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

‑‑‑‑S. 2(12) & Third Sched. R.8(8)(c)‑‑‑Capital assets ‑‑Exchange loss on foreign currency‑‑‑Capital expenditure or revenue loss ‑‑‑Determination‑‑‑ Assessee claimed exchange loss of different amounts on foreign currency loan secured from the Government of Italy which was utilized for obtaining technical services for establishment of a plant‑‑‑Assessing Officer disallowed the same while treating the said loan as a capital. expenditure utilized for establishing the factory ‑‑‑Assessee contented than loan was obtained for purpose of payment of fee for technical services and not for the purchase of plant and machinery which was approved by the State Bank of Pakistan for specific purpose of payment of fee for technical services and the same did not fall within the ambit of R.8(8)(c) of the Third Sched. of the Income Tax Ordinance, 1979‑‑‑First Appellate Authority maintained the action of the Assessing Officer on the ground that the exchange loss was incurred on the payment of instalments of loan and on account of re‑valuation of foreign currency loan in the books of accounts of the assessee and no exchange loss was incurred in connection with the payment of interest on loan and therefore the original loan as well as loan instalment and revaluation of loan all were of capital asset or fixed capital of capital nature‑‑ ‑Validity‑‑Loan was admittedly taken for the purpose of expenditure of capital nature and the exchange loss was incurred on the payment of instalment of loan on account of re‑valuation of foreign currency loan in the books of accounts of the assessee and no exchange loss was incurred in connection with payment of interest of the loan and that the original loan as well as loan instalment and revaluation of loan, all were of capital nature‑‑‑Exchange loss suffered in connection with capital assets or fixed capital was of capital nature‑‑‑Appellate Tribunal did not take any exception to the treatment given to the assessee by the Department and affirmed tht: action of the First Appellate Authority‑‑‑Appeal of the assessee was rejected by the Appellate Tribunal.

House Building Finance Corporation v. CIT, Dacca 1985 PTI 820; Reform Flour Mills Ltd. v. CIT, West Bangal (1981) 132 ITR 184; B.D.G.A. (Punjab) Ltd. v. CIT, Punjab, Lahore (1937) 5 ITR 279; (1962) 46 ITR 590; Income Tax Made Easy by Mr. Sajjad, pp. 14, 73; Income Tax Law by Kanga & Palki Wala, S.33, p.477; 2000 PTD 2446; 2000 PTD 720 and 2000 PTD 2119 ref.

(b) Income Tax Rules, 1982‑‑‑

‑.‑‑‑Rr. 216(1)(b) & 216(3)(b)(ii), (iii)‑‑‑Computation of export profits and tax attributable to export sales‑‑‑Calculation of export rebate‑‑ Assessing Officer took the gross total sales by including the sales of the purchased fertilizers while calculating the export rebate‑‑‑Validity‑‑‑Main point involved in the proposition was regarding definition of "total' as given in the said rule‑‑‑Plea of the assessee was that Para. (ii) of Cl. (b) of sub‑rule (3) of 8.216 will apply to the case of the assessee‑company whereas the stance of the Department was that Para. (iii) of Cl. (b) of sub‑rule (3) of 8.216 was applicable ‑‑‑Assessee only exported the fertilizer which was locally manufactured and it never re‑exported any fertilizer which was imported‑‑‑Case of the assessee would fall in context of definition of "total" as given in Para. (ii) of Cl. (b) of sub‑rule (3) of 8.216 of Income Tax Rules, 1982‑‑‑Plea of the assessee was accepted and the Department was directed to make fresh computation of export profit and tax attributed to export sales and to determine export rebate after providing another opportunity to the assessee.

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

‑‑‑‑S. 25(c)‑‑‑Amounts subsequently recovered in respect of deduction, etc.‑‑‑Loan remained unpaid in excess of three years‑‑‑Assessing Officer while resorting to provisions of S.25(c) of the Income Tax Ordinance, 1979 added back the amount in the income of the assessee and the same was confirmed by the First Appellate Authority‑‑‑Validity‑‑‑With regard to such addition Appellate Tribunal did not interfere because the factual position had been determined by the Assessing Officer specifically with regard to non‑payment of such amount within three years when the same was charged to account‑‑‑First Appellate Authority came to the conclusion that the liability was to be created by 30th June which had admittedly not been done and provisions of S.25(c) of the Income Tax Ordinance, 1979 were attracted‑‑‑Two fact‑findings forums firstly at the assessment stage and secondly at the First Appellate stage had concurrently taken the position in respect of non‑payment of such amount within three years when such amount was charged to account‑‑‑Appellate Tribunal maintained the action of two forums below.

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

‑‑‑‑Third Sched., R.3(2) & (3)‑‑‑Extra depreciation allowance for multiple shift working‑‑‑Other plant and machinery‑‑‑No exit depreciation could be allowed on "other plant and machinery" for the items installed/located in the admin. block of factory, regional office, marketing division and head office as these were not normally used for extra shift and only have normal working office hours but at the same time it was to be looked into again for determining the aspect of use of these items under the head "other plant and machinery" as to have been actually and factually made by the assessee or not‑‑‑Matter in issue was required to be set aside with the directions to Assessing Officer to make a re‑probe into the matter and pass an order in accordance with the relevant rule and law and the same was set aside by the Appellate Tribunal.

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

‑‑‑‑Ss. 24(b) & 50(3)‑‑‑Deductions not admissible‑‑‑Deduction of tax at source‑‑‑Interest expenditure‑‑ ‑Loan advanced and interest received by the foreign sovereign Government‑‑‑Disallowance of interest expenditure on the ground that tax was not deducted on payment of such interest and added to the income of the assessee under S.24(b) of the Income Tax Ordinance, 1979‑‑‑First Appellate Authority deleted the addition on the ground that the loan was advanced and interest was received by the foreign sovereign Government and no tax under S.50(3) of the Income Tax Ordinance, 1979 was deductible as the recipient of interest was not a taxable entity‑‑‑Since no deduction of tax was required to be made, provisions of S.24(b) of the Income Tax Ordinance, 1979 were not attracted‑‑‑Validity‑‑‑Position depicted from the order clearly established that the loan was made available to the assessee with the approval of the Government of Pakistan as well as that of Italy and that the re‑payment was also guaranteed by the Ministry of Finance, Government of Pakistan and Banco Di Roma (Italian Bank) acted simply as a collecting agent of the Government of Italy" which was the actual beneficiary of the interest‑‑Assessing Officer repeatedly referred to the loan as "Government of Italy" loan which meant that they also did not dispute this fact‑‑‑No tax under S.50(3) of the Income Tax Ordinance, 1979 was deductible as the recipient of interest was not taxable entity‑‑‑Provision of S.24(b) of the Income Tax Ordinance, 1979 were not applicable to the case of the assessee‑‑‑Deletion of disallowance of interest being justified was not interfered by the Appellate Tribunal.

(f) Income Tax Ordinance (XXXI of 1979)‑‑‑-

‑‑‑‑Ss. 88 & 54‑‑‑Income Tax Rules, 1982, R.216‑‑‑Additional tax‑‑ Export rebate‑‑‑Additional tax was levied on the basis of new working of the export rebate as made, by the Assessing Officer at the time of assessment‑‑‑First Appellate Authority found levy of additional tax under S.88 of the Income Tax Ordinance, 1979 on the basis of new working was not correct because there was no intentional default‑‑‑Validity Additional tax under S.88 of the Income Tax Ordinance, 1979 was levied if the assessee failed to pay tax under S.54 of the Income Tax Ordinance, 1979, as payable on the basis of return or the tax so paid was less than the tax payable‑‑‑If tax liability was enhanced on the basis ,of an assessment in the event of interpretation placed to a provision of law or rule for calculating total income/taxable income, then of course, there would be a marked distinction between the tax payable under S.54 on the basis of return filed by the assessee and the tax payable on the basis of assessment made by the Assessing Officer‑‑‑Tax payable on the basis of return was considered an admitted tax liability and the tax determined on the basis of assessment order was taken to be assessed tax liability‑‑ Action of the First Appellate Authority was affirmed by the Appellate Tribunal.

(1988) 58 Tax 153 (Trib.) ref.

2002 PTD 388 rel.

(g) Income‑tax‑‑‑

‑‑‑‑Method of accounting‑‑‑Change of‑‑‑Change in the method of accounting could be made but it must be bona fide and not for escapement of treatment of an income for taxation purposes.

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

‑‑‑‑Ss. 32, 11 & 55‑‑‑Method of accounting‑‑‑Total "income ‑‑‑Scope‑‑ Marketing and Pricing Principle Agreement‑‑‑Urea Price Adjustment‑‑ Change of accounting method ,from accrual basis to receipts basis‑‑ Claim of Urea Price Adjustment was not offered for taxation by the assessee due to change of method of accounting from accrual basis to receipts basis‑‑‑Admittedly

claims were recognized on accrual basis‑‑ Assessing Officer added to same in total income as the assessee consistently accounted as income on an "accrual basis" and the claim so worked out under the agreement was always included in the income of the assessee and treated as such for arriving at taxable income‑‑‑First Appellate Authority did not constitute assessee's income on accrual basis on the ground that it neither represents a definitely ascertained amount nor the assessee had acquired the right to receive it‑‑‑Claim will be included in assessee's‑ income only to the extent of its actual approval by the Government in the year of its approval, only then the claim will be considered as having accrued‑‑‑Price adjustment claim was directed to be deleted‑‑‑Validity‑‑‑No deviation could be made to the employment of method of accounting in a half way if the same had been regularly employed in the past by the assessee‑‑‑Change could only be permitted if die method was totally changed from an accrual basis to receipt basis and it was bona fide change‑‑‑Contention of assessee that First Appellate Authority had in fact interpreted/explained the method of accounting on accrual basis and there was no change from accrual basis to receipts basis, had no rational basis to accept the view point of First Appellate Authority because it would amount to bring method of accounting of accrual basis intermingled with method of accounting on receipts basis‑‑‑Such interpretation of method of accounting of that of accrual basis would definitely amount to the negation of the system of accounting and would be defeating the provisions of Ss.11 & 32 of the Income Tax Ordinance, 1979‑‑‑Treatment given by the Assessing Officer seemed to be proper and just in circumstances‑‑‑Action of First Appellate Authority was not sustained and order to that extent was cancelled and that of the Assessing Officer was restored by the Appellate Tribunal.

1985 PTD 820; (1981) 132 ITR 184: (1937) 5 ITR 279; PLD 1966 Lah. 246; 56 ITR 42; 48 ITR 1; (1971) 80 ITR 650; 4 ITR 420 and 44 ITR 22 ref.

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

‑‑‑‑Ss. 49 & 2(3)‑‑‑Allowance to be treated as deductions from income‑‑ Rebate on donation on super‑tax‑‑‑Disallowance‑‑‑Validity‑‑‑Word "tax" had been used in S.49 of the Income Tax Ordinance, 1979 and tax had been defined in S.2(3) of the Income Tax Ordinance, 1979 as to include income‑tax, super‑tax, surcharge etc. and accordingly the rebate on donations should have been allowed on income‑tax as well as on super tax‑‑‑Assessee was entitled to claim rebate on donations on income‑tax as well as on super‑tax and accordingly the Department was directed to allow the same by the Appellate Tribunal.

Shahid Sadiq, F.C.A. and Nadeem Ayaz, A.C.A. for Appellant (in I.T.As. Nos. 1158/IB, 1159/IB of 1986‑87, 223/IB, 224/IB of 1989‑90, 230/IB, 64/IB of 1990‑91, 366/IB and 367/IB of 1996‑97).

Malik Muhammad Nawaz, L.A., Abdul Jaleel, D.R. and Khalid Javed, D.C.I.T. for Respondent (in I.T.As. Nos. 1158/IB, 1159/IB of 1986‑87, 223/IB, 224/IB of 1989‑90, 230/IB; 64/IB of 1990‑91, 366/IB and 367/IB of 1996‑97).

Malik Muhammad Nawaz, L.A., Abdul Jaleel, D.R. and Khalid laved, D.C.I.T. for Appellant (in I.T.As. Nos. 11/IB, 12/113 of 1987‑88, 253/IB of 1989‑90, 328/IB, 206/IB of 1990‑91 and 499/IB of 1992‑93).

Shahid Sadiq, F.C.A. and Nadeem Ayaz, A.C.A. for Respondents (in I.T.As. Nos. 11/IB, 12/IB of 1987‑88, 253/IB of 989‑90, 328/IB, 206/IB of 1990‑91 and 499/IB of 1992‑93).

Date of hearing: 4th June, 2002.

ORDER

SYED MASOODUL HASSAN SHAH (JUDICIAL MEMBER).‑‑‑This order will dispose of above cross‑appeals filed by the assessee and the department for the assessment years 1985‑86 to 1992‑93 which have been directed against following appellate orders (hereinafter referred to as the impugned orders) passed by the learned Appeal Commissioner:‑‑‑

(i)combined order, dated 28‑4‑1987 for assessment years 1985‑86 and 1986‑87;

(ii)combined order, dated 4‑3‑1990 for assessment years 1987‑88 and 1988‑89;

(iii)order, dated 23‑1‑1991 for assessment year 1989‑90;

(iv)order, dated 30‑6‑1991 for assessment year 1990‑91; and

(v)combined order, dated 31‑10‑1993 for assessment years 1991‑92 and 1992‑93.

2. The assessee‑company has contested the above impugned orders for all the years under consideration whereas the department has contested the said impugned orders except for assessment years 1987‑88 and 1991‑92.

3. Present. Mr. Shahid Sadiq, FCA alongwith Mr. Nadeem Ayaz, ACA/learned A.Rs. for the assessee‑company and Malik Muhammad Nawaz, Advocate/learned Legal Advisor alongwith Mr. Abdul Jalil, learned DR and Mr., Khalid Javed, DCIT for the department.

4. The learned representatives of the parties have been heard and respective orders perused.

5. Without firstly narrating or reproducing the facts of the case as per assessment order and orders of the learned first appellate forum, we would like to take up the case issue‑wise because the case has been argued by the parties issue‑wise as per grounds raised by both the sides. In order to chart down the points in issue in seriatim, we may like to firstly state the issues raised on behalf of the assessee‑company which are as under:‑‑‑

(I)Revenue Expenditure Treated as Capital Expenditure:‑‑

(i)For assessment year 1985‑86, the assessee‑company has contested the first appellate order in respect of confirming the action of the Assessing Officer of treating the exchange loss arising on Government of Italy loan and payments of technical fees as of capital nature;

(ii)In respect of assessment years 1986‑87 to 1988‑89 and 1990‑91, the assessee‑company has contested the action of the learned Appeal Commissioner of his confirming the Assessing Officer's action of treating the exchange loss arising on Government of Italy loans as of capital nature;

(iii)For assessment year 1989‑90, the assessee‑company has disputed the action of the learned Appeal Commissioner of his confirming the action of income tax panel of treating the exchange loss arising on Government of Italy loans as of capital nature.

(II)Export Rebate

(i)For assessment years 1985‑86 and 1986‑87, the assessee‑ company has contested the order of the learned Appeal Commissioner of his confirming the change in basis for calculation of export rebate by the Assessing Officer which resulted in reduction of claim of the assessee‑company;.

(ii)For assessment year 1987‑88, the assessee‑company further contested the action of learned Appeal Commissioner of not excluding the sale value of purchased fertilizers for the purpose of calculation of export rebate resulting in reduction of claim of the assessee‑company on this account.

(III)Add Back under section 25(C)

(i)For assessment year 1986‑87, the assessee‑company disputed the action of the learned Appeal Commissioner of upholding the add back on account of deferred interest by the Assessing Officer under section 25(c) of the Income Tax Ordinance, 1979;

(IV) Extra Shift Allowance on "Other Plant and Machinery".

(i)For assessment years 1985‑86 and 1986‑87, the assessee‑company assailed the action of the learned Appeal Commissioner of setting aside the disallowance of extra shift allowance on fixed assets appearing under the head "other plant and machinery".

(ii)For assessment years 1987‑88, 1989‑90 and 1990‑91, the assessee‑company disputed the action of the learned Appeal Commissioner of not allowing in full the extra shift depreciation on fixed assets appearing under the head "other plant and machinery".

6.The issues raised the departmental appeals are as follows:‑‑‑

(I)Interest Expenditure

(i)For assessment years 1985‑86 and 1986‑87, the department has contested the‑action of the learned Appeal Commissioner of his setting aside the case on the point of interest paid to Banco Di Roma, especially keeping in view the fact that he himself observed that specific exemption was called for within the meaning of clause (75) of Second Schedule and that since no such exemption was obtained by the assessee‑company and therefore interest was rightly disallowed.

(II)Extra Shift Depreciation Allowance

(i)For assessment years 1985‑86 and 1986‑87, the department has contested the action of the learned Appeal Commissioner of his setting aside the case on the point of extra shift allowance. In the years under reference this point has elaborately been discussed wherein the findings were given that the nature of this asset is such that they cannot be used round the clock which was further strengthened from the fact that all these assets were not included even by the assessee‑company in the main FFC Urea Plant regarding which the certificate was issued by the Plant Manager regarding its use round the clock;

(III)Additional tax

(i)For assessment years 1985‑86 and 1986‑87, the department has contested the observations of the learned Appeal Commissioner regarding levy of additional tax under section 88 that the same has been worked out incorrectly on the plea of the previous history is not correct especially keeping in view the fact that when he himself has upheld the working of the same by this office as asses see‑company had not calculated tax liability in accordance with the provisions of law and the additional tax was correctly levied for short payment and the learned Appeal Commissioner should not have made these observations and set aside the case accordingly;

(IV) Urea price Adjustment Claim

(i)For assessment year 1988‑89 the department has contested the action of the learned Appeal Commissioner that Urea Price Adjustment claim did not constitute assessee's income on accrual basis in the year 1988‑89 because neither it represented a definitely ascertained amount nor the assessee had acquired the right to receive it and that in fact the amount was definite and ascertained because according to assessee's own version it worked out to 204 million and that upto the assessment year 1987‑88, the assessee‑company had declared Urea Price: Adjustment claim for tax purposes on accrual basis but in the year 1988‑89 it changed system of accounting and decided to declare it on receipt basis and that according to the rulings given by the Higher Courts in the following reported cases the assessee could not change system of accounting:‑‑

(a)1985 PTD 820 Supreme Court of Bangla Desh House Building Finance Corporation v. CIT Dacca;

(b)(1981) 132 ITR 184, Calcutta High Court Reform Flour Mills Ltd. v. CIT, West Bangal and

(c)(1937) 5 ITR 279 B.D.G.A. (Punjab) Ltd. v. CIT Punjab, Lahore.

In all these cases it was held by the Honourable Courts that method of accounting cannot be changed and thus the learned CIT(A) was not justified to delete Rs.204 millions from total income of the assessee;

(ii)For assessment years 1989‑90 and 1990‑91, the department has contested the action of the learned Appeal Commissioner in holding that Urea Price Adjustment claim did not constitute assessee's income on accrual basis because either it represented a definitely ascertained amount nor the assessee had acquired the right to receive it and that in fact the amount was definite and ascertained because according to assessee's own version it worked out to Rs.196,498,734 (196m) and that upto the assessment year 1987‑88, the assessee‑company had declared Urea Price Adjustment claim for tax purposes on accrual basis but from the assessment year 1988‑89 it changed the system of accounting and decided to declare it on receipt basis and that according to the rulings given by the Higher Courts in the following reported cases the assessee‑company could not change system of accounting.

(a)1985 PTD 820 Supreme Court of Bangla Desh House Building Finance Corporation v. CIT Dacca; (b) (1981) 132 ITR 184, Calcutta High Court Reform Flour Mills Ltd. v. CIT West Bangal and (c) (1937) 5 ITR 279 BDGA (Punjab) Ltd. v. CIT Punjab, Lahore.

In all these cases it was held by the Honourable Courts that method of accounting cannot be change and thus the learned CIT(A) was not justified to delete (i) Rs.196 million for the assessment year 1989‑90 and (ii) Rs..163,291,968 for the assessment year 1990‑91 from total income of the assessee company.

7. In respect of assessment years 1991‑92 and 1992‑93, the assessee‑company has raised the following common and separate grounds as indicated thereagainst:‑‑‑

(I)that the learned CIT (A) has erred in, confirming the addition made by the Assessing Officer on account of Urea Price Adjustment (UPA) payable by the assessee‑company to the Government of Pakistan by contending that:‑‑‑

(i)the UPA payable to the Government of Pakistan was not an ascertained and determined revenue liability;

(ii)that the letter issued by the Ministry of Industries in respect of UPA payable to the Government of Pakistan did not have any legal value since it was a mere acknowledgement of the asses see‑company's letter and it did not convey the approval of the assessee‑company's working of the UPA payable to the Government of Pakistan;

(iii)that the assessee‑company's working of the UPA payable to the Government of Pakistan cannot be said to have been made in accordance with the stipulation of Article 9.3 of the Marketing and Pricing Principles Agreement nor any payment in respect of thereof has been made by the assessee‑company and therefore, the revenue liability on this account remained unascertained and undetermined; and

(iv)that in the earlier years when the assessee‑company has shown a favourable claim of UPA, the same was not offered for taxation on the plea that the same has not been received from the Government of Pakistan.

(II)that the net amount of Rs.31,853,617 in respect of Urea Price Adjustment payable, has been claimed by the assessee‑company whereas the disallowance of Rs.48,693,626 related thereto made by the Assessing Officer, has been confirmed by the learned Appeal Commissioner; (for assessment year 1991‑92 only).

(III)that the amount of Urea Price Adjustment payable claimed by the Government of Pakistan which amount was higher than that recorded as payable in the assessee‑company's books of accounts was allowed to assessee‑company.

(IV)that the learned CIT(A) has erred in not allowing in full the extra shift depreciation on fixed assets appearing under the head "other plant and machinery";

(V)that the learned CIT(A) has erred in not allowing correct amount of rebate on donations (for assessment year 1991‑92 only).

8. The ‑department for assessment year 1992‑93 has raised the following issues/grounds:‑‑‑

(I)that the learned CIT(A) was not justified in allowing initial depreciation on additions to Plant and Machinery @ 40%; and

(II)that the learned CIT(A) was not justified in allowing initial depreciation on additions to Heavy Transport Vehicles @ 40%.

9. Now we discuss the case issue‑wise in the context of contentions advanced on behalf of the parties and the respective orders of the forums below.

(I)Revenue Expenditure Treated as Capital Expenditure (Exchange Loss).

10. The assessee‑company had disputed the action of the learned Appeal Commissioner with regard to the confirmation of action of she Assessing Officer for treating the exchange loss arising out from the loan of Government of Italy and payments of technical fee as of capital nature as has been narrated in paragraph 5 of this order.

11. Briefly the facts are that the assessee‑company claimed exchange loss of different amounts for the assessment. years as per assessment order on the foreign currency loan secured from the Government of Italy which was utilized for obtaining technical services for the establishment of FFC Plant. The Assessing Officer disallowed the same while treating, the said loan as of a capital expenditure as to have been utilized for establishing the factory and the learned Appeal Commissioner maintained the said action of the Assessing Officer. The obvious reasons given in the impugned appellate order for the assessment years 1987‑88 to 1988‑89 were that .the exchange loss was incurred on the payment of instalments of loan and on account of re‑valuation of foreign currency loan in the books of accounts of the assessee and no exchange loss was incurred in connection with the payment of interest on loan and therefore, the original loan as well as loan instalment and revaluation of loan all were of capital nature and the exchange loss suffered in connection with a capital asset or fixed capital was of capital nature. The learned Appeal Commissioner gathered support to his view from various case‑laws as cited in his order.

12. It may be mentioned here that the claim of payment as fee for technical service only related to the assessment years 1985‑86.

13. In support of grounds of appeals, the learned AR of the assessee company argued that the loan was obtained from Government of Italy for the purpose of payment of fee for technical services and not for the purchase of plant and machinery and this fact was confirmed to the Assessing Officer through letter, dated 31‑12‑1986. He also referred another letter, dated 16‑8‑1979 issued by the State Bank of Pakistan for approving loan for specific purpose of payment of fee for technical service. He then contended that the case was not falling within the ambit of rule 8(8)(e) of Third Schedule to the Ordinance. He then stated that the accounts are prepared in accordance with the Companies Ordinance and not in accordance with Income Tax Ordinance, 1979. He referred a case reported as (1962) 46 ITR 590 (Bombay High Court) and contended that the matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts. He then contended that the concept of the learned Appeal Commissioner on this issue was misconceived because the standard accounting principles are that pre‑production expenses are treated as capital expenditure.

14. On the other hand, the learned Legal Advisor on behalf of the department contended that the Capital expenditure or Revenue expenditure have not been defined in the Ordinance but the 'Capital assets' have been defined in section 2(12) of the Ordinance. He then referred to pages 14 and 73 of the "Income Tax Made Easy" written by Mr. Sajjad to explain Capital expenditure and Revenue expenditure and contended that the same have nowhere been defined and as such would be defined according to the facts of each case. He further referred section 37 at page 477 of the Income Tax Law by Kanga & Palki Wala in respect of explaining the Capital and Revenue expenditure. He also referred different case laws from Indian jurisdiction reported as 2000 PTD 2446 (H.C. Allahabad); 2000 PTD 720 (H.C. Madras) and 2000 PTD 2119 (H.C. Gujarat). He laid emphasis on the point that the amount was actually spent for technical service for the installation of plant and machinery and the fee for installation of plant was debitable to the plant and the fee was part of acquisition of plant and as such part of capital asset. He continued that payments for technical services for installation of plant and machinery cannot be relatable to the functioning of the plant to be termed as Revenue expenditure. He then argued that it was in fact loan in connection with installation of the machinery and the installation of machinery was always included in the expenditure of capital nature. He contended that the amount spent after functioning/operation of the plant and machinery can be termed as Revenue expenditure. The learned L.A. finally contended that the action of the learned Appeal Commissioner was proper and liable to be maintained.

15. After considering the above contentions on behalf of both the parties, we are of the view that there is nothing to deviate from specific provision as contained in rule 8(8)(e) of Third Schedule to the Ordinance so as to exclude the case of the assessee‑company on the issue in question and to treat the exchange loss as revenue expenditure instead of capital expenditure which occurred on account of foreign loan and the alleged payment of technical fee. For the sake of convenience, we may like to reproduce rule 8(8)(e) of the Third Schedule to the Ordinance as under:‑‑‑

Rules 8(8)(e) of Third Schedule.

Where an assessee has required any plant or machinery (hereinafter to as `asset') from a country outside Pakistan for installation in Pakistan for the purpose of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset and before full and final repayment of any foreign loan, there is an increase or reduction in the liability of the assessee as expressed in Pakistan currency for making payment towards the whole or a part of the moneys borrowed by him from any person directly or indirectly, in any foreign currency specifically for the purposes of acquiring the asset (being in either case the liability existing immediately before the date on which change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the income year shall be added to, or, as the case may be, deducted from the actual cost of the asset and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset.

16. The learned Appeal Commissioner while deciding the issue of both the entries has dealt with the issue at length and we find no substantiation in the arguments of the learned AR from any provisions. of law. We agree with the learned Appeal Commissioner with his findings to the effect that the loan was admittedly taken for the purpose of expenditure of capital nature and that the exchange loss was incurred on the payment of instalment of loan on account of re‑valuation of foreign currency loan in the books of accounts of the assessee‑company and no exchange loss was incurred in connection with payment of interest of the loan and that the original loan as well as loan instalment and re‑valuation of loan, all were of capital nature. We further agree with his view that exchange loss suffered in connection with capital assets or fixed capital was of capital nature. The learned Appeal Commissioner has based his decision various cases as cited in his order and nothing has been argued on behalf of the assessee‑company through the learned AR that the case laws cited by the learned Appeal Commissioner were nor applicable we the issue in question.

17. In vide of above position, we see no exception to be taken to the impugned treatment as given to the assessee‑company in that regard by / the department and accordingly affirm the action of the learned Appeal Commissioner. The grounds raised in the appeal of the assessee company, therefore, stand rejected and consequently the appeals on this count fail.

II. Export Rebate

18. The assessee‑company has challenged the action of the learned Appeal Commissioner of his confirming the. change in basis for calculation of export rebate by the Assessing Officer resulting in reduction of claim of the assessee‑company for assessment years 1985‑86 and 1986‑87. The assessee‑company has also disputed the action of the learned Appeal Commissioner of not excluding the sale value of purchased fertilizer for the purpose of calculation of export rebate again resulting in reduction of claim of the assessee‑company for the assessment year 1987‑88.

19. Briefly the facts are that the Assessing Officer took the gross/total sales by including the sales of the purchased fertilizers while calculating the export rebate. The assessee‑company went in appeal on the ground that the Assessing Officer was not justified in taking total sales inclusive of sales of purchased fertilizer and price adjustment claims receivable from the Government. But the learned Appeal Commissioner confirmed the working of export rebate as made by the Assessing Officer vide impugned combined order, dated 28‑4‑1987 for the assessment years 1985‑86 and 1986‑87. Similarly, for the assessment year 1987‑88, the entire sales of the assessee. were taken in the light of treatment given in the earlier years for the calculation of export rebate.

20. The learned AR of the assessee‑company in support of grounds of appeals referred rule 216 of the Income Tax Rules, 1982 and contended that there can be two methods for calculating export rebate. While explaining first method, he stated that the profits can be seen is separate books of accounts of exports are maintained. For the second method, he stated that it will be based on sale value if no separate books of accounts are maintained in that regard. He contended that the assessee‑company was not maintaining separate books of accounts in respect of exports. He then contended that the fertilizer was manufactured by the assessee‑company and it was exported as well. He further stated that fertilizer was imported also in view of demands of the country and the Government allocated quota for the import so as to cater the needs of the distribution in the net work in the country on account of shortage of fertilizer. He there contended that rule 216(1)(b) of the Income Tax Rules applied to the case of the assessee‑company for computation of export profits and tax attributable to export sales. He then referred that the word "total" has been defined in three categories in clause (b) of sub‑rule (3) of rule ‑216 and the category described in para. (ii) of clause (b) of sub‑rule (3) of rule 216 was applicable to the case of. the assessee for determining profits on export sales of the assessee. He vehemently argued that the action of the Assessing Officer for considering the sale value of fertilizer imported by the assessee company for the purpose of pro‑ration for determining the profits on export sales was highly improper. He then finally contended that the treatment given by the department in that regard was not in accordance with the law.

21. On the other hand, the learned L.A./D.R. supported the action of the department and contended that the formula applied for calculating the export rebate by the department was proper and in accordance with the rule. However, he could not rebut the arguments of the learned AR regarding applicability of provisions of rule 216 as stated by the learned AR with respect of definition of "total" as given in para. (ii) clause (b) of sub‑rule (3) of rule 216 of the Income Tax Rules, 1982. He also could not fortify the stance of the department for the applicability of provisions of rule 216(3)(b)(iii) of the Income Tax Rules, 1982.

22. Keeping in view the above contentions on behalf of the parties, first of all we may like to reproduce the provisions of rule 216 for convenience of reference as under:‑‑‑

Rule 216 of Income Tax Rules 1982.

216. Computation of export profits and tax attributable to export sales. (I) Where an assessee exports any goods manufactured in Pakistan, his profits attributable to export sales of such goods shall be computed in the manner, specified hereunder:‑‑‑

(a)where an assessee maintaining separate accounts of the business of export of goods manufactured in Pakistan, the profits of the export business shall be taken to be such amount as may be determined by the Deputy Commissioner of Income‑tax in accordance with the provisions of Ordinance on the basis of such accounts;

(b)in other cases, the profits of such business shall be taken to be an amount which bears to the total profits of the business of the assessee from the sale of goods, the same proportion as the export sales of goods manufactured in Pakistan bear to the total sales of goods.

(2)Where total income of an assessee includes any profit from export of goods manufactured in Pakistan, the tax attributable to such profits shall be an amount which bears to the tax payable on the total income the same proportion as such profits bear to the total income.

(3)In this rule, unless there is anything repugnant in the subject or context,‑‑

(a)"export sales" means the f.o.b. price of the goods exported;

(b)"total" means.‑‑‑

(i)the aggregate of export sales s determined under clause (a); and

(ii)the ex‑factory price of goods sold in Pakistan, where the goods exported out of Pakistan were manufactured by the exporter, or:

(iii)the ex‑godown price of goods sold in Pakistan, in other cases.

23. If we see to the provisions of rule 216 of the Income Tax Rules, 1982 as reproduced above, obviously the main point involved in the proposition was regarding definition of "total" as given in the said rule. The plea of the assessee was that para. (ii) of clause (b) of sub‑rule (3) of rule 216 will apply to the case of the assessee‑company whereas the stance of the department was that para. (iii) of clause (b) sub‑rule (3) of rule 216 was applicable to the case in hand. As nothing has been argued or substantiated on behalf of the department to negate the arguments of the learned AR of the assessee‑company that the assessee‑company only exported the fertilizer which was locally manufactured and it never re‑ B, exported any fertilizer which was imported, therefore, the contentions of the learned AR of the assessee‑company are considered logical and well founded and obviously the case of the assessee‑company would be falling in the context of definition of "total" as given in para. (ii) of clause (b) of sub‑rule (3) of rule 216 of Income Tax Rules, 1982. We have already observed above that the learned DR could not fortify the view point of the department for the applicability of para. (iii) of clause (b) of sub rule (3) of rule 216 of Income Tax Rules, 1982. Therefore, in this situation the plea of the assessee‑company is accepted and the department is directed to make fresh computation of export profit and tax attributed to export sales and to determine export rebate after providing another opportunity to the assessee‑company in that regard in the light of observations given above.

24. Resultantly, the assessee‑company's appeals on this count merit acceptance in the manner indicated above.

III. Add back under section 25( C)

25. The assessee‑company has contested the action of the learned Appeal Commissioner for assessment year 1986‑87 whereby he maintained the add backs made on account of deferred interest by the Assessing Officer under section 25(c) of the Ordinance.

26. Briefly the facts are that the loan remained unpaid in excess of three years and so the amount was treated as deferred interest and the Assessing Officer while attracting the provisions of section 25(c) of the Ordinance added back the amount in the income of the assessee. In first appeal the action, of the Assessing Officer was confirmed by the learned Appeal Commissioner. Hence this appeal.

27. The learned A.R. of the assessee‑company first of all referred section 25(c) which is reproduced as under:‑‑‑

Section 25(c):‑‑

"Such trading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is, made or any other year (not being a year commencing after the expiration of five years from the end of the said three years) as the Deputy Commissioner may think fit."

He then contended that section 25(c) was only restricted to the trading liability and no other liability. On a question by the Bench as to whether off set was claimed at the time when the loan was paid back, the learned AR of the assessee‑company replied that it was not claimed by the assessee‑company in the year of payment. The learned A.R. of the assessee‑company also referred various provisions like that of sections 3, 52, 53 and 57 of the Limitation Act to support his contention that the amount was not liable to be added back keeping in view the time factor of payment.

28. On the other hand, the learned D.R. supported the action of the department by same reasoning as, given by the learned Appeal Commissioner in the impugned order.

29. After considering the respective contentions of the parties on the above issue with regard to addition on account of deferred interest under section 25(c), we are of the view that the action taken by the department' was calling for no interference by this forum because the factual position has been determined by the Assessing Officer specifically with regard to non‑payment of the said amount within three years of the expiration of assessment year 1983‑84 when the same was charged to account. The learned Appeal Commissioner in the impugned order has mentioned the wording of the provisions of section 25(c) and then came to the conclusion that the liability was to be created by 30th June which has admittedly not been done and hence the provisions of section 25(c) were attracted. He accordingly confirmed the action of the Assessing Officer on this count. Two fact‑findings forums firstly at the assessment stage and secondly at the first appellate stage have concurrently taken the position in respect of non‑payment of the said amount within three years of the expiration of assessment year 1983‑84 when the said amount was charged to account. In these circumstances, we have no alternative but to maintain the action of the forums below in respect of issue in question.

30. Resultantly, the assessee‑company's appeal on this count fail.

IV. Extra Shift Allowance on "other Plant and Machinery".

31. The asses see‑company has contested the action of the learned Appeal Commissioner in respect of assessment years 1985‑86 and 1986‑87 of setting aside the issue of disallowance of extra shift allowance on fixed assets appearing under the head "other plant and machinery". For the assessment years 1987‑88, 1989‑90 and 1990‑91, the assessee‑company assailed the action of the learned Appeal Commissioner of not allowing in full the extra shift depreciation on fixed assets appearing under the head "other plant and machinery".

32. Briefly the facts are that the assessee company claimed extra shift allowance under the head "other plant and machinery'. The detail provided by the assessee‑company revealed that other plant and machinery was including refrigerators, air‑conditioners, construction and maintenance equipment, electric installations etc. The view of the Assessing Officer was that claim of extra shift allowance was not in order at all on these items as their nature was such that they could not be used round the clock and that most of the items belonged to official items, construction equipment or training equipment which did not constitute the part of main F.F.C, Urea Plant and Machinery and hence the nature of other plant and machinery was not entitled to the extra‑shift allowance. Accordingly, the Assessing Officer disallowed the claim. In appeal field by the assessee‑company, the learned Appeal Commissioner while referring to relevant rule of the Third Schedule observed that in order to qualify for Extra Depreciation Allowance for multiple shift working the actual use of assets has to be established by the claimant. He, accordingly, set aside the issue with the direction that the claim may be re‑considered in view of the definition of plant and machinery as available in the C.B.R. Circular mentioned above and satisfy himself as to the actual use of the said assets in terms of sub‑rules (2) and (3) of the Third Schedule. Similarly, the relief in respect of other assessment 3 ears 1987‑88 to 1990‑91 was not allowed by the learned Appeal s commissioner as indicated in para. 31 of this order. Hence these appeals.

33. The learned AR of the assessee‑company stated that the plant of the assessee‑company worked in triple shift basis for more than 300 days in the year and hence the claim of the assessee‑company was in accordance with the facts and nature of the work. He contended that the learned Appeal Commissioner has set aside the issue in the assessment years 1985‑86 and 1986‑87 but has decided the issue against the assessee‑company in the assessment year 1987‑88. He then informed that the department has allowed the claim of the assessee‑company in respect of extra shift allowance in the assessment years 1988‑89 and the learned Appeal Commissioner in respect of assessment years 1989‑90 and 1990‑91 (as stated by the learned AR of the assessee‑company) decided the issue that the extra shift allowance will be allowed on the plant and machinery installed in the factory premises but he declined the allowance of other plant and machinery located outside the factory premises. He then referred rule 3(1) of the Third Schedule to the Ordinance and contended that 100% allowance was allowable on account of triple shift working.

34. On the other hand, the leaned L.A./D.R. contended that the benefit of the extra shift allowance depreciation cannot be extended to the office premises and specifically it cannot be extended to the head office, regional office and marketing office etc. He further stated that these offices are not included in the factory office premises and these do not remain open round the clock and normally these are opened for one shift of normal working hours. Therefore, the benefit of the said rule of Third Schedule cannot re extended for claiming depreciation for office equipment etc. He then referred to the instructions of the C.B.R. with regard to interpretation of plant and machinery laying down emphasis on the factory units. He then referred case‑laws reported as 1995 PTD (Trib.) 440 to support his contentions.

35. We have considered the respect contentions of the parties and have gone through the orders of the forums below. Obviously in the assessment years 1,985‑86 and 1986‑87, the issue has been set aside by the learned Appeal Commissioner vide impugned order with the direction to the Assessing Office that the claim may be reconsidered in view of definition of plant and machinery as available in the C.B.R. circular mentioned in the impugned order and satisfy himself as to the actual use of the said assets in terms of sub‑rules (2) and (3) of rule 3 of the Third Schedule to the Ordinance. It was further obvious from the impugned order for the assessment year 1987‑88 that the learned Appeal Commissioner was of the view that the assessee's claim of Extra Depreciation Allowance was not wholly tenable and Extra Depreciation Allowance will, therefore, not to be allowed on that part of other plant and machinery items which have been installed/located in the Admin Block of the factory, the Regional Officers, Marketing Division and the Head Office. However, he directed that the ITO/Panel may satisfy himself with regard to the authenticity of the aforementioned figures furnished by the AR of the assessee‑company. The learned AR pleaded that the issue had been decided against the assessee‑company in the assessment year 1987‑88 but the position/decision in respect of assessment year 1988‑89 was in favour of the assessee‑company. We have gone through the appellate order on that count in respect of assessment year 1988‑89 wherein the learned Appeal Commissioner observed that the perusal of the record shows that While allowing depreciation for the year, the Panel adopted figures of WDVs of plant and machinery from the assessee's charge whereas it should have adopted WDVs as appearing in the department's depreciation chart for the assessment year 1987‑88 and should have made necessary adjustment for the year and then allowed statutory depreciation. The learned Appeal Commissioner accordingly directed to ITO/Panel to examine the assessee's claim on this point and allow the depreciation as admissible under the law.

36. In this "position as has been depicted by the learned Appeal Commissioner in respect of the issue in question for the assessment year 1988‑89, we see hardly any comparison of the situation with regard to the facts in the assessment year 1988‑89 with that of the facts of the assessment years under appeals. Therefore, the situation in respect of assessment year 1988‑89 cannot be equated with the situation of assessment years under appeals.

37. We have already mentioned the operative part of the impugned order in respect of assessment years 1985‑86 and 1986‑87. We do not find any reason to interfere with the order of setting aside of the issue as has been made by the learned Appeal Commissioner for the assessment years 1985‑86 and 1986‑87 which was proper and justified in the circumstances of the case. In respect of assessment years 1987‑88 and 1989‑90 to 1990‑91, the department's action on the issue in question has been assailed by the assessee‑company in the manner indicated above. It was obvious from the separate orders for the assessment years 1987‑88 and 1989‑90 to 1990‑91 of the learned Appeal Commissioner that both the lower forums have given concurrent findings in respect of issue in question for the assessment years 1989‑90 and 1990‑91 with only variation for the assessment year 1987‑88 where the learned Appeal Commissioner directed the ITO/Panel to satisfy himself with regard to the authenticity of the figures furnished by the AR of the assessee. The learned Appeal Commissioner has also made reference of the appellate order for the assessment year 1987‑88 in the orders for assessment years 1989‑90 and 1990‑91 and followed that order. In the orders for assessment years 1989‑90 and 1990‑91, it was held by the learned Appeal Commissioner that extra shift depreciation allowance will not be allowed on that part of "other plant and machinery" items which have been installed/located in the Admin Block of the factory, Regional Offices, Marketing Division and the Head Office. Accordingly, the learned Appeal Commissioner confirmed the action

of the Assessing Officer/Panel in that respect. In this situation, undoubtedly, we are also of the opinion that no extra shift depreciation can be allowed on the part of "Other Plant and Machinery" for the items installed/located in the Admin Block of Factory, Regional Offices Marketing Division and Head Office as these are not normally used for extra shift and only have normal working office hours. But at the same time, it is to be looked into again for determining the aspect of .use of these items under the head "Other Plant and Machinery" as to have been actually and factually made by the assessee‑company or not. Therefore, as has been done for the assessment years 1985‑86 and 1986‑87, the matter in issue for the assessment years 1987‑88, 1989‑90 and 1990‑91 also require to be set aside with similar directions to the Assessing Officer as given by the learned Appeal Commissioner for the assessment years 1985‑86 and 9 986‑87 so to make a re‑probe into the matter and pass an order in accordance with the relevant rule and law. Accordingly, the impugned order for the assessment. years 1987‑88, 1989‑90 and 1990‑91 shall stand vacated and the issue shall stand set aside for re‑decision as stated above.

38. The assessee's appeals on the issue in question shall stand disposed of in the manner indicated above.

39. Now, we take‑up the issues raised in the departmental appeals.

I.Interest Expenditure.

40. The department has contested the action of the learned Appeal Commissioner on the point of interest paid to Banco Di Roma.

41. Briefly the facts are that the assessee‑company claimed interest on long term loan and it was revealed from the details of the assessee company that the interest of Rs.4,560,342 and Rs.3,417,991 for the assessment years 1987‑88 and 1988‑89 respectively was paid to Banco Di Roma Italy which was A‑non‑resident company of Italy and the said interest was paid on the basis of agreement executed between the assessee‑company and Messrs Snamprogitti SPA of Italy. The Assessing Officer's view was that tax was required to be deducted as per provisions of section 50(3) of the Ordinance, because the interest was paid by the assessee‑company to a non‑resident company but the assessee‑company failed to deduct the tax at the time of making payments. Therefore, the whole amount of interest was disallowed and added to the income of the assessee‑company under section 24(6) of the Ordinance. In appeal filed by the assessee‑company against the said treatment the learned Appeal Commissioner vide impugned order deleted the addition under section 24(b) for the reason that the loan was received by foreign sovereign Government which was not taxable entity and therefore, no deduction of tax was required to be made under section 50(3) and the provisions of section 24(b) were not attracted. The department has assailed the said action before us.

42. The learned A.R. /D.R. vehemently, while. supporting the assessment order, contended that the loan was in fact not received by a sovereign Government but by Messrs F.F.C./assessee‑company and the assessee company was the payer for the sum of the loan and not the Government of Pakistan and the payee was the non resident company Messrs Banco Di Roma and not the Government of Italy. He further argued that all the conditions of section 24(b) have been fulfilled for disallowing the claim because F.F.C. was paying interest to a non‑resident company but did not deduct tax on the same under the provisions of section 50(3) and as such the provisions of section 24(b) were rightly attracted by the Assessing Officer tend the amount was rightly add back to the income of the assessee Company.

43. On the other hand the learned AR supported the action of the learned Appeal Commissioner on the same reasoning as adopted by the learned Appeal Commissioner which were in consonance to the points raised at the first appellate stage.

44. After considering the contentions of the parties in respect of issue in question and going through the respective orders of the forums below, we are of the view that the action of the learned Appeal Commissioner was proper and within the four corners of the provisions of law and he has given plausible reasoning for coming to the conclusion after discussing the point of view of the AR of the assessee‑company which he also reproduced in the impugned order. The learned Appeal Commissioner was of the view that the loan was advanced and the interest was received by the foreign sovereign Government and no tax under section 50(3) was deductible as the recipient of interest was not a taxable entity. He observed that since under the law no deduction of tax was required to be made under section 50(3) of the Ordinance, therefore, the provisions of section 24(b) of the Ordinance were not attracted. He accordingly directed to delete the disallowance of interest for both the years under appeal. He also observed that the assessee‑company reliance on exemption under clause (75) of the Second Schedule to the Ordinance was of no avail as the said exemption applied to loans given by non‑‑resident private organization which was not the case here.

45. The position depicted from the impugned order clearly establish that the loan was made available to the assessee‑company with the approval of the Government of Pakistan as well as that of Italy and that the re‑payment was also guaranteed by the Ministry of Finance, Government of Pakistan and that Banco Di Roma acted simply as a collecting agent of the Government of Italy which was the actual beneficiary of the interest. The impugned order further depicted that the Assessing Officer as well as Income Tax Panel in their respective assessment orders repeatedly referred to the loan as a `Government of Italy' loan and it meant that they also did not dispute this fact. In this position obviously no tax under section 50(3) was deductible as the recipient of interest was not taxable entity. We, therefore, agree that the provisions of section 24(b) were not applicable to the case of the assessee‑company. Hence the action of the learned Appeal Commissioner of deletion of disallowance of interest being justified was calling for no interference by this forum.

46. Resultantly, the departmental appeals on this count would fail.

II. Extra Shift Depreciation Allowance

47. The department has contested the action of the learned Appeal Commissioner of setting aside the issue in respect of assessment years 1985‑86 and 1986‑87. The arguments of both the sides in that regard have been reproduced above while dealing with the appeals of the assessee‑company.

48. We have already decided the matter while deciding the appeals of the assessee on this issue and have affirmed the action of the learned Appeal Commissioner in the preceding paras. while dealing with the issue in question. Therefore, the departmental appeals would stand rejected on the same reasoning as given in deciding the issue in the appeals of the assessee‑company.

III. Additional Tax under section 88

49. The department has contested the action of the learned Appeal Commissioner for the assessment years 1985‑86 and 1986‑87 with regard to the levy of additional tax as the same to have been worked out incorrectly on the plea of the previous history was not correct.

50. Briefly the facts are that the additional tax was also levied on the basis of new working of the export rebate as made by the Assessing officer at the time of assessment as per assessment order. The learned Appeal Commissioner held that levy of additional tax under section 88 ,n the basis of new working was not correct because there was no intentional default. He, accordingly directed the Assessing Officer to re‑examine the issue in the light of these observations and restrict tile quantum of additional tax only to the short payment if otherwise found on the basis of the declared income. The department has contested the said action before us.

51. The learned L.A./D.R. contended that the additional tax was rightly calculated and levied by the Assessing Officer as it was based on working of taxability as per rule 216 of the Income Tax Rules, involving the working of export rebate.

52. OU the other hand, the learned AR supported the action of the learned Appeal Commissioner and contended that the additional tax under section 88 is levied only when an assesses fails to pay tax under section 54 payable on the basis of return. He referred case‑law (1988) 58 Tax 153 (Trib.) to support his arguments.

53. In respect of issue regarding levy of additional tax under section 88 of the Ordinance, we have considered the respective contentions of the parties and have gone through the orders of the forums below. The Assessing Officer was of the view that the assessee incorrectly worked out the export rebate at the time of calculation of tax as he had not adopted the gross sales declared by him as per accounts and the sales were wrongly adopted by him. He was further of the view that the export rebate was incorrectly claimed by him (as per figures given in the assessment order) whereas the exact export rebate comes to Rs.39,458,000 on the basis of his declared income and tax liability. He then worked out the tax payable under section 54 and the short payment of tax as per figures given in the assessment order consequently levying additional tax as per figures given in the assessment order. On the other hand, the learned Appeal Commissioner allowed relief to the assessee in terms as stated above for the reason that levying of additional tax under section 88 on the basis of new working was not correct as there being no intentional default. He accordingly directed the Assessing Officer to re examine the issue in light of his observations and restrict the quantum of additional tax only to the short payment, if otherwise found on the basis of declared income. The reasons advanced by the learned Appeal Commissioner appeared to be proper and unexceptionable because additional tax under section 88 is levied if the assessee fails to pay tax under section 54 as payable on the basis of return or the tax so paid is less than the tax payable under the said section. If tax liability is enhanced on the basis of an assessment in the event of interpretation h placed to a provisions of law or rule for calculating total income/taxable income, then of course, there would be a marked distinction between the tax payable under section 54 on the basis of return filed by the assessee and the tax payable on the basis of assessment made by the Assessing Officer. The tax payable on the basis of return is considered an admitted tax liability and the tax determined on the basis of assessment order is taken to be assessed tax liability. In this view of the matter, we gather support from a recent judgment of the Honourable Karachi High Court reported as 2002 PTD 388 (Karachi High Court).

54. In the light of above discussion and also our findings as given in respect of issue of export rebate, we affirm the action of the learned Appeal Commissioner on the issue in question.

55. Consequently, the departmental appeals on this count fail.

IV. Urea Price Adjustment.

56. The department has contested the action of the learned Appeal Commissioner in respect of assessment years 1988‑89 to 1990‑91 wins regard to issue of claim of Urea Price Adjustment (UPA) on the grounds narrated in para. 6(IV) of this order.

57. Briefly the relevant facts as per assessment order for the assessment year 1988‑89 are that the Assessing Officer on the examination of final accounts of the assessee‑company found that t1w assessee did not offer the claim of UPA for taxation during the year under consideration which the assessee had been offering for tax in a~. the previous years. As per facts the, assessee under the `Marketing at Principle Agreement' with Government of Pakistan was entitled to certain differential between the fertilizer/urea prices fixed by the Government and the costs of production/marketing/distribution whir was to be worked out in accordance with the said agreement in order to ensure a minimum return to the assessee. The assessee was, therefore, as per agreement entitled to the aforesaid amounts termed as Urea Price Adjustment which the assessee consistently accounted as income on ass `accrual basis'. Accordingly, the claim so worked out under the agreement was always included in the income of the assessee and treated as such for arriving at taxable income. But for the first time in the assessment year 1988‑89, the assessee changed the above accounting method/policy. Hence, the assessee was asked to explain the position and why the amount of Rs.204 million (for assessment year 1988‑89) workers out on the same basis as worked out in previous years should not added to the income of the assessee. In reply thereto, the assess, admitted that the UPA claims were recognized on accrual basis upto the last year but the accounting policy had to be changed from accrual bas to receipt basis in view of inordinate delay in the settlement of the claims by the Government of Pakistan. It was further stated by the assessee in the reply that adjustments if any arising on final settlement pending claims will be accounted for in the year of settlement. It was further remarked by the assessee in the reply that had the claim for the year been accounted for on accrual basis then the net profit would have been higher by Rs.108 millions. It was further stated by the assessee company that Government of Pakistan has issued notification of urea ex factory price for the year 1982‑1986 whereby the balance amount shown as receivable from Government of Pakistan on this account of Rs.621,480,000 as at December 31,1997 has been converted by the Government into a net amount of Rs.425,116,724.90 in view of Government of Pakistan's unilateral position of this matter and the issue was presently under arbitration and yet to be resolved. It was further stated that the assessee‑company has neither accounted for claim disallowed by the Government of Rs.1,046,596,724 for the years 1982 to 1986 nor any basis exist to accrue any claim for 1987 under such circumstances. The above contentions of the assessee‑company were considered by Income Tax Panel. It was observed by the Income Tax Panel that the assessee‑company admitted that it has indeed changed its accounting method and policy for accounting UPA claim but justified on the grounds listed above. It was further observed that the assessee also admitted that it has upto the last year recognized UPA claims on an accrual basis. The Income Tax Panel found that the Marketing and Pricing Principle Agreement (M&PP Agreement) under which the assessee was entitled to receive UPA accounts was still valid, effective and operative and has not gone under any change and the assessee company has not been able to cite any legal authority in support of its action in changing the accounting method regularly and consistently employed by the assessee‑company in the past. While referring to the provisions of section 11 of the .Income Tax Ordinance, 1997, it was observed by the Panel that the total income of the assessee included all income accruing or arising to it in Pakistan. While referring to section 32 of the Ordinance, it was observed by the Panel that the income, profits and gains are to be computed in accordance with method of accounting regularly employed by the assessee. It was further observed that the effect of change in accounting method, if accepted would be the indefinite postponement of payment of taxes on this portion of income of the assessee which the assessee had historically been offering for taxation. The Panel observed that the assessee has not only failed to meet the consistency requirements of section 32 but also has not fulfilled the requirement of section 11 and section 55 under which it has to declare this amount as its income of the current year for tax purpose. The Panel then observed that the UPA amount became company's income when it became entitled to them under the M&PP Agreement and he assessee was required under the aforesaid provisions to include this amount in its total income even though there was a counter claim. The other contentions of the assessee‑company with regard to this issue were ejected by the Income Tax Panel repeatedly for the reasons that the assessee‑company was entitled to UPA amounts/claims under the Marketing and Pricing Principle Agreement and the assessee‑company has been including such amounts in its income in the past on an accrual basis in accordance with method of accounting regularly employing by it and now the same could not be excluded from the income of the year of accrual merely because its actual receipts was delayed or deferred. It was held that the issue as to whether any income was year accounted on accrual basis or receipt basis was not effected by the existence of a counter‑claim. However. as per detailed reasoning given in the assessment order for the assessment year 1988‑89, the Income Tax Panel came to the conclusion that since the assessee accordance with the method of accounting regularly employed by it has included .these amounts in its income on accrual basis and now it could not change this to a receipt basis and the choice did not rest with the assessee. Accordingly, the Income Tax Panel found that UPA amounting to Rs.204 million (for the year 1988‑89), which according to the assessee has been worked out on the basis on which it has been worked out in the past did accrue to the assessee as its income during the year under consideration and it shall be added to its income accordingly. Finally, the income tax Panel computed the income as per details given in the assessment order.

58. In appeal filed by the assessee‑company against the said treatment for assessment year 1988‑89, the learned Appeal Commissioner through impugned order while discussing the issue at length directed for the deletion of the addition made on account of UPA claim. The relevant part of the impugned order (assessment year 1988‑89) is reproduced as under:‑‑‑

"Considering the facts of the case and the above case‑law, the action of the company in not including UPA claim in its income of the year under consideration in the changed circumstances is quite justified. The change in accounting policy is also warranted by the changed circumstances and stark realities of business. The said change is also of bona fide nature. The company had already suffered tax on un admitted UPA claims amounting to Rs.1,099 millions in the preceding five years. It would not be fair expect from the assessee‑company to go on paying tax on the basis of mere claims which are liable to and have actually been slashed drastically in the past.

It is, therefore, deemed appropriate to hold that UPA claim of Rs.204 millions does not constitute assessee's income on accrual basis in the year under consideration because neither it represents a definitely ascertained amount nor the assessee had acquired the right to receive it. This claim will be included in assessee's income only to the extent of its actual approval by the Government in the year of its approval. Only then the claim will be considered as having accrued. Accordingly, the addition of Rs.204 millions on account of Urea Price Adjustment claim is directed to be deleted."

59. The same was the result of treatment on this issue for the assessment years 1989‑90 and 1990‑91.

60. The department has challenged the said action of the learned Appeal Commissioner before this Tribunal.

61. The learned L.A. /D.R. in the arguments referred the reasons as given by the Assessing Officer for rejecting the version of the assessee company and making addition in respect of UPA claims. He reiterated the same reasons as given by the Assessing Officer and contended that the assessee‑company had been declaring UPA claims and offering for tax purposes regularly on the method of accounting on an accrual basis upto assessment year 1987‑88 but suddenly changed its method of accounting inthe assessment year 1988‑89 from accrual basis to receipt basis for the simple reason that the approval of the claim were delayed by the Government which was not sufficient or bona fide reasons to change the method of accounting. He then quoted the same case‑laws as mentioned in the grounds of appeals to support his contentions that the action of learned Appeal Commissioner was without any legal justification.

62. In this regard, the leaned AR of the assessee‑company stated that there was Marketing and Pricing Principles Agreement by the assessee with the Government of Pakistan made on 5‑7‑1978. He stated that the prices of fertilizer were controlled by the Government and most of fertilizer at that time 'was imported into Pakistan for meeting the requirement of the country. He further stated that the agreement with the Government of Pakistan was valid for 10 years till 1993‑94. He informed that the Fauji Foundation was a substantial shareholder of the assessee company. He explained that the agreement worked both ways and extra cost was to be borne by the Government. He stated further that 20% of the profit generated by the assessee‑company was to be returned to its shareholders and at least 20% dividend was to be paid to the shareholders. He explained that the assessee‑company from assessment years 1982‑83 to 1987‑88 ending December 1986 (Accounting year), had been declaring the income on an accrual basis. He further stated that the Government of Pakistan used to slash and disallow certain amounts whenever claim was lodged by the assessee‑company with the Government of Pakistan in respect of extra cost hence and therefore, there was dispute between the Government of Pakistan and the assessee company on that score. He contended that the assessee‑company was compelled to change the method of accounting for the said reason with effect from assessment year 1988‑89 from accrual basis to receipt basis but the department did not accept that position and continued to tax on the basis of claims launched by the assessee‑company to the Government. He contended that the learned Appeal Commissioner has decided the issue of Urea Price Adjustment claim to be accounted for on accrual basis but explained the accrual basis to the effect that it will be taken to accrue in the year when the amounts/claims would be approved by the Government of Pakistan. He supported the action of the learned Appeal Commissioner by terming the same as based on proper reasoning. He then contended that income cannot be said to arise or deem to arise to an assessee on the basis of claims lodged to that effect and that the contingent income cannot be taxed. He argued that there was no concept of real income in tax laws. He stated that the method of accounting has not been changed in the impugned order and the learned Appeal Commissioner has only defined the accrual basis in the case of the assessee by relying on several case‑laws. He then stated that the assessee‑company has accepted. the decision of the learned CIT(A) wherein he has defined the accrual basis in the case of the assessee. He then stated that the facts of the case‑laws cited as 1985 PTD 820 (SC Bangladesh) has no relevance to the facts of the case of the assessee company because the learned Appeal Commissioner has held that the said income .will be taxed on accrual basis. He then stated that the case reported as (1981) 132 ITR 184 (H.C. Calcutta) has been relied upon by the Department in the grounds of appeals but that Case‑law goes against the viewpoint of the department. In respect of reliance of the department on the case reported as (1937) 5 ITR 279, the learned AR of the assessee‑company stated that the facts of the case were different and irrelevant for the case of the assessee because interest income was taken to suspense account in that case. He then specifically referred to page‑10 of the impugned order for the assessment year 1988‑89 reflecting the previous position of claims lodged and approved by the Government for the years 1982 to 1986. He then referred page‑11 of the impugned order wherein observation of the case‑law reported as PLD 1966 Lah. 246 (H.C. Lah.) have been reproduced and contended that the income is held to accrue when the assessee has acquired right to receive. He then drew our attention to page 12 of the impugned‑order in support of justification for deviation in the accounting policy wherein the case‑law reported as 56 ITR 42, 48 ITR 1, (1911) ITR 650 (Ban.) 4 ITR 420 and. 44 ITR 22 have been referred. He finally contended that the action taken by the learned Appeal Commissioner was justified and proper in the circumstances of the case and liable to be affirmed.

63. We have considered the respective contentions of the' parties at length on the issue and have also thoroughly gone through the orders of he forums below. '

64. Admittedly, the assessee‑company had been claiming UPA claims on an accrual basis upto assessment year 1987‑88 and the said method of accounting was regularly employed by the assessee‑company and UPA claims of the assessee‑company were thus treated as its income on accrual basis. Undoubtedly, there was an agreement known as Marketing and Pricing Principle Agreement between the assessee company and Government of Pakistan under which the assessee‑company was entitled to receive UPA claims and the same was in force and operative during the years under consideration. As per provisions relating to the scope of total income under section 11 of the Ordinance, the total income of an assessee will include all income from whatever sources which was received or deemed to be received in Pakistan or accrued or arose to him outside Pakistan. Now while looking to the provisions of section 32 relating to method of accounting, it was clearly provided therein that the income, profits and gains shall be computed for the purposes of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed , by an assessee unless the C.B.R. prescribe form and manner by special or general order in respect of any business or profession etc. In the case in hand, the Assessing. Officer, while noticing the change in the method of the accounting in respect of UPA claims, was of the view that the effect of change in accounting method if accepted, would be the indefinite postponement of payment of taxes on this portion of income of the assessee which the assessee had historically been offering .for taxation. The Assessing Officer's further observation was that the assessee has thus not only failed to meet the consistency requirements of section 32 but has also not fulfilled the requirements of section 11 and section 55 tinder which it has to declare this amount as its income of the current year ‑for tax purposes. It was added by the Assessing Officer that the UPA amounts became company's income when it became entitled to them under the .M&PP. Agreement and the assessee was required under the said provisions to include this amount in its total income even though there was a counter claim. Now, we have to' see to the contentions of the learned AR reproduced above on this issue whereby he argued that the learned Appeal Commissioner has in fact explained the issue of UPA claims of the assessee on an accrual basis by giving a summary of the position of the years 1982 to 1986 in respect of amounts claimed by the assessee company and declared as accrued income in its accounts and the claims finally approved by the Government. The learned AR also stated that they have accepted the decision of CIT(A) on that score. From these arguments/stance of the learned AR, the position that emerged was that there was no objection to the treatment of the claims on accrual basis which in a way has been interpreted and explained by the learned Appeal Commissioner in his own manner by ordering deletion of the addition and for inclusion of the claim in the income of the assessee in the year of actual approval of the same by the Government. This line of argument/stance of the learned AR was surprising and in fact negating the method of accounting which was changed by the assessee‑company from an accrual basis to receipt/cash basis in 'the years under consideration. If we subscribe to the above position and agree with the interpretation/explanation placed by the learned Appeal Commissioner to the case of the assessee in respect of UPA claims, then the whole concept of method of accounting employed on an accrual basis would fall to the ground and stood negated because there could not be a midway or half way in interpreting the method of accounting employed by the asses see‑company on an accrual basis to that of actual approval of the claims to be taken in the year of approval. Although, change in the method of accounting can be made but it must be bona fide and not for escapement of treatment of an income for taxation purposes. For the method of accounting to be employed by an assessee either it should be definitely on accrual basis or it should be on receipt basis and one cannot be linked with the other to place an interpretation to make it half way of one method into the other method. Therefore, we are of the view that there can be no deviation to .the employment of method of accounting in a half way if the same had been regularly employed in the past by the assessee. The change, if any, can only be permitted if the method is totally changed from an accrual basis to receipt basis and it is bona fide change. In the case in hand, the contention of the learned AR that the learned Appeal Commissioner has in fact interpreted/explained the method of accounting no accrual basis in the case of the assessee and there was no change from accrual basis to receipt basis, was having no rationale to accept the view point of learned Appeal Commissioner on the issue in question because it would amount to bring method of accounting of accrual basis intermingled with method of accounting of that of receipt basis. The position, depicted by the learned Appeal Commissioner in respect of years 1982 to 1986 for declared claims and approved claims showing slashing of claims by the Government and decreasing the claims to a certain extent, was of no help to the assessee company because every year of assessment in an independent year and treatment can different in the given circumstances of each year on factual reasons and figures. Therefore, we are of the considered opinion that such interpretation of method of accounting of that of accrual basis would definitely amount to the negation of the system of accounting and would be defeating the provisions of section 11 and section 32 of the Ordinance. Accordingly, the treatment given by the Assessing Officer seemed to be proper and just in the circumstances of the case and therefore, the action of the learned Appeal Commissioner on the issue in question was not sustainable. Hence the impugned order to that extent is cancelled and that of the Assessing Officer is restored.

65. Consequently, the departmental appeals succeed on this issue.

V. Rebate on Donation

66. In the assessee‑company's appeal for the assessment year 1991‑92, the learned AR' of the assessee‑company contended that the assessee‑company paid donation to approved institution which fact was accepted by the department. He contended that the as claimed rebate on income tax as well as super tax in accordance with the provision of section 49 of the 6rdinance. He stated that the position of the department was that it will allow rebate on income tax and not on super tax. He 'stated that the word `tax' has been used in section 49 of the Ordinance and tax has been defined in section 2(43) of the Ordinance so as to include is income tax, super tax, surcharge etc. He vehemently contended that the rebate on donations was allowable on income‑tax as well as on super tax. He then stated that the learned Appeal Commissioner has quoted an unreported case of Karachi Bench but he was unable to obtain copy of the same.

67. On the other hand, the learned. L.A./D.R. has supported the action of the department as taken in that regard.

68. In respect of issue in question for assessment year 1991‑92, we would agree with the arguments as advanced by the learned AR of the assessee‑company that the tax as per definition given in section 2(43) of the Ordinance was including income‑tax, super tax and surcharge etc. and accordingly the rebate on donations should have been allowed on income‑tax as well as on super tax. Therefore, the assessee‑company was entitled to claim rebate on donations on income‑tax as well as on super tax and accordingly the department is directed to allow the rebate on donation in that manner.

69. The assessee's appeal on this count succeeds.

70. We may like to mention here that the other grounds and issues raised by the assessee in the appeals for the assessment years 1991‑92 and 1992‑93 already stood answered in our

findings in detail as given above for the earlier assessment years. Therefore, the assessee's appeals for the assessment years 1991‑92 and 1992‑93 shall stand decided in the light of our findings given on the issues in the earlier assessment years.

71. In respect of departmental appeal for the assessment years 1992‑93, nothing has been argued to substantiate the grounds of appeal. Therefore, the action of the learned Appeal Commissioner on that score is affirmed for assessment year 1992‑93. Therefore, the departmental appeal fails.

72. Consequently, all the above appeals of the assessee and the department shall stand disposed off in the manner indicated above.

M.A./551/Tax (Trib.)Order accordingly.