Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched., cl.(118‑C(1))‑‑‑C.B.R. Circular No.5 of 1991, dated, 103‑1991‑‑‑ Exemption‑‑‑Date of setting up or commencement of industrial undertaking, date of commencement of semi‑finished product and date of commencement of fully manufactured product‑‑‑Distinction drawn between semi‑finished and fully manufactured product would not in any way prove that the industrial undertaking had not gone into production.

1979 PTD 612 and 1998 PTD (Trib.) 3742 rel.

Wasim Siddiqui, C.A. for Appellant.

M. Asif, D.R. for Respondent.

Date of hearing: 25th August, 2001.

ORDER

At the time of hearing of appeal filed on behalf of the appellant the learned A.R. of the asses see/appellant stated at the outset that he would not press Ground No.2 pertaining to the assumption of jurisdiction by the Assessing Officer. The instant appeal is accordingly disposed of on the issue of date of comment of the exemption period on the basis of requirements of clause 118C(1) of the Second Schedule to the Income Tax Ordinance, 1979.

2. The action of the Assessing Officer under section 156 determining the date of start of commercial production from July, 1991 has been challenged to be without meeting the requirements of law inasmuch as the date of setting up of undertaking, the date of the commencement of commercial production and which of the two above is latter have not been determined in facts of the case. The order of the CIT(A), dated 25‑10‑2000 in confirming the order under section 156 has been assailed to be without meeting the requirements of law mentioned above..

3. The relevant facts briefly, are that first return of income for the assessment year 1991‑92 was filed on 1‑1‑1992 declaring income with remarks "exempt under clause 118C(1) of Second Schedule Part I". Nil income declared was accepted vide order under section 62, dated 14‑3‑1992 with remarks that "factory was still at the installation stage". However, there was no discussion about the claim of exemption etc,' Return for the assessment year 1992‑93 was filed on 31‑12‑1992 declaring income of Rs.158,603 claimed exempt under clause 118C of the Second Schedule. Vide order under section 62, dated 12‑1‑1994 claim of exemption was accepted subject to tax under section 80‑D. For the subsequent years of 1993‑94 to 1996‑97 returns were filed and assessments finalized under section 62 allowing the exemption under clause 1,180. The peculiar aspect of all the assessments up to year 1996‑‑97 is that setting up of industrial undertaking or for that matter the date of commencement of commercial production was not mentioned/ discussed. It was during the assessment years 1997‑98 and 1998‑99 when date of commencement of commercial production was mentioned as 1‑1‑1992. So far so.

4. The appellant moved an application for issuance of exemption certificate under section 50(4) of the Income Tax Ordinance vide letter, dated July 21; 1999 wherein it had been stated that "exemption period of 8 years expired on 30‑6‑1999". Facts of the outstanding payments against supplies made before 30‑6‑1999 were also mentioned. The Assessing Officer in view of expiry of the period of 8 ‑years on 30‑6‑1999 arrived at the conclusion that commercial production commenced from July, 1991 and not from 1‑1‑1992 as stated in the assessment order for the assessment year 1998‑99. On the basis of above stated facts a notice vide No.683, dated 26‑1‑2000 was issued indicating the intention to rectify the original order in order to rectify the date of commencement of, commercial production to July, 1991 instead of 1‑1‑1992. The facts as declared for the assessment year 1992‑93 were also pointed out in support of the proposed rectification. The assessee in response demanded the details/facts of the records on the basis of which mistake has been found apparent from the record which warranted rectification. The. Assessing Officer was satisfied on the basis of facts stated by the appellant for exemption certificate as well as the date of commercial production earlier on assumed to be 1‑1‑1992. Rectification was carried out.

5. In first appeal it was argued on behalf of the appellant that the set‑up started manufacturing its product "Auto Wire Harness" as is evident from Invoice No.58, dated 10‑4‑1993. All the sales as per invoices before were of the semi‑finished products. It was further stated that raw material for production of Auto Wire Harness was imported vide Bill of Entry, dated 23‑6‑1993. On the basis of this evidence it was asserted before the CIT(A) that industrial undertaking was set up in the year 1993. The CIT(A) also obtained the comments of the Special Officer, Circle 20, Bahawalpur on the written submissions made on behalf of the appellant. It was pointed out by him that appellant had declared income of Rs.158,603 and sales of Rs.1,99,12,000 for the assessment year 1992‑93. Appellant had also paid salaries/wages, electricity bills as well as purchases from Messrs. New Crown Plastic Industry (Pvt.) Limited and Messrs General Engineering, Karachi. The payment of sales tax was also pointed out. Finally the admission by the appellant on its own that their exemption period expired on 30‑6‑1999 clearly established that commercial production had started from July, 1991. The CIT(A) appreciating the facts of the declared income for the assessment year 1992‑93, sales and clarification particularly the clarification issued by C.B.R. vide Circular No.5 of 1991, dated 10‑3‑1991:‑‑‑

"That the date of setting up of any industrial undertaking refers to the date on which the industrial undertaking is ready to go into production. Whether trial production or regular commercial production."

Formed the opinion that the industrial undertaking was ready to go into commercial. production from the month of July, 1991. The CIT(A) further supported his above conclusion on the basis of Note No.1 to the accounts for the year ended 30‑6‑1992 whereby it had been mentioned that company "has established a project in Small Industrial Estate, Bahawalpur. Finally relying upon the contents of the application for exemption under section 50(4) as highlighted by the Assessing Officer the CIT(A) held that industrial undertaking commenced its commercial production from month of July, 1991 and not from 1‑1‑1992. The rectification order was upheld and appeal of the appellant dismissed.

6. Mr. Wasim Siddiqui, learned A.R. of the appellant has argued before us that commercial production actually started in year 1993 as the fully manufactured product was first time sold vide Invoice No.58, dated 10‑4‑1993. Prior to that only semi‑finished Auto Wire Harness were produced while instalation process of the industrial undertaking. was going on. On specific query the A.R. demonstrated that semi‑finished Auto Wire Harness was far different from the fully manufactured Auto Wire Harness in view of the technology and process involved. The production of semi‑finished goods and sales‑are admitted facts.

7. As far as the application for exemption certificate is concerned the A.R. has stated that these have been issued earlier on. Copies of certificates have been filed. It has been observed that the certificate valid for the period 14‑10‑1993 to 30‑6‑1996 although signed by the CIT(A) is without number and date of issuance. The other certificate, dated 13‑7‑1996 was valid for the period 1‑7‑1996 to 30‑6‑1997. The other two certificates are, dated 27‑6‑1997 and 8‑7‑1998. The abovementioned certificates show that product mentioned is "Auto Wire Harness", on supplies of which exemption certificate under the provisions of subsection (4) of section 50 of the Income Tax Ordinance had been requested and issued.

8. The D.R. has re‑emphasized the findings of the CIT(A) as recorded in detail on pages 4 and 5 of the appellate order. The D.R. has pleaded that the case of commercial production as of July, 1991 has been clearly made out which was not only apparent from record but so admitted by the assessee. The Assessing Officer, thus. lawfully assumed jurisdiction for rectification.

9. We have considered the facts of the original assessment for the year 1992‑93, the claim of exemption under clause 118(c),, date of commencement of commercial production assumed to be of 1 _1‑1992 during the assessment proceedings for the years 1997‑98 and 1998‑99, the admission of expiry of exemption of 8 years as on 30‑6‑1999, arguments of the learned A.R. and contentions of the learned D.R. The main thrust of the arguments of the learned A.R. is' that Auto Wire Harness sold by them before the sale vide Invoice No. 58, dated. 10‑4‑1993 was of semi‑finished product. Since the complete product could not be manufactured before the establishment of industrial undertaking, the production and sale of semi‑finished goods, cannot be considered as their commercial production. In support of this contention A.R. has relied upon reported cases with specific reference to judgment of Supreme Court of Pakistan 1979 PTD 612 whereby setting up, date of setting up or commencement of the undertaking have been dealt with.

10. The judgment of Supreme Court of Pakistan heavily relied upon by the learned A.R. has been carefully consulted. The issues before their lordships were the exemption from Income Tax of a technician for period not exceeding three years whether employed before or after commencement of commercial production in the context of service agreement referable to purposes mentioned in clause (xiii) of section 4(3) and meaning of expression of words and phrases "setting up and commencement of undertaking". It is, therefore, considered advantageous to refer to the relevant case‑law discussed and quoted as under:'

The learned counsel also referred to Law Terms and Phrases, by Sardar Muhammad Iqbal Khan Mokal, wherein at page 823, meanings of `set up' given the following effect:‑‑‑

"A unit cannot be said to have been set up unless it is ready to discharge the function for which it is‑ being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organization that it can be said that the unit has been set up. The word `set up' in the principal clause is equivalent to the word `established'. Commissioner of Wealth Tax, Madras v. R.S. Cotton Mills (AIR 1967‑SC 509)."

The learned Judges of the Bombay High Court in the case of Western India Vegetable Products Ltd. Held as under:‑‑‑

It seems to us that the expression `setting up' means as defined in the Oxford English Dictionary `to place on foot' or `to establish' and in contradistinction to `commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is `set up'. ,

The expression `when the trade has been set up within the period of years was considered by the House of Lords in Ormond Investment Co. Ltd. v. Betts (2), though not in the specific way we are required to. It appears from that judgment that the phrase refers to a State when the, trading is started by an undertaking.

After taking due cognizance of various cases on the subject including cases of Indian Courts referred to in ‑the judgment, as well as meaning of setting up as per Oxford Dictionary their lordships were pleased to hold that:‑‑‑

"of the other Courts referred to above appears to be the same. It is that the `setting up and commencement of the undertaking' means that state of the particular project of an assessee which brings it to a, state of production of the goods for which it had been contemplated. The five years period, therefore, starts from the date when the erection of building and instalation of the plant and machinery is complete so as to permit commencement of production of the required goods."

Having considered various facts and factors mentioned above we are of the view that the distinction drawn by the learned A.R. between semi-?finished and fully manufactured product does not in any way prove that the industrial undertaking had not gone into production. If, however, for argument sake, it be considered that final product due to its technological imperative was not produced till April, 1993 yet the industrial undertaking had started commercial production to the stage as admitted of the semi‑finished product. The industrial undertaking, therefore, qualifies to be considered as set up in the light of the judgment of the Honourable Supreme Court referred to and its extract quoted supra. We have also kept in view a judgment reported 1998 PTD (Trib) 3742 whereby the issues of distinction between trial production‑commercial production have been dealt with in detail laying down very clearly that as soon as product of an industrial undertaking is fit for sales and is marketed (the requirements of commercial production) stand fulfilled. We have also found the clarification issued by C.B.R vide Circular No.5 of 1991 regarding set up of an industrial undertaking irrespective of trial or regular production relevant in the facts and circumstances of the case duly appreciated by the CIT(A).

10. In view of our observations above and after having benefited from the judgments referred to above, we do not find any compelling factor or evidence or arguments of the learned A.R, to the effect that commercial production commenced in April, 1993 and not July, 1991. We, therefore, uphold the date of commencement of commercial production from July, 1991. The period of the exemption available of the assessee for the period specified under clause 118C shall commence and expire accordingly. The appeal being devoid of merit is dismissed.

M.B.A./ 181/Tax(Trib). ?????????????????????????????????????????????????????????? ??????????? Appeal dismissed.