I.T.As. Nos.4181/LB to 4183/LB, 4493/LB of 2000, 31/LB, 32/LB of 2001; 1979/LB and 1980/LB of 2003, decided on 30th August, 2003. VS I.T.As. Nos.4181/LB to 4183/LB, 4493/LB of 2000, 31/LB, 32/LB of 2001; 1979/LB and 1980/LB of 2003, decided on 30th August, 2003., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1979 (2003)

Per Rashid Ahmad Sheikh Judicial Member; Khawaja Farooq Saeed Chairman Agreeing---

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 80-D, 80-C, 80-CC & 62---Minimum tax on income of certain persons---Levy of minimum tax in second round of litigation---Assessee contended that no tax in terms of S.80D of the Income Tax Ordinance, 1979 was levied by the department at the time of finalization of original assessment under Ss.62, 80C and 80CC of the Income Tax Ordinance, 1979; said levy was raised in pursuance of Appellate Tribunal's direction given at the time of first round of litigation; since original order had merged with the appellate order on account of following "doctrine of merger" as a result of which the original order loses its independent entity and that levy of new charge under S.80D of the Income Tax Ordinance, 1979 on re-assessment thus was illegal and uncalled for---Validity---Tax under S.80CC of the Income Tax Ordinance, 1979 was originally levied merely that levy had been modified while adhering to the directions and findings given by the Appellate Tribunal, assessee could not dislodge this factum at the time of arguing the case---Plea of assessee that it was a new levy was not established from the record--- Assessing Officer, while assessing the assessee's income, came to a conclusion that no tax was payable or the tax paid was less than one half percent of the amount representing its turnover from all sources the provisions of S.80D of the Income Tax Ordinance, 1979 shall suo motu came into operation---Assessee had not claimed that he had paid more tax than the one worked out on its total turnover from all sources---Assessing Officer therefore, had rightly worked out the tax in terms of S.80D of the Income Tax Ordinance, 1979.

(2000) 82 Tax 149 (Trib.) rel.

1992 PTD 566; (19'92) 65 Tax 366; PLD 1969 SC 322; W.P. No.235 of 2002, I.T.As. Nos.2134 and 2135/LB of 2002; and Messrs Be Be Jan Pakistan, Faisalabad's case (2002) 86 Tax 259 distinguished.

(b) Income-tax---

----New levy---Show-cause notice---Without confronting the assessee with a show-cause notice, no new levy can be charged on re-assessment to be made in pursuance of the directions given in appellate order. [p. 1983] B

1992 PTD 566; 1992 PTD 709; 2001 PTD (Trib.) 1059; PLD 1969 SC 322; W.P. No.235 of 2002, I.T.As. Nos.2134 and 2135/LB of 2002; and Messrs Be Be Jan Pakistan, Faisalabad's case 2002 PTD 208 ref.

(c)Income Tax Ordinance (XXXI of 1979)---

----Third Sched., Rr. 7(b)(1) & 8(5)---Disposal of assets and treatment of resultant gains or losses---Sale proceeds---Exemption was claimed on sale of business assets---Department contended that since land and building represented business assets, which were entitled for depreciation, the gain earned on such asset constituted business income within the meaning of R.7 (b)(1) of the Third Schedule of the Income Tax Ordinance, 1979---Validity---Gain earned on sale of building could not be taxed particularly when R. 7(b)(1) was read with sub-rule (5) of R.8 of the Third Schedule to the Income Tax Ordinance, 1979---Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979 merely enunciate that where any asset was disposed of by an assessee and if the sale proceeds thereof exceeded the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable under the head "income from business or profession" and if the sale proceeds were less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year---Rule 8 of the Third Schedule to the Income Tax Ordinance, 1979 defines the words and terminology used in R.7 of the Third Schedule to the Income Tax Ordinance, 1979 such as "fair market value", "furniture", "plant", "Sale proceeds" etc; proviso had been added through Finance Ordinance, 1980 under the definition of "sale proceeds" whereby it had been provided that in case of "building" the term "sale proceed" shall mean an amount equal to the lower of the original cost and sale price or fair market value whichever was higher---Since original cost was lower, therefore, the gain earned on sale of building fell outside the domain of the Assessing Officer to tax the same under R.7(b) of the Third Schedule to the Income Tax Ordinance, 1979--Gain earned on sale of commercial building was not taxable in the hand of assessee in circumstances and Assessing Officer had fallen in serious error in taking the gain without appreciating the Rules in their proper perspective---Transaction was not an adventure in the nature of trade of property as a commodity---Intention to earn profit was undoubtedly there, but an accretion in capital could not make it an income chargeable to tax even if the intention of its purchase was to earn profit---Order of First Appellate Authority was vacated and addition made on account of gain on sale of building was deleted by the Appellate Tribunal.

2002 PTD 2169; (1990) 61 Tax 105; Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited; Commissioner of Income Tax, Delhi v. M.K.S. Pratap Kumari of Alwar 1982 PTD 59; Premier Cloth Mills Ltd. v. Sales Tax Officer 1972 SCMR 257; K.M.O. Chettiyar Firm v. Commissioner of Income Tax 1934 ITR 155; AIR 1959 SC 1252; (1965) 57 ITR 21; (1978) 37 Taxation 233; (1976) 102 ITR 202; (1994) 69 Tax 299; (1995) 72 Tax 197: (1976) 102 ITR 2002 and AIR 1959 SC 1252 rel.

(d) Income-tax---

----Exemption---If the assessee did not claim that the amount was not taxable, a non-taxable figure could still not be brought to tax under the law.

(e) Administration of justice---

----Issue was not to be raised again in the second round of litigation if the same had come to an end in the first round for all practical purposes.

(f) Income Tax Ordinance (XXXI of 1979)---

----Third Sched., Rr.7(b)(i)(ii) & 8---Disposal of assets and treatment of resultant gains or losses---Explanations---Rule 8 of the Third Schedule of the Income Tax Ordinance, 1979 was in continuation of all earlier rules of the Third Schedule of the Income Tax Ordinance, 1979 and started with the language "for the purpose of this Schedule"---Rule 8 only defined various terms used in the Third Schedule, for example, it defined the terms "sale proceeds" which had been used in Rr.7(b)(i) and 7(b)(ii) of the Third Schedule of the Income Tax Ordinance, 1979---To say that this definition did not have any application and could not be read with R.7(b)(i) of the Third Schedule of the Income Tax Ordinance, 1979, was a misconception---Rule 8 of the Third Schedule of the Income Tax Ordinance, 1979 was not only to be read along with R.7 of the Third Schedule of the Income Tax Ordinance, 1979 but with all other rules of the Third Schedule in entirety.

Per Amjad Ali Ranjha Accountant Member [Minority view]---

1999 PTD (Trib.) 14; 2000 PTD 14; 1987 PTD (Trib.) 671 ref.

Muhammad Iqbal Khawaja and Faisal Iqbal Khawaja for Appellant/Assessee.

Javed-ur-Rehman, D.R. for the Respondent/Department.

ORDER

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).---Out of these eight appeals, six are cross appeals; three each instituted at the instance of the assessee and the department in respect of the assessment years 1997-98 to 1999-2000. The remaining two appeals, for the assessment years 1993-94 and 1994-95, have also' been preferred at the behest of the assessee-appellant. These appeals are directed against four separate orders passed by the CIT(A) Zone-III, Lahore; one the consolidated order, dated 4-2-2003 for the assessment years 1993-94 and 1994-95 under sections 62/135 of the Income Tax Ordinance and the other 2-9-2000 for the charge year 1997-98 while the 3rd and 4th one is dated 3-10-2000 for the latter two assessment years. All these appeals are adjudged through this single consolidated order.

Assessment year 1993-94

The precise question, which has been posed by the learned counsel for the assessee for our consideration was as to whether any new levy can be imposed by the Assessing Officer without confronting the assessee while giving appeal effect to the appellate order.

In this regard it was pleaded by the learned counsel for the assessee that no tax in terms of section 80CC was levied by the department at the time of finalization of original assessment under sections 62, 80C & 80CC. Rather, this levy was raised in pursuance of the Tribunal's direction given in this case at the time of first round of litigation. It was also stated that since the original order had stood merged with the appellate order on account of following "doctrine of merger" as a result of which the original order loses its independent entity. Thus levy of new charge under section 80D on re-assessment was illegal and un-called for, Reference has been made of the judgment delivered by the apex Court of Pakistan cited as 1992 PTD 566 to support the contention. It was also asserted that levy of turnover tax under section 80D was not the subject-matter of appeal before the learned Tribunal, therefore, scope of the Assessing Officer was restricted and continued to the extent of the issue (s) which was/were set aside by the Tribunal. Thus, the Assessing Officer cannot import any new issue while deciding the point having been set aside by the appellate Court and levy of new taxes under section 80CC and 80D under the garb of the appellate order was completely without lawful jurisdiction and as such, is not sustainable in law. It was explained that in case where the assessment has partially or in its entirety been set aside, the jurisdiction of the Assessing Officer is restricted to the extent which has stood set aside by the higher appellate Court. A judgment reported as (1992) 65 Tax 366 (H.C. Kar.) has been referred to substantiate this contention. Another plea has also been taken that the appellant cannot be burdened with a new levy of tax simply on the basis of another reported decision, which has been mentioned by the Assessing Officer in the body of the assessment, while passing the order under sections 62/135, such as (2000) 82 Tax .149 (Trib.). It was urged that this contention is supportive of the ratio and principle laid down in the Supreme Court of Pakistan's judgment in re: PLD 1969 SC 322, as well as by the Hon'ble Lahore High Court, Lahore in W.P. No.235/02, date 11-2-2002 and by the Tribunal in I.T.As. Nos. 2134 and 2135/LB of 2002 in case of Messrs Be Be Jan Pakistan, Faisalabad (2002) 86 Tax 259 (H.C. Lah.). On the other hand, the learned DR appearing on behalf of the Revenue has supported the orders passed by the two authorities below on this point.

We have given anxious thought to the rival arguments and hold that there is no cavil to this proposition that without confronting the assessee with a show-cause notice, no new levy can be charged on re-assessment to be made in pursuance of the directions given in appellate order. Perusal of the facts reveals that tax under section 8000 was originally levied at page 11 of the assessment order made under section 62 of the Income Tax Ordinance and merely that levy has been modified by the Assessing Officer while adhering to the directions and findings given by the Tribunal in its order. The learned counsel for the assessee could not dislodge this factum at the time of arguing the case before us. Thus, plea of the learned AR that it was a new levy is not established from the record. So far as the case law referred to by the learned AR are concerned, the decisions in those cases rest on altogether distinguishable facts viz. the assessee's case and as such the ratio decidendi therein does not squarely apply to the facts of the present case. Hence no reliance is being placed thereon.

Coming to levy of tax under section 80D, this is not the right line of argument canvassed by the learned AR that this was not the tax, which was originally charged rather this levy has been imposed in pursuance of re-assessment made under sections 62/135 of the Income Tax Ordinance, 1979. In fact, section 80D speaks about minimum tax t6 be paid on income of certain persons. It starts with non obstante clause meaning thereby that this section has an overriding effect on other section(s) of this Ordinance or any other law for' the time being in force. This section proclaims, that where no tax is payable or paid by a company or a registered firm, an individual, an association of persons, an unregistered firm or a Hindu undivided family resident in Pakistan or the tax payable or paid is less than one half per cent of the amount representing its turnover from all forces, the aggregate of the declared turnover shall be deemed to be the income of the said company etc., and tax thereon shall be charged in the manner specified in subsection (2). Actually, this is a "substituted" or "alternative" section. It means that no sooner than the Assessing Officer, while assessing the assessee's income; comes to a conclusion that no tax is payable or the tax paid is less than one half per cent of the amount representing its turnover, from all sources the provisions of section 80D shall suo motu come into operation as has been done by the Assessing Officer in the instant case. It is imperative to mention here that this is not the assessee's case that he has paid more tax than the worked out on its total turnover from all sources. We, therefore, do not subscribe to the views expressed by Khawaja Muhammad Iqbal, the learned A.R., on this score. Hence, the Assessing Officer has rightly worked out the tax in terms of section 80D after having received guidance and assistance from the reported judgment of the Tribunal cited as (2000) 82 Tax 129 (Trib.). This objection of the assessee is accordingly overruled.

Assessment year 1994-95

For this assessment year it has been contended by the learned counsel for the assessee that the learned Appeal Commissioner has erred in law in setting aside the issue regarding gain earned on sale of a commercial building namely "Nishat House". Rather the learned Appeal Commissioner should have ordered acceptance of the gain so earned thereon to be exempt from tax in accordance with sub-rule (5) of Rule 8 of 3rd Schedule read with the decision of the Tribunal rendered in the appellant's own case in the first round of litigation, dated 2-9-2000. Further, argued that the profit earned on sale of commercial building was purely a capital gain as no depreciation was ever claimed by the assessee or allowed by the Revenue thereon, hence provisions of sub-rule (5) of Rule 8 of the Income Tax Ordinance, 1979 are duly attracted in such eventuality. It was also pointed out that so far as finding of the learned ITAT that first of all it is to be determined whether the sale of commercial building was venture in the nature of trade is concerned, this direction is not applicable in view of specific legal provisions covering sale of commercial building.

What happened in this case was that the assessee had acquired ownership of a subsidiary company namely General Stiching Company Lahore on 7-6-1993 along with all assets and liabilities including land and building located at 53-A, Lawrence Road, Lahore. The land and the building was acquired on written down value (W.D.V.) of Rs.4,49,4000 which was subsequently sold to D.G. Cement Ltd., at total cost of Rs.7,90,00,000. The difference of Rs.3,40,56,000 was shown by the assessee-company to be a gain on -sale of land and building and exemption from payment of tax was claimed thereon. On the other hand, it was the viewpoint of the department that since land and building represent business assets, which are entitled for depreciation, thus the gain earned on such assets constitutes business income within the meaning of rule 7(b)(I) of 3rd Schedule to the Income Tax Ordinance, 1979.

When this issue, in the first round of litigation was agitated before the Tribunal which stood set aside with the direction to the Assessing Officer to ascertain as to whether the gain earned by the assessee on sale of immovable property is in the nature of capital gain or revenue gain. If the gain is in the nature of revenue then the Assessing Officer would be justified to bring it to tax. If the gain is in the nature of capital gain then the Assessing Officer was directed to give he treatment in accordance with sub-rule (5) of Rule 8 of 3rd Schedule to the Income Tax Ordinance.

On re-assessment the Assessing Officer granted the same treatment as was accorded to the gain earned on sale of this building in the first round of assessment. Meaning thereby the gain on sale of building amounting to Rs.3,40,56,000 was subjected to tax as the exemption was wrongly claimed thereon being the business asset. The Appeal Commissioner, on first appeal, set aside this issue with, the direction to re-examine afresh in detail as the Assessing Officer has neither discussed nor reached to the conclusion as what was the nature of profit earned on sale of building in dispute. This direction of the first appellate authority has compelled the assessee to come up in appeal before the Tribunal in the second round. The learned DR appearing on behalf of the Revenue supported the orders for the reasons recorded therein. In fact, the Tribunal's direction narrated ante legally and factually has no bearing on the real issue involved in this case as the core issue was proper interpretation and application of Rule 7 read with Rule 8 of the Third Schedule of the I.T. Ordinance, 1979. For a proper understanding of the law in reference to the facts it is essential to reproduce the relevant provisions of Rules:

Rule 7. Disposal of assets and treatment of resultant gains on losses.---Notwithstanding anything contained in this Ordinance of the repealed Act, where, in any income year:---

(a) any asset is disposed of by an assessee, no allowance under rules 1, 3, 4 and 5 shall be made in respect thereof in that year;

(b) any (asset) is disposed of by an assessee;

(i) if the sale proceeds thereof exceed the written down value, the excess of that year chargeable under the head "Income from business or Profession"; and

(ii) if the sale proceeds are less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession for that year;

and the business or profession for the purposes of which the said [asset] was used before its disposal, shall be deemed to be carried on by the assessee during that year and all the provisions of this Ordinance shall apply accordingly.

Rule 8. Definition.---For the purpose of this Schedule,--

(2) "fair market value" has the same meaning as in subsection (3) of section 29;

(3) "Furniture" includes fittings;

(4) "Plant" means any ship, aircraft or vehicle registered in

Pakistan and includes books (other than books in respect of which an allowance has been made under section 42 of this Ordinance or section 15F of the repealed Act), scientific apparatus and surgical equipment used for the purposes of business or profession;

(5) "sale proceeds" means

(a) where the asset is actually sold, the sale price thereof or the fair market value, whichever is the higher;

(b) where the asset is transferred by way of exchange, the fair market value of the asset acquired through such transfer;

(c) where the asset is transferred otherwise than by sale or exchange, the consideration for such transfer;

(d) where an asset is discarded; demolished, destroyed or lost, the. scrap value or the amount realized by the disposal thereof together with any insurance, compensation or salvage money received or receivable in respect thereof;

(e) where the asset is compulsorily acquired under any law for the time being in force in Pakistan, the compensation paid thereof;

(f) where the asset ceases to be used by the assessee for purposes of his business or profession, the fair market value thereof at the time of such cessation;

(g) where the asset (other than an asset to which sub-clause (h) or sub-clause (i) [or sub-clause (j)] applies, is exported or transferred outside Pakistan, the original cost thereof, or the fair market value at the time of export, whichever is the higher;

(h) where an asset, after having been used in Pakistan in the execution of a contract entered into by the assessee before the first day of July, 1979, is exported or transferred outside Pakistan, the original cost thereof less all depreciation allowed excepting the sum allowed in pursuance of rule 5;

(i) where an asset [not being an asset to which sub-clause (i) applies], after having been used in Pakistan in the execution of a contract entered into by the assessee on or after the first day of July, 1979, is exported or transferred outside Pakistan the original cost thereof 7[], 8 [; and]

[(j) where an asset, after having been used in Pakistan in the execution of a contract for exploration and production of petroleum (such contract having been entered into by the assessee on or after the first day of July, 1981), is exported or transferred outside Pakistan, the original cost thereof less all depreciation allowed excepting the sum allowed in pursuance of rule 5,]

and in each such case, the asset shall, for the purposes of rule 7, be deemed to have been disposed of by the assessee:

Provided that in the case of a building the term "sale proceeds" shall mean an amount equal to the lower of the following, namely:--

(a) Original cost, and

(b) Sale price or fair market value, whichever is higher:"

We have given anxious thought to the facts available on record and the relevant Rules 7 & 8 ibid, as well as the case-law furnished by the learned counsel for the assessee before us. We feel to incline with the learned counsel for the assessee that the gain earned on sale of building cannot be taxed particularly when rule 7(b)(1) is read with sub-rule (5) of rule 8 of the Third Schedule to the Income Tax Ordinance, 1979. Rule 7 of the Third Schedule merely enunciates that where any asset is disposed of by an assessee and if the sale proceeds thereof exceeds the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable under the "head income from business or profession" and if the sale proceeds are less than the W.D.V. the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year. While Rule 8 of this Schedule defines the words and terminology used in Rule 7 such as "fair market value", "furniture", "plant", "sale proceeds" etc. However, a proviso has been added through Finance Ordinance, 1980 under the definition of "sale proceeds" whereby it has been provided that in case of "building", the term "sale proceed" shall mean an amount equal to the lower of the original cost and sale price or fair market value whichever is higher.

Viewing the assessee's contention in this perspective we find that original cost of the building was at Rs.3,40,56,000 while the sale price was Rs.7,90,00,000. The lower of these two is the original cost, i.e., Rs.3,40,56,000 as per the definition given in the proviso to Rule 8 of the 3rd Schedule which shall be taken to be the "sale proceeds for the purposes of determining taxability of gain earned on sale of building. Since the original cost is lower, therefore, in this view of the matter the gain earned on sale of building falls outside the domain of the Assessing G Officer to tax the same rule 7(b) of Third Schedule to the Income Tax Ordinance, 1979. Since a specific provision for "building" has beeninserted through Finance Ordinance, 1980 in rule 8 of the Third? Schedule to the Income Tax Ordinance, 1979, therefore, rule 7 of the Third Schedule to the Income Tax Ordinance shall not apply, in case of gain earned on sale of building. The definition provisions have nullified the effect of charging to tax provisions whereby amount exceeding the cost was made liable to tax but not in the case of building as legally the "sale proceeds" for determining the taxability shall be taken to be the cost, which in the instant case would result into "NIL". Resultantly so nothing would be charged to tax. However, disposal of rest of the assets and treatment of resultant gains or losses shall be dealt with in accordance with Rule 7 of the Third Schedule to the Income Tax Ordinance, 1979. In fact, proviso to rule 8 of this Schedule has been inserted specifically in order to clear up any ambiguity, if arises while interpreting rule 7 of the Third Schedule, and that should not be so construed as to widen the ambit of this Rule. We, therefore, would observe that, rule 7(b) of the Third Schedule shall not be read in isolation rather than shall be taken together with sub-rule (5) of rule 8 of the Third Schedule to the Income Tax Ordinance in order to understand taxability of gain earned on the "building" if that is sold.

Having wrapping up our discussion and on going through the case-law cited by the learned A.R. at the bar as 2002 PTD 2169 (Kar. H.C.) we hold that the gain earned on sale of commercial building known as "Nishat House" was not taxable in the hands of the appellant and the Assessing Officer had fallen in serious error in taxing this gain without appreciating the Rules in their proper perspective.?????????

Resultantly, the Appeal Commissioner's order is vacated on this score. Consequent, upon which the addition made by the Assessing Officer on account of gain earned on sale of building stands deleted.

Cross-Appeals-Assessment????? Years 1997-98, 1998-99 and 1999-2000.

Assessee's sole grievance relates to the disallowances made under certain heads of the P&L expenses; such as travelling and conveyance, vehicle repairs and maintenance, entertainment, postage, telephone and telegraph, printing and stationery, repairs and main?tenance, fee and subscription, miscellaneous expenses and depreciation on vehicles (assessment years_ 1998-99 and 1999-2000).

The learned counsel for the assessee has willy-nilly pressed the additions made in these heads. On the other hand, the Revenue has challenged the impugned order on the point of claim of export rebate allowance of relief in sales tax as workers participation fund in other income account, in initial depreciation and reduction in additions in travelling and conveyance postage and telephone and telegraph in all the three years under appeal in addition to, relief allowed with regard to chargeability of Workers Welfare Fund deletion of tax charged under section 80C on buy-back lease arrangements and granting of exemption on profit earned on sale of equity investment for the assessment years 1998-99 and 1999-2000 have been called in question.

As regards charging of tax under section 80C on sale of lease back arrangements, it has already been held by the Tribunal in a case cited as 1999 PTD (Trib.) 14 that any transaction made on account of buy and lease back arrangements between the assessee and the leasing company was not covered under the definition of sale or supply, as such the provision of section 80C of the Ordinance does not apply on such arrangement. Hence, this objection of the department is devoid of any force and stands overruled. Similarly, the Karachi High Court, Karachi in a reported case 2000 PTD 14 has categorically held that W.W.F. cannot be charged to the income subject to tax under the presumptive tax regime covered by sections 80C & 80CC of the Income Tax Ordinance and also on the income to which exemption under any of the clauses of the Second Schedule to the Income Tax Ordinance has been granted. Hence, this objection of the Revenue is also not sustainable. Likewise issue of allowance of depreciation on vehicles, the Appeal Commissioner has granted relief therein in view of the principles laid down in a case law cited as 1987 PTD (Trib.) 671. In this view of the matter, the departmental objection loses its force on this point as well. So far as the other heads of the expenses mentioned supra are concerned, perusal of the impugned order reveals that the Appeal Commissioner, after thorough appraisal and appreciation of law and the facts available on record granted relief to the assessee in the heads of expenses mentioned ante.

As the order passed by the first appellate authority in respect of the these assessment years is well-reasoned and well based, therefore, we do not find any reason to intervene in the impugned order on behalf of the Revenue on the objections raised therein.

In the result the assessee's appeals stand disposed of to the extent indicated above while the departmental appeals fail and are dismissed being bereft of any merits.

As per Amjad Ali Ranjha, Accountant Member, (Contra).---I beg to differ with the findings of my learned brother (Judicial Member) regarding deletion of addition on account of the gain earned on sale of building relevant to assessment year 1994-95 for the following reasons:

(i) Assessee himself had declared this gain of Rs.3,40,56,000 as other income in Note 31 of the accounts and offered it for taxation in the computation of income, as is apparent on page-1 of the assessment order.

(ii) Moreover, assessee did not revise his return till the finalization of the assessment, which proves that the gain was not claimed as "exempt" being capital in nature. Hence, its taxation by the Assessing Officer was fully justified, and assessee's contention is an afterthought, which is not permissible in law.

(iii) It is interesting to note that the assessee had sold this property in the same year in which it was purchased, thus disposal of the property in the same year establishes the intention that it was done from business point of view. Hence, Assessing Officer has rightly taxed the same.

(iv) ITAT while setting aside the case on this point for de novo action directed to ascertain whether the gain earned by the assessee on sale of immovable property is in the nature of capital gain or revenue gain. In view of this clear judgment of the Tribunal, the Assessing Officer was fully justified to treat the said gain as "revenue in nature" and consequently bringing it within the ambit of taxation.

(v) Fourthly, I do not agree with the interpretation ' given by my learned brother regarding rule 7(b)(i) of 3rd Schedule read with provision of sub-rule (5) of Rule 8 of 3rd Schedule, as in my view, it is entirely covered under rule 7(b)(i) of 3rd Schedule for, the above given reasons.

(vi) Fifthly; , an important fact of the case has been completely ignored. It is the issue of transfer pricing, where such transfers are made between the parent companies and subsidiary companies to evade tax, as it seems to have been done in this case, as assets and liabilities have been acquired by the parent company Messrs Nishat Mills Ltd. Lahore from subsidiary company, General Stitching Company, and sale of this valuable assets has been made in the same year to another company .D.G. Cement Ltd. with a difference of Rs.3,40,56,000. This aspect of the case needs to be looked into as well before coming to a conclusion as to whether it is really a capital gain, as being envisaged by my learned brother (J.M.). Thus, I am in favour of rejecting assessee's appeal on this major issue.

As the difference of opinion has arisen between the members of this Bench, hence the case is referred to the Hon'ble Chairman for nomination of a third member of resolve the following question:

"Whether in view of the facts and circumstances of the case, assessee's appeal needs to be accepted or rejected?

(As per Khawaja Farooq Saeed, Chairperson, concld.).---This is a case of difference of opinion between two learned brothers. The question posed is quite wide. However, since it is on the basis of certain observations given by the learned Accountant Member, one can have a firm understanding of the issue. The facts in brief are that the assessee-company acquired the ownership rights of its own subsidiary company registered as "General Stitching Company (Pvt.) Limited, Lahore" with its assets and liabilities. Through this transaction which was registered on 7-6-1993, the assessee became owner of land and building at 53-A. Lawrence Road, Lahore for its Written Down Value of Rs. 4,49,44,000. The said building was, alter on, sold for Rs. 7,90,00,000. In this way, the gain of the company was Rs.3,40,56,000 which was claimed as exempt. The Assessing Officer charged the same by holding it as business income within the meaning of Rule 7(b)(1) of the Third Schedule read with section 27 of the Income Tax Ordinance, 1979 (Repealed). In the first round of litigation, the matter went up to the Tribunal and the instructions of the Tribunal given therein after setting aside of the order were:

(i) that the Assessing Officer shall determine whether the gain' earned by the assessee on the sale of immovable property is in the nature of capital gain or revenue gain?

(ii) on satisfaction that the gain is in the nature of capital gain, the Assessing Officer was directed to give the treatment in accordance with sub-rule (5) of Rule 8 of Third Schedule to the Income Tax Ordinance, 1979.

The Assessing Officer in this round while making the assessment relied upon the audited statement of account and after observing that this amount has been declared as income on- disposal of the assets in Note No,31, hence amounts to declaration of the income, added the same in the taxable figure. The other argument of the Assessing Officer was that the assessee himself has not claimed the said transaction as exempt, hence it should be considered as an adventure in the nature of trade and be assessed accordingly.

2. Before, I go to the discussion part made by my two learned brothers, I would like to add here that the Assessing Officer himself has mentioned in the first part that the instructions of the Tribunal were to determine as to whether it was a case of capital gain or revenue gain. The argument that whether it was claimed or not at this belated stage was not be brought on record for confusing the issue. The assessee's claim of exemption stood determined in the first round of litigation. The argument that the assessee having himself shown it as a part of its taxable source stood settled. This argument of the department has been brought to the discussion by the learned D.R. as well. In my opinion, this was not an argument for these proceedings. For these reasons, not much discussion would be required to dispel this argument. This is notwithstanding the argument that the A. R. says that in his return the same has been claimed as exempt.

3. The learned Judicial Member has discussed the issue in detail and basically observed that the assessment framed by the Taxation Officer is totally in deviation to. the instructions. In fact, the learned CIT(A) has also made similar observations, however, has later set aside the case with further directions to re-examine afresh in detail as to what was the nature of profit earned on sale of building in dispute. On the other hand, the learned Accountant Member says that addition is an adventure in the nature of trade, hence taxable.

4. The A.R. repeated his argument and said that the discussion on pages 6 to 13 of the Order of the learned Judicial Member is adopted by him in totality. He added that the objections of Learned Accountant Member are totally misconceived as he has tried to ignite those issues which have nothing to do with the main point involved. He said that why company took over is subsidiary company is not an issue. However, one can argue that if the said sale would have been taxable in the hands of the subsidiary company, it can be taxable in the hands of the principal company. Both the companies are not involved in the business of property dealing. The transaction is the first one and no such transaction has been effected in earlier years. It is a family arrangement. A sister concern took over the business and assets of the other sister concern which, is neither legally barred under any law of the country nor there is any ambiguity with respect thereto. The issue being as to whether it was an adventure in the nature of trade or not, the argument that assessee's claim is an afterthought or that the transaction was for the purpose of earning profit etc., does not arise out of the facts of this case. He said that the Hon'ble Supreme Court in the case reported as (1990) 61 Tax 105 (S.C. Pak.) has determined the parameters in which certain transactions may become an adventure in the nature of trade. He agreed with the learned D.R. that even a single transaction could be an . adventure in the nature of trade but remarked that one needs to understand a transaction by a property dealer and a limited company whose purpose is to manufacture and export certain items. The company's exports are in multi-millions and it has not been set up to do or engage in the business of property. He said that it also makes no difference as to what is the time span between the two transactions.. In all such cases, it is the intention which can be gathered from the planning and other ambient circumstances leading to the subsequent sale. The building and property was taken over as an asset and later it was transferred/sold to third party. Learned D.R. who was also well prepared with the case asserted that the intention is well apparent from the action that the property has not been sold by the subsidiary company but by the principal company besides there is a long line of judgment wherein a single transaction has been held to be an adventure in the nature of trade. He said that the transaction is required to be seen from another angle. Apparently, the third company which is purchasing this property also is a sister concern. It, therefore, appears to be more an arrangement with the intention to deprive the department of its revenue than an actual deal. He said that rule 7(b)(i) of the Third Schedule applies fully in the manner that this asset is subject to depreciation. Hence, the provision mentioned above would apply in full. Even if this is not an adventure in the nature of trade, the amount shall be taxable for the reasons of rule 7(b)(i). This is where going back to the observations of my learned brother Accountant Member becomes necessary.

5.? His first objection is that the assessee himself has declared this gain as his income. Thus, it deprives him from subsequently claiming it as exemption. This is a question which will not require much discussion. Even if the assessee does not claim that the amount was not taxable, a non-taxable figure can still not be brought to tax under law. In any case, I have already discussed in the earlier part of this Order that this issue was not to be raised again in the second round of litigation as in the first round the same had come to an end for all practical purposes.

6.? Second objection of the learned brother is also a part of the first objection. The revision is not an issue. There being a specific claim on which appellate authorities had already given findings even in the first round to say that there was no claim is being naive.

7. The third objection, however, is the one of which dilation shall be required and, in fact, this is the only issue which creates some doubt about the transaction and purpose behind the same. The learned Member has held that the Assessing Officer has rightly taxed in on which I reserve discussion for the latter part of this order.

8. In its para.4, learned Accountant Member has supported the Assessing Officer for considering the gain as revenue in nature and consequently, bringing it in the tax net which shall also be covered in the discussion hereafter.

9. So far as the objection in Para-V is concerned, the same gives a very surprising impression. Rule 8 is in continuation of all earlier rules of the Third Schedule. It starts with the language, `for the purpose of this Schedule'. Further Rule 8 only defines various terms used in the said Third Schedule. For example, it defines the terms "sale proceeds" which has been used in Rules 7(b)(i) and 7(b)(ii). To say that this definition does not have any application and cannot be read with Rule (b)(i) is a misconception. Rule 8 is not only to be read along with Rule 7 but with all other rules of the Third Schedule in entirety. Wherever the terms defined in this Rule have been used earlier in the said Schedule, these definitions shall apply. However, this would not have any direct bearing on the main issue which is the status of the transaction, hence, this comment was unnecessary even from the said angle. Still further in the first round of litigation, the Tribunal had given instructions on this angle as well.

10. Lastly, the learned Accountant Member has commented that this is a case of transfer of price. He has further commented that such transfers are made to the foreign company and subsidiary company to evade tax'. The example of the same has been given by discussing the transaction impugned in this case. It has been commented that the valuable asset has been acquired and sold during the year which aspect needs to be looked into. He, however, has only given a finding without looking into the details in total disregard of the discussion at more than five pages given by the learned Judicial Member. This, however, shall also be covered in our main discussion in the latter part.

11. The upshot of the observations of learned Accountant Member, therefore, is that whether a transaction which has been made by the principal company after acquiring the valuable asset amounts to a business transaction or a solitary capital gain?

12. The question reminds me of a very old Judgment by Mr. Justice Rowlatt who followed the view of Lords Sterndale, M.R., in Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited and held that:---

"When you are considering whether a certain form of enterprise is carrying on business or not, it is material to look and set. whether it is a company that is doing it." The objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.

(See Commercial Properties Ltd., In re: and East India Prospecting Syndicate v. Commissioner of Excess Profits Tax, Calcutta). But they are relevant for the purpose of determining the nature and scope of such activities."

In the case of Commissioner of Income-tax, Delhi v. M.K.S. Pratap Kumari of Alwar (1982 PTD 59), it was held by the Delhi High Court, while quashing a notice for reopening an assessment, as under:--

"This is a simple case where on a reappraisal of the very same material, which he had earlier obtained, the Income Tax Officer thought of taking a different view and initiated the proceedings. The action of the Income Tax Officer was clearly' without legal warrant in view of the well-settled position regarding action under section 147(b)."

The superior Courts in Pakistan have also frequently intervened in writ proceedings in relation to fiscal disputes. Reference may be made to the following:--

In the case of Premier Cloth Mills Ltd. v. Sales Tax Officer (reported in 1972 SCMR 257) it was held by the Lahore High Court as under: --

"In the case of the Premier Cloth Mills Ltd. v. Sales-tax Officer the remaining contentions raised in the petition are the subject-matter of an Appeal before the Income Tax Authority. It will, therefore, amount to usurpation of the jurisdiction of the Special Tribunal if we adjudicate upon the subject-matter of the Appeal."

The crucial question therefore is whether the sales of the property by the appellant-company constituted the carrying on of a business. For the answer to this question, we may usefully refer to certain reported cases to which our attention was drawn. The first case in series that we may reproduce is the case of K.M.O. Chettiyar Firm v. Commissioner of. Income-tax (1934 ITR 155) in which the following apt illustration is given. It was observed that the intention of the assessee has to be considered in each case. To quote from the judgment:--.

"A man may either buy shares or securities with the object and intention of making a gain from the sale when these shares or securities have risen to a' higher price, or he may purchase the shares or securities with the intention of keeping his capital safe and receiving meanwhile a certain amount of dividend or interest. The intention must be deduced from the facts and from the circumstances of the case. Where a man makes a business of speculating this will be deduced by the Court from the fact that he makes numerous purchases and sales, the sales being within a short time of the purchase.

On the other hand where a man makes a few sales, although he may make a number of purchases, and where the sales are made at long intervals after the purchases, the conclusion to be drawn is that he is not indulging in the business of speculating in these stocks and shares, but that he is investing his capital in these stocks and shares."

The Indian Supreme Court in the case reported, in AIR 1959 SC 1252 considered the circumstances in which it is to be decided whether the amount in question is `income' or `capital gains'. In this case the assessee who was carrying on business purchased a plot of land and made a profit. The Income-tax Department held that it was taxable and that the purchase had been made because the assessee had realized that it was a valuable plot on which he should make a handsome profit. However, the Supreme Court struck down this finding and pointed out that the mere fact that the assessee had realized that the property was valuable and would increase in price was no reason to hold that it should be treated as income and reliance was placed on a decision of the House of Lords in which it was held:--

"An accretion of capital does not become `income' merely because original capital was invested in the hope and expectation that it would rise in value; if it does so rise its realization does not make it 'income'."

In the case reported in (1965) 57 ITR 21 the Indian Supreme Court held:--

"It is for the Revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must be determined on a consideration of all the facts and circumstances".

The distinction was also pointed out between sales and purchases of commercial commodities and land. It was specifically held that "a transaction of purchase of land cannot be assumed without more to be venture in the nature of trade.

In the case reported in (1978) 37 Taxation 233 in which a business firm sold certain land and the question was whether the profit was taxable, it was held firstly the property in question in the present case is land which is not ordinarily a commercial commodity secondly, the resale of the said land took place a little over six years after the purchase which would militate against any inference being drawn that the purchase had been with the intention for embarking on a venture in the nature of trade.

In the case reported in (1976) 102 ITR 202 the following principles were laid down in order to decide whether a transaction of purchase amounts to carrying on a business or not:--

"The following principles have to be borne in mind in deciding whether a transaction of purchase and sale amounts to an adventure in the nature of trade: (1) The commodity purchased plays an important role in deciding whether a person was including in an adventure in the nature of trade or was making an investment. (2) Whether the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor. (3) The fact that the property bought was sold within a short time does not by itself indicate the transaction was in the nature of trade. (4) If land has been purchased or a commodity which normally is not treated as stock-in-trade has been purchased the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade. (5) If the property purchased was capable of yielding income then again the inference is that an investment was intended and not an adventure. It is not a matter of merely counting the number of facts and circumstances pro and con. What is important is to consider their distinctive character. In such case it is the total effect of all relevant factors and circumstances that determine the character of the transaction. The onus of proof in cases of transactions of this kind to establish that they were in the nature of trade is entirely on the department and that onus cannot be satisfied by merely surmises."

13. In a case of ITAT reported as (1994) 69 Tax 299, the assessee purchased a plot for construction of a hotel, could not manage loan, sold. the same on profit. The profit was held to be as not an adventure in the trade.

14. In the case reported as (1995) 72 Tax 197 which is basically relied upon by learned DR to say that even a solitary transaction can be a revenue deal the Tribunal considered the only transaction to be as sale. The same was for the reason that the assessee had been purchasing and selling properties as a business in earlier years.

15. The upshot of the various judgments above is that for each and every transaction, the circumstances shall determine the fate of the transaction. The criteria for holding a solitary sale to be as an adventure in the nature of trade which appears from various judgments above therefore is:-.-

(i) Whether the transaction was done with the intention of doing the business of purchase and sale?

(ii) Whether for getting more profit some renovation or re-arrangement of the property/asset was done?

(iii) Whether the assessee had been doing such activities in the past or the transaction is subsequently followed by such and similar deals to show tendency?

(iv) Whether the commodity is the one which the assessee had been dealing in the regular course of his business in perpetuity?

(v) Whether the same is voluntary and pre-intended and not by the force of the circumstances?

(vi) Whether the commodity/asset can be said to be as a stock in trade?

16. Above criteria's have been discussed in the above judgments and (1976) 102 ITR 2002 has taken care of the majority of the same. I find myself in full agreement with the same. I also feel convinced that it is but the department who is to prove that the transaction is an adventure in the nature of trade.

17. Taking all the above parameters in view if we first see that whether the onus has been satisfied or not? The department has added the gain on following grounds:

(i) The assessee himself has offered it for tax.

(ii) That the property was sold at a substantially higher figure resulting in 35 millions gain hence was an adventure in the nature of trade.

18. Regarding first objection, we have already shown disagreement with the same in earlier part of this order.

19. For the second reason, one can say that if the gain was not that big it could end in acceptance of the same as a capital gain. Obviously, it is not the size or amount of a gain that determines the fate of transaction.

20. The Assessing Officer has on the one hand totally ignored the directions of the Tribunal and on the other hand has made the additions

on basis of the arguments which are just flimsy and a non-issue. The assessee's claim needed no revision and each substantial gain cannot be taxed just because of its size. It has to come within the parameters of law to charge a gain as Income of the assessee. The department, therefore, has failed in discharging its onus.

21. Now coming to the comments of learned Accountant Member that this transaction was an adventure in the nature of trade. The facts before us are:

(i) That the company is not involved, as a habit, in the business of purchase and sale of property.

(ii) Neither in the near past or uptill now after the said deal such an asset has been transacted as a commodity.

(iii) Neither any mentionable renovation has been made to increase its price nor any bifurcation in terms of smaller plots has been made. The purchase and sale of property is in the same form, size and condition.

(iv) It is an isolated and solitary transaction.

22. The circumstances of the case, therefore, clearly warrant that it was not an adventure in the nature of trade of property as a commodity. The intention to earn profit was undoubtedly there, but an accretion in capital under the circumstances cannot make it an income chargeable to tax even if the intention of its purchase was to earn profit (Ref: AIR 1969 SC 1252). This, therefore, is a clear case of a `capital gain'. I, therefore, respectfully endorse my view in favour of learned Judicial Member that the rise in value as expected does not make it as an `income' liable to tax.

23. Regarding charge of the same under clause 7, I have already dilated this issue also. Clause 7(b)(i) read with clause 8(5) gives a very clear treatment to transaction like this. Learned Judicial Member has discussed in detail the relevant issue at page-6 to 13 of his order. I adopt all the discussion and fully agree with his interpretations has been allowed to the said asset of the company during the year or in earlier years no addition can ,be made in the income of the assessee even if the sale value is higher than the W.D.V.

24. This leaves us to the doubt that has emerged on transfer of this asset to the principal company by the subsidiary. The D.R. during his argument has also commented that the transaction between the principal and subsidiary company is doubtful. The .A.R, on the other hand, had opined that both companies are registered before the Corporate Law Authority and there is no question of any sham or benami transaction.

All legal documentation with regard thereto under Company Law has been completed.

25. I have not been shown its Transfer Deed which even otherwise at this stage may not be required. It has never been the case of the department at any stage of the proceedings either in the first round or upto my stage in second round. The transfer of asset by one company to the other company in the same family of companies with profit motive and claiming the gain as exempt in case of transferee may be doubtful but the same cannot help the department in any way. Before me the issue is of exemption of the transaction in the hands of this assessee. What are the implications of this deal in the hands of the transferor company who might have enjoyed the facility of depreciation in her accounts etc.? The answer remains that this is neither an issue before us nor the other company, which also is a legal person, is impugned. The argument, therefore, in respect of this assessee, is of no help.

26. The upshot of above discussion is obvious. For the reasons of the arguments and various discussions above, I agree with the deletion of the addition earlier made by the Assessing Officer and accordingly concur with the findings given by learned brother Judicial Member. This disposes the appeal.

C.M.A./48/Tax (Trib.)????????????????????????????????????????????????????????????? Order accordingly.