CALICON (PVT.) LTD. VS FEDERAL GOVERNMENT OF PAKISTAN
1996 P T D (Trib.) 705
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman
I.T.As. Nos.292/LBI/DB of 1988-89, 193, 194, 195 of 1990-91 and No.9960/LB/DB of 1991-92, decided on 12/03/1996.
Per Muhammad Mujeebullah Siddiqui, Chairman agreeing with Muhammad Mushtaq, Accountant Member---
(a) Interpretation of statutes---
---- Legislation by reference/incorporation---Implications---Risk of confusion and other complications involved in such exercise pointed out.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.30(2)(d) & 31(1)(c)---Income from other sources ---Depreciation-- Deduction---Assessee deriving income from hire of machinery, plant or furniture alongwith the buildings which are inseparable from the letting of the said machinery, plant or furniture is entitled to allowance of depreciation.
I.T.A. No.648(ID) of 1992-93 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.31(1)(c)---Deduction---Allowances and deductions---Conditions ofadmissibility.
(d) Interpretation of statutes---
---- Law has to be interpreted in such a way that it is made workable.
I.T.A. No.648(ID) of 1992-93 fol.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.31(1)(c)---Income Tax Appellate Tribunal desired that Legislature removed the ambiguity pointed out in S.31(1)(c) of Income Tax Ordinance, 1979 by re drafting the same on the lines indicated.
Per Muhammad Mushtaq, Accountant Member---
Per Nasim Sikandar, Judicial Member, Contra---
Naeem Akhtar, C.A. for Appellant.
Muhammad Asif Hashmi, D.R. for Respondent
Date of hearing: 11th August, 1993.
ORDER
In this case appeals have been filed both by M/s. Punjab Bottlers (Pvt.) Ltd., Lahore, hereinafter also referred to as the assessee, as well as by the Income Tax Department. The Income Tax Department has challenged the order of the learned C.I.T.(A), Zone-I, Lahore vide A.O. No. 16/CC.II, dated 30-5-1988 for the assessment year 1987-88. The assessee has challenged the following orders of the learned CIT(A) Zone-1 and Zone-2, Lahore:
(1) A. O. Nos. 277, 285 & 339/CCII, dated 25-6-1990 (Assessment years 1988-89,1988-89 & 1989-90).
(2)A.O. No. 125, dated 7-5-1992 (Assessment year 1990-91).
2. One of the appeals filed by the assessee is against order under section 108 and the other appeals filed by the Income Tax Department as well as the assessee are in respect of orders section 62 of the Income Tax Ordinance, 1979.
3. The disputed issues in all these appeals are common and interlinked, hence these appeals are being decided by a combined order as under. The brief facts leading to these appeals are as under.
4. The assessee in this case is a private limited company who has leased out a plant for manufacture of fruit juices to M/s. Riaz Bottlers Ltd. For all these years the lease money has been shown at Rs.6,00,000 except for the assessment year 1987-88 where lease money has been shown at Rs.6,00,518. For all these years the assessee claimed that it had paid rent of the building to M/s. Riaz Bottlers (Pvt.) Ltd. at Rs.1,80,000 because building in which plant of the assessee has been installed belonged to M/s. Riaz Bottlers (Pvt.) Ltd. The assessee has claimed depreciation for plant and machinery for all these years. Besides this minor P&L expenses such as professional expenses etc. have been claimed for various years. However the major dispute relates to the rent paid by the assessee and the claim of depreciation. The treatment given by the Income Tax Department and the learned CIT(A) in various years is as under:
ASSESSMENT YEAR 1987-88
5. The computation of income for this year furnished by the assessee is as under:---
| Income from lease of machinery to M/s. RiazBottlers Ltd. | Rs.6,00,518 |
| Less | |
| Rent of Building | Rs.1,80,000 |
| Depreciation | Rs.3,40,945 |
| Professional charges | Rs. 1,750 |
| Audit fee | Rs. 5,000 |
| | Rs. 5,27,695 |
| Net income declared:--- | Rs. 72,823 |
6. The I.T.O: disallowed the rent of the building as well as claim of depreciation and determined the income at Rs.5,93,868.
7. Aggrieved by this treatment the assessee went into appeal: The learned CIT(A) allowed the claim of depreciation as well as rent on the ground that both these items were allowed to the assessee in the assessment years 1985-86 and 1986-87. Against this treatment the Income Tax Department has come up in appeal and has contended that the learned CIT(A) was not justified in allowing rent as well as depreciation to the assessee.
ASSESSMENT YEAR 1988-89
8. In this year again the assessee declared lease income at Rs.6,00,000 andclaimed expenses as under:
| Income from lease to Riaz Bottlers. | Rs. 6,00,000 |
| Less Expenses | |
| Rent (15,000 x 12) | Rs.1,80,000 |
| Depreciation | Rs.3,06,851 |
| Audit fee | Rs. 5,000 |
| | Rs.4,91,851 |
| Net income: | Rs.1,08,149 |
9. For the assessment year 1989-90 the assessment order does not indicate computation furnished by the assessee, however, lease money for this year was same i.e. Rs.6,00,000 and for these years also the ITO disallowed the assessee's claim of depreciation as well as rent of the building.
10. Aggrieved by this treatment the assessee went into appeal. The learned CIT(A) Zone-I, Lahore vide combined order for the assessment years 1988-89 and 1989-90 set aside the assessment order on the point of rent of the building but upheld the disallowance of depreciation.
11. For these two years the assessee has challenged the setting aside of the assessment order by the learned CIT(A) in respect of building rent and disallowance of depreciation.
12. For the assessment year 1990-91 again the lease income was declared at Rs.6,00,000 and the expenses claimed were as under:
| Lease Income | | Rs.6,00,000 |
| Less | Rs.1,80,000 | |
| Rent | | |
| Legal & Professional | | |
| Charges | Rs. 10,200 | |
| Depreciation | Rs.2,48,549 | |
| Total expenses | Rs.4,38,749 | Rs.4,38,749 |
| | Balance income: | Rs.1,61,251 |
However, this year the ITO allowed the building rent to the assessee but disallowed depreciation. Again the assessee went into first appeal, however the learned CIT(A) rejected the appeal of the assessee.
13. From the above facts it is quite evident that major dispute in this case for all the years relates to admissibility of claim of rent and depreciation. These issues are being discussed as under: --
14. Building rent.---For the assessment year 1987-88 claim of rent was disallowed by the ITO with the following observations:
"The claim of the assessee on this account is not acceptable. The machinery is being used by M/s. Riaz Bottlers (who own the building as well) for manufacture of fruit juices and the assessee is not deriving any benefit on account of this production. Under these circumstances there was no requirement from the assessee to pay any rent for the building as the machinery installed there is being used for the benefit of M/s. Riaz Bottlers and the assessee is not deriving any profits or gains out of it. Since the building is owned by M/s. Riaz Bottlers Limited and the machinery installed therein is also being used for their own benefit, the claim on account of rent paid for this building on the point of the assessee is totally uncalled for and justified. The claim is therefore disallowed. "
For the assessment years 1988-89 and 1989-90 the ITO disallowed the claim of rent with the same observations.
15. When the matter reached in first appeal, the learned CIT(A) allowed the claim of rent for the assessment year 1987-88 with the following observation:
"The appellant's learned counsel has argued that no doubt the building belongs to M/s. Riaz Bottlers Ltd. but it was leased out to appellant Punjnad Bottlers Ltd. and thus the appellant is paying a rent of Rs.15,000 p.m. to M/s. Riaz Bottlers Ltd. for this facility. The fact that machinery has been leased out to the same party who has leased the building to the assessee does not debar the assessee from claiming the legitimate expenses that the assessee has incurred in connection with the hire of the machinery which is charged to tax in the hands of the assessee. Moreover this claim has been allowed by the Department for preceding assessment years 1985-86 and 1986-87. Accordingly the I. T. O. is directed to allow this claim."
16. For the assessment years 1988-89 and 1989-90 the learned CIT(A) setaside the assessment order on this issue with the following observations:
"After having heard the arguments, I find this fact needs to be re examined as the same was not properly scrutinized by the assessing authority. In case M/s. Riaz Bottlers Ltd., rented the building premises to the appellant company and had also declared an amount of Rs.1,80,000 as income from house property in its own return, the expenses will be admissible as it was for sufficient consideration. These issues are, therefore, remanded back to the assessing authority for reconsideration in the light of foregoing observation."
17. The learned D.R. arguing on behalf of the Income Tax Department vehemently contended that the ITO was justified in disallowing rent because the purpose of acquiring the building on rent was not clear because the assessee was not doing any business itself and only the machinery of the assessee was installed in the building owned by M/s. Riaz Bottlers (Pvt.) Ltd. who manufacture juice from machinery installed in that building, hence the ITOs were justified in not allowing the rent.
18. The learned A.R. of the assessee, Mr. Naeem Akhtar, ACA, on the other hand contended that in this case it has been admitted by the assessing officer that building belonging to M/s. Riaz Bottlers (Pvt.) Ltd. was obtained by the assessee on rent. This fact has not been denied by the assessing officer in any of the assessment year under dispute, however the ITO disallowed the rent expenses on the ground that obtaining of the building on rent was not requirement of the assessee. The learned A.R. of the assessee contended that these observations of the assessing officer are not correct because the assessee installed plant and machinery in the said building. The learned A.R. further contended that it has been admitted by the learned CIT(A) that rent received from the building, declared by the assessee in the income-tax return. In these circumstances there was no justification for making disallowance of the rent. The learned A.R. of the assessee further contended that for the assessment years 1988-89 and 1989-90 these facts were indicated by the learned CIT(A) in the appeal order but still the assessment orders were set aside which was not justified.
19. We have carefully considered the facts of the case and arguments advanced from both the sides. In this case what has happened is that the appellant M/s. Punjnad Bottlers (Pvt.) Ltd. have leased out machinery to M/s. Riaz Bottlers (Pvt.) Ltd. and on the other hand they have obtained on rent a building from M/s. Riaz Bottlers (Pvt.) Ltd. Thus one party has rented machinery to other and the other party has rented out the building to the first one. Various ITOs made the disallowances of rental income in the hands of the assessee on the ground that obtaining the building on rent was not requirement of the assessee. We cannot agree with this point of view because the assessee wanted to install its plant and machinery and it has to be done in some building. The assessee instead of constructing its own building installed this plant and machinery in a rented building. Various assessing officers have not made out a case that assessee and M/s. Riaz Bottlers made a collusive arrangements to evade tax. If this is not as then there is no point in making disallowances of rental expenses in the hands of the assesee.
20. Reverting to assessment year 1987-88 the learned CIT(A) allowed the rental expenses on the ground that for the assessment years 1985-86 and 1986-87, the rental expenses were allowed to the assessee. A perusal of the record indicates that for the assessment year 1990-91, the ITO allowed rent expenses to the assessee to the extent of Rs.1,80,000. Thus for the assessment years 1985-86, 1986-87 and 1990-91, the assessee's claim regarding rent expenses were allowed and for the assessment years 1987-88, 1988-89 and 1989-90 these were disallowed which is not tenable. The Income Tax Department has itself admitted the genuineness of the claim of the assessee for the assessment years 1985-86, 1986-87 and 1990-91 and there is no reason why the assessee's claim should not be allowed for the assessment years 1987-88 and 1988-89 and 1989-90 especially when no distinguishing factor has been pointed out by the assessing officer for these three years.
21. Thus the position regarding claim of rental expenses of the assessee is as under:
(i) That assessee's claim was allowed in the assessment year 1985-86. 1986-87 and 1990-91.
(ii) That for the assessment years 1987-88, 1988-89 and 1989-90 disallowance was made without pointing out any distinguishing factor.
(iii) The assessing officers have not proved any collusive arrangements between the assessee and M/s. Riaz Bottlers (Pvt.) Ltd.
22. Because of these reasons we have no doubt in our mind that claim of rental expenses made by the assessee for all these years is admissible and is allowed accordingly. Consequently the appeal of the assessee for the assessment years 1988-89 to 1990-91 is allowed and the appeal of the Income Tax Department for the assessment year 1987-88 is, rejected.
DEPRECIATION
23. For the assessment year 1987-88 claim of depreciation was disallowed by the I.T.O. with the following observations: ---
"The assessee has claimed depreciation on machinery leased out to M/s. Riaz Bottlers Limited. The depreciation is only admissible in respect of assets employed in the business carried on by the assessee himself. Since the assessee not used the machinery on its own account and no evidence has been furnished to suggest that the assessee was deriving any benefit out of production from the said machinery, the claim is not admissible under the rules."
For the assessment years 1988-89 and 1989-90 the assessee's claim of depreciation was disallowed on similar ground.
24. For the assessment years 1988-89 and 1989-90 the learned CIT(A) dwelt on the provisions of section 23(1)(v) of the Income Tax Ordinance, 1979 and Third Schedule in detail and ultimately arrived at following conclusion:
"In view of foregoing it is quite clear that depreciation on plant and machinery if given on lease is only admissible by a leasing company if approved by the Central Board of Revenue. Since the appellant company does not have such approval, the disallowance of depreciation was justifiably made. The action of the learned Chairman Panel for both the years in this behalf is confirmed."
25. For the assessment year 1990-91 the appeal was dismissed simply on the ground that in the assessment years 1988-89 and 1989-90 the assessee's appeal was rejected by the learned CIT. The learned counsel of the assessee has contended that the ITO was not justified in disallowing depreciation for the above years because for the assessment years 1985-86 and 1986-87 assessee's claim of depreciation was allowed in identical circumstances. For these years there was no extraordinary factor which would call for departure from the past history of the case. The learned A.R. of the assessee argued that provisions of section 31(1)(c) are quite clear and machinery which has been given on lease is entitled to depreciation. The learned A.R. of the assessee also relied on the case reported as 1977 PTD 13.
26. The learned D.R. on the other hand supported the orders of the authorities below and contended that the assessee derives income in this case from lease of machinery and such income is assessable under section 30 of the Income Tax Ordinance. According to the learned D.R. depreciation has to be allowed to the assessee in view of the provisions of sections 31(1)(c), 23(1)(v) and Rule 1 of Third Schedule, 1979. The learned D.R. contended that a perusal of the provision of Rule 1 of Third Schedule clearly indicates that depreciation is only admissible on the assets which are owned by the assessee and are used by the assessee in his own business or profession. The learned D.R further contended that in case of leased assets depreciation is available if the machinery is given by the leasing company or Modaraba Co. approved by the Central Board of Revenue for the purpose of Third Schedule. Since the assessee is neither a leasing company nor a Modaraba approved by the CBR for the purposes of Third Schedule, hence the machinery of the assessee is not entitled to any depreciation.
27. We have carefully considered the facts of the case and arguments advanced from both the sides. The provisions of sections 30(1), 30(2), 31(1)(c) and 23(1)(v) are reproduced as under: --
"30(1). Income of every kind which may be included in the total income of any assessee under this Ordinance shall be chargeable under the head Income from other sources' if it is not included in his total income under any other head.
30(2). In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes shall, save as otherwise provided in this Ordinance, be chargeable under the head Income from other sources', namely: --
(a) Dividend.
(b) Interest, royalties and fees for technical services:
(c) Ground rent.
(d) Income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging is to him if the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture; and
(e) any income to which subsection (12) of section 12 or section 13 applies. "
31(1)(c) In the case of income to which clause (d) of subsection (2) of section 30 applies, any allowance or deduction computed in accordance with the provisions of clauses (iii), (iv) and (v) of subsection (1) of section 23.
23(1)(v). In respect of depreciation of any such building, machinery, plant, furniture or fittings, being the property of the assessee, allowance admissible under the Third Schedule:"
28. These provisions clearly indicate to that assessee who has leased out his machinery to other concerns is entitled to depreciation. However, the depreciation of the machinery is to be allowed under Rule 1 of Third Schedule which is reproduced as under:-
"1. Allowances for depreciation.---(1) 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, or in any income year commencing on or after the first day of July, 1982, any machinery or plant is given on lease by the assessee, being a scheduled bank, a financial institution for such Modaraba or leasing company as is approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may be specified an allowance for depreciation shall be made in computing the profits and gains of the business or profession of the assessee in the manner hereinafter provided."
A perusal of the above provisions of law indicates that under section 31 (1)(c) of the Income Tax Ordinance, 1979 machinery which has been given on lease is eligible for depreciation as available to machinery under section 23(1)(v) of the Income Tax Ordinance, 1979. A perusal of the section 23(1)(v) of the Income Tax Ordinance, 1979 indicates that depreciation is admissible on the machinery which is the property of the assessee. But a perusal of the Third Schedule of the Income Tax Ordinance, 1979 indicates that under this rule two conditions have been laid down for eligibility of machinery for the purposes of depreciation. These are: -
(i) That plant and machinery should be owned by the assessee.
(ii) That plant and machinery is used for the purposes of business or profession carried on by the assessee.
29. In this case depreciation has been disallowed on the ground that the machinery has not been used by the assessee for the purposes of his own business and profession. The learned A.R. of the assessee relied on the case reported as (1976) 35 Tax 74 (H.C. Lah.). Actually the correct citation of this case is 1977 PTD 0 CIT, Lahore Zone v: Muhammad Allah Bukhsh PTR 200 (TR No.137 of 1971 dated 5-7-1976). The decision of the Lahore High Court has been carefully gone through by us but the facts of the reported case are entirely different than the instant case. Briefly the facts of the reported case are that the assessee was tax-payer since 1937. He had two cotton factories and an Ice factory in 1942-43. The assessee added a number of factories. All these factories were operated by the assessee. In 1954-55 the assessee leased out three of his cotton factories to other persons for a period of 5 years and ultimately these factories were disposed of by the assessee. Their Lordship observed "thus the apparent intention of the lease of the factories was not to use the factories for a fixed income but was in fact to increase the profits from business in this manner. The terms of the lease also show that assessee had every intention of preserving his commercial assets, fit to be taken over to be worked by himself. He had the right to get them well maintained in good condition. The lessee was obliged to repair and replace machinery. The assessee could change the miller, engineer and other technical staff if their working was unsatisfactory or inefficient. The factories which started as commercial asset continued in that state throughout. The fact whether the assessee was running them himself or had let out to the other will hot make much difference." With these observations it was held that income derived by the assessee in the reported case was assessable as income from business under section 22 of the Repealed Income-tax Act, 1922 and not under section 12 of the said Act.
30. The facts in this case are different. The issue here is not whether income of the assessee is assessable as business income or lease income because this contention has not been made by the assessee for any of the year in the grounds of appeal and no additional grounds of appeal have been furnished to this effect. Precise issue in this case is whether depreciation is admissible to the machinery under section 31 of the Income tax Ordinance, 1979 or not. A perusal of the provision of section 31(1)(c) read with provision of section 23(1)(v) of the Income Tax Ordinance, 1979 clearly indicates that machinery given on lease by an assessee is entitled to depreciation and if there was any ambiguity it was removed by CBR's Circular No.4 of 1979 dated 23-8-1979. This circular is reproduced as under: --
"Income from the hire of machinery, plant or furniture belonging to an assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery, plant or furniture is chargeable to tax under the head "Income from other sources" (section 30(2)(d). However, depreciation in respect of such building, machinery, plant or furniture is not a deductible expense under section 31. Under the repealed Act depreciation on such assets was a deductible expenses. As a matter of concession, a notification under section 167 is being issued by virtue of which such plant and machinery will be eligible for depreciation allowance in respect of assessment for assessment year 1979-80."
31. It may be clarified that originally Income Tax Ordinance, 1979 did not contain clause (e) of subsection (1) of section 31 of the Income Tax Ordinance, 1979. In other words the Income Tax Ordinance has promulgated in 1979 did not contain - any provision allowing depreciation on leased assets but subsequently vide SRO No.751(1)/79 dated 23-8-1979 allowed depreciation on leased assets and the provisions contained in this SRO were subsequently incorporated in the Income Tax Ordinance as clause (c) of subsection (1) of section 31 of the Income Tax Ordinance, 1979.
32. The reason against allowing depreciation on leased assets are as under:--
(i) That under Rule 1 of Third Schedule of the Income Tax Ordinance. 1979 only that machinery ranks for depreciation which is owned by the assessee as well as used by the assessee for his own business of profession. But since in the case of leased assets the assessee does not use the machinery for the purposes of his business or profession depreciation is not admissible on such assets.
(ii) That the depreciation in respect of leased assets is admissible only if these assets belong to leasing company or a Modaraba. But the amendment regarding depreciation on leased assets of leasing company or Modaraba was introduced only in 1985 and subsequently in 1988. It has been argued that if the intention of the legislature had been to allow depreciation on all leased assets then there was no necessity for introducing amendment in Rule-1 of Third Schedule indicating that depreciation will be admissible to the leased assets belonging to leasing company or Modaraba.
33. We have carefully considered these arguments. Again at the cost of repetition it is reiterated that provisions of section 31(1)(c) of the Income Tax Ordinance, 1979 indicate that depreciation on leased assets will be admissible keeping in view the provisions of section 23(1)(v) of the Income Tax Ordinance, 1979. Section 23(1)(v) of the Income Tax Ordinance imposes only one condition for admissibility of depreciation that the machinery should be owned by the assessee. However, Rule 1 of the Third Schedule imposes a further condition that such machinery should also be used by the assessee for his own business or profession. For the assessment year 1987-88 the assessee contended before the learned CIT(A) that hiring of the machinery was the business of the assessee but as pointed out above this is not the issue here. We are of the view that rules are made to carry out the purposes of law and intents of an Act or Ordinance. If no condition is imposed in the main section of the Ordinance or the Act there any condition indicated in the rules will not be applicable. They will be contradictory to the provisions of main Act and in such a situation the provision contained in the main Act will apply.
34. As far as question of amendment in respect of depreciation on leased assets belonging to a leasing Company or Modaraba is concerned, these provisions in no way affect the question of admissibility of leased assets for depreciation. If for the sake of arguments it is considered that leased assets are not entitled to depreciation then the provisions of section 31(l)(c) will become redundant or superfluous but redundancy or superfluity cannot be attributed to legislature. Lastly, Circular No.4 of 1979 clarifies that leased assets and leased machinery is entitled to depreciation. The assessee's appeals on this issue are accordingly allowed for the assessment years 1988-89 to 1990-91 whereas Departmental appeal for the assessment year 1987-88 on this point is rejected.
Order under section 108 (Assessment year 1988-89)
35. For the year under consideration income-tax return of the assessee was due on 15-1-1989 but it was filed by the assessee on 31-8-1989. The ITO took cognizance of the default committed as above and imposed a penalty at Rs.11,350 under section 108 of the Income Tax Ordinance, 1979.
36. Aggrieved by this penalty the assessee preferred 1st appeal. The learned CIT(A) rejected the appeal of the assessee as being devoid of any merit. The assessee still feels aggrieved and has contended that penalty imposed by the ITO and maintained by the learned CIT(A) as above was unjustified because delay in filing of the return in this case was not intentional but it was due to the change in the management of the company.
37. The learned D.R. on the other hand contended that this was a case of an existing assessee who was a limited company. Services of legal adviser were also available with the assessee hence there was no reason as to why income-tax return in this case should not have been filed by the assessee in time. The learned D.R. further contended that default of late filing of the return has been admitted by the assessee. The ITO imposed penalty of Rs.50 for each day instead of Rs.100 for each day. According to the learned D.R. ITO has already given a lenient treatment to the assessee, no further concession can be allowed to the assessee.
38. We have carefully considered the facts of the case. The learned A.R. of the assessee has contended that late filing of the return was due to change of management but this plea was not taken by the assessee either before the ITO or before the learned CIT(A). A perusal of the penalty order indicates that before the ITO the assessee contended that delay was inadvertent. Because of these reasons the contention raised by the assessee is not acceptable and the penalty has correctly been imposed by the ITO and maintained by the learned CIT(A). There is no merit in the appeal of the assessee it is, therefore, rejected.
39. As a result of above discussion the appeals of the assessee and the Income Tax Department are disposed of as above.
(Sd.)
MUHAMMAD MUSHTAQ,
ACCOUNTANT MEMBER.
40. NASIM SIKANDAR (JUDICIAL MEMBER). --I am in total agreement with the findings recorded by the learned Accountant Member except for those whereby depreciation on machinery rentals has been considered allowable in the years under consideration.
41. The assessee has claimed depreciation in respect of machinery (plant for manufacture of fruit juices) installed in the building owned by the lessee. This is simple leasing out of machinery and is, therefore, covered by the only applicable provision as contained in subsection (1) (v) of section 23 of the Ordinance. The assessee has not based his claim of depreciation as being against income from business. Even in absence of such a claim, for the same could not be made under my other provision, first and foremost aspect to be considered is the head of income under which the income of the kind is to fall. If the income from plant rentals is "income from other sources" then the applicable provision would be section 30(2)(d) of the Ordinance. However, this section covers only the income from hire of machinery, plant or furniture belonging to the assessee if the letting of the building is inseparable from letting of the said machinery. According to the view expressed by the learned Accountant Member this clause applies to income both from simple hire of machinery, plant or furniture and also to the income from hire of the machinery and of building if the letting of the building is inseparable. In the opinion expressed income from hire of machinery, plant or furniture will fall under the category "income from other sources" as will also from building belonging to the lessee if the letting is inseparable from the said machinery. This is where I respectfully disagree with the findings of my learned brother. In my humble view use of words "said machinery, plant or furniture", in section 30(2)(d) of the Ordinance make it clear that this clause is relevant in regard only to that lease income which is derived by letting of both machinery, plant or furniture and the building together as their letting of separately is not possible. Income from hire of machinery, plant or furniture simpliciter will fall within the ambit of business as will certainly the income from leasing out of building only will be income from property. The law-makers have visualized only that kind of income to be categorised under the head "income from other sources" and, therefore, entitled to deduction available under section 31 where both machinery, plant or furniture and the building are inseparable for the purpose of letting out. Further, the depreciation allowance on such an income under section 31(1)(c) will be exactly in the same manner and to the extent as prescribed under section 23(1)(v) of the Ordinance for income from business or profession. There may however appear some confusion when we go to the provisions of clause (1) of the Third Schedule to the Ordinance wherein two conditions have been prescribed for availing of the allowance. Both conditions have been set out in para. 28 of the order proposed by my learned brother.
42. According to this clause and the conditions stated therein an allowance for depreciation shall be made in the prescribed manner to any building, machinery, plant or furniture if the same is owned by an assessee and is used for the purpose of any business or profession carried on by him. The contradiction that seemingly emerges is that whereas the provisions of Third Schedule allow depreciation only to those buildings, machineries or plants or furniture which are owned and used by an assessee in an income year. The income from hire of machinery etc. as contemplated under subsection 30(2)(d) would not qualify for such an allowance. Obviously, receipt of income from hire itself indicates that the plant, machinery did not remain in use of the owner assessee. This contradiction is apparently due to insertion of sub-clause (c) in section 31(1) of the Ordinance in the year 1980 and its reference to already existing provisions of section 23(1)(v) of the Ordinance. The assumed contradiction in my humble estimation is not there as sub-clause (v) of subsection (1) of section, 23 as referred to in section 31(1)(c) is an enabling provision for the kind of institutions detailed in the Third Schedule viz; a Scheduled Bank, a Financial Institution or such Madarabas or leasing companies which are approved by the CBR for the purpose of this Schedule. It may also be seen that provisions of section 31(l)(c) of the Ordinance do not in any way become redundant as this sub-clause simply refers to another provision of the Ordinance and the provisions so referred viz; section 23(l)(v) of the Ordinance further refers to the provisions of the Third Schedule. The provisions of Third Schedule are part of the Statute and, therefore, these are applicable in the same way as any other provision of the Ordinance. Even in case of the presumed contradiction the provisions of the Third Schedule should rather prevail instead of being pushed to oblivion. The provisions in the Third Schedule are, in fact, special provisions which deal with depreciation allowance and, therefore, should have precedence on similar provisions contained in the Ordinance at an earlier stage. This mode of interpretation is only relevant if both the provisions cannot be made to co exist on a reasonable construction. In this case, however, as observed earlier, there is no contradiction or any redundancy of a provision involved inasmuch as one enabling provision refers to another and then the second provision refers to the third one. Collision in the language of the Statute is to be avoided as far as possible. It was so laid down by the Supreme Court of Pakistan in PLD 1989 SC 232 Re: M/s. Yousaf Re-rolling Mills v. Collector of Customs and another. As submitted earlier, in my humble view there is no contradiction which cannot be made to reconcile. Nor is there any need to stretch or squeeze the meanings of the involved provisions in order to make them workable.
43. In case income from hiring of machinery, plant or furniture is held allowable by reference to the provisions of sub-clause (c) of section 31(1) of the Ordinance as inserted by Finance Ordinance, 1980, whole of clause (1) of the Third Schedule shall become nugatory and, therefore, redundant. Also, express mention in the Third Schedule of institutions like banks, financial institutions, Madarabas and leasing companies clearly point out that income from simple hiring of plants, machinery, etc., shall only be allowed to these institutions. Other having been excluded, no assessee shall be entitled to claim depreciation on simple hiring of machinery, plant or furniture. In other words, it is again emphasized, depreciation allowance has to be in accordance with and to the extent allowed by special provisions, i.e. Rule 1 of the Third Schedule to the Ordinance. I will, therefore, hold that rental income from the plant leased out by the assessee to M/s. Riaz Brothers Limited shall not be allowed depreciation.
44. Since we have differed in our views in relation to the allowance of depreciation in the given circumstances, following question is formed and referred to the Chairman under section 133 (7) of the Ordinance:
"Whether income from hiring of plant in the circumstances of this case is entitled to depreciation allowance under section 31(1) (c) read with section 23(1)(v) and Rule 1 of the Third Schedule to the Ordinance."
(Sd.)
(NASIM SIKANDAR),
JUDICIAL MEMBER.
(Sd.)
(MUHAMMAD MUSHTAQ),
ACCOUNTANT MEMBER.
45. MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).--The above appeals have been referred to me for resolving the difference of opinion between the learned Accountant Member and the Judicial Member contained in question referred by the learned Members of the Bench.
46. Heard Mr. Najam-ud-Din Khan, DR., learned Representative for the Department and Mr. Naeem Akhtar, ACA learned Representative for the respondent. I have gone through the respective opinions expressed by the learned Members and in the light of facts as narrated by the learned Members in their respective opinion, I am of the opinion that the question referred by the learned Members has gone beyond the issue contained in the opinion of the learned Accountant Member with which the learned Judicial Member has differed. I am of the opinion that point of difference is whether the income from hiring of plant in the circumstances of the case is entitled to depreciation allowance under section 31(1)(c) read with section 23(1)(v) read with Third Schedule to the Ordinance. Rule 1 ought not to have been referred in the question formulated by the learned Members, for the simple reason that the learned Accountant Member has observed in para. 33 of the order that Rule 1 of the Third Schedule is not applicable to the facts of present case and the depreciation is admissible to the assessee by virtue of the provisions contained in the main Act, i.e., section 31(1)(c) and section 23(1)(v). On the other hand, the learned Judicial Member is of the opinion that in view of resort to the legislation by reference the question of admissibility of the depreciation in the facts and circumstances of case is to be considered in the light of the provisions contained in section 31(1)(c) section 23(1)(v) and Rule 1 of the Third Schedule. Since both the learned Members have agreed on the point that the income derived by the respondent is assessable under section 30 of the Income Tax Ordinance, 1979, meaning thereby, as income from other sources, therefore, the point for consideration is whether depreciation is allowable to the respondent on the income to which clause (d) of subsection (2) of section 30 is applicable by virtue of the provisions contained in section 31(1)(c) read with section 23(1)(c) notwithstanding the restriction placed in Rule 1 to the Third Schedule that the building, machinery, pl4nt or furniture is used for the purpose of any business or profession carried on by an assessee.
47. The learned Members of the Bench have observed in their respective opinions that the legislature has resorted to the method of legislation by reference/incorporation. I am of the considered opinion that this method of legislation by reference/incorporation has posed the problem. Although legislation by incorporation of common occurrence and is known mode of legislation but is a dangerous mode of draftsman to incorporate provision of a particular section in another section of the same Act or provision of a former Act in the subsequent Act for the reason that unless the draftsman has a much clearer reflection of the whole of the former Act or the former section and of all its implications there is always a risk of confusion and the complications. The expression used for the purpose of legislation by incorporation/reference usually are: "So far as may be", "mutatis mutandis" as far as applicable. The use of above expressions make the situation easier, however, if the drafting is inept and the above expressions are not used then there is always likely hood of occurring analogous situation which has taken place in this case.
48. After a careful examination and consideration of the opinions expressed by the learned Members of the Bench and reasons advanced by them I am persuaded to agree with the opinion of learned Accountant Member that the depreciation allowance is admissible to the respondent but slightly for the different reasons. I agree with the opinion of learned Accountant Member that the depreciation is admissible to the income from other sources which falls within the purview of section 30(2)(d) of the Income Tax Ordinance. In the case of income from hiring of machinery, plant or furniture belonging to the assessee as well as in the case of income from hiring of machinery, plant or furniture belonging to the assessee and also to the buildings belonging to him if the letting of the building is inseparable from the letting of said machinery, plant or furniture. I am not persuaded to agree with the opinion of the learned Judicial Member that clause (d) of subsection (2) of section 30 is relevant in regard to only that lease income which is derived by letting of both machinery, plant or furniture of the building together of their letting of separately is not possible. I am further unable to agree with the opinion of learned Judicial Member that the law-makers have visualized only that account of income to be categorised under the head 'income from other sources' and, therefore, entitled to deduction available under section 31 where both machinery, plant or furniture and the building is inseparable for the purposes of letting out. Further the depreciation allowance on such an income under section 31(1)(c) will be exactly in the same manner and to the extent as prescribed under section 23(1)(v) of the Ordinance for income from business or profession". The reason for my disagreeing with the opinion of learned Judicial Member is that on a careful reading of the provisions contained in sections 19, 20, 22, 23, 30 and 31 of the Income Tax Ordinance, 1979, it appears that the legislature has taken into consideration the fact that if an assessee derives an income from business and in doing so any machinery, plant or furniture owned by the assessee is used for the purposes of any business or profession carried on by him, the assessee shall be entitled for depreciation thereon. However, if an assessee derives income from hiring of machinery, plant or furniture' belonging to him then if no separate provision is made the depreciation for the use of said machinery, plant of furniture shall not be allowed to the owner/lessor for the reason that he has not used the same for his own business and, on the other hand, it will not be allowed to the lessee for the reason that the plant, machinery and furniture is not owned by him. Thus, notwithstanding the use of said machinery, plant or furniture the depreciation shall not be allowed for the above reasons. This treatment would be discriminatory as well as amount to injustice and, therefore, legislature provided that in the case of income from hiring of machinery, plant and furniture belonging to an assessee he should be placed at par with an assessee using the said assets for his own business. The legislature has proceeded to consider another situation where a person derived income from letting out of building and thus is liable to be assessed under section 19 under the head "income from house property" in the case of income falling under section 19 under the head "income from house property" the assessee is allowed to a mandatory allowance equal to 1/5th of Annual value in respect of repairs without any further condition of proof of incurring of expenses on account of repairs. Other allowances and educations are also admissible under section 20 but they are subject to incurring of expenses and, production of evidence. Thus, in case of income from house property an assessee is allowed 1/5th of the annual value on account of repairs whether any actual expenses on account of repairs have been incurred or not and thus the relief to the assessee on account of repairs can be termed as a relief equivalent to the depreciation allowed to an assessee whose building is used for his business or profession. However, if the building has been leased out alongwith the machinery, plant or furniture in a situation where the building is inseparable from the letting of the said machinery, plant or furniture, the income so earned shall be chargeable as income from other sources and thus the repairs allowance admissible under section 20 would not be available to an assessee and thus in order to meet the situation the legislature has made provision for allowing depreciation on the building as well so that the assessee/lessor is brought at par with an assessee deriving income from business or profession and income from house property. The upshot of the above discussion is that the purpose and spirit of enacting section 30(2)(d) and section 31(1)(c) is that the assesses deriving income from hiring machinery, plant or furniture belonging to them and thereby their income made liable to charge under the head "income from other sources" and such income having been taken out from the head "income from business and profession" and likewise the assessees deriving income from hire of machinery, plant of furniture as well as building belonging to the assessee and thus the income from lease of building being brought under the head "income from other sources" and having been taken out from the head "income from house property" should not be placed in disadvantageous position. The provision has been made for allowing depreciation to both the categories of assessees. In other words, the law has allowed an allowance of depreciation to the assessees deriving income from hire of machinery, plant or furniture as well as to the assessee deriving income from hire of machinery, plant or furniture alongwith the buildings which are inseparable from the letting of the said machinery, plant or furniture. Thus, there are two categories of assessees coming within the purview of section 30(2)(d) and the assessees falling under both the categories are entitled to claim depreciation allowance. The opinion of the learned Judicial Member that the depreciation allowance under section 31(1)(c) is available where both machinery, plant or furniture and the building is let out and the depreciation will be exactly in the same manner and to the extent as prescribed under section 23(1)(v) of the Ordinance for income from business or profession, does not appear to be m consonance with the scheme of law when all the relevant provisions contained in the Ordinance are examined in their totality. The view held by the learned Judicial Member that depreciation allowed under section 31(1)(c) would be permissible exactly in the same manner and to the extent as prescribed in section 23(1)(v) of the Ordinance overlooks ,the facts that this interpretation makes the very provision contained in section 31(1)(c) as nugatory and superfluous. The reason being that if the test prescribes under section 23(1)(v) is made applicable exactly for allowing depreciation under section 31(1)(c), then no depreciation can be allowed at all because in such situation the condition precedent would be that the machinery, plant or furniture and building is not only owned by an assessee but is also used by him for his business or profession and in the case of income from hire of plant, machinery or furniture and building, the said assets can never be used by a lessor for his own business or profession. Thus, it would amount to giving relief by one hand and taking away the same from the other hand. As already observed, this difficulty has arisen because of recourse to the legislation by incorporation/reference. This point came for consideration before a Division Bench of this Tribunal at Islamabad in ITA No.648(ID)92-93 and vide order dated 12-2-1996, the learned Members of the DB held that sub-rule (1) of Rule 1 of the Third Schedule did not control the admissibility of depreciation allowance in computing income from the hire of factories chargeable to under section 30(2)(d) of the Ordinance as income from other sources and that the amendment made by the Finance Act, 1985 in the sub-rule did not affect the said admissibility. The learned members of the DB at Islamabad further held that even under the unamended sub-rule(1) of rule 1 of Third Schedule, the depreciation allowance was admissible in computing income under section 30(2)(d) of the Ordinance as income from other sources, The learned Bench further observed that in sub-rule (1) of rule 1 of the Third Schedule there is a specific reference to the computation of the profits and gains of the business or profession of the assessee, and as such only governed the cases relating to computation of income from business and profession and did not relate the computation of income from other sources. The learned Bench further held that, "if the sub-rule is applied in determining the admissibility of depreciation allowance in computing income from the hire of factories chargeable to tax an income from other sources, there would be an obvious irreconcilable inconsistency between the two provisions of sub-rule and the provisions of section 31(1)(c) of the Ordinance. Because the sub-rule provided 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 assets is not used by the assessee himself but is used by the lessee. And, where there are two irreconcilable in-consistent provisions of a statute the rule of construction is that they are deemed as not intended to apply at the same time. It is deemed that each provision was intended to apply to different situation 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 inconsistency between the sub-rule and the 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". The learned Bench further held that sub-rule (1) of rule 1 of the Third Schedule usually applied only where an income from lease is chargeable to tax as income from business and not where it is charged to tax as income from other sources.
49. I find myself in total agreement with the findings of the learned DB at Islamabad in the order cited above. The view held by the learned DB at Islamabad further finds support from the fact that under section 31(1)(c) the allowances and deductions have been made admissible in cases of income to which clause (d) of subsection (2) of section 30 applies which are to be computed in accordance with the provisions of clauses (iii), (iv) and (v) of subsection (1) of section 23. An elaborate discussion has already been made in respect of computing income and allowing depreciation admissible under clause (v) of subsection (1) of section 23. Because of the reasons their clause (v) of subsection (1) of section 23 provides that it is to be read with the provisions contained in Third Schedule, the learned Accountant Member while discussing the point in issue came to the conclusion that the provisions contained in section 31(1)(c) read with section 23(1)(v) are inconsisent with the provisions contained in sub-rule (1) of rule 1 of the Third Schedule and, therefore, the provisions contained in the main Act shall prevail over the provisions contained in the Third Schedule. However, when we consider the allowance admissible under clauses (iii) and (iv) of subsection (1) of section 23 we are faced with more serious difficulty and grave situation as clauses (iii) and (iv) of subsection (1) of section 23 contain in themselves a provision that an amount on account of current repair to any premises or machinery, plant, furniture or fittings, used for the purpose of business or profession and any premium paid in respect of an insurance against risk of damage or destruction to any machinery, plant or furniture or stock used for the purposes of business or profession shall be allowed. Thus in these two provisions the condition that the machinery, plant, furniture or fittings is used for the purpose of business or profession is contained in the main Act itself and if any claim is preferred under section 23(1)(iii)(iv) read with section 31 (1)(c) the admissibility of allowances would become impossibility if it is held that while allowing the allowance and deductions under section 31(1)(c) all the conditions referred to in section 23(1)(iii) (iv) and (v) are fulfilled. Thus, in order to save the provisions contained in section 31(1)(c) from being rendered nugatory and superfluous the only way is to hold that allowances and deductions referred in section 31(1)(c) shall be allowed in accordance with, the computation and other conditions of inadmissibility there the use thereof for the purposes of business or profession as insistence on the fulfilment of such conviction would amount to ask for fulfilling an impossibility which can never be attributed to the legislature and can never be the intention of any law. The law is always to be interpreted in such a way that it is made workable. Thus, respectfully agreeing with the views of the learned Division Bench at Islamabad, I agree with the conclusion arrived at by the learned Accountant Member, for the reasons stated above. Before parting with this order, I would like to observe that it would have been more appropriate if the draftsman while drafting section 31(1)(c) would have used the expressions: "So far as may be mutatis mutandis" or "as far as applicable" which is normally used for the purposes of legislation by incorporation/reference. The use of above expressions would have removed the difficulties, and for proper application of law and the working of the provisions in accordance with the spirit of the law with the use of above expressions only those provisions would have become relevant as are necessary for the proper implementation of the enactment. It would be in the fitness of things if the legislatue removes the ambiguity as early as possible by re-drafting section 31(1)(c) of the Income Tax Ordinance, 1979.
50. With the above observations and while agreeing with the conclusion arrived at by the learned Accountant Member, the appeal at the instance of the Department on the point of admissibility of depreciation stands dismissed and the appeals at the instances of the assessee on the said point are allowed.
M.B.A./200/Trib Order accordingly.