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

‑‑‑‑S. 62‑‑‑Income Tax Rules, 1982, R.34‑‑‑Assessment‑‑‑Estimation of sales‑‑‑Sales were estimated on the ground that the same were not open to verification because invoices produced were devoid of complete particulars of the clients and the sales were mostly on cash basis and complete addresses of the customers had not been given on the cash memos‑‑‑Assessee contended that no defects were pointed out to the assessee and that the cash memos issued contained the details as required under R.34 of the Income Tax Rules, 1982 and that detailed addresses were not required as per the said rule‑‑‑Sales were reduced by the First Appellate Authority ‑‑‑Validity‑‑‑Assessee had not contested rejection of the declared version‑‑‑Assessee's concern was that adequate relief in estimate of sales had not been given‑‑‑On one hand it was pleaded that addresses of the customers were given on cash memos but on the other hand it was contended that R.34 of the Income Tax Ordinance, 1982 did not require that the assessee should give full particulars of the customers and the declared sales could not be rejected on that ground‑‑‑Assessing Officer had also not evolved any basis for estimate of sales‑‑‑Assessee was not confronted with instances of particular sales which were not verifiable‑‑‑Case was of a private limited company where account books were maintained‑‑‑Appellate Tribunal agreed that relief allowed by the Appellate Tribunal was not adequate and further reduced the estimation of sales.

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

‑‑‑‑Third Sched., R. 5A Category‑E & R.5‑‑‑Depreciation allowance‑‑ First year allowance‑‑‑Assessee was an Internet Service Provider ‑‑ Assessee's claim of First Year Allowance under R.5A of the Third Schedule of the Income Tax Ordinance, 1979 was rejected by the Assessing Officer on the ground that assessee was not an industrial undertaking as provided in Explanation to R.5 of the Third Schedule of the Income Tax Ordinance, 1979 which was confirmed by the First Appellate Authority‑‑‑Validity‑‑‑Under R.5A of the Third Schedule of the Income Tax Ordinance, 1979, First Year Allowance was available apart from manufacturers to other industries including service, infrastructure, social and agricultural sector etc.,‑‑Definition of "industrial undertaking" given in the First Schedule of the Income Tax Ordinance, 1979 was confined to the manufactures etc. Only the First Year Allowance was available both to manufacturers and other industries which includes services industries‑‑‑Definition given in Explanation to R.5 of the Third Schedule of the Income Tax Ordinance, 1979 or given in the First Schedule to the clause "industrial undertaking" will not apply in case of assessee which provided services‑‑‑Conditions laid down in R.5A of the Third Schedule of the Income Tax Ordinance, 1979 would apply in case of assessee‑‑‑Assessee was entitled to the allowance‑‑ Appellate Tribunal held that the assessee be allowed allowance @ 40 % as provided in R.5A of the Third Schedule of the Income Tax Ordinance, 1979.

2002 PTD 470; 1999 PTD (Trib.) 4 and Oxford Advanced Learner's Dictionary ref.

Saeed Anwar Kazmi, ITP for Appellant.

Abdul Shakoor, DR for Respondent.

Date of hearing: 20th December, 2003.

ORDER

MAHMOOD AHMAD MALIK (ACCOUNTANT MEMBER).‑‑ These are cross appeals. The first grievance of both the department and the assessee are regarding estimate of sales. Sales had been declared at Rs.2,587,277. The Assessing Officer estimated the same at Rs.5,000,000 which were reduced in first appeal to Rs.3,500,000. The department contends that the relief allowed was too liberal whereas the assessee contends that adequate relief had not been allowed by the First Appellate Authority. The second issue raised in the assessee's appeal is that the learned CIT(A) was not justified in confirming disallowance of first year depreciation allowance under rule 5A of the Third Schedule to the repealed Income Tax Ordinance, 1979.

2. The facts of the case briefly stated are that the assessee is a private, limited company that derived income as an internet service provider (ISP). This was the first 'year of assessment when business was conducted for a period of six months. The Assessing Officer confronted the assessee that the sales were not open to verification because invoices produced were devoid of complete particulars of the clients and that sales were mostly on cash basis and complete addresses of the customers had not been given on the cash memos. The assessee replied that mostly the sales of the company are to corporate sectors/institutions/organizations which are fully identifiable. Further it was submitted that the receipts or the assessee also bore names and addresses of .the customers. The learned Assessing Officer however was not satisfied and he observed that complete addresses of the customers were missing and therefore verification was not possible. The Assessing Officer further observed that the assessee was a leading ISP. Accordingly receipts were estimated at Rs.5,000,000. The AR of the assessee submitted before the First Appellate Authority that no defects were pointed out nor confronted to the assessee and that the case memos issued contained the details as required under rule 34 of the Income Tax Rules, 1982 and that detailed addresses were not required as per the said rule. The learned CIT(A) observed that the declared sales had been rejected on general observations and that the estimate of sales was excessive. He accordingly reduced the estimate of sales to Rs. 3,500,000.

3. The assessee had claimed First Year Allowance under rule 5A of the Third Schedule to the repealed Income Tax Ordinance, 1979 @ 40 % contending that category E of the Table to the said Rule 5A applied in its case. The learned Assessing Officer observed that the claim was not allowable because the assessee was not an industrial undertaking as provided in Explanation to Rule 5 of the Third Schedule. Accordingly the claim was not allowed to the assessee. The learned CIT(A) agreedwith the Assessing Officer and confirmed the disallowance.

4. The learned AR reiterated the arguments given before the First Appellate Authority. He submitted that the assessee had maintained cash memos as provided in rule 34 of Income Tax Rules, 1982 which do not require that complete particulars like address etc. of the customers be recorded. He further submitted that this was the first year of business which was conducted for a period of six months, that the assessee had declared reasonable results, that the estimate of receipts made by the Assessing Officer and as reduced by the First Appellate Authority were on the higher side. He submitted that it was held in the case reported as 2002 PTD 470 by the Karachi High Court that accounts could not be rejected till specific defects were found in the accounts from which it could be seen that correct profits could not be determined therefrom. Further he referred to the Tribunal's decision reported as 1999 PTD (Trib.) 4 wherein it was observed that mere statement that addresses of clients/customers were not available will hardly clothe the Assessing Officer with the authority to make addition. He further submitted that the authorities below had wrongly disallowed the claim of First Year Allowance because they had referred to the definition of "industrial undertaking" as given in Explanation to Rule 5 which was not relevant to the term used in Rule 5A of the Third Schedule to the Income Tax Ordinance, 1979. He then referred to the dictionary meanings of the term "industry". He, stated that the definition of the term "industry" given in "Oxford Advanced Learner's Dictionary" includes commercial undertaking that provides services. He stated that the assessee provides services which squarely fall in the category E of the Table given under rule 5A and therefore, the assessee was entitled to allowance @ 40% of the written down. The learned DR on his part repeated the arguments given in the assessment order regarding estimate of sales and stated that since particulars of customers were not available the Assessing Officer had rightly estimated sales at Rs.5,000,000. He further stated that since the definition of the term "industrial undertaking" had not been given in rule 5A, we may refer to the definition given elsewhere in the Income Tax Ordinance. He stated that reference to the dictionary meaning is relevant when the term has not been defined anywhere else in the relevant statute. He submitted that in these circumstances the Assessing Officer was justified to disallow the claim of the assessee under rule 5A because the assessee's case was not covered in the definition of "industrial undertaking" given in Explanation to Rule 5 read with the First Schedule to the Income Tax Ordinance, 1979.

5. We have perused the orders of the authorities below and have given consideration to the arguments of both the parties. The arguments of the learned AR with regard to estimate of sales were partly self‑contradictory. In the grounds of appeal it has not been contended that the declared sales be accepted. Relevant ground is reproduced below:‑‑

"That though the learned Commissioner has granted relief in estimation of sales yet the relief granted is not sufficient to appreciate the facts of the case".

Thus the assessee has not contested rejection of the declared version as such in the grounds of appeal. The assessee's concern is that adequate relief in estimate of sales had not been given. Further on the one hand it was pleaded that addresses of the customers were given on cash memo but on the other hand it was contended that Rule 34 of the Income Tax Rules does not require that the assessee should give full particulars of the customers and therefore, the declared sales could not be rejected on that, ground. We however, find that the Assessing Officer has also not evolved any basis for estimate of sales. He did not confront the assessee with instances of particular sales which were not verifiable. This is the case of a private limited company where account books were maintained. In these circumstances we agree that the relief allowed by the First Appellate Authority is also not adequate. The learned Alt submitted that the assessee has itself declared better results in the succeeding years. Keeping in view various factors we deem it appropriate to reduce estimate of sales to Rs.3,000,000. Ordered accordingly.

6. Rule 5A of the Third Schedule to the repealed Income Tax Ordinance, 1979 is reproduced below:--

"5A First Year Allowance.

Where any machinery, plant and equipment is installed by any industrial undertaking set‑up in Pakistan on or after the twenty‑first day of November, 1997, and owned and managed by a company formed after the said date, exclusively for operating the said industrial undertaking, further depreciation by way of First Year Allowance in respect of the year of installation or the year in which such machinery, plant or equipment is used by the assessee for the first time for the purposes of his business or profession or the year in which commercial production is commenced, whichever is the later, shall be allowed at the rates specified in the table below:‑‑

Table

Categories of IndustriesRates

E ..Other industries Forty per cent of the including service, infrastructure, written down value.

social and agricultural sector,

other than transport industry.

7. The Assessing Officer has interpreted the clause "industrial undertaking set‑up in Pakistan" used in the above provisions to mean as the industrial undertaking as defined in Explanation to Rule 5 of the said schedule read with the meanings assigned to the clause in the First Schedule. The learned AR pointed out that the term has been defined in Para. . B of part IV of the First Schedule but it has been specifically stated therein that the definition is relevant for the said Schedule i.e. the First Schedule only. Further he submitted that the Explanation to Rule 5 also provides as under:‑‑

"Explanation. As used in this clause "industrial undertaking" has the same meaning as in the First Schedule."

To us the arguments of the learned AR carry substantial weight. In order to properly apprehend the provisions it would be worthwhile to reproduce the definition of "industrial undertaking" given in Para. B of Part‑IV to the First Schedule as under:‑‑

"--------------------------

B. As used in this Schedule:‑‑

(1) "Industrial undertaking" means an undertaking which is set up or commenced in Pakistan on or after the 14th day of August, 1947, and which employees (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency; or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency and which is

(i) engaged in:‑‑

(a) the manufacture of goods or materials or the subjection of goods or materials to any process, which substantially changes their original condition;

(b) ship‑building:

(c) Generation, transformation, conversion, transmission or distribution of electrical energy or the supply of hydraulic power; or

(d) the working of, any mine, oil‑well or other source of mineral deposits not being an undertaking to which the Fifth Schedule applies; or

(ii) Any other industrial undertaking which may be approved by the Central Board of Revenue for the purposes of this clause

7. A bare perusal of the above provisions shows that this definition is relevant for manufacture of goods or material, ship building, generation etc. of electrical energy, working of mines etc. or any other industrial undertaking approved by the C.B.R. The provisions show that these do not apply in case of an industrial undertaking which provides services. On the other hand Rule 5A of Third Schedule which is under consideration indicates that the First Year allowance is available apart from manufacturers to other industries including service, infrastructure, social and agricultural sector etc. Thus the two provisions are different in that whereas the definition of "industrial undertaking" given in the First Schedule is confined to the manufacturers etc. only the First Year Allowance is available both to manufacturers and other industries which include service industries. In these circumstances the AR rightly argued that the definition given in Explanation to Rule 5 or given in the First Schedule to the clause "industrial undertaking" will not apply in case of the assessee which provides services. The other conditions as laid down in rule 5A apply in case of assessee and therefore, the assessee was entitled to the Allowance as given in Rule 5A of the Third Schedule. Accordingly it is held that the assessee be allowed @ 40% as provided in Rule 5A.

8. The two appeals are disposed of in the manner indicated above.

C.M.A./50/Tax (Trib.)Order accordingly.