1996 PTD (Trib.) 1013
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and S.M. Sibtain, Accountant Member
I.T.As. Nos.5128/KB of 1991-92, 1793/KB and 2238/KB of 1994-95, decided on 04/02/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 23(l)(vii)---Deduction---Interest---Capital borrowed for balancing, modernization and replacement meant for increasing the efficiency and capacity of the production in existence and not for exploring new products---Claim on account of interest on borrowed capital is admissible deduction.
Packages Limited v C.I.T. 1993 PTD 758 fol.
1991 PTD (Trib.) 531; 1989 PTD 500=1989 SCMR 61; 1993 PTD 758 = 1993 SCMR 1224 ref
(b) Income tax---
---- C.B.R. Circular No.9 of 1943---Interpretation---Hire-purchase agreement-- Development and concept---Conditions necessary to prove that agreement is in fact a hire-purchase agreement---Ownership---Nature---Determination---Duty of Court---Depreciation on goods under hire-purchase agreement ---Admissibility-- Principles---Expression "hire-purchase" has to be construed in its ordinary common sense---Agreement in question was termed, as "lease purchase agreement"---Effect---Mere title to an agreement is not sufficient to bring the transaction in a particular category but the agreement's nature is to be determined on the basis of contents of the same---Ownership in a hire-purchase agreement is not transferred to the hire-purchasers at the time of commencement of the contract---Allowing of depreciation in a transaction in accordance with C.B.R. Circular No. 9 of 1943 is not sufficient to prove the transaction to be a hire-purchase transaction.
(1979) 39 Tax 47 (Trib.); 1988 PTD (Trib.) 428; Dictionary of English Law by Ear Jowitt, pp.913-914; Halsbury's Laws of England, Third Edn., Vol.19, Paragraph 823, at pp.510-511; K.L. Johar & Co. v. Deputy Commercial Tax Officer (1965) 2 SCR 112; Babu Balmakund v. Narayan Singh AIR 1934 Oudh 133; Anand Singh v. Commercial Trading Corporation AIR 1935 Lah. 861; Shewram Das Agarwala v. Arobinda Podder PLD 1961 SC 321; Sundaram Finance Ltd. v. State of Kerala (1966) 2 SCR 828; Mass v. Pepper 1905 AC 102 and Moddal v. Thomas & Co. (1891) 1 QB 230 ref.
(c) Income tax---
---- Lease purchase agreement of equipments by the assessee, an oil Refinery-- Ownership---Nature---Depreciation---Admissibility---Lease purchase agreement in the case was in fact an agreement of advancing loan by the Bank to assessee on the security of hire-purchase agreement and-the transaction was merely a loan transaction and the lender i.e. the Bank was to be repaid its loan and to have a security of the transaction by sham hire-purchase agreement ---Assessee was merely financed by the Bank and the assessee had purchased the equipments according to its requirements and specifications from the suppliers---Property in the equipments thus passed to the assessee when the contract was made and it was immaterial if the time of payment of the price was postponed beyond the date of contract---Ownership in the equipments thus became vested in the assessee upon the making of the contract and the alleged hire-purchase agreement was in fact not in the nature of hire-purchase agreement but in the nature of sale---Ownership and title in the equipments stood transferred in favour of assessee from the date of acquiring the equipments ---Depreciation, therefore, has to be allowed to the lessee on the entire purchase price as per agreement and C.B.R. Circular No.9 of 1943, in circumstances.
K.L. Johar & Co. v. Deputy. Commercial Tax Officer (1965) 2 SCR 112 fol.
1993 PTD 758 = 1993 SCMR 1224; (1979) 39 Tax 47 (Trib.); 1988 PTD (Trib.) 428; Dictionary of English Law by Ear Jowitt 913-914; Halsbury's Laws of England, Third Edn, Vol. 19, Paragraph 823, at pp.510-511; K.L. Johar & Co. v. 'Deputy Commercial Tax Officer (1965) 2 SCR 112; Babu Balmakund v. Narayan Singh AIR 1934 Oudh 133; Anand Singh v. Commercial Trading Corporation AIR 1935 Lah.' 861; Shewram Das Agarwala v. Arobinda Podder PLD 1961 SC 321; Sundaram Finance Ltd. v. State of Kerala (1966) 2 SCR 828; Mass v. Pepper 1905 AC 102; Moddal v. Thomas & Co. (1891) 1 QB 230 and Darngavil Coal Co. v. Francis (1913) 7 Tax Cases 1 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.12(12)---Assessee had merely arranged a loan from Bank on security of goods and the terms and conditions contained in the agreement clearly showed that the assessee had purchased the equipments on placing orders with the suppliers of goods on the contract price which was the market price at the time of purchase---Held, notwithstanding the fact that the equipments were acquired in the Assessment year 1985-86 there was no question of applying 5.12(12), Income Tax Ordinance, 1979 to the transaction in question as the price which had been paid by the assessee was not less than 'the fair market value thereof.
Shabbar Zaidi, F.C.A. for Appellant.
Mehfoozur Rehman Pasha, D.R. for Respondent
Date of hearing: 5th December 1995
ORDER
The above appeals are directed against the orders, dated 8-12-1991 by the learned C.I.T. (A-V), Karachi, 21-2-1995 and 22-6-1995 by the learned C.I.T. (A-II), Karachi.
2. Heard Mr. Shabbar Zaidi,- F.C.A., learned representative for the appellant and Mr. Mehfoozur Rehman Pasha, learned representative for the department.
3. The first common objection in all the three assessment years under appeal is to the disallowance of interest claimed and confirmation thereof by the learned C.I.T.(A). Briefly stated the relevant facts as gleaned from the assessment orders are that on perusal of computation of income the assessing officer found that the assessee had subtracted a sum of Rs.69,'76,000 in the Assessment year 1990-91. Rs.12,31,48,000, in the Assessment year 1991-92 and a sum of Rs.1,03,27,000 in the Assessment year 1992-93 from the total income, on account of borrowing cost included in the capital work-in-progress. The assessing officer confronted the appellant as to why this claim may not be disallowed. The appellant contended that the interest was allowable expenditure under the provisions of section 23(1)(xv) of the Income Tax Ordinance, 1979. According to appellant the conditions for allowing the expenditure on account of interest was that the capital was borrowed by the assessee for the purpose of business or profession. In support of his contention that the claim on account of interest was allowable expenditure reliance was placed on the judgment of Hon'ble Supreme Court of Pakistan in the case of Packages Limited v. CIT 1993 PTD 758. However, the assessing officer held that the decision of Hon'ble Supreme court in the case of Packages Ltd. was distinguishable -on facts from the present case. According to assessing officer the Hon'ble Supreme Court of Pakistan held that if the interest was paid on installation of machinery to add efficiency to the production already in existence then the amount of interest is payable regardless of the fact whether the stage was pre-production or otherwise. The assessing officer further held that in the case of appellant its Chairman has mentioned in his review on page 4 of the 28th Annual Report that the projects on the installation whereof interest was paid include capacity enhancement of plat-forming unit to process additional 33000 tons per year of Naptha. Thus, the borrowed cost was being incurred not to enhance the efficiency of machinery but for the expansion of the unit and, therefore, the borrowing cost was not allowable. The learned CIT(A) maintained the finding of assessing officer and hence the present appeals. Mr. Shabbar Zaidi, learned representative for the appellant has submitted that the learned two officers below have misconstrued the law and have not properly appreciated the decision of Hon'ble Supreme Court of Pakistan. In support of his contention that the interest paid on the borrowed capital was allowable expenditure he has placed reliance on the judgment of this Tribunal reported as 1991 PTD (Trib.) 531 and two judgments of Hon'ble Supreme Court of Pakistan reported as 1989 PTD 500 = 1989 SCMR 61 and 1993 PTD 758 = 1993 SCMR 1224. Mr. Shabbar Zaidi has submitted that the learned two officers below have neither correctly appreciated the facts nor the law. Mr. Shabbar Zaidi has taken us through 27th and 28th Annual Reports and accounts for the years 1990 and 1991. In the annual report for the year 1990 under the head projects it is stated as follows:
"Work on Phase-II of Energy Conservation B.M'.R. Projects have also progressed during the year and their process engineering design (EDS) packages have been completed by the foreign consultants. These projects are:
(a) Capacity enhancement of platforming unit to process additional 33000 tons per year of Naptha.
(b) Process and modification of old lube refinery to improve efficiency on energy utilization.
(c) Self-power generation of 7.5 MW electricity by utilizing high pressure steam internally available. "
4. Mr. Shabbar Zaidi has submitted that the above passage from the annual report clearly indicates that the capital has been borrowed for B.M:R. projects and, therefore, the assessing officer was not justified in holding that the borrowing cost was being incurred not to enhance the efficiency of the machinery but for the ` expansion of unit. Mr. Shabbar Zaidi has further submitted that even if the capital was borrowed for expansion of the unit the expenditure on account of interest was allowable deduction. In support of his contention he has placed reliance on the following finding of this Tribunal in the judgment reported as 1991) PTD (Trib.) 531:
"From the bare reading of the above clause it is evident that the requirements of the above clause are as under:
(i) There should be capital borrowed.
(ii) The borrowed capital should be for the purpose of business or profession.
(iii) Interest has been paid in respect of the capital borrowed
If these conditions are fulfilled the assessee is entitled to the allowance to the extent of interest paid by him. "
5. The next judgment on which Mr. Shabbar Zaidi has placed reliance is in the case of Khairpur Textile Mills 1989 PTD 500=1989 SCMR 61. This judgment has been considered by the Hon'ble Supreme Court of Pakistan in the case of Packages Ltd. 1993 PTD 758 = 1993 SCMR 1224, and, therefore, for the sake of brevity we will refer to the decision of Hon'ble Supreme Court of Pakistan in the case of Packages Ltd. only. The facts in this case were that the assessee borrowed capital from P.I.C.I.C. for import of machinery and claimed interest paid thereon. I.T.O. disallowed the claim on the ground that the interest related to pre production stage. The Appellate Assistant Commissioner and the Income Tax Appellate Assistant Commissioner and the Income Tax Appellate Tribunal confirmed the treatment for the reason that the capital was borrowed to import machinery, the cost whereof had been capitalized and the machinery. was not commissioned during the previous year, hence interest relatable to the loan utilized for this machinery could not be allowed as revenue expense and that this had to be capitalized. A reference made to the Hon'ble High Court was answered in affirmative meaning thereby that the finding of the Tribunal disallowing the interest was confirmed. The appeal was taken to the Hon'ble Supreme Court of Pakistan: The Hon'ble Supreme Court of Pakistan decided that if an assessee having running business obtains loan for the purchase of additional machinery in order to increase the efficiency of the production already in existence and not to go for new products then the interest was admissible deduction and in such circumstances there was no case of pre-production stage. The Hon'ble Supreme Court of Pakistan held that in such circumstances the interest was to be allowed in full regardless of the fact whether stage was pre production or otherwise. Mr. Shabbar Zaidi has submitted that reverting to the facts of the present case it is evident that the capital was borrowed for balancing, modernization and replacement which is always meant for increasing the efficiency and capacity of the production in existence and not for exploring new products. Mr. Shabbar Zaidi has further taken us through the agreement between the Islamic Development Bank, Jeddah and National Refinery Ltd. the preamble whereof contains that the National Refinery Ltd. required capital for acquiring machinery, equipment and service for the lube oil expansion project. Mr. Shabbar Zaidi has submitted that the appellant was already in production and, therefore, the capital was borrowed for the running business and as such the decision of the Hon'ble Supreme Court of Pakistan in the case of Packages Ltd. is fully attracted. The learned D.R. has supported the impugned findings of the learned two officers below but he is not able to rebut the contentions raised by Mr. Shabbar Zaidi on facts and law.
6. We have carefully considered the contentions raised by the learned representatives for the parties. On perusal of the material available on record we are persuaded to agree with the submission of Mr. Shabbar Zaidi that the decision of Hon'ble Supreme Court of Pakistan in the case of Packages Ltd. is fully attracted to the facts of the present case and, therefore. it is held that the claim on account of interest on borrowed capital is an admissible deduction. The findings of the learned two officers below to the contrary are hereby vacated and the assessing officer is directed to allow the claim on account of interest on the borrowed capital in all the three Assessment years under appeal.
7. The next objection which pertains to the Assessment year 1992-93 only is to the addition of Rs.66,40,67,655 under section 12(12) of the Income Tax Ordinance, 1979. Briefly stated the facts giving rise to this issue are that on examination of the statement of accounts for the Assessment year 1992-93 the assessing officer found that the appellant acquired certain machinery/assets under the "lube refinery extension project" on lease through an agreement with the Islamic Development Bank, dated 25-1-1983. As per clause 10.1 (a) of .the agreement, total consideration on account of rentals amounted to I'D 2,50,60,743, which were required to be paid in twelve equal half-yearly instalments starting from 25-7-1986. The statement of accounts filed with the return for Assessment year 1992-93 contain final payments of account of rental consideration at ID 23,814,499. The bifurcation was shown as under:
| | I-D. | PAK Rs. |
| Cost of assets, | 13,283,750 | 187,402,713 |
| Finance charges | 10,530,742 | 222,639,721 |
| Total lease consideration/rental | 23,814,499 | 410,042,434 |
8. The cost of assets was capitalized on which depreciation was allowed by the department since Assessment year 1985-86. The last instalment on account of rental was paid in the Assessment year 1992-93 and as per terms of the agreement the appellant company became owner of the machinery assets factually and legally in the Assessment year 1992-93 with the payment of agreed purchase price of ID. The Assessing Officer observed that this purchase price of 1 ID was not in parity with the fair market value in terms of the provisions of section 12(12) of the Income Tax Ordinance, 1979. In order to determine the fair market value against the purchase price of 1 ID the Assessing Officer confronted the appellant and sought explanation. The complete details and description of the assets were also required to be furnished. Other particulars such as market value of the assets declared for acquiring insurance policies were also called for.
9. The appellant raised objection to the invoking of provisions contained in section 12(12) for the following reasons:---
(i) That the assets were purchased under a hire purchase agreement.
(ii) Cost of assets were already capitalized since the Assessment year 1985-86 on which depreciation has been allowed and financial charges have been claimed as straight deduction and this treatment td the leased assets is in accordance with the Circular No-9 of 1943, which has been supported through another Circular No.26 of 1988, dated 19-12-1988.
(iii) The purchase price was accepted and the ' assets involved were also accepted as part of the assets of the company by allowing depreciation in the assessment order for the Assessment year 1985-86 (first order after acquisition of the assets).
(iv) As the assets stand already acquired/purchased in the Assessment year 1985-86, section 12(12) cannot be invoked in the Assessment year 1992-93.
(v) It is imperative for invoking the provisions of section 12(12) that the purchaser has obtained some advantage by paying a price lower than the fair market value which results into deemed income. The assessee company, a State-managed company, has not obtained any advantage. So section 12(12) is not applicable."
10. The assessing officer did not accept the above contentions and held that the assets were not purchased under hire-purchase agreement as the appellant was only entitled to use the assets acquired during the period starting from the first payment till last payment of the agreed instalment of lease rentals with option to purchase these assets at 1 ID after the last payment of the rentals. Thus according to assessing officer the assets remained under the hire with the assessee-company till the payment of last instalment of rentals, whereafter it was purchased in the Assessment year 1992-93. The assessing officer further came to the conclusion that the agreement between the appellant and the Islamic Development Bank was in fact a lease agreement from the first day till the last day of the payment of last instalment. The appellant was never owner of these assets during the period of lease till such time that the last payment of the rentals was made in the Assessment year 1992-93. The assessing officer derived support from the following clauses in the agreement between the appellant and Islamic Development Bank.
"2.1 I.D.B. shall, subject to the terms and conditions of this lease-purchase Agreement, lease exclusively to N.R.L. and N.R.L. shall take on lease from I.D.B. goods at a semi-annual rental of 2,105,062 Islamic Dinars payable as provided under clause 10(1)(a) hereof.
2.2 I.D.B. cannot lease and N.R.L. cannot sub-lease during the currency of this lease purchase agreement and the parties hereto agree and warrant not to enter into any agreement or contract with any third party for the lease, sub-lease, hire, sale, purchase, pledge or mortgage of the goods leased to N.R.L. under this lease purchase agreement.
Clause 10.1 (a) provides for the payment of total rentals for whole lease period in 12 equal instalments, which is reproduced below:---
10.1 (a) Payments.--Subject to clause 10.2 hereof N.R.L. covenants and agrees to pay to I.B.D. I.D. 25,260,743 representing the total rentals for the whole lease period hereunder in twelve consecutive rentals as per following schedule. "
11. The contention on behalf of the appellant that the purchase price was accepted vide Assessment order for the Assessment year 1985-86 by which depreciation was allowed was not accepted for the reason that the depreciation was allowed to the appellant under Circular No.9 of 1943 and not because these assets were owned by the assessee. The assessing officer held that prior to the Assessment year 1992-93 the appellant was never owner of the assets under consideration. The assessing officer placed reliance on the following clauses in the sale agreement:
"Clause 3.1.--Upon receipt by I.D.B. of all outstanding payments from N.R.L. as provided for in clause 10 hereof or upon termination of this Lease Purchase Agreement N.R.L. shall own the goods and the title to and ownership rights thereof shall pass to N.R.L.
Clause 10.1(b).--The purchase price 1.D. 1.00 shall be paid by N.R.L to I.D.B. at the end of rental period to purchase the goods.
Clause 13.--The goods shall at all times until the title therein passes to N.R.L. under clause 3 hereof remain the sole and exclusive property of the I.D.B. and N.R.L. shall not do or permit to be done anything which could prejudice the rights of the I.D.B. in respect of the goods.
Clause 14.--N.R.L. shall not sub-lease, sell, charge, pledge, mortgage or otherwise dispose of the goods or any of them or assign its rights and obligations under this agreement or permit any lien to arise over any of the goods or part with possession of any of the goods without the previous written consent of the I.D.B.
Clause 25.1.--Upon receipt by I.D.B. of all the outstanding payment from N.R.L. as provided under clause 10.1 (a) and upon payment by N.R.L. of the purchase price mentioned in clause 10.1 (b) of this agreement, the title to and ownership of the goods shall pass to NRL. "
12. The assessing officer, therefore, held that it was incorrect to suggest that the appellant was owner of the assets before the payment of entire rental and invocation of clause 10(1)(b) of the agreement. The assessing officer observed that the appellant exercised option to purchase the asset in the Assessment year 1992-93 at the agreed purchase price of I.D. and thereafter the appellant became owner of the assets.
13. The contention that for application of section 12(12) an assessee should derive certain advantage by paying a price lower than the fair market value was repelled for the reason that no such conditionality was provided in law. The assessing officer was of the view that if purchase price for any asset acquired in a year is lower than the fair market value the provision contained in section 12(12) is applicable. The assessing officer held that the price of I I.D can never be held as fair market value of the highly sophisticated machinery. The assessing officer ultimately estimated the fair market value of the machinery at Rs.66,40,67,677 for the reason that this value was presented by the appellant company for the purpose of insurance for the period relevant to the Assessment year 1992-93. The assessing officer deducted the amount of Rs.22, which is equivalent to I I.D. from the above fair market value and added the remaining amount to the total income of the appellant under section 12(12) of the Income Tax Ordinance, 1979.
14. The appellant preferred first appeal contending that the asset' was acquired under hire-purchase agreement and, therefore, by virtue of Circular No.9 of 1943 the consideration for hire was required to be treated as revenue charge and other payment on account of purchase was to be treated as capital expenditure on which depreciation was allowable. It was further contended that on the strength of C.B.R. Circular No.9 of 1943 read with C.B.R. Circular No.26 of 1988 the assets acquired by the appellant under hire purchase agreement with I.D.B. were deemed to have been purchased at the time of inception of the agreement in the Assessment year 1985-86 and, therefore, the assessing officer's action in considering the purchase in the Assessment year 1992-93 was incorrect. It was submitted that the department itself allowed the depreciation from the Assessment year 1985-86 and, therefore, the case made out by the department in the Assessment year 1992-93 for invoking provisions of section 12(12) was contradictory. It was further contended that there should be manipulated transaction of purchases for a purchase whereof the purchaser is provided with an advantage if the receipt would have been taxable for attracting the provision contained in section 12(12) of the Income Tax Ordinance. Reliance was placed in this behalf on the Board's Circular No.3 IT/1966 dated 22-10-1966. The learned C.I.T.(A) repelled all the contentions raised on behalf of the appellant and confirmed the invocation of provision contained in section 12(12) of the Income-tax Ordinance, 1979 and the consequent addition hence this second appeal before us.
15. Mr. Shabbar Zaidi, learned counsel for the appellant has reiterated same contentions before us as raised before the learned two officers below. His first contention is that the assets under consideration were purchased under hire purchase agreement the cost whereof has already been capitalized since the Assessment year 1985-86 on which the department is allowing depreciation since the Assessment year 1985-86 and, therefore, assets already stand acquired/purchased in the Assessment year 1985-86, therefore, section 12(12) cannot be invoked in the Assessment year 1992-93. There are various facts of this contention and there are various presuppositions in this plea. The first supposition is that under the hire-purchase agreement the purchaser becomes owner of the goods at the time of execution of hire-purchase agreement. It appears that the learned A.R. for the appellant entertained incorrect propositions of law because of a Division Bench judgment of this Tribunal reported as (1979) 39 Tax 47 (Trib.) wherein it was held as follows:
"The learned Authorised Representative for the assessee drew our attention to the finding of the learned Judges of the Supreme Court of Pakistan in Shewram Das Agarwala reported as PLD 1961 SC 321 wherein it was held that if the property in the goods continued to vest in the owner there could be no question of the hire-purchaser having a right to any part of the sale proceeds. It was insisted by A.R. that in the present case the property in the machinery had passed on to the purchaser hence they became entitled to depreciation also. Having considered the facts and circumstances of the case, we are of the view that in hire-purchase agreement the purchaser becomes the owner of the goods and the amount of deferred instalments has the character of outstanding liability (or debt). Therefore, the claim for depreciation cannot be refused."
16. The above proposition came for consideration before a Full Bench of this Tribunal in the case reported as 1988 PTD (Trib.) 428 and the above view was overruled. It was held by the Full Bench of this Tribunal that the law was not correctly stated by the Division Bench of this Tribunal. Respectfully following the Full Bench judgment of this Tribunal it is held that under hire purchase agreement the ownership of the agreement is not transferred to the hire purchaser at the time of commencement of the contract. So far the allowing of depreciation in accordance with the Circular No.9 of 1943 is concerned, this fact alone is not sufficient to hold that the asset is transferred in favour of hirer immediately on execution of hire purchase agreement because the depreciation is allowed under Circular No.9 of 1943 which is in the nature of a beneficial circular. The C.B.R. Circular No.9 of 1943 reads as follows:
"The following instructions are issued for dealing with cases in which an asset is being acquired under, what is known as, a hire-purchase agreement:--
(i) In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.
(ii) Where the effect of an agreement is that the ownership of the subject is at once transferred to, the lessee (e.g. where the lessor. obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of purchase by instalment and no deduction in respect of 'hire' should be made. Depreciation should be allowed to the lessee on the entire purchase price as per agreement.
(iii) Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of"---
(1). consideration for hire, to be allowed as a deduction in the assessment; and
(2) payment on account of purchase, to .be treated as capital outlay, depreciation allowed to the lessee on the initial value (i.e. the amount for which it would have been sold for cash at the date of agreement). The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payment under the agreement and the initial value (as described above) the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreements were terminated either by the outright purchase of the equipment or its return to the owner the deduction should cease as from the date of the termination. An assessee claiming this deduction should be asked to furnish a certificate from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum, in doubtful cases the facts should be reported to the Board."
17. A perusal of the above circular shows that in para. 2 it is clearly provided that where the effect of an agreement is that the ownership of the subject is at once transferred to the assessee the transaction should be regarded as one of purchase by instalment and depreciation should be allowed to the lessee on the entire purchase price. An example has also been given to illustrate the transaction according to which a lessor obtains a right to sue for arrear instalments but no right to recover the asset it shall be treated as a transaction of purchase by instalments and the ownership of the asset shall stand transferred at once. In para 3 of above circular another situation has been visualized whereby under the terms of agreement the equipment shall eventually become property of the hirer or confer on the hires an option to purchase the equipment the transaction should be regarded as one of hire-purchase and in such cases periodical payments made by the hires should for tax purposes be regarded as made up of consideration for hire to be allowed as a deduction in the assessment and payment on account of purchase to be treated as capital outlay, on which depreciation is to be allowed to the lessee on the initial value i.e. the amount, for which it would have been sold for cash at the date. of agreement. Thus, Circular No.9 of 1943 is very clear on the point that in the case of hire-purchase agreement the title in the asset is not transferred at once in favour of hire purchaser and, therefore, we are of the considered opinion that the contention of Mr. Shabbar Zaidi that merely because depreciation was allowed by the department to the appellant under Circular No.9 of 1943 taking the agreement to be in the nature of hire-purchase the asset stands transferred in the Assessment year 1985-86. However, it is not the end of matter because we find that the agreement between the appellant National Refinery Limited and Islamic Development Bank is described as lease purchase agreement and the assessee appellant as well as the department have been describing .the agreement as lease purchase agreement without examining the contents of the said agreement and without adverting to the salient features constituting hire-purchase agreement and purchase by instalment. Thus before proceeding further it is incumbent to examine the exact nature of transaction in pursuance of the so-called lease purchase agreement between the-appellant and Islamic Development Bank and the Islamic Development Bank, Jeddah. As already observed the agreement is termed as "lease purchase agreement" but mere title to an agreement is not sufficient to bring the transaction in a particular category. which is to be determined on the basis of contents of the agreement. A perusal of the agreement between the appellant and the Appendices 1, 2 and 3 attached thereto shows that the appellant required certain machineries, their accessories and spare parts for extension of their existing production and the appellant contacted the Islamic Development Bank. The Islamic Development Bank authorised the appellant, N.R.L. Karachi to negotiate and sign contracts with the suppliers on behalf of Islamic Development Bank not exceeding the total amount of U.S. Dollaras 15,916,000 equivalent to 1,47,37,000 Islamic Dinar. The Islamic Development Bank (hereinafter referred to as I.D.B.) agreed to lease exclusively to the appellant (hereinafter referred to appellant N.R.L.) at a semi-annual rental of 21,05,062 Islamic Dinars. It was further agreed that on payment of 25,27,60,743 Islamic Dinars representing total rentals to I.D.B. the N.R.L. shall pay purchase price of I.D., 1 to I.D.B. and on payment of this entire amount the lease purchase agreement shall stand terminated and N.R.L shall own the goods and the title to and ownership right thereof shall pass to N.R.L. It was further agreed that until the title in the goods passes to N.R.L. it shall remain the sole and exclusive property of the I.D.B. and that N.R.L. shall fix on the goods identification plates bearing statement that, "this equipment is the property of I.D.B. and is on lease to N.R.L." It was further agreed that I.D.B. was not liable for any claim, less damage or expenses arising directly or indirectly from the use, operation or lease of the goods or for any inadequacy, deficiency, performance or repair therein and N.R.L. shall not be released from any liability to pay rental due under the agreement for any such reason. All the benefits from any guarantee by the supplier were to be availed by the N.R.L. It was further agreed that either party may by notice in writing to the other party terminate the agreement if either party fails to fulfil its obligations under the agreement and if any breach or non-performance was not remitted within 90 days following the date of notice by one party to the other. In the case of N.R.L. going into liquidation or becoming insolvent the agreement could be terminated. However, it was further agreed that if the agreement was terminated for breach or non-performance of obligations and before the notice expires the I.D.B. shall sell and N.R.L. shall, purchase-the goods at their contact price. It was further agreed that in the event N.R.L. becomes insolvent or is liquidated and the agreement is terminated the Government of Pakistan was obliged to assume N.R.L.'s obligations under the lease purchase agreement to make rental payments on- their due dates and purchase the goods at the end of the lease period. It was further agreed that upon receipt by I.D.B. all the outstanding payments from N.R.L., i.e., the rentals and purchase price of 1 Islamic Dinar the title to and ownership of the goods shall pass to N.R.L. In the event of termination of lease purchase agreement the title and ownership in the goods was likewise to pass on to N.R.L. The N.R.L. was authorised and empowered for the entire ordering proceedings, installation work and to sign contracts and other documents and N.R.L. was responsible for negotiating and agreeing all specifications, terms and conditions for the purchase of goods to the suppliers and for arranging with the supplier all matters relating to the delivery of goods as agent of I.D.B. The terms of the contract for purchase of the goods were to be such that the property in the goods passed on to the I.D.B. The N.R.L. was further authorised to purchase the goods on any terms of purchase from any country or supplier except those countries, which were boycotted by the Arab League or the Organisation of the African Unity at the time of purchase. The I.D.B. was to bear the entire insurance cost of the goods during transportation while comprehensive insurance expenses were to be borne by N.R.L. The N.R.L. was responsible for completing all arrangements for the acquisition, delivery, insurance, customs formalities and customs clearance of goods. The goods were agreed to be at the absolute risk of N.R.L. The goods were agreed to be located in Karachi on the site of the N.R.L. Lube Expansion Product. The risk, loss or damage to the goods were to pass to N.R.L. immediately following the time when such risk passes to I.D.B. in accordance with the terms prescribed in the contract. All the expenses on account of repair and replacement of any defective, worn out or damaged components were to be borne by N.R.L. It was further agreed that if the I.D.B. advances an amount less than US $ 1,59,16,000 to the suppliers of goods the rentals payable by the N.R.L. shall be reduced on pro rata basis. There were certain other terms and conditions in the agreement but the salient feature of the agreement were as narrated above.
18. On the basis of above facts we proceed to consider if the agreement between the appellant N.R.L. and I.D.B. was a lease purchase agreement or not.
19. In the agreement between the I.D.B. and N.R.L. it has been referred to as lease purchase agreement but for the sake of convenience and uniformity we will refer it as hire-purchase agreement. Before we embark upon examining if the hire-purchase agreement executed between the I.D.B. and N.R.L. is hire-purchase agreement or a sale on instalments or any other arrangement it would be appropriate to examine the nature of hire-purchase agreements. The terms "hire-purchase" has not been defined in any law on the statute book in Pakistan and at least has not been brought to our notice. The system of hire-purchase transactions and the contracts of hiring developed under the common law in England and was treated mainly as one of the species of a contract of bailment. With the passage of time it has undergone a series of refinement as a result of modern industrial and commercial developments. Since the term has not been defined by the Legislature in any Act of Parliament in Pakistan, therefore, we have to construe the expression in its ordinary common sense. The expression has been defined in the Dictionary of English Law by Ear Jowiitt at pages 913-914 as follows:--
"Hire-purchase---a system whereby the owner of goods lets them on hire for periodic payments by the hirer upon an agreement that when a certain number of payments have been completed, the absolute property in the goods will pass to the hirer, but so that the hirer may return the goods at any time without any obligation to pay any balance of rent accruing after return; until the conditions have been fulfilled, the property remains in the owner. The instrument by which the hire purchase is effected does not ordinarily require registration as a bill of sale (Exp. Craweour (1878) 9 Ch.D.419); the hirer is 'reputed owner' within the Bankruptcv Act, 1914 (Exp. Brooks (1883) 23 Ch. D. 261); but the hirer does not 'agree to buy' within the Factors Act or the Sale of Goods Act, 1893, so as .to be able to sell or pledge the goods as if he were a mercantile agent (Helby v. Matthews (1895) A.C. 471; Brooks v. Biernstein (1909) 1 KB 98). Such agreements are to be distinguished from agreement such as in Lee v. Butler (1893) 2 QB 318, which are in fact a sale, the price being paid in instalments with the condition that the property passes when all the instalments have been paid; here there is a binding agreement for the party to purchase, where in a true hire purchase agreement there is not. "
20. In the Halsbury's Laws of England, Third Edition, Volume 19, paragraph 823, at pages 510-511, the nature of hire-purchase transaction is expressed as under:
"The contract of hire-purchase is one of the variations of the contract of bailment, but it is a modern development of commercial life, and the rules with regard to bailments, which were laid down before any contract of hire-purchase was contemplated, cannot be applied simpliciter, because such a contract has in it not only the element of bailment but also the element of sale. At common law the term ' hire purchase' properly applies only to contracts of hire conferring an option to purchase, but it is often used to describe contracts, which are in reality agreements to purchase chattels by instalments, subject to condition that the property in them is not to pass until all instalments have been paid. The distinction between these two types of hire purchase contracts is, however, a most important one, because under the latter type of contact there is a binding obligation on hirer to buy and the hirer can, therefore, pass a good title to a purchaser or pledgee dealing with him in good faith and without notice of the rights of the true owner, whereas in the case of a contract which merely confers an option to purchase there is no binding obligation on the hirer to buy, and a purchaser or pledgee can obtain no better title than the hirer had, except in the case of a sale in market overt, the contract not being an agreement to buy within the Factors Act, 1889, or the Sale of Goods Act, 1893. "
21 The question whether there is any difference in the contract of sale and hire-purchase agreement came for consideration before Supreme Court of India in the case of Johar & Co. v. Deputy Commercial Tax Officer (1965) 2 SCR 112) wherein it was held as follows: .
"It is necessary in this connection to understand the nature of a typical hive-purchase agreement as distinct from a sale' in which the price is to be paid latter by instalments. In the case of a sale in which the price is to be paid by instalments the property passes as soon as the same is made, even though the price has not been fully paid and may latter be paid in instalments. This follows from the definition of sale in section 4 of the Indian Sale of Goods Act (as distinguished from an agreement of sale) which required that the seller transfers the property in the goods to the buyer for the price: The essence of sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments, on the other hand hire purchase agreement, as its very name implies, has two aspects. There is first an aspect of bailment of the goods subjected to the hire-purchase agreement, and there is next an element of sale which fructifies when the option to purchase, which is usually a term of hire-purchase agreement is exercised by the intending purchaser. Thus, the intending purchaser is known as the hirer so long as the option to purchase is not exercised, and the essence of hire-purchase agreement properly so called is that property in the goods does not pass at the time of the agreement but remains in the intending seller, and only passes latter when the option is exercised by the intending purchaser. The distinguishing feature of atypical hire-purchase agreement, therefore, is that the property does not pass when the agreement is made and only passes when the option is finally exercised after complying with all the terms of agreement."
22. The point came for consideration before Chief Court of Oudh in 193 in the case of Babu Balmakund v. Narayan Singh AIR 1934 Oudh 133 and it was held that:
"Where under a hire-purchase agreement the purchaser is given that option to terminate the contract of hire at any time by returning the goods and paying the hire due up to the date of such return the transaction cannot be regarded as an out and out sale."
23. The question similar as is under consideration in the present case was agitated before Lahore High Court in the case of Anand Singh v, Commercial Trading Corporation (AIR 1935 Lahore 861) and it was held that:
"Where a person lends money to another in order that he should be able to complete the purchases of a car and the money is paid to the dealer and the car is delivered to the buyer, property in the car immediately passes to the buyer even though the buyer executes an agreement of hire-purchase in favour of the lender in addition to the pro-note executed by him in his favour. The real nature of the transaction is, therefore, not one of hiring purchase but that of collateral security for the loan in addition to the promissory note already given .by the buyer to the lender. "
24. In the earlier part of this order we have already referred to the Judgment of Hon'ble Supreme Court of Pakistan in the case of Shewram Das Agarwala v. Arobinda Podder PLD 1961 SC 321. It was held by the Hon'ble Supreme Cow t of Pakistan as follows:
"In our opinion the conclusion that the agreement was not to hr construed as a hire-purchase agreement can be supported on other grounds besides that mentioned by the learned Judges of the High Court, viz., that it contains no provision enabling the 'hire-purchase to return the apparatus. Firstly, as has been pointed out above, there is specific provision in the first paragraph of the agreement that the 'hire purchase' would have 'the right to keep and use' the apparatus 'till the payment of the full value of the price settled' subject only to the other terms and conditions, of which the relevant condition is that contained in Article (2) relating to the right of distraint to be vested in the owner upon default of payment of three consecutive instalments. The conferment of a 'right' in these terms is highly unusual. Its duration was to be determined by the performance of an obligation by the hire-purchaser' himself. Moreover upon fulfilment of this obligation, the right was not to terminate but was to continue. The purpose behind the use of these words is thus not wholly clear, but it is certainly opposed to any suggestion that the hire-purchaser was entitled to return the property, in the manner of a true hire-purchaser at law.
...Moreover, the apparatus in question being movable property, the ordinary presumption would be that property in the apparatus passed to the alleged 'hire-purchaser' when the contract was made, it being immaterial whether the time of payment of the price was. Postponed beyond the date of the contract. Reference in this connection may be made to section 20 of the Sale of Goods Act, 1930, which is relatable to ' an unconditional contract for the sale of specific goods' but embodies a principle which in our opinion may be extended to cover a case where there are terms in the contract which purport to retain ownership in the vendor until the fulfilment of a certain condition relating to the price, alongside with other conditions from which an equally clear conclusion may be drawn that ownership in the goods became vested in the vendee upon the making of the contract."
25 The point in issue again came for consideration before Supreme Court of India in the case of Sundaram Finance Ltd. v. State of Kerala (1966) 2 SCR 828). The relevant facts were that a limited company had its registered office at Madras. The company carried on the business of financing purchases of motor vehicles on the security of those vehicles. A customer desirous of purchasing the motor vehicle but unable to pay the price to the dealer and then approached the finance company for a loan. The finance company would advance the loan to the customer on the strength of nine documents executed by the customer one of which was a 'sale letter' purporting to sell the vehicle to the finance company on the date of the loan; another was a promissory note agreeing to pay the difference between the price of the vehicle and the amount paid by the customer to the dealer and interest thereon at the stipulated rate. Another of these documents was the hire-purchase agreement itself; in clause (6) -whereof it was recited that on the customer paying the entire amount due under the Second Schedule to the agreement the vehicle would become the sole and absolute property of the customer. It was held by majority opinion as under:
"The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court had, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convery or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licnece to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exerciable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before. In such a hire purchase agreement there is no agreement to buy goods; the hirer being' under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreements must be distinguished from transactions in - which the customer is the owner of the goods and with a view to finance his purchase he enters into an agreement 'which is in the form of a hire purchase agreement with 'the financier, but in substance evidences a loan transaction; subject to a hiring agreement under which the lender is given the licence to seize the goods."
26. The Supreme Court of India while coming to the above conclusions placed reliance in the judgment of House of Lords in Mass v. Pepper 1905 AC 102. In the cited case one M entered-into a contract with a wine merchant under which the latter was to provide C2,000 for purchasing the furniture of a hotel which was agreed to be purchased by M. The wine merchant paid 12,000 to the vendor who gave a receipt for that sum as a part of purchase money of the furniture. M then executed a hire-purchase agreement in favour of the wine merchant and the wine merchant let the, furniture to M to be paid for by instalments and the furniture not to become property of M till all the instalments were paid. It was held by the House of Lords that the circumstances showed that the transaction was merely colourable and was a loan on the security of a hire purchase agreement.
27. The cases cited above and the principles enunciated therein lead to the conclusion that the Court is not to look merely at the document. It must discover what the real transaction is? As said by Lord Esher in Moddal v Thomas & Co. (1891) 1 QB 230: "The Court is to look through or behind the document and to get at the reality and if in reality the documents are only given as a security for money then they are bills of sale". We now proceed to examine the true nature of the transaction between the I. D. B. and N. R. L..
28. As already observed in para. 17 of this order the appellant N.R.L. required certain machineries, their accessories, etc. but had no money to purchase the same and, therefore, contacted I.D.B. who authorised the appellant, N.R.L. to negotiate and sign the contract with the suppliers on behalf of I.D.B. for an amount not exceeding the total amount of US$ 1,59,16,000. The I.D.B. agreed to lease exclusively to the N.R.L. the said equipments at a semi-annual rental of ID 21,05,062 and further agreed that on payment of ID 2,52,60,743 representing total rentals the N.R.L. shall pay purchase price of 1 ID to I.D.B. and on payment of this entire amount the lease purchase agreement shall stand terminated and N.R.L. shall own the goods and title to and ownership right thereof shall pass to N.R.L. A perusal of entire hire-purchase agreement shows that the vendee (appellant, N.R.L.) had no option to determine the agreement 'and return the equipments to I.D.B. on payment of rentals. On the contrary we find that the N.R.L. has agreed to pay the total consideration in instalments and on payment of entire rentals plus so-called purchase price of I ID the N.R.L. shall automatically acquire the title and ownership in the property. Under no circumstances the option of not purchasing the equipments could be exercised as is evident from clause (3.1) in the agreement which reads as follows:
"Upon receipt by, I.D.B. of all outstanding payments from N.R.L. as provided for in clause (10) hereof or upon termination of this lease purchase agreement, N.RX. shall own the goods and the title to and ownership rights thereof shall pass to N.R.L. In the event of termination under clauses 18.1(b) and 19.2 title and ownership rights in the goods shall pass to the guarantor."
29. When we examine clauses (18) and (19) we find that they contain as follows:
" 18.1 Either party to this Lease-Purchase Agreement, may by notice in writing to the other party, terminate this agreement if--
(a) either party shall fail to fulfil its obligations hereunder and shall not remedy such breach or non-performance within 90 days following the date of notice that has been given to it by the other party.
(b) N.R.L. shall go into liquidation or become insolvent or has. a Receiver or Liquidator appointed.
18.2. Termination of this Lease. ---Purchase Agreement, in whole or in part, shall not release either party hereto from its obligations, which shall have accrued prior to the date of such termination pursuant to the provisions hereof.
19. In the event that this Lease-Purchase Agreement is terminated by either party in accordance with clause 18.1(a), before it expires, I. D. B. shall sell and N.R.L. shall purchase the goods at their contract price.
19.2. In the event that N.R.L. becomes insolvent or. is liquidated and this Lease-Purchase Agreement is terminated pursuant to the provisions of clause 18.1 (b) the Government of Pakistan warrants to assume N.R.L.'s obligations under this Lease-Purchase Agreement to make rental payments on their due dates and purchase the goods at the end of the lease period.
30. A perusal of above clauses shows that even if the hire-purchase agreement is terminated by any party before it expires the I.D.B. is bound to sell and N.R.L. is bound to purchase the goods at their contract price. Even if the N.R.L. becomes insolvent the guarantee has been provided by the Government of Pakistan to assume the obligations of N.R.L. and to make rental payments on their due dates and purchase the goods at the end of the lease period. Clause 25.1 of the agreement is also relevant in this behalf which leaves no room for any doubt that the transaction between the I.D.B. and N.R.L. is riot a hire-purchase agreement but it is a contract of sale on payment of instalments. Clause 25.1 reads as follows:
25.1. Upon receipt by I.D.B. of all the outstanding payments from N.R.L. as provided under clause 10.1 (a) and upon payment by N.R.L. of the purchase price mentioned in clause 10.1 (b) of this Agreement, the title to and ownership of the goods shall pass to N.R.L. In the event of termination of this Lease-Purchase Agreement under clause (a) read with 19.1 the title and ownership in the goods shall likewise pass to N. R. L.
31. On consideration of entire facts we are of the considered opinion that the so-called lease-purchase agreement is in fact an arrangement of advancing loan by I.D.B. to N.R.L. on the security of said hire-purchase agreement. The transaction in truth is merely a loan transaction and the lender, i.e., I.D.B. is to be repaid its loan and to have a security upon the goods. It is an attempt to cloak the reality of the transaction by sham hire-purchase agreement. In fact N.R.L. was merely financed by I.D.B. and the N.R.L. has purchased the equipments according to its requirements and specifications from the supplier and as held by the Hon'ble Supreme Court of Pakistan in the case of Shewram Das (supra) the property in the equipments pass to the N.R.L. when the contract was made and it is immaterial if the time of payment of the price was postponed beyond the date of contract. We are of the considered opinion that the ownership in the goods become vested in the N.R.L upon the making of the contract and the alleged hire-purchase agreement was in fact not -in the nature of hire-purchase agreement but in the nature of sale.
32. For the foregoing reasons it is held that the ownership and title in the equipments in question stood transferred in favour of N.R.L. from the date of acquiring the equipments. It is further held that the learned two officers below have misdirected in holding that the transaction between the I.D.B. and N.R.L. was in the nature of hire-purchase agreement-and that the title to the property has been transferred in favour of N.R.L. in the assessment year 1992-93. The assessing officer has wrongly incorporated the expression "option" while examining the nature of transaction on page 6 of the assessment order. The assessing officer while referring to clause 10.1(b) of the Lease-Purchase Agreement has observed that clause 10.1(b) provides an option to the assessee company to purchase these assets after the payment of all lease rentals. The assessing officer has incorrectly held that the assessee exercised his option to purchase the goods on payment of 1 ID in the Assessment year 1992-93 after payment of entire rental amount. As already observed the necessary condition for a hire-purchase agreement is the vesting of option in the vendee to return goods at any time during the lease period on payment of rentals due up to that time. This condition is missing in the agreement. The other condition is that the vendee should exercise option for purchasing of goods at the end of lease period. The assessing officer has assumed that this option existed which has been exercised by the appellant while clauses 3.1, 10.1(b) and 25.1 which have been reproduced by the assessing officer on page 6 of the assessment order show that no option is allowed to the appellant, N.R.L. either to return the goods to I.D.B. or to exercise the discretion of purchasing or not purchasing the goods. The conditions are absolute and, therefore, the transaction between the I.D.B. and N.R.L. is nothing but a transaction of loan on security of goods and the property in the goods transferred to N.R.L. at the time of acquiring the possession of the property. It would be appropriate to refer to Circular No. 9 of 1943 of the C.B.R. The transaction in fact falls in para. 2 of Circular No. 9 of 1943, which provides that where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (for example, where the lessor obtains a right to sue for arrear instalments but no right of recovery of the assets) the transaction should be regarded as one of purchase by instalment and no deduction in respect of hire should be made. Depreciation should be allowed to the lessee on the entire purchase price as per agreement. The depreciation was also allowed in pursuance of the above instruction of the C.B.R. A perusal of the Assessment order and the first appellate order shows that both the learned two officers below as well as the learned counsel for the appellant fell in error and built up their respective cases on wrong appreciation of facts and law and on incorrect assumptions and presumptions. The assessing officer has held that the agreement between I.D.B. and N.R.L. was, "actually and factually a lease agreement from 1st day till the last day which is the date of payment of last instalment". After coming to this conclusion the assessing officer has further held that at the-end of lease period the N.R.L. exercises option to purchase the goods at 1 ID and on payment thereof became owner of the goods. Thus, the assessing Officer has mixed up the issues. It appears that the learned two officers below have no clear conception about the nature of lease and the nature of hire-purchase agreement. It would suffice to say that in the case of simple lease the ie5see is never given an option to purchase the property on payment of nominal amount at the end of lease period. On the other hand, learned counsel for the N.R.L. also fell in error in building his case on wrong premises that the transaction between I.D.B. and N.R.L. was in the nature of hire-purchase agreement. The issue in 'question has been already discussed at length,' and therefore, we do not want to delete on this point again.
33. Before we conclude the findings on this issue we would like to consider another point. The assessing officer by referring to. purchase price as shown in clause 10.1(b) of the agreement at 1 I.D. has observed that this price is not adequate and, therefore, section 12(12) is applicable. This discussion is made just for the sake of clarification otherwise our finding is that the title to the goods transferred in favour of N.R.L. in the Assessment year 1985-86 when the possession of the goods was acquired by N.R.L. and the price of the goods paid by N.R.L. was the contract price which was agreed between the suppliers of the goods and the N.R.L. In order to determine this issue we respectfully place reliance on the judgment of Supreme Court of India in the case of K.L. Johar & Co. v. Deputy Commercial Tax Officer. In this case there was hire-purchase transaction in which a company carried on hire-purchase business in motor vehicles. The course of business was that the price of the vehicles would be paid by the appellant to the motor dealer and the vehicle would be hired out to the intending purchaser. The latter had to pay the hire money in instalment and when all the instalments according to the agreement had been paid the purchaser would have the option of purchasing the vehicle by final payment of Re. 1. Sales tax was levied by Madras Government and a plea was taken on behalf of the purchaser that the sale price in that case was Re. 1 only which the hirer had to pay when he exercises his option to purchase. On the other hand, the contention of tax authorities was that the sale price was the entire amount paid by the hirer to the financier and the tax was payable on the entire amount. The Supreme Court of India held that both the contentions were not correct. The Supreme Court of India observed that the contention on behalf of the assessee overlooks the fact that in hire-purchase agreements hire includes not only what would be payable really as hire but also a part of it towards the price. Thus, the contention that the price was only Re. l which was paid for the option could not be accepted. The Supreme Court of India further observed that on the other hand the contention of the tax authorities that the entire amount paid was the price was also incorrect. This contention ignored the fact that at any rate part of what is paid as hire is really onwards the hire of the vehicle for the period when the hirer is only a hirer. It was held that if this contention was accepted the result would be that the price of what is a second hand vehicle when the sale eventually takes place would be more than the price of a new vehicle. The Hon'ble Judges of the Supreme Court of India held that real position in their opinion was that the value must be something less than the original price and in order to arrive at the value the sales tax authorities should take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price on which the sale can be said to have taken place when the option is exercised but that price must always be less than the original price. The Supreme Court of India ultimately suggested, two ways of determining the price of goods in the case of hire-purchase. According to the Supreme Court of India the sales-tax authorities may split up the hire into two parts, the amount paid as consideration for the use of vehicle so long as it was property of owner and the payment for the option at a future date to purchase the vehicle at a nominal price. If the first part is determined the rest would be towards the payments of price. The first part may be determined after finding out the proper amount to be paid as hire in the market for a vehicle of the type concerned, or in such other way as may be -available to the sales tax authorities. The second method may be to take the original price fixed in the hire-purchase agreement and to calculate depreciation and all other factors that may be relevant in arriving at the: price when the second sale takes place to the hirer including the condition of the vehicle at .the time of the second sale.
34. The above judgment from the Supreme Court of India in which reliance has been placed on a case from English jurisdiction, namely, Darngavil Coal Co. v. Francis (1913) 7 Tax Cases Pt. 1, page 1, it becomes clear that there is no justification for taking the nominal price as the purchase price, even if there is a hire-purchase agreement which is not in the present case. In the present case when the facts are examined in their right perspective and the real nature of the transaction is discerned, we find that N.R.L. has merely arranged a loan from I.D.B. on security of goods and the terms and conditions contained in the agreement clearly show that the N.R.L. has purchased the equipments in question on placing orders with the supplier of goods on the contract price which was the market value at that time. Thus notwithstanding the fact that the equipment was acquired in the Assessment year 1985-86 there was no question of applying section 12(12) of the Income-tax Ordinance to the transaction in question as the price which has been paid by N.R.L. was not less than the fair market value thereof.
35. For the foregoing reasons the addition under section 12(12) stands deleted.
36. The last objection raised by the appellant in the Assessment-year 1992 93 is to the consequential relief in workers' welfare fund. The assessing officer is directed to allow the consequential relief.
37. All the three appeals at the instance of assessee are allowed as above
M.B.A./212/TribOrder accordingl