(a) Legislation---

-- Method of legislation by reference is not approved by superior Courts.

(b) Income Tax Ordinance (XXXI of 1979)---

----Third Sched., Rr.2 to 7 & S.30(2)(d)---Depreciation allowance---Income from other sources ---Assessee, a private limited company deriving income from hire of its four flour mills---Such an assessee, held, was entitled to depreciation allowance and his income being from the hire of plant/machinery would be assessable under S. 30(2)(d) of the Income Tax Ordinance, 1979-- Principles.

Commissioner of Income Tax, Lahore v. Muhammad Allah Bakhsh 1977 PTD 13 and Income Tax Act by A.C. Sampath Iyangar, 4th Edn., Vol II, ,.568 fol.

(c) Interpretation of statutes---

-- Two irreconcilable and inconsistent provisions of a statute--Construction-- Principles.

Nasir Hussain, D.R. for Appellant.

Ch. Muhammad Aslam Sahi, ITP for Respondent

Date of hearing: 11th June, 1995.

ORDER

CH. IRSHAD AHMAD (JUDICIAL MEMBER). --The judiciary disapprove Legislation by reference. The people of the State of New York have gone to the extent that they have provided in their Constitution that the Legislature shall not pass any Act applying any provision of law by reference (Article 111, section 16 of the Constitution of the State of New York). This order will demonstrate the reason for the judicial disapproval of and the obvious flaw in, the method of legislation by reference.

Section 15 of the. Income Tax Ordinance, 1979 (the Ordinance) provides that all income shall for the purposes of the charge of tax and the computation of income-tax be classified under the following heads namely: ---

(a) Salary:

(b) interest on securities;

(c) income from house property;

(d) income from business or profession;

(e) capital gains; and

(f) income from other sources

Section 23 of the Ordinance specifies the allowances and deductions which shall be made in computing the income under the head "income from business or profession". O e of the allowances is depreciation allowance specified in clause (v) of subsection (1) of section 23 which reads as under:---

"(ii) in respect of depreciation of any such building, machinery, plant; furniture or fittings being the property of the assessee the allowance admissible under the Third Schedule (to the Ordinance)."

The Third Schedule contains the rules for the computation of depreciation allowance. Rule 1 of the Third Schedule specifies the conditions under which the allowance for depreciation shall be made in computing the profits and gains of the business or profession of he assessee under section 23 of the Ordinance. Rules 2 to 7 of the said Schedule give the rates of depreciation allowance in respect of various assets, extra depreciation allowance for multiple shift working disallowance, disallowance of depreciation allowance in cases where cast of renewal or replacement of an asset has been allowed, special rates of initial depreciation in respect of specified assets, maximum amount of depreciation and disposal of assets on which depreciation allowance has been allowed and treatment of resultant gains and losses.

Clause (d) of subsection (2) of section 30 of the Ordinance provides that income from the hire of machinery, plant or furniture belonging to the assessee and also the building belonging to him if the letting, of the buildings is inseparable from the letting o the said machinery, plant or furniture shall be chargeable under the head ' inc me from other sources'. Clause (c) of section 31 of the Ordinance provides that in the case of income to which clause (d) of subsection (2) of section 30 applies, among others, the allowance computed in accordance with the provision f clause (v) (allowance for depreciation) of subsection (1) of section 23 shall be made. Although clause (c) of subsection (1) of section 31 provides that (allowance for depreciation shall be made in computing the income (income from the hire of machinery alongwith the building) to which clause (d) of subsection (2) of section 30 applies but it does not in itself provide the manner in which the said allowance shall be worked out. For the working of the allowance it refers to clause (v) of subsection (1) of section 23 of the Ordinance which jn its own turn refers to the rules given in the Third Schedule to the Ordinance.

The facts, so far as material, are that the assessee a private limited company, derives income from hire of its five flour mills. In computing its income from the hire of its mills for the assessment year 1991-92 the assessee claimed depreciation allowance mounting to Rs.3,49,134. The assessing officer disallowed the allowance for the season that in view of the amendment in the Third Schedule to the Ordinance (to be noticed later made by the Finance Act, 1985 the depreciation allowance on the assets given on lease as admissible only to banking or leasing companies. On assessee's appeal the Appeal Commissioner has held that depreciation allowance is admissible to the assessee under section 31(1)(c) of the Ordinance because its income from hire of its mills is assessable under section 30(2)(d) of the Ordinance.

The I. T. O. has objected to the order of he Appeal Commissioner on the ground that he was not justified to allow the depreciation.

We have heard Mr. Nasir Hussain, D.R. and Ch. Muhammad Aslam Sahi, ITP for the assessee.

The learned D.R. contended that sub-rule; (1) of rule 1 of the Third Schedule to the Ordinance (the sub-rule) has been amended by Finance Act, 1985 providing for that where any machinery or plant is given on lease the depreciation allowance in respect thereof shall be allowed only to an assessee who is either a scheduled bank, a financial institution, a modaraba, or a leasing company approved by the CBR, and since the assessee is not one of the assessee's falling in the above categories is n 3t entitled to depreciation allowance.

In our view since the sub-rule even as it existed before it was amended by the Finance Act, 1985 did not control the admissibility of depreciation allowance in computing income from the hire of factories chargeable to tax under section 30(2)(d) of the Ordinance as income from other sources the amendment made by the Finance Act, 1985 in the s b-rule did not effect the said admissibility. As a starting point it would be appr6priate to state how we say that even the unamended sub-rule did not cont o l. the admissibility of the depreciation allowance in computing income from h ire of factories chargeable to tax as income from other sources. The un, mended sub-rule reads as follows: ---

"Where, in any income year, any building, machinery, plant or furniture owned by an assessee is used for purposes of any business or profession carried on by him, an allowance a for depreciation shall be made in computing the profits and gains of the business or profession of the assessee in the manner hereinafter provided. "

It appears to be an accepted position that the depreciation allowance was admissible in computing income under section 30(2)(d) of the Ordinance as income from other sources before the sub-rule was amended by the Finance Act, 19851.6.One simple reason in saying that the sub-rule did not control the admissibility of depreciation allowance in computing income from hire of factories chargeable to tax as income from other sources is that the sub-rule clearly referred to the computation of profits and gains of the business of profession of, the assessee, and as such it only governed the cases relating to computation of income fro business and profession and did not relate to the computation of income fro a other sources. But we have also something more to say. The sub-rule provide that in computing the profits and gains of the business or profession of t e assessee depreciation allowance -shall be made where any building, mach try, plant or furniture owned by an assessee is used for the purposes of any business or profession carried on by him. Section 31(1)(c) of the ordinance however, provided that in computing any income from hire of facto chargeable to tax as income from other sources depreciation allowance shall a allowed as provided in the Third Schedule. If the sub-rule is applied in determining the admissibility of depreciation allowance in computing income from the ire of factories chargeable to tax as income from other sources there would be 1 obvious irreconcilable inconsistency between the provisions of the sub-rule an the provision of section 31(1)(c) of the Ordinance. Because the sub-rule provide that the depreciation allowance shall be allowed if an asset, is used by the assessee for the purposes of his own business whereas section 31(1)(c) of the Ordinance provided that the depreciation allowance shall be allowed in computing income from hire of factories. Necessarily in cases of income from hire of factories the asset is not used by the assessee himself but is used by the lessee. And, where there are two irreconcilable inconsistent provisions of a statute the rule of construction is that they are deemed as no intended to apply at the same time. It is deemed that each such provision was intended to apply to different situations and at different times. The other rule of construction of statute is that so far as possible the repugnancy between the two inconsistent provisions is to be avoided. In the case before us the inconsistent; between the sub-rule and section 31(1)(c) of the Ordinance can be avoided to hold that reference of the Third Schedule in section 31(1)(c) was reference only to the rates and other conditions on which the depreciation allowance was to be allowed and not the condition given in the sub-rule whose application would negate the admissibility of depreciation allowance in cases where the assessee was not using the assets for the purpose of his own business but was earning the gains and profits by leasing his assets.

As noted earlier the sub-rule has been amended by the Finance Act, 1985. The amended sub-rule reads as follows: ---

"Where, in any income year, any building, machinery, plant furniture owned by an assessee is used for purposes of any business profession carried on by him, or in any income year commencing on after the first day of July, 1982, any machinery or plant is given lease by the assessee, being a scheduled bank, a financial institution such modaraba or leasing company as is approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may specified, an allowance for depreciation shall be made in computing profits and gains of the business or profession of the assessee in manner hereinafter provided."

It is obvious that under the amended sub-rule depreciation allowance shall be made in computing the profits and gains of the business or profession of the assessee if either any building, machinery, plant or furniture owned by an assessee is used for the purpose of his own business or profession carried on by him or if any of the asset is given on lease only to an assessee who is a scheduled bank, a financial institution or an approved modaraba or leasing company. The application of the provisions of the Third Schedule which primarily were meant to provide for depreciation allowance in computing income from business or profession by reference to provide for such allowance in computing income from other sources has highlighted the flaw of the method of legislation by reference.

Under which head of income the income from hire of factory would fall has been and continues to be a difficult question to answer. Sometimes it was found that it was income from business and some times it was found that it was income from other sources. There is no straight answer to the question whether income from hire of a factory is' income from business or income from other sources. A guidance to answer the question can however be obtained from the judgment of the Lahore High Court in case of Commissioner of Income Tax, Lahore v. Muhammad Allah Bakhsh 1977 PTD 1:). The Court after surveying various precedents has held as follows: ---

"The principle that emerges from the above judgments is that it is the nature of the property and the intention of the owner that will spell out the nature of the income in any given case. We agree that no hard and fast rule can be laid down for its determination. If the property was let out just after making it, the intention of the owner will be clear that it was not a commercial asset and would be governed by section 9. If the owner makes the property to be used as a commercial asset, the subsequent letting out will not bring it under section 9 unless it was clear that the assessee had abandoned his intention to use it as commercial asset. But it cannot be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The past and present business of the assessee seen in the light of the lease deed-can also be of great help to gather that intention. The actual of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to the best advance and he may do so either by using it himself personally or by letting it out to somebody, else. A.C. Sampath Iyangar in his book on Income Tax ;Act, 4th Edn., Vol. II, p. 568 opined as follows:---

If the plant, machinery or furniture was used by the lessor himself there is no question that the income would have been business income in his hands chargeable under section 10. The fact, that instead of using the plant, machinery or furniture himself, he permits another person to use it, would not change the character of the income. The yield of income through the plant, machinery or furniture is profit of the business, irrespective of the manner in which the plant, machinery or furniture is exploited by the owner. He may do so by either using the plant, machinery, or furniture himself or by letting it out to somebody else. But there is this qualification. If the plant, machinery or furniture ceases to be a commercial asset, then the hire income would not constitute business income. It would only constitute income under the head 'other sources'. The non-user of a commercial asset might be due to a change in the condition of the plant, machinery or furniture or by its absoluteness. "

Thus, while in one case the income from hiring of a factory shall be treated as income from business in another case it will be treated as income from other sources depending upon the circumstances and the manner in which the assessee had given the factory on lease. If the owner continues to treat the factory given on lease as his commercial assets the income from hire will be income from business but if he hands over the assets to the lessee without having any control over them his income from hire will be income from other sources.

In this case the assessing officer has computed the assessee's income from hire of factories as income from other sources. That is the reason that he has disallowed the allowances and deductions claimed in respect of the income which are admissible in cases of income from business.

So far as the position regarding the admissibility of depreciation allowance in respect of income from hire of factory etc. under section 30(2)(d) read with section 31(1)(c) is concerned it has not undergone any change with the amendment of the sub-rule by the Finance Act, 1985. The said sub-rule neither before its amendment applied in computing depreciation allowance in case of income to which section 30(2)(d) was applicable nor it has affected the admissibility of the said allowance after its amendment. As stated the sub-rule shall apply only where an income from lease is charged to tax as income from business and not where it is charged to tax as income from other sources.

This case and many such other cases have highlighted the fallacy when legislation is made by reference.

For these reasons the I.T.O.'s appeal is rejected.

M.B.A./198/TribAppeal rejected