I.T.AS. NOS. 1618/LB TO 1621/LB AND 2067/LB TO 2071/LB OF 1996. VS I.T.AS. NOS. 1618/LB TO 1621/LB AND 2067/LB TO 2071/LB OF 1996.
1997 P T D (Trib.) 2368
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Judicial Member and Sikandar Kalim Fazal, Accountant Member
I. T. As. Nos. 1618/LB to 1621/LB and 2067/LB to 2071/LB of 1996, decided on 24/12/1996.
Income Tax Ordinance (XXXI of 1979)
----Ss.22 & 23---Revenue expenditure---Deduction of expenditures Capitalization of expenses---Validity---Partial reduction/relief in machinery maintenance allowance ---Assessee claimed expenditure regarding machinery maintenance as revenue expenditure---Assessing Officer turned down the claim and capitalized all such expenses---Commissioner of Income-tax (Appeal) allowed partial relief and left the balance for capitalization-- Validity ---No reason existed for partially allowing relief in the claim and leaving the balance for capitalization---Tribunal directed for deletion of all expenditures spent for the purpose of repair and maintenance as replacement of such parts was revenue expenditure.
I. T. As. Nos. 1659 to 1662/LB of 1996 ref.
Khawaja Muhammad Iqbal for Appellant (in I.T.As. Nos.1618/LB to 1621/LB of 1996).
Mian Masood Ahmad, D.R. for Respondent (in I.T.As. Nos. 1618/LB to 1621/LB of 1996)
Mian Masood Ahmad, D.R. for Appellant (in I.T.As. Nos.2067/LB to 2071 /LB of 1996).
Khawaja Muhammad Iqbal for Respondent (in I.T.As, Nos.2067/LB to 2071/LB of 1996).
Date of hearing: 8th December, 1996.
ORDER
KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).----In these appeals from department as well as from the assessee various points have been taken up which are disposed of separately in each year respectively.
Assessment Year 1990-91:
The first issue in this assessee's appeal is with regard to partial reduction in machinery maintenance account. The claim of the assessee in this head was capitalized by learned I.T.O. by considering the replacement of worn out parts as capital expenditure. These items consist of ring cups, spindles boosters and spindles. The A.R. said that they are replaced almost every year and its claim for the assessment year 1989-90 has already been allowed by learned CIT(A). In view thereof the A.R. wants deletion of the balance amount of Rs.25,00,000 which was left for capitalization by learned CIT(A) in the impugned year. The other grounds are relatable to add backs in travelling, car running expenses, postage and telegram, entertainment, general expenses, donation and subscription. So far as the issue regarding replacement of worn out parts is concerned, we have already held in I.T.A. No.2919/LB of 1992-93 for the assessment year 1989-90 of the same case that replacement of these parts is a revenue expenditure. While giving above decision we have relied upon various judgments from Indian as well as Pakistan origin. We have also relied upon a latest judgment of the Income Tax Appellate Tribunal in the case of M/s. Rawal Textile Mills Ltd. Lahore decided vide I.T.As. Nos.1659 to 1662/LB of 1996, assessment years 1990-91 to 1994-95, dated 20-5-1996. In view thereof there was no reason to only partially allow relief in the claim and leave a balance for capitalisation. We hereby direct for its deletion. So far as the other disallowances are concerned, the same are on the basis of facts and circumstances of the case and the learned CIT(A) has rightly disallowed them which we also hereby maintain.
The departmental appeal for the impugned year has been filed contesting following grounds:---
"That the learned CIT(A) was not justified to delete the addition of Rs.9,33,254 made due to low yield as the assessee failed to produce stage-wise records of production at the time of assessment.
(2) That the deletion of sales account addition of Rs.48,96,675 is without cogent reasons, whereas the assessing officer made this addition on the basis of daily "Business Recorder and Sun-Rise Report" where the sales of assessee were being published.
(3) That the reduction of addition to Rs.25,00,000 out of capitalized repair and maintenance as well as allowance of normal and T.S.A. depreciation is without cogent reasons.
(4) That the deletion of addition in exchange fluctuation at Rs.2,13,173 and depreciation as capitalized exchanges fluctuation at Rs.6,56,114 is unjustified and arbitrary.
(5) That Zakat allowed on income of Khas deposit account at Rs.7,00,379 and interest paid on borrowed capital of Rs.22,41,234 for investment in Khas deposit account is unjustified."
So far as the ground No.4 is concerned, the assessees appeal decided by us supra relying upon our own order for the assessment year 1989-90 and certain orders of the Income Tax Appellate Tribunal decided earlier stands settled.
Similarly the issue taken up in grounds Nos.2, 3 and 5 have also been properly thrashed out and disposed in the order given by us for the assessment year 1989-90 vide Order No.2919/LB of 1992-93 and we need not repeat those arguments here again. The departmental appeal does not have any merit on any of these points. The appeal is dismissed and is accordingly disposed of.
Regarding Zakat the issue has been decided by the learned CIT(A) after relying upon a judgment of the Income Tax Appellate Tribunal cited as 1992 (66) 58 (Trib.). The relevant part wherefrom is as under:---
"During the period under review on amount of Rs.7,00,379 was deducted on account of Zakat from Khas Deceit Account as per detail of financial charges. The entire amount is disallowed as income/profit disclosed on these Khas Deposits at 40,55,648 is exempt. Accordingly the said amount is added-back in the income of the assessee."
The appellant referred to the reported case of (1992) 66 Tax 58 (Trib.) in which the issue of allowance of Zakat as a deduction has been elaborately discussed. It has been held that this in an admissible deduction. The Assessing Officer's view that since Zakat was paid on Khas Deposit Certificate which are exempt from tax and hence deduction of Zakat is not allowable, is not correct. In view of the decision of the learned Tribunal, the addition is deleted. "
We agree with the finding of learned CIT(A) and accordingly dismiss department ground even on this score.
Assessment Year 1991-92:
No appeal has been filed by the assesses for assessment year 1991-92 while department has an appeal where in the following grounds have been taken up:--- '
(1) "That the learned CIT(A) was not justified to delete the addition of Rs.5,56,461 made due to low yield age, as the assessee failed to produce stage-wise records of production.
(2) That the deletion of addition of Rs.40,00,000 made due to capitalization of repair and maintenance is not justified.
(3) That the deletion of additions of Rs.1,76,883 in exchange floatation loss and depreciation on fluctuation loss at Rs.12,49,943 is against fact and annulled for."
These three issues have been decided in favour of the assessee by the learned Income Tax Appellate Tribunal for the preceding two years.
The department having no case, the appeal is hereby dismissed.
Assessment Year 1992-93:
In the impugned year the assessee appeal relates to confirmation of the capitalisation of the amount claimed as revenue expenditure on account of replacement of worn out parts likes ring cups and spindles etc. which were necessary for the purpose of maintenance of the running of the company.
The perusal of record and from the arguments of learned D.R. it transpires that the claim is the same as has been allowed by Tribunal through various judgments. Relying upon which we have also allowed the same for the assessment year 1989-90 in the impugned case. Neither I.T.O. nor learned CIT(A) has been able to make out a separate case for the impugned year 1992-93 from the previous years. The learned CIT(A) has given following reasons for confirming this addition during the year.
Capitalization of repair expenses:
"The assessing officer noted that the appellant company had claimed expenses of a capital nature under the head repair and maintenance. He, therefore, capitalized the amount of Rs.72,54,892 out of machinery expenses and Rs.50,531 out of furniture and fittings. After allowing depreciation at 10 % he disallowed a sum of Rs.6,574,881. A.R. of the appellant has advanced the same arguments in support of the claim as were advanced in the assessment years 1990-91 and 1991-92. In the assessment year under consideration the assessing officer has made out a list of the items of capital nature. The addition made this year is, therefore, justified and is maintained. However, the assessing officer is directed to allow triple shift depreciation also on the amount of machinery capitalized. The claim of the appellant regarding initial depreciation is misplaced and cannot be entertained. "
As from above para. the only exception learned CIT(A) has drawn is that the I.T.O. has given a list of the items of the claim of the assessee. The order of the I.T.O. has been perused by us. He has only referred to following items which in his opinion are of capital nature:---
| Date | Particulars | Amount |
| 14-9-91 to18-9-91 | Spare Parts generator | 277,486 |
| 1-7-91 | Generator | 15,000 |
| 1-9-91 | Ring cup | 283,753 |
| 4-9-91 | -do- | 202,722 |
| 22-5-91 | Cone winding drum | 443,476 |
| 7-5-91 | Spindle with bolster ring | 185,805 |
| 9-5-91 | -do- | 185,850 |
| 30-6-91 | Sofa set Bed Newari Chair Table | 11,500 11,400 1,600 11,631 50,531 |
| 19-6-91 | Electronic scale | 40,000 |
| 21-8-91 | Conveyor belt | 554,000 |
| 29-8-91 | -do- | 233,000 |
From the above description it is clear that the above detail includes spare parts of Generator ring cups, Cone winding drum, spindle with booster ruin and conveyor belt etc. All these items are of the kind which have a life of normally one year or so. We have already declared purchase of these items to be of revenue nature in the earlier part of this order after relying upon various judgments. Moreover, the details given by the I.T.O. does not give complete picture of the whole amount of the claim. He has only narrated those items which. in his opinion are of capital nature from the total claim of Rs.7,245,892. It is also not his case that the claim is unverifiable. There is a, however, little exception to the extent of furniture etc. The addition in which has separately been made. We, therefore, cannot agree with learned CIT(A) on this point and direct for deletion of all these expenditures spent for thepurpose of repair and maintenance. We need not repeat here that while deleting this amount, we are relying upon various judgments of the Income Tax Appellate Tribunal already discussed above.
The other add backs being fair and reasonable does not call for any interference by us. The same have rightly confirmed by learned CIT(A).
Coming to the departmental appeal following two grounds have been taken up:---
"That the learned CIT(A) was not justified two allow T.S.A. Depreciation on capitalized repair of machinery. That the deletion of financial expenses at Rs.6,14,859 representing interest on borrowed capital and ad anteed undertaking is unjustified. "
The claim of the department that the learned CIT(A) was not justified to allow Triple Shift Allowance on capitalization of machinery, becomes redundant in view of allowance of repair and maintenance expenditure as revenue expenditure. The question of depreciation on this amount shall automatically be waved of.
Regarding capitalization of the amount of repair of machinery on account of exchange fluctuation representing interest on borrowed capital, the deletion of add backs by learned CIT(A) was after rebutting, I.T.O's. claim that the borrowed amount on which this interest was paid has been transferred to sister concern. The learned A.R. established before CIT(A) that the amount taken as loan has been used by the impugned company and learned CIT(A) after relying upon a judgment of Supreme Court of Pakistan cited as 1992 (66) Tax 136 deleted this amount. In this regard the department has not been able to establish a different fact then the one given by learned CIT(A) in his order as such we maintain the same.
Assessment Year 1993-94:
The claim of the assessee is the same as in the assessment year 1992-93. The learned CIT(A) has allowed partial relief in machinery maintenance expenses while the learned I.T.O. had capitalized the whole of it. The assessee has informed that all these expenditures being the same and having been spent for replacement of worn out boosters and spindles on which the Tribunal has already given its judgments, the whole amount was allowable as a revenue expenditure. We agree with the learned A.R. on the basis of earlier orders, hence the whole amount is hereby deleted.
The add-backs are the same and have been made on that of same facts and circumstances as in the earlier years. Hence assessee's case in respect thereof is hereby rejected for the impugned year.
An additional point has also been taken in respect of application of provision of sections 80-C and 80-D with the arguments that the matter is subjoined in the honourable Supreme Court of Pakistan. Since this issue is not within the jurisdiction of the Income Tax Appellate Tribunal, we do not comment on the same. The departmental appeal is against partial relief allowed for capitalization of the repair and maintenance expenses. We have already decided this issue in favour of the assessee by fully allowing expenditure. Similarly, the other ground which relates to deletion of the addition made on account of capital borrowed and amount advanced to the sister concern is also now settled. The loan having been used by the impugned company from amount other than borrowed by him, there was no question of disallowance of interest thereon.
Assessment Year 1994-95:
In the impugned appeal the assessee have a different claim then that of the earlier year. The learned CIT(A) has disallowed extra shift depreciation of Rs.7,86,126 on electric generator. While add backs in various heads have also been challenged. The A.R. has argued that the generator was not used as a stand by generator and that the same is an additional arrangement and is being regularly used simultaneously alongwith electric connection of the WAPDA. He said that in the sister concerns of this textile unit, the expenditure of the generator being less than the WAPDA electricity on average, WAPDA line has been disconnected by option. We, however, consider it more appropriate to set aside the case for determination of the facts that whether the generators have been used as an additional facility alongwith the regular power supply or the same is a stand by in case of electric shut down for the purposes of load shedding. The I.T.O. shall allow the same if the same is regularly used and only refuse if it is not used as substitute on shut down of the electricity. The issue of add backs does not need any modification. The assessee appeal shall fail on this issue.
In case of department the claims are the same. For example deletion on account of interest of borrowed capital capitalization of machinery account from store and repair and loss of fixed asset etc. The first two issues already stand settled in the earlier years, hence we do not interfere in the order of the learned CIT(A) for the reasons given in our earlier judgment for the assessment year 1989-90. The issue regarding loss of fixed asset has been settled by learned CIT(A) in the following manner:---
"The appellant argued that while filing the returns this had been ignored and income under this head was declared at Rs.850,086 for tax purposes. The declared computation of income filed with the return is reproduced as under:---
| Loss as per audited accounts | | Rs.1,29,14,410 |
| Less: (i) Dep. charges in A/C. (ii) Loss on sale of fixed assets | Rs.60,29,395 4,85,433 | 65,14,825 |
| Loss prior to depreciation | | Rs. 63,99,582 |
| Add: (i)Dep. as per I. T. Rules | | Rs. 70,58,162 |
| LOSS | | Rs.1,34,57,744 |
| Less: Gain on sale of fixed assets | | Rs.50,086 |
| Loss as Returned | | Rs.1,34,07,658 |
In view of the factual position as reproduced above it is clear that the loss of Rs.485,433 has been added twice. The addition made by the assessing officer is deleted."
From the above details, it is clear that the amount has already been reduced from loss by adding Rs.50,086 as gain. We, therefore, hold that the order of the learned CIT(A) does not call for any modification. The departmental appeal fails on this point also. Appeal in all the years as such is disposed of in the manner and to the extent as mentioned above.
C.M.S./374/Trib.Order accordingly.