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

----Second Sched., Cl. (118-D)---Exemption period---Exemption period of 5 years was claimed over and above the trial production period ---Assessee immediately, after production, sold it in the open market---Held, assessee's production was not treated as trial production which was rather commercial production in the circumstances and the period of exemption of five years was allowed by the Tribunal from the immediate date of production.

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

----S.80-D---Turn-over tax---Exemption period ---Assessee an exempt unit-- Charge of turn-over tax under the said section on an exempt unit was deleted by the Appellate Tribunal and the additional tax charged thereon was also cancelled.

PLD 1997 SC 582 and 1997 PTD 1555 ref.,

(c) Income-tax---

----"Trial production"---"Commercial production'---Distinction---Difference between "trial production" and "commercial production" was that the former was not meant for marketing while the latter was---Trial product was only produced to see as to whether the product was marketable or not---When the trial production was considered as fit for sale, it becomes a commercial production.

Sirajuddin Khalid for Appellant

Ch. Safdar Hussain, D.R. for Respondent.

Date of hearing: 18th October, 1997.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).---The appeal has been preferred on behalf of the assessee against order of the C.I.T.(A), dated 2-7-1996. The company wants indulgence of the Income Tax Appellate Tribunal and claims that under clause (118-D) the exemption period of 5 years is over and above the trial production period of the industrial undertaking. The assessee also wants a favour of consideration regarding charging minimum tax under section 80-D.

2. The brief facts of the case are that the appellant a public limited company derives income from manufacturing and sale of cloth. The company is an exempt unit and is covered under clause (118-D) of the Second Schedule of the Income Tax Ordinance, 197.9. The company came into production on 1-7-1993 and produced goods for a total period of 3 months. During the assessment year 1994-95 the assessee contended before the Assessing Officer that this period of 3 months was not of commercial production He distinguished the trial production from commercial production. The trial production he said is the period between the completion of installation and start of commercial production. During this period the product is produced for the purpose of adjustment of the plant and to bring the product up to the required quality. During this period of trial production the process basically is of test run until the plant is ready for the producing commercially salable commodity. The date of commencement of commercial production, thus, is the date when the plant is ready for such production. The cut off date, thus, to be fixed is date when the plant actually commences commercial production.

3. The A.R- of the assessee further argued that it is a universal truth that there is always sometime lag between the installation and the commercial production. This he said is more true in respect of textile industry as plant has to run a test period to get a commercially liable product. The learned A.R. further argued that it is the quality and quantity of goods, which determines the commencement of the commercial production. He said that the impugned company during the first three months could achieve 65 efficiency while the total production in the trial period were worth Rs.5,76,63,084. He added that in the subsequent year which is actually year of commercial production the assessee made a sale of Rs.6,04,13,210 which in itself is pointer of assessee's claim that the period of commercial production actually started from 1-10-1993. He substantiated his claim with annual report for the year 1993 wherein the assessee declared the period impugned to be the trial production period for the assessment year 1994-95, The relevant para. wherefrom is as follows:---

"Director's Report.

In the Name of Allah, the Most

Gracious, the Most Benevolent, the Most Merciful

The Directors have the honour to present the 2nd Annual Report of the Company together with the audited accounts and the auditor's report thereon for the year ended 30th September, 1993.

In Director's Report of the half year ended 31st March, 1993, it was reported that mill buildings were nearing completion. Trial production at the mill was commenced on 1st July, 1993 and after successful trials, full scale commercial production has commenced from 1st October, 1993. "

He further brought our attention to the notes to the accounts for the impugned year wherein as per Note No. 1 following observation has been given in Note No. 1 point 2:---

1-2."No profit and loss account has been prepared as the project went into trial operation on July 1, 1993 and is still in trial production. "

4. The learned D.R. did not agree with the contention of the A.R. of the assessee. He said that the production for all intents and purposes is a production, it includes a trial as well as regular one. The product of initial stages may not fetch full price some times but the same cannot be thrown away even if the same is not up to the desired standard. Moreover, he said that no body produces products in millions just for the trial purposes. He further added that an experiment does not expand over months. 1t may some times, be of a few days and in certain special circumstances it may expand over weeks. Such situation, he said, however, never arose in this case. It started its production on 1-7-1993 and then continued uptill this date. Commenting upon the argument of the A.R. he said that even if by the end of the year the optimum production could not be attained there was a continuity in the production. He added that the assessee during this period never required any adjustment or re-adjustment of the plant. He further added that the assessee's own action of selling out the whole of its item and declaring profit therefrom also makes it clear that the assessee had started its production on regular terms and that he is entitled to exemption from 1-7-1993.

5 The other issue of the assessee is charge of 80-D, and additional tax under section 88 on non-payment of demand under section 80-D.

6. The A.R. claims that 80-D, was got applicable as the company has not carried out any commercial activity. Besides, it being an exempt unit section 80-D is not applicable on it. He relied upon the latest judgment of the Supreme Court of Pakistan in the case of Ellahi Cotton Mills Ltd. and others v. Federation of Pakistan reported as PLD 1997 SC 582 = 1997 PTD 1555 (Supreme Court of Pakistan).

7. We have heard assessee as well as the learned D.R. The word 'commercial' as used in dictionary includes any item or commodity, which can be sold out in the market while the trial speaks of experimental which is a restricted term. The words have not been explained in Income Tax ordinance hence we shall go for the dictionary meaning The words have been explained as follows:---

(The Concise Oxford Dictionary):

'Trial' Experimental treatment, A process or mode of testing qualities, 'Commercial', of, engaged in, or concerned with, commerce, Having profit as a primary aim rather than artistic etc.

(Chambers 20th Century Dictionary):,

'Trial': ---A trying, Examination by a test, Examination, sometimes merely formal,

'Commercial':---Pertains to commerce, Mercantile, Having profit as the main aim (sometimes implying disregard of quality).

The 'Commerce' means, a financial transaction specially buying and selling of merchandise, on a large scale. The trial, therefore, would restrict to experimental production to test the quality of that production while commercial production means a product produced with the intention of sale and to earn profit therein.

8. Reverting back to the facts the A.R. of the assessee mainly relies upon the Director's Report given in the first annual report of the Company. He, however, would not satisfy us as to how the whole of this period can be termed as an experimental period. The basic difference between the trial product and a commercial product is that the earlier is not meant for marketing. The same is only produced to see as to whether the product is marketable or not. The day the same is considered as fit for sale it becomes a commercial product. In the impugned case the production have not only been sold in the local market but the major portion has been exported. During the production period the appellant might have improved the quality of product by keeping a check on the earlier, but the same, however, cannot be said to be a "Trial Product". It is true that an industry can only run after its test run finishes successfully, but, however, even if the product produced during the test run is sold in the open market, in our humble opinion, comes within the definition of commercial production. The assessee immediately after its production from 1-7-1993 to onwards have sold its product hence, we are unable to agree with learned A.R. that the product during this period was a trial production. We, therefore, have no hesitation in holding that the period of exemption of five years shall start from 1-7-1993, and shall remain available to the assessee for the five years thereafter, i.e., up to 30-6-1998. The assessees' appeal, therefore, fails on this point.

9. The other ground is regarding charge of turn over tax under section 80-D. Since the assessee is an exempt unit and the issue on this subject has already been decided in the case of Ellahi Cotton Mills Ltd. by the Honourable Supreme Court of Pakistan, we have no hesitation in holding that no turn over tax can be charged on the impugned assessee. The provisions of section 80-D were enacted by Finance Act, 1993 while the exemption allowed to the assessee is through section 6 of Act XII of 1992. The same being a subsequent provision, the honourable Supreme Court has directed for cancellation of the charge of tax under section 80-D on such cases. The same, therefore, is deleted. As a consequence the additional tax charged thereon shall also be cancelled.

10. The assessees' appeal, therefore, succeeds on this issue and stands accordingly disposed of in the manner and to the extent as mentioned above.

A.A./563/Trib. Appeal accepted.