I.T.A. No. 1778/KB of 1999, decided on 15th, May, 2001. VS I.T.A. No. 1778/KB of 1999, decided on 15th, May, 2001., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1081 (2001)

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

‑‑‑‑S. 66‑A & Second Sched. Cl. (118‑E), Part IV, Cl. (9)‑‑‑C. B. R. Circular No.7 of 1992, dated 18‑3‑1992‑‑‑C.B.R. Letter No. (84) Dtp- II/94, dated 9‑7‑1995‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Exemption‑‑‑Single object manufacturing yarn concern‑‑‑Stray transaction‑‑‑Sale of raw cotton/cotton waste‑‑Exemption was disallowed on sale of raw cotton being in violation of single object for which the company was formed‑‑Validity‑‑‑In process of manufacturing of yarn, the assessee will end up with cotton waste as well as inferior quality of cotton‑‑‑Sale of cotton/cotton waste was not more than 7% of the overall sales and it was definitely a stray 'incident‑‑‑Not right for the Inspecting Additional Commissioner to infer that assessee had deviated from stated objective of business ‑‑‑Assessee had exercised an irrevocable option under Cl. (9) of Part IV of the Second Shed. of Income Tax Ordinance, 1979, opting out of the presumptive regime and C.B.R. Circular No.7 of 1992 stated that if assessee engaged in manufacturing happened to sell part of their raw material meant for their own consumption such incidental sale, if not regular or continuous, would still be covered by the option exercised by the assessee i.e. such income would fall under normal law‑‑‑Denial of exemption on account of stray or incidental transaction was not rational and Inspecting Additional Commissioner was not justified in assumption that assessee had taken a separate business activity and violated the single object clause‑‑‑Action under S.66‑A of the Income Tax Ordinance, 1979 cancelling the order of Assessing Officer was clearly without jurisdiction in circumstances‑‑‑Appellate Tribunal cancelled the order of Inspecting Additional Commissioner and restored that of the Assessing Officer.  

1997 PTD (Trib.) 902; (1980) 122 ITR 283; CIT v. Hossen Kasam Dada (1961) 4 Tax 96 (SC); PLD 1977 Lah. 292 and 2000 PTD 280 rel.

(b) Interpretation of statutes‑‑‑

-----Exemption---In matters of exemption and relief the law is to be construed liberally and the relief is not to be denied for technical irritants.

Javed Zakaria for Appellant.

Qamaruddin, D.R. for Respondent.

Date of hearing: 15th May, 2001.

ORDER

SHAHID JAMAL (ACCOUNTANT MEMBER).‑‑‑This appeal is directed against the order passed under section 66‑A of the Income Tax Ordinance, 1979 by IAC Range‑III, Cos. I, Karachi, dated 19‑2‑2000.

2. Briefly stated the facts giving rise to this appeal are as under. Appellant is a private limited company owning an industrial undertaking engaged in manufacturing of yarn and weaving of cloth. The industrial undertaking was set up at site Karachi. Appellant had claimed exemption under clause (118‑E) of the 2nd Schedule to the Income Tax Ordinance during assessment year 1995-96 and the exemption was allowed vide Order No.109/45, dated 29‑5‑1996. Thereafter, exemption continued to be allowed during assessment years 1996‑97 and 1997‑98. During assessment year 1997‑98 DCIT noticed from the audited accounts that appellant‑company had sold raw cotton worth Rs.87,49,770 on which tax was deducted by the payer. This transaction according to him fell under the presumptive regime and he, therefore, treated it as such. He further held that assessee to be assessee‑in‑default under section 52 of the Income Tax Ordinance, for failure to deduct tax on payment of various contractors. Other than this, exemption under clause (118‑E) was allowed as in the past. The IAC Range‑III, on inspection of the record discovered that sale of raw cotton was against the single object of manufacture of yarn/weaving of cloth undertaken by the said industrial undertaking and thus assessee has deviated from the object for which the company was formed and the said industrial under taking was set up, and was no more entitled to exemption, hence after giving proper opportunity, to the assessee and after hearing its defence, she cancelled the order passed under section 62 on 4‑3‑1998, and directed to re‑frame assessment in accordance with the observation made in the order. Appellant‑company feels that the IAC was not justified in passing this order and hence this appeal.

3. We have heard Mr. Javed Zakaria, Advocate, for the appellant and Mr. Qamaruddin, D.R. for the respondent.

4. Mr. Javed Zakaria pleading the case of his client submitted that appellant's industrial undertaking was engaged in manufacturing of yarn and during the process of such manufacturing it was discovered that the quality of cotton was inferior and its consumption would naturally result in inferior quality of yarn, as such, the management of the company decided to sell the yarn. It was a. stray incident forced by circumstances, and not regular line of assessee's business. He further submitted that although such stray transactions were not covered under presumptive regime as per Circular No.7/1992, yet the DCIT assessed it under presumptive regime and assessee did not object to it. However, IAG's action in cancelling the assessment order and directing to disallow exemption granted under clause (118‑E), on the basis of this transaction, was wholly unjustified, as there was neither any error nor any prejudice to Revenue, citing several case laws in support of his contention he submitted that there was neither any inquiry nor any discovery by the IAC, but merely a disagreement. An assessment could not be held to be erroneous and prejudicial to the interest of Revenue merely on disagreement. He relied on reported judgment 1997 PTD (Trib.) 902. Further elucidating principles of interpretation, he submitted that clauses relating to exemption and relief should be liberally constructed. He cited (1980) 122 ITR 283 (Mad.) in support of his arguments:

"It is well‑settled principle of construction that in construing a provision for exemption or relief, it should be liberally construed. The reason behind this rule of interpretation is that the administrative authorities or the Courts should not whittle down the plenitude of the exemption or relief granted by parliament by laying stress on any ambiguity here or there: Ordinarily, any statute would have to be construed on the language it employees. But in the case of a fiscal statute, the rule is that if there are two ways in which a provision could be construed, the construction most beneficial to the subject should be adopted."

He further relied on Pakistan Supreme Court decision in the case of CIT v. Hossen Kasam Dada (1961) 4 Tax 96 (SC) wherein the well known principle of construction of a provision of statue namely "where two equal reasonable constructions are possible be strict and the other beneficial to the assessee, the latter should the preferred, Similar decision by Lahore High Court and Karachi High Court reported as PLD 1977 Lah. 292 and 2000 PTD 280 were cited.

5. Mr. Qamaruddin, the departmental representative, responding to the arguments of Mr. Javed Zakaria submitted that exemption envisaged in clause (118-E) was conditional on single object, the said industrial undertaking was to be owned and managed by .a company formed exclusively to meet single objective. The single objective in the appellant's case was manufacturing of yarn, when assessee indulged in sale of cotton, it naturally violated exclusive object and hence exemption, could not be extended to a company violating the basic condition.

6. We have heard the two representatives appearing before us at length. The fact is that the company was formed to run an industrial undertaking situated at SITE, Karachi to. manufacture yarn and weave cloth. These objects were specified in Articles and Memorandum of Association, examined by the Tax Authorities and upon fulfillment of all conditions prescribed. The examination envisaged under clause (118‑E) was allowed to the appellant‑company during assessment years 190‑96, 1996‑97 and 1997‑98. Once during three years appellants‑company was forced to sell inferior quality yarn and cotton waste because it was neither possible to store it or use it nor to carry forward as dead stock. The entire transaction was incidental to the business appellant was carrying on. It was something outside the line of the business, not covered by objective stated in the Article or Memorandum. It is matter of common sense that in the process of manufacturing of yarn, the assessee will end up with cotton waste as well as inferior quality of Cotton. Besides the sale of cotton/cotton waste was not more than 7% of the overall sales, and it was definitely, a stray incident. Under the circumstances it was not right for the IAC to infer that assessee had deviated from stated objective of business. Copy of audited accounts made available to us, shows that appellant‑company had declared sales amounting to Rs.114,396,705, out of this sale of cotton/cotton waste amounted to Rs.87,49,770 which was treated by the ITO under 80C. Appellant had exercised an irrevocable option under clause (9) of Part IV of the 2nd Schedule, opting out of the, presumptive regime and Circular No.7 of 1992 stated that if assessed engaged in manufacturing happen to sell part of their raw material, meant for their own consumption such incidental sale if not regular or continuous still be covered by the option exercised by the assessee i.e. such income would fail under normal law. Without prejudice to this denial of exemption on account of stray or incidental transaction, was not rational. As to the single and exclusive object referred by the learned D.R. in the course of his arguments, we have come across C.B.R. Letter No.(sic)(84) Dtp‑II/94, dated 9th July, 1995.

"It is, therefore, advised that the assessee who fulfil the spirit of law, may be absolved of the technical lacunae if any in their cases. This can be ensured by certifying that tax holiday is allowed only in those cases, where only one business activity has actually been carried out."

In our considered opinion sale of cotton/cotton waste incidentally is not a separate business activity unless regularly carried on, and restricted to reasonable proportions. It is in fact incidental to carrying on of manufacture of yarn. We are also inclined to agree with Mr: Javed Zakaria that in matters of exemption and relief the law is to be construed liberally and the relief is not to be denied for technical irritants. We art fortified in our view by several decisions cited by Mr. Zakaria. Accordingly, therefore, we hold that IAC was not justified in her assumption that appellant had taken a separate business activity and violated under the single object clause. Her action in cancelling the order was clearly without jurisdiction. We, therefore, cancel her order and restore the order of the DCIT.

C.M.A./618/Tax (Trib.) Order accordingly.