COMMISSIONER OF INCOME-TAX VS VALIKA ART FABRICS LTD.
2001 P T D 672
[Karachi High Court]
Before Saiyed Saeed Ashhad and Raja Qureshi, JJ
COMMISSIONER OF INCOME‑TAX
versus
VALIKA ART FABRICS LTD
I.T.Cs. Nos. 27 and 30 of 1993, decided on 23/07/1998.
(a) Income Tax Ordinance (XXXI of 1979)‑‑‑
---S. 19‑‑‑Rental income---Premises/properties used for manufacturing process or business‑‑‑Income derived by renting out such premises/properties‑‑‑Such income to be treated as rental income‑‑‑Failure to produce any material evidence to show that the closure or stoppage of the business or manufacturing process was merely temporary and not permanent and the properties were rented out on temporary basis‑‑‑Effect‑‑‑Income derived by renting out the premises/properties which were being used for manufacturing process or business could not be construed to be income from business and the same was to be treated as rental income liable to assessment under the head "rental income".
C.I.T. (Appeals) v. Muhammad Allah Bux 1977 PTD 13; CIT v. Narayandas Kishindutt (1988) 149 ITR 636; CIT. v. Rampur Industries Ltd. (1971) 82 ITR 23 and CIT v. Hindustan Chemical Works (1980) 124 ITR 561 ref.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss.19 & 22‑‑‑Rental income‑‑‑Premises/properties used for manufacturing process or business‑‑‑Income derived by renting out such premises/properties‑‑‑Failure. to establish that the premises were temporarily rented out till the time the manufacturing process or business was restarted after installing new machinery‑‑‑Income‑tax Authorities assessed the income under S.19 of Income Tax Ordinance, 1979, as income from rental‑‑ Commissioner Income‑tax as well as the Income‑tax Appellate Tribunal found the income as one from business and to be assessed under S.22 of Income Tax Ordinance, 1979‑‑‑Validitl‑‑‑Asscssce had been absolutely quiet and had not been able to establish that they, at any time during the period that had lapsed since closure of the manufacturing business, reflected or showed any real and positive interest, desire or intention to restart the business of manufacturing‑‑‑Both the Income‑tax Commissioner and the Income‑tax Appellate Tribunal had fallen in error in holding that the income of the assessee was derived from leasing out the godowns and part of factory premises was incidental to or connected with the process of manufacturing business and was to be construed as income liable to be assessed under S.22 of Income Tax Ordinance, 1979‑‑‑Findings of the Tribunal that the rental income of the assessee was, to be assessed under S.22 of Income Tax Ordinance, 1979, could not be upheld‑‑‑Order of the Tribunal was set aside by High Court in circumstances.
C.I.T (Appeals) v Muhammad Allah Bux 1977 PTD 13 distinguished.
CIT v. Narayandas Kishindutt, (1988) 149 ITR 636; CIT. v. Rampur Industries Ltd. (1971) 82 ITR 23 and CIT v. Hindustan Chemical Works (1980) 124 ITR 561 ref.
Nasarullah Awan for Applicant.
Khalifa Salahuddin for Respondent.
Date of hearing: 9th July, 1998.
JUDGMENT
SAIYED SAEED ASHHAD, J.‑‑‑‑The aforesaid two applications under section 136(2) of the Income Tax Ordinance have been filed by the Income Tax Department/applicant pertaining to assessment years 1987‑88 and 1988‑89, whereby the following question of law was referred to this Court for its opinion/answer:‑‑‑
"Whether on the facts and in the circumstances of the case, the learned Income‑tax Appellate Tribunal was justified in directing to assess the rental income under section 22 and to allow expenses as admissible under section 23 of the Income Tax Ordinance, 1979."
The facts in brief, leading to the filing of the above applications are that the respondent/assessee, which was a public limited company, engaged in the business of manufacturing artificial leather cloth since 1954, filed its return of income for the aforesaid two assessment years claiming the Same to be the income from rental and interest, as according to the respondent/assessee the business of manufacturing of artificial leather cloth was stopped during the assessment year 1987‑88 on account of unit having become unfeasible, old and obsolete as well as due to the development of new technology and sophisticated machinery. It is further the case of the respondent/assessee that they started dismantling the old and obsolete machinery with a view to adopt new technology and instal sophisticated machinery, for which necessary application was made to the Government. The respondent/assessee further stated that they had also applied for financial assistance and till such time as the financial assistance was made available to the respondent/assessee and new and sophisticated machinery had been imported and installed in place of the old and obsolete machinery, the respondent/assessee rented out the godown and part of the premises of the factory, which they claimed to be business income. However; the Income‑tax Officer did not accept the version of the respondent/assessee and treated the aforesaid income as rentals income and finalized the assessment for both the aforesaid assessment years under section 19 of the Income Tax Ordinance. The respondent/assessee feeling aggrieved and dissatisfied with the aforesaid orders filed appeals before the Commissioner of Income‑tax (Appeals) who set aside the assessment under section 19 of the Income Tax Ordinance and remanded the cases to the Income‑tax Officer with the direction to assess the respondent/assessee under section 22 of the Income Tax Ordinance as income from business. The orders of the Commissioner of Income Tax (Appeals) were not accepted by the Department/applicant and it challenged the same by way of two second appeals before the Income‑tax Appellate Tribunal. The Appellate Tribunal by its order, dated 13‑10‑1991 upheld the orders of the Commissioner of Income‑tax (Appeals) confirming the finding that the rents received by the respondent/assessee from the godown and part of the premises of the factory be assessed as business income under section 22 of the Income Tax Ordinance, placing reliance on an earlier decision of the Tribunal to the above effect, dated 23‑4‑1991. The department again feeling aggrieved and dissatisfied with the findings of the Appellate Tribunal moved an application under section 136(1) of the Income Tax Ordinance before the Appellate Tribunal, framing the afore‑referred question of law and praying that the same be referred to the High Court for its opinion. The Appellate Tribunal by its order, dated 28‑9‑1991, relying on the case of CIT (Appeals) v. Muhammad Allah Bux 1977 PTD 13 of the Lahore High Court, dismissed the said application and re‑iterated that the income earned by the respondent/assesee by way of rent for the aforesaid two assessment years could not be considered to be rental income and was income from the business liable to be assessed under section 22 of the Income Tax Ordinance. The Department/applicant, thereafter, approached this Court directly under section 136(2) of the Income Tax Ordinance for the opinion of this Court on the afore‑referred question of law.
We have heard the arguments of Mr. Nasarullah Awan, learned counsel for the Department/applicant and Mr. Khalifa Salahuddin learned counsel for the respondent/assessee and we have also perused the relevant provisions of the Income Tax Ordinance as well as the case law relied upon by the learned counsel for the parties in support of their respective contentions.
Mr. Nasarullah Awan, learned Advocate for the department/applicant vehemently attacked the findings of the Appellate Tribunal in the second appeals, filed by the department as well as the orders of the Appellate Tribunal refusing to refer the proposed question of law for opinion of this Court and submitted that the Tribunal had erred in not appreciating the facts of the aforesaid two cases and had wrongly placed reliance on the case of CIT (Appeals). v. Muhammad Allah Bux 1977 PTD 13. He further submitted that both the Commissioner of Income‑tax (Appeals) as well as the Appellate Tribunal had completely overlooked the facts and circumstances of this case in concluding that the closure of the manufacturing process by the applicant was temporary with a view to replace the existing old, obsolete and irreparable machinery with modern and sophisticated machinery as the respondent/assessee did not produce any material to substantiate its above contention. He placed reliance on the cases of (i) CIT v. Narayandas Kishindutt (1988) 149 ITR 636; (ii) CIT. v. Rampur Industries Ltd. (1971) 82 ITR 23; and (iii) CIT v. Hindustan Chemical Works (1980) 124 ITR 561. The facts and circumstances wherein were according to him analogous and similar to the facts and circumstances of this case.
In all the afore‑cited three cases the principle laid down for determining the income obtained by renting out the premises/property wherein some business of manufacturing was being carried out but was brought to an end, was as to whether the stop‑page or closure of the business of manufacturing process was a temporary or passing phase or was a complete closure. In the afore‑cited cases it was held that when the assessee failed to produce any material evidence to show that the closure or stop‑page of the business or manufacturing process was merely temporary and not permanent, the income derived by renting out the premises/properties which were being used for manufacturing process or business could not be construed to be income from business and was to be treated as rental income liable to assessment under the head "rental income".
Mr. Khalifa Salahuddin during the course of his arguments duly supported the orders of the Commissioner of Income Tax (Appeals) and the two orders of the Income‑tax Appellate Tribunal, holding the income in dispute as business income and submitted that the same stands duly supported by the case of CIT v. Muhammad Allah Bux 1977 PTD 13, which is to be given preference being a case of Pakistani Jurisdiction over and above the cases of Indian jurisdiction relied upon by Mr Nasarullah Awan.
We have given our due consideration, to the arguments advanced by the learned counsel for the parties and have minutely examined the provisions of sections 19 and 22 of the Income Tax Ordinance as well as the case law relied upon by the learned counsel for the parties. At the very out set it may be pointed out that the facts of the case of CIT (Appeals). v. Muhammad Allah Bux, (supra), decided by the Lahore High Court, were different from the facts in these two applications, inasmuch as, the material evidence adduced by the assessee in the afore‑cited case was such that the Court was satisfied that the stoppage or closure of the manufacturing business by the assessee was not of permanent nature but was merely temporary and the assessee had all the intention of re‑stating the process of manufacturing business in future. In the present case no such evidence had been brought on record by the respondent/assessee. The process of manufacturing of artificial leather cloth was stopped some time in 1986‑87 and after a lapse of 12 years. The respondent/assessee has not been able to show as to what serious efforts were made by it to obtain the requisite finance/funds for importing the latest and sophisticated machinery and plant; whether it had undertaken consultations and negotiations with any manufacturer of the machinery and plant, required to be installed for re starting the business of manufacturing artificial leather cloth; whether the manufacturing licence issued in favour of the assessee still continues to be in force or the same has lapsed; and whether the assessee had made repairs/alterations to the factory premises so as to make it ready and suitable for installation of the new and sophisticated machinery and plant. In the absence of evidence to establish the aforesaid requirements, the only assumption which can be had in the circumstances is that the respondents/assessee have dropped the idea of restarting the process of manufacturing artificial leather cloth and. had no intention of importing new and sophisticated machinery/plant for installing the same in the aforesaid factory premises so as to start the manufacturing process. Mr. Khalifa Salehuddin submitted that the delay had been occasioned as the lessee to whom the godowns and part of the factory premises was leased out refused vacate after the expiry of lease and the respondent/assessee had to institute legal proceedings for evicting them. No material was brought on record in support of the legal proceedings having been instituted against the lessee to whom the godown and part of the factory premises was leased out. Even if it be taken for granted, the same did not absolve them from making efforts in other directions, such as, obtaining finance, negotiating with manufactures of the machinery/plant in question for importing the same, obtaining the licence/permit for import of the new machinery/plant and repairing/making alteration and modification in the factory premises for making it suitable and adjustable for installation of new machinery and plant. The respondent/ assessee had been absolutely quiet and had not been able to establish that they at any time during the period that has lapsed since closure of the manufacturing business, reflected or showed any real and positive interest, desire or intention to re‑start the business of manufacturing artificial leather cloth. In the circumstances, we are of the view that both the Income‑tax Commissioner (Appeals) and the Income‑tax Appellate Tribunal had fallen in error in holding that the income of the respondent/assesee relative to the aforesaid two assessment years derived from leasing out the godowns and part of the factory premises was incidental 8 to or connected with the process of manufacturing business and was to be construed as income liable to be assessed under section 22 of the Income Tax Ordinance.
Upon the above discussion, the findings of the Appellate Tribunal in holding that the rental income of the respondent/assessee to be assessed under section 22 of the Income Tax Ordinance cannot be upheld. Accordingly, we allow these applications and set aside the orders of the Appellate Tribunal. The question is decided in the negative and the income derived by the respondent/assessee is to be assessed as rental income.
By a short order, dated 9‑7‑1998 we had announced the judgment, whereby the question referred to this Court was answered in negative. These are the reasons for the same.
Q.M.H./M.A.K./C‑13/KReference answered.