Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 156 & 118‑E‑‑‑Rectification of mistakes‑‑‑Income of trial production was assessed at normal rate of tax by rectification of assessment order‑‑‑Validity‑‑‑Income/loss earned during trial production was to be considered part of capital and was not taxable under normal rate‑‑‑Order passed under S.156 of the Income Tax Ordinance, 1979 was vacated and Appellate Tribunal restored original order.

1992 SCMR 687 = 1992 PTD 570 1976 PTD 109 and (1971) 23 Tax 4 (Trib.) rel.

Fakhar Majeed, F.C.A. and Mirza Anwar Baig for Appellant.

Talat Altaf Khan, D.R. for Respondent.

Date of hearing: 2nd October, 2002.

ORDER

Titled appeal at the instance of the assessee pertaining to the assessment year 1992‑93 has been directed against the impugned order 15‑12‑2001 passed by the learned CIT(A) Zone‑III, Lahore. The sole contention agitated by the assessee is that the learned Assessing Officer was not justified in passing rectification order under section 156 of the income Tax Ordinance, 1979 (hereinafter called the Ordinance) since it was without jurisdiction and confirmation thereof by the learned First Appellate Authority has also been objected to

2. Briefly stated the facts of the case are that assessment for the year under consideration was completed at net income of Rs.2,09,956 against the declared nil income by rejecting the claim of exemption under clause 118‑E of the Second Schedule to the Ordinance. The sales relevant to the trial production were estimated at Rs.20,00,000 against the declared at Rs.11,27,923, in the first round of litigation the learned First Appellate Authority reduced the sales to Rs.1,80,000 and thus total income was assessed at Rs.1,59,959. It is also to be noted that in the IT‑30 prepared with the order passed under section 132 of the Ordinance and tax under section 80‑D was levied at Rs.5,640. Subsequently, the Assessing Officer while following instructions of the C.B.R. rectified the assessment framed under section 132/62 of the Ordinance and proceeded to assess the trial production income at normal rate of Tax. Accordingly the assessment order was rectified. The assessee failed at the first appellate level whereby the rectified order was confirmed by the learned First Appellate Authority, hence the present appeal on behalf of the assessee.

3. The learned A.R. has vehemently argued the case and contended that whether profit earned during the trial production is taxable is not clearly evident from any provision of law under the Ordinance, therefore, it is debatable issue and not subject to rectification. In this regard the learned A.R. placed reliance upon the judgment pronounced by the august Supreme Court of Pakistan reported as 1992 SCMR 687 = 1992 PTD 570 and also from the Indian jurisdiction reported as 1976 PTD 109. It was further argued that it is a settled principle "of accounting and law that any profit or loss incurred during the trial production is to be treated as capital which increases the cost of assets if there is loss and it decreases the cost of assets, if there is a profit and thus the treatment meted out by the Assessing Officer by subjecting to tax the profit earned during the trial production is not in accordance with the law. He continued to argue that if loss is suffered, being trial production, it should be added up to the cost of machinery. Conversely, if profit is earned during the trial production, the said profit reduces the cost of asset i.e. machinery etc. On this issue the learned A.R. relied upon a judgment of the Tribunal reported as (1971) 23 Tax 4 (Trib). The learned A.R. while summing up his argument pleaded that both the learned lower officers have erred in law while invoking section 156 of the Income Tax Ordinance, 1979 to rectify the order passed under section 132 of the Income Tax Ordinance and levying tax at the normal rate. The learned D.R. has opposed the arguments advanced by the learned A.R. and supported the rectification order as well as order passed by the learned First Appellate Authority.

4. I have heard the learned counsels for both the parties and have gone through the relevant orders. In the light of above discussion and the case‑law cited at the bar I find myself in full agreement with the arguments tendered by the learned A.R. I have perused the case‑law produced by the learned A.R. in support of his contention specially Tribunal's judgment reported as (1971) 23 Tax 4 (Trib.) which appears to be on all fours to the assessee's case. In the supra cited judgment the learned Division Bench of the Tribunal while dilating upon the issue resorted to the definition of the word "machinery". The Division Bench of the Tribunal held that loss of raw materials for testing the machine in the process of installation of the factory is nothing but an additional cost for the machinery. The Division Bench of the Tribunal further held that loss must be added to the cost of machinery in the same sense in which Freight, Duty, Installation cost and even the interest on borrowed capital is allowable for the purposes of depreciation.

5. In the light of ratio settled in the supra judgment, I am inclined to accept the arguments addressed at the bar that income/loss earned during trial production is to be considered part of capital, hence not taxable under normal rate.

6. For the foregoing reasons the orders passed under section 156 both by the learned First Appellate Authority and assessing officer are vacated and original assessment made in this case is restored.

7. Appeal of the assessee succeeds accordingly.

C.M.A./73/Tax (Trib.)Order accordingly.