I.T.As. Nos.1060/LB to 1063/LB, 1229/LB to 1232/LB and 1250/LB of 2002, decided on 31st December, 2004. VS I.T.As. Nos.1060/LB to 1063/LB, 1229/LB to 1232/LB and 1250/LB of 2002, decided on 31st December, 2004.
2005 P T D (Trib.) 1303
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Chairman and Mazhar Farooq Sherazi, Accountant Member
I.T.As. Nos.1060/LB to 1063/LB, 1229/LB to 1232/LB and 1250/LB of 2002, decided on 31/12/2004.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 52 & 50(4)---Liability of persons failing to deduct or pay tax---Reassessment proceedings---Assessing Officer came out with new charge under S.52 of the Income Tax Ordinance, 1979 by holding that assessee had failed to produce evidence for the deduction of tax under S.50 of the Income Tax Ordinance, 1979 on his purchases and other payments---Panel had only mentioned in its order that the assessee had failed to furnish evidence of deduction or paying tax and thus was held as an assessee in default---Validity---Section 52 of the Income Tax Ordinance, 1979 was being used as a tool for recovery of tax and more as substitute of normal assessment and it had totally been ignored that it was only a method of withholding tax and had nothing to do with the charging provisions---If a person had been given responsibility of collecting tax on behalf of the department, it must be verified that the law is applied on the facts of his case in full and he was legally bound to deduct tax---Assessee was purchasing goods liable to deduction of tax under S. 50(4) of the Income Tax Ordinance, 1979 which required a very strong and tangible evidence---Observation of Panel with regard to purchases i.e. "purchases were also unverifiable" in itself demolishes the subsequent creation of demand in respect of such purchases which were neither known to the assessee nor to the department---Doubt in favour of the assessee in terms of non-availability of the names of the parties, non-determination of the amount, non-establishment of the fact as to whether said purchases were supplies, the gap between the two rounds etc. did give reason tobelieve that the department had no case for holding the assessee in default---Non-submission of detail or the other accounts was undoubtedly an offence which was punishable under the law but the assessee had to be punished for the default which he had committed and not otherwise---Decision of holding the assessee as an assessee in default was not justified at all---Setting aside was not an answer to the situation as itwas like making the Assessing Officer wiser so that he may come out with a better assessment.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 52---Liability of persons failing to deduct or pay tax---Benefit of doubt---For a charge, the benefit of doubt goes to favour the taxpayer---In aprovisionlikeS. 52oftheIncomeTaxOrdinance,1979evena slightestdoubtshouldbeusedtofavourthesubjecttaxpayer.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 52---Liability of persons failing to deduct or pay tax---Whether a person was liable to withholding tax or not needed very clear and unambiguous evidence based upon documentation.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.52---Liability of persons failing to deduct or pay tax---Department's observation with regard to non-production of documents and un-verifiability of purchases may be fatal to the claim of acceptance of accounts, however, it was of no help for holding an assessee as an assessee in default.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 52---Liability of persons failing to deduct or pay tax---Delay---Department had finalized the assessment in the year, 2000 and had found the assesseeasanassesseeindefaultfortheyear,whichhadendedon 30th of June, 1994---Delay by itself was fatalto the assessor.
2003 PTD 1167rel.
(f) Income Tax---
----Remand order---Remand order was continuation of the order in which new source could be added.
(g) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(d))---Exemption---Setting up of industry---Department contended that a specific period was granted in which the set up of industry was to be completed---Completion of set up could only be ascertained from the production of industry---Assessee failed to complete the set up by the end of June, 1998 and could not enjoy exemption on its production started after 30th of June, 1998---Validity---Assessee had completed construction of its building by 5-6-1988 and had imported the entire machinery before the end of 30th of June, 1998---No proof was availablewithregardtoinstallationofelectricconnectionpriorto30-6-1998---Letter reproduced by the Assessing Officer in assessment orderprovedthatthecommencementcertificatewasobtainedon30th September, 1988 and trial run production started on first January, 1989---Industry was in process of commencement of production during such period---Sequence of circumstances was pointer to continuous and perpetual effort on the part of assessee to reach to production stage---Intention of the assessee was clear and the project was ready for productionaswasprovedfromrecord---Setupwascompletedby30-6-1988---Exemption was to be for five years beginning with the month in which the undertaking was set up or commercial production was commenced---Mentioning two connotations i.e. set up or commercial production for determination of period and having used only one i.e. 'set up' in the first part, the legislature had made the situation very clear---'Set up' was a different situation than 'commercial production'---Adopting the principle of interpretation, language of law should be applied in its natural meanings---Assessee having completed its set up by and before 30-6-1988 was entitled to exemption---Department was directedtoallowthesameaccordinglybytheAppellateTribunal.
1991 PTD 359; 2004 PTD 921 and Irum Ghee Mills Limited's case 2002 SCMR 1871 rel.
(h) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(d))---Exemption---Setting up of industry---Under normal circumstances only laying of foundation may also be a form of set up---However, for granting exemption to an industry the series of circumstances is not to be ignored.
(i) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(D))---Exemption---Setting up of industry---Set up in which the seriesof events prove that the assessee is serious in starting the industry within the specific period but for the reasons of some unforeseen events or bottlenecks from certain functionaries with respect to import of machinery, installation of electric connection etc. could not enter into production, he should not be deprived of the benefits of set up of the industry.
(j) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(D))---Exemption---Setting up of industry---"Commencement" is something different from "set up".
(k) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(D))---Exemption---Setting up of industry---Exemption was on profit and gains derived by an assessee from an industrial unit set up upto 30-6-1988---Basic requirement was that the industry must be "set up" by 30-6-1988---Determination of set up was a point of fact and it could only be decided after looking into the facts andcircumstances in each case separately.
(l) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (122(D))---Exemption---"Set up", meaning of---Simpleandworkabledefinitionof'setup'forthepurposeofCl. (122(D)) of Second Schedule of the Income Tax Ordinance, 1979 can be 'ready for production'.
(m) Income Tax Ordinance (XXXI of 1979)---
----S. 13(1)(aa)----Addition---Deletion of addition under S.13(1)(aa) of the Income Tax Ordinance, 1979 was confirmed by the Appellate Tribunal as at no stage of the proceedings the Panel had mentioned issuance of specific notice under S.13 of the Income Tax Ordinance, 1979orapprovalfromthenexthigherauthorityandamountwasalso obtained from sister concern, ledger copy of which was obtained from thesisterconcernandproducedbeforetheAssessingOfficer.
Muhammad Iqbal Khawaja for Appellant (in I.T.As. Nos.1060/LB to 1063/LB, 1229/LB to 1232/LB of 2002).
Muhammad Aslam Bhatti, D.R. for Respondent (in I.T.As. Nos.1060/LB to 1063/LB, 1229/LB to 1232/LB of 2002).
Muhammad Aslam Bhatti, D.R. for Appellant (in I.T.A. No.1250/LB of 2002).
Muhammad Iqbal Khawaja for Respondent (in I.T.A. No.1250/LB of 2002).
Date of hearing: 17th December, 2004.
ORDER
In these cross-appeals the assessee is against set aside on the issue of holding him as assessee in default and refusal of the claim of exemption etc. The department on the other hand has also come out with certain objections against the relief allowed by the CIT(A).
The A.R. while arguing the case on the issue of assessment under section 52 first of all challenged the very initiation of the proceedings and said that the same are barred by time. He said that in the first round of litigation there was no objection withregard to non-deduction of tax. In the said round, therefore, there was no charge under section 52, said order was set aside andsubsequently confirmed by the learned ITAT. In reassessment proceedings the Assessing Officer became wiser and came out with new charge under section 52 by holding that the assessee has failed to produce evidence for the deduction of tax under section 50 on his purchases and other payments. The First Appellate Authoritywhilegivinghisfindingsobservedthattheassesseehasbeen held as an assessee in default without issuance of a notice under section 52 or any other specific confrontation with regard thereto. The Panel has only mentioned in its order that an assessee has failed to furnished details hence is held as an assessee in default. This description has been considered as unsatisfactory by the CIT(A) hence the case has been set aside.
The emphasis of the AR remained that firstly it is a time-barred case, secondly; the assessee had been making purchases from various known companies who have settled their accounts hence there is no question of any deduction from this assessee on their behalf. Further more, the assessee is an exporter and exporters are not liable to deduct tax from their purchases.
In addition to above the AR said that non-identification of the recipients alone is enough to hold that the proceedings are illegal on the face of it.
The DR however, reiterated that the assessee default of not being present before the Assessing Officer has deprived him from all the privileges and rights. Since he failed to provide any detail with regard to his purchases and sales etc., there is no question at the stage of these proceedings to grant a relief. In his opinion the law is very clear with regard todeduction of tax and who so ever failed to deduct becomes liable to payment of the same. It was pointed out to learned DRthat a lot of case-law has developed on this issue and that the recent drafting of a similar provision in the Income TaxOrdinance, 2001 is a result of said judgments. The new provision i.e. section 161of the Income Tax Ordinance, 2001has covered all such eventualities. However, for the assessments finalized prior to the said Ordinance, thejudgments in field are the best guide. In the present case the panel has dealt with the issue in the following manner:--
The assessee has failed to produce the details of local sales at Rs.27,64,186 and the same are not verifiable. The purchases have been declared at Rs.25,629,574. The assessee has also failed to produce the detail of purchases and the same are also unverifiable. Moreover, the evidence for the following expenses has not been furnished:--
| Sr. No | Nature of expense. | Amount |
| 1 | Wages and salaries. | Rs.1,185,980 |
| 2 | Power fuel and water. | Rs.640,230 |
| 3 | Sundry stores and spares | Rs.73,450 |
| 4 | Sizing charges. | Rs.249,875 |
| 5 | Repair and Maintenance. | Rs.145,390 |
| 6 | Insurance expenses | Rs.50,648 |
Subsequent to above observation another para deals with the situation and says that the assessee was given another opportunity to produce Challans of deduction of tax which he failed. This Tribunal in a chain of judgments has disapproved such a treatment and found it to be harsh and unjustified. Section 52 is being used as a tool for recovery of tax and more as substitute of normal assessment. It has totally been ignored that it is only a method of withholding tax and has nothing to do with the charging provisions. If a person has been given responsibility of collecting tax on behalf of the department it must be verified that the law applies on thefacts of his case in full and he was legally bound to deduct tax. The assessee is purchasing goods liable to deduction of tax under section 50(4) requires a very strong and tangible evidence. The observation of the panel with regard to purchases i.e. "Purchases are also unverifiable" in itself demolishes the subsequent creation of demand in respect of the purchases which are neither known to the assessee nor to the department. This is not in dispute that the tax even if charged from an assessee in default will remain tax of the persons from whom it was presumably deductible. Thisassessee would not be entitled to its benefits against its demand in any form. The use of the same as a tool of slicing the assessing cannot be appreciated. This is a settled principle of law that for a charge, the doubt goes to favour to the taxpayer. In a provision like this even a slightest doubt should be used to favour the subject taxpayer. Whether a person was liable to withholding tax or not needs very clear andunambiguous evidence based upon documentation. The department's observation already mentioned by us above with regard to non-production of documents and unverifiability ofpurchases may be fatal for the claim of acceptance of accounts, however, is of no help for holding him as an assesseein default. Non-charge of tax under the said provisions in the first round of litigation and other connected arguments with regard to non-deductibility etc. also cannot be ruled out. Thedepartment has finalized the assessment in the year, 2000 and had held him as an assessee in default for the year which hasended on 30th of June, 1994. This delay in itself is fatal for the assessor. In this regard the judgments which can bereferred include 2003 PTD 1167.
The issuerequires dilation from another angle also. In the first round of litigation the only issue involved was allowances of exemption under sections 118B and 122D. The learned Tribunal while deciding the said issue came out with specific directions. These directions were obviously in respect of the issue before them. Introduction of a new issue therefore, is like reassessment. This was the argument of the learned AR that since this amounts to creation of a new charge, the Assessing Officer was to proceed either under sections 65 or 66A. The remand order was continuation of the order in which no new source could be added. Though in principle we do not agree with this argument of learned AR however, the other strong view remains intact. The department's ignorance of this issue in earlier round in itself provesthatitwasnotin fact an issue. However, since, there is no legal bar as far as the language ofsection 52 is concerned we do not comment on the same to avoid confusion. We however, do have the impression that thedoubt in favour of the assessee in terms of non-availabilityof the names of the parties, non-determination of the amounts, non-establishment of the fact that whether said purchases were supplies, the gap between the two rounds etc. does give reason to believe that the department have no case for holding the assessee in default. Non-submission of detail or the other accounts is undoubtedly an offence which is punishable under the law. But the assessee has to be punished for the defaultwhich he has committed and not otherwise. The decision of holding this assessee as an assessee in default, therefore, is not justified at all. The set aside was not an answer to the situation. It is like making the Assessing Officer wiser so thathe may come out with a better assessment.
The other issue advanced by the AR was that the assessee has been disallowed exemption without proper support. The provisions of law relevant in this case is Clause 122D. The AR submits that the assessee had completed set up of the industry before 30th of June, 1988 in the manner that building had completed and the final major shipment of that plant and machinery had also been received. He said that the requirement to qualify for exemption is setting up of industry and not production. He agreed that the exemption has been provided to the industrial undertaking that has been set up for some manufacturing process but remarked that the production was not the requirement of exemption in any case. What he meant was if up to the last date of the set up period the assessee has established its industry.
The production subsequent to the said last date does not debar him from the exemption provided by law. He said that the principle of interpretation called as the golden method also favours his point of view in totality. The said golden principle of interpretation says that the language of fiscal statute should be read in its full spirit. It should be interpreted and applied in its natural meanings and nothing should be added orignored therefrom at the time of its application. The strict application of such a legal provision is the essence of law. Hesaid keeping said principle in view if one goes through the language in hand it gives a clear impression that the said set up remarked that ultimately the industry entered into the phase of manufacturing, however, this would not mean delay in commercial production debars exemption. While explaining the definition of set up the AR relied upon the judgment of PakistanTobaccoCompanydecidedbyHonourableHighCourtKarachireportedas1991PTD359.Inthereferredjudgmenttheword set up has been defined as to "establish", "start" and "begin". It has further been said that an undertaking is set up when itsfoundationis laid or is started, it cannot be set up when it is already in existence.Inthisdistinctiontheemphasisisonlayingoffoundation.Hetherefore,remarkedthathisassesseehavegonemuchaheadoflayingof foundation which is the criteria prescribed of defining the set up. The AR further added that the word has been defined in many judgments however, the ordinary dictionary meanings being clear no further support is required. He referred the relevant provisions again and said that it only allows exemption to theset up of industry while the commercial production is with reference to the period of exemption which is five years. On a question he said that if the set up of the industry isconfirmedbeforetheendofthelastdatewhichinthepresent case is 30th of June, 1998, the commercial production can be started atany date thereafter. In such situation the period of exemption of five years shall commence from the date of said commercial production.
The learned DR called it a far-fetched idea. He said that a specific period is granted in which the set up of industry is to be completed. Thecompletionofthesetupcouldonlybeascertainedfromtheproductionofsaidindustry.Hesaidthateventhecasereferred as parallel by the AR himself has proved to be of no help. Inthe said cases namely Ghani Textile Mills Ltd. from which the Honourable Tribunal had directed to take guidance, has gone against him. He added that while reassessing not only direction from the said order has been sought but the assessee has also been allowed full chance. The assessee has failed to complete the set up by the end ofJune, 1998 hence cannot enjoy exemption on its production started after 30th of June, 1998.
We have heard both and perused the record in detail. The provision before us speaks as follows:--
(122D) Profits and gains derived by an assessee from an Industrial undertaking set up between the twenty-fifth day of March, 1987, and the thirtieth day of June, 1988, both days inclusive, for a period of five years beginning with the months in which the undertaking is set up or commercial production is commenced, whichever is the later.
The exemption under this clause shall apply to an industrial undertaking which is:--
(a)set up in the industrial estate in the area notified in the Punjab Government's Notification No.DRA/LAC/3225, dated 25th March, 1987;
(b)not formed by the splitting up, or the reconstruction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business;
(c)owned and managed by a company formed and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan;
(d)engaged in the manufacture of goods or materials or the subjection of goods or materials to such process; and
(e)an undertaking the income, profits and gains, of which are not liable to be computed in accordance with the rules contained in the Fifth Schedule."
From the plain reading of above language it appears to be correct that it is the set up before the 30th of June, 1998 which is required. Production is only for determination of period of exemption. The word "set up" having not been defined is to be applied on the basis of dictionary meanings and other judicial pronouncements reference 2004 PTD 921. In this regard the intention and subsequent action may play best role in defining the word 'set up'. Under normal circumstances only laying of foundation may also be a form of set up. However, for granting exemption to an industry the series of circumstances is not to be ignored. If in a case foundation has been laid but no action has subsequently been taken to complete the industry, this definition shall not be of any help to the assessee. Furthermore, if a person has raised a building after forming a company for an industrial undertaking but during the construction period and years after he has not imported any machinery or opened an L.C. and has not applied for electricity connection etc. it shall be a proof that he was not seriously interested and that the wide definition of set up shall not be of help to him. The set up in which the series of events prove that the assessee is serious in starting the industry within the specific period but for the reasons of someunforeseen events or bottlenecks from certain functionaries with respect to import of machinery, installation of electric connection etc. etc. could not enter into production, he should not be deprived of the benefits of set up of the industry. In this regard we are supported by the decision given by the Supreme Court of Pakistan in the case of Iram Ghee MillsLimited reported as (2000 SCMR 1871). In the referred judgment, the Honourable Supreme Court of Pakistan has heldthat the amount of production is not relevant for granting exemption to an industry. It may be as little as possible. This is where mentioning dictionary meanings becomes relevant.
'Set up'
Aunitcannotbesaidtohavebeensetupunlessitisreadytodischargethefunctionforwhichitisbeingsetup.Itis only where the unit has been put into such a shapethat it can start functioning as a business or a manufacturing organizationthatitcanbesaidthattheunithasbeensetup.Theword'set up'intheprincipalclauseisequivalenttotheword'established'(AIR1967SC509)(639ITR478) from Words and Phrases by Mian Muhib ullah Kakakhail publishedbyKashmirLawTimes.19-TempleRoad,Lahore.
In the light of above definition which clearly says that commencementissomethingdifferentfromsetup,werevertbacktothe facts in hand. The assessee had completed construction of its buildingby5-6-1988andhadimportedtheentiremachinerybeforetheendof30thofJune,1998.Thereisnoproofwithregard to installation of electric connection prior to 30-6-1998,however, the letter reproduced by the Assessing Officer in the assessment order proves that the commencement certificate was obtained on 30th September, 1988 and trial run production started in first January, 1989.
The circumstances make it abundantly clear that the industry was in the process of commencement production during this period and if we give the benefit to the assessee the sequence of the circumstances is pointer of a continuous and perpetual effort on the part of the assesseetoreachtoproductionstage.HowfarthissituationiscoveredbytheprovisioncanbejudgedbygoingthroughtheprovisionsofClause (122-D) of the Second Schedule.
"Profits and gain derived by an assessee from an industrial undertaking set up between the twenty-fifth day of March, 1987, and the thirteenth day of June, 1988, both days inclusive, for a period of five years beginning with the one in which the undertaking is set up or commercial production is commenced, whichever is the later. The exemption under this clause shall apply to an industrial undertaking which is---
(a)set up in the industrial estate in the area notified in the Punjab Government's Notification No.DRA/LAC/3225, dated 25th March, 1987;
(b)not formed by the splitting up or the reconstitution a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business;
(c)owned and managed by a company formed and registered under the Companies Ordinance, 1984 (XLVII of 1984) and having its registered office in Pakistan;
(d)engaged in manufacture of goods or material or the subjection of goods or materials to such process; and
(e)an undertaking the income, profits and gains, of such or not liable to be computed in accordance with the rules contained in the Fifth Schedule."
Theexemption,therefore,isonprofitandgainsderivedbyan assessee from an industrial unit SET UP up to 30-6-1988. The basicrequirement,therefore, is that the industry must be 'set up'by30-6-1988. Determination of set up is apoint of fact and it can only be decided looking into the facts and circumstances in each case separately. We have alreadydilated the meanings of set up, however, for final conclusion we considerthat its simple and workable definition for the purpose of clause 122(D) can be 'ready for production'.
Since in the present case the intention of the assessee was clear and the project was ready for production as is proved from subsequent record we find ourselves in agreement with the AR that set up completed by 30-6-1988.
The balance part of the provision again supports our view. It says that the exemption shall be for five years beginning with the month in which the undertaking is set up or Commercial Production is commenced. In this part mentioning two connotations i.e. Set Up or Commercial Production (Emphasis added) for determination of period and having used only one i.e. 'setup' in the first part, the legislature has made the situation very clear. It conveys without any doubt that 'set up' is a different situation than 'commercial production'. So adoptingthegoldenprincipleofinterpretationwhichsays,thelanguageoflawshouldbeappliedinitsnaturalmeanings,weholdthattheassessee company having completed its set up by and before 30-6-1988 is entitled to exemption. The department, therefore, is directed to allow the same.
We now go to the appeals of the department. For 1991-92 it is against the deletion of the addition under section 13(1)(aa) and reduction in sales. We shall not be needing much dilation for dismissing this appeal as at no stage of the proceedings the panel has mentioned issuance of specific notice under section 13 or approval from the next higher authority. Moreover, this amount was obtained from the sister concern, the ledger copy of which was obtained from the sister concern and produced before the Assessing Officer.
The deletion, therefore, is confirmed without exemption.
Regarding sale the assessee mostly has imports and a little part pertain to local sale. In such circumstances estimate was unnecessary. The relief is considered unexceptionable and no interference is required. The same is dismissed.
All the appeals, therefore, are finalized in the manner and to the extent mentioned above.
C.M.A./384/Tax (Trib.)Order accordingly.