I. T. A., NO. 1502/HQ OF 1989-90, DECIDED ON 24TH MARCH, 1994. VS I. T. A., NO. 1502/HQ OF 1989-90, DECIDED ON 24TH MARCH, 1994.
1996 P T D (Trib.) 292
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and Asad Arif, Accountant
Member
I. T. A., No. 1502/HQ of 1989-90, decided on 24/03/1994.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 29 & Third Sched Rr.7 & 8(5)(a)---C.B.R. Circular No.10 of 1979, dated Ist October, Id79---Disposal of assets and treatment of resultant gains or losses---Determination of fair market value of said assets by Assessing Officer is subject to the approval of I.A.C.---If the Assessing Officer failed to obtain approval of I.A.C, for such determination, addition made by him was not sustainable which was rightly ordered to be deleted by the C.I.T. (A).
(1994) PTD (Trib.) 70 fol.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.19 & 23(1)(vii)---Interest---Set off---Interest on capital borrowed for business purpose On be allowed under S.23(1)(vii) of the Income Tax Ordinance, 1979---Contention of Department that there was no business nor funds were utilized for business purposes during the assessment year, the expenses of interest claimed could not be set off against income assessable under S.19 of the Ordinance---Substance---Finding of C.I.T.(A) in this behalf, held, was unexceptionable.
(c) Interpretation of statutes---
---- Headings and the marginal notes do not form part of the statute as such.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 38(6)---Purport and scope of S.38(6), Income Tax Ordinance, 1979-- Provisions contained in S.38(6) of the Ordinance are to be considered independently without reading the marginal note to S.38 for the purpose of ascertaining the purport and scope of the said provision.
(e) Income Tax Ordinance (XXXI of 1979)---
----Ss. 38(6) & Third Sched., R.7---Provisions of S. 38(6) & Third Sched., R.7 of the Income Tax Ordinance, 1.979 are identical if not similar---Scope and purport of both the provisions---Loss---Set off---Disposal of assets and treatment of resultant gains or losses---Principles---Property income---Unabsorbed depreciation ---Allow ability---Provisions of S.38(6), Income Tax Ordinance, 1979 are general in nature and apply to the unabsorbed depreciation irrespective of the status of assessee---Year in which assets or class of assets are disposed of, the business would be deemed to be continuing by fiction of law and, therefore, carrying on of actual business is not necessary---Unabsorbed depreciation can thus be allowed against the property income of the assessee in the relevant year.
A comparison of sections 32 & 41 of the Indian Income Tax Act, 1961 as they stood at the relevant- time and section 38(6) and R.7 of Third Schedule of the Income Tax Ordinance, 1979 shows that the two provisions are identical if not similar. When by a fiction of law as contained in Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979, it has been enjoined to deem the excess of sale proceed over the written down value as income of an assessee for that year, chargeable under the head income from business or profession and likewise if the sale proceeds are less than the written down value the deficit is required to be deemed as an expenditure deductible from the profits and gains of the business or profession and further the business or profession for the purpose of which the class of assets or asset, as the case may be, was used before its disposal shall be deemed to be carried on by the assessee during that year then the further expression that, "all the provisions of this Ordinance shall apply accordingly" should not be taken to its logical conclusion. It means that although no business or profession has been carried out in the income year corresponding to the assessment year in which any asset or class of assets have been sold but by fiction of law it shall be deemed that the business is carried on by the assessee then there should be no reason as to why all other provisions of the Ordinance should not apply accordingly. Thus, the view that the unabsorbed depreciation pertaining to the business years and depreciation allowance under section 23 cannot be considered for the year under consideration because no business is carried out is not correct. By virtue of provision contained in Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979, the year in which assets or class of assets are disposed of the business would be deemed to be continuing by fiction of law and, therefore, carrying on of actual business is not necessary. The unabsorbed depreciation can be allowed against the property income because by virtue of the provisions contained in subsection (6) of section 38 the unabsorbed depreciation ought to have been treated as depreciation allowance for the assessment year, and the same ought to have been set off against income from property as provided under section 34 of the Income Tax Ordinance, 1979. It was right to allow the unabsorbed depreciation by way of set off against the income from property for the assessment year.
In the present case objection raised was that subsection (6) of section 38 was restricted to the firms and partners only. The reason for this objection was that the heading of section 38 is "limitations as to set off and carry forward of loss in the case of firms, partners, etc. " It is established principle of interpretation of statutes that the headings and marginal notes are not the part of statute, therefore, mere heading of the section is not sufficient to accept the view. Alongwith the expression firms and partners, the word ' etc. ' , is there which means that the provisions contained in section 38 are not confined to firms and partners only but other assessees are also included therein. Thus, in order to discern the true intent of the Legislature the provisions contained in various subsections of section 38 are to be read. A perusal of subsections (1), (2), (3), (4) and (5) of section 38 clearly shows that these subsections contained provisions relating to registered firm, unregistered firm and the partners. On the other hand, subsections (6), (7) and (8) have not referred to the registered firm, unregistered firm and partners, and, therefore, there is marked deviation by the Legislature in the drafting of subsections (1) to (5) and subsections (6) to (8). When we read the contents of subsection (6) we find that it- contains that "where in making an assessment for any year, full effect cannot be given to the allowances referred to in clause (v) of subsection (1) of section 23", and when clause (v) of subsection (1) of section 23 is perused it is found that it speaks of depreciation allowance admissible under the Third Schedule for the purpose of computing income under the head income from business or profession, irrespective of the fact whether it is carried on by an individual, A.O.P., firm or company. It means that when the provisions contained in subsection (6) of section 38 and in clause (v) of subsection (1) of section 23 are read together the only conclusion which can be drawn is that the provisions contained in subsection (6) of section 38 are general in nature and apply to the unabsorbed depreciation irrespective of the status of an assessee. The objection raised to the effect that subsection (6) of section 38 is applicable to the firms and partners only and not to the companies is without substance.
Muhammad Nawaz, D.R. for Appellant.
Iqbal Salman Pasha for Respondent.
Date of hearing: 28th July, 1993.
ORDER
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). --This appeal at the instance of department is directed against the order, dated 21-1-1990 by the learned C.I.T.(A), Karachi in I.T.A. No. CIT (A-1)/ 114/1989 relating to the assessment year 1988-89.
2. The first objection raised on behalf of the department is that the learned C.I.T.(A) was not justified in accepting the loss claimed on sale of machinery because assessee could not produce complete address of purchaser, nor nature of assets/machinery sold was disclosed.
3. Briefly stated the relevant facts are that the assessee (hereinafter referred to as the respondent) is a private limited company deriving income from rent of premises. The respondent was previously engaged in business but subsequently the business was closed and the premises held by the respondent were rented out. In the assessment year 1988-89 the respondent declared rental receipts only at Rs.709,607. The respondent had rented out building of the factory only and the machinery was not rented out. The declared receipts were accepted by the assessing officer, which was treated as income from property under section 19 of the Income Tax Ordinance, 1979. The assessing officer further observed that in the income year corresponding to the assessment year 1988-89 the respondent declared loss of Rs.2,13,565 on sale of machinery. The written down value of the machinery as on 1-7-1987, the day on which the corresponding income year commenced aggregated to Rs.813,565. According to-respondent the machinery was sold at Rs.6,00,000 and thus a loss of Rs.2,13,565 was suffered within the meaning of sub-clause (ii) of clause (b) of Rule 7 of the Third Schedule. The assessing officer observed that after the close of business the respondent used to sell the machinery at different stages and during the income year under consideration entire machinery, tools and equipments available with the respondent were sold and, therefore, resultant profit/loss on sale of entire class was to be determined under Rule 7 of the Third Schedule. It was held that the respondent sold the machinery, tools and equipments to unverifiable parties. It was further held that the respondent has not furnished details and particulars of the machinery and equipments sold and, therefore, it was not possible to determine the fair market value. The loss declared was, thus, disallowed. The respondent being aggrieved with the above treatment preferred first appeal contending that the assessing officer had disallowed the loss which means that the market value of the machinery and equipment sold has been estimated at Rs.8,13,565 which is the written down value. It was further submitted that under section 8 of the Income Tax Ordinance, 1979 it is mandatory on the part of officers employed in the execution of Ordinance to observe and follow the orders, instructions directions of the C.B.R. and the Board of Revenue has issued specific instructions to the effect that the fair market value should be determined under the Third Schedule to the income Tax Ordinance after approval from the I.A.C. The contentions found favour with the learned C.I.T.(A) who deleted the addition for want of approval from the C.I.T. as the assessing officer was I.A.C. Feeling aggrieved with the above direction of learned C.I.T.(A) the department has assailed the finding. The point in issue already stands decided by this Tribunal vide judgment reported as (1994) FTD (Trib.) 70. The finding of learned C.I.T.(A) is in consonance with the finding of Tribunal in the judgment cited above and, therefore, no interference is required.
4. The second objection raised on behalf of the department is that the learned CJ.T.(A) was not justified in allowing the interest paid for the purpose of S.N.F. Bonds and interest paid to other 'sister concerns because as per provision of section 23(1)(vii) only interest on capital borrowed for business purposes can be allowed. As there was no reasons nor funds were utilised for business purposes during the year, the expenses claimed cannot be set off against income assessed under section 19. The learned counsel for the respondent has submitted that objection is misconceived. A perusal of the assessment order shows that the respondent claimed interest expenses amounting to Rs.1,89,953. The assessing officer disallowed the same for the reason that an. amount of Rs.1,33,908 was paid on account of S.N.F. Bonds which is not an admissible expense, while balance interest expense amounting to Rs.56,045 has been paid on credit balance of sister concern. The loans/credit balance of sister concern was not used for renovation/addition in building account hence the claim was not admissible. Other expenses claimed in the profit and loss account were also disallowed by the assessing officer for the reason that the income for the relevant year was under section 19 and, therefore, the expenses admissible under section 23 cannot be considered. The respondent assailed the finding of assessing officer before the learned C.I.T.(A) contending that under sub-clause (ii) of clause (b) of Rule 7 of the Third Schedule if any class of asset is disposed of by the assessee and the sale proceeds are less than the written down value the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or provision of that year and the business or profession for the purpose of which the said class of assets or asset as the case may be, was used before its disposal, shall be deemed to be carried on by the assessee during that year and all the provisions of the Ordinance shall apply accordingly. It was contended that by virtue of the said provisions the business of appellant would be deemed to be carried out in the year in which the assets are sold and, therefore, the assessing officer misdirected in law in not allowing the expenses. The learned C.I.T.(A) accepted the contention and gave direction as follows:
"The assessing officer is directed to allow expenses subject to add backs out of legally inadmissible expenses."
5. The learned counsel for the respondent has submitted that the assessing officer disallowed the claim on account of interest for the reason that it was legally inadmissible and, therefore, the direction of learned C.I.T.(A) should not give any cause of grievance to the department. The learned D.R. is not able to rebut the contention. In these circumstances it is held that the objection raised by the department is misconceived and, therefore, requires no consideration.
6: The last objection raised on behalf of the department is that the learned C. I. T. (A) was not justified in directing to set off the unabsorbed depreciation of earlier years against property income of the assessee because the provisions of section 38(6) is applicable to the firms and partners and not to the companies.
7. The relevant facts for the purpose of this issue are that the respondent claimed set off of unabsorbed depreciation pertaining to the business years for the reason that in the income year under consideration the respondent sold the machinery, tools and equipments and by virtue of the deeming provision contained in sub-rule (ii) of clause (b) of Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979 the business would be deemed to be carried on in the year in which the assets are sold. The assessing officer did not accept the contention and disallowed the set off on account of unabsorbed depreciation for the reason that no business has been carried out in the income year under consideration. It was contended before the learned C.I.T.(A) that the assessing officer has wrongly observed that no business was carried out in the income year relevant to the assessment year 1988-89 because by fiction of law the income would be deemed to be carried out and, therefore, it should be taken to its logical conclusion with the result that the unabsorbed depreciation is to be allowed in view of the provision contained in section 38(6). It was further contended that the assessing officer ought to have treated the unabsorbed depreciation as the depreciation allowance for the assessment year 1988-89 and should have computed business loss by adding thereto the expenses claimed by the appellant as per audited profit and loss account and after computing the business loss the same should have set off against income from property as provided under section 34 of the Income Tax Ordinance, 1979. The contention was accepted by the learned C.I.T.(A) to the extent that he directed the assessing officer to adjust unabsorbed depreciation by treating the same as depreciation allowance for assessment year 1988-89.
8. The department is aggrieved with the above direction. The learned representative for the department has submitted that it the income year relevant to the assessment year 1988-89 no business was carried on and the appellant declared property income only, therefore, the impugned direction of learned C.I.T.(A) is misdirected. He has further submitted that the provision contained in section 38(6) is applicable to the firms and partners only and it is not applicable to the companies. On the other hand, Mr. lqbal Salman Pasha, learned counsel for the respondent has submitted that though actually no business was conducted by the respondent in the relevant income year but by fiction of law the business would be deemed to be carried on and, therefore, all the provisions contained in the Ordinance in respect of the carrying forward of unabsorbed depreciation shall apply accordingly. He has further submitted that notwithstanding the fact that the heading of section 38 reads as, "limitations as to set off and carry forward of losses in the case of firms, partners, etc." the provisions contained in subsections (6), (7) and (8) of section 38 are independent provisions and they are general in nature. According to him the provisions contained in subsections (1), (2), (3), (4) and (5) of section 38 are related to set off and carry forward of losses in cases of firms and partners because they specifically refer to the firms and partners while the provisions contained in subsections (6), (7) and (8) do not refer to the firms and partners and the provisions contained therein are couched in general terms. The learned representatives for the parties were not able to cite any direct ruling on the point. Mr. Pasha cited one judgment subsequently from the Calcutta High Court in tire case of Satlaj Cotton Mills Ltd. v. C.I.T. (1950) 18 ITR 112 on the point that marginal note is not part of statute and should not be used to explain meaning of a section. It is established principle of the interpretation of statutes that the headings and the marginal notes do not form part of the statute as such and, therefore, we are persuaded to agree with the contention of Mr. Pasha that the provisions contained in subsection (6) of section 38 are to be considered independently without reading the marginal note to section 38 for the purpose of ascertaining the purport and scope of the provision.
9. I have carefully considered the contentions raised by the learned representatives for the parties. I have tried to search out the case-law on the point. I was not able to lay hand on any case law from the Income Tax Appellate Tribunal or from the superior Courts in Pakistan. However, I was able to lay hand on some cases from the Indian jurisdiction. Since no case-law is available in Pakistan, therefore, I have tried to seek guidance from the judgments of the superior Courts from Indian jurisdiction. The first judgment is from the Allahabad High Court in the case of C.I.T. v. Rampur Timber and Turnery Co. Ltd. (1973) 89 ITR 150. Briefly stated the relevant facts in the case were that the assessee company which was carrying on business of the manufacturer of bobins etc. closed the business with effect from the previous year relevant to the assessment year 1955-56, though it continued to own the plant and machinery etc. Thereafter the assessee company continued to be assessed only in respect of income from property, which it owned. During the previous year relevant to the assessment year 1962-63 the assessee received a refund of Rs.6,982 from the Electricity Department out of electricity charges already paid by it in the years when it was carrying on the business and which was allowed as an expenditure of the business. During the assessment for the assessment year 1962-63 the I.T.O. included the said amount of Rs.6,982 as the business income of assessee in view of the provisions of section 41(1) of the Indian Income Tax Act, 1961. When the matter reached the appellate Tribunal it was held by majority that the profit of Rs.6,982 should be set off against the unabsorbed depreciation allowance of Rs. 46,003 determined for the assessment years 1951-52 to 1954-55. On reference to the Allahabad High Court it was held that the sum of Rs.6,982 assessed as the business income of the assessee for the relevant previous year was liable to be set off against the unabsorbed depreciation carried forward from 1954-55. It was further held that the benefit of unabsorbed depreciation could be availed of by an assessee in any subsequent year without satisfaction of the preconditions attaching to subsection (1) of section 32 of the Indian Income 'Tax Act, 1961 and it was not necessary that in the such subsequent year the assessee actually carried on the business and the asset in question was used for the purpose of the assessee's business. It was further held that if in any particular year there is no income from business, but there is income from other heads, the unabsorbed depreciation carried forward from the past years will be available for set off against such income from other heads. The unabsorbed depreciation of Rs.46,003 carried forward by the assessee from the assessment year 1954-55 was, therefore, available to it for set off against its income from property. It was further held that alternatively, section 41(1) of the Act creates a legal fiction that the sum of Rs.6,982 shall be deemed to be business income of the assessee for the relevant previous year although in fact the business had ceased to exist. If so, the inevitable corollary of that fiction would be that the business would be deemed to have been carried on in that year. Hence, the unabsorbed depreciation of the past would be available as the depreciation allowance for the relevant previous year and should be set off against the sum of Rs.6, 982 deemed to be business income of the assessee of the previous year. The appellate Tribunal had observed that, it is a well-known legal principle that statutory fiction had to be carried to its logical conclusion. In this behalf the principle was enunciated by Lord Asquith in the case of East and Dwellings Co. Ltd. v. Finsbury Borough Council (1952) A.C. 109; (1951) 2 All E.R. 587, 599 (H.L), "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it the statute says that you must imagine a certain state of affairs. It does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the Inevitable corollaries of that state of affairs". The Allahabad High Court thus answered the reference in affirmative and confirmed the view held by appellate Tribunal.
10. The second, case from the Indian jurisdiction is by the Andhra Pradesh High Court in the case of C.I.T. V. Warangle Industries (Pvt..) Ltd. (1977) 110 ITR 756. The facts in this case were that during the previous year corresponding to the assessment year 1967-68 the assessee .a private limited company which was running an oil mill sold its building, machinery etc. on October 22, 1965 and the title to the immovable property was transferred on 19th February, 1966, though the document of transfer was registered in October, 1970. The assessee closed its accounts on November 22, 1966. The I.T.O. held that the assessee did not carry on any business during the assessment year 1967-68, on the ground that the plant and machinery, and building were sold on October 22, 1965 and accordingly included the business income returned by the assessee under the head "other sources". He further computed the income under section 41(2) of the Indian Income Tax Act, 1961 at Rs.43,496 rejecting the claim of the assessee in regard to the unabsorbed depreciation on the same ground that it has not carried on business during the previous year. The assessee succeeded before the Appellate Assistant Commissioner and the Tribunal. On reference to the Andhra Pradesh High Court it wa4 held that by virtue of Explanation to section 41(2) of the Indian Income Tax Act, 1961 a fiction is created and the business which is no longer in existence has to be treated as in existence during the previous year in the course of which the machinery, building or furniture in respect of which depreciation has been allowed during the earlier years is sold, discarded, demolished or destroyed. Since the legislature itself has not made the other fiction under section 32(2) subject to the provisions of section 41(5) which is for the benefit of the assessee, it is obvious that in working out the due profit under section 41(2) full effect must be given to the deeming fiction arising under section 32(2) as well. It was further held that the unabsorbed depreciation of the past years is to be added to the depreciation of the current year and the aggregate has to be deducted from the total income of previous year and the Tribunal was right in holding that the assessee was entitled to have the unabsorbed depreciation set off against the income computed, even though it might be income under section 41(2), so far as the assessment for 1967-68 is concerned. In coming to this conclusion the Andhra Pradesh High Court placed reliance on the judgments of Allahabad High Court in C.I.T. v. Rampur Timber and Turnery Co. Ltd. (1973) 89 ITR 150 (cited supra) and C.I.T. v. Veerman Industries (Pvt.) Ltd. (1974) 97 ITR 461.
11. The third judgment on the point is in the case of C.I.T. v. Official Liquidator, New Era Manufacturing Co. Ltd. (1977) 109 ITR 262 (Kerala H.C.). Briefly stated the relevant facts in this case were that the assessee company went into liquidation in the financial year 1963-64. Returns were filed by the Official Liquidator for the subsequent years including. 1970-71. During the accounting year 1970-71 same plant, machinery and furniture belonging to the assessee company were sold for Rs.1,08,743 out of this a sum of Rs.1,00,000 represented the sale of plant and machinery. The plant and machinery were the subject-matter of depreciation in the earlier assessment years, but as the assessee did not make any profit, the depreciation which remained unabsorbed had to be carried forward from year to year. During the assessment year 1963-64 when the assessee went into liquidation it had an unabsorbed depreciation of Rs.1,81,019. In the return filed by the assessee no profit under section 41(2) of the Income Tax Act, 1961 was disclosed. The note was, however, added in the return showing, "value realised by the sale of plant and machinery is less than book value" no income was shown. The assessing officer, however, estimated the written down value of the plant and machinery for the purpose of section 41(2) at Rs.35,692 and adjusted the same against Rs.1,00,000 being the sale price of plant and machinery. He thus arrived at a profit of Rs.64,308 which was held to be assessable under section 41(2). On appeal the Assistant Commissioner held that the assessee was entitled to treat the unabsorbed depreciation allowance of the earlier years as depreciation allowance for the year previous to the assessment year 1964-65 and set off the same against the profits computed under section 41(2) for the assessment year 1970-71. The Tribunal following the judgment of Allahabad High Court reported as (1973) 89 ITR 150 held that the unabsorbed depreciation of the past years was available as depreciation allowance in the relevant previous year and it could be set off against the profits determined or assessable under section 41(2) in the assessment year 1970-71. The Kerala High Court held that the appellate Tribunal has rightly followed the principle laid down by Allahabad High Court and answered the question referred to it in the affirmative which was in favour of the assessee and against the department.
12. Since in all the above judgments from Indian jurisdiction section 32 and section 41 of the Indian Income Tax Act, 1961 as it stood prior to assessment year 1988-89 has been referred, therefore, it would be appropriate to reproduce the relevant provisions from Indian statute and analogous provisions in the Income Tax Ordinance, 1979 for the sake of convenience:
"32(2).--Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iv) or clause (v) or clause (vi) of subsection (1) or under clause (i) of subsection (1-A) in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of subsection (2) of section 72 and subsection (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.
41(1).---.Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains or business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.
(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery; plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due:
Provided that where the building sold, discarded, demolished or destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year.
Explanation.---Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this subsection become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this subsection shall apply as if the business or profession is in existence in. that previous year.
Section 38(6) of the I. Tax Ordinance, 1979.
Where, in making an assessment for any year, full effect cannot be given to the allowances referred to in clause (v) of subsection (1) of section 23 owing to there being no profits or gains chargeable for that year or such profits or gains being less than the allowance, then, subject to the provisions of subsection (7), the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and be deemed to be part of that allowance, or if there is no such allowance for that year be deemed to be the allowance for that year and so on for succeeding years.
Rule 7 of the Third Schedule to the I. Tax Ordinance, 1979:
Disposal of assets and treatment of resultant gains or losses.-- Notwithstanding anything contained in this Ordinance or the repealed Act, where, in any income year,---
(a) any asset or, class of assets is disposed of by an assessee, no allowance under rule 1, 3, 4 or 5 shall be made in respect thereof in that year;
(b) any class of assets is disposed of by an assessee,--
(i) if the sale proceeds thereof exceed the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable under the head "Income from business or profession"; and ,
(ii) if the sale proceeds are less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year; and
(c) any asset (but not all assets) included in a class of assets is disposed of by an assessee, the written down value of the said class of assets shall be reduced by the sale proceeds thereof, and where the said sale proceeds exceed the said written down value, no further allowances for the depreciation shall be made in respect thereof and the excess shall be deemed to be income chargeable under the head "Income from business or profession" of the year in which the disposal takes place, and the business or profession for the purposes of which the said class of assets or asset, as the case may be, was used before its disposal, shall be deemed to be carried on by the - assessee during that year and all the provisions of this Ordinance shall apply accordingly."
13. A comparison of the above provisions from the Indian statute and the Pakistani law as contained in the Income Tax Ordinance, 1979 shows that the two provisions are identical if not similar. Thus, I respectfully follow the law as interpreted and propounded by the superior Courts in India. I entirely agree with the view that when by a fiction of law as contained in Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979, it has been enjoined to deem the excess of sale proceed over the written down value as income of an assessee for that year, chargeable under the head income from business or profession and likewise if the sale proceeds are less than the written down value the deficit is required to be deemed as an expenditure deductible from the profits and gains of the business or profession and further the business or profession for the purpose of which the class of assets or asset, as the case may be, was used before its disposal shall be deemed to be carried on by the assessee during that year then the further expression that, "all the provisions of this Ordinance shall apply accordingly" should be taker to its logical conclusion. It means that although no business or profession has been carried out in the income year corresponding to the assessment year in which any asset or class of asset have been sold but by fiction of law it shall be deemed that the business is carried on by the assessee then there should be no reason as to why all other provisions of the Ordinance should not apply accordingly. Thus, the view held by the assessing officer that the unabsorbed depreciation pertaining to the business years and depreciation allowance under section 23 cannot be considered for the year under consideration because no business is carried on, is not correct. While coming to this conclusion the assessing officer totally ignored the fact that by virtue of provision contained in Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979, the year in which assets or class of asset are disposed of the business would be deemed to be continuing by fiction of law and, therefore, carrying on of actual business is not necessary. The assessing officer further misdirected in holding that the unabsorbed depreciation cannot be allowed against the property income because by virtue of the provisions contained in subsection (6) of section 38 the unabsorbed depreciation ought to have been treated as depreciation allowance for the assessment year 1988-89 and the same ought to have been set off against income from property as provided under section 34 of the Income Tax Ordinance, 1979. The learned C.I.T. (A) has correctly appreciated the law and has rightly directed to allow the unabsorbed depreciation by way of set- off against the income from property for the assessment year 1988-89. It appears that after the direction of learned C.I.T.(A) the department realised the infirmity of its view held at the assessment stage and, therefore, the only objection which has been raised before us in the grounds of appeal is that the learned C.I.T.(A) was not justified in directing to set off the unabsorbed depreciation of earlier years against property income of the assessee because the provision of section 38(6) is applicable only to firms and partner and not to the companies. Thus the objection before us is not the same as way raised at the time of assessment. Now the objection is that subsection (6) o1 section 38 is restricted to the firms and partners only. The reason for this objection was that the heading of section 38 is "limitations as to set off and carry forward of losses in the case of firms, partners, etc." I have already held that it is established principle of interpretation of statutes that the headings and marginal notes are not the part of statute therefore, mere heading of the- section is not sufficient to accept the departmental view. In addition to this reason the department has ignored the fact that alongwith the expression firms and partners, 'etc.', is also there which means that the provisions contained in section 38 are not confined to firms and partners only but other assessees are also included therein. Thus, in order to discern the true intent of the Legislature the provisions contained in various subsections of section 38 are to be read. A perusal of subsections (1), (2), (3), (4) and (5) of section 38 clearly shows that these subsections contained provisions relating to registered firm, unregistered firm and the partners. On the other hand, subsections (6), (7) and (8) have not referred to the registered firm, unregistered firm and partners, and, therefore, there is marked deviation by the legislature in the drafting of subsections (1) to (5) and subsections (6) to (8). When we read the contents of subsection (6) we find that it contains that "where in making an assessment for any year, full effect cannot be given to the allowances referred to in clause (v) of subsection (1) of section 23", and when clause (v) of subsection (1) of section 23 is perused it is found that it speaks of depreciation allowance admissible under the There Schedule for the purpose of computing income under the head income from business or profession, irrespective of the fact whether it is carried on by an individual, A.O.P., firm or company. It means that when the provisions contained in subsection (6) of section 38 and in clause (v) of subsection (1) of section 23 are read together the only conclusion which can be drawn is that the provisions contained in subsection (6) of section 38 are general in nature, and apply to the unabsorbed depreciation irrespective of the status of an assessee. It is, therefore, held that the objection raised by the department to the effect that subsection (6) of section 38 is applicable to the firms and partners only and not to the companies is without substance and is hereby repelled.
14. For the foregoing reasons the impugned direction of learned C.I.T.(A) is hereby maintained and the objection raised on behalf of the department is repelled.
15. The appeal stands disposed of as above.
M. B. A./151/Trib.
Order accordingly.