I.T.As. Nos. 157(PB) and 172(PB) of 2002, decided on 16th December, 2003. VS I.T.As. Nos. 157(PB) and 172(PB) of 2002, decided on 16th December, 2003., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2040 (2003)

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

----Second Sched., Part-1, Cl. (118C) & S.156---S.R.O. 857(I)/88, dated 26-9-1988---Exemption---Rectification of mistake---First year of exemption---Determination---Assessee contended that production during assessment year 1993-94 was trial production and assessment year 1994-95 was first year of exemption as in assessment year 1993-94 no commercial production was made and the production of 113 days was trial production and Assessing Officer made a mistake in the assessment year 1999-2000 by allocating it as 7th year of exemption .from tax holiday; that commercial production started from 5-11-1992 which was relevant to the assessment year 1994-95 as Assessing Officer while framing assessment for assessment Year 1994-95 had mentioned that commercial production had started from 5-11-1992; that allocation of 2nd year of exemption in the assessment order for assessment year 1994-95 was a mistake on the basis of which period of 8 years exemption could not be curtailed by the mistaken remarks in the assessment year 1994-95, "that it was 2nd year of exemption" and that such mistake in the assessment order for assessment year 1999-2000 be rectified-- Validity---When product was marketed the production should be considered commercial production---Production was carried out for full crushing season of 113 days and the product was sold in market---Plea that production of assessment year 1993.-94 was trial production had been found incorrect---Rectification application had been filed on 16-8-2001, whereas the filing of alleged rectification application for assessment year 1994-95 and onward had been claimed to be filed as on 8-3-2001 but this fact had neither been established from .the subsequent rectification application, dated 16-8-2001 nor in the order of rejection by Assessing Officer or in the order, otherwise this fact should have been definitely mentioned in subsequent application for assessment year 1999-2000---If the rectification application for assessment year 1994-95 and onward was already filed by the assessee and the word "onward" covered all subsequent assessment years then why the application for the subject year under appeal had been filed---Orders of assessment years 1993-94 to 1997-98 had got finality---Assessment order of assessment year 1998-99, order of which was passed in combine with assessment year under appeal had also attained finality to which the exemption of 6th year had been allocated by Assessing Officer, with the allocation of 7th year to assessment year 1999-2000-First Appellate Authority committed a mistake by setting aside the order of assessment year, as there existed no mistake apparent from the order and the Assessing Officer was absolutely right in rejecting the rectification application---Orders of earlier years had got finality which could not be disturbed by rectifying only subsequent order of assessment year 1999-2000---Order of First Appellate Authority was vacated and that of Assessing Officer was restored by the Appellate Tribunal.

(1954) 26 ITR (sic); (1982) 133 ITR 879; 1999 PTD 4126; (1998) 79 Tax 279 (Trib.); 2001 PTD (Trib.) 2922 and (2000) 82 Taxation 481 ref.

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

----5.156 & Second Sched., Part-1, C1.118C---Rectification of mistake---Exemption---Combined order of two assessment years---Rectification application of only one year---Validity---For assessment years 1998-99 and 1999-2000 combined assessment had been framed, the assessee had only asked for the rectification of alleged mistake in assessment year 1999-2000 while assessment year 1998-99 he had not contested the allocation of 6th years at all---Not possible that for both of the assessment years exemption holiday of 6th years, could be allocated.

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

----S. 156---Rectification of mistake---Section 156 of the Income Tax Ordinance, 1979 covers only the mistake which is obvious, glaring and apparent from the order and is curable without any further extraneous evidence and further arguments---Lengthy agitation through the grounds, additional grounds of appeal and long drawn arguments on the issue of rectification are sufficient reasons to disapprove the rectification application.

Shaukat Amin Shah, F.C.A. and Mehmood Mirza for Appellant/Assessee.

Mirza Khan, D.R. for Respondent/Department.

ORDER

JAVID IQBAL, (JUDICIAL MEMBER).---This order will dispose of two cross-appeals for assessment year 1999-2000, one each instituted by the assessee as well as by the department against the impugned order recorded in Appeal No.708, dated 10-12-2002.

2. Brief relevant facts of the case are that assessee is a public limited company quoted on stock exchange in Pakistan. The company is situated at D.I. Khan and enjoys exemption from income-tax for a period of 8 years under clause (118-C) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979. Assessments for assessment years 1998-99 and 1999-2000 were finalized vide combined order under section 62 by the DCIT, Circle-08 in 9-2-2001 allowing to assessee the, exemption from tax under clause (118-C) of the Second Schedule to the Income Tax Ordinance, 1979 as 6th and 7th years of exemption. Later on after receipt of assessment order for assessment years 1998-99 and 1999-2000, 'assessee filed rectification application under section 156, dated 16-8-2001 alleging that the assessment year 1999-2000 is the 6th year of exemption which was rejected. Assessee felt aggrieved and instituted appeal before the CIT(A) who accepted the appeal of assessee and set aside the order of the Assessing Officer. Hence, against the impugned order both the parties have approached this Tribunal for their grievances. The grounds of appeals agitated by the parties are reproduced as under:---

Assessee's objections:

"(1) That the L/CIT(A) has legally erred to set aside the issue in respect of treating the assessment year 1999-2000 as seventh year of exemption under clause (118-C) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 instead of sixth year as claimed by the appellant.

(2) That the L/CIT(A) has legally erred in remanding the case back to the Assessing Officer for de novo proceedings even stating the following remarks on page 4 of the appellate order:---

As already held by the Higher Appellate Authorities and S.R.O. referred to above the term set up included trial production therefore according to clause (118-C) of the Second Schedule to the Income Tax Ordinance, 1979 exemption period starts from the month in which the undertaking is set up or commercial production is commenced whichever is later.

He should have himself decided this issue instead of remanding the case back to the Assessing Officer for de novo proceedings.

(3) That the L/CIT(A) has legally erred in not following the judgments reported as (1954) 26 ITR (sic) and (1982) 133 ITR 879 in which it is held that set up and commencing of business are two distinct terms and set includes trial production. It is well-settled principle of law that the rulings of higher Courts are binding on subordinate authority till the time such is overruled.

(4) That the judgment reported as 1999 PTD 4126, referred by the learned Assessing Officer in the rectification order was not in favour of Revenue, wherein it has been held that set up includes trial production.

(5) That the L/CIT(A) has legally erred in not following the S.R.O. 857(I)/88, dated 26 September, 1988 which clearly states that set up includes trial production.

Departmental objections:

"(1) That the L/CIT(A) has misconceived the judgment of the Peshawar High Court in Writ Petitions Nos.1122 and 1189 of 1995, reported as 1999 PTD 4126, wherein para. 17, the Hon'ble Peshawar High Court while disposing of the case, very clearly terms the marketing of the product and payment of sales tax on the product being part of commercial production. The judgment by the L/ITAT reported as. (1998) 79 Tax 279 (Trib.) considers trial production being only experimental and not meant for marketing in the instant case, crushing was done for full season (113-day), product worth Rs.15,55,12,430 marketed, and Excise Duty to the tune of Rs. 3,24,49,950 paid.

(2) That the L/CIT(A) on page 3, last para of order failed to appreciate accounting facts by accepting assessee's plea regarding capitalization of loss incurred as trial production. In the instance case, the statement of accounts for the relevant period bears testimony to the fact that the loss capitalized by the assessee at Rs.67,23,150 was net result of sale of product at Rs. 15,55,12,430 and cost incurred thereon at Rs.16,37,27,310."

Additional grounds:

"(1) That the L/CIT(A) erred in ignoring the position that the profit and gains in the income year relevant to assessment year 1999-2000 could not be counted as 7th year of tax holiday inasmuch as the alleged first year of tax holiday (i.e. assessment year 1993-94) admittedly did not have any profits and gains to avail exemption.

(2) That the authorities below have erred in failing to note that while computing profits and gains for the assessment year 1999-2000 depreciation had been allowed as of the sixty year of tax holiday thus there remains no justification in the departmental claim that the profit and gains were of the seventh year of tax holiday."

3. Both the parties represented through their representatives have been heard. Their arguments considered. Learned A.R. of the assessee argued that the assessee had filed nil income return for assessment year 1993-94 and had not put in any claim for tax holiday as there were no industrial profits or gains in respect of which exemption could have been claimed, the Assessing Officer while completing the assessment for succeeding year i.e. assessment year 1994-95 accepted that the industrial profits and gains were exempt under the tax holiday clause and he also admitted that the industrial undertaking of the assessee commenced production during the November, 1992 which fell to be assessed in the assessment year 1994-95 the Assessing Officer in his order for the same assessment year has recorded that the company is granted exemption under clause (118-C) for 8 years and this being the second year of exemption and according to AR's contention 2nd year of exemption was used by a mistake inasmuch as the normal depreciation for industrial assets was allowed for the first time. According to them, it goes without saying that the industrial profits of a limited company cannot be computed without taking into consideration the normal depreciation, and the tax holiday clause eight years period of tax holiday would commence from the month of November, 1992 and that the period of eight years could not be curtailed by the mistaken remark in assessment year 1994-95 that "it was the second year of exemption." It was further argued that the assessee submitted an application for rectification of the above mistake on 8th March, 2001 covering the assessment year 1994-95 and the subsequent years 'assessments completed till the date of the application. The department has not passed any order in response to the said application for any of the above referred years. The action of the department seeking to change the well-considered finding by refusing to rectify the mistake in order passed for assessment year 1999-2000 is illegal. It was further submitted that the finding of fact given in the assessment order for the assessment years 1993-94 has attained finality. In support the learned A.R. of assessee referred cases-law reported as 2001 PTD (Trib.) 2922 and (2000) 82 Taxation 481.

4. While on behalf of the department the learned D.R. contended that for the assessment year 1993-94 the Assessing Officer allowed 'exemption under clause (118-A) of Part-III of the Second Schedule to the Income Tax Ordinance, 1979. Later on, the exemption was regularized under clause (118-C). On these parameters the exemption continued and lasted in the assessment year 2000-2001 under clause (118-C). The same fact was cited in the assessment year 1993-94, where the Assessing Officer stated that, "the exemption will continue till 2001, meaning thereby assessment year 2000-2001". The assessee agitated the assessment order for assessment year 1993-94 before CIT(A) Peshawar on the following grounds:--

(a) That trial run production was treated as commercial production.

(b) That minimum tax under section 80-D was charged.

(c) That federal education fee was charged.

Learned CIT(A) Peshawar vide his order No.1014, dated 25-1-1994 did not entertain the appeal after exhaustive discussion on each aspect. The assessee did not agitate these issues in further appeal. It was further stated that if assessment year 1993-94 tax under section 80-D was charged at Rs.7,77,562 out of which Rs.58,161 was claimed as tax deducted at source, while Rs.7,63,748 was paid through challan vide, dated 30-12-1993. It was further contended that assessee-company never agitated or applied for rectification for so-called correction in the order of exemption since the very inception. The assessee claimed that production during the period relevant to the assessment year 1993-94 was trial production was not accepted by the department as the same was treated as commercial production. In the assessment order for assessment year 2000-2001 the assessee claimed exemption under section (118-C) for 7th years, exemption was allowed for the year keeping in view the requisite qualification which was fulfilled by the assessee. However, the assessee misconceived that the exemption allowed for assessment year 2000-2001 is for the 7th year of the tax holiday period. No such omission was made in the assessment order. Moreover, in each assessment order from assessment years 1993-94 to 1999-2000 the year of tax holiday period has been specifically mentioned. Hence, the assessment year 2000-2001 is 8th and last year of exemption of the tax holiday period under clause (118-C).

5. We have considered the arguments of the representatives, perused the relevant orders and also examined the case record with the help of learned D.R. The moot point of dispute is that according to the learned A.R. of the assessee the production of assessment year 1993-94 was trial production and assessment year 1994-95 was first year of exemption. While the department view is that commencement date of production is 25-11-1991 when the production started and was marketed whereas according to the view of assessee that the production of this period was initial production and counting the assessment year 1994-95 as first year of the exemption the assessment year 1999-2000 is to be considered as 6th year of exemption. The allocation as 7th year of exemption is incorrect which should have been allocated as 6th year of exemption. Though the assessee has asked for the rectification of the order for assessment year 1999-2000, however, through numerous grounds of appeal and lengthy arguments has also contested the finding of earlier assessment years by contending that in assessment year 1993-94 no commercial production was made and the production of 113 days was trial production and Assessing Officer made a mistake in the assessment year 1999-2000 by allocating it as 7th year of exemption from tax holiday, as according to him commercial production started from 5-11-1992 which is relevant to assessment year 1994-95 as his argument was based on the fact that DCIT while framing the assessment for assessment year 1994-95 has mentioned that commercial production started from 5-11-1992. Regarding allocation of 2nd year of exemption in the assessment order for assessment year 1994-95, the learned A.R. stated that it was a mistake on the basis of which period of 8 years exemption could not be curtailed by the mistaken remarks in the assessment year 1994-95, "that it was 2nd year of exemption". Hence, on this ground assessee has asked for rectification of alleged mistake in the assessment order for assessment year 1999-2000 and for the sake of convenience rectification application filed on 16-8-2001 is reproduced as under:--

SUBJECT:???? ASSESSMENT YEAR 1999-2000 RECTIFICATION UNDER SECTION 156 OF THE INCOME TAX ORDINANCE, 1979 (THE ORDINANCE)

Dear Sir,

In continuation to letter No.1038/C-83/2001, dated 21 March, 2001. We further request that:

The income of the Chashma Sugar Mills was exempt from tax for the period of eight years from the date of commercial production.

As per Assessment Order for the Assessment year 1993-94, dated 19th December, 1993 passed by learned DICT Mr. Asad Ali Jan, which clearly stated that:--

"That company has run trial production commenced from 25th November, 1991. The company was in production for 113 days and crushed 374,454 tons of cane and produced 15,093 tons of Sugar.

Accordingly, our first year of commercial production was started from 5th November, 1992 and the relevant Assessment year 1994-95 was our first year of exemption under the said clause 118C. Likewise, assessment year 1999-2000 is our Sixth year of exemption under the clause. But in the Assessment Order for the year 1999-2000 it has been treated as the seventh year.

We request your good-self that the above mentioned mistake which is apparent from record may kindly be rectified under section 156 of the Ordinance.

Thanking you in anticipation.

Your's faithfully.

(Sd.)

Manager Finance"

While the Assessing Officer rejected the application with the following observation:--

Subject: Rectification under section 156 of the Income Tax Ordinance, 1979

Assessment year 1999-2000.

Please refer to your Rectification Nos. 2272 and 2273, dated 16-8-2001.

The detailed judgment of the learned Peshawar High Court in the Writ Petition No.1122 of 1995, decided on the 18th February, 1999, in the case of Frontier Ceramics, Government of Pakistan, very clearly terms the word "set up" as the time when the unit is ready to commence production of start manufacturing goods and is certainly the state immediately before trial production is commenced and not after. In the case of Messrs Chashma Sugar Mills Ltd. the plant was ready for production before 25th November, 1991 as it started the trial production on the said date hence making the assessment year 1993-94, 1994-95, 1995-96, 1997-98, 1998-99, 1999-2000 and 2000-2001 as the 1st, 2nd, 3rd, 4th, 5th, 6th and 7th year of production and exemption under clause (118C) of the Income Tax Ordinance, 1979 respectively.

In the light of aforementioned discussion your rectification application is rejected.

(Sd.)

(Assistant Commissioner of Income Tax)

Company Circle-08, Peshawar.

While the learned Commissioner of Income Tax (Appeals) has decided the matter with the following observations:--

From the foregoing facts and from the perusal of said assessment orders it is noted that the department has accepted the trial run production of the appellant during assessment year 1993-94, whereas the commercial production was started w.e.f. 5th November, 1992. As already held by the High Court Appellate Authorities and S.R.O. referred to above the term set up included trial production therefore according to clause (118C) of the Second Schedule to the Income Tax Ordinance, 1979, exemption period starts from the month in which the under-taking is set up or commercial production is commenced whichever is later. On the other hand assessment for the year 1994-95 was considered as second year of exemption and based on this fact the year under appeal was taken as 7th year of exemption.

It is also interesting to note that for 2000-2001 i.e. succeeding to year of appeal the Assessing Officer has allowed exemption under clause (118C) considering the year of assessment as seventh year.

Consideration the above facts it is concluded that the Assessing Officer has failed to apply his mind by completely ignoring the facts of the case. The action of the Assessing Officer rejecting application under section 156 is therefore set aside. He is directed to examine the matter afresh in the light of above observations keeping in view the fact that clause (118C) of the Second Schedule to the Income Tax Ordinance, 1979 allows exemption for 8 years from the date the industry is set up or commercial production is commenced, whichever is later and disposed of the rectification application accordingly.

Before us through this M.A. by agitation through numerous grounds, additional grounds, and through lengthy argument rectification of alleged mistake in the order for assessment year 1999-2000 has been asked by the assessee but mostly arguments relevant to 1993-94 and 1994-95 have been delivered on behalf of assessee.

On one hand the A.Rs. of the assessee contended that the earlier assessment year have got finality, yet on the other hand it was stated that the production of assessment year 1993-94 was trial production and not commercial production and according to them the Assessing Officer has recorded this fact in the relevant assessment order. From the perusal of relevant order it transpires that though at the time of hearing before the Assessing Officer the assessee has claimed the production of this period as trial production, but while concluding his order it has been recorded in the order that the industrial undertaking has been setup in D.I. Khan and enjoy tax holiday for a period of 8 years under clause 118(A) of the Second Schedule to the Income Tax Ordinance, 1979 and company fulfils the conditions laid down in the said clause, therefore, trading results of assessee are not probed into. The exemption will continue till 2001. In his finding for assessment year 1993-94 nowhere he has mentioned that it was trial production. Similarly in appeals relevant to assessment years 1993-94 against the levy of tax under section 80D, the L/ITAT in its order, while narrating the brief facts of the case has recorded that assessee has claimed the production of the period as trial production, beside this no finding on the issue of trial or commercial production has been given by the appellate authorities as it was not issue of contention.

As regards the distinction between trial production and commercial production we would like to refer the judgment of reported case reported as 1998 PTD 2722, the operative portion which is reproduced as under:--

"We have heard the assessee as well as the learned DR. The word `commercial' as used in dictionary includes any item or commodity which can be sold out in the market while the trial speaks of experimental which is a restricted term. The words have not been explained in Income Tax Ordinance hence we shall go for the dictionary meanings. The words have been explained as follows:--

(The Concise Oxford Dictionary):

"Trial", Experimental treatment. A process or mode of testing qualities; Commercial, of, engaged in, or concerned with, commerce,. Having profit as a primary aim rather than artistic etc.

(Chambers 20th Century Dictionary):

Trial.--A trying, Examination by a test, Examination, sometimes merely formal.

Commercial.---Pertains to commerce, Mercantile. Having profit as the main aim (sometimes implying disregard of quality).

Hence Commerce means, a financial transaction specially buying and selling of merchandise, on a large scale. The trial, therefore, would restrict to experimental production to test the quality of that production while commercial production means a product produced with the intention of sale and to earn profit therein.

8. Reverting back to the facts the AR of the assessee mainly relies upon the Director's Report given in the first annual report of the Company. He, however, would not satisfy us as to how the whole of this period can be termed as an experimental period. The basic difference between the trial product and a commercial product is that the earlier is not meant for marketing. The same is only produced to see as to whether the product is marketable or not. The day the same is considered as fit for sale it becomes a commercial product. In the impugned case the production have not only been sold in the local market but the major portion has been exported. During the production period the appellant might have improved the quality of product by keeping a check on the earlier, but the same, however cannot be said to be a "Trial Product". It is true that an industry can only run after its test run finishes successfully, but however, even if the product produced during the test run is sold in the open market, in our humble opinion, comes within the definition of commercial production. The assessee immediately after its production from 1-7-1993 to onward, have sold its product hence, we are unable to agree with learned AR that the product during this period was a trial production. We, therefore, have no hesitation in holding that the period of exemption of five years shall start from 1-7-1993, and shall remain available to the assessee for the years thereafter i.e. up to 30-6-1998. The assessee appeal, therefore, fails on the point.

In the quoted above case-law it has been held that when the product is marketed the production should be considered commercial production. As in present matter the production was carried out for full crushing season of 113 days and the product was sold in market. Hence the plea of assessee that production of assessment year 1993-94 was trial production has been found incorrect.

Before proceeding further we would like to reproduce the year-wise comparative schedule of the production and period of production: Year-wise comparative schedule of production and period of production:--

The above chart shows that from assessment years 1993-94 to 2000-2001 the number of days of production are alike having a slight difference. It is also evident from the above charge submitted by department that assessment year 1993-94 has been considered as first year of exemption and the assessment year 2000-2001 as 8th year of exemption. In this way counting period of exemption assessment year 1993-94 to 1999-2000, there have been allocated as 1st, 2nd 3rd, 4th, 5th, 6th, 7th years of exemption.

As regards to the claim of assessee that so-called rectification application for assessment year 1994-1995 and onward has been filed as on 8-3-2001 and as no order has been passed by the department, therefore, the order should be deemed and considered as rectified. This allegation of assessee is unfounded, because order sheet entry of departmental record is silent, about filing of any such application. While on 19-3-2003, the previous date of hearing of the present appeal, the then A.R. of assessee submitted the written argument, where there is no mention of this fact that any of the M.A. relevant to assessment year 1994-95 and onward have ever been filed. To this effect the record of the case was also examined by the Court at that time where no such application was available on the department record. Further the miscellaneous application filed under section 156 for assessment year under consideration has been filed on 16-8-2001, whereas the filing of alleged rectification application for assessment year 1994-95 and onward has been claimed filed as on 8-3-2001 but this fact has neither been established from the subsequent rectification application, dated 16-8-2001 nor in the order of rejection by Assessing Officer or in the impugned order otherwise this fact should have definitely mentioned in subsequent application under section 156 for assessment year 1999-2000. Moreover, if the alleged rectification application for assessment year 1994-95 and onward was already filed by the assessee and according to assessee the word "onward" covers all subsequent assessment years then why the application for the subject year under appeal has been filed. In our view the orders of assessment years 1993-94 to 1997-98 have got finality. Similarly, the assessment order of assessment year 1998-99, order of which was passed in combine with assessment year under appeal has also attained finality to which the exemption of 6th year has been allocated the Assessing Officer, with the allocation of 7th year to assessment year 1999-2000 whereas the case-laws reported as (2000) 82 Tax 481 referred by learned A.Rs. of the assessee also supports the departmental view wherein the aforementioned case-law at page 483A it has been held "that even a wrong order has a finality and unless that finality is disturbed by a process authorized by law, rights of assessee and Revenue will continue to be governed by the order."

It is also pertinent to note that for assessment years 1998-99 and 1999-2000 combined assessment have been framed, the assessee has only asked for the rectification of alleged mistake in assessment year 1999-2000 while for assessment year 1998-99 he has not contested the allocation of 6th years at all, now how it is possible that to both of the assessment years exemption holiday of 6th years, could be allocated. Further lengthy grounds, additional grounds and long drawn arguments of the parties are indicative of the facts that alleged mistake falls outside the ambit of section 156 of the Income Tax Ordinance, 1979, whereas section 156 covers only the mistakes which are so obvious, glaring and apparent from the order and are curable without any further extraneous evidence and further arguments, whereas in the present matter assessment of evidence, the lengthy agitation through the grounds, additional grounds of appeal and long drawn arguments on the issue of rectification are sufficient reasons to disapprove the contention of assessee. So in the light of aforementioned discussion we are of the considered opinion, that learned CIT(A) has committed a mistake by setting aside the order of Assessing Officer, as there exists no mistake apparent from the order and the Assessing Officer was absolutely right in rejecting the rectification application. The learned CIT(A) while concluding the matter has not taken the fact in entirely, and has misconceived the fact that the order of earlier years have got finality which could not be disturbed by rectifying only subsequent order of assessment year 1999-2000. In the light of aforementioned discussion we are inclined to accept the department appeal and to vacate the order of learned CIT(A) by restoring the order of Assessing Officer and we order it accordingly. As a result, the departmental appeal succeeds, assessee appeal fails and rejected.

C.M.A./52/Tax (Trib.)????????????????????????????????????????????????????????????? Order accordingly.