I. T. As. Nos. 2209/LB, 2462/LB, 2257/LB of 1997, 955/LB of 1996, 4816/LB of 2001 VS I. T. As. Nos. 2209/LB, 2462/LB, 2257/LB of 1997, 955/LB of 1996, 4816/LB of 2001
2004 P T D (Trib.) 151
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Judicial Member and Imtiaz Anjum, Accountant Member
I. T. As. Nos. 2209/LB, 2462/LB, 2257/LB of 1997, 955/LB of 1996, 4816/LB of 2001 and 3207/LB of 2002, decided on /01/.
st
August, 2003. (a) Income-tax-----
----Rejection of accounts---Requirements---Requirement of rejection is that the accounts of the assessee should firstly be rejected on objective basis.
(b) Income Tax Ordinance (XXXI of 1979)-----
----Third Sched., R. 8(8)(e)---Computation of depreciation allowance-- Foreign Exchange fluctuation difference---Even strict interpretation of R. 8(8)(e) of Third Sched. of the Income Tax Ordinance, 1979 did not give the impression that taxpayers could be deprived of the exchange fluctuation difference in the years subsequent to the import of machinery.
(c) Income Tax Ordinance (XXXI of 1979)---
-----Third Sched., R. 8(8)(e)---Computation of depreciation allowance-- Foreign Exchange fluctuation difference---Addition of exchange fluctuation difference in the value of imported machinery for the purpose of depreciation allowance---Validity---Appellate Tribunal allowed the addition in value of the machinery imported by assessee by way of exchange fluctuation for the purpose of determination of depreciation.
I. T. As. Nos. 1669 to 1671/LB of 1996 rel.
(d) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R. 8(8)(e)--Computation of depreciation allowance-- Foreign Exchange fluctuation difference---Determination of value of machinery---Mercantile Accounting System ---Assessee having prepared its account on Mercantile basis was entitled to determine the value of its machinery on the valuation date on the basis of the currency rate which is the spirit of R.8(8)(e) of the Third Sched. of the Income Tax Ordinance, 1979.
(e) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R. 8(8)(e)---Computation of depreciation allowance-- Foreign Exchange fluctuation difference---Part payment of imported machinery could not, be added in the value of such machinery for depreciation purpose---Contention of the Department that a part of amount was unpaid hence was not to be added in the value was not correct---Had the assessee paid total sum, that would not have been the question of exchange fluctuation--Exchange fluctuation only affects if some outstanding foreign currency loan was obtaining in the balance sheet---Once the account is settled the currency rate as is obtaining on the date of settlement becomes final and further fluctuation did not come into question---Appellate Tribunal disagreed with the Department that fluctuation could not be added and their action was disapproved-- Calculation of the figure shall be done by the Assessing Officer with the help of assessee for the purpose of determining depreciation.
(f) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R.3---C.B.R. Circular No. 14 of 1979, dated 7-11-1979 (No. 14, C. 1(25) IT-1/79, dated 7-11-1979)---Extra-depreciation allowance---Provisions of R.3 of the Third Schedule of the Income Tax Ordinance, 1979 did not grant any right to anybody be that Central Board of Revenue or some other Authority to enlarge the scope of the provision which had granted exemption, through a circular.
(g) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R.3---C.B.R. Circular No. 14 of 1979, dated 7-11-1979 (No. 14, C.1 (25) IT-1/79, dated 7-11-1979)---Extra-depreciation allowance---Import of machinery ---Assessee claimed extra-shift allowance on' imported machinery being a part of the class of assets in the light of Central Board of Revenue's Circular---Validity---Provision of R.3 of the Third Sched. of the Income Tax Ordinance, 1979 did not give any impression about the allowance of depreciation as a class-- Directions of Central Board of Revenue had come as a piece of legislation to that extent which was for the reason that some difficulty in determination of the separate machinery in a class of machinery was not possible---Such direction was beyond the scope of the powers available with the Central Board of Revenue under S.14 of the Income Tax Ordinance, 1979---Extra-shift allowance had correctly been disallowed by the .Assessing Officer---Even otherwise assets were separately identifiable---Assessee's appeal on such issue was rejected by the Appellate Tribunal.
LT.A. No.460/LB of 1998 per incurium.
1999 PTD (Trib.), 1672 and 1993 SCMR 232 = 1993 PTD 766 rel.
(h) Income Tax Ordinance (XXXI of 1979)---
----S. 3(1)(a)---Income Tax Authorities---Central Board of Revenue-- Directions of the Central Board of Revenue which are in conflict with the main legislation are illegal to the extent , they deviate from the said law.
I.T.A. No.464/LB of 1998 per incurium.
(i) Interpretation of statutes---
----Fiscal law is to be construed strictly and the intendments behind the legislation should not be ignored.
(j) Income Tax Ordinance (XXXI of 1979)-----
----Third Sched., R.3---C.B.R. Circular No. 14 of 1979, dated 7-11-1979 (No. 14, C.1 (25) IT-1/79, dated 7-11-1979)---Extra-depreciation allowance---When law clearly says that the extra-shift allowance shall be calculated by adopting number of days, Central Board of Revenue could not grant further benefit beyond the legislation through a Circular.
(k) Income Tax Ordinance (XXXI of 1979)---
----S. 80CC & Eighth Sched., Part II---Tax on income of certain exporters---Export of yarn---Charge of tax @ 1 %---Validity---Assessee was a yarn manufacturer which was covered under Part II of the Eighth Sched. of the Income Tax Ordinance, 1979---Contention of the Department that yarn was not a manufactured product was quite surprising---Yarn is an end product of raw material which can be raw cotton or such other input---Charge of 1% tax was not justified and Appellate Tribunal directed that 0.75% rate be applied under S.80-CC of the Income Tax Ordinance, 1979.
I.T.A. No. 1466/LB of 1999 rel.
Javed Iqbal Khan, F.C.A. for Appellant.
Muhammad Asif, D.R. for Respondent.
Date of hearing: 1st August, 2003.
ORDER
KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).-- Appeals in respect of all the years have been filed by the assessee. For 1993-94 the assessee has filed two appeals, one is against order under section 62 while the other is against order under section 156. The AR said that since the issue regarding 80D has been settled by the Supreme Court of Pakistan in the cases of Messrs Ellahi Cotton Mills he does not have much to say. He, therefore, without conceding is not willing, to add any more argument at this stage.
The DR says that the issue having been settled by the Supreme Court of Pakistan the assessee argument that he does not concede is of no help. We agree with him, the issue having been decided by the Supreme Court of Pakistan there is no option for us but to reject, the appeal filed by the assessee for the Assessment Year 1993-94 against order under section 156.
The appeals for 1993-94 against order under section 62 is contesting application of yieldage @ 99% as well as add-backs in P & L accounts. The AR. says that the yieldage of this assessee is best in Pakistan besides department has accepted accounts .in the immediate preceding year as well as in the subsequent years. On pointing out by learned DR that for 1982-83 to 1985-86 the learned ITAT has fixed yield age at 99 %, he remarked that it is a remote history and that the assessee machinery in comparison to the said year is now older. Furthermore, the Department itself having accepted the accounts of the assessee in the recent past i.e. in the immediate preceding and subsequent years could not make further addition. He said that this is an addition to the fact that no defect has been pointed out in the accounts. He, therefore, urged acceptance of the trading results.
The DR repeated his argument and said that the decision of the Tribunal is binding on the Tribunal hence no deviation should be made.
This Tribunal has decided dozens of cases and it is very rare that some body had disclosed more than 95% yieldage in yarn manufacturing account. Even the Department itself generally has applied 85% yieldage in dozens of cases. The circumstances for 1982-83 and 1985-86 were definitely different and taking queue for the present assessment from, the said old years is not appropriate. In any case the requirement of rejection is that the accounts of the assessee should firstly be rejected on objective basis. As a result we hold that the declared yieldage of the assessee for the impugned year should be accepted.
Regarding P & L the comparative details furnished by the assessee shows that the same is at par with the history. There is therefore, no reason for us to interfere on that account. These additions are confirmed.
For 1994-95 the issues involved are disallowance of depreciation in proportion to the addition in value because of exchange fluctuation. The AR says that the issue has been misconstrued as the machinery was available with the assessee and was fully in use. The value of the exchange in Pak rupee as on 30-9-1993 was determined on the basis of the State Bank rates and the same was added in the value of the machinery for determination of the depreciation. This was so done under rule 8(8)(e) which provides for such an adjustments in the balance sheet. The Assessing Officer says that the assessee had not paid the total amount of the difference in dollars hence was not entitled to the depreciation to that extent. The CIT found the treatment as justified and upheld the same.
The AR re-emphasized that the payment in such cases is immaterial and it is the value on the valuation date that determines the written down value on which depreciation can be claimed by the assessee.
The DR firstly supported the orders of the Assessing Officer and CIT and than argued that the said rule cannot be applied subsequent to the year in which the machinery has been imported.
We have already discussed this issue in the case of Messrs Qureshi Textile Mills vide ITA No.1669 to 1671/LB/1996 decided on 31-7-2003 in which we have disagreed with learned DR on this preposition. Even the strict interpretation of section 8(8)(e) does not give the impression that the taxpayers can be deprived of the exchange fluctuation difference in the years subsequent to the import of machinery. In fact we have already given judgment on this point and have allowed the addition in value of the machinery imported by the assessee by way of exchange fluctuation for the purpose of determination of depreciation. ' We have decided this issue in the case of Messrs Qureshi Textile Mills. In our opinion the assessee having prepared its account on mercantile basis was entitled to determine the value of its machinery on the II valuation date on the basis o the currency rate. This is as per the spirit of rule 8(8)(e). The argument of the Department that a part of the amount was unpaid hence was not to be added in the value is amazing. Had the assessee paid total sum, their would not have been the question of exchange fluctuation? The exchange fluctuation only affects if some outstanding foreign currency loan is obtaining in the balance-sheet. Once the accounts is settled the currency rate as is obtaining on the date of settlement becomes final and further fluctuation does not come into question. In this way alone there is no question for us to agree with the department that the fluctuation cannot be added hence their action, is disapproved. However, the calculation of the figure shall be done by the Assessing Officer with the help of the assessee for the purpose of determining depreciation etc.
Next issue for the year is extra shift allowance for the newly added machinery. The AR says that the assessee addition during the year had become a part of the total machinery hence it was not to be earmarked separately for the purpose of disallowing extra shift allowance. In this regard the Circular of the Central Board of Revenue issued vide No .14. CI (25) IT-1/79, dated November 7, 1979 is of relevance. He says the circular makes it binding to allow the depreciation to the class of assets as a whole and not in piecemeal, if the total machinery is used together. The DR remarked that it may be binding on the Department but not on the Tribunal. The same is in deviation to law itself, which have precedence over circulars. It is, therefore, to be ignored. He further said that the provisions of The Third Schedule with regard to extra shift allowance for the newly-added machinery is very clear in its operation.
Before giving finding it will be of help to mention the relevant part of the Circular. The relevant para of the Circular speaks as follows:---
"Rule 3-Extra depreciation allowance. Following is an extract from C.B.R.'s Circular No.14 of 1979, dated November, 7, 1979:--
`Where the assets owned by an assessee consist of separate independent units or branches with some of the units working on varying extra shifts, the account of assets, for the purposes of depreciation, shall be separately maintained in respect of each independent unit or branch. This will enable computation of extra shift allowance in respect of the assets working extra shifts. However, where some (but not all) of the assets fall in a class are used in double or triple shifts, the whole class shall be entitled to the extra shift allowance'."
In addition to above the ITAT has already given a finding in ITA No.460/LB/1998 order, dated 19-5-1998. The AR states that in the above referred judgment the learned Tribunal has set aside the case with directions. The Department complying with the directions of the learned Tribunal allowed the extra shift and observed as follows:--
"Perusal of the record shows that while passing the original order the assessing officer has observed that additional plant and machinery did not work for the full year and accordingly E.B.A is curtailed. Since the curtailment of E.S.A. on additional plant & machinery is in conflict with the relevant provisions of law as discussed above, in the light of Circular No. 14 of 1979, dated 7-11-1979, the claim is allowed in total."
The assessee case is that the Department itself having accepted this situation in one year now cannot deviate. Furthermore, since it was under directions from the ITAT the same should be followed by this Tribunal. We are not in agreement with learned AR. The main provision of law is clear in its application and it does not leave anything as doubtful. The reference to the Circular of the C.B.R. apparently is of no help. The Circular does not give the impression which the learned AR is trying to impose besides, even if it is so, the same amounts to legislation which is not within the power of the C.B.R. This is not even relaxation of some kind hence cannot override the provision of clause (3) of the Third Schedule of the Income Tax Ordinance, 1979. The relevant provision of 3rd Schedule speaks as follows:--
"(3) Extra depreciation allowance for multiple shift working.-(1) In the case of machinery and plant, to which the general rate applies, an extra depreciation allowance, equal to fifty per cent of the allowance computed under sub-rule (1) of rule 2 shall be allowed on account of double shift working and hundred per cent of such allowance on account of triple shift working.
(2)The extra depreciation allowance under sub-rule (1) shall be proportionate to the number of days during which the double or triple shifts are worked, and, for the purpose of computing this allowance, the normal working days throughout the year shall be taken as three hundred.
(3)The provisions of sub-rules (2) and (3) of rule 1 shall, so far as may be, apply to this rule as they apply to the said rule."
Further and this has been pointed out by the DR that the assets are not separately identifiable has not been established. In fact the machinery imported during the year was separately mentioned in balance-sheet, hence even if we agree with the provisions of the Circular, even on factual premises the assessee does not have any case to argue. In any case the provision mentioned above does not grant any right to anybody be that Central Board of Revenue or some other authority to enlarge the 'scope of the provision which has granted this exemption, through a Circular.
Depreciation is an allowance provided by the legislature and the principle of interpretation of such provision is that the one who claims the same should prove that he is well within the fours of the language. The assessee in a general manner claims that he had imported some machinery during the year which was liable to extra shift allowance being a part of the class of assets. However, it was separately identified by the Assessing Officer in the following manner:--
"Triple shift allowance has been, claimed at Rs.721,057 on this addition also. But while examining the details of assets added during the year it is found that the assessee has added the plant and machinery on following dates:--
6-1-1993Air Compressor 6,00,000
26-12-1992Textile Machinery18,25,993"
The departmental objection is that the machinery is not used for the whole year hence shall be restricted to the extent of its utilization in terms of number of days. We have already shown out agreement with the arguments of DR in respect of this issue. The provision of law in terms of clause (3) of the Third Schedule mentioned above does not give any impression about the allowance of depreciation as a class. The directions of the C.B.R., therefore, have come as a piece of legislation to that extent which perhaps was for the reason that some difficulty in determination of the separate machinery in a class of machinery was not possible. This direction is beyond the scope of the powers available with C.B.R. under section 14 of the Income Tax Ordinance, 1979. In this regard we are fortified by the judgment of the ITAT reported as 1999 PTD (Trib.) 1672 and which has further relied upon the judgment of the Supreme Court of Pakistan reported as 1993 SCMR 1232 = 1993 PTD 766. The learned Judicial Member as the then he was writing on behalf of the full Bench held:--
"The idea was found to be fallacious in view of the fact that the C.B.R. being a creation of the Statute (Act IV of 1924) could not create an exemption .in the way it did by way of the aforesaid letter. Reference was made to a reported judgment of the Karachi High Court in re: Syed Ali Azhar Naqvi v. Government of Pakistan cited as PLD 1994 Kar 67 wherein it was found "where a statute provides a procedure for doing a thing in a particular manner then that thing should be done in that manner and in no other way or should not be done at all". The view of their Lordships of the Lahore High Court expressed in PLD 1971 Lah. 217 re: Chairman Evacuee Property Trust Board West Pakistan v. Muhammad Din and others was also referred which said, `wherever a statute limits a thing to be done in a particular form, it necessarily includes in itself a negative, viz. That a thing shall not be done otherwise". Lastly it was noted that the competency of the C.B.R. to issue Circulars, notifications or letters to interpret various provisions of the law was finally settled by the Supreme Court of Pakistan in Re: Central Insurance Company and others v. C.B.R. and others cited as (1993) 68 Tax 86 = 1993 PTD 766 = 1993 SCMR 1232. In that case the Court inter alia re-affirmed its view cited in PLD 1964 SC 657 = (1964) 10 Tax 206 re: CIT East Pakistan Dacca v. Noor Hussain. In that case (Cornelius C.J. remarked "in my view if there is a departure from the law involved in the provision for relaxation contained in the Circular then that Circular is to the extent of the deviation, invalid and ineffective and power there under is illegally exercised" .
In above lines the Honourable ITAT has held that the directions of the C.B.R. which are in conflict to the main legislation are illegal to the extent they deviate from the said law. As regards ITA No. 460/LB/1998 is concerned the judgment has not been produced before us by the learned AR and the Assessing Officer while following the same has not given any reference to the findings therein. We, therefore, consider the same to be as per incurium as the same apparently has not discussed the C.B.R. Circular and the main provision in its true spirit. Here we also find ourselves in agreement with learned DR that the fiscal law is to be construed strictly and the intendments behind the legislation should not h be ignored. When law clearly says that the extra shift allowance shall be calculated by adopting number of days C.B.R. cannot grant further benefit beyond the legislation through a Circular. One may further refer the famous judgment or Central Insurance Company decided by the Supreme Court of Pakistan reported as (1993) 68 Tax 86 (SC Pak). We, therefore, hold that extra shift allowance has correctly been disallowed by the Assessing Officer. We need not add that the assets in this case even otherwise were separately identifiable. The assessee appeal on this issue, therefore, is rejected.
On the issue of profit and loss for this year the assessee arguments are the same but, however, since the same is in line with the history we do not interfere.
For 1995-96 the issues are the same. For example extra shift allowance charge of section 80D and profit and loss disallowances. For the reasons already given above all the issues are decided as for the assessment year case of 1994-95.
Coming to the assessment year 1996-97 the two issues with regard to profit and loss being the same as decided earlier we refuse to interfere. However, on the application of the rate at 0.75 % we have already given a finding in our unreported judgment registered as ITA No. 1466/LB/1999 order, dated 15-12-1999. The assessee is a yarn manufacturer which is covered within Part II of the Eighth Schedule. The rate applicable therein is 0.75 %. The argument of the Department that yarn is not a manufactured product is quite surprising. We need not mention here in detail what forms manufacturing. However, suffice will be to say that yarn is an end product of a raw material which can be raw cotton or such other input. In this regard the relevant para of the order mentioned above shall also be of help:--
"The Assessing Officer levied that tax @ 1 % on export sales of yarn of the receipts under section 80CC of Income Tax Ordinance, 1979. This action was confirmed by the First Appellate Authority. The learned AR has stated that as per para. FF, Part- of the 1st Schedule read with S. No. 1 of Part II of the Eighth Schedule the rate of tax payable under section 80CC has been given and the rate applicable in the case of the assessee was 0.75 %. In support of this contention the learned counsel of the assessee filed a copy of combined order, dated 9-9-1999 in I.T.A. No.422 to 427/LB of 1999 and I.T.A. No.546 to 551/LB of 1999 wherein it was held that yarn was a manufactured product and was therefore not covered under the head raw cotton. CIT's order to apply rate of 0.75% on the export yarn was accordingly upheld. We feel inclined to respectfully agree with this finding and we accordingly reduce the rate of tax to 0.75 % in the assessment year 1998-99. "
In view of above discussion we hold that charge of 1 % was not justified and direct that 0.75 % rate be applied under section 80CC.
Finally for assessment year 1998-99 and 1999-2000 the common issue is that of charge of rate of tax under section 80CC which we have already decided. The Department is directed to charge the same @ 0.75 % for these two years.
In the end for the assessment year 2000-2001 the issue being that of profit and loss only we refuse to interfere as the assessee had accepted similar add backs in earlier years without any objection. No plausible reasons having been advanced to distinguish from the earlier orders were dismiss assessee claim on this score.
All the appeals are decided in the manner and to the extent as mentioned above.
C.M.A.885/Tax (Trib.)Order accordingly.