I.TA. NO.277/KB OF 1990-91 VS I.TA. NO.277/KB OF 1990-91, 1994 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 70 (1993)

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

----S. 29 & Third Sched., Rr.7 & 8 (5)(a)---C.B.R. Circular No.10 of 1979 dated 1st October, 1979---Disposal of assets and treatment of resultant gains or losses---While determining .the fair market value the Assessing Officer is required to do so, subject to approval of the AA.C: --Where the Assessing officer had not obtained the required approval, they addition was not sustainable in law which was ordered to be deleted by the Tribunal.

Rule 7 of the Third Schedule, Income Tax Ordinance 1979 provides that if any assets are sold by an assessee and sale proceeds exceed the written down value the excess shall be deemed to be the income of the assessee and if the sale proceeds are less than the written down value the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year. The sale proceeds have been defined in Rule 8(5)(a) to mean, where the asset is actually sold, the sale price thereof or the fair market value whichever is the higher. In the present case the assessing officer had not accepted the declared sale price which meant that he had determined the fair market value, under rule 8(2) the fair market value has the same meaning as in subsection (3) of section 29.

According to definition of fair market value either it would be the price, which the capital asset would ordinarily fetch on sale in the open market on the relevant date or where such price is not ascertainable the prices may be determined by the I.T.O. after obtaining the approval of the IA.C. in writing.

While determining fair market value the assessing officer is required to do so, subject to approval of the IA.C. and it was admitted fact that in the present case the assessing officer had not obtained any such approval. The addition, was therefore, not sustainable in law which stood deleted accordingly.

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

----Third Sched.---C.B.R. Circular Letter No.IT,JI-1(40)/79, dated 19-3-1986-- C.B.R. Circular No.22 of 1988 dated 31-10-1988--Depreciation allowance-- Computation of---Depreciation on wooden shuttering was admissible and provisions of Third Schedule of the Income Tax Ordinance, 1979 were applicable to the case---Where the Assessing Officer had not obtained the approval of IA.C. while determining the fair market value of the assets, the addition was not sustainable which was ordered to be deleted by the Tribunal.

Raisul Hasan for Appellant.

Muhammad Nawaz, D.R. for Respondent.

Date of hearing: 5th September, 1993.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).--This appeal is directed against the order dated 15-9-1990 by the learned C.I.T.(A) Zone-I1, Karachi in I.T.A. No.333/CIT(A)/III/89-90, relating to the assessment year 1988-89.

2. The appellant is a private limited company deriving income as construction contractor. The only objection pressed by the learned counsel for the appellant before us is to the additions made under Rule 7 of Third Schedule to the Income-tax Ordinance in respect of motor vehicles and other assets.

3. Briefly stated the relevant facts are that in the assessment year 1988-89 the appellant disposed of three Cars namely, Honda Civic, Model 1983, Toyota Corolla, Model 1982 and Toyota Corolla, Model 1974 for Rs.95,000, Rs.75,000 and Rs.45,000 respectively. The assessing officer observed that the cars had coasted the assessee Rs.3,40,000 and since acquisition of these cars the assessee has charged Rs.1,22,400 towards depreciation. The depreciated value of these vehicle thus came to Rs.2,17,600. The total sate value of the cars was declared at Rs.2,15,000. The assessing officer further observed that sale receipts were. not produced for examination, complete address of the parties to whom Toyota Corolla, Model 1982 and Toyota Corolla, Model 1974 were sold were also not made available. It was stated on behalf of appellant that the cars were sold by negotiation. The assessing officer held that all the three cars were of popular models and according to him during the past several years no owner of these models had suffered loss on resale. The assessing officer, therefore, discarded the declared loss and estimated the sale proceeds of three cars at Rs.3,40,000 (the same amount at which the cars were originally acquired by the appellant). In this manner An addition of Rs.1,25,000 was made which has been confirmed by the learned C.I.T.(A).

The addition has been made under Rule 7 of the Third Schedule, which provides that if any assets are sold by an assessee and sale proceeds exceeds the written down value the excess shall be deemed to be the income of the assessee and if the sale proceeds are less than the written down value the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year. The sale proceeds has been defined in Rule 8(5)(a) to mean, where the asset is actually sold, the sale price thereof or the fair market value whichever is the higher. In the present case the assessing officer has not accepted the declared sale price, which means that he has determined the fair market value, under Rule 8(2) the fair market value has the same meaning as in subsection (3) of section 29. Subsection (3) of section 29 provides as follows:--

29(3) For the purposes of subsections (1) and (2) and subsection (12) .of, section 12, "fair market value" means

(a) the price which the capital asset would ordinarily fetch on sale in the open market on the relevant date; and

(b) where the price referred to in clause (a) is not ascertainable such price as may be determined by the Income Tax Officer after obtaining the approval of the Inspecting Assistant Commissioner in writing."

5. According to above definition of fair market value either it would be the price which the capital asset would ordinarily fetch on sale in the open market on the relevant date or where such price is not ascertainable the prices may be determined by the I.T.O. after obtaining the approval of the I..A.C. in writing.

6. In addition to the above provision C.B.R. has issued following instructions in Circular No.10 of 1979 dated 1st October, 1979:

"Rule 8(5) of the Third Schedule provides that where any asset on which depreciation has been allowed is sold, the Income Tax Officer has the discretion to compute profit on such sale by estimating the fair market value of the assets instead of the actual sale or cost price as the case may be. This is likely to create difficulties.. Instructions have been issued making the determination of the fair market value of such asset subject to the approval of the Inspecting Assistant Commissioner."

7. While determining fair market value the assessing officer is required to do so, subject to approval of the IA.C. and it is admitted fact that in the present case the assessing officer had not obtained any such approval. The addition, is therefore, not sustainable in law which stands deleted accordingly.

8. So far the addition on account of sale of machines, tools and wood shuttering is concerned, the assessing officer observed that these assets were also sold through negotiation and complete address of the purchasers were not made available. The assessing officer thus ignored the declared sale proceeds and held that taking a lenient view the sale of these assets is taken at written down value as on 1-7-1987. In this manner he made addition of Rs.54,582. The assessing officer has not assigned any reason for ignoring the loss and discarding the declared sale proceeds. During the course of arguments before us the question was raised if depreciation was admissible on wood shuttering and if depreciation was not admissible on wood shuttering whether provisions of Schedule III shall apply or not. We find that in Circular Letter No. IT, JI-1(40)/79, dated March 19, 1986 following instructions were given by C.B.R.;

"I am directed to say that items as serial (i) and (ii) of the reference will qualify for depreciation allowance but the item at serial (iii) will not."

Items referred to above are the following:

(i) Shuttering material owned by contractors for self-use.

(ii) Steel Drums used by Surgical manufacturers as containers of chemicals.

(iii) Gunny bags used by Rice Dealers as containers of paddy."

9. There is another Circular Letter No.22 of 1988, dated October 31, 1988 which reads as follows:

"References have been received in the Board seeking uniform treatment of depreciation allowance on wooden shuttering.

(2) The factual position is that no specific rate of depreciation allowance has been provided in the Third Schedule to the Income Tax Ordinance, 1979 on wooden shuttering. However, depreciation allowance on this asset is being allowed at varying rates in different zones. For example, in Rawalpindi Zone, 10% rate of depreciation applied in certain cases has been enhanced to 33-1/3% by the ITAT keeping in view the history of each case.

(3) For the sake of uniformity and having regard to the fact that wooden shuttering has, a normal useful life of three years, it has been decided that depreciation allowance on wooden shuttering may be allowed at the rate of 33-1/3% on straight line method.

(4) In order to obviate the possibility of misuse of this concession, it would be necessary to properly examine and verify the claims of depreciation allowance in relation to the nature and extent of each business. Sale of discarded shuttering, if any, should also be accounted for as provided under rule 7 of the Third Schedule.

I am directed to request you to kindly intimate the prevailing practice in your Region in this regard."

10. From the above circular letters it stands clarified that depreciation on wooden shuttering is admissible and, therefore, provision of Schedule III are applicable in the case of sale of wooden shuttering as well. It is admitted position that the assessing officer has not obtained approval as discussed above while determining the fair market value of the assets and, therefore, the addition is not sustainable which is hereby deleted.

11. The appeal is allowed as above.

M.BA./2594/TOrder accordingly.