I.T.A. No.552/LB of 2002, decided on 10th February, 2004. VS I.T.A. No.552/LB of 2002, decided on 10th February, 2004.
2004 P T D (Trib.) 2225
[Income‑tax Appellate Tribunal Pakistan]
Before Muhammad Munir Qureshi, Accountant Member
I.T.A. No.552/LB of 2002, decided on /01/.
th
February, 2004. Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss. 27(2)(a)(i)(ii), 22 & Third Sched., R. 7‑‑‑Capital gain‑‑‑Capital gain arising out of sale of share of Association of Persons was taxed as business income‑‑‑Order of Assessing Officer was vacated by the First Appellate Authority‑‑‑Validity‑‑‑Assessee sold his 10% share in the Association of Persons and had realized a gain‑‑‑Such was clearly a capital gain and was required to be brought to tax accordingly‑‑ Assessee's capital investment was not subject to any depreciation allowance and did not constitute immovable property and was therefore, not within the purview of sub‑Cl. (i) & (ii) of Cl. (a) of subsection (2) of S.27 of the Income Tax Ordinance, 1979‑‑‑Order of First Appellate Authority was vacated by the Appellate Tribunal being misconceived tin law and order of Assessing Officer 'was also not maintained as the Assessing Officer had wrongly treated the gain realized on the sale of his share in the capital of the Association of Persons as business income when it was actually a capital gain‑‑‑Order of Assessing Officer was annulled by the Appellate Tribunal with the observation that Assessing Officer may explore the possibility of suitable remedial action, as feasible in law, subject to limitation of time laid down in. law.
I.T.A. No.5572/LB of 2002 per incurium.
Anwar Ali Shah, DR for Appellant.
Mirza Saleem Baig for Respondent.
Date of hearing: 10th February, 2004.
ORDER
This appeal by Revenue arises out of order of the CIT(A), Multan, dated 10‑8‑2002.
2. It is the departmental contention that the First Appellate Authority has unjustifiably vacated the order of the Assessing Officer.
3. According to the DR, in this case, the assessee had realized a clear business gain arising out of sale of share in AOP and the same has rightly been brought to tax as business income of the assessee. It is explained that on leaving the AOP in which he was a member, the assessee received an amount of Rs.316,173 which is the assessee's share in the capital AOP and so reflected in the relevant balance sheet of the AOP. After his departure as member of the AOP, the assessee sold his 10% share in AOP to Messrs Jabir Ahmad, Zakir Ahmad, Muhammad Usman, Abdul Marian, Ch. Muhammad Hanif and Ch. Muhammad Riaz and in return received an amount of Rs.550,000 from them thereby realizing a gain of Rs.233,827. The Assessing Officer held this gain to be taxable and framed assessment accordingly.
4. Before the CIT(A), the assessee argued that depreciation as statutory had been allowed on the assets held by the AOP arid the profits earned on sale of such (depreciable) assets of the AOP should have been assessed in the AOP's hands and the members of the AOP were not liable to any tax on such profit. Thus, according to the assessee the share disbursed to him on his departure from the. AOP is also akin to sale of assets by the AOP. So far as the members are concerned, it was pointed out to the CIT(A) that as depreciation under the Third Schedule is not allowable on the capital investment of the members of the AOP, rule 7 of the Third Schedule is not applicable so far as the gain in the hands of the member is concerned. The assessee's contention found favour with the CIT(A) who held that the order passed by the Assessing Officer determining business income under section 22 of the (repealed) Ordinance, 1979 in the hands of the assessee was not tenable as "neither the appellant claimed depreciation on capital investment nor had the department allowed the same to the assessee".
5. Before the Tribunal, the assossee's AR has referred to ITAT judgment in a related case cited as I.T.A. No.5572/LB/2002 (Assessment year 1999‑2000), dated 1‑10‑2003 in which the Tribunal has dismissed the departmental appeal against the order of the CIT(A) and has maintained the viewpoint of the CIT (A) (Single Bench Judgment).
6. According to the AR, as the facts and circumstances of the assessee's case are same as is in cited judgment of the Tribunal, the order of the CIT(A) is required to be maintained.
7. I have heard both sides and have examined the available record and in my considered judgment, prima facie, this is a clear case of "capital gain" realized by assessee and the provisions of section 27 of the Income Tax Ordinance, 1979 (since repealed) therefore, apply rule 7 of the Third Schedule to the Income Tax Ordinance, 1979 (since repealed) clearly does not apply in this case as the AOP has not realized any gain on disposal of its (depreciable assets). Rather, assessee's "capital investment" in the AOP standing to his credit in the balance sheet has been handed over to him on his departure from the AOP. The assessee has then sold his 10% share in the AOP to the persons cited Supra and has realized a gain, as explained above. This is clearly a capital gain in his hands and was required to be brought to tax accordingly. Assessee's capital investment is not subject to any depreciation allowance and does not constitute immovable property and is therefore, not within the purview of sub‑clauses (i) & (ii) of clause (a) of subsection (2) of section 27 of the Income Tax Ordinance, 1979 (since repealed). Any depreciation allowed to the AOP on its depreciable assets is a separate matter and is not at all of any direct relevance in the context of capital gains realized by the assessee on sale of his 10% share in the AOP to the persons cited Supra.
8. In my judgment, the DR did not properly assist the Tribunal when Appeal bearing I.T.A. No. 5572/LB of 2002 (Assessment Year 1999‑2000), dated 1‑10‑2003 was heard. The assessee respondent was not present before the Tribunal on that date. The DR did not explain to the Tribunal that rule 7 of the Third Schedule to the Ordinance was not relevant in the present case' at all as that rule dealt with disposal of depreciable assets and the treatment of resultant gains or losses. It was not explained that the AOP has not disposed off any depreciable assets. Rather, only capital investment share has been disbursed to the outgoing member and as the member has been able to get a higher amount from an incoming member stepping into his shoes and making capital investment in the AOP as Member of the AOP, the differential amount is a capital gain. As the applicable law has not been properly appreciated by the Tribunal in its cited order .for lack of assistance, that order is an order passed `per incurium' and is not binding on this Bench.
9. For the reasons given supra, the order of the CIT(A) is found to be wholly misconceived in law and is hereby vacated. The order of the Assessing Officer also cannot be maintained as the ITO has wrongly treated the gain realized on sale of .his share in the capital of the AOP as business income when it was actually a capital gain as explained supra. The order of the Assessing Officer is therefore annulled. The Assessing Officer may however explore the possibility of suitable remedial action, as feasible in law, subject to limitation of time laid down in law.
10. Resultantly, the appeal is disposed off as above.
C. M. A./151/Tax (Trib.)Order accordingly.