I.T.AS. NOS. 3579/LB, 3594/LB OF 1994 AND 3582-A/LB OF 1995, DECIDED ON 17TH AUGUST, 1995. VS I.T.AS. NOS. 3579/LB, 3594/LB OF 1994 AND 3582-A/LB OF 1995, DECIDED ON 17TH AUGUST, 1995.
1996 P T D (Trib.) 360
[Income-tax Appellate Tribunal Pakistan]
Before Nasim Sikandar, Muhammad Zaman Khan, Judicial Members and Ashfaq
Ahmad, Accountant Member
I.T.As. Nos. 3579/LB, 3594/LB of 1994 and 3582-A/LB of 1995, decided on 17/08/1995.
Per Nasim Sikandar, Judicial Member, agreeing with Ashfaq Ahmad, Accountant Member---
(a) Income Tax Ordinance (XXXI of 1979)---
---Second Sched, Part I, Cl. (118-E), S.66 & C.B.R. Letter No.l(14) EP-11/91, dated 20-5-1991 and C.B.R. Letter No. 1(41)/TP-II/91, dated 15-12-1993---Exemption---Held, it was the actual business activity carried on by the assessee and not the statement of objects as narrated in memorandum of association which should determine the "exclusiveness" of purpose of an assessee-company---Exclusiveness of purpose in the light of exemption provision had to be seen in the perspective of the actual activity and not merely the object clause of Memorandum of Association of the company---Presence of more than one object in memorandum clauses could only give an inference that the company was not formed exclusively for operating an industry unit and such inference or presumption was re-buttable and could have easily been adjudged by examining or probing into the actual business activity being carried on by the assessee---Where accounts produced by assessee showed only one manufacturing activity by the assessee, assessee fully discharged the initial burden that laid upon its shoulder in order to claim exemption ---Assessee having discharged its burden, revenue was not justified in invoking S.66-A of the Income Tax Ordinance, 1979---Only purpose of exemption was to encourage operation of industrial undertaking irrespective of what remained as part of objects in the Memorandum of Association---Where the assessee had engaged itself only in one kind of business activity, Revenue would have accepted the claimed exemption but for the presence of some other objects in its Memorandum of Association.
(b) Company---
----Memorandum and Articles of Association of a company---Object, purpose and construction---Principles.
1994 PTD (Trib.) 1034; 1980 PTD 322; 1990 PTD (Trib.) 671; C.I.T. v. Habib Insurance Corl3pany PLD 1969 Kar. 278; (1969) PTD 317 = 1990 PTD 671 and Eduljee Dinshaw Limited v. I.T.O. PLD 1990 SC 399 = 1990 PTD 155 ref.
(c) Central Board of Revenue---
---- Board is not entitled to make any interpretation of legal provision.
Central Insurance Company and another v. CPB.R. 1993 PTD 766 = 1993 SCMR 1232 ref.
(d) Income-tax---
----Exemption---Claim for---Principles---When Revenue can withdraw the concession already allowed.
The principle is that every claimant of exemption must prove its entitlement. Once such claim has been accepted the burden shifts to Revenue. To withdraw a concession already allowed the Revenue must bring home in clear terms that it was allowed either on account of any fraud or misrepresentation on the part of the assessee or was in total disregard of any statutory provision including the one allowing exemption.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Revision---Change of opinion---Held, although principle of change of opinion on the part of Revenue was not applicable in cases where exercise of powers under S.66-A, Income Tax Ordinance, 1979 was warranted, yet it could loosely be taken benefit of as far as burden of proof was concerned.
(f) Income-tax---
----Exemption---Withdrawal---Withdrawal of an exemption as such is different from disallowing it on the ground that it was wrongly allowed.
(g) C.B.R. Circular---
----Value---If there is a departure from the law involved in the provision for relaxation contained in the circular, such circular is to the extent of the deviation is invalid and ineffective and the power thereunder is illegally exercised.
Central Insurance Company and another v. Central Board of Revenue 1993 PTD 766 = 1993 SCMR 1232 fol.
Ellerman Lines Limited v. C.I.T., West Bengal (1971) 82 ITR 913; C.I.T., Delhi v. Mrs. Avtar Mohan Singh (1982) 136 ITR 465 (Delhi); Commissioner of Taxes v. Dharmendra Trading Company 1989 PTD 839; Navit Lal Company Javrai v. K.K. Sen A.C. Bombay (1965) 56 ITR 198; K.P. Vargese v. I.T.O. (1981) 131 ITR 597 and Kerala Financial Corporation v. C.1.T. 1995 PTD 121 = 210 ITR 129 ref.
Per Muhammad Zaman Khan, Judicial Member [Minority view]-----
Per Ashfaq Ahmad, Accountant Member, Nasim Sikandar, Judicial Member, agreeing.---
Maxwell on, Interpretation of Statutes, 12th Edn., p.33; C.I.T: v. Sodhra Devi 32 ITR 615 SC, CWT v. Hashmatunnisa Begum 176 ITR 98 (SC) etc.; State Bank of Travancore v. C.I.T. (1986) 158 ITR 102 (SC); C.I.T. v. B.M. Edward, India. Sea Foods' case (1979) ITR 334; C.I.T. v. Geeva Films (1932) 141 ITR 632; PLD 1970 SC (Pak.) 439; 1989 PTD 839; C.I.T. v. Olympia 1988 PTD 677 and 1995 PTD (Trib.) 482 ref.
Amjad Malik, D.R., Shahbaz Butt, L.A. and Zahid Pervaiz, L.A. for Respondent/Appellant.
Javaid Iqbal Khan, FAC for Respondent/Appellant.
Date of hearing: 4th June, 1995.
ORDER
NASIM SIKANDAR (JUDICIAL MEMBER).--Through this order we propose to dispose of the captioned three appeals which are interlinked and pertain to the assessment year 1992-93.
The assessee is a private Limited Company which is engaged in the manufacture and sale of fluting paper and liner. The company was incorporated on 4-4-1991 and the assessment year under review is the, first year of business activity of the assessee.
3. Return had been filed declaring loss of Rs.17,85,293. However, vide the assessment order passed under section 62 of the Income-tax Ordinance, 1979, on 27-4-1993 assessment has been made at net loss of Rs.218,196 by the Assessing Officer, Companies-21, Lahore. ,
4. The assessee had claimed exemption under clause (118-E) of the Second Schedule to the Ordinance from October, 1991 i.e. the commencement of commercial production and immunity under clause (8) of Part IV of the said Schedule from probe for investment for shares and the Assessing Officer found that all the requirements of relevant clauses were, fulfilled and as such the claim of the assessee being in order was accepted.
5. Trading results were declared as under:--
| Sales ?? ??????????????????? | Rs.1,08,98,609 |
| G.P,???? ????? ??????????? | Rs.97,26,087 |
| G. P. Rate | 10.75% |
6. For the reasons embodied in the assessment order which need not be recapitulated here the declared version of the assessee has been rejected. Sales were estimated at Rs. 1,50,00,000 and have been subjected to gross profit rate of 18 % as per parallel cases. Some additions out of profit and loss account expenses were also made.
7. The assessee had field appeal before the CIT"(A), Lahore, contesting the rejection of declared version, estimation of sales made at Rs.1,50,000 and application of gross profit rate of 18 % as unjustified and excessive. Various add backs out of profit and loss account expenses were also contested as arbitrary.
8. Vide his-order dated 2-6-1994 the CIT (A) has upheld the order of the I.T.O. regarding the rejection of declared version due to the defects pointed out in the assessment order, applied gross profit rate of 18 % due to the fact that this rate is being applied in other cases in this line of business and the add backs made out of expenses claimed in profit and loss account, the same being proper. However, turnover estimated at Rs.150,00,000 has been reduced by the CIT (A) to Rs.1,30,00,000 finding that the same was excessive.
9. The said decision of the CIT (A) confirming the rejection of accounts, application of gross profit rate at 18 % various disallowances as made by the Assessing Officer and the estimation of sales at Rs.1,30,00,000 as against declared sales of Rs.1,08,609 have been assailed by the assessee by filing second appeal in the Tribunal. The department has also filed cross appeal against the order of the CIT(A) asserting that there was no justification for him to reduce the sales from Rs.1,50,00,000 to Rs.1,30,00,000.
10. In the meanwhile before the appeal was decided by the CIT (A) on 2-6-1994, as the luck would have it, the Inspecting Assistant Commissioner of Income-tax, Range-II, Companies Zone-I, Lahore, by invoking the provisions of section 66-A of the Ordinance issued a show-cause notice on 27-2-1994 to the assessee. The gist of the notice is that the assessee did not qualify for tax exemption under clause (188) end as such the assessment order by virtue of which exemption was granted to the assessee by the Assessing Officer was liable to be cancelled the same being erroneous in so far as it is prejudicial to the interest of revenue. The reply of the assessee-.respondent to this show-cause notice was dated 7-3-1994: The long and short of the case of the assessee is that the assessment order was neither erroneous nor prejudicial to the interest of revenue. The assessee, therefore, requested the I.A.C. to drop the proceedings initiated by the latter under section 66-A:
11. Ultimately it was found by the I.A.C. vide his order dated 9-6-1994 that assessment order passed by the Assessing Officer declaring the profits and gains of the assessee-company exempt under clause (118-E) for the assessment year 1992-93 was erroneous in so far as .it was prejudicial to the interest of revenue and as such the same has been cancelled with a direction that a fresh assessment be made in the case in accordance with the relevant provisions of law. It was observed by the I.A.C. that as the production had started when the Memorandum and Articles of Association did not provide for operating a sole object industrial undertaking, the assessee could not avail of benefit of exemption retrospectively.
12. The assessee has also called in question the correctness and propriety of the order dated 9-6-1994 rendered by I.A.C., by filing a separate appeal for a variety of reasons. 'In the above circumstances, we are supposed to decide the above explained three appeals and we hereby proceed to dispose them of through this-single consolidated order.
13. As is manifest by now the decision of appeal by us filed by the assessee against the order dated 9-6-1994 passed by the I.A.C. cancelling the assessment order under consideration would be most material and thus it would be appropriate that this appeal is taken up for disposal in the first instance.
14. We have heard the learned representatives of both the parties and have also gone through the orders rendered by the departmental officers, as explained above in this case, from time to time.
15. As described above, the assessee-company was incorporated under the provisions of Companies Ordinance, 1984, on 4-4-1991. According to the assessee, it was entitled to avail of the benefit of tax exemption under clause.(119-E) of Part I of Second Schedule to the Income Tax Ordinance, 1979.
This clause was inserted vide S.R.O. No.1283(1)/90, dated December 13, 1990, which allows three years tax exemption to an industrial undertaking owned and managed by a company registered under the Companies Ordinance, 1984, when, set up between the First day of December, 1990 to 30th June, 1995. For ready reference clause (118-E) is reproduced as under:--
"(118-E):
(1) Profits and gains derived by an assessee from an industrial undertaking set up anywhere in Pakistan, no covered by clause (I18-C) or clause (1.18-D), between the first day of December, 1990, and the thirtieth day of June, 1995, both days inclusive, for a period of three years beginning with the month in which the undertaking is set up or commercial production is commenced whichever is the later.
(2) The exemption under the clause shall apply to an industrial undertaking which fulfils the following conditions, namely:--
(a) that it is owned, and managed by a Company formed exclusively for operating the said industrial undertaking and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan;
(b) that it is not formed by the splitting up or the reconstruction or reconstruction of business already in existence or by transfer to new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and
(c) That it is an undertaking engaged in the manufacture of goods or materials, or the subjection of goods or materials to a manufacturing process, or mining (excluding petroleum and gas) or extraction of timber. "
16. The assessee-company established an industrial undertaking to manufacture board and paper production and closed its first accounts on 30-6-1992.
17. The C.B.R. issued a Letter bearing No. 1(14)/EP-11/91, dated May 20, 1991 and confirmed that a company formed with multifarious objects in its Memorandum and Articles of Association would not be entitled to tax holiday under clauses (118-E) and (118-C) unless the Memorandum and Articles of Association is amended to restrict the object of the company to only one exclusive business, of course, subject to fulfilment of other conditions laid down in the said clauses. It was further clarified that under the above clauses tax holiday would be available only if the industrial undertaking restricts its business to the object as given in the Memorandum end Articles of Association and any shifting from the laid down exclusive business to any other business would not be covered by these tax holiday clauses.
18. The C.B.R: also issued another Circular Letter No.1(41)/TP-II/91, dated 15-12-1993 in, which it was further clarified that exemption under clause (118-C) would be available to a company if the object clauses is changed before the commencement of business/erection of plant and machinery and other terms and conditions under the law were also met.
19. Admittedly the assessee-company in order to restrict the objects given in their Memorandum and Articles of Association to only one object passed a resolution on 15-7-1992 which was approved by the Corporate Law Authority on,10-11-1993 for tax holiday. .
20. As indicated above, the I.A.C. issued notice to the assessee on 27-2-1994 stating that the assessee-company had amended the objects in Memorandum and Articles of Association after the commencement of the business/erection of plant arid machinery, so far that reason the assessee?-company cannot avail of the benefit of clause (118-E). The assessee sent a reply to this show-cause notice in which it was asserted that as the assessee had fully satisfied the requirements of law and C.B.R.'s. policy, the vested rights of the assessee could not be denied or frustrated unilaterally and retrospectively. However, the I. A. C. vide order passed under section 66-A declared, the order passed by the Assessing Officer as erroneous in so far as it was prejudicial to they; revenue and cancelled the same with a direction to make fresh assessment.
21. The plea of the assessee before us is that the I. A. C. has passed the order without application of mind because the assessee could not be deprived of the exemption/concessions given to them under clause (118-E) and circular letter dated 20-5-1991 and as the same constituted against the Government a promissory estoppel, there was no justification to resile from the same.
22. It has been further submitted that circular letter dated 15-12-1993 on the basis of. which notice under section 66-A was issued to the assessee was ultra vires of clause (118-E), and circular letter dated 20-5-1991 particularly when the assessment order had since been finalized and was, therefore, ab initio void and illegal. ???????
23. The order of I.A.C. has also been impugned on the ground that the assessment order had since merged in the order of the CIT (A) and has as such forfeited its entity and thus the same could not be cancelled for de novo assessment.
24. On the contrary the stand of the department is that the company has failed to fulfil and observe all the conditions precedent to: claim the benefit of provisions of clause (118-E). It has been submitted that in the case of the assessee the assessee-company was incorporated on 4-4-1991 and after setting up an industrial undertaking i.e. when it was ready to go into production it had commenced its commercial production in October, 1991 and thus closed its accounts on 30-6-1992. At that time the company was admittedly a company having multifarious objects. It was only in July, 1992, that the company had by virtue of resolution dated 15-7-1992 converted it into a company having single object i.e. for manufacturing and sale of board and paper products. The resolution was confirmed by Corporate Law Authority on 10-11-1993. Thus, the company was multifarious company till the date of confirmation by the Corporate Law Authority and it was on 10-11-1993 when the object clause was restricted to exclusive purpose. As such; it has been submitted on behalf of the department that in the instant case the conversion had taken place much later than the commencement of the commercial production and as such at the material time of setting up of the industrial undertaking it was a company which was meant for attainment of various objects.
25. It has been further submitted for the department that the Assessing Officer while completing the assessment had not considered the material fact regarding the commencement of commercial production i.e. in October, 1991 and conversion of the company by resolution dated 15-7-1992 to an exclusive purpose company therefore, the exemption was erroneously allowed to the assessee.
26. First of all, we would examine the point whether all the precedent conditions which are necessary to invoke the provisions of section 66-A were existing on the relevant date. Under this section the I.A.C. could institute proceeding if it was considered by him that the order passed by the Assessing Officer was erroneous in. so far as it was prejudicial to the interest of revenue and after giving a reasonable opportunity to the assessee could cancel, modify, enhance or set aside the assessment. Obviously, .in the instant case, after examination of record it was found by the I.A.C: that by grant of erroneous exemption to the assessee the Order itself had become prejudicial to the interest of revenue, as by grant of exemption the investors of the company were also granted exemption within the meaning of clause (8) of Part .IV of the Second Schedule to the Ordinance. Hence, Show-Cause Notice dated 27-2-1994 was also issued to the assessee and he was also heard before the impugned order was passed by the I.A.C.. We, therefore, find that the provisions of section 66-A were correctly initiated and; invoked by the I.A.C. ,
27. Regarding the question of merger it is manifest from the order of the CIT (A) that .the point of allowance of exemption was not the subject-matter of appeal before him obviously for the reason that the department has no right to file appeal before the CIT (A) against the order of the Assessing Officer. The subject-matter of appeal before the CIT (A) was only to the extent of estimate of sales and profit and loss account add backs at the instance of the assessee. Under the circumstances, we can say that the order of the Assessing Officer-to the extent of estimate of sales and profit and loss account add-backs stood merged in the order of the CIT (A) but as the question of allowance of exemption was not the subject-matter of appeal before the CIT (A) nor he had recorded any independent finding in this regard, the order to this extent did not and could not merge in the order of the appellate authority. The objection raised by the assessee in this behalf is, therefore, overruled.
28. Regarding the merits of the case and the question of tax holiday we would state at the outset that the examination of Memorandum and Articles Pf Association of the company would indicate in unmistakable terms that various other clauses were also enumerated in them besides the object of manufacturing of board and paper products. Clause (118-E) restricted the company to be formed exclusively for a certain object. Similarly in order to ensure that no subsequent shifting is made in the business the C.B.R. had also issued a letter dated 20-5-1991 directing that a company formed with multifarious objects in its Memorandum and Articles of Association would not be entitled to tax holiday under clause (118-E) unless the Memorandum and Articles of Association are amended to restrict the object of the company to only one exclusive business. It was thereafter that the company had undertaken the above exercise and Corporate Law Authority had granted approval on 10-11-1993 on company's resolution passed on 15-7-1992. Besides the company has nowhere discharged the onus that it had not done any other business except the exclusive business during the period under consideration.
29. The C.B.R. as indicated above, had issued another circular letter on 15-12-1993 stating that the exemption would be available if the object is changed before the commencement of business/erection of plant and machinery. Thereafter, the I.A.C. had issued notice on 27-2-1994 to the assessee saying that since the company had amended the object clause after the commencement of the business/erection of plant and machinery the company was not entitled to avail of the benefit of exemption. As stated above, the reply of the company was that they have fully satisfied the requirements of law according to the clause (118-E) and C.B.R.'s. policy/instructions. The plea of the company is that the department cannot deny the vested rights by changing the criteria unilaterally and retrospectively.
30. In the first instance we shall have to see as to whether all the necessary conditions as required under clause (118-E) and that of the circular letter dated 20-5-1991 were satisfied by the assessee-company to avail of the exemption and whether the circular letter dated 15-12-1993 in any way debars the company from the benefit of exemption and immunity. According to he assessee, the instructions issued by the C.B.R. are quite in accordance with the provisions of clause (118-E). However, according to them the circular letter dated 15-12-1993 was a clear modification of the earlier policy and being in contravention to the earlier letter, did tantamount to usurp the vested right of the company and of repealing the exemption. To. resolve the controversy in true perspective; we shall have to carefully study clause (118-E) as reproduced above and letter dated 20-5-1991 as reproduced below:
"Exclusiveness of object. Following is the text of. C.B.R.'s. Letter C. No. 1(14) TP-11/91 No.5, dated May 20, 1991:--
'I am directed to refer to your Letter No.9975, dated April 21, 1991 on the above subject and to confirm that a company formed with multifarious objects in its Memorandum and Articles. of Association would not be, entitled to tax holiday under clauses (118-C), (118-D) and (118-E) of Part I of the Second Schedule to the Income Tax Ordinance, 1979 unless the Memorandum of Association is amended to restrict the object of the company to only one exclusive business. The eligibility for tax holiday would of course depend upon fulfilment of other conditions laid down in the said clauses."
2. It is also clarified that under the above clauses tax holiday would be available only if the industrial undertaking restricts the business to the object as given in the Memorandum and Articles of Association. Any shifting, from the laid down exclusive business to any other business would not be covered by these tax holiday clauses."
Apart from the above, the meaning of term "setting up" which has appeared in the relevant clause and are of paramount significance in the instant case shall have to be seen. It would be relevant to mention here in this behalf that the term "setting up" was defined by C.B.R. in Circular No.5 of 1991 dated 3-10-1991 as under:--
"The date of setting up of an industrial undertaking refers to the date on which the industrial undertaking is ready to go into production whether trial production or regular commercial production."
31. Admittedly the company was incorporated on 4-4-1991 and after setting up an industrial undertaking it commenced its production in October, 1991 and closed its accounts on 30-6-1992. In this way the assessee was admittedly a company having multifarious objects at the material time of the commencement of the commercial production. It was only in July, 1992, that the business was required to be converted into a company having single object by virtue of special resolution dated 15-7-1992 which, as indicated above, was confirmed by the Corporate Law Authority on 10-11-1993. In these circumstances, it clearly follows that the company was multifarious company till the resolution was confirmed by the Corporate Law Authority. As the grant of exemption was to commence under the law, from the date of setting up of an industrial undertaking the company in this case was an undertaking which only had the permission to undertake various types of business and thus it cannot be said that it was formed for an exclusive purpose as is categorically stated in the relevant provisions of' law. It was only on 10-11-1993 when the object clause was restricted to, exclusive purpose. Hence, there is no escape from the conclusion that the company has failed to observe all the conditions precedent under clause (118-E) for claiming exemption. The C.B.R.'s. circular letter dated 20-5-1991 which does not conflict in any wav with the said clause also emphasize on setting up of an industrial undertaking which has an exclusive purpose and conversion of a company having multifarious purposes into a company having the exclusive object. However, as indicated above, the conversion took place much latter than the date of the commencement of the commercial production.
32. So far as the letter dated 15-12-1993 is concerned, it relates to clause (118-C) and not to clause (118-E) and is as such not applicable to the case of the assessee. A mere mention of the letter in the notice issued by the I.A.C. cannot have the effect of rendering the entire proceedings illegal and no law or authority in this behalf has been cited on behalf of the assessee to show that the said fact would have the effect of making proceedings illegal or unlawful. We feel that it would also be pertinent to reproduce the letter dated 27-2-1994 which was issued by the I.A.C. and the same is as follows:--
"Assessment for the assessment year 1992-93 was finalized hide assessment order under section 62 No.340 dated 27-4-1993 at total loss of Rs.218,196 granting exemption from tax to the income from paper mill under clause (118-E) of Part I of the Second Schedule. It had been noticed that this order. is erroneous as it is prejudicial to the interest of revenue . This conclusion is based on the following fact:--
(1) Your Company is not formed exclusively for' operating the industrial undertaking as envisaged under clause (I 18-17)(2)(a) the original memorandum of association was amended by special resolution dated 15-7-1992 to substitute multifarious objects clauses by a single object clause, in order to qualify for tax exemption under clause (118-E) of Part I of the Second Schedule. This amendment was confirmed by C. L. A. vide order dated 10-11-1993. As per C. B.R.'s. letter No.l(41)TP-II/91, dated 15-12-1993 an assessee can change his object clause only before the commencement of business/erection of plant and machinery. You amended your object clause after erection of plant and machinery which was completed during the, financial year ending on 30-6-1992 and even after commencement of commercial production steadily in October, 1991.
By virtue of this show-cause notice, you are hereby given an opportunity to show, cause as to why the assessment order noted above should not be cancelled under section 66-A and directions for making a fresh assessment be given. Your reply in this regard should reach this office on or before 9-3-1994."
33, A study of the letter would show that it also clearly speaks of the non-fulfilment of necessary conditions of clause (118-E) and that of the letter dated 20-5-1991 as discussed above on the part of the assessee and the assessee .has been fully confronted with the allegations against the assessee and was also given full opportunity to show cause thereof.
34. In the given circumstances, we do not find any force in the contention raised on behalf of the assessee that the privileges and rights conferred by clause (118-E) and letter dated 20-5-1991 have been, recalled or withdrawn by the subsequent letter 15-12-1993, as the later mentioned letter does not contain anything in it to lend support to the said condition. The contention raised in this behalf is rather misconceived. The default on the part of the assessee for violating the provisions of clause (118-E) and letter dated 20-5-1991 clearly established even if circular letter dated 15-12-1993 is ignored.
35. We may also observe here in passing that as submitted by the learned A.R. of the assessee there is no cavil with the proposition that the instructions and directions of C.B.R. in respect of administrative matters are binding on the functionaries discharging their functions under the Income-tax Ordinance; 1979 but this argument in the instant case is not relevant as the said principle has not been violated or defied in any manner in the present case. On the contrary the learned legal advisor appearing on behalf of the revenue has also rightly submitted in reply that in the first instance in the case in hand the I.A.C. ha; not made any administrative violation. Regarding the impugned order it has beer stated that this order has been passed by the I.A.C. in exercise of the judicial of quasi--judicial powers vested in him under the Ordinance and any interpretation placed by the C.B.R. on the relevant provisions of Ordinance in a circular cat only be treated as administrative interpretation and not judicial interpretation This position is also correct.
36. Be that as it may, as discussed above in detail, we find that the assessee has miserably failed to convince us that the order of the IAC was unjustified or entailed, miscarriage of justice or that any vested right of the assessee has been grasped or for that matter the department was estopped to take action under section 66-A. On the other hand, we find that the impugned order of I.A.C. by virtue; of which assessment for the assessment year 1992-93 had been cancelled with direction to frame fresh assessment in accordance with law is perfectly legal and deserves to be upheld and we order accordingly.
37. As a sequel to the above the appeal filed by the assessee against the order of the I.A.C. is, therefore, dismissed. In consequence of the same the cross appeals preferred by both the parties against the order of the CIT (A) have become infructuous and the same also stand disposed of accordingly.
(Sd.) ?????????????????????????????????????????????????????????????????????????????????????????????????? (Sd.)
????? Ashfaq Ahmad,????????????????????????????????????????????????????? ???????????????? Muhammad Zaman Khan,
?? Accountant Member.???????????????????????????????????????????????????????????? Judicial Member.
38. ASHFAQ AHMAD (ACCOUNTANT MEMBER).--These appeals relating to assessment years 1992-93 are against the order under section 66-A passed by the I.A.C. on 2-6-1994 in respect of order under section 62 dated 27-4-1993 in which case there are cross appeals filed by the department and the assessee. Judgment on the said appeals has been rendered by my learned and reverend colleague wherein he found that the order passed by the I.A.C. under section 66-A in the said case is in order and the appeal filed by the assessee had been refused.
39. After carefully going through the order and keeping in view the arguments put forth by the learned D.R. and the learned A.R. and the written submissions available on record, with all due respects to my learned brother, the Judicial Member, I am not in agreement with the conclusion drawn by him for the reasons recorded in the following lines.
40. Facts of the case have been detailed in the body of the order of the learned Judicial Member and the same are briefly reproduced for convenience. The appellant is a Public Limited Company which was incorporated on 4-4-1991 and' engaged in the business of- fluting paper and liner both paper products) and commercial production was undertaken in October, 1991. Return was filed for the year ending 30-6-1992 i.e. for the assessment year 1992-93 wherein exemption was claimed under clause (118-E) and immunity under clause (8) of the Part IV of the Second Schedule for the investment made therein. After examining the records amendment in the object clause of the memorandum of articles of association was made on 15-7-1992 in view of the directive of C.B.R. Circular Letter C.No.1(14)TP-11/1991, dated 20-5-1991. The Assessing Officer accepted the claim of exemption in his assessment order under section 62 dated 27-4-1993. The I.A.C. cancelled the assessment order on the point of exemption with a direction for fresh assessment on the ground that as per Circular Letter NO.1(41)TP-II/91, dated 15-12-1993 the assessee could change its object clause only before commencement of the business/erection of plant and machinery and as commercial production was commenced in October, 1991 and the amendment in memorandum of articles of association was made on 15-7-1992, the exemption allowed previously was held to be incorrect and against the interest of revenue. The single manufacturing activity (board and paper products) is not denied or disputed by the I.A.C.
41. The memorandum of articles of association has contained manufacture of board and paper products and its main object and other clauses in connection with this business were customary. On 20-5-1991 the C.B.R. issued a directive vide its Letter C. No.I(14)TP-II/91, No.5, in which while explaining the amendment of the expression "the company formed exclusively for operating the said industrial undertaking appearing in clauses (118-E), (118-C) and (118-F) had ruled that the expression ruled that the memorandum of articles of association of the company should have only object i.e. to operate the said unit. However, it allowed the company already formed to have the memorandum of association "amended to restrict the objects of the company to only one exclusive business". In pursuance of this clarification the appellant got its memorandum amended on 15-7-1992 which was also subsequently approved by the Corporate Law Authority.
42. Although the learned counsel of the appellant has mainly challenged the validity of the action of the I.A.C. under section 66-A yet the issues germane to the resolution of the controversy, are as follows:--
(a) Whether the company fulfilled all the conditions of clause (118-E)?
(b) Whether the interpretation issued by the C.B.R. through Letter C. No. I(14)TP-11/91 No. 5, dated 20-5-1991 and Letter C.No.1(41)/TP?11/91, dated 15-12-1993 are according to law?
(c) Whether the permission granted to the companies already formed to have their memorandum of associations amended applies only to the claim under clauses (118-C), (118-D) and (118-E) or it also applies claiming exemption under other clause having similar other exclusive clause?
(d) Whether the company is entitled to exemption on the first directive of the C.B.R. dated 25-9-1991 available at the time of assessment at which time the second instruction by C.B.R. had not been issued?
43. For the sake of convenience the relevant clause is reproduced as below:--
"(118-E):
(1)??????? ... ... ... ... ... ... ...
(2) the exemption under this clause shall apply to industrial undertaking which fulfils the following conditions, namely,--
(a)???? ?. ?.. ?.. ?? ??
(b) that it is owned and managed by a company formed exclusively for operating the said undertaking and registered under the Companies Ordinance, 1984, and having its registered office in Pakistan."
44. In order to correctly appreciate the true import of the above-cited provision it is necessary to trace the history formulation contained therein. Ever since the concept of exemption of industrial unit was introduced in the Income-?tax law, there has been insistence that the undertaking is owned by a company. Such exemptions were first introduced in section 15-BB of the repealed Act which was inserted in 1959. Clause (a) of subsection of this section reads as under:--
"(a) that it is owned and managed by a company formed under Companies Act, 1913, having its registered office' in Pakistan ????"
45. Later, Notifications, S.R.Os.234(1)/78, dated 2-3-1978, 317(1)/78, dated 25-3-1978, 688(1)/78, dated 30-4-1978 and dated 18-5-1978 etc., under section 60 of the repealed Act were issued granting tax holiday, which was incorporated in the Ordinance and appeared in clauses (119) to (124) etc. All these clauses contained the expression "it is owned and managed by a company formed and registered under Companies Act, 1913, having its registered office in Pakistan". This formulation continued to appear in various clauses until clause (118-A) was inserted by Finance Act, 1988. It was for the first time that after the term "formed" the words "exclusively for operating the, said industrial undertaking" were added. Since that time almost all notifications issued contained this condition of exclusivity.
46. A plane reading of this provision indicates that the impression "formed exclusively for operating the said industrial undertaking" means that the company does not undertake any commercial activity other than operating the undertaking. This is such mixing of set of accounts which always leads to endless litigation on the issue that the taxable income is being disguised as exempt income is understandable because the law-makers intended that the exempt income from the undertaking should not be mixed in taxable income from other activities and the surest test whether such company indulged in any other activity was to see its actual conduct i.e. whether, in fact, it indulged in other activities or not.
47 The relevant portion of the C.B.R.'s interpretation as contained in their Circular No.5 of 1991 dated 13-3-1991 is reproduced below:--
"(2) Formation of Company for exclusive purpose.--Tax holiday in the abovementioned clauses would be available only to a company, which is formed exclusively for operating the new industrial undertaking. The existing company installing another unit in the same premises or at some other place would not be eligible for this concession. Similarly, if the memorandum and articles of association of a company included the business of the industrial undertaking simply as one of its object, it can be inferred that the company has not been formed exclusively for operating the said undertaking."
48. According to the circular the sub-clause required that the memorandum of association of the company should contain only one object i.e. operation of the said undertaking is not borne out from the plain words of the provision. This interpretation would add words which do not exist in the provision. It is an accepted principle of construction that "nothing is to be added to or taken from the statutes unless there are adequate grounds to justify the inference that the legislature intended something which had omitted to express". (Maxwell on Interpretation of Statutes 12th Edition, page 33). He quotes Lord Mersey saying "it is wrong thing to read into an act of Parliament words which are not there". He again quotes Lord Lower-burn saying "we are pot entitled to read words into the act of Parliament unless applied reasons for it are to be found within the fore-corners of the act itself". These principles have been affirmed in a large number of cases by the superior Courts in both India and Pakistan. For example, CIT v. Sodhra Devi 32 ITR 615 (SC), CWT v. Hashmatunnisa Begum 176 ITR 98 (SC) etc. In the instant case there are absolutely no reasons to import the concept of memorandum of association into clause (118-E) which is the relevant provision.
49. In fact, the Board did not appear to be of the view that the provision requires the memorandum of association to have only one object. Para. 27 of the Circular No.28 of 1988 issued at the time of insertion of clause (118-A) reads as under:--
"27. Tax holiday for industrial undertaking set un in certain specified areas.--A new clause (118-A) has been inserted in Part I of the Second Schedule to the Ordinance which allows 8 years exemption to a newly undertaking owned and managed by a company formed exclusively for operating the said undertaking and registered under the Companies Ordinance, 1984, where the said undertaking is set up between the Is~ July, 1988 and 15th June, 1991, and is situated anywhere in the following areas of Pakistan ??????? .
50. It will be appreciated that while explaining the provisions of the clause nowhere the Board says that the expression formed "exclusively for the operating of the said industrial, undertaking" means that the memorandum o articles of association should be restricted to one object clause. It was as late a: 10-3-1991 that while replying to a query in, regard to clauses (118-C) to (118-E) inserted on 13-12-1990, that the Board for the first time introduced the element of memorandum of association in the interpretation. The contents of Circular No.5 of 1991 reads as under:--
?...................Similarly, if the memorandum and articles of association of a company include the business of the new industrial undertaking simply as one of its object, it can be inferred that the company has not been formed exclusively for operating the undertaking ... . . ... ... ... ...................." (Underlining supplied).
51. It may be pointed out that even in this letter the Board does not categorically say that the multiplicity of the object proves that the company intends to pursue to other activities but only says that an inference to that effect could be drawn. However, realising the ambiguity created the Board issued another Circular Letter C.No.1(41)TP-II/91 No.5, dated 20-5-1991 which permitted the companies who had already been formed to amend their memorandum of association to become eligible for exemption. The letter reads as under:--
"I am directed to refer to a Letter No.9975, dated April 21, 1991, on the above subject and to confirm that a company formed with multifarious objects in its memorandum and articles of association would no be entitled to tax holiday under clauses (118-C), (118-D) and (118-E) of Part I of the Second Schedule to the Income Tax Ordinance, 1979, unless the memorandum of association is amended to restrict the object of the company to one exclusive business. The eligibility for tax holiday would, of course, depend upon fulfilment of other conditions laid down in the said clauses. It is also clarified that under the above clauses tax holiday would be available only if the industrial undertaking restricts its business to the object as given in memorandum and articles of association. Any shifting from the laid down exclusive business to any other business would not be covered by these tax holiday clauses."
52. Since the concession of the term exclusively in the law which is only after five years for the concept of memorandum has been introduced in the interpretation. Thus. it can be said that there is no condition of having a single object clause in the memorandum of association as per clause (118-C) even as per the interpretation of the C.B.R. In fact, the relevant provision only requires for one exclusive business is undertaken and C.B.R. required a further condition to be met i.e. amendment to restrict the memorandum to one exclusive business with no prescribed time limit, which was again complied with and this is the case of the assessee. The department cannot in the circumstances withdraw the exemption granted by law under clause (118-E).
53. Looking at this issue from another angle, every condition placed by law for availing any tax benefit must have seen and the one may call the rational reason behind it. Even if the department's objection is accepted to be correct one would like to ask what is intended to be achieved by having a single object to memorandum of association. There can be only one answer to that question. It is that the company should not indulge in any commercial activity other than operating the undertaking. Thus, the ultimate objective would still be that the company does not engage in any other activity. This object in either case is the same, Restricting the memorandum of association is thus a means to the same end. The real test is the actual conduct of the company. It should not, in fact, indulge in any commercial activity other than operating the said industrial undertaking.
53-A. My learned brother, the Judicial Member, has observed in para. 28 of his order that "a company has nowhere discharged the onus that it had not done any other business except the exclusive business during the period under consideration". On the other hand, the assessment order categorically states that the assessee is "engaged in the manufacture and sale of fluting paper and liner (both paper products used for packing the material). The assessment order also clearly bares out that apart from books of accounts, excise records were also produced and that the products were subject to excise and sales tax. Duly audited accounts consisting of balance-sheet, drawings and profit and loss account expenses have also been furnished and examined and the same can be restricted on one exclusive business activity i.e. manufacture of paper products. The Assessing Officer has also estimated the sales for the same products and income has been computed only for the same exclusive source of business. No further evidence would possibly be required to establish that only business of manufacturing was undertaken during the relevant period. As such, it is only fair to conclude that the onus to prove one exclusive activity stood fully discharged and the same as stated earlier had neither been denied or disputed by the I.A.C. or the D.R.
54. The learned D.R. also submitted that C.B.R. Circular NO.1(14)TP?II/91, dated 20-5-1991 emphasized on setting up of an industrial undertaking which has an exclusive purpose, hence according to him the amendment in the memorandum of association should only have been made prior to setting up of an undertaking which as per C.B.R.'s Circular dated 10-3-1991 is the date on which the industrial undertaking is ready to go into production. As discussed above, the relevant clause (118-E) of the Second Schedule does not prescribe' mention of the exclusive industrial undertaking in the memorandum of association compulsorily for exemption. Even if for arguments sake, we consider the submission of the learned D.R. same circular dated 20-5-1991 in para. 2 also specifically states:--
"It is also clarified that under the above clauses, tax holiday would be available only if industrial undertaking restricts the business to the object as given in the memorandum and articles of association. Any shifting from the laid down business to any other business would not be covered by these tax holiday clauses."
55. No where does the circular mention the term "setting up" as has been indicated by the learned D.R. Instead it emphasized on the conduct of the business and the shifting from the laid down business would not be covered for exemption. From a plane reading of this construction, the term shifting has been used and shifting can take place only if the manufacturing activity business was already in existence. Hence, the conclusion in any case would be that there is no prescribed time limit for amendment provided that the company is engaged in one newly industrial undertaking business. At the time of assessment this circular letter dated 20-5-1991 was considered alongwith the provisions of clause (118-E) and on this basis the exemption was correctly granted.
56. Subsequent to assessment under section 62 the second instructions dated 15-12-1993 were issued. Although my learned Judicial Member has held that second instructions are not applicable to clause (118-E) as it relates only to clause (118-C) yet he has stated that a mere mention of the same in the notice issued by the I.A.C. under section 66-A cannot render the entire proceedings illegal.
57. From a reading of the relevant notice also reproduced in para 32 of the order of the learned Judicial Member, it is abundantly clear that the whole proceedings under section 66-A has been initiated because of the C.B.R.'s letter dated 15-12-1993 and there can be no doubt that the I.A.C. has based his order on this second letter of C.B.R. where the mention of amendment before commercial production has been made for the first time and without which the I.A.C. would not have invoked the section 66-A.
58. My learned brother, the Judicial Member, has also correctly held that this subsequent letter of the C.B.R. is not applicable as it does not cover the relevant clause and also as it cannot be applied retrospectively, when the assessment stood completed on the basis of the first instructions dated 20-5-1991 which is much before the issue of the second instructions by the C.B.R. As held above, the entire proceedings under section 66-A are based on the second instructions, therefore, the entire proceedings undertaken thereunder were also illegal and, therefore, must suffer of its consequences of being annulled.
59. Exclusivity as per clause (118-E) and also as per C. B.R.'s instructions is thus not concluded by mention of the same in the memorandum of association as clause (I18-E) does not mention the exclusive clause memorandum to be a precondition for exemption and the C.B.R. added this further requirement only to achieve the same end and this condition had also been complied-with and as such created a vested right. Moreover, the order of the I.A.C. is itself based on C.B.R.'s subsequent, instructions issued on 15-12-1993 which has been established not to be applicable by my learned brother the Judicial Member. The order under section 66-A being based on this instruction is equally invalid. Further, the first direction issued by circular letter dated 20-5-1991 by the C.B.R. was available up to the date of assessment created a vested right which cannot be withdrawn with retrospective effect. This principle has elaborately been considered and adjudicated in the following judicial pronouncements which insists on application and implementation for beneficial circulars only.
(1) State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC):
Held that: Circulars giving concession can be withdrawn prospectively
(2) CIT v. B.M. Edward, India. Sea Foods (1979) ITR 334 (FB):
Held that: Circulars of Central Board of Revenue are primarily meant to serve as guidelines are binding upon subordinate authorities vested with administration of I.T. Act Circular conferring privileges and rights on assessee---Subsequent recall or withdrawal of such circular does not affect assessee's right to have assessments effected or carried out in accordance with circular.
(3) CIT v. Geeva Films (1932) 141 ITR 632:
Held that: Circular conferring privileges and rights on assessee in force at beginning of assessment year---Effect of subsequent modification does not affect assessee's right to benefit of circular.
(4) PLD 1970 Supreme Court (Pak.) 439:
"The respondent had acquired a vested right of exemption from the levy of excise duty on all the goods produced or manufactured by it for a period of four years under the Notifications of the Central Government referred to above. That vested right could not, therefore, be taken away by an executive action. The Notification dated the 28th February, 1964, being completely destructive of the right vested in the respondent company was in this view without lawful authority and of no legal effect. ,
(5) 1989 PTD 839:
Held that:
Government cannot resile from the promise and withdraw concessions.
Plea of, by Province or its functionaries. Maintainability. Incentive scheme by Government giving concessions in sales tax to new entrepreneurs. Not open for Sales Tax Officer and the Province itself to contend that the scheme itself was ultra wires statutory provisions.
1988 PTD 677--CIT v. Olympia:
Held that:
"retrospective operation can only cover cases which were pending at the time the amending law was enacted i.e. cases which had not been finally determined or proceedings wh1ch had not attained finality. The retrospective effect of the amending law would, therefore, apply only to those cases where assessments had not been made by the Income Tax Officer.
We may observe here that when reference is made in any law, legal instrument, legal document, legal language or law book or dictionary, about vested right, the reference is to the vested right of a person natural or legal, and never to vested right of the State, legal theories relating to vested rights never contemplate vested rights of State. We are unable to accept the submission made by the learned counsel for the department that by giving retrospective operation to the amending law vested right of the State will be affected."
(6) 1995 PTD (Trib.) 482 (Full. Bench) Assessee v. Department:
The following grounds of submission were decided in favour of the assessee:
(i) That the provision shall not operate retrospectively to defeat the assessee's vested right of appeal.
(ii) That in matter of appeal the law as it existed at the time of making of assessment not as it exists at the time of filing the appeal shall apply.
(iii) ????????????????????????.........................?
(iv) That the proviso is void being inconsistent with constitutionally guaranteed right of equality before law; it discriminates between haves and have nots;
The conclusion, therefore; is that the answer to the question regarding the retrospection of a statute is to be found in the principle of fairness rather than by reference to whether the statute effects Vested or substantive rights or only it relates to the procedure of the Court. "
60. In view of the foregoing discussion, I have no choice but to conclude that the interpretation made by the learned D.R' on the provision is not tenable. Provision simply means that the company should not engage itself in activity other than operating the said undertaking. The subsequent concept of memorandum of association having only one clause is alien to the provision.
61. As regards the clarification contained in the second circular Letter C.No.1(41)TP-11/91, dated 15-12-1993, the contents of the said letter are as under:-- ???????????
"Please refer to your Letter No. SO-II-35(40)/93-93/2593, dated 21-11-1993 on the above subject. The matter has been examined by the C. B. R. Clause (118-C) of Part I of the Second' 'Schedule to the Income Tax Ordinance, 1979, provides exemption to an industrial undertaking exclusively formed for a specific purpose. If the object is changed before the commencement/erection of plant and machinery and other terms and conditions required under the law are also met, exemption would be available to the company."
62. This interpretation is not relevant as has also been held by my learned brother, the Judicial Member, as the same does not cover clause (118-E) and as it has been issued subsequent to the passing of the assessment order. Secondly, there is nothing in the provision to suggest that the memorandum of association should restrict to one clause only but says that if the memorandum is to be amended it must-be so done before the commencement of commercial production etc., is to add words to the statute which is not tenable. The relevant sub-clause does not contain anything to suggest such condition. The department is imposing conditions which are unwarranted in view of the plaon language of the provision contained in the law.
63. Thirdly the contents of this circular letter impose an extra condition not contained in the earlier circular which permitted amendment. If for any reason such amendment was required to be made before the creation of plant and machinery/commencement of business etc., the circular should not have mentioned it which it has not. It amounts to allowing the concession and then withdrawing it which as per decisions of the higher Courts (quoted above) is not permissible under the law. And finally this interpretation causes discrimination against those who had already erected the machinery or commenced the business by the time the C.B.R. permitted the existing companies to amend their memorandums. They cannot possibly avail of this concession without any lapse on their part. It is for this reason that whenever such conditions are imposed, these are made applicable prospectively. The memorandum clause can in any case be amended for any number of times under the Companies Ordinance, 1984.
64. In view of the fore-goings, I hold that the exemption and immunity granted in the Second Schedule to the Ordinance in the assessment order dated 27-4-1993 -is an order and is, therefore, restored and the circular letter issued by the C.B.R. bearing C. No. 1(41)/TP-II/91 dated 15-12-1993 is not applicable to the appellant's case.
65. Regarding the order passed under section 62, the issues regarding rejection of accounts, estimation of sales and the add backs out of profit and loss account expenses have already been taken in appeal at the first appeal stage and, therefore, not covered in the order under section 66-A and are being considered separately.
66. The CIT (A) confirmed the rejection of accounts and application of gross profit rate at 18 % as against 10.7 % declared by the assessee. The estimate of sales had been reduced to Rs:1,30,00,000 from Rs.1,50,00,000 as against declared sales of Rs.1,08,98,690. Other profits and loss account add-backs have also been confirmed by the CIT (A).
67. The appellant's A.R. has argued that the sales of the assessee are subject ` to excise and the year under review is the first year of the business, hence accounts should be accepted and gross profit rate as applied in other concerns should not have been applied. The department, on the other contends, that the relief granted by the CIT(A) is excessive. After considering the arguments of both the parties, I am of the view that the rejection of accounts had been properly made and the estimate of sales as well as the applied gross profit rate has rightly been confirmed by the CIT (A) and his order on this score calls for no interference.. Therefore, the appeals of the assessee and that of the department against assessment order under section 62 are dismissed.
68. As a result of the above discussion all the three appeals stand disposed of in the manner and to the extent as indicated above.
(Sd.)
??????????? (ASHFAQ AHMAD),
? ACCOUNTANT MEMBER
69. As a difference of opinion has arisen amongst the Members the case is placed before the Honourable Chairman for resolving the controversy.
QUESTION OF DIFFERENCE
"Whether, in the facts and circumstances of the case the I.A.C. was justified to withdraw the exemption .granted under clause (118-E) to the assessee by resorting to section 66-A. "
(Sd.) ?????????????????????????????????????????????????????????????????????????? (Sd.)
??????????? (ASHFAQ AH.MAD),??????????????????????????????????? (MUHAMMAD ZAMAN KHAN),
??????? ACCOUNTANT MEMBER ????????????????????????????????????????? ????????JUDICIAL MEMBER
70. NASIM SIKANDAR (JUDICIAL MEMBER).--The above question has been referred to me for resolving the difference of opinion.
71. Parties have been heard. The exemption clause (118-E) of the Second Schedule to the Income Tax Ordinance (since withdrawn by Finance Act, 1955) which is centre of controversy appears to have been interpreted by C.B.R., from time to time, in its peculiar way. These interpretations, at times, appear to have come along on the queries made by individual tax payers. In this connection leaned Accountant Member has rightly pointed out that C.B.R. in a way kept on improving its opinion. The latest example of such improvement has come after hearing of the case by the learned Division Bench on 4-6-1995. This Letter No. F.1(84)DTP-II/94, dated 9-7-1995 issued with respect to clause (118-D) Part I of the Second Schedule to the Ordinance (which is pari materia with exemption allowed vide 118-E) has finally accepted that it is the spirit of law and not the technical lacuna which should be seen while deciding the claims made under the aforesaid clause. The relevant portion of the letter reads:--
"It is therefore, advised that the assessee who fulfils the spirit of law, may be absolved of the technical lacunae if any in their cases. This can be ensured by certifying that tax holiday is allowed only in those cases, where only one business activity had actually been carried out Such treatment would be applicable only to cases which have already been set up, as the admissibility of this concession has expired on 30th June, 1995. "
72. The contents of this improved version of interpretation placed on a similar clause indicates that the Revenue has finally come to the same conclusion as the tax payers or their Legal Advisors were hammering in; that it is the actual business activity carried on by the assessee and not the statement of objects as narrated in a memorandum of association which should determine the "exclusiveness" of purpose of an assessee-company. The history of legislation of exemption clauses (118-C) to (118-M) (since-omitted by Finance Act, 1995) as gone through by the learned Accountant Member amply indicates the purpose underlining their enforcement. Therefore, if the interpretation of learned Legal Advisor for the Revenue that sole or exclusive purpose for which a company is formed is to be seen from its memorandum of association is accepted, whole idea of allowing exemption will collapse. For, in such situation a company formed only for one object may immediately amend its memo to undertake other objects or even in absence of such amendment go for engagement in other manufacturing/production business keeping intact its entitlement .for exemption. The limitations prescribed under sub-clause (2) of clause (118-E) them selves demonstrate that the only purpose of exemption is to encourage operation of industrial undertaking irrespective of what remains as part of objects in the memorandum of association.
73. The stress placed on provision of sole object in a memorandum of association by the Revenue has not impressed me. The framing of memorandum of associations is generally done in a way to keep some room available for performance of multifarious activity a company is likely to do. It is equally correct that in spite of mentioning of a number of objects in a memorandum of association, the main purpose remains limited to one or two objects and the rest are only ancillary which a company may never undertake. This issue was recently examined by a Division Bench of this Tribunal (of Which I was also a Member) in a case now reported as 1994 PTD (Trib.) 1034 which has also been relied upon by the assessee. In para four at page 303 of the report it was observed:--
"It is a common practice that a wide range of activities are incorporated in the Memorandum but unless a concrete shape is given to the subsidiary objects mentioned in the Memorandum, a company cannot be regarded as having ventured in business other than the main business. To have the intention of doing a business and being in a business are different matters. Mere mention of an activity in the Memorandum of association, at best, raised a rebuttable presumption which can be dispelled by showing that the company actually did not carry out that business. This preposition was examined in detail in the cases reported as 1980 PTD 322 (H.C. Kar.) and 1990 PTD (Trib.) 671."
74.. In the same order we respectfully followed a judgment of -the Karachi High Court cited as PLD 1969 Kar. 278 = 1969 PTD 317 re: CIT v. Habib Insurance Company. Their Lordships were quoted as saying that "The cardinal rule for constructing the memo. of a Limited Company is that when a company has a primary object all other clauses in the memorandum are to be understood as ancillary to the main object of the company". The Revenue has never attempted to make out a case that the assessee before us never had a primary object and that it had actually carried on more than one operations negating the sense and soul of the purpose for which the exemption was allowed. Reference in this connection may also be made to the observations made by this Tribunal in 1990 PTD 671 wherein it was found that "the memorandum and article of association are not conclusive against or in favour of the company for the question is not what business the tax-payer professes to carry on but what business he actually carries on".
75. The business a company is engaged in does have a bearing and nexus with its objects as contained in the memorandum of association but these clauses are not a determinative factor. The reliance of learned A.R. of the assessee on the remarks of Rowllat, J. as made in Commissioners of Inland Revenue v. Birmingham. Theatre Royal Estate Company Limited and reproduced by Supreme Court in PLD 1990 SC 399 = 1990 PTD 155 re: Eduljee Dinshaw Limited v. ITO are pertinent. The learned Judge said:
"When you are considering whether a certain form of enterprise is carrying on business or not it is material to look and see whether it is a company that is doing it'. The objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business. "
75-A. Since the issuance of notice to the assessee under section 66-A on 27-2-1994 it is persistent stand of the Revenue that as the company after closing its accounts for the first year of operation amended and got approved its conversion from multi-object to single object company, it was not entitled to the claimed exemption. The amendment in the memorandum was in a way taken as an admission on the part of the assessee-company that it was neither a sole object company nor its operations we restricted to only one kind of production. It is to be noted, rightly pointed out by learned Accountant Member that the Revenue never doubted that the assessee did not engage itself in any other object except the manufacturing of fluting paper and liner. To me it appears admitted, as far the Revenue is concerned, that the assessee engaged itself only in one kind of the said business activity and that the Revenue would have accepted, as it originally did, the claimed exemption but for the presence of some other objects in its memorandum of association.
76. The interpretation made by C.B.R. through various letters particularly one, issued on 15-12-1993 which became the raison d?etre for exercise of powers under section 66-A by the I.A.C. cannot be accepted. The C.B.R. is not entitled to make any interpretation of legal provisions as held by the Supreme Court of Pakistan in Central Insurance Company and another v. C.B.R. and cited as 1993 PTD 766 = 1993 SCMR 1232. Secondly the improvements made in such interpretation from 8-10-1988 through para. 27 of Circul4r No.20 till the issuance of the aforesaid last letter in July, 1995 indicate that they themselves were never sure of the real implication of their requirements of allowing exemption under clause (118-E). Thirdly, I have not been able to understand how and wherefrom the object clauses of a memorandum of association of an assessee-company was brought in to judge the admissibility of exemption. If the Board had reached the conclusion that it expressed in the latest letter issued on July 9, 1995, when the exemption clause had already been taken away from the Statute book on 30-6-1995, it could have saved a lot of inconvenience to the tax payers who were trapped in a maze of technicalities after being allured in to invest in certain areas or for certain objects. .
77. The "exclusiveness" of purpose, as said above, in the light .of the exemption provision had to be seen in the perspective of the actual activity and not merely the object clause of memorandum of association. The contents of Circular No.5 of 1991 dated 10-3-1991 a portion of which has been reproduced in para. 50 ante also indicates that presence of more than one object in memorandum clauses could only give an inference that the company was not formed exclusively for operating an industrial unit. Learned Accountant Member has therefore, very rightly pointed out that such inference, or presumption, if we may call it, was rebuttable and could have easily been adjudged by examining or probing into the actual business activity being carried on by the assessee. The permission allowed by C.B.R. to enable the assessee companies to amend their memorandum of association at a later stage on 20-5-1991 as referred to in para.51 again implies the march of Revenue towards reason though by inches.
78. I am also in full agreement with the findings of learned Accountant Member that the assessee fully discharged the initial burden that laid upon its shoulder in order to claim exemption. From the accounts produced before the assessing officer only one manufacturing activity was expressed and the claim was undoubtedly accepted by the Assessing Officer while framing the original assessment. The Revenue having done so cannot be allowed to succeed only by invoking section 66-A of the Ordinance.. The principle is that every claimant of exemption must prove its entitlement. It can be said with equal certainty that once such claim had been accepted the burden shifts to the Revenue. To withdraw a concession already allowed the Revenue must bring home in clear terms that it was allowed either on account of any fraud or misrepresentation on the part of the assessee or was in total disregard of any statutory provision including the one allowing exemption. The second part would apply to Revenue functionaries who may in some cases rectify the order or the controlling officer may opt to exercise its revisional jurisdiction. However, the way it has been done in the present case cannot be described as a valid discharge of onus on the part of the Revenue. Clearly the exercise of power under section 66-A was proposed on the ground that the exemption was allowed in spite of the fact that the assessee was not entitled to it. The Revenue did not rest its case that no such exemption at all was available in the Statute. The revising authority's only conclusion appears to have been the eligibility of the assessee to view of the competency of the assessee-company to engage in other business activity as well besides the one which was already undertaken. Although principle of change of opinion on the part of Revenue is not as such applicable in cases where exercise of power under section 66-A is warranted yet it can loosely be taken benefit of as far as burden of proof is concerned. And, I will confidently say, that this burden has not been effectively discharged by the Revenue in this case.
79. The contention of the assessee that after once having allowed exemption in the original assessment the Revenue could not take it away under the purported exercise of power under section 66-A of the Ordinance is however, misplaced. This question in fact does not arise in this case because the exemption clause as such was not recalled or withdrawn. The doctrine of locus poententiae or power, to recede as such therefore, cannot be a moot point before us. The case of the Revenue actually is that exemption was erroneously allowed which resulted into a prejudice to it. Otherwise also, the doctrine has recently undergone so many changes that it is difficult to subscribe to the relevancy of ratio and the case-law discussed in para. 59 ante. As said above since this issue did not arise in the facts before us my humble views in this regard do not make any difference as far the entitlement of assessee to the claimed exemption or the exercise of power of Revenue under section 66-A are concerned. Nor I find it suitable to discuss the case-law cited before me in this regard. It needs to be repeated that withdrawal of an exemption as such is different from disallowing it on the ground that it was wrongly allowed.
80. Learned A.R. for the assessee has also relied upon (1971) 82 ITR 913 re: Ellerman Lines Limited v. CIT, West Bengal wherein it was found that C. B. R. Circulars are bending on assessing officers even if deviating from the law. In the other case Additional CIT, Delhi v. Mrs. Avtar Mohan Singh (1982) 136, ITR 465 (Delhi) it was found that C.B.R. Circular wherein rigours of law were softened were available to assessee for a relief in Courts though these were not biding on Courts. In Assistant Commissioner of Commercial Taxes v. Dharmendra Trading Company 1989 PTD 839 Supreme Court of India did not allow the counsel for the Revenue as well as the other functionaries of State to find fault in a concession given by the State on the ground that it was ultra vires of any statutory provision.
81. All the three above cases have been cited to say that the assessee is entitled to the benefit of the latest view of. the Revenue as expressed in the abovesaid letter, dated July 9, 1995. The idea is also to forestall any attempt on the part of the Revenue to circumvent the meaning or effect of that letter. This attempt had in fact been made by the learned Legal Advisor Mr. Shehbaz Butt, who insists that the plain words of clause (118-E) do not admit of any interpretation or the concession as doled out through that letter. He further stresses that any change in the objects of company after it had already come into existence, gone into production and also closed its accounts for the first year, as in the case of the assessee, is totally derivative of the letter and spirit of the exemption clause. He also questioned the competency of the Revenue to issue letters which are allegedly against the statutory provisions.
82. As far the value and force of C.B.R. instructions is concerned the view of the Supreme Court of Pakistan has already been referred above. The last-cited two cases are general statements of law and have no direct bearing upon the issue before us. However, I would like to submit something as far the first case re: Ellerman Lines Limited is concerned. In that case the Supreme Court with reference to its earlier opinion in Navit Lal Company Javrai v. K.K. Sen A.C. Bomaby (1965) 65 ITR 198 at 203 found that C.B.R. Circulars were binding on Assessing Officers even if these deviated from the provisions of the Act. Both of these cases were relied upon and followed in K.P. Vagese v. ITO (1981) 131 ITR 597. However, lately the last-mentioned case was cited and relied upon before a Division Bench of the Supreme Court of India in 1995 PTD 1212 = 210 ITR 129, Re: Kerala Financial Corpn. v. C.I.T. There Lordships expressed reservations qua the said ratio and finally remarked "such a contention cannot seriously be even raised". It may be noted that the view of Supreme Court of Pakistan as expressed by a Full Bench in re: Central Insurance Company (supra) is that "if there is a departure from the law involved in the provision for relaxation contained in the Circular, then that Circular is to the extent of the deviation invalid and ineffective and the power there under is illegally exercised".
83. Learned Judicial, Member dismissed cross-appeals filed against the original assessment order on the ground of their having become infructuous after confirming the action under section 66-A. Learned Accountant Member has, on the other hand, dismissed these appeals on merit. Parties have not seriously challenged the findings of the learned Accountant Member recorded in para. 67 above. To these findings I subscribe. Therefore, in order to fully dispose of the matter and as a necessary corollary to my answer the question referred to me, the cross-appeals by the assessee as well as the department against the assessment order dated 27-4-1993 shall fail while the appeal filed by the assessee against the order recorded under section 66-A on 9-6-1994 shall succeed, in toto.
M.B.A. /146/Trib.??????????????????????????????????????????????????????????????????????????????? ???? Order accordingly.