R.A. No.13/PB of 2004, decided on 13th July, 2005. VS R.A. No.13/PB of 2004, decided on 13th July, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2709 (2005)

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

----Ss. 156 & 136---Rectification of mistake---Reference to High Court---Scope---Order of the Appellate Tribunal made under S.156 of the Income Tax Ordinance, 1979 could not give rise to question of law unless such order merged into the main order---If the Appellate Tribunal had found some mistake apparent from record and the order was rectified up to the said mistake, the rectified order became part of the main order up to that extent and there could always be new question and the assessee or the department became entitled to raise the same---Where the Appellate Tribunal found that there was no mistake apparent from record, order under S.156 of the Income Tax Ordinance, 1979 could not become part of the main order and no question could be raised from the said rejected order---Reference application could only be filed by posing a question of law arising out of the order of the Appellate Tribunal decided under S.34 of the Income Tax Ordinance, 1979---No question of law could be proposed from an order under S.156 of the Income Tax Ordinance, 1979 if the same had been rejected---Conversely in case of acceptance, the same became part of the main order and if a new question from the said situation arose the same could always be referred.

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

---Ss. 136, Second Sched., Part-I, Cls. (118C) & (80D)-Reference to High Court---Exemption---Trial production---Commercial production---Questions, "whether trial production in the Sugar Mill can be treated its commercial production in relation to determination of exemption period under Cl. (118C) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 and Appellate Tribunal was justified in confirming that assessment year 1999-2000 was seventh year and not sixth year of the exemption under the said Cl. (118C) of Part-I of the Income Tax Ordinance, 1979" was referred to High Court by the Appellate Tribunal for its opinion.

1999 PTD 4126; (1954) 26 IT; (1982) 133 ITR 879 and 1998 PTD (Trib.) 3742 ref.

Shaukat Amin Shah FCA for Applicant.

Mian Saeed Iqbal, D.R. for Respondent.

STATEMENT OF THE CASE

The reference application filed by the assessee speaks as follows:--

"Applicant Chashma Sugar Mills Ltd. is a Public Limited Company quoted on stock exchanges in Pakistan. The industrial undertaking of the company is situated at D.I. Khan and enjoys exemption from income tax for a period of 8 years under Clause 118C of Part-I, of the Second Schedule to the Income Tax Ordinance, 1979 (the Ordinance). Assessments for assessment years 1998-99 and 1999-2000 were finalized accepting the declared results of loss of Rs.8,845,625 for the former and profit of Rs.211,651 for the latter year from the industrial undertaking. The assessments were made vide combined order under section 62 of the Ordinance by the Deputy Commissioner of Income Tax, Companies Circle 08, Peshawar on 9th February, 2001 allowing exemption from tax under Clause (118C) of Part-I, of Second Schedule to the Ordinance as, according to the Department, 6th and 7th years of exemption. It is pertinent to note that whereas the loss and the exempt profit respectively assessed for the said two years is said to be of 6th and 7th years of tax holiday, the depreciation allowed as of the 5th and 6th years because for the assessment year 1993-94 no depreciation of industrial assets was allowed. This in the opinion of A.R. amounted to admission by the Department that during the income year relevant to the assessment year 1993-94 only trial production had been done inasmuch as in the case of a year of tax exemption depreciation cannot be legally ignored. After receipt of assessment order for assessment years 1998-99 and 1999-2000 the applicant filed two rectification applications both, dated 16th August, 2001 under section 156 of the Ordinance pointing out that the assessment years 1998-1999 and 1999-2000 were 5th and 6th years of exemption."

The Assessing Officer rejected both applications relying upon a judgment of Peshawar High Court in writ petition number 1122 of 1995. This case was later reported as (2000) 81 Tax 94. The said judgment related to Sales Tax Act, 1951 the provision of which were not at par with those of Clause (118C) of Part-I Second Schedule to the Ordinance under which period of tax holiday started running from the month in which the undertaking is set up or commercial production is commenced, whichever is the later. Applicant felt aggrieved of the rejection of its application and instituted appeal for the assessment year 1999-2000 before the learned Commissioner of Income Tax (Appeal-I), Peshawar (the CITA) who set aside the order of the Assessing Officer directing him" to examine the matter afresh in the light of above observations keeping in view the fact the Clause (118C) of the Second Schedule to the Income Tax Ordinance, 1979 which allows exemption for 8 years from the date the industry is set up or commercial production is commenced whichever is later, and disposed off the rectification application accordingly". According to the learned CITA the issue for determination was the month and year in which commercial production started. Against the appellate order both the parties approached the honourable Income Tax Appellate Tribunal (Tribunal) for their grievances. The assessee claims that he omitted to file appeal for the assessment year 2000-2001 by being misled by the Assessing Officer's combined order vide Memo. dated 10th December, 2001 whose caption mentioned the assessment year 1999-2000 only (instead of the assessment years 1999-2000 and 2000-2001).

2. The grounds of appeals agitated by the parties are reproduced as under:

Applicant's objection:

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

(ii) 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 (118C) of the Second Schedule to the Ordinance 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.

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

(iv) That the judgment reported as (2000) 81 Tax 94 (H.C. Pesh.) 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.

(v) That the L/CIT(A) has legally erred in not following the S.R.O. 857(1)/88, dated 26 September, 1988 which clearly states that set up includes trial production."

Departmental Objection: --

"(i) 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 product and payment of sales tax on the product being part of commercial production. The judgment by the L/ITAT reported as 1998 PTD (Trib.) 3742 considers trial production being only experimental and not meant for marketing in the instant case, crushing was done for full season (113-days), product worth Rs.15,55,12,430, marketed, and Excise Duty to the tune of Rs.3,24,49,950 paid.

(ii) 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 Rs.67,23,150 was not result of sale of product at Rs.15,55,12,430 and cost incurred thereon at Rs.16,37,27,310."

Applicant's additional grounds:

"(i) 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.

(ii) That the Authorities have erred in failing to note that while competing profits and gains for the assessment year 1999-2000 depreciation has been allowed as of the sixth 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. The issue for determination was the month and year in which the industrial undertaking started commercial production to Earn Tax Holiday in Respect of its Profits and Gains under Clause (118C) of Part-1 of the Second Schedule to the Ordinance. The said Clause (118C) read as follows:--

"(118C) (1) Profits and gains derived by an assessee from an industrial undertaking set up between the first day of December, 1990 and the thirtieth day of June, 1995 both days inclusive, for a period of eight years beginning with the month in which the undertaking is set up or commercial production is commenced, whichever is the later.

(2) The exemption under this clause shall apply to an industrial undertaking which fulfils the following conditions, namely:--

(a) That is set up in the Province of Balochistan (excluding Hub Chowki area), the North-West Frontier Province, the Federally Administered Tribal Areas, the Northen areas, Azad Khasmir, the divisions of Dera Ghazi Khan and Bahawalpur in the Province of the Punjab or the divisions of Sukur and Larkana in the Province of Sindh.

(Provided that the exemption under this clause shall be admissible to the industries for processing of fish, minerals, fruits, vegetables, flowers and mineral-water based on the natural resources of the Province of Balochistan, including those situated in the Hub Chowki Area; and)

(b) That it is owned and managed by a company formed exclusively for operating the said industrial undertaking and registered under the Companies Ordinance, 1984 (XI-VII of 1984), and having it registered officer in Pakistan.

(c) That it is not formed by the splitting up or the re-construction or re-constitution of business already in existence or by transfer to a new business of any machinery and plant used in business which was being carried on in Pakistan at any time before the commencement of the new business; and

(d) That it is engaged in the manufacture of goods or materials, or the subject of goods or materials to a manufacturing process, or mining (excluding petroleum and gas) or extraction of timber."

[1 Substituted for semi-colon by Notification S.R.O.1155(1)/93, dated November 29, 1993]

[2 Provision inserted by Notification No.S.R.O.1155(1)/93, dated November 29, 1993].

3. The assessee claim was that exemption of profits and gains is a right, which exists for each and every year during eight years of tax holiday commencing from the month in which commercial production started and the statutory right of exemption could not be curtailed by an error of mathematical counting by any authority whatsoever.

4. Facts relevant for determination of the aforesaid question were declared vide the assessment orders for assessment years 1993-94 and 1994-95. These are reproduced below from para. 3 page 3 of the Hon'ble Tribunal's order:

"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 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 (118C) 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 1993-94 that "it was the second year of exemption." It was further argued that the assessee submitted and 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 year 1993-94 has attained finality. In support the learned A.R. of assessee referred cases-law reported as 2001 PTD (Trib.) 2922, 2000 (82) Taxation 481."

5. Arguments of the Departmental Representative before the honourable Tribunal which appear in para. 4 of the Tribunal's order are as under:--

"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 (118C) of Part-III of the Second Schedule to the Income Tax Ordinance, 1979. Later on, the exemption was regularized under Clause (118C). On these parameters the exemption continued and lasted in the assessment year 2000-2001 under Clause (118C). The same fact was cited in the assessment year 1993-94, where the Assessing Officer stated hat, "the exemption will continue till 2001, meaning thereby assessment year 2000-2001." The assessee agitated the assessment order for assessment year 1993-94 before CTT(A) Peshawar on the following grounds:

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

(b) That minimum tax under section 80D 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 80D 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 claim 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 Clause (118C) for 7th year, 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 tax holiday period under Clause (118C.)"

6. The A.R. before us argued that the facts stated in para.4 of the honourable Tribunal's order do not depict correct picture of the event:

(i) Firstly, it is erroneously stated in fifth line in para. 4 on page 4 of the honourable Tribunal's order as follows:---

"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 for the assessment year 2000-2001."

It is submitted that the words "meaning thereby assessment year 2000-2001" do not appear in the assessment order for the assessment year 1993-94. The sentence which appears in sixth line of fourth paragraph on page 4 of the said assessment order reads as under:--

"The exemption will continue till 2001"

The words "meaning thereby assessment year 2000-2001" are not part of said order. The sentence constructed meant the relevant month of. the calendar year, 2001 and not the assessment year 2000-2001.

(ii) The learned departmental representative (D.R.) was not correct in stating that the appellate order of the learned CIT(A), dated 25th January, 1994 was not agitated by the appellant in further appeal. The appellant did file an appeal before the honourable Tribunal upheld levy of minimum tax under section 80D of the Ordinance without determining the issue as to when the commercial production commenced. Thus no finding of the Tribunal exists in the appellate order for the assessment year 1993-94 as to when commercial production commenced. The assessee's appeals before the learned CITA and the honourable Tribunal were against the charge of tax under section 80D of the Ordinance and Federal Education Fee, which the then authorized representative considered were chargeable, only if commercial production took place. In the appellant's grounds of appeal it did not concede that the applicant carried on commercial production in the period relevant to assessment year 1993-94.

(iii) The learned DR misled the honourable Tribunal by contending that the applicant "never agitated or applied for rectification for so-called correction in the order of exemption since the very inception." As regards the assessment order For 1993-94 after the Assessing Officer accepted the capitalization of loss, the point of view of the applicant had been fully accepted. If there was any grievance it should have been that of the Department which they could seek to correct under section 66A of the Ordinance which was never done.

7. The A.R. further added that the honourable Tribunal has rejected the appeal of the applicant and accepted the appeal of the Department, for the assessment year 1999-2000 on the. Following grounds:--

(i) The production carried on by the applicant in the period relevant to assessment year 1993-94 was not of a trial nature but of commercial nature. In this connection the honourable Tribunal relied upon a judgment of the Lahore Bench of the honourable Tribunal reported as 1998 PTD (Trib.) 3742. It is respectfully stated that findings about the trial production given in the assess ment order for 1993-94 could not be reviewed by the honourable Tribunal in appeal for the assessment year 1999-2000. This reported judgment does not distinguish trial production from commercial production where the said trial production was first for sale. That case was that of a weaving factory involving only one machine and one process. He added that the nature and problems of a sugar manufacturing mills which was complex involving multiple operations could not be decided on the basis of a judgment of an easy technology weaving factory. The honourable Tribunal misdirected itself by comparison of two industrial units of different nature. The difference between the nature of production activity of a weaving factory and that of a sugar-manufacturing mill was completely ignored while deciding the applicant's appeal in relying upon case-law reported as 1998 PTD (Trib.) 3742.

(ii) The A.R. further said that the honourable Tribunal in this behalf also relied upon "year-wise comparative schedule of production: which appear at page 9 of the appellate order of the honourable Tribunal. This chart was submitted by the Department. The significant factor considered in this chart was the number of days worked and quantity of sugarcane crushed and the quantity of the sugar produced. If the said chart submitted by the Department was properly interpreted.' It would have revealed that actual production of sugar in the year relevant to the assessment year 1993-94 was 38.76% of the installed capacity of 4500 MT and that the actual production of the next year was 72.98% of the installed capacity. This fact alone would show that undertaking was facing trial run problems in the year relevant to assessment year 1993-94.

(iii) The A.R. has also gone to argue that the honourable Tribunal also ignored to give its judgment on merit on two additional grounds of appeal though it took notice of applicant's grounds in para. 3 of its appellate order. These additional grounds raised vital issues having bearing for determining the nature of production in the period relevant assessment year 1993-94. On the question of finality, the applicant relied upon a judgment of the honourable Tribunal reported as 2001 PTD (Trib.) 2922 which has not been discussed but only cursorily referred to by the honourable Tribunal. This judgment in his opinion clinches the issue and in the light of the said judgment the assessment year 1993-94 could never be held as the year in which commercial production commenced. The honourable Tribunal again failed the A.R. claimed to pronounce its judgment on the other additional ground relating to depreciation which appears at page 3 of appellate order and reads as follows:--

"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 sixth 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."

(iv) Thus there is an irreconcilable contradiction in holiday the assessment year 1999-2000 as the seventh year of tax holiday while the depreciation has been allowed as of the sixth year of tax holiday the A.R. remarked.

(v) Regarding refusal to believe that any application for the assessment years 1994-95 and onwards under section 156 of the Ordinance had been filed by the applicant on 8th March, 2001, the A.R. claims that the learned DR misled the honourble Tribunal in the matter. Not only the application was on record, but a reminder, dated 2nd December, 2002 was filed by the applicant and was also available on the file. It is respectfully submitted that no finding of fact in this matter could legally and justifiably be given by the honourable Tribunal without due verification about this aspect from the relevant official who acknowledged its receipt on 8th March, 2001. Failing on the part of the former authorized representative in his arguments or that of the Department to enter the receipt of the application in the order sheet could not be a basis for the honourable Tribunal to give an adverse finding against the applicant. Following sentence appearing at the start of para. 5 of the honourable Tribunal's order needs special mention:

"We have considered the arguments of the representatives, perused the relevant orders and also examined the case record with the help of the learned D.R."

It was argued that the examination of case record is a matter of vital importance for the applicant and its exclusion from the process, infringes its basic and natural right namely "audi alteram partem". The applicant, therefore, request for recommendation of the following question of law to the High Court the A.R. added:--(sic)

8. It was pointed out to learned AR that in view of the importance of the main issue the Tribunal and even to some extent the Department does not object to sending of the relevant issue to the Hon'ble High Court for getting their superior wisdom. In this regard the Tribunal is of the opinion that having decided in some other judgment that trial production is covered within the term commercial production the issue has become of the more importance. The assessee claim that his item being sugar manufacturing his case on facts can be distinguished from the said referred case wherein the said assessee had done weaving, also requires consideration. However, the questions proposed do not reflect clearly these legal prepositions. We are convinced from the arguments and detailed discussion of the history of the issue that certain important questions of law emerge from the order but we are not satisfied with the question. Some questions relate to main order while same emerge from the miscellaneous applications. In this regard suffice will be to say that the orders of the Tribunal made under section 156 cannot give rise to question of law unless such order merges into the main order. It means that if the Tribunal has found some mistake apparent from record and the order is rectified up to the said mistake, the rectification order becomes part of the main order up to that extent. In an eventuality like this there can always be new question and thus the assessee or the Department becomes entitled to raise the same. However, in the cases where the Tribunal finds that there was no mistake apparent from record, order under section 156 does not become part of the main order. No question, therefore, can be raised from the said rejected order, as provision of law does not provide for a situation like this. A reference application can only be filed by posing a question of law arising out of the order of the ITAT decided under section 134 of the erstwhile Income Tax Ordinance, 1979. No question of law can be proposed from an order under section 156 if the same has been rejected conversely in case of acceptance we have already mentioned that the same become part of the main order hence if a new question from the said situation arises the same can always be referred.

The question proposed before us, therefore, does not convey the actual controversy. During the course of the proceedings and upon dilating the arguments it has satisfactorily been felt that there are certain issues which do require indulgence of the High Court and we should get the benefit of their superior wisdom.

9. The issue, which in our opinion emerge from the long and detailed arguments of the two sides, are:--

(1) Whether on the facts and in the circumstances of the case trial production in the Sugar Mill can be treated its commercial production in relation to determination of exemption period under Clause (1180) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979? and

(2) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in confirming that Assessment Year 1999-2000 was seventh year and not sixth year of the exemption under the said Clause (118C)?

10. So far as non-discussion of additional grounds is concerned this is issue of fact and does not give rise to a question of law. The D.R. claims that the additional grounds were not in fact additional as the same basically were already covered by the original main grounds. In such-like situation where the additional grounds are mere repetition, it will be naive to say that the same also required disposal. He supported all the departmental arguments made part of appeal in main order as well as in the R.A. filed by the assessee. In fact he has very ably discussed the details of the order during the discussion before us. We in principle are in agreement that in this case the common controversy stood decided, however, for the reasons of our agreement with that the learned AR with regard to the issue that some question of law does arise not much discussion on the arguments of the DR is required. We have already proposed two questions as against a long list of the learned AR for which we hereby request the honourable High Court to guide us with their valued opinion.

(Documents listed in the Appendix shall form part of the Paper Book)

C.M.A./122/Tax (Trib.)Reference application accepted.