I.T.As. Nos. 3949/LB to 3951/LB and 4450 to 4453/LB of 2003, decided on 8th December, 2005. VS I.T.As. Nos. 3949/LB to 3951/LB and 4450 to 4453/LB of 2003, decided on 8th December, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2325 (2005)

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

----S. 62---Assessment on production of accounts, evidence etc.---Disallowances---First Appellate Authority deleted the disallowances on the ground that despite maintaining books of account, no specific notice under S.62 of the Income Tax Ordinance, 1979 was issued indicating the quantum of intended Profit and Loss account expenses---Such findings were upheld by the Appellate Tribunal.

2002 PTD 1195; 2001 PTD (Trib.) 2938; 1999 PTD (Trib.) 3892 and 2003 PTD (Trib.) 625 rel.

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

----Third Sated., R.5(1)-Depreciation allowance---Initial depreciation--Machinery regarding which depreciation had been claimed was in use with the assessee on lease rental basis---Company became owner of the said machinery on termination of lease---Contention was that machinery transferred in the name of assessee-Company was entitled to initial depreciation because it was the first year of ownership of the assessee-Company-Validity-Neither there was any installation of machinery or plant nor first time use of the machinery for the purposes of business of the assessee---Machinery was in use prior to the year when the initial depreciation had been claimed---Assessing Officer had rightly disallowed the claim of initial depreciation---Appeal filed on the issue of initial depreciation was dismissed by the Appellate Tribunal.

Zaeem-ul-Farooq for Appellant.

Javed Iqbal Rana, LTU and Sabiha Mujahid, D.R. for Respondents.

Javed Iqbal Rana, LTU and Sabiha Mujahid, D.R. for Appellants (in I.T.A. Nos. 4450/LB to 4453/LB of 2003).

Zaeem-ul-Farooq for Respondents.

ORDER

Out of these seven appeals, six are cross appeals for the assessment years 1998-99 to 2000-2001 by both Department and the assessee and remaining one for the assessment year 2001-2002 has been filed by the Department against the consolidated impugned order of the learned CIT(A), dated 1-7-2003 for the assessment years 1998-99 to 2001-2002.

Leaned counsel for the assessee has at the very outset submitted that he is not pressing the appeals filed by the assessee for the assessment year, 2000-2001, which is, therefore, dismissed being not pressed.

Regarding the four appeals filed by the Department for the assessment years 1998-99 to 2001-2002, we have found that all the four appeals are against the deletion of disallowances out of P&L A/c expenses, except the appeal for the assessment year 1998-99 for which year, apart from disallowances, the deletion of addition made under section 24 (ff) amounting to Rs.5,33,224 has been objected.

Regarding the disallowances, we have found that these have been deleted for all the four years under review, as despite maintaining the books of accounts, no specific notice under section 62 was issued indicating the quantum of intended P&L A/c expenses disallowance. Learned CIT(A) in this respect, has placed reliance on the following reported decisions of the Hon'ble High Court and this Tribunal:--

2002 PTD 1195, 2001 PTD (Trib.) 2938, 1999 PTD (Trib.) 3892 and 2003 PTD (Trib.) 625.

We, therefore, find no warrant for interference in this respect. All the four appeals filed by the Department are, therefore, dismissed.

Regarding the deletion of addition made under section 24 (ff) for the assessment year 1998-99, we have found that the learned CIT(A) has deleted the addition placing reliance on the decision of this Tribunal, dated 28-6-2002 in ITA No.2346/LB/2002, wherein, it has been held that "if withholding tax under section 52 has been paid for certain amounts, the same cannot be disallowed", and in this case, it has been contended that on account of commission though made in cash has suffered withholding tax, which serves the intention of section 24(1), which is to establish genuineness of expenses. The appeal on this issue filed by the Department is, therefore, also dismissed.

The remaining two appeals have been filed by the assessee and the learned counsel for the, assessee has only agitated the ground regarding disallowance of the claim of "initial depreciation" on account of machinery for both the years i.e. 1998-99 and 1999-2000 and regarding additions made under section 2A(i) on account of perquisites paid to Directors for the assessment year 1999-2000.

Regarding the "initial depreciation", we have found that the assessee has claimed initial depreciation amounting to Rs.11,96,244 for the assessment year 1998-99 and at Rs.5,93,265 for the assessment year 1999-2000. The machinery regarding which the depreciation has been claimed was in use with the assessee on lease rental basis. On termination of lease, the company became owner of the said machinery and it was pleaded that the machinery transferred in the name of the assessee-Company is entitled to initial depreciation because it was the first year of ownership of the assessee-Company. It has been contended that the primary condition as provided under Rule 5(1) of the 3rd Schedule is that the machinery is owned by the assessee. Learned counsel for the assessee has contended that there is nothing in Rule 5(1) of the 3rd Schedule to the repealed Income Tax Ordinance, 1979 which suggests that initial depreciation is allowable to new machinery only and. not to used or second hand machinery. He has contended that the word "new" is with reference to "building" only and not with the machinery. He has, in this respect, referred the provision of which reads "where any building has been newly erected or any machinery or plant has been installed....". According to the learned counsel, the natural effect of the provision of law is that an assessee imports or purchases used/second hand machinery, he is entitled to initial depreciation on such machinery. He has contended that the appellant had purchased used machinery from the leasing company, who was the owner of the machinery and had claimed the initial depreciation for the year in which the used machinery was purchased by the assessee and was used by the assessee as owner of the machinery for the first time. He has, therefore, requested that claim in this respect may please be allowed.

On the other hand, Mr. Javed Iqbal Rana, the representative of the Department has contended that the Taxation Officer has rightly disallowed the claim of initial depreciation, as the machinery was already in use and there was no installation during the assessment years under review and the learned CIT(A) has rightly upheld the treatment meted out by the Taxation Officer. Regarding the addition made under section 24(1) on account of perquisites paid to Directors, learned DR has contended that the Taxation Officer after examining the books of account of the assessee has made an addition of Rs.2,16,000 under section 24(1), which has rightly been upheld by the learned CIT(A).

We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CIT(A) and the assessment orders.

Regarding the initial depreciation, which is the common agitated issue raised by the assessee for both the years i.e. 1998-99 and 1999-2000, we have found that under Rule 5(1) of the 3rd Schedule to the repealed Income Tax Ordinance, 1979, the initial depreciation at the specific rate is to be allowed where any building has been newly erected, or any machinery or plant has been installed in Pakistan at any time between the first day of July, 1976 and the 30th day of June, 2001 (both dates inclusive) in respect of the year of erection or installation or the year in which such building, machinery or plant is used by the assessee for the first time for the purposes of his business or profession or the year in which commercial production is commenced, whichever is the later. We have found that in the present case, neither there is any installation of machinery or plant nor first time use of the machinery for the purposes of business of the assessee. Machinery was in use prior to the year when the initial depreciation has been claimed. We are, therefore, of the view that the Taxation Officer has rightly disallowed the claim of initial depreciation which has been upheld by the learned CIT(A). Both the appeals filed by the assessee for the assessment years 1998-99 and 1999-2000 on the issue of initial depreciation are, therefore; dismissed.

Regarding the addition made under section 24(1) for the assessment year 1999-2000, learned counsel for the assessee has contended that the addition has been made taking the wrong figure of salaries and perquisites of Directors. As the record of the case is not available with the learned DR we, therefore, find it reasonable to set aside the assessment on this issue for further consideration by the Taxation Officer. The Taxation Officer is directed to make fresh order in this regard if required after giving proper opportunity of being heard to the assessee.

The appeals filed by the assessee for the assessment years 1998-99 and 1999-2000 on the remaining grounds of appeal being not pressed by the learned representative of the assessee, are dismissed.

All the six cross-appeals for the assessment years 1998-99 to 2000-2001 and the one appeal filed by the Department for the assessment year 2001-2002 are decided in the manner as indicated above.

C.M.A./80/Tax (Trib.)Order accordingly.