I.T.A. NO.4614/LB OF 1997, DECIDED ON 13TH JANUARY, 1998. VS I.T.A. NO.4614/LB OF 1997, DECIDED ON 13TH JANUARY, 1998., 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 3731 (1998)

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

----Second Sched., cl. 118-E---Exemption---Refusal---Assessee, a Private Limited Company---Memorandum of Association of the Company stated the objects which enabled the company to arrange the financial affairs other than the main object---Assessing Officer refused the claim of exemption on various grounds, including that the company was not formed exclusively for operating the industrial undertaking---Validity---Held, disputed objects did not mean that the company was authorised to carry out any other business than the main object which had not been rejected by the Assessing Officer-- Disputed objects only enabled the company to arrange the financial affairs of the company without which no business was possible and such objects were usually found in the Memorandum of Association of Companies---Exemption could not be refused in circumstances.

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

---Second Sched., cl. 118-E, sub-cl. (2)(c)---Exemption claim of exemption was rejected by the Assessing Officer on the ground that the assessee had failed to satisfy the condition laid down in cl. 118-E (2)(c) of Second Sched of Income Tax Ordinance, 1979---No evidence was produced to justify any assumption that the assessee had constructed the factory structure and installed the machinery at any time during the year under consideration-- Exemption was refused by the Appellate Tribunal as the assessee failed to fulfil the requirement of condition (c) of sub-cl. (2) of cl. 118-E of Second Sched to the Income Tax Ordinance, 1979---Condition (b) of the said clause was not commented by the Appellate Tribunal.

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

----S.50(5)---S.R.O. 593(1)/91, dated 30-6-1991---Deduction of tax at source---Exemption---Commissioner of Income-tax, Companies issued exemption certificate to the extent of machinery and raw material exclusively consumable by the assessee company itself in its own unit---During the proceedings of the case it was established on the basis of material on record that the assessee company was not engaged in the manufacturing of goods in the relevant period and it also disposed of a portion of raw material in the open market ---Assessee's contention was that the department had already accepted the claim of exemption while issuing certificate of exemption under subsection (5) of S.50 of the Income Tax Ordinance, 1979 based on S.R.O. 593(1)/91, dated 30-6-1991---Held, Commissioner of Income-tax having exempted the assessee from the operation of the provision of sub-cl. (5) of S.50 of Income Tax Ordinance, 1979 to the extent of machinery and raw material exclusively consumable by the assessee company itself in its own unit, such a certificate was not an unconditional certificate and exemption was allowed in respect of raw material exclusively consumable in its own unit---Exemption was refused by the Appellate Tribunal in circumstances.

Dr. Ilyas Zafar alongwith Mr. Tariq, General Manager, Accounts for Appellant.

Shafqat Mahmood Chohan, L.A., Masood Ahmad, D.C.I.T. and Ahmad Kamal, D.R. for Respondent.

Date of hearing: 11th November, 1997.

ORDER

INAM ELLAHI SHEIKH (ACCOUNTANT MEMBER).---A private limited company has filed this further appeal against an order, dated 12-9-1997 recorded by the learned C.I.T. (Appeals), Zone-I, Faisalabad (Camp at Lahore).

2. The relevant facts in brief are that the assessee filed a return to declare nil income. The assessee declared to have earned business income at Rs.7,658,011 and exemption of such income was claimed under clause 118-E of the Second Schedule to the Income Tax Ordinance (hereinafter called the Ordinance). The audited balance-sheet and trading accounts were not filed alongwith the return. The company is said to have been incorporated on 27-5-1993 mainly for the purposes of setting up an industrial undertaking for manufacturing and processing etc. of edible oils, cooking oil etc. and performance of all the acts directly or indirectly related to or incidental to this object of the company. The other objects included borrowing and drawing of promissory notes etc. and opening of bank accounts etc. Land for the factory was purchased on 8-11-1993 from a sister concern. The assessee claimed exemption under clause (118-E) of the Second Schedule to the Ordinance stating that an industrial unit had been set-up and operated to earn the entire declared income. The assessee claimed to have purchased or got fabricated machinery from M/s. Zakaria Engineering, Multan. The Assessing officer summoned a partner of the said Zakaria Engineering, Multan and came to the conclusion that the declared transactions were not genuine. The Assessing Officer, also found that the assessee did not have the necessary installed capacity 'to manufacture/process the declared quantities sold. The declared electricity charges were also found to be inadequate for production declared. Thus the Assessing Officer came to the conclusion that the company had not been formed for the sole object of manufacturing of ghee and cooking oil, and that the company consumed in manufacturing only a portion of raw material imported by it and that the remaining quantity of raw material was disposed of as such. The Assessing Officer also pointed out that the books of accounts had not been produced nor the audited accounts were available. It appears that only an auditor's report had been made available to the Assessing Officer and even such report was not found satisfactory, as in that report the Auditors had expressed their inability to express their opinion upon the accounts. In view of the abovementioned objections and observations of the Assessing Officer that the assessee had failed to satisfy the conditions laid down in clause 118-E(2)(b) of the Second Schedule to the Ordinance, he refused the claim of exemption. A number of notices had been issued, some of which were not complied. The last notice for 25-6-1997 was issued by the Assessing Officer but no one attended. Hence, ex parte assessment was made on 30-7-1997 in the following manner:---

"As stated above production capacity of the industrial f undertaking as determined by the Ghee Corporation's experts comes to 90 M.T. daily. The sale rate per M.T. was determined at Rs.22,000 vide assessment order, dated 20-6-1997 in the case of Nadia Ghee Mills (Pvt.) Limited. The same rate is applied in the instant case. In this way value of manufacturing sales comes to (236 x 90 x 22000) Rs.4,672,80,000. The balance sales i.e. (1,085,272,261--4,672,80,000) Rs.617,992,261 are held to be the commercial sales to which the provision: of section 80-C of the Income Tax Ordinance, 1979 are applicable. Income is determined as under:---

3.It may be mentioned that the assessee had declared the following trading results:---

SalesRs. 1,085,272,261

Gross ProfitRs. 42,402,579

G. P. rate3.90%

4. Before the First Appellate Authority, the assessee challenged the assessment on various grounds but the assessee's appeal was dismissed and the assessment was confirmed.

5. The main objection of the assessee before us is that the Revenue was not justified in refusing the claim of exemption under clause 118-E of the Second Schedule to the Income Tax Ordinance. The learned counsel of the assessee has strongly argued that the Assessing Officer was not justified in coming to the conclusion that the assessee-company had not been formed for the sole object of manufacturing of ghee and cooking oil etc. The learned Counsel of the assessee has referred to the object clause referred to by the Assessing Officer in his order. It was elaborated by the learned counsel of the assessee that the other objects, as noted by the Assessing Officer, were merely ancillary and incidental objects which were normally incorporated in all the memoranda of association to enable the company to carry on day-to day business and that this did not mean that the company was allowed to conduct any other business than the main business of manufacturing of edible oil and ghee etc. The learned counsel of the assessee has also referred to a C.B.R. Letter NO.E.1(84)DTP-11/94, dated 9-7-1995 to contend that technical lacunas should not be used while interpreting the object clauses. The learned counsel of the assessee also referred to a decision reported as 1996 PTD 360 to support this contention. The learned counsel also referred to the following case-law at this stage:

--PLD 1969 Kar. 278

--1994 PTD 1034.

--1990 PTD 671.

-,1980 PTD 322.

6. On the question of capability and capacity of production, the learned counsel of the assessee conceded that there was no Sui-gas connection during the period under consideration. The learned counsel of the assessee also did not dispute the observation of the Assessing Officer with regard to the low number of electricity units. The learned counsel of the assessee submitted that the assessee has used alternative arrangements such as generator to run the plant and machinery. It was submitted by the learned counsel that the assessee spent Rs.27,042,890 on fuel which was used to run the generator, included in the plant and machinery. The learned counsel of the assessee further submitted that actual production of the assessee during the period under consideration was 41,505 M. Tons with an average of 154 M. Tons per day. The learned counsel of the assessee further submitted that the department had already accepted the contention of the assessee with regard to manufacturing activities while issuing certificates of exemption under subsection (5) of section 50 of the Ordinance based on S.R.O. 593(1)/91, dated 30-6-1991. The learned counsel of the assessee further submitted that proper survey of the production capacity of this Company had been carried out by the independent surveyors on behalf of the Banks. It was further submitted that the assessee had successfully filed a Writ in Lahore High Court when the Revenue refused to issue the exemption certificate in 1997. It was further submitted that the Lahore High Court had directed the Revenue to issue such a certificate on the basis of capacity of the assessee at 150 M. Tons. With regard to the production plant and machinery, it was submitted that the same was partly imported and partly locally purchased. The learned counsel of the assessee also drew our attention to the observation of the Assessing Officer with regard to the appointment of a Committee to determine the production capacity of this assessee. As per the impugned assessment order, the Deputy Commissioner of Income-tax, Circle 29, Multan was appointed as 'Commission' to verify the claim of purchase of machinery from M/s. Zakaria Engineering, Multan. The learned counsel of the assessee states that nowhere it had been held by the commission that old machinery had been Installed.

6. The learned counsel of the assessee further disputed the adoption of sales from own manufacturing capacity and commercial activities. On the issue of G.P. rate the learned counsel of the assessee submitted that normally a G.P. rate of 4% was applied. On the issue of sales on account of commercial activities, the learned counsel of the assessee has submitted that no instance has been given by the Assessing Officer to establish any such activity.

7. Mr. Shafqat Mahmood, Legal Adviser, appearing on behalf of the Revenue on his turn defended the ex parte proceedings with the submission that a number of notices had been issued and opportunities provided to the assessee, which were not availed. It was further submitted that although no notice was issued for 30-6-1997. when the assessment was finalized, the Assessing Officer was justified in making the ex pane assessment in view. of a number of opportunities given. It was further submitted that no prejudice had been caused to the assessee by such ex parte proceedings especially in view of the lenient treatment given by the Assessing Officer. The learned Legal Adviser relied on the following judgments to support his contention.,

(i) 1975 PTD 58

(ii) 1966 PTD 169

(iii) 1996 PTD 1125

8. On the issue of the claim of the exemption by the assessee, it was submitted by the learned Legal Adviser that the company had not been formed for the exclusive object of carrying on the industrial activity and that the assessee-company had failed to prove that new machinery had been installed. The learned L.A. referred to the decision reported as 1996 PTD 360 to support these contentions. The learned L.A. further elaborated that the assessee had two types of activities namely, manufacturing as well as marketing. The learned L.A. was in possession of certain evidence, which showed that the assessee-company had sold 50 tons of Palm oil to a company named Solvex (Pakistan) Ltd. on 31-5-1994. With regard to the purchase of machinery, the learned L.A. submitted that the alleged supplier had denied the sale of any such machinery to this assessee and there were no evidence to support these transactions. The learned L.A. also pointed out that the reports with regard to the capacity of production as relied on by the assessee were contrary to each, other and also to the production declared. The learned L.A. also submitted that the issuance of exemption certificates by the learned C.I.T. on his own or on the direction of the Lahore High Court did not mean that the income of the assessee was exempt. The G.P. rate applied and bifurcation of sales were defended by the learned L.A. as well as the Assessing Officer at the time of hearing of the appeal with the submission that the assessee had not provided any audited account and the rates applied were as per the parallel cases.

9. The learned counsel of the assessee taking his turn to respond to the arguments of the Revenue, submitted that the alleged sales to Solvex (Pakistan) Ltd. had not been confronted to the assessee and the Assessing Officer had not considered this point. It was further submitted by the learned counsel of the assessee that there was no notice under section 61 of the Ordinance for 25th June, 1997. The learned counsel of the assessee has also disputed the sales to Solvex (Pak.) Ltd. with the submission that no such sales were made. With regard to the observation of the Assessing Officer on the issue of processing time, the learned counsel of the assessee submitted that the P.R:D. Pam oil imported by the assessee took I-1/2 hours for deodorisation whereas the other crued oils took five hours in this process.

10. The arguments of both the parties have been considered and also documents as well as case-law produced before us. The first and the foremost issue involved in this appeal is the assessee's claim of exemption under clause (118-E) of the Second Schedule to the Income Tax Ordinance which read as follows---

"(118-E) (1) Profits and gains derived by an assessee from an industrial undertaking set up anywhere in Pakistan, not covered by clause (118-C) or clause (118-D), between the first day of December, 1990, and the thirtieth day of June, 1995, both days inclusive, for a period of three years beginning with the month in which the undertaking is set up or commercial production is commenced, whichever is the later.

(2)The exemption under the clause shall apply to an industrial undertaking which fulfils the following conditions, namely:---

(a) that it is owned and managed by a company formed exclusively for operating the said industrial undertaking and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan;

(b)that it is not formed by the splitting up or the reconstruction or reconstitution of business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and

(c)that it is an undertaking engaged in the manufacture of goods or materials, or the subjection of goods or materials to a manufacturing process, or mining (excluding petroleum and gas) or extraction of timber. "

It may be mentioned that this clause was omitted by Finance Act, 1995.

11. The Assessing Officer has refused the claim of exemption on various grounds. The first ground for refusal as given by the Assessing Officer is that the company was not formed exclusively for operating the industrial undertaking. The Assessing Officer has referred to some of the objects of the company, which in his opinion meant that the company was not formed exclusively for running such industrial projects. According to the assessment order, the other objects included the following objects which did not meet his approval : ---

(i)To borrowing and taking loans whether or promissory note, bill of exchange or other securities including mortgage, pledge charge or hypothecation whole or any property of the company.

(ii)To draw, make, accept, endorse, discount, execute and issue cheques, promissory notes, bills of exchange, bills of lading, warrants, debentures, and other negotiable or transferable instruments.

(iii)To open an account or accounts with any individual, firm or company or with any bank or bankers, shroffs and to pay into and to withdraw money from such account or accounts, for the purposes of the Company except doing banking business.

Also the learned Legal Adviser had objected that the assessee-company was engaged in the marketing of raw material imported. However, we are not inclined to agree with these reasons of the Revenue. The disputed objects as given above do not mean that the company is authorised to carry out any other business than the main object, which has not been rejected by the Assessing Officer. The disputed objects only enable the company to arrange the financial affairs of the company without which no business is possible and such objects are usually found in the memoranda of association of all the companies. Thus, in our view the exemption could not be refused on this ground.

12. The second objection raised by the Assessing Officer for refusing the exemption is that the company consumed only a part of raw material imported by it in the manufacturing ' activity. This objection was raised in view of absence of any Sui-gas consumption and a small quantity of electricity consumed during the year under consideration. To this the learned counsel of the assessee has replied that the assessee was using a generator and he has filed a photo copy of account under the head fuel and power according to which an amount of Rs.27,042,890 was spent in this account. As per such photocopy of account, the first purchase of the fuel is recorded on 4-10-1993 'for Rs:419,752 as per Cash Book". The second purchase for Rs.338,948 is dated 9-10-1993. Then various purchases had been recorded on different dates up to 30-6-1994. As already stated above, the learned counsel of the assessee claims that this amount of Rs.27,042,890 was spent on the purchase of fuel for generator. However, no evidence for the purchase of generator was produced before us. The claim of purchase of machinery from Zakaria Engineering, Multan has already been rejected by the Revenue and no evidence had been produced before us to support such purchases. It may also be interesting to note that the land for the factory was purchased on 8-11-1993 as already stated above. This is in contrast to the first purchase of fuel dated 4-10-1993. Obviously the assessee must have constructed some kind of a factory structure on this land purchased on 8-11-1993 which would require some time to complete. Whereafter any machinery could be installed The assessee has filed certain unaudited accounts, some of which are hand written. Such unaudited accounts, included a schedule of fixed assets showing the cost of building at Rs.6,372,927 and cost of plant and machinery at Rs.13,497,963. The construction of such a building and installation of plant and machinery would require certain amount of time even if the same had been actually constructed/installed. No evidence has been produced to justify any assumption that the assessee had constructed the factory structure and installed the machinery at any time during the year under consideration. Thus in our view the assessee has failed to fulfil the condition (c) of sub-clause (2) of clause (118-E) of the Second Schedule. In other words, the assessee has failed to establish that it was undertaking engaged in the manufacture of goods etc. as required by the condition (c) of sub-clause. With regard to the condition (b) of the said sub-clause, the learned counsel of the assessee has asserted that there was no evidence with regard to the installation of second hand or used machinery. However, since the assessee has failed to fulfil the requirements of the condition (c), we refrain from commenting on the requirements of condition (b) of said sub -clause. Thus, we are inclined to hold that the assessee has not been able to establish the claim for exemption under clause (118-E) of the Second'' Schedule to the Ordinance.

13. The claim of the learned counsel of the assessee that the Revenue had already accepted the claim of exemption while issuing exemption certificates or by way of the success of the assessee's writ petition before the Lahore High Court is not found to be forceful. The learned counsel of the assessee has filed copies of two certificates issued under section 50(5) of the Ordinance one dated 1-11-1993 and the other dated 22-12-1994. The only certificate, which is relevant to the period under consideration is the one dated 1-11-1993. By that certificate the CIT, Companies, Lahore has "exempted the assessee from the operation of the provisions of sub-clause (5) of', section 50 to the extent of machinery and raw material exclusively', consumable by the assessee-company itself in its own units". Obviously, j such a certificate is not an unconditional certificate and allowed exemption in respect of raw material exclusively consumable in its own units. With regard to the writ of the assessee in the Lahore High Court it may be pointed out that the said writ was filed in 1997 and was not related to the period under consideration. Even in the Order on that writ the Hon'able Chief Justice of the Lahore High Court refrained from commenting upon the assessment which is now under consideration because such assessment was under appeal and that any comment by that Court could prejudice the case.

14. The assessee has also filed copies of certain survey/project valuation reports. One of these reports dated 8-2-1996 has been issued by Blue Feather Affiliations. Obviously this report is not related to the period under consideration. Another report dated 9-5-1997 has been issued by a Technical Adviser of Ghee Corporation of Pakistan which again is not relevant to the period under consideration. The assessee has filed an incomplete copy (comprising three pages and carrying no signatures) of a report dated 18-12-1993 form Al-Qasim Consultants. According to such report the survey was conducted on 14th and 15th December, 1993. However, the report is incomplete and without any signature. According to the part of the report, filed, the value of the R.C.C. building constructed over 31,148 sq. ft. has been given at Rs.350 per sq. ft. However, as already stated above, the land was purchased on 8-11-93 and it is unimaginable that so much construction could have been carried out in such a short time and also the plant and machinery installed. Hence, this report also does not come to the help of the assessee.

15. Coming to the objection of the assessee with regard to the ex parte proceedings, we find that no notice had been issued for 30-6-1997 when the assessment had been finalized. On the other hand, the learned Legal Adviser has submitted that no prejudice has been caused to the assessee. The total sales as declared by the assessee have been accepted by the Assessing Officer. The only grievance of the assessee could be with regard to the bifurcation of sales between commercial sales and sales of own manufactured products and also to the application of G.P. rate or the quantum of P & L expenses. A copy of the notice issued by the Assessing Officer on 21-6-1997 has been produced before us which reads as follows:-

"No.752/09OFFICE OF THE

DEPUTY COMMISSIONER OF

I/W TAX, CIRCLE-09,

COYS ZONE-I, LAHORE

DATED: 21-6-1997.

To

M/s. Iram Ghee Mills (Pvt.) Ltd.

SUB: NOTICE UNDER SECTION 62 OF THE INCOME TAX ORDINANCE, 1979 ASSESSMENT YEAR 1994-95 COMPLETION OF ASSESSMENT.

In response to your A.R.'s Letter No.IGM(P)/002, dated 13-6-1997 and in continuation of this Office Letter No.737/09, dated 14-6-1997 you are allowed to make compliance of this Office Letter No.699, dated 6-6-1997 on or before 25-6-1997.

Please note that no further extension shall be allowed as the proceedings in your case are going be barred by time after 30-6-1997. In case of further non-compliance the law shall have its own re-course. The trading results declared by you shall be rejected, sales estimated G.P. applied @ 7% to the extent of sales covered by your production capacity. Balance sales shall be treated as commercial imports/sales besides rejecting your claim of exemption made under clause (118-E), Part-I of Second Schedule to the Income Tax Ordinance, 1979-.

This should please be treated as most urgent.

(MASOOD AHMAD),

DEPUTY COMMISSIONER OF I/W TAX

CIRCLE-19, COYS ZONE-I, LAHORE.

CODE N0.03-79-0549"

Admittedly, the assessee has failed to respond this notice. The learned counsel of the assessee agitated before us that the G.P. rate applied was excessive and he was asked to produce any evidence of a lower G.P. rate. However, no such evidence has been produced. In any case, the contention of the learned Legal Adviser that the assessee had already been accorded a lenient treatment appears to be forceful. The assessee was duly cautioned regarding the limitation expiring on 30-6-1997. A G. P. Rate of 7% was duly confronted. In the presence of these circumstances, we feel that the technical objection of the assessee against the ex parte proceedings is not sustainable. Hence, the ex parte action is confirmed. The assessee has not taken any ground before us with regard to the P&L A/c expenses. The audited accounts have not been filed so far, although these were required to be filed at the time of hearing of the appeal. Hence, we find no force in this appeal, which is dismissed.

C.M.A./566/Trib.Appeal dismissed.