged that respondent No.2 stated that no further particulars were required as the question turned on interpretation of provisions of the Ordinance. At this stage it may be mentioned that for the assessment year 1986-87 the petitioner had filed its return of income under the Self-Assessment Scheme but as it was selected for total audit, notice under sections 61 and 62 were issued from time to time and assessment was accordingly made simultaneously with the preceding assessment years. In all the orders the findings on claim for depreciation, tax credit and under clause 122 are the same. On 25-5-1987 demand notices in respect of assessment years 1983-84, 1984-85, 1985-86 and 1986-87 were served demanding a total amount of Rs.54.669 million for payment upto 30-5-1987. A notice of rectification under section 156 dated 25-5-1987 was also served as some claim of depreciation which may be admissible has not been allowed for want of information and documents and the same can be rectified on furnishing the required particulars. The demand was however stayed by the Inspecting Assistant Commissioner. The petitioner has challenged the assessment orders passed in respect of these four years. From the assessment orders passed by respondent No.5 it seems that claims in respect of depreciation, tax credit allowed under section 107 and exemption under clause 122 of the Second Schedule were re-examined and decided by the impugned orders. The assessment order for the assessment year 1986-87 was passed under section 62 and the same has been challenged in this petition as it is similar to the orders passed in respect of previous assessment years with regard to claim for depreciation, exemption and allowances. However, it seems that a notice under section 65 of the Income Tax Act was also issued in respect of that assessment year and the same has been challenged in petition No.1041/88.
The learned counsel for the petitioner has contended that the assessment is based on change of opinion and therefore, proceedings under section 65 are without jurisdiction. On the other hand Mr. Shaikh Haider the learned counsel for the respondents has contended that the first assessment was made under the Self-Assessment Scheme, the Assessing Officer had not applied his mind and passed the assessment order without any inquiry and or investigation, therefore, the question of change of opinion does not arise. The learned counsel for the petitioner has referred to Jenning Private School's case 1990 P T D 873, Edulji Dinshaw 1990 P T D 155 and Arafat Woollen's case 1990 P T D 338. Mr. Shaikh Haider the learned counsel distinguishing the aforestated cases pointed out that m Edulji Dinshaw's case notice under section 65 was served after 10 years and immediately on service of notice, the same was challenged. In Arafat Woollen Mill's case also the notice has been challenged immediately on service, whereas Jenning Privat School's case was stated to be inapplicable to the facts of the present case. It was contended by Mr. Shaikh Haider that as the assessment was made during the year 1983-84, 1984-85 and 1985-86 under section 59(1) on the basis of the Self-Assessment Scheme, the Income Tax Officer had not applied his mind to the facts and claims but passed the assessment order in a mechanical manner accepting the declared income and granting allowances and deductions in the normal manner without any proper investigation. The learned counsel has referred to 1971 P T D 200 and (1975) 89 ITR 382 to the effect that the question of change of opinion arises only when mind has been applied during the first assessment by the Assessing Officer. Similar question came up for consideration before us in H.M. Abdullah v. The Income Tax Officer and others C.P.D. 340/88 whereafter considering the aforestated authorities and similar contention we had observed that the question of change of opinion will arise in cases where the Income Tax Officer has passed a conscious order of assessment and has not acted in a mechanical manner without investigating into the claims and declarations made by the assessee. Jenning School's case was also taken notice of and it was pointed out that although it was a case under the Self-Assessment Scheme investigations were made and books of account were checked by the Income Tax Officer before making the assessment. Therefore, the observations in this judgment do not apply to cases of Self-Assessment Scheme in which assessment orders are passed in a mechanical and routine manner. In the present case we find that the assessment orders under section 59 were made without much consideration and without dilating and discussing the claim for depreciation, allowance and exemption claimed by the petitioner. Therefore, in our view it is not a case where question of change of opinion will arise.
Mr. Mansoor Ahmad Khan then contended that the Income Tax Officer has calculated the depreciation in a manner not permitted under law and further that exemptions permitted under clause 122 of the Second Schedule to the Income Tax Ordinance have also been illegally denied. The contention of Mr. Shaikh Haider was that even if it is so proper forum for agitating- such dispute is provided by the statute, and the remedy should be availed there first. Mr. Mansoor Ahmed Khan relying on Nawabzada Mohammad Amir Khan v. Cowrolier of Estate Duty P L D 1961 S.C. 119 Sindh Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and 3 others P L D 1975 Kar. 128 and Nagina Silk Mill, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and another 1963 P T D 633 contended that as the action of respondent No.5 is without jurisdiction and further that the matter relates to interpretation of the provisions of fiscal statute which can be decided without entering into the facts the plea of exhausting alternate remedy cannot be sustained. From the facts stated by the parties it is clear that the entire case depends upon the interpretation of the provisions of the Income Tax Ordinance relating to depreciation and exemption. In such circumstances the Courts have been liberal in considering the petitions and not shutting out the remedy on technical grounds. Mr. Shaikh Haider has referred to a host of authorities namely P L D 1958 SC 437, P L D 1959 SC 177, (1968)18 Taxation 1, 196919 Taxation 97, 1972 S C M R 556,1989179 1 T R 287, (1989) 1 ITR 140, P L D 1979 Lah. 559 and 1985 P T D 465. However, considering the limited controversy raised, in this petition mainly relates to interpretation of the provisions of Income Tax Ordinance and further if on examination we find that the interpretation placed by respondent No.5 is palpably wrong resulting in miscarriage of justice, we would be justified in entertaining these petitions.
The admitted facts are that the petitioner had set up his factory in 1976 which was extended during the years 1982-83, 1983-84 and 1984-85. The petitioner claimed depreciation on such machinery. These machineries were given to the petitioner as a gift by its parent company. The Income Tax officer while re-assessing under section 65 and assessing in respect of assessment year 1986-87 observed that as the plants and machineries were gifted to the petitioner there was no actual cost to the assessee for acquiring them and therefore, there could be no written down-value of these machineries and no depreciation could be claimed. According to Mr. Mansoor Ahmed Khan although the machinery was gifted by the parent company and nothing was paid by the petitioner towards cost of the machinery it has some value and such value is the cost to the petitioner and that should be treated as the written down value. Depreciation is an allowance given to the assessee for wear and tear caused to the machinery due to user in the normal course of business. If an assessee has used a plant and machinery during the accounting year, then for such wear and tear which may have been caused to it, a certain percentage of allowance is allowed. Such allowance is fixed by law on the written down value of the machinery under the Income Tax Ordinance. While computing the income under the head income from business or profession allowances and deductions are made. Section 23 (1) (v) provides for depreciation as follows:--
S.23. Deductions.---(1) In computing the income under the head `Income from business or profession', the following allowances and deductions shall be made, namely--
(i).................................................................
(ii)................................................................
(iii)...............................................................
(iv) ...............................................................
(v) in respect of depreciation of any such building, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule;
The admissible allowance under this provision is mentioned in the IIIrd Schedule which are rules for computation of depreciation allowance. Rule 1 reads as follows:
"R.1. Allowance for depreciation.---(1) Where, in any income year, any building, machinery, plant or furniture owned by-an assessee is used for purposes of any business or profession carried on by him, or in any income year commencing on or after the first day of July, 1982, any machinery or plant is given on lease by the assessee, being a scheduled bank, a financial institution or such modaraba or leasing company as is approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may be specified, an allowance for depreciation shall be made in computing the profits and gains of the business or profession of the assessee in the manner hereinafter provided."
The provisions for computing are mentioned in Rule 2 relevant part of which reads as follows:
"2. Rates of depreciation allowance.---(1) The allowance under rule 1 shall be computed at the rates specified in the Table annexed hereto.
TABLE
| Class of asset | Description | Rate per cent of the written down value |
| 1 | 2 | 3 |
| I . | ................ | |
| II. | ................ | |
| II-A................ | ................ | III................ |
| IV. Machinery and plant | (not otherwise specified | 10 (general rate) |
Therefore, in cases of machinery and plant an assessee is entitled to depreciation allowance @ 10% of the written down value. "Written down value" has been defined by Rule 8(7) and reads as follows"
R.8(7)"written down value" means:
(a) in the case of a ship or any asset to which sub-rule (3) of rule 2 applies; -
(i) for purpose of rule 7, as in sub-clause (b), and
(ii) for any other purpose, the actual cost thereof to the assessee; and
(b)in the case of other assets, or class of assets.
(i) where the asset, or class of assets, was acquired in the income year, the actual cost thereof to the assessee; and
(ii) where the asset, or class of assets, was acquired before the income year; the actual cost thereof to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of the assessments for earlier years."
Under the scheme of Ordinance section 23 permits the depreciation allowance in computing the income arising from business or profession. The depreciation is allowed on any building, plant, machinery, furniture and fitting of which the assessee is the owner. The depreciation which is admissible under the Third Schedule to the Ordinance shall be allowed as deduction. The conditions for admissibility of depreciation allowance as specified by the Third Schedule are that the machinery, plant, building and furniture must be owned by the assessee and must have been used for purposes of business or profession during the accounting year. Once the entitlement is proved the depreciation allowance will be calculated as provided by Rule 2. Under Rule 2(iv) the rate of depreciation is 10% of the written down value. Rule 8(7) defines the expression "written down value" which for purposes of this case means "actual cost thereof to the assessee". Therefore, where an assessee acquires any asset and uses it for purposes of business or profession during the income year he is entitled to 10% of the actual cost to him (assessee). As the term `actual cost' has not been defined it has been subjected to interpretation particularly in a situation where the assessee acquires the asset without payment of any consideration. The petitioner's stand is that it has received the machinery as a gift. According to the Income Tax Officer as no cost has been paid by the petitioner it is not entitled to any depreciation. As discussed above Section 23(1)(v) and Rule 1 of the Third Schedule lay down the conditions precedent for claiming depreciation. Once the entitlement i5 established there remains question of calculation of depreciation allowance in the manner provided by Rule 2 which is a formula for mechanical calculation and has no reference to the conditions of entitlement to claim depreciation. In these circumstances can it be claimed that although the assessee fulfils the requisite condition, he cannot claim depreciation as he has acquired the asset without payment of any price. This cannot be the intention of the legislature otherwise section 23(1)(v) and Rule 1 while prescribing the condition that the assessee must be the owner must have provided that such ownership should have been acquired on payment of consideration. A property can be acquired by purchase, exchange, acquisition, gift, inheritance or will. Except in cases of purchase, exchange or acquisition the new owner does not pay any consideration to its previous owner for acquiring ownership. Once entitlement is established term `actual cost' should be interpreted in such a manner that a written down value is determined. The `actual cost to the assessee' may be the price paid by him or the price on the date of transfer which he would have been liable to pay for such machinery/asset. A fair market value on the date of transfer will be written down value of the machinery. Mr. Mansoor Ahmad Khan has referred to Commissioner of Income Tax v. E. Solemon & Sons (1933) 1 ITR 324 where provision of section 10(2) (v) of the Income Tax Act relating to depreciation allowance which was similar to section 23(1)(v) & Rules 1, 8(71 came up for consideration. The assessee had inherited the assets and question arose whether market price on the date of inheritance can be treated as the written down value of such assets which was defined as `original cost thereof to the assessee'. The Court. answered in the affirmative and observed as follows:--
" where, as in the present case the assessees acquired property otherwise than by purchase, in my opinion, `the original cost thereof, to the assessee' means and is the real value of the property at the title when the assessees acquired it ...."
The learned counsel has also referred to Francis Vallabarayar v. C.I. f Madras (1960) 40 I T R 426. In this case the assessee claimed depreciation respect of machinery acquired by inheritance. By this time the Income Tax Act held been amended and under section 10(2)(vi) of the Income Tax Act, 1922 such ;Allowance was calculated on the basis of the `actual cost to the assessee' being the written down value and not the `original cost thereof to the assessee' as used earlier. The view expressed in E. Solomon Son's case was followed and it was observed that there was no real difference between the expressions `original cost thereof to the assessee' and `actual cost to the assessee'. Although tills controversy existed under the Income Tax Act, 1922, the Income Tax Ordinance has adopted the same terminology as used in the Act. In India section 10 of the Income Tax Act was amended in 1953 by inserting section 10(5)(c) and on repeal the same provision was incorporated in the Income, Tax Act, 1961, with provides that `in the case of assets acquired by the assessee by way of gift inheritance the written down value as in the case of the previous owner or the market value thereof whichever is lesser.' This provision gives statutory recognition to the aforestated judgment.
In Pakistan Rule 8(7) of the Third Schedule to the Income Tax Ordinance has adopted the same definition of the `written down value' which was found in the Income Tax Act, 1922. It has been interpreted in the aforestated judgments and no other judgment taking a different view has been brought to our notice. Where an assessee becomes entitled to the depreciation allowance but such asset was acquired by him by gift or inheritance, the written down value shall be the fair market value of such asset on the date of acquisition. The petitioner was therefore entitled to depreciation.
The petitioner had claimed exemption in respect of income derived from machinery which were set up after 1-1-1982. This claim was made under clause 122 of the Second Schedule to the Income Tax Ordinance. The petitioner had installed its factory at Akora Khatak in the year 1978 and was entitled to exemption. According to the petitioner, additional machinery was installed and therefore, it was entitled to claim exemption in respect of the income derive,' from such undertaking. The respondent No.1 was of the view that the industry' was set up as far back as in 1978 and any addition or expansion made thereafter would not amount to setting up of any undertaking and thus no exemption can be granted. To appreciate the contention of the learned counsel for the parties it is proper to first refer to the relevant provisions of the Ordinance. Section 23 enumerates the deductions and allowances which an assessee is entitled while' computing profit and gain of a business or profession.
The petitioner's claim for exemption has not been accepted by respondent No.5. The petitioner has claimed exemption in respect of income derived" from machineries and plant installed during 1982. Section 14 of the Ordinance grants exemption to the incomes or classes of income, or persons or classes of person specified in the Second Schedule subject to the conditions and limits mentioned therein. Relevant part of Clause 122 of the Second Schedule is reproduced as follows:--
(122) Profits and gains derived by an assessee from an industrial undertaking set up between the first day of July, 1980, and the thirtieth day of June, 1988, both days inclusive, for a period of five years beginning with the month in which the undertaking is set-up or commercial production is commenced, whichever is the later.
The exemption under this clause shall apply to an industrial undertaking which is--
(a) set up in an industrial estate approved by the Central Board of Revenue in any of the following areas, namely:
(i) the North-West Frontier Province;
(ii) ...........................................................
(iii)..........................................................
(b) ...............................................................
(c)..........................................................
(d) ..........................................................
According to section 14 read with clause 122 of the schedule of the profits and gains derived from an industrial undertaking established during 1-7-1980 and: 30-6-1988 by an assessee shall not be charged to tax for a period of five years computed from the date of setting up or commencing of commercial production whichever is later. The main condition for grant of such exemption is that the assessee must have `set up' an industrial undertaking during the given period and, in the specified area. The dispute between the parties is on the interpretation of expressions `set tip' and `industrial undertaking'. The petitioner had established its' factory at Akhora Khatak in the year 1978 but during the year 1982 certain other machineries were installed there. The petitioner claimed exemption in respect of profits derived from these newly-installed machinery. The Income Tax Officer by the impugned orders held that the installation of the machinery in 1982 was an expansion of the old factory and dose not amount to setting up of an industrial undertaking.
The expression `undertaking' has not been defined in the Ordinance. Literally it means any business or project. But the meaning for purposes of clause 122 has to be understood with reference to the object of the Ordinance and its: other provisions. Clause 122 provides for exemption in respect of industrial undertaking established in under-developed areas. The object is to provide incentive for industrialisation in such areas. Therefore to begin with it must require setting up a full-fledged establishment with factory or mill which is capable of manufacturing goods or the subjection of goods or material to such process. The word `undertaking' connotes a wider meaning than mill or factory. An industrial undertaking will mean an organization, establishment or enterprise where organized industrial activity for manufacturing goods is carried on for commercial purposes. It will include office, factory and all other allied components which appertain to and are collectively required to manufacture or produce goods. In Commissioner of Income Tax v. Textile Machinery Corporation (1971) 80 ITR 428 (436-37) it was observed that:
"industrial undertaking therefore would normally be in its ordinary acceptation, some industrial concern or enterprise or adventure which is undertaken to be done by the person concerned. Whether the industrial undertaking means only the physical assets or the human assets involved in it or the principles of organization which cover it are to a certain extent unrealistic because we are of the view that industrial undertakings cover a complex of ideas both physical and non-physical and we will not choose one at the cost of the other. It is a complex of ideas and methods of practical execution and, therefore, must necessarily involve both tangible and intangible consideration.'
In Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564 (630) the word undertaking was defined as `the entire organization...whether it has a plant or whether it has an organization is considered as one whole unit and the entire business of the going concern is embraced within the word `undertaking'.
The Ahmadahad Textile Industries Research Association v. State of Bombay A I R 1961 SC.' 4,84 (486) may throw some light on the subject as it was interpreting in the light of the Industrial dispute Act.
The word undertaking as used in section 9 of the Electricity Act was held to include `land, building, machinery, lines of supply, goodwill etc. in fact every thing which appertains to the supply of electricity under the licence but if the concern is not a running one then the plant, machinery building and other material constituting the undertaking become, ordinary goods. Murlia Parasad v. Parsanath Parasad AIR 1967 Pat 191 (198). Guidance can also be sought from the meaning of the expression `organization' which may mean undertaking, as held by our superior Courts. In Koh-i-Noor Chemical Co. Ltd. v. Sindh Employees Social Security P L D 1977 SC 197 it was observed:
"In its literal sense an organization connotes a systematic arrangement for a definite purpose. In the legal sense it describes a system, a body or a society furnished with organs for the normal exercise of its appropriate functions."
It was followed in Don Basco High School v. Assistant Director E.O.B.I. P L D 1989 SC 128 and St. Jude's Secondary School and others v. Employees' Old Age Benefits Institution P L D 1988 Kar. 473.
Some of the meanings of `undertaking' given above are sufficiently wide due to the reference in which this term has been used. However for purposes of clause 122 of the Second Schedule the `Industrial undertaking' will mean organization or establishment carrying on an organized industrial and commercial activity operating through factory or mill for producing and manufacturing goods. The fact that the income derived from it is exempted indicates that such undertaking should be a compact, self-reliant and independent unit capable of manufacturing goods for commercial purpose. It should not be a part of any existing factory nor should it be an expansion, adjunct or improvement in an existing factory unable to run and produce independently. The expression `set up' also furnishes a clue to the interpretation of clause 122. It means `establish', `start' and `begin'. An undertaking is set up when its foundation is laid or is started. It cannot be set up when it is already in existence. An existing machinery or plant of an undertaking can be modernised, balanced or replaced.
In this background we have to examine whether the petitioner could claim exemption under clause 122. The petitioner claims that the cigarette manufacturing machines progressively installed constituted industrial undertaking entitling exemption in each year the new machines were installed. The Income Tax Officer however maintained that the petitioner merely installed three additional machines in the existing undertaking for which it claimed tax credit under section 107 and was not entitled to exemption. In view of the above discussion if the newly-installed machinery constitutes a completely independent plant capable of manufacturing cigarettes independent of the existing factory, the petitioner would be entitled to exemption under clause 122. The Income Tax Officer has treated the newly-installed machinery as expansion without inquiring whether it is independently capable of manufacturing goods. If the finding is in the affirmative the entire treatment given to the petitioner's case will have to be changed.
The petitioner has claimed credit at the rate of 15% of the amount invested in purchasing the plant and machinery against the tax payable by it. According to the respondent No.5 such claim negates the claim under clause 122. Such credit can be claimed under section 107 of the Ordnance. It is allowed only in respect of investment made during the specified period for purchasing plant and machinery for the purposes of `replacement, balancing or modernising of the already installed machinery and plant. This credit is available where machinery and plant has already been installed and purchases of machinery have been made for modernising, balancing or replacing the existing machinery and plant. This credit will not be available where the plant and machinery purchased is to be installed afresh for the first time. To avail of the benefits of section 107 the machinery and plant should be purchased for absorption in an existing machinery. It is possible that for purposes of modernising, some machinery may be installed but after installation it should be a part of the existing machinery and plant and not an independent unit capable of manufacturing goods.
The controversy between the parties can be decided only if inquiry is made on the lines indicated above for determining whether the machinery and plant purchased by the petitioner constitute industrial undertaking.
In Petition No.1129/1988 the petitioner has challenged the order of assessment for assessment year 1987-88 in which claim for exemption under clause 122 and depreciation has been rejected following the same reasoning as adopted in rejecting such claim in preceding years which have been challenged in C.P.D-571/1987. This judgment will therefore govern Petition No.1129/1988 as well.
We therefore declare that the impugned assessment orders passed by respondent No. 5 in respect of assessment years 1983-84, 1984-85, 1985-86. 1986-87 and .1987-88 are without lawful authority and of no legal effect. We remand the cases to respondent No. 5 to frame assessment for assessment years 1983-84, 1984-85 and 1985-86 in pursuance of notice under section 65 and for assessment years 1986-87 and 1987-88 in the regular manner in the light of the observations made in this judgment, particularly with regard to the petitioner's claim for depreciation and exemption. The parties to bear their own cost.
M.B.A./P-183/K Order accordingly.