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

----Second Sched., CI. (116) & First Shed.. Part IV, Para. B (2)---Karachi Stock Exchange Listing Regulations, Para. 2(i)(iv)---Capital gain---Exemption from tax---Public company---Definition---Listing of company with Stock Exchange includes "provisional listing"---Public company of which shares were sold by the assessee was approved by the Stock Exchange ---Assessee's claim for exemption fulfilled the requirements laid down in Second Sched., CL(116) and First Sched., Part IV, Para B(2) of the Ordinance---Income Tax Officer and Income Tax Commissioner, ignored the documentary evidence, misread the law and pressed into service hypothetical grounds to reject the claim of assessee for exemption---Income Tax Appellate Tribunal directed the Assessing Officer to treat the capital gain as exempted from tax and modify the assessment accordingly.

(b) Income-tax---

----Depreciation---Income Tax Officer accepted the declared trading results and worked out the income by adding back certain profit and loss expenses to the accounting profits---No finding was given by the Income Tax Officer as to whether depreciation for the assessment year had or had not been correctly worked out by the assessee---Earlier year's depreciation allowance was not allowed on the ground that the same had not been determined ---Assessee's applications for rectification of earlier assessments made on nil income were reportedly pending with the Assessing Officer---Last year's assessment was ordered to be modified after disposing of the application and to work out the depreciation for the assessment year in accordance with law.

(c) Income-tax---

----Add backs---Profit and loss add backs were made in an ad hoc manner---No history with regard to profit and loss account of assessee existed---Assessing Officer, held, had to substantiate the add backs in circumstances---Assessment was set aside by the Tribunal for re-examination of expenses and Income Tax Officer was directed to confront the assessee with the ground of add backs, if any, in the course of assessment proceedings to rebut Assessing Officer's objections in this regard.

Sarfraz Mahmood, FCA for Appellant.

Mazhar F. Sherazi, D.R. for Respondent.

Date of hearing: 17th November, 1993.

ORDER

IFTIKHAR AHMAD BAJWA (ACCOUNTANT MEMBER).---The Appellant, a Private Limited Company deriving income from manufacturing of garments, has brought these appeals against CIT (Appeals) orders, dated 29-8-1992 and 22-11-1992 wherein assessment orders in respect of assessment years 1990-91 and 1991-92 have been upheld. The two appeals are disposed of in this order.

Assessment year 1990-91:

The main issue in appeal in respect of assessment year 1990-91 is rejection of appellant's claim for exemption in respect of capital gain amounting to Rs.27,15,960. The gain in question shown to have resulted from sale of 6,96,400 shares of M/s. Ravi- Textile Mills on 3-10-1989 was claimed to be exempt from tax under clause 116 of the Second Schedule to the Income Tax Ordinance, 1979.

During the period relevant for assessment year 1990-91, clause 116 provided exemption to capital gains in the following terms:

"Any income chargeable under the head `capital gains' being income from the sale of shares of a public company (as defined in the First Schedule) derived by an assessee in respect of any assessment year ending on or before the thirtieth day of June 1992."

In the First Schedule, public company has been defined in para B(2) of Part IV as under:

"Public company" means:

(a) a company in which not less than fifty per cent of the shares are held by the Government;

(b) a company whose shares were the subject of dealings in a registered stock exchange in Pakistan at any time during the income year and remained listed on the stock exchange till the close of that year; or

(c) a trust formed by or under any law for the time being in force.

Appellant's claim that M/s. Ravi Textile Mills Ltd. was a public company as per para. B(2)(b) of Part IV of the First Schedule was refused by the assessing officer on the following grounds:

"(1) Company was not formally listed on stock exchange. As per information obtained by this office vide No.139, dated 27-11-1991 from Lahore Stock Exchange, Company was listed on 15-11-1989.

(2) Transaction has not taken place on floor of the exchange.

(3) The Assessee has failed to establish any genuine transactions (indicating name of the purchaser and number of shares) on floor of the house has taken place from which market price at the material time could be ascertained.

(4) The intention of the Legislature for allowing exemption under section 116 (sic clause 116) is to incurrege (sic encourage) investment. But here in this case motive of the transacting parties is different as discussed below:

(a) Transaction has taken place between the companies, which are Associated Undertaking. The company whose shares have been sold and selling and purchasing companies all are Associated Undertaking being managed by a family and even sale-deed has been executed by two brothers on behalf of two companies.

(b) M/s. Ravi Enterprises had shown a loan of Rs.84,57,739 from the said Associated Undertaking (purchasers and shares) in the balance-sheet as on 31-12-1988. The said loan has been adjusted against sale price and there is not debit/credit balance as per balance-sheet as on 31-12-1989.

(c) The amount of sale price i.e. 13.90 per share has been adopted to influence the general public etc. regarding goodwill of the company as prospectus for public issue was being published in newspaper on 2-10-1989. Above thesis has been fortified by the information obtained by this office from Lahore Stock Exchange vide No.139, dated 27-11-1991 according to which first dealing price of the share was Rs.11.80.

As per above discussion the entire capital gain of Rs.27,15,960 is being taxed..."

The assessment order has been reproduced in detail to show that the assessing officer deliberately obfuscated the issue and developed an unnecessary thesis which had no sanction in law. The grounds taken by him i.e. lack of formal listing, transactions not having taken place on floor of exchange, Assessee's failure to provide particulars in support of the market price and intention of the legislature, were totally irrelevant in determining the point at issue.

The sale of shares had admittedly taken place on 3-10-1989. Thus, assessing officer had to determine whether M/s. Ravi Textile Mills Ltd. was a public company as defined in the First Schedule. The definition of public company as per First Schedule has been reproduced -in the earlier part of this order. According to this definition a company would qualify as a public company if its shares were subject of dealings in a registered stock exchange in Pakistan at any time during the income year and the company remained listed till the close of the year.

The appellant produced evidence to show that the company had been approved by the Karachi Stock Exchange on 24-9-1989 for provisional listing and quotation of shares w.e.f. 2-10-1989. Ready Board Quotations of Karachi Stock Exchange for 2-10-1989 and 3-10-1989 had also been produced by the appellant before the assessing officer and the CIT(Appeals). While the assessing officer made no mention of this evidence, the CIT (Appeals) reproduced the Karachi Stock Exchange Quotations of company's shares on 2-10-1989 and 3-10-1989 in the appellate order.

It was shown by appellant's AR that as per clause 2(1)(iv) of the Listing Regulations of the Karachi Stock Exchange, "listed company" included a provisionally listed company under the said regulations. It was also pointed out by the AR that listing in any registered stock exchange in Pakistan fulfilled the statutory requirement.

?ITO's objection that the company was not formally listed on 2-10-1989 as it had been listed in Lahore Stock Exchange on 15-11-1989 was not warranted by the relevant law. The law did not provide for formal listing or listing in more than one Exchanges. As pointed out by the A.R. listing included provisional listing and as per documentary evidence the company had indeed been listed w.e.f. 2-10-1989. Thus, reference to Lahore Stock Exchange was entirely misplaced. One really wonders at the naivete of the assessing officer that he chose to rely his case on the listing of company in Lahore Stock Exchange while assessee had claimed the status of public company on the strength of its listing in Karachi Stock Exchange.

If one goes strictly by the letter of the law, a Company listed even a day before the end of the income year (the words used in the definition being at any time during the income year') and having remained listed till the close the income year in any registered stock exchange in Pakistan, would qualify as a public company. In this case the assessee took absolutely no chances and effected the sale of shares after the company had been duly listed and shares had actually been quoted in the Karachi Stock Exchange.

It is quite evident that the ITO and CIT (Appeals) ignored documentary evidence, misread the letter of law and pressed into service hypothetical grounds to reject a valid claim. Their orders are clearly unsustainable. Appellant's claim for exemption fulfilled the requirements laid down in clause 116 of the Second Schedule read with Para. B (2) of Part IV of the First Schedule. The assessing officer is directed to treat the capital gain of Rs.27,15,960 as exempt from tax and modify the assessment accordingly.

Assessment Year 1991-92:

In appeal in respect of assessment year 1991-92, objections have been raised against disallowance of depreciation allowance and addbacks out of P&L expenses.

The assessing officer accepted the declared trading results. He worked out the income by adding back certain P&L expenses to the accounting profits. There was no finding whether depreciation for this year had or had not been correctly worked out by the appellant. Earlier year's deprecation allowance was not allowed on the ground that the same had not been determined.

Appellant's applications for rectification of earlier assessments made on nil income are reportedly pending with the assessing officer. Last year's assessment is to be modified in consequence of this order in respect of assessment year 1990-91. After disposing of these applications and modifying last year's assessment, assessing officer would work out the depreciation for this year in accordance with law.

The P&L addbacks were made in an ad hoc manner. Since there was no history of examination of P&L expenses, assessing officer ought to have substantiated the addbacks. The assessment is accordingly set aside for re-?exmaination of the expenses. The assessing officer will confront the appellant with the grounds for addbacks, if any, in the course of reassessment proceedings and allow and appellant an opportunity to rebut assessing officer's objections in this regard.

Both the appeals succeed as indicated above.

M.BA./36/T.T. ???????????

Appeals accepted.