I.TAS. NOS. 3967/KB TO 3970/KB OF 1986-87, DECIDED ON 2ND NOVEMBER, 1994, VS I.TAS. NOS. 3967/KB TO 3970/KB OF 1986-87, DECIDED ON 2ND NOVEMBER, 1994,
1995 P T D (Trib.) 440
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman
and S. Shoukat Ali Zaidi, Accountant Member
I.TAs. Nos. 3967/KB to 3970/KB of 1986-87, decided on 02/11/1994.
(a) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., Rr. 1, 2 & 3---Allowance for depreciation---Extra depreciation allowance for multiple shift working---Word "shift"-- Connotation---Storage tanks used for molasses---Extra depreciation allowance for multiple shift working can be allowed only if successive extra shifts or double or triple shifts have been distinctly designed---Where no such distinction had been made which could give a detail of shifts, Extra Depreciation Shift Allowance could not be allowed---Extra Depreciation Shift Allowance, therefore, cannot be allowed on storage tanks used for molasses.
Sub-rule (2) of rule 3 to the Third Schedule, Income Tax Ordinance, 1979 states that extra depreciation allowance under sub-rule (1) shall be proportionate to the number of days during which the double or triple shifts are worked, and for the purpose of computing this allowance, the normal working days throughout the year shall be taken as three hundred.
Rule 3 lays special significance to the word "shift" which means a mode of the devolution or substitution for that primarily prescribed. It also conveys the sense of transferring the duties from one party to the other or from one side to the other. The word "shifting", therefore, conveys the sense of secondary or executory use of an asset, which, when executed, operates in derogation of a preceding state. The basic sense of the word "shift" is, therefore, the change from one party to the other or from one position to the other position or from one timings to the other timings. Something which gives a sense of constant use without the change of working hands, timings of the worker, or the use of a certain asset without a regular interval does not convey the sense of shifting.
The word shift is synonymous with the number of days work whether it is one day's work or shift-wise work in a day. This again emphasises the timings of a particular shift. A shift means a certain timing, during which a certain performance is fulfilled or a certain use of plant and machinery is made.
Extra shift or triple shift depreciation allowance requires the clear divisions of shifts succeeding one after the other. Rule 3 also requires the acceptance of double shift working or triple shift working. The same is distinguished from the depreciation allowed under general rate vis-a-vis extra or multiple shift working. The use of any asset falling in the category of plant and machinery, entitles a tax payer to normal depreciation for which sub rule (2) of rule 1 is applicable but for extra shift depreciation special rule has been provided as rule 3. Further sub-rule (2) of rule 3 also specifies the use of the asset in respect of the number of days during which the double or triple shift has worked. Therefore, extra shift allowance can be allowed only if successive extra shifts or double or triple shifts have been distinctly designed.
In the present case no such distinction has been made which could give a detail of shifts, breaks or changes. As such extra shift depreciation allowance cannot be allowed to storage tanks, used for molasses.
Gunaish Sugar Mills v. CIT (1960) 73 ITR 395; AIR 1967 S 315 and Stroud's Judicial Dictionary (Sweet and Maxwell), 1974 Edn., Vo1.V, p.2531 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 23(v) read with Third Sched., Rr. 1, 2 & 3---Depreciation---Dock lines-- Existence of assets---Income Tax Officer, before denying the existence of Dock lines, had to assure hi If that the asset had not really existed---Income Tax Officer, in such a case, was to conduct an enquiry and to physically examine evidence and other relevant proofs to establish whether the assets had existed in the relevant year---Only initial depreciation in the first year and normal depreciation in the subsequent year will be allowed excluding the extra shift and triple shift depreciation.
(c) Income-tax---
----Addition ---Deletion of addition by Commissioner of Income-tax (Appeals)--- Department did not contest the deletion before any higher appellate forum---Failure of department to challenge deletion, would tantamount to the acceptance of deletion.
(d) Income-tax---
----Addition---Assessee-Company having storage tanks used for molasses-- Defects in accounts pointed out by the Income Tax Officer were not only specific but carried weight as well, which were partly conceded by the Authorised representative of the assessee in so far as the variation of purchase rates and the unverifiability of the freight paid and absence of record of wastage and leakage were concerned---Additions made by the Income Tax Officer were maintained by the Tribunal in circumstances.
(e) Income-tax---
----Penalty---Business expenditure---Word "penalty"---Connotation---Penalty when can and cannot be claimed as admissible expenditure---Principles.
Black's Law Dictionary; 1986 PTD 52; ITR Vol. 73, p.969; (1978) 37 Tax 257; (1976) 103 ITR 298 and (1960) 2 Tax (5-377) ref.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 23(xviii)---Penalty---Business expenditure ---Assessee, a company exporting molasses had paid the amount of penalty to the foreign buyers as the contents of sugar in molasses bulk was short of the required percentage as per mutual agreement and understanding ---No infraction of law, breach of public interest, violation of public law or civil law on the part of assessee was thus committed in the case---Penalty paid by the assessee, therefore, was on account of the breach of the contract having pure business character as such an admissible expenditure.
Black's Law Dictionary; 1986 PTD 52; ITR Vol. 73, p.969; (1978) 37 Tax 257; (1976) 103 ITR 298 and (1960) 2 Tax (5-377) ref.
Basharatullah Khan, D.R. for Appellant.
Muzaffar Jafferi, A.R. for Respondent.
Date of hearing: 2nd November, 1994.
ORDER
SHAUKAT ALI ZAIDI (ACCOUNTANT MEMBER).--These four departmental appeals lodged against vacating several disallowances by the learned CIT(A) are adjudicated by a combined order as there are also among other issues common ground like charging the triple short depreciation on molasses tank, initial normal and triple shift depreciation on rocklines disallowed by the I.T.O. and allowed by the learned CIT(A). As such the common grounds of all the years are adjudicated as under
2. The I.T.O. (hereinafter referred to as the appellant) noted that the initial, normal and the triple shift depreciation was claimed by the assessee who earned income from the sale of bulk storage of mollasses etc. On examination it was concluded by the I.T.O. that for the year 1981-82 total depreciation was claimed at Rs.51,99,867 out of which a sum of Rs.9,62,315 claimed for the triple shift depreciation allowance pertained to plant and machinery (storage and tank) costing Rs.96,26,23,156. The I.T.O. allowed the initial and normal depreciation for 1981-82 and normal depreciation for all the subsequent years. The triple shift depreciation was, however, disallowed in all the years on the ground that storage tanks were passive assets and did not fall in the category of plant and machinery in so far as extra shift allowance could be applicable. The ITO fortified his view on an Indian case reported as Gunaish Sugar Mills v. CIT (1960) 73 ITR page 395).
3. The learned D.R. Mr. Basharatullah Khan supported the ITO stand asserting that the storage tanks are more like godowns and stores where the goods are stored and released as per requirement. As such the extra shift allowance could not be applicable on these tanks.
4. The learned A.R. Mr. Mazhar Jafari repeated almost the same arguments which he had adopted before the learned CIT(A).
5. The learned A.R. reiterated that once the ITO had accepted that the storage tanks fell in the category -if "plant and machinery" then Rule 3 of the Third Schedule of the Income Tax Ordinance, 1979 was initially attracted. Further the learned A.R. insisted that after allowing the initial or normal depreciation on any unit of the plant and machinery the ITO had to allow the extra shift allowance provided it proved to his satisfaction that such machinery and plant was on operation and use of more than three hundred normal working days in the relevant years. The learned A.R. stressed that the storage tanks have been in use throughout the year for all days twenty four hours, as such the triple shift depreciation allowance could not legally be taken away for the tax payer.
6. The learned A.R. also stressed that the present Income Tax Ordinance of 1979 was distinguishable from the old Income-tax Act of 1922 where a Schedule of Depreciation was provided detailing various assets on which single, double or triple shift allowance could be allowed. In the present Income Tax Ordinance of 1979 no such list of asset was provided. The allowances were rather a general in nature. For the triple shift or double shift or extra shift depreciation the ITO only had worked for the required period. As such the ITO had no such discretion in allowing normal or initial depreciation and withholding the triple shift depreciation on any ground.
7. The learned A. R. also advocated that the case of M/s. Gunaish Sugar Mills v. CIT as relied upon by the ITO pertained to the depreciation provision of Income-tax Act, 1922 which no longer existed in Pakistan.
8. We have examined the record and also the assertion of the ITO and have also heard the cross-arguments of both the sides/parties.
9. At the outset we feel to clarify the position with regard to the initial and normal depreciation with regard to the storage tank. The department has agitated against the initial, normal and triple shift depreciation allowance on storage tank and docklines for all the years. The claim of the department is incorrect (For example Ref. Ground No.2 Appeal of 1981-82), which reads as under:--
"The learned Appellate Assistant Commissioner (D), Karachi was not justified in allowing normal initial and triple shift allowance on storage tanks and pipelines (Dock Wires) and installation."
10. Since the ITO had himself allowed the initial and normal depreciation on storage tanks, therefore, we hold that the ground of appeal are defective as far as reference to initial and normal depreciation is concerned. We, therefore, will restrict our discussion only to the triple shift disallowance of storage tanks and also to the disallowance of initial normal and triple shift in respect of Dock Lines whose very existence has been denied by the ITO. Now we refer to the relevant rules governing the depreciation allowance Rule 1(3)(b) of the Third Schedule of the Income Tax Ordinance reads as under :--
"Such building or furniture has been so used during the income year."
11. This sub-rule only provides the depreciation allowance to assets used for the period which is the basic condition. As for the triple shift allowance is concerned the same is dealt by the Rule 3 of the Third Schedule which reads as follows:--
"Rule (3). Extra depreciation allowance for multiple shift working--(i) In the case of a machinery and plant to which the general rate applies an extra-depreciation allowance equal to fifty per cent. of the allowance computed under sub-rule(1) of rule 2 shall be allowed on account of double shift working and hundred per cent. of such allowance on account of triple shift working ... ... ..."
12. So far the sub-rule (2) of rule 3 to the Third Schedule is concerned the same states that extra-depreciation allowance under sub-rule(1) shall be proportionate to the number of days during which the double or triple shifts are worked, and, for the purpose of computing this allowance, the normal working days throughout the year shall be taken as three hundred.
13. The above text of Rule 3 lays special significance to the word "shift" which means a mode of the devolution or substitution for that primarily prescribed. It also conveys the sense of transferring the duties from one party to the other or from one side to the other. The word "shifting", therefore, conveys the sense of secondary or executory use of an asset, which, when executed, operates in derogation of a preceding estate. The basic sense of the word "shift" is, therefore, the chance from one party to the other or from one position to the other position or from one timings to the other timings. Something which gives a sense of constant use without the change of working hands, timings of the worker, or the use of a certain asset without a regular interval does not convey the sense of shifting.
14. This position was considered in a case of Printing Industry, Industrial Agreement (AIR 1967 S 315) and explained in Stroud's Judicial Dictionary (Sweet and Maxwell), 1974 Edition, Vol.V, page 2531 wherein it was held that he word shift was synonymous with the number of days work whether it was one day's work or shift-wise work in day. This again emphasises the timings of a particular shift. In another case reported as Flaming v. Howden L.R.I. Supreme Court 372 (Reference Stroud's Judicial Dictionary, 4th Edition, Page 253) wherein it was held that if not strictly, at all event not so as to carry it beyond the performance for which it was rescinded, thus a shift means a certain timing, during which a certain performance was fulfilled or a certain use of plant and machinery was made.
15. Carrying the above definition of shift further, it shows that extra-shift or triple shift allowance requires the clear divisions of shifts succeeding one after the other. Rule 3 of the Income Tax Act as referred above also requires the acceptance of double shift working or triple shift working. The same is distinguished from the depreciation allowed under general rate vis-a-vis extra or multiple shift working. The use of any asset following in the category of plant and machinery, entitles a tax payer to normal depreciation for which sub rule (2) of the rule 1 is applicable but for extra-shift depreciation special rule has been provided as rule 3 quoted above. Further sub-rule (2) of rule-3 also specifies the use of the asset in respect of the number of days during which the double or triple shift has worked. Therefore, extra-shift allowance can be allowed only if successive extra-shifts or double or triple shifts have been distinctly designed. In the instant case no such distinction has been made which could give a detail of shifts, breaks or changes. As such extra-shift allowance cannot be allowed to a storage tanks, in the instant case used for mollasses.
Depreciation on Dock Lines:
16. The I.T.O. has totally rejected the depreciation claimed on assets amounting to Rs.36,32,039 relating to the Dock Lines. In this respect the I.T.O. noted that payment of Rs.33,36,750 made to one Messrs Anwer Baig & Co. for the fabrication of Dock Lines were found by him, to be unverifiable as the said party was not available at the given address. Another amount of Rs.69,907 claimed to have been paid to M/s. Ghulam Rasool & Co. as Diesel Generator hiring charges for the purpose of welding and payment of Rs.2,25,382 made to Mr. Amanat Ali Baig was also found unverifiable. The ITO issued notice under section 148 for the personal appearance but none of the above parties appeared. The total payment was, therefore, considered baseless and bogus and as such disallowed. The ITO not only disallowed the claim of depreciation but also proceeded to addback interest claimed to I.D.B.P. in respect of the relevant amount of loan. The I.T.O. concluded that the same asset had never existed at all. Consequently, no interest to I.D.B.P. was payable. The learned A.R. has advocated that the assets for the claim of depreciation, was very much existing in the factory and could have been physically examined by the I.T.O. If a proper enquiry was conducted to verify whether Dock Lines were operating or not, the ITO could find it operating. It was also pointed out by the appellant, that merely by not finding the parties to whom the payment was made, by the company on account of wrong addresses or non-appearance in response to the notice under section 148, cannot cause to presume that the expenditure made on the Dock Lines was bogus. It is also pointed out that the asset was installed by the credit facilities of the loan advanced by the Industrial Development Bank of Pakistan who, after verifying that the Dock Lines 20" Dia had been laid down in the premises of the factory issued a certificate vide No.K-ED-III W-II-4376, dated 25th June, 1984 (Reference page 7 of the learned Appellate Assistant Commissioner's Order, dated 7-12-1986).
17. The learned A.A.C. has considered the I.T.O.'s action as misconceived and misdirected and allowed normal, initial and triple shift depreciation on this asset of Dock Lines.
18. The learned D.R. on the other hand has contended that once the I.T.O. has issued notice under section 148 calling for proofs of the payments to the recipient (payment made with regard to installation of pipelines) having received no response, he was justified to reject claim of expenses.
19. We have examined the issue and after hearing both sides have come to the conclusion that the I.T.O. had wrongly denied the existence of the Dock Lines without assuring himself that the asset had not really existed in the premises of the factory. The order of the ITO in this respect is set aside with the direction that the ITO should conduct an enquiry and also to physically examine evidences and other relevant proofs to establish that whether the assets had existed in the relevant years. As far the depreciation is concerned only initial depreciation in the first year and normal depreciation in the subsequent year will be allowed excluding the extra shift and triple shift depreciation which has been disallowed in the case of storage tanks etc.
20. The Departmental Appeal is also directed against the deletion of Rs.14,007 made by the ITO under section 12(7). The ITO has added Rs.14,007 as deemed income on the amount receivable from one of the Directors amounting to Rs.1,00,052 where no interest was charged. The facts of this issue are that the ITO calculated the deemed interest income under section 12(7) on an amount of Rs.1,00,052 standing in the name of M/s. Sindh Enterprises Ltd. The learned CIT(A) on the other hand deleted this addition on the basis of the order of his predecessor for 1979-80 vide Order No.CIT/Z-II, 150-151, 82, dated 10-3-1985.
21. The issue is examined it is held that the addition made in the preceding year under section 12(7) was deleted by the learned CIT(A) and the department did not contest the deletion before any higher appellate forums which tantamounts to the acceptance as the conditions, circumstances and the reasonings of this addition made by the ITO remains the same as in the preceding year, therefore, the addition made by the ITO cannot be sustained. We, therefore, confirm the deletion of Rs.14,000.
Addition in the Trading Account 1982-83):
22. In the year 1982-83 the respondent declared export sales of Rs.10,27,40,402 with the GP rate of 3 per cent. It was noted by the assessing officer that the clearing and forwarding paid and the export duty and wharfage etc. were chargeable to trading account and not to P&L Account. The trading account was therefore recast by him by adopting total expenses, under the above-referred heads amounting to Rs.2,63,45,025 which resulted in a gross loss of Rs.1,07,87,432. The ITO also pointed out to certain other defects also which merited the rejection of returned version. It was further pointed out by the 1T0 that no stock register was maintained and no wastage on account of leakage and spilling was declared. The ITO listed various examples of leakage differences on page 3 which confirmed that there was a difference between net weight loaded and the net weight received. This difference as per assessee's explanation was due to the spilling and leakages etc. The ITO, therefore, came to the conclusion that the books of accounts were cooked up and were un reliable. He further observed that the purchases were not fully open to verification as the purchases from Khandsari amounting to Rs.50,03,557 were without addresses and details, and as such were unverifiable. The ITO has narrated various examples of unverifiability and incomplete addresses in respect of the account of Khandsari purchases, which are available at pages 3 and 4 of his order. Further, the ITO also noted that there was a grave difference in the rates of purchase in relation to Khandsari, which ranged from Rs.32 per maund to Rs.628 per maund. The ITO rejected, in this respect, the appellant's pleading, that the variation in the purchase rates was due to the quality and timing of purchases of the Khandsari items. The ITO also found that the freight expenses paid to the transporters (Awan Carriage Company Rs.769,384) had remained unverifiable. The ITO also issued a notice under section 62 requiring specific inquiry and reply from the assessee-Company in this regard. The I.T.O. also issued notice under section 148 to various parties of transporters and having received no response from them issued another notice under section 62 dated 11-6-1985 confronting the appellant with the defective addressed. On further verification of the given addresses, it was found that the parties did not exist on these addresses. Therefore, the ITO concluded, that the freight paid to the Khandsari supplies amounting to Rs.1,96,744 paid to M/s. Alladin and Brothers and Rs.1,25,496 paid to Mollases Carriage Company were all unverifiable. The ITO also noted that an amount of Rs.38,50,653 paid to Lari Drivers also could not be verified due to incomplete addresses. The declared trading version as such was rejected and 10 per cent. GP was applied on the declared sales of Rs.10,27,40,402 whereby an addition in the trading account was made amounting to Rs.1,02,74,040. The ITO while applying the GP at 10% referred to a parallel case vide NTN 12-02-2219160 relating to the assessment year 1982-83 completed under section 59(1).
23. The learned A.R. on the other hand contended that all expenses in relation to business pertained to the selling expenses and as such were correctly debited to the P&L Account. The recasting of the account as made by the ITO was, therefore, unjustified.
24. It was also pleaded by the learned A.R. that the parallel case as stated by the ITO, was never confronted to the appellant. It was also stated that the stock register was maintained but as it was never specifically required by the ITO, therefore, the same was not produced before him. Shortage and leakage was, the appellant advocated, due to the mishandling of loading and unloading which due to the carelessness resulted in short weight received. With regard to the Khandsari price variation it was contended that the purchase price changes every day and on every station but as the ITO has not quantified the unverifiable purchases, therefore, his remarks be considered as general observations. The payments to the transporters were made by cheque or in cash but were according to prevailing rates which could be verified from the market.
25. The learned AA.C. has observed that the objections raised by the ITO were partly correct, but he concluded that the addition was excessive and as such the same was reduced to Rs.10,00,000 against Rs.2,10,61,463 as worked out by the ITO. The learned AA.C. and the learned A.R. both have also referred to a subsequent assessment for the year 1985-86 wherein the addition in the trading was restricted to Rs.10,00,000 only by the ITO.
26. The issue has been examined, it is noted that the defects pointed out by the ITO are not only specific but carry weight as well. Further, the defects have also been partly conceded by the learned A.R. in so far as the variation of the Khandsari purchase rates and the unverifiability of the freight paid and the absence of the record of wastage and leakage are concerned. We feel that the analogy which has been drawn by the learned A.R. and also by the learned AA.C. in respect of the assessment for the subsequent year of 1985-86 cannot hold good for the year 1982-83. The ITO did not have the assessment for 1985 86 before him. As such the same could not be applicable for preceding year. The restriction of the addition as made by the learned CIT(A) cannot therefore be sustained.
27. We are inclined to maintain the addition made by the ITO and restore the addition of Rs.2,10,61,463.
28. Penalty.
The defendant had claimed Rs.7,30,197 as penalty paid to the principal's abroad on account of sugar contents percentage than required as per agreement, between the principal and the assessee-Company. The ITO observed that this penalty was not allowable under the Income Tax Law. Reference page 8, para 8 of the ITO's order. On the other hand the learned A.R. contended that this penalty was paid as per business exigencies which were incidental to carrying on the business. The learned D.R. on the other hand contended that the penalty was charged on account of breach of the contract made by the defendants. As such it was inadmissible.
29. We have examined the case in the light of the observations of the ITO and the cross-arguments of the learned A.R. as well as the learned D.R.
30. According to Black's Law Dictionary the word `penalty' is corporeal term. It has a certain character of elasticity and denotes an idea of punishment for corporeal conforming for pecuniary, civil or criminal acts, therefore, to restrict penalty to only case of pecuniary punishment does not give comprehensive understanding of the term penalty.
31. There exist instances when the penalty claimed as admissible expenses has been disallowed by the higher Courts on account of the conduct of the business contrary to law. Reference in this respect is made to a case reported in 1986 PTD 52. There are also cases where the penalty despite the fact that penalty paid, involves breach of the warranty resulting in claim of damages from the other side of the transaction, was allowed as admissible expenditure. This was made on the ground that breach had occurred as an inevitable consequence of the business. In a case reported as ITR Vo1.73, page 969 such losses were held to be allowable as connected with the business in the sense that they were very incidental to the trade itself. The nature of the trade, therefore, is to be considered and it is to be established whether the damages claimed were really unavoidable on the part of the tax payer.
32. In a number of cases Indian and Pakistani Courts both have held that a clear distinction must be made between the business or non-business exigencies resulting in the claim of damages. The true nature of the business must, therefore, be examined. In a case reported as (1978) 37 Tax 257 it was held that the assessee an exporter of certain quantity of cloth agreed to pay amount of penalty for short exports which later' on was held as allowable expenditure, as it was necessary for him to retain his customers abroad as such it was a business requirement. Further, it also has to be examined by the Income Tax Authorities that whether penalty paid involved any breach of public policy or public interest, or the breach was only in respect of the mutual agreement between the two businessmen and that the act of violation of the contract did not involve any infraction of law. The penalty so paid becomes a business expenditure against the breach of a pure business agreement. The Indian Court held in a case reported as (1976) 103 ITR 298 that penalty paid by one businessman to another businessman on purely business basis is an admissible expenditure. In still another case reported as (1960) 2 Tax (5-377) decided by the Income Tax Appellate Tribunal, vide ITA No.1107/KP of 1959 60, it was held that the recovery of penalty as extra amount for late supplies was in the nature of compensation and not a penalty for any deliberate wilful or dishonest act. Here again it was found necessary to distinguish between any illegal act and between business breach of the contract.
33. Coming to the instant case we find that the respondent-Company has paid the amount of penalty to the foreign buyers as the contents of sugar in mollasses bulk was short of the required percentage of sugar as per mutual agreement and understanding. This is, therefore, a breach of agreement, which G is purely of business nature. The respondent has not violated any public law. They have also not jeopardised any public interest whatsoever. The purchases made by the respondent were through their buying agents etc. and therefore they could not exercise a quality control on getting the required sugar contents in the bulk. As such the bulk exported to foreign buyers was found by the principals, having less percentage of sugar' content. The penalty was, therefore, levied as term of contract between the importers and exporters was not fulfilled. It was accordingly paid to save further export transactions.
34. We do not find any infraction of law, breach of public interest, violation of public law or any civil law on the part of the respondent. Therefore, we hold that the penalty was paid by the respondent on account of the breach of the contract having pure business character. As such it is an admissible expenditure. It is therefore held that the learned AA.C. has rightly deleted the addition to which no exception can be taken. The impugned
direction of the learned AA.C. is confirmed.
35. The appeals stand disposed of as above.
M.BA./73/TOrder accordingly.