P T D 1996 (Trib.) 743
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed Judicial Member and Muhammad Mahboob Alam,
Accountant Member
I. T. As. Nos. 4573/KB of 1986-87, 2388/KB of 1987-88, 1225/HQB of 1988-89, decided on 31/01/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 23(xviii)---Drugs (Licensing, Registration and Advertising) Rules, 1976, R. 33---Business expenditure ---Assessee a pharmaceutical manufacturing company---Sale promotion expenses---Limit---Provision of R.33, Drugs (Licensing, Registration and Advertising) Rules, 1976 being not applicable in respect of claim of sales promotion expenses of assessee under Income Tax Ordinance, such expenses are allowable even if the same are in excess of the limit prescribed in the Drugs (Licensing, Registration and Advertising) Rules, 1976, provided these are otherwise verifiable and have been spent for the purpose of promoting the business of the company.
1995 PTD 577 fol.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 107(2)---C.B.R. Circular Letter No.1 (40) ITI/79 dated 5-2-1983-- Replacement, balancing and modernization of machinery or plant---Amount of investment on installation---Rebate under S. 107, Income Tax Ordinance, 1979 cannot be allowed on such amount.
1987 PTD (Trib.) 116 fol.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 107(2)---Replacement, balancing and modernization of machinary or plant---Air conditioner plant falls withing the scope of balancing, modernization and replacement.
82 ITR 44 ref.
(1993) 67 (Tax) H.C. distinguished.
Abdul Mateen, FCA for Appellant.
Muhammad Saeed, D.R. for Respondent
Date of hearing: 11th October, 1995.
ORDER
The assessee challenges confirmation of disallowance in respect of various profit and loss accounts. The assessee claims that the add-backs have been made without formerly asking for the details on the basis of stock phrases without calling for the record which is all verifiable. He said that the accounts having been accepted to the extent of trading result there was hardly any reason for add-backs.
2. The issues being common the same are taken up together.
(Assessment Year 1986-87)
FACTORY OVER HEADS: While perusing the records it has been observed that the learned CIT(A) has allowed claim of the assessee in full for the assessment years 1985-86 and 1986-87. While for the assessment year 1986-87 the same have been confirmed. The record of the assessee and the orders of the officers below do not indicate as to what is the base of this add-back and how can the same be disallowed for one year and be allowed for the two years of which one is immediately preceding year and the other is subsequent of the impugned year. The circumstance of the accounts being the same we do not bind any justification for this addition. The same are, therefore, directed to be deleted for the assessment year 1986-87 also.
Assessment years 1985-86, 1986-87, 1987-88.
MARKETING OVER HEADS: The reasons given for these disallowances are the same in all the years. We, therefore, consider appropriate to pitch these additions to the following extents: ---
| Heads of Expenses | 1985-86 | 1986-87 | 1987-88 |
| Carriage & Duties | maintained | maintained | maintained |
| Rent, Rates & Insurance | deleted | maintained | maintained |
| Communication | maintained | maintained | maintained |
| Stationery and Supplies | maintained | maintained | maintained |
| Travelling | maintained | maintained | maintained |
| Entertainment | maintained | maintained | maintained |
| Maintenance of Assets | maintained | maintained | reduced to 10% |
| Medical Expenses | confirmed | confirmed | confirmed |
| Personal Expenses | confirmed | confirmed | confirmed |
| Vehicle Expenses | confirmed | confirmed | reduced to 10% |
| Advertisement Promotional | deleted | confirmed | confirmed |
| Samples and Replacement | deleted | confirmed | confirmed |
| heads of Expenses | 1985-86 | 1986-87 | 1987-88 |
| Sundries | confirmed | confirmed | confirmed |
| Subscription | confirmed | confirmed | deleted |
ADMINISTRATION OVERHEADS:
| Head of Expenses | 1985-86 | 1986-87 | 1987-88 |
| Carriage & Duties | deleted | Deleted | deleted |
| Communication | confirmed | confirmed | confirmed |
| Stationery and Supplies | confirmed | confirmed | confirmed |
| Travelling | confirmed | confirmed | confirmed |
| Entertainment | deleted | deleted | confirmed |
| Maintenance of Assets. | reduced to 10% | reduced to 10% | confirmed |
| Medical Expenses | maintained | maintained | maintained |
| Vehicle Expenses | reduced to 10% | reduced to 10% | confirmed |
| Subscriptions | maintained | maintained | maintained |
| Legal & Professional | maintained | maintained | maintained |
| Sundries | deleted | Deleted | deleted |
3. Now we deal with the issues which are not common, hence arc separately taken in respect of each year.
(Assessment Year 1986-87)
4. The addition of Rs.5,09,065 has been made from sales promotion expenditure being more than 5 per cent of the total sales under Drugs (L.R. & A.) Rules, 1976 vide its section 33. The issue has since been settled and it has already held in a judgment reported as 1995 PTD 577 that above noted provision is not applicable in respect of claim under Income Tax Ordinance, 1979. The learned Tribunal has also directed to allow the expenses even if the same are over and above the prescribed rules of the referred Act if the same are otherwise verifiable and have been spent for the purpose of promoting business of the Company. The action of the learned CIT(A) to confirm the same, is, therefore, unjustified. The same is deleted.
(Assessment Year 1987-88)
5. The addition made at Rs.12,09,087 in this year in the sales promotion expenses are also deleted for the reasons mentioned in the assessment year 1986-87.
6. Another important point in this year is in respect of maintenance of disallowance of rebate under section 107 of Air-Condition System, imported and installed under BMR Scheme. The assessee has claimed that the Air-Condition System has also been imported under the BMR Scheme and is a part and parcel of the production machinery, hence, disallowance on this amount is not justified. Similarly, the disallowance of tax credited on the installation expenses amounting to Rs.4,21,788 has also been challenged. We shall take up the second issue first and before proceeding in the matter it shall be more appropriate to go through the relevant provision of law which is as follows: ---
" 107. Tax credit for replacement, balancing and modernisation of machinery or plant.---(1) Where an assessee being a Pakistani company invest any amount in the purchase of plant and machinery for installation at any time between the first day of July, 1976 and the thirtieth day of June, 1988 or between the first day of July, 1990 and the thirtieth day of June, 1993, in an industrial undertaking set up in Pakistan and owned by it, for the purposes of replacement blancing or modernisation of the machinery and plant already installed therein, credit at the rate of fifteen per cent of the amount so invested shall be allowed against the tax payable by it in the manner hereinafter provided. "
The language of law clearly speaks of the allowance of tax credit on investment in "any amount spent for purchase of plant and machinery" it does not speak on any additional-expenditure with respect thereof. The subsequent phrase which speaks of the allowance at 15 per cent of the amounts so invested relates to the purchase of machinery. In this regard installation though is obligatory cannot be made part of the definition of the word "purchase" as used in this section. The assessee's claim that the amount being allowable from the date of its installation as per section 107(2) includes installation expenses is not correct. The same only is for the determination of the period in which this rebate is allowable. Our view also finds support from the C.B.R. Circular Letter No. 1(40)ITI/79 (Vol. II), dated February 5, 1983, which is as follows:---
"Under section 107 of the Income Tax Ordinance, 1979 an assessee, subject to the specified conditions, is entitled to tax credit at the rate of 15 per cent. of the amount invested in the purchase of plant and machinery for the purposes of replacement, balancing or modernisation of the machinery and plant of an industrial undertaking. It has come to the notice of the Board that proper care is not being exercised while allowing tax credit under the said section. It is, therefore, clarified that tax credit under section 107 is admissible only on the amount invested in the 'purchase' of 'machinery and plant' and not on the amount invested for other purposes. Obviously the amount spent on purchase of other assets or the amounts relating to plant and machinery spent for other than their "purchase" such as cost of installation etc., would not qualify for the purpose of rebate."
7. In view of the above discussion we confirm the action of the officer below to disallow the rebate under section 107 on the amount of investment on installation. While giving above view we also have in our mind the judgment reported as 1987 PTD (Trib.) 116 wherein the learned I.T.A.T. confirmed this view in the following words.
"From bare perusal of section 107 that the legislature has laid emphasis on investment of any amount by an assessee in the purchase of plant and machinery whereas section 15-GG of the repealed Act stressed on installation of any plant or machinery, since section 15-GG was highlighting the installation of the machinery, the expenses incurred on installation were used to be included to the cost of the machinery for the purpose of tax credit. However, section 107 of the Ordinance is lying emphasis on investment of, any amount therefore, the installation charges would not be included in the cost of plant or machinery unless this concession is given by Central Board of Revenue. Let us point out that both words 'invest' or 'instal' as used in section 107, of the Ordinance and 15-GG of the repealed Act are transitive verb. The word 'invest' therefore, would refer to purchasing of the plant or machinery only and not to its installation, though it is the ultimate object of the investment. Similarly, the word 'instal' would relate to machinery and plant and not to replacement or modernisation which is the real purpose of installation. Mr. Muhammad Farid, the learned Departmental Representative has invited our attention to Circular Letter NO.1(40)ITI/79 (Vol.II), dated February 5, 1983, which has specifically excluded the expenses incurred on installation of machinery and plant for the purpose of tax credit. We, therefore, see no force in the submission of Mr. Akbar Merchant and reject it accordingly.."
8. As regards allowance of tax credit on installation and purchase of Air-Conditioning plant is concerned. The A.R. has produced before us relevant details of its import and a certificate from Directorate of Industries and Mineral Development. Contents of which areas follows:---
GOVERNMENT OF SINDH
DIRECTORATE OF INDUSTRIES
AND MINERAL DEVELOPMENT
BLOCK N0.23, FRERE ROAD, KARACHI.
No. 21(64)/65-Chem/239 Dated 30-7-1980.
CERTIFICATE OF INSTALLATION
Certified that M/s. Searl Pakistan (Pvt.) Limited, F-319, Opp. Gas Turbine S.I.T.E., Karachi have imported machinery against Import Licence No.A-801047, dated 9-8-1984 issued by the Controller of Import and Exports, Government of Pakistan, under B.M.R. for the purpose of Replacement, (Particulars are given in the enclosed statement).
It is further certified that the said machinery have been installed and working in the factory premises of M/s. Searle Pakistan (Pvt.) Limited at Plot No.F-319, Opp. Gas Turbine S.I.T.E., Karachi.
This certificate is being issued on specific request of the party under section 107(1) of the Income Tax Ordinance, 1979.
(Sd.)
(MUHAMMAD SALEEM KHAN),
DIRECTOR OF INDUSTRIES AND MINERAL DEVELOPMENT
GOVERNMENT OF SINDH, KARACHI.
To
M/s. Searle Pakistan (Pvt.) Limited,
F-319, Opp. Gas Turbine, S.I.T.E., Karachi.
The machinery imported against License No.A-801047 is .Air conditioning plant as per annexure given with the above letter.
9. It. has further been argued that the plant is an integral part of the manufacturing process of the Company and that in view of abnormal best, the medicine and its other ingredients are kept at a fixed temperature to maintain its utility. He said, that the Income Tax Officer while denying this credit has simply considered the Air-Conditioning Unit to be outside the scope of B.M.R. and have not given any other reason for its disallowance. While continuing with its arguments the A.R. made reference to section 107 which we have already detailed supra. The language of the section, he argued, clearly speaks of the allowance on plant and machinery which has been purchased for balancing and modernization. By no stretch of imagination, he continued, that Air-Conditioner Plant can be excluded from the definition of plant and machinery. In support of his contention he made reference to the following judgment:
82 ITR 44
"Held, that the sanitary and pipeline fittings fall within the definition of 'plant' in section 19(5) and the respondent was entitled to development rebate in respect thereof under section 10(2) (vib). The fact that the respondent claimed depreciation on the basis that the sanitary and pipeline fittings fell under furniture and fittings in rule 8(2) of Income Tax Rules, 1922, did not detract from this position. "
10. It may also be added here that High Court of India in another reported judgment cited as (1993) 67 (Tax) H.C. has clearly defined all the installation to be a part of the plant for the purpose of investment allowance if the same is used in production of the business. This way even the intercom used in a factory has been considered as a machinery as the same helps in increasing the working of an institution. In the impugned case the machinery referred is directly connected with the maintenance of temperature which is a condition precedent for keeping the medicine at a fixed temperature so that its utility is not disturbed.
11. Under the circumstances, we cannot agree with the learned Income Tax Officer that the Air-Conditioner Plant does not fall within the scope of B.M.R. The issue is, therefore, decided in favour of the assessee and the Income Tax Officer is directed to allow tax credit under section 107 in full on the amount invested for the purpose of Air-Conditioner Plant being fully covered under the requirement of law. No other ground is pressed by the assessee. The appeals in respect of all three years are, therefore, disposed of accordingly in the manner as mentioned above.
M.B.A./203/Trib. Order accordingly.