(a) Finance Act (XII of 1991)‑‑‑

‑‑‑‑S. 12(1)‑‑‑C.B.R. Letter C. No.3(1) WT/93, dated 19‑4‑1993‑‑ Corporate Assets Tax ‑‑‑Assessee a leasing company‑‑‑Assets leased out to various lessees was not disclosed by the assessee‑‑‑Department found that actual owner of such assets was the assessee/leasing company and lease‑hold assets were their fixed assets chargeable to Corporate Assets Tax under the provision of S.7 of the Finance Act, 1991‑‑‑Assessee contended that by virtue of lease the actual owner was the lessee and not the lessor and the same had wrongly been charged to Corporate Assets Tax‑‑‑Validity‑‑‑Agreement was of an ordinary lease rental in which .the asset was not compulsorily sold on completion of lease rental agreement‑‑‑Factual position of the contract was that the assessee was owner of the assets leased out and this was not a case of a hire purchase agreement‑‑‑Ownership remained with the assessee and the lessee was only a beneficiary as he was to utilize the machinery on payment of rental‑‑‑Lessee , did not have right to claim ownership in any form‑‑ Option .to buy was subject to total discretion of the seller who may or may not sell it ‑‑‑Assessee had also the right to transfer the lease to a third party but the lessee did not have any right to further, sublet or transfer any part of the leased machinery/assets‑‑‑Contracts nowhere indicated that such situation existed where a person could say with authority that the lessor was under compulsion to transfer the machinery in lease to. lessee on a fixed or determined value at a subsequent stage‑‑ ownership had been transferred arid was to remain in the name of assessee while the right of alienation also remained with assessee‑‑ Assets had been given on rent by the assessee and no one else had got any right to call such property as his belonging‑‑‑Assets were fully owned by the assessee‑‑‑If other company had shown it as its assets, this could not be used as a lever for misapplication of a. provision of law‑‑ Assessee was fully liable to pay Corporate Assets Tax on such lease hold assets.

PLD 1986 SC 53 ref.

(b) Finance Act (XII of 1991)‑‑‑

‑‑‑‑S. 12(7)‑‑‑Corporate Assets Tax‑‑‑Additional tax ‑‑‑Penalty‑‑ Appellate Tribunal disapproved the charge of additional tax and penalty on Corporate Assets Tax.

2000 PTD 1057 and W.T.A. No. 1338/LB of 2000 rel.

M. Awais, A.C.A. for Appellant.

Muhammad Asif, D.R. for Respondent.

Date of hearing: 14th November, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑The appeal has been, filed by the assessee. The issue relates to application of CAT on the assets leased by the leasing company to the lessor, in the hands of leasing company.

The brief facts leading to this appeal are that the Assessee company leased cars and machinery to various lessees for which the terms of agreement are normal in the case of such lease‑hold arrangements. The assessee under instruction from the C.B.R. filed return of CAT in which he did not disclose the assets leased out by the Company to various lessors. The department after issuing notices held that the actual owner of the such assets is the leasing company hence lease‑hold assets are their fixed assets chargeable to CAT under the provisions of section‑7 of the Finance Ordinance, 1991. The assessee challenged this treatment before the First Appellate Authority who confirmed this charge hence this appeal.

The AR before us says that by virtue of lease the actual owner is the lessee and not the lessor hence ha has wrongly been charged to CAT. He mentioned various contracts signed by the company with the lessees and remarked that it is only an arrangement for providing loan and it is the spirit behind the transaction, which should prevail. At no stage the Lessor Company becomes owner as neither they can sell the property under any circumstances or they have got possession of the items leased out.

Regarding lease transactions he said that two methods are adopted:---

(i)The asset already in ownership and possession of the Lessor Company is purchased and leased back:

(ii)The lessee after fulfilling certain formalities enter into a contract, as a result of which the leasing company purchases machinery as per their requirements and specifications and then lease it to the said lessee.

The AR said that on satisfaction of lease the leasee company pays the balance. agreed amount to the lessor and at no stage including purchase installation and subsequent functioning of the said machinery the leasing company have access to the same. On a question as to it is only machinery which is leased out he remarked that the company also leases out cars but however, since the same are not fixed assets are not an issue before us.

Regarding penalty he said that lot of findings have been given on the subject and there is a chain of judgments of the ITAT. It has already been held that the charge of additional tax and penalty in addition to CAT is not Justified. There is unanimity of opinion in the Tribunal that the charge of CAT remained controversial for a number of years and the issue of fixed assets also was resolved at a later stage. During the intervening period the issue remained controversial hence charge of additional tax and penalty has been held to be as illegal. He referred the famous judgment by the Full Bench of the ITAT, reported as 2000 PTD 1057.

The DR on his turn also relied upon the same judgment and defined the word "fixed assets". He remarked that it includes all assets owned by a company. Regarding definition of word `held' as used in CAT he said that it includes assets leased to the other persons because he remains owner of leased assets. Even the Pawnee in the case of a mortgage never becomes owner unless there is a breach of contract. Hi referred PLD 1986 SC 53. and said that in such circumstances the owner remains chargeable under CAT.

Regarding penalty he remarked that the assessee having himself subsequently paid taxes have impliedly, accepted that he was chargeable to CAT. He also referred C.B.R. and Circular letter C. No.3(1) WT/93, dated April 19, 1993 which says that CAT is payable on the assets of the leasing company also. The C.B.R. has further opined that the law does not make any distinction on the basis of the purpose of the asset. In his opinion the assets of the leasing company were covered within the language of the said Circular.

We have heard both and perused the record also. In this case the most relevant document is the lease agreement made by the leasing company with its lessees. The agreements produced before us are statedly of two kind i.e. direct lease and indirect lease. The one, which we are now referring, is with regard to direct leas. The selection of such property is by the lessee however, on its selection the amount is paid by the lessor.

We have gone through the contract in detail and for the purpose of arriving at a decision it will be more appropriate to mention relevant parts of the same. The same speak as follows:‑‑

ARTICLE VI

SELECTION OF LEASE PROPERTY

6.01. In the event of the Lease. Property having been selected by the lessee, the ALC shall arrange to make payment to the supplier/ manufacturer of the said asset for purposes of importation/ supply of the same at the total risk and responsibility of the lessee. It shall be the obligation of the lessee to take all, requisite steps for the importation/shipment/transfer and clearance of the Lease Property without prejudice to ALC's right of title and ownership in relation thereto.

From the para above and the other paras, which we have gone through from the said agreement, the apparent situation is that the asset for all intents and purposes are owned by the leasing company. In this regard Article‑9 is of more prominence. It imposes restriction on the lessee to prominently display in its premises a board to disclose that the machinery under its use is the property of the ALC and they have no right to sell it to anybody else. Furthermore, the other articles also give the same impression. In this regard Article‑XIV is of still more relevance. It speaks of return of the machinery after expiry of the lease to ALC at their designated place or their designated carrier to the destination specified by the ALC.

This also may be worth mentioning that the contract specifically declares itself to be as "not a hire purchase agreement" and states that it is only a contract of lease. This is where mentioning of the other arguments of learned AR shall be of relevance. It is said that the International Accounting Standard has given guidance for accounting the terms of lease. He highlighted following paras of the same:

"Finance lease a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred."

The classification of leases adopted in this Standard is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be presented by the expectation of profitable operation over the asset's economic life and of gain from appreciation in value or realization of a residual value, "in the case of finance leases the substance and financial reality are that the lessee acquires the economic benefits of the use of the leased asset for the major part of its useful life in return for entertaining into an obligation to pay for that right an amount approximately to the fair value of the asset and the related finance charge."

"It is therefore, appropriate that a finance lease be recorded in the lessee's balance‑sheet both as an asset and as an obligation to pay future rentals."

"(4) Under a finance lease substantially all the risks and rewards incident to ownership are transferred by the lessor and thus the lease rentals receivable are treated by the lessor as repayment of principal and finance income to reimburse and reward him for his investment and services."

He remarked that the accounts have been prepared on the basis of the same. The assessee is not the actual owner by virtue of this method of account and the assets therefore, have been declared in the hands of the lessee companies. The treatment given by the lessor of not considering the same as a part of its property, therefore, as per IAS which support their contention that they are not the actual owner of these fixed assets and are not chargeable to capital assets. We appreciate his effort; however, we are not convinced that this method is applicable on the facts and circumstances of this case. From the contents of the agreement mentioned by us in the earlier paras it is apparent that the lease is not a hire purchase agreement. In. fact the contract itself says that it is not. It is a regular lease agreement, which also is apparent from the details, mentioned by us supra. This is the case of a regular lease rental which has separately been explained by the International Accounting Standard as "an agreement whereby the lessor conveys to the lessee .in return for rent use an asset for an agreed period of time."

The method of accounting for leased asset separately mentioned in IAS‑6 speaks as follows:‑‑

"(6) Transactions and other event sought to be accounted for and presented in accordance with their substance and financial reality and not merely with legal form. While the legal form of a lease agreement is that the lessee may acquire no legal title to the leased asset."

The learned AR earlier had not referred this part for the reason that he considered his lease arrangement to be a purchase and lease back which fact is missing from the copies of the lease agreement produced by him. His remarks with regard to financial lease, therefore, do not require adjudication, in his case, as this is not a case of financial lease at all. The contents clearly spell out that in the instant case the agreement is or an ordinary lease rental in which the asset is not compulsorily sold on completion of lease rental agreement. The factual position of the above contract, therefore, is that the assessee is owner of the assets leased out and this is not a case of a hire purchase agreement.

In the contracts, where an option has been given to the lessee for purchase of the assets on culmination of the lease contract, the language of them also does not support the contention of learned AR. In fact even in the said second contract the asset remain ownership of ALC. In this agreement which has been made on 21st day of May, 1991 between Service Industries Ltd. and ALC, the option to purchase is there but this also is subject to the lessor discretion. It is solely on his sweet‑will that he may sell the items to the lessee at such price and such terms mutually agreed at that time. The relevant Article of the above contract speaks as follows:‑‑

ARTICLE FIVE

(Option to Purchase)

5.01.In the event of the ALC conferring an option on the lessee in the schedule to purchase the equipment/machinery/properties, it is agreed that:‑‑

(a)The said option can only be exercised by the lessee after strict compliance by it of all the terms and conditions herein, and

(b)The conferment of the said option shall not in any event detract from the legal rights of the ALC in relation to the said equipment/machinery/properties as set out herein and the ALC shall be entitled to take all such legal actions against the lessee for any defaults of the lessee in complying with any provisions of this agreement as if no such option had been conferred on it.

5.02.Upon expiry of the period of this lease in respect of the items of equipment/machinery/properties as specified in the schedule, in whatever condition or state such items of equipment/machinery/ properties are, the lessor may at its discretion sell the items of equipment/machinery/properties to the lessee at such price, and on such terms as may be mutually agreed between the parties.

Above provision is self‑explanatory. The ownership obviously I remains with the ALC and the lessee is only a beneficiary as he is to utilize this machinery on payment of rental. The lessee does not have right to claim ownership in any form. Even the option to buy is subject to total discretion of the seller who may or may not sell it. Moreover, it only says that even if an option to purchase is given still ALC holds exclusive right to take a decision whether to sell or not or to whom. Further Article‑8 of the said contract also confirms that the property shall for all practical purposes remain ownership of ALC (lessor) and he may at his own discretion decides to sell or not to sell it. The Article‑8 speaks as follows:‑‑

ARTICLE EIGHT

(Selection of Equipment)

8.01.In the event of the equipment/machinery/properties for purposes of importation/supply of the same at the total risk and responsibility of the lessee. It shall be the obligation of the lessee to take all requisite steps for the transfer/shipment/ importation and clearance taxes obtaining delivery of insurance, custom duties, taxes, octroi and/or other charges of whatsoever nature, without prejudice to the ALC's right of title and ownership in relation thereto. In case the equipment/machinery/ properties are required to be imported/purchased in the name of lessee, the lessee shall sell/transfer the same to the ALC immediately upon acquiring title thereto in terms of the agreement between the supplier and the lessee. Notwithstanding any delay on the part of lessee in completing safe/transfer under the preceding sentence the equipment/machinery/properties concerned shall be deemed to have been transferred to the ALC immediately upon transfer of title thereto in favour of the lessee and thereafter the same shall be deemed to be the property of the ALC.

Other clauses of agreement also at no stage give the impression that this asset belongs to the lessee or at any stage or upon culmination of the contract he shall be given the right to opt for purchase of the same as integral part of the contract. Conversely Article‑11 speaks of (return of Equipment/Machinery/Properties).

11.01.Upon the expiration or earlier termination of this Agreement by the ALC in respect of the equipment/machinery/properties, the lessee shall return the same to the ALC in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted, in the following manner as may be specified by the ALC.

Furthermore the ALC (Lessor) have the right to transfer the lease to a third party but the lessee does not have any right to further sublet or transfer any part of the leased machinery. The learned AR has called this arrangement as security to recover the leased, amount. All this in his opinion is done with the purpose of protecting the loan amount as the assets remain in custody of the lessee. Still further in the schedule attached with the agreement in the case of ALC and Qadri Textile Mills also does not give any such impression that an unequivocal option has been given to the lessee for purchase of property. Another important aspect which also needs mentioning is that in the agreement the term used in respect of amount of lease is `rent'.

All the above discussion in respect of two contracts provided to us leads to the conclusion that the property in question has been purchased by the ALC and is not alienable to any other party as a compulsion. Every independent owner has got the right to sell its property at his own convenience. One may surrender the same but obviously through clear words. Nowhere in the above contracts such situation exists where a person can say with authority that the lessor is under compulsion to transfer the machinery in lease to lessee on a fixed or determined value at a subsequent stage. In documents the ownership has been transferred and is to remain in the name of the ALC while the right of alienation also remains with ALC. It has been given on rent by the said organization and no one else has got any right to call this property as his belonging. Rather the lessee is bound to conspicuously advertise that he is not the owner of the machinery, which he is using. All these circumstances lead to the obvious conclusion.

The A.R. has produced to us the sale agreements, which have been prepared on the pads of Service Industry (Pvt.) Ltd. It appears from them that Messrs Service Industries has sold machinery to ALC. Subsequently Asian, Leasing Company has sold it back to the Service, Industry. This sale receipt does not indicate as to what were the circumstances in which the ALC opted to sell the machinery back to Service Industry. It. only obtains that this is on the basis of the agreement, dated 20 May, 1991 but does not disclose as to under what clause and under what provision of the same. On the other hand we have dilated upon various parts of the contract and have not been able to find any clause, which could support the AR's contention. In this regard we are conscious of our decision which this Tribunal gave in respect of purchase and lease back arrangement by holding them, as a transaction not covered within the definition of supply. The Tribunal has held such an arrangement to be a financial arrangement and in particular circumstances have held that this is not fully covered within the definition of word sale either. However, the facts and circumstances therein are quite distinguishable. The issue and the provisions of law applicable was also not of CAT. We, therefore, without any further discussion or dilation hold that the assets under discussion, i.e, machinery etc. was fully owned by the IAC. If the other company has shown it as his asset, this cannot be used as a lever for misapplication of a provision of law. The ALC is fully liable CAT on the Assets that belong to this company, hence we uphold the order of the Assessing Officer to the extent of the same.

This leaves us to the issue regarding penalty and additional tax. It is true that by holding the assessee liable to CAT we confirm the charge. However, we are not in favour of charge of any additional tax or penalty in any form. This cannot be ignored that the controversy regarding charge of this assets in the hands of this company remained under discussion till this appeal. The fact that it has been held to be as chargeable in the hands of this company apparently is a decision of first impression. There were many other related issues in addition to above, which have been decided by the ITAT in few recent judgments except that the most important issue with regard to constitutionality of the charge was decided by the Supreme Court of Pakistan quite a few years back. We, therefore, have no hesitation in disapproving the charge of additional tax or penalty on the Assessees Company. In this regard this Tribunal has already given so many judgments latest of which is in the case of Messrs Ali Akbar Spinning Mills Ltd. Lahore vide W. T. A. No. 1338/LB of 2000 decided on 30‑1‑2002.

The result of above discussion is obvious. The charge of CAT in the hands of Assessee‑Company is maintained while additional tax and penalty is deleted in toto.

C.M.A./786/Tax(Trib.)Order accordingly.