(a) Income Tax Ordinance (XXXI of 1979)---

----First Sched., Part II, .Cl. A(1)(v)---Claim of rebate by assessee---Assessee, a company doing business of manufacturing and vending of ice cream---Held. though the assessee was not engaged in the freezing of a food item, but it was clearly carrying on the activity of preserving of an item of food and therefore entitled to rebate as claimed.

ITA 1804 of 1985-86; Crescent Sugar Mills and Distillery Ltd., Lahore v. Commissioner of Income-tax, Lahore Zone, Lahore 1981 PTD 43 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.107 & Third Sched., Rr.8(8)---Depreciation---Tax credit being not `synonymous for "allowance or deduction" amount of tax credit could not be excluded from the cost of assets.

ITA 1804 of 1985-86 and 1987 PTD (Trib.) 116 fol.

(c) Income Tax Ordinance (XXXI of 1979)---

----Third Sched., Rr.1 & 5(1)(cc)---Depreciation---Assessee, a company doing business of manufacturing and vending ice cream---Supplying the freezer by the assessee company on security obtained from the dealers for a valuable facility and as an inducement would amount to "use" of such class of asset for the purpose of business and assessee would thus be entitled to depreciation.

(1971) 79 ITR 613; (1985) 140 ITR 132; In re: Muhammad Allah Buksh 1977 PTD 13 and In re: Muhammad Din & Sons PLD 1966 Lah. 488 ref.

I.N. Pasha for Appellant.

S. Roomi Shah D.R. for Respondent (in I.TA. Nos.778/LB and 779/LB of 1990-91).

S. Roomi Shah D.R. for Appellant.

I.N. Pasha for Respondent (in I.T.A. Nos.790/LB and 791/LB of 1990-91).

Date of hearing: 30th June, 1991.

ORDER

Of these four appeals, two are by the assessee and two by the Department. These assail two separate 'orders both, dated 16-12-1990 passed by the learned Commissioner Appeals (Zone-1), Lahore in respect of the assessment years 1988-89 and 1989-90. The Assessee Company is a manufacturer and vendor of `Ice Cream'.

Department's Appeal

Rebate: --It is alleged that for 1989-90 the learned Commissioner was not justified to allow rebate of 10% in super-tax as per clause `A'(i)(v) of Part I to the First Schedule to the Income Tax Ordinance. The learned counsel promptly pointed out that this very issue had come up for consideration in the Assessee's appeals for earlier years which were decided vide consolidated order, dated 4-1-1988 on ITA 1804 of 1985-86 (etc.). The learned counsel produced a copy of that decision. On scrutiny of that order we find That the assessing officer had refused to allow rebate as was available to Companies engaged in "processing, canning, freezing or preserving" of food items. However, after a detailed examination of facts and scrutinizing the definition of the words used as also the decision by the superior Courts, e.g. 1981 PTD 43 in re: Crescent Sugar Mills and Distillery Ltd., we had recorded the conclusion classified as under:--

"....This, in our view is a distinct and additional activity with the sole purpose to ensure that the food item (ice cream) preserves and retains its flavor and does not deteriorate in quality or decompose its texture. It can thus be safely classified as falling under the category of preserving as mentioned in Paragraph A(i)(v) of Part II of the First Schedule... Therefore, in the peculiar circumstances of the appellant we see no hazard to hold that though the appellant is not engaged in the freezing of a food item, we agree that they are clearly carrying on the activity of preserving of an item of food and, therefore, entitled to rebate as claimed."

As the facts and circumstances of the case remain unchanged and the learned Commissioner has simply followed our decision dated 4-1-1988, we need not take long to DISMISS this ground of appeal by the Department.

Calculation of Written Down Value.---This issue pertains both to the assessment years 1988-89 and 1989-90. The Department feels aggrieved that the learned Commissioner ordered to allow depreciation without deduction of tax credit earned under section 107 of the Income Tax Ordinance. Here also the learned counsel for the assessee pointed out that the issue was the subject matter of the appeal before this Tribunal in respect of the preceding years for which the appeals were decided vide consolidated order, dated 4-1-1988 on ITA Nos. 1804 of 1985-86 (etc.). On scrutinizing the ordered to by the learned counsel we find that the relying upon this Tribunal's decision reported as 1987 PTD (Trib.) 116 we adjudicated as under:

" ....it was held, after a well-reasoned discussion that the tax credit is not synonymous for "allowance or deduction" and, therefore, it is not fair to exclude the amount of tax credit from the cost of assets because it cannot be excluded under clause B of sub-rule (8) of Rule 8 of the Third Schedule to the Income Tax Ordinance. Respectively adhering to this view we need not take long to UNDO the treatment meted out by the two officers below and direct them not to exclude the amount of tax rebate from the costs of assets while working out its written down value "

As the dates and circumstances are exactly identical on which the above pronouncement was made, and the learned Commissioner has simply followed our decision in earlier years; we refuse to INTERFERE with the result that the appeal by the Department on this issue also FAILS.

Appeal by the Assessee

The learned counsel for the assessee expressed the wish not to press the appeal for the assessment year 1988-89. This is allowed and the appeal DISMISSED as not pressed.

As respect the assessment year 1989-90, the learned counsel explained that they awarded Dealership for sale of Polka Ice Cream and some of the dealers were provided with deep freezers also to stock the merchandise. For this purpose a separate `agreement to lend a deep freezer' was entered into. This agreement stipulated the Dealer to use the freezer for storage of the products purchased from the Assessee-Company alone; to pay damages for misuse of the freezer, while the assessee-company was required to install the deep freezer at a suitable place in the premises of the Dealer who could not move it to any other place (clause 5 of the agreement); the authorised officers of the Assessee-Company were entitled to inspect the freezer and the contents therein (clause 6); the security for the freezer paid by the Dealer was to be refunded on the termination of the contract; the Assessee-Company was to assist the Dealer by schemes to boost sales for which the Dealer was to honour the sale-promotion slips issued by the Assessee-Company; and (finally) the repair and maintenance of the freezer was the responsibility of the Assessee- Company (Clause 5 of the agreement). The learned counsel built up the argument that the terms of the agreement were enough to establish that the freezer continued to be the property of the Assessee-Company and, therefore, they had claimed depreciation on these (aggregating Rs.1,109,962) which the assessing officer disallowed holding that deep-freezers were not being used by the company-for its own business as such an allowance for depreciation (as claimed) was not admissible under sub-rule (1) of Rule 1 of the Third Schedule to the Income Tax Ordinance. The learned counsel read out from the assessment order the conclusions by the assessing officer which, according to the learned counsel, were founded on the view that the Dealers exercised the right of ownership over the products lying in the deep-freezer hence it was they alone (Dealers) who used the deep-freezer for the, purpose of their business but not the Assessee-Company. This view was upheld by the learned Commissioner who also expressed the opinion that:

"The ownership of the deep-freezer remains that of the Appellant's Company, yet it can only claim to exercise control over the products which were entirely owned by the shopkeeper, in other words it is quite evident and clear that the appellant's Company has no control over the products lying in the deep-freezer although the same may be entirely manufactured by the appellant company."

Mr. Iqbal Naeem Pasha, the learned counsel argued at length to controvert the above findings by the officers below. According to him it was beyond controversy that the deep-freezers were the property of the Assessee-Company and that these were installed at various points (shops etc.) against security deposits paid by the Dealers. The learned counsel relied upon a decision of Indian jurisdiction reported as (1971) 79 ITR 613 where the learned Judges of the Bombay High Court ruled that in a "pooling agreement" though the assets of an Assessee remained under forced idleness, these were to be treated as "used for the purpose of business". An argument was developed by Mr. Iqbal N. Pasha, the learned counsel, that although the Assessee-Company did not use the deep-freezer directly, on the principle explained in the above decision the lending of the freezer to the Dealers was as an inducement offered by the assessee to the Dealers to stock Ice Cream (produced by the Assessee) with the result that the utilization of the asset amounted to "use for the purpose of business" by the Assessee thus entitling them to depreciation. Mr. Pasha, emphasised with vehemence, on clause 5 of the Dealership Agreement which prohibited selling of "any damaged/unsealed or re-frozen ice cream" which if found stored in the deep-freezer was to be "destroyed without any compensation". 'He further highlighted the terms of clause 3A of the "Agreement to lend a deep freezer" prohibiting misuse of the equipment by the Dealers and pre-claiming the entitlement of the Assessee to claim damages, the extent of which also was to be determined by the Assessee. It was vociferously asserted by the learned counsel that these two provisions clearly brought home Assessee's unquestioned control both over the freezer and the product therein, hence for all intents and purposes, the freezer was provided so that the stock freezed therein retained a desired standard of quality to ward off the possibility of sale of damaged, unsealed or deteriorated Ice Cream lest the good name and goodwill of the Assessee is tarnished. The submissions by Mr. Pasha aimed to establish that the freezer was in the "use" of the Assessee "for the purpose of business" especially when repair and maintenance was their responsibility and the Dealers could not even shift the deep-freezer from the place where it was installed by the Assessee.

The learned counsel developed yet another argument to claim depreciation by contending that principles of commercial expediency dictated the Assessee to install deep-freezers at their own cost which amounted to the `use' of this class of asset for the purpose of business. For this assertion reliance was placed on a decision of Indian jurisdiction reported as (1985) 140 ITR 132.

The learned DR on his turn supported the order by the officers below by contending that the ownership in the products being that of the Dealer, the stocking in the deep freezer amounted to the use of the freezer by the Dealer and not by the assessee-company who simply lent the freezer to the Dealer.

After evaluating the rival arguments from the two sides, we are of the view that what clinches the issue is whether lending of an asset to a Dealer for the limited purpose of stocking the products of the lender-manufacturer who all the time retained the ownership of the asset accepted responsibility for "repair and maintenance" thereof, would amount to use of the asset for the purpose of the business" carried on by the lender-company. What emerges from the scrutiny of the document on record, such as the agreement for dealership and the agreement for lending the Deep freezer leaves no room for doubt that the ownership of the asset undisputedly remained with the Assessee-Company and the Dealers to whom the freezers were lent could use them for limited purpose of stocking the supplies from the lender who exercised strict supervision and control over the asset so much so that the freezers were used for the "purpose of the business" of the lender. The question which demands resolution is as to who would be entitled to depreciation on assets which contained the product the assessee, had their banners displaying their name and monogram. It cannot be easily ignored that stocking of `ice cream' in freezer is of vital importance for maintaining the texture which may `make or mar' its flavour and palatability. Therefore, for achieving firmness of texture and flavour of ice cream, it is an absolute must to stock it in a continual frozen state which anxiety is manifest from clause 5 of the agreement for Dealership prohibiting a Dealer from selling "any damaged, unsealed or re-frozen ice cream" entailing the penalty of destroying the stock without any entitlement for compensation. Therefore, supplying the freezer by the Assessee-company on security obtained from the dealers for a valuable facility and as an inducement would, to our mind, amount to `use' of this class of asset for the purpose of business. Therefore, it is difficult to say that just because the ice cream had been sold against payment to the Dealers who in turn were to earn the profit (or suffer the loss) from its sale, should deprive the Assessee-company of the `use' of freezer for the purpose of the business. Therefore in the totality of the circumstances there is no difficulty for us to hold that the deep-freezers were lent out to dealers under a scheme to enable them to retain the stocks of the ice cream in a palatable state, processing its texture and taste for the goodwill of the Assessee-Company and, therefore, these were ultimately used by the assessee "for the propose of the business", as envisaged by clause 1 of Rule 1 and Rule 5 of the Third Schedule to the Income Tax Ordinance.

We have examined the matter in issue from yet another angle: It is not denied that the freezers were used for the purpose of business of marketing of the product manufactured by the Assessee. It is beyond controversy that the freezer units were owned by the Assessee. It also cannot be questioned that the dealers are neither entitled to (nor claimed) depreciation because they do not own the units. In our view, therefore, the situation is very much akin to the leasing of machinery (etc.), a new dimension of transactions known as the Leasing Business which has been recognized by the Income Tax Ordinance through insertion of clauses `aa' and `cc' in Rule 5 of the Rules for the computation of Depreciation Allowance in the Third Schedule to the Income Tax Ordinance. This system was recognized by the superior Courts even earlier in decision such as 1977 PTD 13 in re: Muhammad Allah Buksh.

In the Leasing Business, the asset is sold on installment, the possession of the property is handed over to the purchaser who is free to use it in any manner he likes, but the ownership is transferred only when full payment (and mark-up) is realized by the leasing company (etc.). However, the lesser is accepted by law to have used the asset for the purpose of his `leasing business' and thus entitled to deduct depreciation.

In the case in hand, the freezer units remained the property of the Assessee but were lent to the Dealers for the specific purpose of stocking the product supplied by the assessee so as to prevent the deterioration of quality. In our opinion, therefore, applying the principle as obtaining in leasing business, the "use" of freezer units remained confined to the distribution/marketing activity of the assessee hence these were utilized for the earning of the profits by the Assessee entitling them to claim depreciation. We may here recall a decision by the Lahore High Court in re: Muhammad Din and Sons PLD 1966 Lah. 488 where the learned Judges ruled that a partner who was owner of Plant and machinery was entitled to depreciation though the asset was used by the firm who could not claim depreciation as the asset did not belong to it. The case of the Assessee before us is on a better footing because the asset was here used for the purpose of Assessee's own business, though installed in the premises of Dealers. Therefore, whichever we look having in mind the spirit of law as contained in the Third Schedule (ibid), as also the case-law (ibid), we feel fortified to hold that the officers below erred in denying depreciation to the Assessee on freezer units lent by it to the Dealers. It is, therefore, adjudged that depreciation, as admissible under the rules, be allowed for the use of the deep-freezers provided to the Dealers under the `Agreement to lend a deep-freezer'.

No other ground was pressed by any side.

CONCLUSION

For the reasons recorded hereinabove, the Department's appeal FAILS both in the year 1988-89 and 1989-90 while Appellant's appeal for the assessment year 1988-89 stands DISMISSED but the one for 1989-90 SUCCEEDS.

M.B.A./1604/TOrder accordingly.