I.T.As. Nos. 3498/LB to 3501/LB of 2001, decided on 11th December, 2001. VS I.T.As. Nos. 3498/LB to 3501/LB of 2001, decided on 11th December, 2001., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2185 (2001)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.66‑A & Second Sched. Part I, Cls. (118C) & (118H)‑‑‑C.B.R. Letter C. No. 1(84) DTP‑II/94, dated 22‑8‑1998‑‑‑Companies Ordinance (LVIII of 1984), S.33‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Exemption‑‑‑Assessment allowing exemption to assessee was cancelled by the Inspecting Additional Commissioner being erroneous and prejudice to the interest of revenue on the ground that entire share capital of the company/assessee was owned and controlled by a company, which had resulted in a subsidiary status of the company/ assessee‑‑‑Industrial undertaking was not exclusively handled by the assessee as a number of services were undertaken by the holding company on a cost sharing arrangement for which the assessee‑company made payment to the holding company‑‑ Validity‑‑‑No provision of law provided that companies formed to undertake manufacturing process should not be formed by a holding company or its subscribers/directors should not have similar positions in any other company working in Pakistan‑‑‑Formation of new company with machinery, having not been used in Pakistan‑‑‑Company could be owned by another limited company ‑or could employ staff of a sister concern‑‑‑Utilization of electricity in co-action with another company or owner of other companies, which were not exempt was not barred‑‑ Requirements, of Cl.(118C) of Second Sched., Part I basically were that the company should be formed exclusively for one purpose and the machinery installed should not have been earlier used for such purpose or any other purpose in Pakistan‑‑‑If the view of Inspecting Additional Commissioner was accepted then all such companies which were formed under Economic Reforms Act could be excluded if among its subscribers and directors those persons were included who were also attached to other companies‑‑‑Entire proceedings by the Inspecting Additional Commissioner were based upon misconception‑‑‑Basic requirement for such exemption was that the industrial undertaking that claimed exemption must be owned and managed by a company, registered under the Companies Ordinance, 1984‑‑‑Was immaterial as to who had floated such company and who was running its affairs‑‑‑Law had not put any embargo in any form whatsoever as to who shall or should not be behind the running of the affairs of the industrial undertaking‑‑‑Concept of lifting the veil, was an irrelevant argument if it was a sister concern of an already existing company and the affairs of said company were being managed by those people who had been running certain other industrial undertakings in the near vicinity‑‑‑Once a company was allowed an incorporation certificate by the Registrar Corporate Law Authority no third person could challenge its validity on his own‑‑‑Industrial undertaking in the present case, being managed by the validly incorporated company could not be deprived of the rights to which it was entitled under Cl. (118C) or (118D) of the Second Sched., Part‑I of the Income Tax Ordinance, 1979 on the ground that same was actually being controlled by some other company‑‑‑If a company could legally float another company as one of its subscribers, no one could deny the benefits which may accrue, to the new incorporated company‑‑‑Exempt units were subsequently permitted to expand themselves and exemption was extended to the expanded units under Cl. (118H) of the Second Sched. of Income Tax Ordinance, 1979‑‑‑Companies who claimed exemption must demonstrate that their claim was within all the fours of the requirements thereof, but when an Assessing Officer on .the same fact had formed a bona fide opinion revising authority could not simply jump in by calling same an error'‑‑‑Substitution of opinion could not be made a basis for cancellation of an earlier order‑‑‑No reason existed to say the order of the Assessing Officer was "erroneous" as there was nothing wrong with his order‑‑‑Assessing Officer had allowed exemption after careful consideration of all the facts on record‑‑‑ Inspecting Additional Commissioner had exceeded his jurisdiction and order as such was not sustainable and the same was cancelled by the Tribunal.

1997 PTD (Trib.) 2137; United Builders Corporation and CIT v. Gabriel India Ltd. 203 ITR 108; 2001. PTD (Trib.) 3810; PLD 1991 SC 280 and 2000 PTD (Trib.) 2133 ref.

1997 PTD (Trib.) 2137 and 1984 PTD 137 rel.

Faleh Ali Villani for Appellant.

Javed‑ur‑Rehman, D. R. for Respondent.

Date of hearing; 27th October, 2001.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑All four appeals are against the order of the IAC decided by him under section 66‑A. The learned IAC has cancelled the order by considering it as erroneous as well as prejudicial to the interest of revenue.

The brief facts of the case are that the company was incorporated to claim tax holiday being in an exemption area under clause (118C). It was set up in Bahawalpur Division for manufacturing of Sulphonic Acid exclusively. The company is being managed by a Board of Directors and its commercial production started on first April, 1993. The learned Assessing Officer found that the same fulfilled the legal requirement and thereby allowed exemption. At a later stage the IAC on inspection of record found that it was an erroneous order, which has caused prejudice to the interest of revenue. He, therefore, cancelled the same and directed the ITO to make assessment afresh. The facts in his opinion, which have made the order as erroneous are that entire share capital of the company is owned and controlled by LBPL as holding company, which has resulted in a subsidiary status of this company. Moreover, the industrial undertaking was not Exclusively handled by the assessee as a number of services are undertaken by LBPL on a cost sharing arrangement for which the assessee company makes payment to LBPL of his part.

In addition to above the learned IAC found that the Industrial undertaking was within the premises of LBPL. Above all the management and the staff of the other company were also being shared by this company. The learned IAC, therefore, held that this company was sham and the transaction was just on papers. He, further observed that if veil of incorporation is lifted, the owners behind would be the same as in the case of LBPL. He, therefore, cancelled the order and directed the Assessing Officer to re‑assess.

The A.R. of the assessee before us argued that the observation of the IAC are based upon conjectures and surmises and there is no objective reason for holding the Company to be as a paper company and that the assessee is a sham institution. The evidence produced shows that this was a separate legal person, which had constructed an independent unit on the leasehold premises. He remarked that the. company was formed for the purpose of manufacturing Sulphonic Acid exclusively for which new machinery as required by the said scheme was imported and installed at an independent plot though near and within the vicinity of its old project without any interference. He remarked that the requirements of clause (118C) were fulfilled in letter and spirit and none of the objections of the IAC hit the requirements provided for exemption by clause (118C) as the then it was. This provision, he remarked has come as a part of Economic Reforms Act, which liberally allowed exemption for a fixed period and its requirements were that the company should be exclusively for the purpose of manufacturing of a specific item and that it should be owned and managed by a limited Company. The only exception to this Rule was that the machinery should not be an old one or the unit should not be as a result of splitting up of some old unit. The learned A.R. argued that section 66‑A could be invoked where the order of the DCIT is erroneous and prejudicial to the interest of revenue but his view should not merely be a substitute of the view of the DCIT. In this case he has neither demonstrated any `error', in the order nor has pointed out any prejudice to the interest of revenue. He, therefore, in his opinion, was not justified in invoking jurisdiction under section 66‑A. His reliance was on 1997 VTD (Trib.) 2137 in the case of United Builders Corporation and CIT v. Gabriel India Ltd. 203 ITR 108. He further said that initiation of fiction 66‑A is on the basis of the report of inspection and audit which by no means can be considered as inspection of the record by the IAC itself and application of his mind which again is against the spirit of section 66‑A, reliance is on 2001 PTD (Trib.) 3810. The fact that LCL is a subsidiary of LBPL is not a hidden secret and, it was always in the knowledge of the department and even the C.B.R., learned A.R. remarked.

The department's case as argued by learned D.R. is the same as mentioned by us above. He has repeated all the objections mentioned in the order of the IAC end commented that the requirements of clause (118C) were not properly met hence Assessing Officer was not justified in granting exemption which made the order to be erroneous and prejudicial to the interest of revenue. He, therefore, remarked that the order has rightly been cancelled and urged for maintenance of the same.

Before we give our finding it will be more appropriate to go through the actual provision applicable on this case before its omission. The same speaks as follows:‑

"(118C) (1) Profit and gain derived by an assessee from an industrial undertake set up between the first day of December, 1990, and the thirtieth day of June, 1995 both days inclusive, for a period of eight 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 this clause shall apply to an industrial undertaking which fulfils the following conditions, namely:‑‑

(a) That it is set up in the Province of Baluchistan (excluding HUB Chowki area), the North‑West Frontier Province, the Federally Administered Tribal Area, the Northern Areas, Azad Kashmir, the divisions of Dira Ghazi Khan and Bahawalpur in the Province of the Punjab or the division of Sukkar and Larkana in the Province of Sindh:

Provided that the exemption under this clause shall be admissible to the industries of processing of fish, minerals, fruits, vegetable, flowers and mineral water based on the natural resources of the Province of Balochistan including those situated in the Hub Chowki Area; and

(b) 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;

(c) 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

(d) that it is 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. "

Before we dilate upon above clause it will be appropriate to mention the rule of interpretation applicable on such provisions. So far as the golden principle of interpretation is concerned that the "law should be applied as it is and nothing should be imported beyond its intendments hardly needs any support as the same has now attained judicial almost authority, however, PLD 1991 SC 280 is hereby referred. Among other principles the one applicable to the exemption clauses is that it should be decided in favour of the State and not in favour of the subject 2000 PTD (Trib.) 2133. This is obviously unlike the other famous principle of interpretation; which deals with the charging provisions and says that where two interpretations of a provision are possible the one in favour of the assessee should be adopted. Civil Petitions Nos. 984‑L of 2001 to 988‑L of 2001 refers.

All the above principles are settled one and needs further no reference as the cases in their support are in abundance. So, applying the first principle i.e. literal interpretation, if we go through the above provisions the requirements are:‑‑

(1) An Industrial undertaking.

(2) Set up between the 1st of December, 1990 and 30th day of June, 1995.

Since there is no dispute on these requirements we shall ignore the same.

Then comes the para. relevant to the case para. 2(c) envisages:

It should not be formed‑‑‑

(a) by splitting up or the reconstruction or reconstitution of business already in existence;

(b) or by transfer to a new business a machinery or plant used earlier in Pakistan.

Applying these provisions if we see the facts of the present case the same are as follows:‑‑

(1) It is new company a legal person formed exclusively for one product.

(2) This product was not being manufactured by even the LBPL.

(3) The machinery was imported afresh by newly incorporated company and it was never in use in Pakistan earlier.

(4) It was (as argued) neither as a result of splitting up of an old business nor reconstruction or reconstitution of an earlier business.

The fact that among others the subscribers include LBPL' or such others who have held similar positions in other companies is no embargo. None of the provisions give any such impression that such new companies formed to undertake some kind of manufacturing process should not be formed by a holding or its subscribers/directors should not have similar positions in any other company that earlier works in Pakistan. It basically invites formation of new projects by a new company with such machinery, which has not been used in Pakistan. Further, it is nowhere said that the limited company cannot be owned by another limited company or that it cannot employ staff of a sister concern. Utilization of electricity in conjunction with another company or the owner being owners of certain other companies, which are not exempt, is also no bar. The requirements of clause (118C) basically are that the company should be formed exclusively for the purpose and the machinery installed should not have been earlier used for such purpose or any other purpose in Pakistan. If the contention of IAC is accepted then all such companies which were formed under Economic Reforms Act can be excluded if among its subscribers and directors those persons are included who are also attached to other companies.

In fact the entire proceedings by the learned IAC are based upon some misconception. On the basic requirement for such exemption is that the industrial undertaking that claims exemption must be owned and managed by a company, registered under the Companies Ordinance, 1984. It, therefore, becomes immaterial as to who has floated such company and who is running its affairs. The law has not put any embargo in any form whatsoever as to who shall or should not be behind the running of the affairs of the industrial undertaking. The concept of lifting the veil, therefore, is an irrelevant argument as no one denies that it is a sister concern of an already existing company and that the affairs of this company are being managed by those people who have been running certain other industrial undertakings in the near vicinity Suffice, therefore, will be to say that once a company is allowed an incorporation certificate by the Registrar Corporate Law Authority, no third person can challenge its validity at his awn. The industrial undertaking under discussion being managed by a validly incorporate company cannot be deprived of the rights to which it is entitled under clause (118C) or (118D) as the case may .be under the argument that it is actually being controlled by some other company. If a company can legally float another company as o tie of its subscribers, no one can deny the benefits, which may accrue, to the new incorporated company. It was perhaps for this reason that this exemption was denied to individuals. Another argument that supports our point of view is that such exempt units were subsequently permitted to expand themselves and exemption was extended to the expansion units under clause (118H) before omission. Further, C.B.R. Circular Letter C.No.1(84) DTP 11/94, dated August 22, 1998 is also referred in its support.

It is true that those who claim exemption must demonstrate that their claim is within all the fours of the requirement thereof, but when an earlier officer on the same facts have formed a bona fide opinion no revising authority can simply jump in by calling it an `error'. Substitution of opinion cannot be made a base for cancellation of an earlier order. In this case one officer on the same facts have considered assessee entitled to exemption and the other has opined that it was not. Such action does not find support the already finalized case on the subject. One may refer 1997 PTD (Trib.) 2137 the relevant para. wherefrom speaks as follows:‑‑

"It appears that the line of arguments which has been adopted on behalf of the assessee is not devoid of force because the order passed under section 66‑A is based on mere presumptions, surmises and conjectures. All the material and facts were duly considered by the Assessing Officer at the time, of original assessment as such we do not find justification to maintain the order passed under section 66‑A. Learned D.R. too has not been able to support the order passed under section 66‑A in any manner whatsoever."

Further, the landmark judgment on the subject reported as, 1984 PTD 137 has observed as follows:‑‑

"The power conferred under section 34‑A, indicated that such powers were exercisable only on the proof and satisfaction that the order of the Income‑tax Officer was unlawful, as such erroneous, so as to be prejudicial to the interest of the revenue. Unless such a condition was not fulfilled, power under the section could not be invoked. In the present case, the close study of the notice under section 34‑A reflects that the Inspecting Assistant Commissioner was not in possession of sound facts leading to the inference that the assessment made by the Income‑tax Officer was in any manner erroneous."

"It is well accepted that provisions of section 34‑A were not available on the ground of mere disagreement in assessment. Such powers' can be invoked only when an order of Income‑tax Officer is found deviating from law. Thus, only that Inspecting Assistant Commissioner was not in agreement with the result of assessment made by the Income‑tax Officer, .was not a genuine reason for resort to section 34‑A. The other aspect of the case is the power conferred on Inspecting Assistant Commissioner under section 34‑A, is just in the nature of supervisory power. In exercise of supervisory authority, Inspecting Assistant was, net expected to indulge in deep inquiry by assuming the role of Income‑tax Officer. The distinction between their position was obvious. It was in view of their respective positions that assessment made by an Income‑tax Officer who was conversant with local conditions and working of neighbouring works and contracts, was given more weight. In the present case, the Inspecting Assistant Commissioner acted in derogation to the aforesaid principle."

There is, therefore, no reason to say that order of the Assessing Officer is `erroneous as there was nothing wrong with his order. He had allowed exemption after careful consideration of all the facts on record. The revising authority has exceeded his jurisdiction. The order as such is not sustainable and the same, therefore, is cancelled.

C.M.A./M.A.K./342/Tax(Trib.) Appeal accepted.