W.T.As. Nos. 129/LB to 131/LB of 2004, decided on 20th April, 2005. VS W.T.As. Nos. 129/LB to 131/LB of 2004, decided on 20th April, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1852 (2005)

Per Mehmood Ahmed Malik, Accountant Member [Minority view]---Wealth Tax Act (XV of 1963)---

----Ss.2(1)(5)(ii) [2(e)(ii)] & 3---Assets---Flour Mill---Lease out---Taxation---Assessee contended that Mills were leased out for, a limited number of years and it could not be said that the assets were held for the purpose of letting out or business of letting out of property---Validity---Assessments had been made ex parte because the assessee had failed to file Wealth Tax Returns---Claim of assessee that some liabilities had also to be allowed required consideration by the Taxation Officer---Assessee held immovable property for letting out and that it was an "asset" within the meaning of Wealth Tax Act, 1963 and liable to wealth tax---Assessments were set aside with the directions that proper opportunity of hearing be allowed to the assessee and the claim regarding liabilities may be examined.

2000 PTD (Trib.) 1826; W.T.As. Nos. 694 and 695/LB of 2003 and W.T.As. Nos. 1919 to 1921/LB of 2002 ref.

Afzal Flour Mills (Pvt.) Limited v. C.I.T. and others 2004 PTD 188 and Messrs B.P. Biscuit Factory Ltd., Karachi v. W.T.O. 1981 PTD 217 rel.

Per Khawaja Farooq Saeed, Chairperson---

(a) Wealth Tax Act (XV of 1963)---

----Ss.2(1)(5)(ii) [2(e)(ii)] & 3---Assets---Flour Mill---Lease out---Taxation---Validity---Flour Mill neither normally nor specifically in the present case had been established to earn rent---Purpose of the Flour Mill evidently was to run the industry and commercially exploit the same for earning income and not to earn the rental income therefrom ---Assessee claimed that it was only for two years previous to present year that this industry had been given on lease goes to favour his point of view---After the years under discussion the lease had again been revoked---Wealth tax was not chargeable to the Flour Mill in circumstances.

W.T.As. Nos. 694 and 695/LB of 2003; W.T.As. Nos.1919 to 1921/LB of 2002; 1977 PTD. 13 = PLD 1977 Lah. 170 and 224 ITR 310 rel.

Afzal Flour Mills (Pvt.) Limited v. C.I.T. and others 2004 PTD 188 distinguished.

Per Jawaid Masood Tahir, Bhatti Judicial Member; Khawaja Farooq Saeed, Chairperson---[Agreeing with Majority view]---

(b) Wealth Tax Act (XV of 1963)---

----S.2(1)(5)(ii) [2(e)(ii)]---Assets---Flour Mill---Lease out---Taxation---Section 2 (1)(5)(ii) of the Wealth Tax Act, 1963 applies to those properties purpose of which right from their construction remains letting out or sale and it was the purpose of holding a property which was subject to charge---Flour mill being neither normally nor specifically established to earn rent, could not be taken under the ambit of definition of an "asset"---Language of law itself had referred the word "immovable property held for the purpose of construction and letting out of property, immovable property held for the purpose of business of construction and letting out"---None of the propositions applied in the present case as the purpose of the assessee had never been letting out---Wealth tax was not chargeable to assessee's flour mill---Order of First Appellate Authority and that of Assessing Officer were vacated by the Appellate Tribunal and appeals of the assessee were allowed.

Afzal Flour Mills (Pvt.) Limited v. C.I.T. and others 2004 PTD 188 and Messrs B.P. Biscuit Factory Ltd., Karachi v. W.T.O. 1981 PTD 217 distinguished.

1977 PTD 13 = PLD 1977 Lah. 170 rel.

Riaz Bashir Sh., I.T.P./A.R. for Appellant.

Abdul Salam, D.R. for Respondent.

Anwar Ali Shah, D.R. for Respondent.

ORDER

These three appeals have been filed by a private limited company stating that the authorities below were "not justified in assessing wealth tax on the company as it was exempt under section 2(e)(ii) of the Wealth Tax Act, 1963." (Sic). Additional grounds have also been filed stating that the Assessing Officer was not justified in not subtracting the liability of the limited company amounting to Rs.27,75,000 for the assessment year 1996-98, Rs.35,75,000 for the assessment year 1999-00 and Rs.90,11,042 for this assessment year 2000-01.

2. The facts of the case are that the assessee leased out its factory building and machinery for annual consideration of Rs.600,000. The Assessing Officer issued notice under section 14(2) of the repealed Wealth Tax Act to the assessee to file wealth tax return. The assessee filed Return for the assessment year 1999-00 declaring `Nil' wealth but no Returns were filed for the assessment years 1996-97 and 2000-01. The Assessing Officer accordingly assessed the value of the assets for the years under appeal as under:

???????????

??????????????????????????????????????????????? 1996-97?????????? 1999-2000?????? 2000-01

GALV of Flour Mills.?? 6000000????????? 6000000????????? 6000000

Less S. Exemption??????????????????? 1000000????????? 1000000????????? 2500000

Taxable Wealth??????????????????????? 5000000????????? 5000000????????? 3500000

3. Being aggrieved, the assessee filed appeal before the first appellate authority. It was argued before the first appellate authority thatthe Flour Mill had been temporarily rented out for a couple of years and, therefore, the assets did not fall under the purview of clause (ii) of sub-section (1) of Section 2 of the Wealth Tax Act, 1963. The learned CIT(A) relying upon the decision of this Tribunal reported as 2000 PTD (Trib.) 1826 held that wealth tax was leviable on flour mills along with buildings and machinery leased out by the assessee. He accordingly upheld the assessment framed by the Assessing Officer. Hence, the present appeal.

4. The learned A.R. referred to the following unreported decisions of this Tribunal to argue that no wealth tax was leviable on flour mills which have been leased out:---

(i) W.T.As. Nos. 694 and 695/LB of 2003 dated 25-9-2004

(ii) W.T.As. Nos. 1919 to 1921/LB of 2002 dated 5-12-2003

The learned A.R. stated that no wealth tax was levied for the assessment years 1997-98 and 1998-99 because the Mill had not been let out in these years. He argued that the Mills were leased out for a limited number of years and, therefore, it cannot be said that the assets were held for the purpose of letting out or business of letting out of property as envisaged in section 2(1)(5)(ii) of the repealed Wealth Tax Act, 1963.

5. The learned D.R. on his part relied upon the case law referred to in the order of the learned CIT (A) and stated that no infirmity was involved in the order of the authorities below which should be maintained.

6. We have given consideration to the arguments of both the parties. It was held by the Karachi High Court in Afzal Flour Mills (Pvt.) Limited v. CIT and others reported as 2004 PTD 188 that the land and buildings of flour mill let out would be included in the assets within the meanings of Wealth Tax Act and would be liable to levy of wealth tax. The case law already shows that the contention of the assessee is not in order. The assets of the flour mill let out are liable to the levy of wealth tax. The submission made by the learned A.R. that the mills was not leased out during the assessment years 1997-98 and 1998-99 has not been found correct. A perusal of the copy of the assessment order dated 3-9-1999 for the assessment years 1997-98 and 1998-99 furnished by the learned A.R. shows that the mill had been let out during these years. Though no wealth tax was levied for the assessment years 1997-98 and 1998-99, this would not provide justification to allow exemption during the years under appeal against the provisions of law. The immovable assets were leased out for at least five years from 1996-97 to 2000-01. It was held by the Karachi High Court in Messrs B.P. Biscuit Factory Ltd., Karachi v. W.T.O. reported as 1981 PTD 217 that whatever the original purpose of the property within the meaning of the Memorandum of Companys' association may be, it may subsequently change to suit the purpose from time to time. We, however, find that the assessments have been framed ex parte because the assessee had failed to file Wealth Tax Returns for the assessment years 1996-97 and 2000-01. The claim of the assessee that some liabilities have also to be allowed requires consideration by the Taxation Officer. In these circumstances, we hold that the assessee held immovable property of letting out and that it is an asset within the meaning of Wealth Tax Act, 1963 and liable to wealth tax. However, we set aside the assessments with the directions that proper opportunity of hearing be allowed to the assessee and the claim regarding liabilities may be examined. Re-assessment may be framed in the light of decisions of the Hon'ble High Court referred to above.

7. The appeals are disposed of in the manner as indicated above.

(Sd.)??????????????????????????????????????????????????????????????? (Sd.)

(Khawaja Farooq Saeed)???????????????????????????????? (Mehmood Ahmed Malik)

????? Chairperson??????????????????????????????????????????????? ???? Accountant Member

8. KHAWAJA FAROOQ SAEED (CHAIRPERSON).---I have full respect for the findings of my learned brother, Accountant Member. However, for the reasons recorded hereafter I beg to disagree with his findings that the property having been let out during the period under consideration was liable to wealth tax. Before going for the arguments some facts relevant to the issue are referred in brief.

9. The assessee is a Floor Mill and has been mostly run by the owners themselves. For the year under discussion it was leased out as the department has considered the same as covered within the definition of section 2(5)(ii) of the Wealth Tax Act, 1963 as amended. Earlier, this clause number as section 2(e)(ii). Since this change has not made any difference in the language of the provision no further comment shall be required. In the previous two years the property was let out but has not been subjected to wealth tax by the department.

10. The learned A.M. has held that land, building and machinery of the Flour Mill is covered within the definition of the term `Asset' and chargeable to wealth tax. In this regard his reliance is on 2004 PTD 188. In my humble opinion this judgment of the Hon'ble High Court Sindh has not been applied in its actual spirit. It says that the machinery is part and parcel of the building and if building is subjected to wealth tax, machinery shall also be considered as part thereof. Moreover, the facts are also distinguishable, For proceedings further going through the history of this legislation shall be of help:---

"(i) The status of AOP was inserted in 1980 for charging un?productive investment in Plazas and such other properties as were retained for property income. The language of the provision, therefore, was drafted advisedly and purposely. The same was further explained after the judgment of the Supreme Court through an explanation and was, therefore, made a part of the provision. The said provision after attaining finality and reorganization of the section is now placed in section 2(5)(ii) and the same speaks as follows:-

(ii) In the case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a company immovable property held for the purpose of the business of construction and sale, or letting out, of property,

Explanation.---For removal of doubt it is hereby declared that immovable property and the purpose, referred to in this sub-clause, includes

(i) immovable property held for the purpose of letting out, or business of letting out, of property.

(ii) Immovable property held for the purpose of construction and letting out of property; and

(iii) Immovable property held for the purpose of construction and sale of property."

11. This provision has been further elaborated by the C.B.R. in view of the directions of the Supreme Court of Pakistan in the famous case of B.P. Biscuits. The emphasis, remained on the words "immovable property held for the purpose of" (emphasis added). The use of the words underlined above, in the main provision, Explanation and in the circulars of C.B.R. cannot be ignored. The legislature as well as the C.B.R. have repeatedly used the words `held for the purpose of' again and again. It is evident from the following:---

(i) Immovable property held for the purpose of letting out of property.

(ii) Immovable property held for the purpose of construction and letting out of property.

(iii) Immovable property held for the purpose of construction and sale of property.

(iv) Immovable property held for the purpose of business of construction and sale.

12. Further explanation by the C.B.R. vide Circular No.18 of 1991 dated July 2, 1991 also repeats the same as already mentioned by me. This, therefore, applies on those properties purpose of which right from their construction remains letting out or sale. It can be further said that it is the purpose of holding, property which 's subject to this charge of AOP. Applying said purpose a Flour Mill neither normally nor specifically in this case has been established to earn rent. The purpose of the Flour Mill evidently is to run the industry and commercially exploit the same for earning income and not to earn the rental income therefrom. In fact, the assessee claim that it is only for two years previous to these years that this industry has been given on lease goes to favour his point of view. After the years under discussion the lease has again been revoked. This is where reference to the question proposed in the judgment of the High Court which in my opinion is distinguishable needs re-production:

"(1) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified to hold that the learned Assessing Officer should estimate the value of land and building only which has been let out for the purpose of charging wealth tax by excluding the plant and machinery from the net wealth when the entire flour mills was leased out since 1989-90 and no wealth tax was charged up to the assessment year 1994-95?

(2) Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was legally justified in invoking the provisions of section 2(e)(ii) of the Wealth Tax Act, 1963 in the case of the appellant when the entire flour mill was leased out and the income tax assessments were being made under section 30 of the Income Tax Ordinance, 1979 treating the leasing income as income from other sources from the assessment year 1994-95?"

13 Above questions are in respect of the leased out flour mill which was permanently leased from 1989-90 to onwards and was not operated by the owners. In the present case leasing out' was not earning rental income from the assets. The fact is supported from the memorandum of the Company. In this regard I am convinced to agree with the argument of the learned ITAT in W.T.A. Nos. 1919 to 1921/LB of 2002 wherein the distinction between the "immovable property" and "industrial undertaking" has been drawn. However, my emphasis is more on the language of law itself which has repeatedly referred the words "immovable property held for the purpose of construction and letting out of property, immovable property held for the purpose of business of construction and letting out." None of these two propositions applies on the facts of this case as the purpose of assessee has never been letting out. In this regard reference to the judgment reported as 1977 PTD 13 = PLD 1977 Lah. 170 relied with approval in W.T.As. Nos. 694-695/LB of 2003 Assessment years 1996-97 & 1997-98 order dated 25-9-2004 and in tL- other case mentioned Supra should not have been ignored. This case ha, in fact been circulated by the C.B.R. itself for the guidance of the assessing officers with specific directions as follows:--

"In a case reported as CIT Lahore v. Muhammad Allah Buksh 1977 PTD 13 = PLD 1977 Lah. 170, the Court has held that the yied of income through the use of plant, machinery or furniture is profit of the business, irrespective of the manner in which the plant and machinery etc, is exploited by the owner, which he may do by either using the plant and machinery etc. himself or by letting it out to someone else provided that the assets do not cease to be commercial assets.

(2) The above decision lays down a good precedent and has bestowed judicial approval on the well-established principle, that income of commercial assets, regardless of the manner of their operation, would be business income so long as they remain assets."

14. Further the term "held for the purpose of" has been defined in 224 ITR 310 which also says that in case of Educational Institutions if purpose is imparting education the exemption cannot be denied if said purpose results in income as well.

15. In this view of the matter I respectfully record my disagreement with learned A.M. that it is the case of confirmation and hold that the wealth tax is not chargeable to the Flour Mill under discussion.

16. Because of the difference of opinion the case is referred td the competent authority for appointing a referee member.

(Sd.)

(Khawaja Farooq Saeed)

(Judicial Member)

17. Whether on the facts and circumstances of the case the learned A.M. is justified in holding that the wealth tax is chargeable to the assessee flour mill under clause 2(5)(ii) or that the same is not covered within the said definition as held by the learned Judicial Member.

(Sd.)??????????????????????????????????????????????????????????????????????????????????????? (Sd.)

(Mehmood Ahmed Malik)???????????????????????????????????????????????????? (Khawaja Farooq Saeed)

(Accountant Member)?????????????????????????????????????????????????????????? (Judicial Member)

Since there is a difference of opinion, the question framed may be placed before Mr. Jawaid Masood Tahir Bhatti for acting as referee Judge.

18. JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEM?BER).---This case has been entrusted to me by the Hon'ble Chairman of Income Tax Appellate Tribunal of Pakistan to act as a referee judge because difference of opinion has cropped up between the learned judicial and Accountant Members while deciding the titled appeals. The following question has been proposed for the consideration:-

"Whether on the facts and circumstances of the case, the learned A. M. is justified in the holding that the wealth tax is chargeable to the assessee flour mill under clause 2(5)(ii) or that the same is not covered within the said definition as held by the learned Judicial Member?"

I have heard the learned representatives from both the sides and have also perused the findings of my two learned brothers, the impugned order of the learned CWT (A), the assessment order and the case law referred from both the sides.

19. While perusal of the findings as given in the above paras by my learned brothers, I have found that the learned Accountant Member (as he then was) has held that "the assessee held immovable property for letting out and that it is an asset within' the meaning of Wealth Tax Act, 1963 and liable to wealth tax." While the learned Judicial Member (the Hon'ble Chairman) in his findings has held that "the wealth tax, is not chargeable to the assessee flour mill for the years under review." The learned Accountant Member has upheld the treatment meted out by the Officers below on the decision of this Tribunal, which has been referred in the impugned order of the learned CWT (A). He has, however, set aside the assessment with the directions to afford proper opportunity of being heard to assessee regarding liabilities claimed by the assessee and has directed to make fresh assessment in the light of the decision of the Hon'ble Karachi High Court in the matter of Messrs Afzal Flour Mills (Pvt.) Ltd. v. CIT (A) & others reported as 2004 PTD 188 and in the matter of Messrs B.P. Biscuit Factory Ltd. Karachi v. W.T.O. reported as 1981 PTD 217. On the other hand, the learned Judicial Member has discussed the issue in detail and has ultimately come to the conclusion that he wealth tax is not chargeable by assessee?flour mill.

20. While perusal of the record of the case, I have found that the assessee-flour mill has been owned by the owners themselves except for the years under discussion, when it was leased out and the learned Officers below have considered the same asset/property as covered within the definition of Section 2(5)(ii) of the revoked Wealth Tax Act, 1963. I have further noted that in the previous two years to the years under review, assessee's same property, the flour, mill has not been subjected to wealth tax by the Department. I have further noted that the learned judicial member has very elaborately distinguished the referred decisions by the learned Accountant Member from the present case. The learned Judicial Member has also discussed in detail the history of legislation regarding the definition of assets and concept of AOP in the matter of wealth tax and has finally come to conclusion that section 2(5)(ii) of the revoked Wealth Tax Act, 1963 applies on those properties purpose of which right from their construction remains letting out of sale. He has further observed that "it is the purpose of holding a property which is subject to this charge of AOP and therefore, a flour mill being neither normally nor specifically established to earn rent cannot be taken under the ambit of definition of an asset".

21. After considering all the above facts of the case, I fully endorse the findings and conclusions arrived at by my learned brother judicial member (presently the Hon'ble Chairman). The language of law itself has referred the words "immovable property held for the purpose of construction and letting out of property, immovable property held for the purpose of business of construction and letting out". But in the present case, none of these prepositions applies, as the purpose of the present assessee has never been letting out. In this regard, the judgment of the Hon'ble Lahore High Court, Lahore reported as 1977 PTD 13 = PLD 1977 Lail. 170 has been referred.

22. In view of the above facts, I am of the view that my learned brother, the Accountant Member (as he then was) is not justified in holding that wealth tax is chargeable to the assessee-flour mill_ and I endorse the findings of my learned brother, Judicial Member (the Hon'ble Chairman) that the wealth tax is not chargeable to the assessee-flour mill for the years under review. Consequently, the consolidated impugned order of the learned CWT (A) dated 5-12-2003 G and the consolidated assessment order for all the three years under review are vacated and all the three appeals filed by the assessee are allowed.

(Sd.)

(Jawaid Masood Tahir Bhatti)

(Judicial Member)

C.M.A./517/Tax(Trib.)???????????????????????????????????????????????????????????? Appeal allowed.