I.TAS. NOS.896/KB, 897/KB, 898/KB, 899/KB AND 900/KB OF 1987-88, DECIDED ON 16TH APRIL, 1995. VS I.TAS. NOS.896/KB, 897/KB, 898/KB, 899/KB AND 900/KB OF 1987-88, DECIDED ON 16TH APRIL, 1995.
1995 P T D (Trib.) 1440
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Acting Chairman and S.M. Sibtain, Accountant Member
I.TAs. Nos.896/KB, 897/KB, 898/KB, 899/KB and 900/KB of 1987-88, decided on 16/04/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl.(125)---Exemption---Industrial undertaking ---Assessee, a company, had itself stated before the Income Tax Officer and Appellate Assistant Commissioner that a sister registered firm was engaged in manufacturing of hosiery garments for the last several years; that its industrial unit was set up for the purpose by the registered firm and that the industrial undertaking claimed to be owned and managed by the assessee-company formed and registered under the Companies Act, 1913 having its registered office in Pakistan, comprised of machinery and building purchased from the said registered firm---Held. Appellate Assistant Commissioner in appeal misdirected himself in holding that its income qualified for exemption under Cl. 125 of Second Sched., Income Tax Ordinance, 1979 in circumstances.
1990 PTD (Trib.) 1065 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., C1.125---Exemption---Company---Industrial undertaking-- Exemption when available to an existing company setting up an industrial undertaking---Exemption provided under C1.125 of the second Sched. is available only to an existing company setting up Industrial undertaking between dates specified in the clause---Such exemption is not available to a nearly formed and registered company that acquires ownership and management of an existing industrial undertaking.
Muhammad YousufButt, D.R. for Appellant.
Muhammad Naseem for Respondent.
ORDER
These five appeals at the instance of the Department are directed against the orders of the learned AA.C. recorded on 24-3-1987, directing the assessing officer to accept the claim of the assessee for exemption of income under clause (125) of the Second Schedule to the Income Tax Ordinance and setting aside the assessment orders to be passed de novo.
Briefly the facts are that the respondent was incorporated as a private limited company on 23-6-1980. The sponsor, directors were Mrs. Halima Bai, Mr. Abdul Hameed and Mr. Abdul Majeed. The first two sponsor Directors were also partner in a registered firm by the name of Messrs Halima Enterprises. This firm was engaged in manufacturing of hosiery garments.
The learned A.A.C. has reproduced at pages 2 and 3 of his order the reasons recorded by the I.T.O. for rejecting assessee's claim of exemption of its income under clause (125) of the Second Schedule and the arguments offered by the assessee against the findings of the I.T.O. before the learned AA.C., which are being reproduced hereunder for convenience of reference.
The appellant has filed his first return of total income for the yearz1981-82 and has claimed exemption under clause (125) of the Second Schedule. The assessing officer has rejected the claim of exemption stated in the assessment order for the following reasons:--
(i)The assessee is engaged in hosiery goods business while the exemptionis for garments manufacturers.
(ii)The assessee's business is not a new undertaking but a continuation ofbusiness of registered firm.
(iii)The assessee is not a manufacturer at all. This limited company was incorporated on 23-6-1980 consisting of three directors namely Mr. Abdul Majeed, Mrs. Halima Bai and Mr. Abdul Hameed. Three directors except for Mr. Abdul Majeed are also partners in the registered firm Messrs Halima Enterprises. The registered firm carried on its business side by side during the assessment year 1981-82. The same premises was utilized, the same machinery was used, the electricity expenses were divided and obviously the same labour force worked. Actually the registered firm transferred some of its production in the name of limited company for exports purpose and the limited company concocted a fictitious trading account. It was only on 1-1-1981 when the firm discontinued its business and the assets and liabilities of the registered firm were transferred to limited company vide vendors agreement executed on 21-12-1982. While this agreement is relevant to subsequent year and shall be examined at the time of assessment proceedings for that year, it is clear that it was the registered firm which was engaged in manufacturing and claimed depreciation on machinery and not the limited company.
(iv) Lastly, the purpose of statute is to encourage new production unit for garments manufacturing and so the exemption in case of business this company which is only a continuation of old business in a new status is not allowable."
In assailing the above contentions, the Authorised Representative submits that the assessing officer has based his findings upon complete misunderstanding of fact and legal position e.g.:
(1)The export orders from year to year would show that the goods sold are made of yarn and cloth and are meant for human wear and for no other purpose. They have thus necessarily to be described as `Garments' and nothing else. The objection of the assessing officer that the exported items are merely `hosiery products' has no merit. In subsequent years assessment, the assessing officer has himself admitted manufacture and sale of garments. The objection, therefore, has no merit.
(2)The second and fourth objections are in fact one and the same. The assessing officer does not dispute that the limited company is a juristic person which has come into existence by a memorandum and Articles of Association during the year and is completely independent of the Registered Firm. The assessing officer does not doubt rather admits that the limited company has purchased machinery and building from the Registered Firm. The memorandum of Association does not sanction any authorisation of taxing over the existing business. The assessing officer cannot dispute that while the company had come into being and was assessed to Income Tax, the registered firm has continued to be assessed in a separate circle for a number of subsequent years simultaneously. The assessing officer does not seem to have examined properly the requirement of clause (125) of the second schedule, which does not deny exemption if the machinery had been employed before or if some other tax payer had been earlier carrying on a similar business. The assessing officer seems to have given an interpretation beyond the language of the clause.
(3) The assessing officer's third objection appears very strange. He seems to have been influenced by certain incorrect assumptions of fact e.g.
(i) He has assumed that the three Directors of the limited company are the partners of the registered firm which is not correct.
(ii) The firm comprises of six partners in which Abdul Hameed is the only male partner.
(iii) The Director of the company, Mr. Abdul Majeed was not a partner of the Registered Firm. Thus, four of the partners of the firm have nothing to do with the limited company.
(iv) The Income Tax Officer has incorrectly assumed that the same labour was employed for which he has not given any data or basis.
(v) The limited company has made its own purchases and sales and has incurred its own expenses, which the assessing officer has considered and mostly allowed.
(vi) The appellant company commenced commercial production of its own with effect from 23-6-1980 and as per their own statement of account submitted they have shown two periods in their computation:--
(a) 1-1-1980 to 22-6-1980 Pre Incorporation period.
(b) 23-6-1980 to 31-12-1980Post Incorporation period.
This is because while the limited company was mooted and arrangements were made, there were certain formalities regarding availability of name, payment of fees, drafting and printing of Memorandum Stamping and Incorporation which of course had to take time. This all is also obvious since the export orders had in the meantime been booked by the company. The appellant has come forward even to include the transactions and profits of pre-incorporation period of his own which refutes the contention of the assessing officer. If the objection of the assessing officer is taken to its logical conclusion, in that situation, the assessing officer himself would not be entitled to assess the transactions and profits of the pre-incorporation period in the hands of the company simply because then the company was not in existence.
(vii) It was very strange that the assessing officer was accepting exports and purchases of many lacs of rupees in the hands of company in the face of fact that the firm was carrying on business during the year simultaneous with the company while for the purpose of granting exemption, he was waiting to see that the Registered Firm was to close business.
(viii) It is not correct that the -Registered Firm has been allowed depreciation and the limited company has withdrawn its claim. The assessing officer has himself allowed the company a depreciation, claim of Rs.61,340 while he rectified his own assessment order.
(ix) Strangely enough while he promised to look into the matter afresh in1982-83 and in that year he admitted manufacture and export of garments, the matter of granting exemption was overlooked for future years as well without any reason.
We have heard the learned D.R. Mr. Yousuf Butt and Mr. Muhammad Naseem Ahmed at length.
On the facts and circumstances recorded by the learned AA.C. in his impugned order we are persuaded to agree with the learned D.R. that on the confession of the assessee both before the learned I.T.O. as well as the learned AA.C. that a sister registered firm was engaged in manufacturing of hosiery garments for the last several years; that an industrial undertaking was set up for this purpose by the registered firm and that the industrial undertaking claimed to be owned and managed by the assessee company formed and registered under the Companies Act, 1913 (VII of 1913); having its registered office in Pakistan, comprised of machinery and building purchased from the aforesaid Register Firm, the learned AA.C. misdirected himself in holding that its income qualified for exemption under clause (125) of the Second Schedule. The decision of this Tribunal reported as 1990 PTD (Trib.) 1065 relied upon by Mr. Muhammad Naseem Ahmed in support of respondent's claim of exemption is of no avail because while exemption provided in clause (125) ibid is available to an existing company setting up an undertaking between the first day of July, 1978 and the thirtieth day of June, 1994, both days inclusive, it is not available to a newly formed and registered company that acquires ownership and starts managing the whole or part of an existing industrial undertaking. Since, admittedly, the respondent company did not itself set up an industrial undertaking between the specified dates, its claim for exemption of its income from such industrial undertaking under clause (125) of the Second Schedule to the Income Tax Ordinance is untenable in law. Accordingly, the impugned orders of the learned C.I.T.(A) are vacated and the assessment orders are restored on the issue of exemption under clause (125) theSecond Schedule.
Regarding second ground taken in all these appeals we find that the learned AA.C. has not set aside the assessment orders in toto except for assessment year 1985-86. On perusal of impugned orders we find that the learned AA.C. was justified in setting aside the assessment orders for and from assessment years 1981-82 to 1984-85 on the question of treatment of custom duty rebate and application of 12% G.P. rate as well as on several other issues on year to year basis. Assessment order for 1985-86 has been set aside in toto because total income had been determined at Rs.18,00,000 without recording any basis in an ex parte order. Accordingly the impugned orders setting aside the assessments on various issues do not call for any interference; hence confirmed.
All the appeals are allowed on the first ground while on the second ground all the appeals, are dismissed.
M.BA./132/T Order accordingly.