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

‑‑‑‑Ss.66‑A, 23 & Third Sched., Rr.3 & 7‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑ Deductions‑‑‑Deterioration of gas cylinders‑‑‑Cancellation of assessment on the ground that Assessing Officer had wrongly allowed provision for deterioration of cylinder as such cylinder were assets of the assessee and any business loss or gain on their disposal may be considered under Third Schedule of the Income Tax Ordinance, 1979 as business loss or business gain‑‑‑Validity‑‑‑Departmental Authorities erred in law while invoking S.66‑A of the Income Tax Ordinance, 1979 as word "deterioration" used by the Accountant of the assessee was synonymous for the word "depreciation" which had been used in the Income Tax Ordinance, 1979‑‑‑Department could not get any benefit out of such mistaken use of the word "deterioration" ‑‑‑Depreciation on cylinders were allowable‑‑‑Finding of Inspecting Additional Commissioner on the issue was vacated and assessment order was restored by the Appellate Tribunal.

173 ITR 100; CIT v. Taj Mahal Hotel (1971) 82 ITR 44 (SC) and (1986) 157 ITR 86 (SC) ref.

CIT v. National Air Products Ltd. ITR 126 page 196 and CIT v. Heavy Mechanical Complex Ltd., Taxila 2001 PTD 1354 rel.

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

‑‑‑‑S.66‑A‑‑‑Powers of Inspecting Additional commissioner to revise Deputy Commissioner's order‑‑‑Deferred income‑‑‑Income from "lease back arrangement"‑‑‑Taxability of deferred income as due cognizance was not taken by the Assessing Officer ‑‑‑Assessee contended that addition of deferred income was not justified as the same had arisen out of lease back arrangement and lease back arrangement was not "sale" but only financial arrangement‑‑‑Validity‑‑‑Issue was remanded to Assessing Officer by the Appellate Tribunal to be re‑examined with the direction that if the deferred income had resulted from "lease back arrangements" then the exemption be allowed and if it was out of any other source the taxability of the same should be decided on the basis of facts and in accordance with the law after affording an opportunity of hearing to the assessee.

1999 PTD (Trib.) 14 and Medipak Ltd., Lahore's case I.T.A. No.624/LB of 1999 rel.

Yousaf Ali Ch., I.T.P. and Iqbal Hashmi for Appellant.

Najum‑ud‑Din, D.R. for Respondent.

Date of hearing; 28th March, 2002.

ORDER

SYED NADEEM SAQLAIN (JUDICIAL MEMBER). ‑‑‑Titled appeals pertaining to the assessment years 1997‑98 and 1998‑99 have been filed at the instance of the assessee/appellant against the two separate orders dated 26‑12‑2001 and 18‑2‑2002. For the assessment year 1997‑98, the learned I.A.C. Range‑II, Coys. Zone‑II, Lahore while exercising his powers under section 66‑A of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) treated the assessment dated 30‑9‑1998 framed under sections 62/132 of the Ordinance by the learned D.C.I.T. to be erroneous as well as prejudicial to the interest of revenue on two issues i.e. the Assessing Officer had allowed two provisions for deterioration of cylinders of Rs.76,44,168 and also cognizance of taxability of deferred income of Rs.11,69,356 has not been taken. As regards assessment year 1998‑99, the learned Commissioner of Inc6me tax, Companies Zone‑II, Lahore vide his order, dated 18‑2‑2002 declared the assessment order, dated 22‑12‑1999 passed under section 62 of the Ordinance by the learned I.A.C. Range‑II, Companies Zone‑II, Lahore in exercise of the powers of D.C.I.T. in pursuance to the jurisdictional order given by RCIT, Eastern Region, Lahore under section 5(1)(c) vide Letter No.RCIT/J‑II/98‑99/9857 dated 24‑4‑1999 to be erroneous so far as prejudicial to the interest of revenue, on the allowability of expenses under the head deterioration of cylinders.

2. Facts relevant for the disposal of present appeals are that assessee a Private Ltd. Company, is involved in the sale of liquid petroleum gas. Assessment for the assessment year 1997‑98 was framed under section 62/132 of the Ordinance at the total income of Rs.2,13,80,100 and for the assessment year 1998‑99 under section 62 of the Ordinance at the total income of Rs.4,63,33,322.. Examination of record of the assessee by the respective authorities revealed that the assessments for both the assessment years dated 30‑9‑1998 and 22‑12‑1999 were erroneous so far as prejudicial to the interest of revenue for the reason that for the assessment year 1997‑98 the Assessing Officer had wrongly allowed the provisions for deterioration of cylinders of Rs.76,44,148 and due cognizance was not taken of taxability of deferred income of Rs.11,69,356. Similarly for the assessment year 1998‑99 allowability of provisions for deterioration to be erroneous as well prejudicial to the interest of revenue. The respective authorities issued show-cause notice under section 66‑A of the Ordinance which are being reproduced hereunder for the sake of convenience:

Assessment year 1997‑98

"The examination of record reveals that the assessment for assessment year 1997‑98 was completed by the D.C.I.T. under section 63 on 13‑4‑1998 and subsequently an order under sections 62/132 was passed on 30‑9‑1998 at an income of Rs.2,13,80,800. While passing the order under section 63 or 62/132 it has been noted that the assessee company has charged the provisions for deterioration of cylinders amounting to Rs.7,644,168. The provisions for expense has however been allowed erroneously by the D.C.I.T. which is also prejudicial to the interest of revenue as under section 23 no provisions of any expense is allowable except the expense which has actually been made or an expense incurred according to the method of accounting adopted by you. Besides above, there is no provision under the law to allow you the expense merely by providing the provisions for the deterioration of cylinder. The cylinders are your assets and any loss or gain on their disposal may be considered under Rule 7 of Third Schedule to the Income Tax Ordinance, 1979 as business loss of business gain as the circumstances may arise. As per record no disposal of the assets was made during the year, therefore, no expense as per Rule No.7 of the Third Schedule may be allowed. Since the Assessing Officer has not taken cognizance of the Rule 7 of 3rd Schedule to the Income Tax Ordinance, 1979 and allow you the mere provisions for deterioration of assets, therefore, the order passed by the D.C.I.T. is found erroneous and so far prejudicial to the interest of revenue. You are requested to please file your objection if any as to why the proposed action may not be taken against you as per law.

2. As per Note 25 of the audited accounts to the assessment year 1997‑98 you have disclosed the deferred income of Rs.16,05,951. The balance‑sheet has also been perused and it is found that as per Note No. 14 you have also another, deferred income at Rs.11,69,356. Thus the deferred income during the year is at Rs.27,75,307. You have offered the income for the tax purpose at Rs.16,05,951 only and thus has not offered balance income at Rs.11,69,356 the D.C.I.T. has erroneously assessed the deferred income of Rs.16,05,951 as income chargeable tax instead of taking Rs.27,75,307 as under the law there is no, provision of deferment or postponement of income and thus has caused the loss to the Revenue. Please explain as to why not action under section 66‑A on this issue may also be taken as the assessment framed by the D.C.I.T. is erroneous insofar as prejudicial to the interest of revenue on this score also.

3. You are requested to file your objection, if any by 3‑12‑2001 as to why not the proposed actions may be taken against you."

Notice issued for the assessment year 1998‑99 is as under:‑‑‑

"Assessment record, maintained in Circle 13 was examined which reveals that the assessment for the assessment year 1998‑99 was completed by the I.A.C., Range‑II, under section, 62 on 22‑6‑1999. Subsequently an order under sections 62/132 was passed on 22‑12‑1999 at an income of Rs.39,147,804. It has been noted that cost of sales have been debited by an amount of Rs.71,85,518 under the head "Deterioration" of Gas Cylinders. The I.A.C., Range‑II vide his order reported above did not scrutinize the said head of account. This act of the I.A.C. is erroneous and prejudicial to the interest of revenue. Since the Assessing Officer has allowed the expenditure, without proper examination, the order passed by him is liable for revision.

In view of the above, I intend to invoke provisions under section 66‑A of the Income Tax Ordinance, 1979.

You are requested to please file I your objections, if any within 7 days of the receipt of this notice as to why the proposed action should not be taken against you as per law."

In response to these notices the assessee filed reply which are also reproduced as under for the sake of convenience:

Assessment year 1997‑98

"This with reference to your Notice No. 144 dated 24th November, 2001 under section 66‑A of Income Tax Ordinance, 1979, we submit as under:

The cylinders have a limited life and deteriorate in few years. The gas has a definite pressure which depreciates the life of cylinders. This is an movable assets. Either depreciation has to be charged or deterioration has to be claimed.

The assessee has rightly claimed deterioration of 6% on the marketed cylinders and the Income‑tax Officer has rightly allowed the said in the assessment order.

Your good-self rightly pointed out that cylinders are out assets and profits and loss has to be treated under rule 7 of Third Schedule.

The cylinders are our assets; it is not consumable items in a year. The cylinders have a limited life and as we have already submitted that either department has to give depreciation @ 10% or deterioration as claimed by the assessee @ 6%.

It is not a provision, it is deterioration and like depreciation, we have reduced the value of cylinders by the amount of Rs.7,444,168.

The assessee has offered Rs.3,417,094 as other income as per Note No.25 in this year. As per Note No. 14 the only deferred FUN income is Rs.1,605,951 which is included in the other income. The said amount is already assessed and offered for tax.

The order passed by the Deputy Commissioner of Income‑tax is not erroneous and also not prejudicial to the interest of revenue.

It is requested that proceedings initiated under section 66‑A may lease be dropped."

Assessment year 1998‑99

"This is with reference to your Notice No. J/2251 dated 11th December, 2001, we submit that cylinders are used for filling gas. The gas has a definite pressure and the life of cylinders is limited.

This is a movable asset either assessee has to claim the depreciation or deterioration on the movable assets. The assessee claimed 6% deterioration instead of 10% depreciation as per Third Schedule. The Assessing Officer rightly allowed the said allowance in the trading account.

The order passed by the Inspecting Additional Commissioner of Income‑tax is neither erroneous nor prejudicial to the interest of revenue.

It is requested that proceedings under section 66‑A of Income Tax Ordinance, 1979 may please be dropped."

3. The replies submitted by the assessee were found to be unsatisfactory by the Departmental Authorities and they proceeded to make additions of Rs.76.44,168 and Rs.71,85,518 on account of deterioration of Cylinders for both the assessment years under consideration. However, addition under the head deferred income amounting to Rs.11,69,356 was made only for the assessment year 1997‑98. Feeling aggrieved with the same the assessee/appellant is in appeal before us.

4. Both the parties have been heard and relevant orders perused. The learned A.R. has vehemently argued the case and contended that cylinders are part of plant and machinery and not stock in trade as treated by the Department. He further submitted that accountant of the company wrongly used term of deterioration allowance which is as a matter of fact is a depreciation allowance which is admissible @ 10%. He further argued that expenses on account of deterioration allowance works out @ 6% instead of admissible depreciation allowance @ 10%. He averred that if expenses claimed are lesser than admissible expenses, it means more income has been declared entailing more tax. Continued to argue that payment of more tax by the assessee due to reduced claim of detrioration/depreciation does not amount to an act prejudicial to the interest of revenue, therefore, proceedings under section 66‑A had been wrongly initiated.

5. As regards the other issue which is the subject‑matter, the learned A.R. vehemently contested the addition of Rs.11,69,356 under the head deferred income. It was contended by the learned A.R. for the assessee that appellant had entered into an agreement with the leasing company and this financial agreement had wrongly been held as yielding profit. He submitted that agreement with the leasing company does not amount to sale, hence no profit said to have been arisen from such arrangement.

6. To substantiate his contentions the learned A.R. of the assessee relied upon various judgments of the Tribunal as‑well as from the Indian jurisdiction. The first judgment which was cited at the bar is reported as 173 ITR page 100. This is the judgment of Rajasthan High Court wherein section 43 of the Income Tax Act, 1961 which provides for definition of word "plant" came for discussion, it was observed by their Lordships that definition of plant under section 43 of the Income Tax Act, 1961 is an inclusive definition and the intention of the Legislature to give it a wide meaning is evident from the fact that articles like books and surgical instruments have been expressly included in the definition of "plant". It was further observed that this inclusive definition of plant must be understood to mean, in its ordinary sense, as including all apparatus used by a businessman for carrying on his business but not as stock‑in‑trade. Since it was a case where Court has to determine whether depreciation could be allowed on bottles and shells used for soft drinks, it was concluded that:

"Whether an assessee manufactures soft drinks, bottles and shells .used for bottling soft drinks would constitute `plant' and the assessee would be eligible for depreciation and development rebate in respect of them."

7. While deciding the supra judgment, their Lordships of the Rajasthan High Court sought strength 'from the judgment of Supreme Court of India reported as CIT v. Taj Mahal Hotel (1971) 82 ITR 44(SC) wherein the august Court held that sanitary and pipeline fittings installed in the hotel fell within the definition of "plant" hence liable to depreciation. Similarly, in the judgment of 'Supreme Court reported as (1986) 157 ITR 86 (SC) wherein the question arose whether drawings, designs, charts, plants, etc. were within the definition of "plant" where the assessee's' business was to manufacture scientific instruments. The question was also answered in the assessee's favour. The next judgment cited by the learned A.R. of the assessee at the bar was reported as ITR 126 page 196 (CIT v. National Air Products Ltd.) which appears to be applicable on all fours to the assessee's case. In the said case the Appellate Tribunal held that gas cylinders used by the assessee were to be treated as "plant" within the meaning of Income Tax Act, 1961. To arrive at this conclusion they relied upon the definition of "plant" contained in section 43(3) as including ships, vehicles, books, scientific apparatus and surgical equipment and therefore observed that the assessee was entitled to depreciation on .gas cylinders. On a reference filed by the Department before the Delhi High Court, it was answered in affirmative. The Honourable High Court dilated upon the issue and adjudicated that:

"It is not necessarily confined to an apparatus which is used for mechanical operations or process or is employed in mechanical or industrial business. It would not, however, cover the stock in trade, that is goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on. An article to qualify as `plant' must, furthermore, have some degree of durability and that which is quickly consumed or worn‑out in the course of a few operations or within a short time cannot properly be called plant. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity therefore, is consumed while being employed in carrying on business. In the ultimate analysis, the inquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is does it fulfil the function of plant in assessee's activity? Is it the tool of the taxpayer's trade? If it is, then it is plant, no matter that it is not very long‑lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose."

8. Lastly, the learned A.R. placed reliance on a recent judgment of the Lahore High Court in the case of CIT v. Heavy Mechanical Complex Ltd., Taxila reported as 2001 PTD, 1354. In the supra cited case the question which came before the Lahore 'High Court for determination was that whether Railway Sidings and Roads owned by the industrial. establishment were covered by the term of plant and entitled to depreciation? Their Lordships rejected the reference filed by the Department with the following observation:

"Learned counsel for the Revenue has not been able to state any authoritative pronouncement against the view adopted by the Tribunal that word 'plant' had much wider meaning when used in the context of factory. Also that in its factual meaning it includes not only the main structure but also the ancillary ones which are in use as integral part of the factory. Therefore, the conclusion drawn by them that roads, and railways sidings in question were a necessary part of the factory is not open to exception. Particularly, when the Revenue failed to dislodge the claim of the assessee that without these facilities viz. roads and railway sidings it was not possible to transport the capital goods manufactured to and from its premises."

9. The learned A.R. also placed on file assessment orders relating to Mehran LPG (Pvt.) Ltd. and Ranjha Enterprises (Pvt.) Ltd. In both of the cases, the assessees are involved in the business of selling LPG wherein cylinders were considered as a part of plant and machinery and not stock in trade.

10. On the other issue of deferred income the learned A.R. of the assessee contended that addition of Rs.11,69,356 under the head deferred income is not justified as same has arisen out of lease back arrangement and lease back arrangement is not sale but only financial arrangement. In support of his contention he placed reliance on the following two judgments of the Tribunal:‑‑‑

(i) 1999 PTD (Trib.) 14.

(ii) I.T.A. No.624/LB of 1999, dated 20‑1‑2000 in the case of Medipak Ltd., Lahore.

11. The learned D.R. on the contrary controverted the arguments advanced by the learned A.R. and submitted that the, is no provision of law to allow provision for deterioration of cylinders: It was submitted by the learned D.R. that cylinders owned by the company were assets and any loss or gain on their disposal may be considered under 3rd Schedule as business loss or business gain as the circumstances may arise. He further argued that since no disposal of assets were made during the year, therefore no expense as per Rule 7 of the 3rd Schedule may be allowed. It was stressed by the learned D.R. that in fact cylinders are kept by the assessee as stock in trade as is evident from the note shown in the balance‑sheet. He also referred to section 23 as well as Rule 3 of the 3rd Schedule to the Ordinance which provides as follows:

(3) No allowance under this Rule shall be made unless‑‑‑

(a) at the time of filing a return of total income such as particulars as may be prescribed and such further information of documents as the (Deputy Commissioner) may require, are furnished; and

(b) such building, machinery, plant of furniture has been so used ⁶[***] during the income year.

Section 23(v).‑‑‑In respect of depreciation (including first year allowance of reinvestment allowance or Industrial Building Allowance) of any such building, machinery, plant, furniture or fittings, being the property of the assessee the allowance admissible under the Third Schedule [except depreciation (or first .year allowance) on assets given on lease shall be allowed against income from lease rentals only]:

12. On the issue of deferred income the learned D.R. supported the observations made by the Departmental Authorities while passing the order under section 66‑A of the Ordinance.

13. We have heard the learned counsel for both the parties and have gone through the relevant orders as well as the judgments and the law cited at the bar in support of their contentions. We are of the considered view that the Departmental Authorities erred in law while invoking section 66‑A of the Ordinance in the instant case. Before we embark upon the real issue which is involved in the case that whether cylinders used by the assessee‑company are to be considered as part of plant and machinery or not, we would like to observe that word `deterioration' used by the Accountant of, the assessee‑company was synonymous for the word `depreciation' which has been used in the Income Tax Ordinance, 1979. So the Department cannot get any benefit out of this mistaken use of the word `deterioration'. After having observed so, there is no cavil to the proposition that `depreciation' on cylinders are allowable. Our stance, on the issue stands fortified by the judgments cited at the bar particularly' the judgment of the Delhi High Court in Re: CIT v. National Air Products Ltd. reported as ITR 126 page 196 wherein business of manufacturing of Oxygen Gas which is almost identical to the business of the assessee was held to be one where depreciation was allowed. It is also worth‑noting that in the recent judgment of the Honourable Lahore High Court while deciding in favour of the assessee, and their lordships extended the definition of word `plant', thus stretching it to railway sidings and roads laid on the factory premises of the industrial establishment.

14. For the foregoing reasons the impugned finding of the learned I. A .C. on this issue is vacated and assessment orders stand restored.

15. As regards deferred income, the order of ‑the learned I.A.C. is also vacated since the learned representatives of both the parties have not been able to clear their position on this point. Therefore, in the interest of justice this issue is remanded to the Assessing Officer to re‑examine the issue and if deferred income has resulted from lease back arrangements then he is directed to allow exemption in the light of above .two judgments on the issue and if it is out of any other source the taxability of the same should be decided on the basis of facts and in accordance with the law after affording an opportunity to the assessee of being heard

16. As a result of above discussion appeals of the assessee succeed in the manner indicated above.

C. M. A./634/Tax(Trib.)Appeals succeeded.