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

----S.2(44)---Total income---Words of S.2(44) of the Income Tax Ordinance, 1979 do not refer only to income of an industrial concern from manufacturing and other business activity but also to the income from any other sources including deemed income, which under the provisions of Income Tax Ordinance, 1979 is liable to be included in the total income of an assessee.

(b) Workers Welfare Fund Ordinance (XXXVI of 1979)---

----S.2(f)---Chargeability---All kinds of income of an industrial concern from any kind of source mentioned in S.2(f) of the Ordinance and of other income including deemed income are subject to the levy of Workers Welfare Fund and legally justified.

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

----S.29(3)(b) & Third Sched., R.8(5)---Sale proceeds---Valuation of assets- Determination---Fair market value---Sale of fixed assets---Sale value declared by the assessee was rejected by the Assessing Officer---Addition made with the approval of I.A.C.---Neither any instance of unverifiability was given nor any reason supported by any evidence for determining the terminal profit was provided---Held, additions made in estimate of value of assets was not in accordance with law and, thus, liable to deletion.

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

----S.29(3)---Definition of "fair market value" contained in S.29(3) of the Ordinance provides procedure to determine fair market value---Two stages in-built in the definition are clearly distinguishable---Second stage comes in operation only when the first method does not work---Discretion available to the D.C.I.T. to determine the fair market value is invocable only when the price of asset in the open market is not ascertainable.

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

----S.29(3)(b)---Discretion invoked under sub-clause (b) of S.29(3) of the Ordinance, like any other discretion vested in a judicial or quasi judicial authority, can be used only in a judicious manner.

(f) Income-tax---

----Mere confronting an assessee to the proposed valuation hardly means anything if the valuation ultimately adopted is not supported by any evidence.

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

----S.29 & Third Sched., R.8 (5)---"Sale proceeds"---Definition---Rule 8(5) of Third Sched. defines the sale proceeds as the sale price or the fair market value whichever is higher---Disclosed sale price had to be first rejected for good reasons to proceed to the next stage of determination of fair market value---Rejection of sale price which was evidenced by a deed was based upon considerations which were extraneous to the facts as well as the law applicable on the subject.

Z. H. Jafri for Appellant.

Farooq Tahir, D.R. for the Department.

Date of hearing: 26th November, 1996.

ORDER

The appellant has come up in appeal against orders of -the learned Commissioner of Income Tax (Appeals), Zone-III, Lahore. Mr. Z.H. Jafri, Advocate for the appellant as well as Mr. Farooq Tahir, D.R. for the department have been heard.

2. The facts of the case are that the Income Tax Officer has estimated profit on the sale of fixed assets and the appellant vehemently contests the same. The fixed assets are as follows:

3. The learned CIT (A) has stated that the identity of the two parties to the transactions is entirely different in their juridical entities not being identical. He also stated that it is a trite law that the identities of the shareholders are entirely different from the identities of the corporate entities as these are juristic persons and not natural. He held that since the principle of identification cannot be extended to this situation, the jurisdiction acquired by the I.T.O. under Rule 7 of the Third Schedule did not suffer from any infirmity. The CIT (A) held that the value of Plant and Machinery at Rs.15,46,847 was confirmed. Similarly the valuation of furniture, factory and lab equipment, vehicles and neon sign also appear to be reasonable and the profits were therefore, confirmed. Next he observed that curtailment of expenses at Rs.187,517 was incorrect and he directed that expenses be allowed at the retrenched figure of Rs.1,50,000. The learned counsel had contended before the CIT (A) that Workers Welfare. Fund were not chargeable. The CIT (A) rejected this plea on a plain reading of the provisions of Workers Welfare Fund.

4. Before us the learned A.R. has taken the same objections. We find that in the first appellate order relief has been given wherever it was necessary. The profit as estimated for these four classes of assets seems to be entirely reasonable and does not call for any interference. The appeal of the assessee is disposed of as indicated above.

(SIKANDER KALIM FAZAL),

ACCOUNTANT MEMBER.

(KHAWAJA FAROOQ SAEED),

JUDICIAL MEMBER.

5. While respectfully disagreeing with my learned brother, I would like to bring on record my submissions in the following manner.

6. The brief facts of the case have already been narrated by learned A.M. However, for the reasons of my dissent some details are added.

7. The assessee-company basically was engaged in the business of food processing for the last few years and on 1-1-1988 it stopped 'commercial production and accordingly informed the Income Tax Department. The company made an agreement to sell its plant, machinery and land, with its sister concern Ahmad Food Industries, Karachi.

8. The property impugned before us vis-a-vis its declared sale value and written down value etc. is as follows:

9. The I.T.O. did not accept the sale value declared the assessee and he proceeded to assess the value in keeping view Rule 8(5) and Rule 7 of the Third. Schedule for the purpose of determining the terminal profit. He used following formula:

Terminal profit = Sale Proceed - W.D.V.

10. He also issued a notice to the assessee wherein he showed his intention of making an estimate but, however, did not disclose the amount. 1n reply to said notice the assessee informed that the assets were sold to a sister concern hence question of its being lessor than the market price does not arise. The I.T.O. made a local inquiry and then send the matter to the I.A.C. for approval in compliance to Rule 8 and Circular No.10 of 1979. The learned I.A.C. approved the value of the property on following figures:

11. After approval by the I.A.C. the assessee was confronted with the figures who made following replies:

(1)As regards factory land, building and other assets on which depreciation has been claimed it is not taxable as immovable assets and assets from the definition of capital assets under section 27 of the Income Tax Ordinance, 1979.

(2)According to proviso to Rule 8(5) of the Third Schedule, the lower figure is to be taken as sale proceeds of original cost and fair market value.

(3)The question- of profit on sale of fixed assets does not arise because these were transferred to assessee's Associated Companies where the owner, shareholders are more or less the same.

(4)This sale/transfer was not for the purpose of avoiding or evading tax. It was not strictly a transaction of revenue nature or in the course of business or a transaction in a commercial sense. In such circumstances provisions of Rules 8(5)(a) and 7(b)(i) of Third Schedule and section 12(12) of the Income Tax Ordinance is not applicable.

(5)We rely on the following cases-law, which deals with the very spirit of the subject:

(i)(1995) 28 ITR 928 (CIT v. Homi Mehta)

(ii)(1964) 51 ITR 6.32 (Cherian v. CIT).

(6) Without prejudice to the above that the sale of immovable property is not yet complete as vendee is not yet the legal owner pending registration of the sale.

(7)Regarding other movable assets which are detailed and spelled out, there has been no intention whatsoever on the part of the seller to sell without at lesser price than the fair market value.

12. The I.T.O. observed that the reply was not satisfactory and the amount shown as sale consideration were not fair market value which in his opinion was the one confronted to the assessee as mentioned above by us and subsequently made the addition on the basis of the same. An addition in building account was also made, however, the issue has already been decided in favour of the assessee and the same is not impugned before us. We, therefore, restrict our discussion to the issue impugned.

13. The resume of the above discussion is that (i) assessee was confronted with the price proposed after approval from I.A.C.; (ii) that Inspector's Report which allegedly says that the price quoted by the assessee was lower has not been confronted to the assessee; (iii) that while making the estimate the I.T.O. has not given any reason whatsoever in any shape.

14. Before moving ahead I would like to revert back to the sale-deed between the two parties. The detail of the assets sold forms part as Annexure I, of the impugned deed, which includes 13 numbers of items in the head of plant and machinery, 34 in the factory and lab. equipments and 27 in furniture and fixture account. The 4th item is vehicles, which have been sold to various parties separately and same comprised of some old cars etc.

15. The above detail makes it clear that estimate of the I.T.O. is totally bald and without taking into consideration the items impugned before him No effort seems to have been done for determining the fair market value which is the requirement of law.

16. The A.R. of the assessee while pointing out above facts from the order and the deed of sale argued that nothing on record proves existence of any business to any shape whatsoever so as to say that the additions to business account were legally maintainable. He made reference to a judgment of the ITAT order vide I.T.A. No. 922/KB of 1984-85 (assessment year 1981-82). He said that the Tribunal has categorically directed not to make additions without giving any instance of unverifiability. The relevant part from the above judgment is as follows:

"We have gone through the assessment order with the assistance of learned D.R. and have found that while disallowing the expenses under consideration the I.T.O. old not give any specific instance of unverifiability and did not give any specific instance of unverifiability and did not confront the respondent with any such instances providing him opportunity of being heard. The disallowances made, therefore, militate against the bona fide exercise of discretion and the add-backs made are against the principle of natural justice. We have emphasized time and again that the assessment order being quasi-judicial in nature should be speaking and while making disallowance for the reason of unverifiability the Assessing Officers are required to cite specific instances and before making additions the instances should be brought to the notice of assessee affording them opportunity of being heard. If these two conditions are not satisfied the disallowances made are bound to be struck down. Since the Income Tax Officer while making disallowances has neither given any specific instances of unverifiability nor has confronted the respondent with the instances leading to the disallowances, therefore, the learned CIT (A) has rightly deleted the addition. The learned CIT (A) has acted on sound principle of law and as such the impugned order does not suffer from any infirmity and no interference is called for. The deletion made by the learned CIT (A) are consequently maintained."

17. He further argued that the higher Courts have never allowed estimates which are just leap in the dark and which are not supported by any evidence. In this case the impugned company purchased a machinery through proper documentation and the value of the same was determined after year to year depreciation as per balance-sheet of the company. The fair market value of the same was the one declared by the assessee. He further said that it was more a transaction with self and the I.T.O.'s observation that company is legal person and transaction was not within the self does not sound for the reason that such legal persons can be considered as human beings. The companies are run by a management comprising of its Chief Executive, Directors, Subscribers etc. and both being the same in the two companies, the arguments of learned I.T.O. is not applicable in the spirit he wants. He repeated that this was not case where the I.T.O. had option to make an estimate. Relying upon famous case cited as 14 ITR 775 in the case of Dhakeswari Cotton Mills, he repeated that the addition being just on surmises should have been cancelled.

18. The issue regarding Workers Welfare Fund also needs review as the industrial undertaking did not earn any profit during the year 'from its manufacturing process. The assessee sold it out on 1-8-1988 as such there was no question of application of W .W .F.

19. I, therefore, respectfully record my disagreement with learned A.M. It was a clear case of blind estimate. The I.T.O.'s action to issue the notice to the assessee after obtaining approval from I.A.C. is also not understandable as to how he could being a junior officer, deviate from the proposal already approved by his boss. Moreover, non-confronting the Inspector's report to the assessee or even non-mentioning of its contents in the body of order also makes the order to be a nullity in the eyes of law. Even if his contention is taken to be correct that the value declared by the assessee was low, there still does not remain any support for the estimate of the I.T.O. who has adopted the value merely on self-determined estimates without any support for such valuations. Such treatments have been favoured by the higher Courts. The relevant case in my opinion is as follows:

1987 PTD (Trib.) 300:

"No addition should be made on account of low drawing by using stock-phrases of 'standard of living' or 'posh locality' or ' school- going children', etc. An Income-tax Officer has at his disposal enough staff who can make private investigations to ascertain the correct standard of living of a particular assessee by checking the electricity telephone and gas bills; by finding out the number and capacity of the cars used by him; by knowing the exact number of the family members of the assessee. He should further collect information as to how many members of the family of an assessee are earning members and how many school-going. In case of school -going children, it can be found out as to whether the children were going by school bus or by public transport. If the children are having any tuition, this fact can also be kept into consideration. The number of domestic servants is also indicative of the standard of living of a person. Whether a person is living in a bungalow or a flat is also a very relevant question. Eating habits of one community are different from another. Other habits of life are very important as far as the household expenditure is concerned. A careful Income-tax Officer would collect the material on the above-noted points which are definitely not exhaustive."

My humble finding in this case, therefore, is that the additions in value of sale of assets in this case is not supported by any evidence besides there is no reason for doubting the value transacted as per agreement. Therefore, the additions made in my opinion are liable to deletion.

(KHAWAJA FAROOQ SAEED),

JUDICIAL MEMBER

DIFFERENCE OF OPINION

Since a difference of opinion has arisen between us, the matter is placed before the learned Chairman for reference to a third Member for resolving the following question:

"(1)Whether on facts and circumstances of the case the additions made on sale of plant and machinery by estimating the same at a higher value was justified or not?

(2)Whether the application of W.W.F. in the given circumstances was justified or not?"

(Sd.)

(KHAWAJA FAROOQ SAEED,

JUDICIAL MEMBER

(Sd.),

(SIKANDER KALIM FAZAL),

ACCOUNTANT MEMBER.

20. After reference of the above questions under section 133(7) of the Income Tax Ordinance I have heard the parties. Their line of arguments remains the same. Learned A.R. for the assessee supports the opinion expressed by the learned J.M. while the Legal Adviser for the department supports the orders of the authorities below.

21. Having considered the submissions it appears that chargeability of Workers Welfare Fund in the light of the relevant provisions of the Workers Welfare Ordinance, 1979 (Ordinance No.XXXVI of 1979) remains a moot point. While the learned A.M. has maintained the levy without considering the issue at any length the learned J.M. finds that industrial concern having not earned any profit during the period under review, there was no question of application of Workers Welfare Fund. I will not, however, agree with the learned J.M. It is not disputed that the concern did not undertake any manufacturing process during this period. However, it is equally correct that the assessee disclosed sales of imported material and also a gross profit on this account at Rs.9.591. Therefore, a business activity was undertaken though not of manufacturing. Even if it had not been so the definition of industrial concern as given in section 2(f) of the Workers Welfare Fund Ordinance, 1979 is to be read with definition of "total income" mentioned to sub-clause (1) of that section. The Workers Welfare Fund Ordinance does not define total income. It refers to the one contained in Income Tax "Ordinance 1979. According to section 2(44) of that Ordinance "total income means the total amount of income referred to in section 11 computed in the manner laid down in the Ordinance and includes any income which, under any provisions of the Ordinance, is to be included in the total income of an assessee.

22. These words of statute clearly imply that the scope of total income does not refer only to income of an industrial concern from manufacturing and other business activity but also to the income from any other sources including deemed income which under the provisions of Income Tax Ordinance is includible in the total income of an assessee. All kind of income of an industrial concern from any kind of sources mentioned in subsection (f) of section 2 of Workers Welfare Fund Ordinance and of other income including deemed income are subject to the levy of the fund.

23. The picture becomes more clear if we further see it in the light of Rule 7(B)(i) and (ii) of the Third Schedule to the Income tax Ordinance which was invoked to treat the gains as income on disposal of assets. It reads:

7. Disposal of assets and treatment of resultant gains or losses.-- Notwithstanding anything contained in this Ordinance or the repealed Act, where, in any income year---

(a) any asset is disposed of by an assessee, no allowance under rules 1, 3, 4 or 5 shall be made in respect thereof in that year;

(b) any (asset) is disposed of by an assessee---

(i) if the sale proceeds thereof exceed the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable under the head 'income from business or profession and

(ii) if the sale proceeds are less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year,

and the business or profession for the purposes of which the said (asset) was used before its disposal, shall be deemed to be carried on by the assessee during that year and all the provisions of this Ordinance shall apply accordingly.

24. The above rule therefore by fiction of law supposes that a business whose assets on which depreciation had earlier been allowed are disposed of shall be considered to be carried on by the assessee during the period in which the assets are disposed of shall be considered to be carried on by the assessee during the period in which the assets are disposed of. Accordingly the scope of "total income" includes deemed income and also as the said rule provides, a business or profession shall be considered to have remained in operation the purpose of which these assets were used before their disposal. Therefore, the fact that the factory operated by the assessee-company had ceased to do any manufacturing process during the period when the assets were disposed of remains of no significance at all as far the application of rules for computation of depreciation allowance and other matters are concerned when seen in the light of the governed provisions of section 23 of the Ordinance. The view of learned J.M. as expressed in para. 18 ante cannot be subscribed.

25. The scope of the phrase "total income" in the perspective of levy of Workers Welfare Fund was considered by us in a reported decision cited as (1993) 68 Tax 177 Trib. The majority view as expressed by Mr. A.A. Zuberi, Accountant Member to which though I disagreed was subscribed by the then Chairman Mr. Farhat Ali Khan. Mr. A.A. Zuberi finding in favour of the levy concluded:

"The scope of 'total income' as per section 11 of the Income Tax Ordinance, in relation to a resident (which is the status of the present appellant) is: includes all income from whatever source derived, received or deemed to be received in Pakistan and accrued or deemed to have accrued in Pakistan and accrued or arose outside Pakistan. The manner of computation of total income is the clubbing of income under various heads specified in section 15 of the Income Tax Ordinance. The conclusion is inescapable that in assessment of a resident assessee, charge in respect of Workers Welfare Fund would be raised at 2% of the aggregated sum representing income from all sources defined as 'total income'."

25. The majority finding in the above case also gives support to my view that the treatment meted out to the assessee was in accordance with law although the issue was not discussed in any detail by any of the authorities below nor even by the learned Accountant Member. For these reason my answer to the second question is that the application of Workers Welfare Fund in the facts of the case was legally justified.

26. To the second question, However. I will say without hesitation that the addition made in estimation of value of assets was not in accordance with law. It will be noted that competency of the assessing officer to determine a fair market value as defined in section 29(3) of the Ordinance has not been seriously questioned before me. It will also be noted that the arguments taken before the authorities below with respect to the identity of seller and the purchaser associated company earlier taken before the learned Division Bench have not been pressed before him.

27. Subsection (3) of section 29 of the Ordinance provides for two shades of the fair market value. The first is the price, which the capital asset would ordinarily fetch in the open market on the relevant date. The other being that where it is not so ascertainable at such price as may be determined by the DCIT after obtaining the approval of the Additional Commissioner in writing. The definition contained in subs. (sic) this provision (in a way also) provides procedure to determine fair market value. The two stages in-built in the definition are clearly distinguishable. The second stage comes in operation only when the first method does not work. In other words the discretion available to the DCIT to determine the fair market value is invoceable only when the price fetchable in the open market is not ascertainable.

The assessing officer in the case before us, however, proceeded to exercise his discretion though after obtaining the statutory approval of the I.A.C. but without bringing on record that the asset was either nor marketable or for some other good reason its price in the open market in the relevant date was not ascertainable. He may have made out a case for approval of his I.A.C. but no such reason was mentioned in the assessment order. This was his first mistake.

28. The next being his treatment of lumping up a number of assets into one lot and assigning them a value without, even properly identifying or explaining the nature, condition and use of articles included in plant and machinery, furniture and fixture, factory equipment and neon signs etc. The number, make, model or condition of various vehicles numbering five in all was also not mentioned. One could ignore this lack of exercise on the part of the assessing officer if he had otherwise supported his valuation of the lots by some material. However, unfortunately it was not so done. The discretion invoked under sub-clause (b) of section 29(3) of the Ordinance, like any other discretion vested in a judicial or quasi-judicial authority can be used only in a judicious manner. The assessing officer in the circumstances not only hastened to exercise his discretion without complying with the condition precedent but also used the same in a way, which exceeded bounds of his authority. Mere confronting an assessee to the proposed valuation hardly means anything if the valuation ultimately adopted is not supported by any evidence. All the moreso when the objections made in reply to the notice confronting estimation of a particular value were not properly answered. In absence of a legally acceptable basis an estimation of value assigned by an assessing officer to any asset or property does not stand at a better footing than the disclosed version. In 1989 PTD 177 re: Daud Corporation v. CIT their Lordships held that an assessing officer had wide powers to make an assessment. However, in the view of their Lordships the estimate of an assessing officer must be based upon facts and circumstances of the case as borne out from record and not on the basis of his whims and desires. In another case re: Magna Industries v. CIT, Rawalpindi reported as 1980 PTD 35 a Division Bench of the Lahore High Court laid down that after rejecting turned version the assessing officer should evolve reasonable basis for making an estimate. Also that the basis of estimate should be disclosed to the assessee.

29. As said above no basis whatsoever were evolved while estimating the value of the assets muchless to say of their proper confrontation to the assessee. It was all the more necessary as Rule 8(5) of the Third Schedule defines the sale proceeds as the sale price or the fair market value whichever was higher. It means that as a first step the disclosed sale price had to be rejected for good reasons to proceed to the next stage of determination of fair market value. The rejection of sale price, which was evidence by a deed was based upon considerations which were extraneous to the facts as well as the law applicable on the subject.

Although in the assessment order the assessing officer did mention that he was proceeding to determine the value of assets "after conducting proper inquiries" yet not iota of such proof was brought on record. Even the verifiable purchaser which was also an associated concern of the assessee-company was never summoned to judge the veracity of the disclosed sales price. The outright rejection of the sale-deed, dated 1-7-1988 was accordingly based upon mere suspicion that both the parties being inter connected by common management, shareholders and Directors the price evidenced by the sale-deed did not inspire confidence. The assessing officer may have been correct in his opinion but he forgot that holding of an opinion as layman was different from that of a person who was exercising a judicial or quasi-judicial authority where notions do not take place of facts proved by process of evidence logic and reason.

30. On facts, as observed above, the assessee had a very strong case inasmuch as all the assets were not only used but had to be uprooted or dismantled from the factory premises before disposal. In such situation a transfer on book value hardly appears a case of favourable deal as thought by the assessing officer. The learned A.R. of the assessee is also right in pointing out that used machinery and other equipment could hardly attract any buyer in the open market as these assets pertain to a specific kind of business and the new entrepreneurs do not generally go for outdated parts and machinery. He is also right in saying that since the associated company was running a similar plant at Karachi it opted to purchase the assets though these cost it more on account of transportation charges. The views expressed by the learned J.M. on the subject, therefore, are supported by legal provisions as well as the facts prevailing on record.

31. Accordingly the addition made on account of valuation of assets shall be deleted. Also in view of my answer to the second question the Workers Welfare Fund is held chargeable on the "total income" if it answers the other conditions- of levy as given in section 4 of that Ordinance.

M.B.A. /544/Trib.Order accordingly.