2006 P T D (Trib.) 288

[Income-tax Appellate Tribunal Pakistan]

Before Khawaja Farooq Saeed, Chairperson and Mahmood Ahmad Malik, Accountant Member

I.T.As. Nos. 1356/IB to 1358/IB of 1998-99, 343/IB of 2001-02, 823/IB of 2003, 1079/IB to 1081/IB, 1095/IB to 1097/IB of 2004; 1458/IB to 1460/IB of 1998-99, 295/IB of 2001-02 and 814/IB of 2003, decided on 01/01/2005.

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

---Second Sched., Part-I Cl. (176) and S.30---Protection of Economic Reforms Act (XII of 1992), Preamble---Power Policy of 1994---Power generation---Exemption---Interest received by the assessee on unutilized balances lying in the bank---Taxation---Validity---Exemption was only and strictly to profit and gains on sale of electricity and it did not in any way provide room for auxiliary or ancillary item either---Interest income from unutilized regular business accounts for the matter was not even an ancillary income to the power generation---Protection of Economic Reforms Act, 1992 was available to the persons who were notified in the Schedule to the said Act.

Genertech Pakistan Ltd. v. ITAT (2004) 90 Tax 33 (SC Pak.) = 2004 PTD 2255 distinguished.

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

---S. 14---Protection of Economic Reforms Act (XII of 1992), Preamble---Notification No.1283(I)/90, dated 13-12-1990---Exemption---Protection of Economic Reforms Act, 1992 provided that the exemption was provided specifically under Notification No.1283(I)/90, dated 13-12-1990 which had been issued under S.14 of the Income Tax Ordinance, 1979---Protection of Economic Reforms Act, 1992 applied only on those projects which were specifically mentioned in its Schedule.

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

---Second Sched: Part-I CI. 176 & S.30---Protection of Economic Reforms Act (XII of 1992), Preamble--Power Policy of 1994---Power generation---Exemption---Interest income---In pre-production period when the actual work had not started, there was no question of exemption either on the main produce or other sources but it did not hold that after setting up of the industry its income from all sources shall be exempted---In statutory construction the provisions with regard to exemption were subject to strict interpretation---Unlike charging provisions doubt was to be resolved in favour of the department---Since law was very clear and exemption was only from power generation, appellate Tribunal did not subscribe to the view that interest income was covered with the protection.

Genertech Pakistan Ltd. v. ITAT 2004 SCMR 1319 = 2004 PTD 2255 distinguished.

General Pakistan Ltd. v. ITAT 2004 SCMR 1319 = 2004 PTD 2255; 1999 PTD (Trib.) 708; (2000) 112 Taxman 629 S.C.; (1999) 102 Taxman 94 (S.C.); (1936) 4 ITR 270 (P.C.) and PLD 1977 Lah. 170 = 1977 PTD 13 rel.

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

---S. 31(1)(b)---Deductions---Interest income---Assessee was entitled to expenses which he had incurred wholly and exclusively for earning interest income---Appellate Tribunal left the matter for the Assessing Officer to determine the actual expenses laid out wholly and exclusively for the income earned from interest---Appellate Tribunal agreed that even for dealing with the bank, maintenance of record etc; some infrastructure was required.

1989 PTD 211; PLD 1972 Kar. 186 and (2003) 87 Tax 416 and (1982) 467 Tax 56 H.C. rel.

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

----Ss. 38(6), 22 & 30---Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.---Setting off of unabsorbed depreciation---Set off and carry forward of depreciation was a statutory allowance and it could not be denied unless claim was proved to be legally defective---Since this situation did not exist setting aside was not the answer in the case---Appellate Tribunal instructed the department to allow the same.

I.T.A. No.636(IB)/1998-99 and 1999 PTD (Trib.) 1528 rel.

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

----S. 12(9A)---Protection of Economic Reforms Act (XII of 1992), Preamble---Power Policy of 1994---C.B.R. Circular No.26 of 1999, dated 30-9-1999---Power generation---Exemption---Income deemed to accrue or arise in Pakistan---Reserve---Assessee contended that First Appellate Authority failed to appreciate that company's reserves represent nothing but its undistributed profits and gains derived from its electric power generation project---Since entire amount of company's profit and gains from its electric power generation project were exempt from tax the First Appellate Authority should have deleted the addition instead of setting it aside on merits---Validity---Held, it was correct that income for power generation was exemption but it did not mean that provisions regarding charge under deemed income also stood eliminated---Section 12(9A) of the Income Tax Ordinance, 1979 provided of an entirely different situation and had come out to protect an ordinary share holder---Only the income power generation was exempt and other sources were taxable---Language of the Power Policy, 1994 did not say that the income from all sources shall be exempt---Neither it allows exemption from all sources nor it suspends Income Tax Ordinance, 1979 while taxing such power generation plants from sources other than power generation itself---Amount of reserve may entirely be from the income of power generation but on such reserves provisions of Income Tax Ordinance, 1979 in terms of S.12(9A) could be applied---Since issue had been set aside, the Assessing Officer being bound by the instructions of Central Board of Revenue could be of more help to the assessee than Appellate Tribunal.

Fecto Belarus Tractors v. Pakistan through Ministt'y of Finance 2001 PTD 1829; Julian Hoshang Dinshaw Trust and others v. ITO 1992 SCMR 250 = 1992 PTD 1; Uthman Gee Industries v. CIT 2002 PTD 63 and Central Insurance Company v. C.B.R. 1993 PTD 766 = 1993 SCMR 1232 ref.

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

---S. 12(9A)---Income Tax Rules, 1982, R.203AA---Protection of Economic Reforms Act (XII of 1992), Preamble---Power Policy of 1994---C.B.R. Circular No.26 of 1999, dated 30-9-1999---Power generation---Exemption---Income deemed to accrue or arise in Pakistan--Reserve---Term "reserves" as defined in R.203AA of the Income Tax Rules, 1982 for the purpose of S.12(9A) of the Income Tax Ordinance, 1979 did not include any amount the company could not distribute due to any legal restrictions---Central Board of Revenue vide paragraph 4 of the Circular No.26 of 1999, dated 30-9-1999 had clarified that the term ^"reserves" for the purposes of S.12(9A) of the Income Tax Ordinance, 1979 did not include any income, profit or gain which under any restriction could not be distributed.

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

----S. 12(9A) & Second Sched., Part-IV Cl. (59A)---Income deemed to accrue or arise in Pakistan---Disallowance of "provisions for doubtful debts" in computation of excess reserves under S.12(9A) of the Income Tax Ordinance, 1979---Validity---Provision for doubtful debt was a claim relatable to profit and loss account and it could not be added in the amount of reserve in defiance to Cl. 59A of Part-IV of the Second Schedule of the Income Tax Ordinance, 1979 read with S.12(9A) of the Income Tax Ordinance, 1979---Since the Appellate Tribunal did not have figures and the status of the assessee, claim of set aside was disturbed---Assessing Officer was directed to strictly comply, with the instructions given by the Appellate Tribunal.

2004 PTD (Trib.) 1062 rel.

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

----S. 88---Charge of additional tax for failure to pay tax with the return---Illegal charge of additional tax---Assessee contended that after giving a finding the ^`nil' return was filed, no additional tax could be imposed under S.88 of the Income Tax Ordinance, 1979 as such additional tax could only be imposed if tax was not paid on the basis of the return---Validity---Where facts were not disputed and the legal position was obvious leaving the issue undecided was not justified---Set aside or remand order was made in doubtful situations or where the determination of facts required scrutiny of record---No tax was payable on the basis of return---Charge of additional tax under S.88 of the Income Tax Ordinance, 1979 was not justified and the same was deleted by the Appellate Tribunal.

1988 PTD (Trib.) 647; I.T.As. Nos.541 and 542/IB of 1998-99 and I.T.A. No.636(IB) of 1998-99 rel.

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

----Third Sched: R.7(b)(i) & Second Sched: Cl. 176---Power generation project-Exemption-Disposal of assets and treatment of resultant gains or losses---Profit on sale of fixed assets and sale of scrap---Department contended that the sale proceeds of an asset exceeding the written down value shall be deemed to be the income chargeable under the head ^"income from business or profession" while the contention of the assessee was that these profits were of a power project---Exemption was not restricted to sale of electricity but any and all incomes arising from power project---Validity---Sale of scrap was a business income---Scrap was an ancillary item of the main project---In exemption provisions, the scope of exemption is always to the specific business and in most of the cases it was only one source---Unlike interest, scrap was an offshoot of main business---Restrictive scope of exemption and patent law did not give any reason to extent over arms to allow exemption to any other source than the power generation under Cl. 176 of the Second Schedule of the Income Tax Ordinance, 1979---Departmental appeal was allowed in the manner that sale of scrap though held to be as business income, was declared as not exempt from tax and was not covered under R. 7 of the Third Schedule of the Income Tax Ordinance, ^'1979.

1989 PTD (Trib.) 1199 rel.

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

----S. 27---Capital gain---Foreign exchange gain---Foreign exchange loss mainly comprised of unrealized gains and losses on conversion of foreign currency loans and favourable balances-Gain on re-valuation on foreign currency was not real income as long as the foreign currency was not actually exchanged for Pakistan rupee---Currency exchange gain was, otherwise not liable to tax as being capital in nature.

1998 PTD (Trib.) 288 and 541 and 542/IB/1998-99 rel.

(l) Income tax---

----Turn key contract---Agreements were separate of supply as well as other civil work etc.---All contracts were separate and specific and category of work in each case had separately been defined therein---It was not a case of one complete contract of construction, installation and other ancillary work--Such a contract could not be called a `turn key' contract.

(m) Income tax---

----Turn key project---Definition---Turn key project is the one in which the contractor completes the project at his own in respect of every thing including starting from laying of foundation to set up the undertaking till it is ready for production.

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

---Ss. 52, 86, 80C(2)(b), 50(4), Proviso---C.B.R. Circular No.4 of 1995, dated 9-7-1995---Liability of person failing to deduct or pay tax---Assessee in default---Charge was crated on account of differential of ^withholding tax---'Validity---Facts as well as the order of the Assessing Officer did not give any convincing reason that it was a case of `turn key' p^roject---Different works had been assigned to different persons---Tax calculated in addition to the tax deducted by no means was ^justified---Further, assessee claimed that all the parties to the contrac^t were tax payer in Pakistan and tax could always be charged from them which ^hopefully must have been charged by now---Even otherwise the p^rovisions of S.52(A) of the Income Tax Ordinance, 1979 could still be invoked if there was some deficiency---Held, that charge created by holding the company as assessee in default was highly unjustified; there may be a doubt with regard to the amount of deduction on account of purchase of machinery, since both of them were being charged to tax in Pakistan, the agreement to be treated as a normal construction and supply agreement and not a turnkey one, the difference if any, could always be charged from the companies---Appellate Tribunal reconfirmed deletion of the tax created on account of differential of withholding tax.

2004 PTD (Trib.) 2695; Ghulam Muhammad Landkhor v. Safdar Ali PLD 1967 SC 530; Irfan Gul Magsi v. Haji Abdul Khalid Soomro and others 1999 PTD 1302; 2002 PTD (Trib.) 3118; (2001) 83 Tax 22 (Trib.) 2001 PTD (Trib.) 2605; 2000 PTD (Trib.) 2193; -CIT v. Asbestos Industries Ltd. 1993 PTD 459 and Noon Sugar Mills Ltd. v. CIT Rawalpindi PLD 1990 SC 156 = 1990 PTD 768 = 1990 MLD 1977 ref.

Dr. Ikram-ul-Haq for Appellant.

M. Arif Khan, D.R. for Respondent.

Date of hearing: 27th November, 2004.

ORDER

KHAWAJA FAROOQ SAEED (CHAIRPERSON).---These appeals have been filed at the behest of the assessee. The issues mostly are common. However, the discussion and dilation is made in respect of each one of them separately in the following manner.

Taxation of profit/interest on bank deposits assessment year 1998-99 to 2002-2003.

2. The Assessing Officer has taxed interest received by the assessee on unutilized balances of assessee lying in the bank. The assessee challenged it before the Assessing Officer as well as the CIT(A) but however his claim has been dismissed. In this regard, various earlier ^judgments on the issue holding that interest income is covered under section 30, hence, is a separate block of income than of business, have been followed. The AR does not challenge the ratio of the judgments directly but has come out with a new line of argument and says that the cases have not covered all the angles of the charge of the interest income in the said judgments. First of all, the AR said that case of this assessee is covered under Power Policy of 1994, hence no corporate income tax is payable by the power generating companies, be that from any source, whatsoever. In his opinion, clause (176) Part I of the Second Schedule to the Income Tax Ordinance, 1979 does not come in picture at all. The assessee case being fully covered under Power Policy of 1994 and having cover of the Protection of Economic Reforms Act, 1992 overrides all other provisions including that of the Income Tax Ordinance, 1979. He says that he gets support from the famous case of Fecto Belarus in which it has been held that if the Court omits or overlooks some material question of fact or law, the power of review is available. In such circumstances, this review being in the shape of rectification of a mistake is provided to the Court. In his opinion, the application of power policy and the sanction of the Protection of the Economic Reforms Act, 1992 having been ignored in the earlier judgments the same are not binding on the subsequent Benches. He further said that in the judgment of the Supreme Court of Pakistan reported as 2004 SCMR 1319 = 2004 PTD 2255 re: Genertech Pakistan Ltd. v. ITAT, the controversy was different. It was the unutilized share deposit money which was deposited and the Court held that in ^'pre-production period, such interest cannot be considered as income from the industrial undertaking as the requirement of law there was setting up of industry first. In the present case, he remarked, the company is not only set up but the industrial undertaking, is in full functioning and the interest is on business accounts comprising of borrowed funds for project and deposits from sale of electricity. He has referred a chain of judgments in support of his claim which we shall discuss later.

3. The DR has vehemently opposed the arguments of the learned AR. He says that it is the income which is to be taxed and later exempted under a specific provision of Income Tax Ordinance. He said that there cannot be any cavil in the argument that it is the legislature which can provide exemption either directly through the Income Tax Ordinance or any other special legislation. He said that the Protection of Economic Reforms Act has provided for exemption to only to those industries which have been notified under section 6 of the said Act of 1992. Notwithstanding the fact that these arguments were not available at the time of assessment as well as before the first appellate authority, they still are not applicable as the exemption has to be given under section 14 of the Income Tax Ordinance, 1979 even if it is in consequence to some other policy. Moreover, the policy framework and package of incentives for private sector power generation projects in Pakistan, dated March, 1994 issued by the Government of Pakistan was in respect of liberalizing the policy for accelerating the development of generation capacity through private sector resource mobilization. It was not to grant exemption in respect of bank deposits and interest income therefrom etc. He concluded by saying that when a policy or reform is announced in respect of development of a particular industry or a project, it cannot be extended to other sources. The argument of the AR, he said, therefore, be ignored. This amount is covered entirely by a separate section and if the assessee is involved in some other activity, it may come within the ambit of business but is not power generation, it shall also not be covered within the policy as well as other protections available under the law.

4. So far as the arguments of learned AR with regard to ignorance of the application of the Protection of Economic Reforms Act of 1992 is concerned, we would like to be very precise and particular. The exemption is only and strictly to profit and gains on sale of electricity. It does not in any way provide room for auxiliary or ancillary items either. The interest income from unutilized regular business accounts for the matter is not even an ancillary income to the power generation. The Protection of Economic Reforms Act of 1992 is available to the persons which are notified in the Schedule of the said Act and until this day only two notifications have been issued which are as follows:--

(1)Notification No. S.R.O. 1283(1)/90, dated 13th December, 1990, issued under subsection (2) of section 14 of the Income Tax Ordinance, 1979 (XXXI of 1979).

(2)Notification No. S.R.O. 1284(1)/90, dated 13th December, 1990, issued under section 19_. of the Customs Act, 1969 (IV of 1969).

Before going further, we would like to comment here that even in the said Protection of Economic Reforms Act, 1992, the exemption has been provided specifically under Notification No.1284(1)/90 as above which have been issued under section 14 of the Income Tax Ordinance, 1979. This IPP therefore is not at all covered by the said Act, hence, reference even otherwise is not relevant. We have already held in a number of cases that the above Economic Reforms Act applies only on those projects which are specifically mentioned in its Schedule and in this regard, we would like to refer the judgment in the case.

5. Coming back to the issue in hand, the judgment, my learned brother has referred does not help him much. It is correct that it says that in pre-production period when the actual work has not started, there is no question of exemption either on the main produce or other sources but it does not hold that after setting up of the industry its income from all sources shall be exempt. In statutory construction the provisions with regard to exemption are subject to strict interpretation. Unlike charging provisions doubt is to be resolved in favour of the department and notice assessee. However, since law is very clear and exemption is only from Power generation we are unable to subscribe to the view of the learned AR that interest income is also covered with the above protection.

6. We have full respect for the judgments referred by learned brother A.R. which in his opinion are direct on the issue. However, in our humble view the case of Genertech Pakistan Ltd. decided by the Supreme Court of Pakistan reported as 2004 SCMR 1319 = 2004 PTD 2255 and 1999 PTD (Trib.) 708 both are fully applicable on this case. In fact we have already followed the same in the case of other power plants and cannot now take an exception.

7. We are also convinced that this amount is not intrinsically related to project. Had it been so, there would not have been income from deposit with the bank. In this regard even the intention of the assessee is of no help.

8. The argument that section 30 can only be invoked when all other heads of income are exhausted, is also not convincing. In this case we have no doubt in our mind about the fact that this interest cannot be charged under any other provision. The judgments referred as (2000) 112 Taxman 629 S.C., (1999) 102 Taxman 94 (S.C.) as well as (1.936) 4 ITR 270 (P.C.), PLD 1977 Lah. 170 = 1977 PTD 13 and such other in favour of above two arguments are, therefore, ignored.

Expenses under section 31(1)(b) for assessment years 1998-99, 1999-2000 and 2002-2003.

9. We are convinced that assessee is entitled to expenses which he has incurred wholly and exclusively for earning interest income. In this regard learned AR is right in referring 1989 PTD 211, PLD 1972 Kar. 186 and (2003) 87 Tax 416 and (1982) 467 Tax 56 H.C. However, determination of the expenses is not possible at our stage. We therefore, leave this for the Assessing Officer to determine the actual expenses laid out wholly and exclusively for the income earned from interest. In this regard we partly agree that even for dealing with the bank, maintenance of record etc., some infrastructure is required. In any case we leave this for the Assessing Officer to determine the same with the assistance of the assessee.

Setting? off of unabsorbed depreciation assessment years 1998-99, 1999-2000, 2000-2001 and 2002-2003.

The A.R. informed that in above issue Tribunal has given categorical instructions in earlier years.

Unabsorbed depreciation allowance is to be carried forward and allowed under section 38(6) of the Income Tax Ordinance, 1979 which the Department has refused despite specific instruction of this honourable Tribunal. This Tribunal in ITA No.636(IB)/1998-99 in appellant's own case for the assessment year 1997-98 has held in the following manner:--

"The AR vehemently contested the action of the Assessing Officer in not assessing the overall income of the assessee under-section 22 of the Ordinance notwithstanding the fact that such income enjoyed exemption under the law. According to him, the income should have been quantified under section 22 and the income from interest assessed under section 30 should have been set off against income so determined under section 22 of the Ordinance. Business income having not been assessed/ determined at all, carry forward of the resultant loss had thus been denied to the assessee. Relying on a case reported as 1999 PTD (Trib.) 1528, he submitted that the income of an industrial undertaking which qualified for exemption under the Second Schedule to the Ordinance, had to be assessed in accordance with law after proper examination of the accounts. The Assessing Officer had failed to do so and the CIT(A) also failed to give necessary direction in this regard.

Having heard the A.R., the D.R. was asked to respond. He, however, did not have anything to say with regard to the cited case. On our part, we consider that the contention of the AR has much force. The cited case evidently is applicable to the facts of the present case. We, accordingly, remand the case for de novo proceedings and direct that the Assessing Officer shall pass a speaking order taking into account the ratio decidendi of in the said case".

The DR could not satisfy us as to why above instructions have not been followed. Set off and carry forward of depreciation is a statutory allowance. It cannot be denied unless claim is proved to be legally defective. Since this situation does not exist set aside was not the owner in this case. The department is instructed to allow the same.

Addition under section 12(9A) Assessment Year 2000-2001, 2001-2002 and 2002-2003.

Speaking in favour of the assessee against application of section 12(9A) the AR said that the entire income of the company has been derived from its electric power generation project. Since the company has neither set up any other project nor has established any other industrial undertaking in Pakistan. The learned CIT (Appeals) failed to appreciate that company's reserves represent nothing but its undistributed profits and gains derived from its electric power generation project. Since entire amount of company's profits and gains from its electric power generation, project are exempt from tax the learned CIT (Appeals) should have deleted the addition instead of setting it aside on merits. Para E(1) of the Power Policy, 1994 categorically says that the private power companies shall be exempt from corporate income tax. This policy is covered under special law i.e. The Protection of Economic Reforms Act, 1992 in terms of section 2(b) read with section 6 of the said Act. The Honourable apex Court has already given the judgment in Fecto Belarus Tractors v. Pakistan through Ministry of Finance (2001) 84 Tax 25 (S.C. Pak.) = 2001 PTD 1829 (paras. 34 to 36) that such policies cannot be altered to the disadvantage of the investors and benefit provided therein cannot be denied.

Without prejudice to above, the term "reserves" as defined in Rule 203AA of the Income Tax Rules, 1982 for the purposes of section 12(9A) of the Ordinance does not include any amount the company cannot distribute due to any legal restrictions. C.B.R. vide paragraph 4 of Circular No.26 of 1999, dated 30-9-1999 has clarified that the term "reserves" for the purposes of section 12(9A) of the Ordinance does not include any income, profit or gain which under any restriction cannot be distributed. The relevant portion of the circular is reproduced as under:

"(4) Consequently, if due to any legal restrictions on distribution of any particular income, profit or gain, which cannot be distributed and has to be set apart or placed in a reserve, such a reserve, like the one created in pursuance of section 248 of the Companies Ordinance, 1984 would be treated as a reserve required to be created under the law."

The AR said that according to this circular where any income, profit or gain cannot be distributed by the company under any legal restriction, the same falls outside the ambit of section 12(9A) of the Ordinance and cannot be subjected to tax. The legal restrictions have been imposed on the Company from distributing dividend to its shareholders under the provisions of---

Article 4.02 of Trust and Retention Agreement entered into between the Company, ABN AMRO Bank N.V. (ABN), International Finance Corporation (IFC), Bank America National Trust Company and Commercial Lenders, dated September 19, 1995; and Article 6.03 of the First amended and restated agreement as to certain common representations, warranties, conventions and other terms (Common Agreement), dated May 22, 1995 entered into between the company, IFC, ABN and certain financial institutions.

The articles constitute "legal restrictions" as para 21.3 of Implementation Agreement signed between President of the Islamic Republic of Pakistan and the restriction is created by the State itself. The relevant para. of the Agreement reads as under---

"21.3 Commercial Acts.

The GOP unconditionally and irrevocably agrees that the execution, delivery, and performance by it of this Agreement and those agreements included in the Security Package to which it is a party constitute private and commercial acts."

Accordingly, the AR remarked that the undistributed profit held by the Company fall outside the ambit of the term "reserve" for the purposes of section 12(9A) of the Ordinance. He said the instructions have further been clarified by the C.B.R. in its circular which the tax authorities are bound to follow as held in following cases:

(i) Julian Hoshang Dinshaw Trust and others v. ITO 1992 SCMR 250 = 1992 PTD 1

"it is not disputed that Circular No.8 issued by the Central Board of Revenue was in force at the relevant time under section 5(8) of the Income Tax Act, 1922, and section 8 of the Income Tax Ordinance, 1979 the order, instructions and directions of the Central Board of Revenue are binding on all the Officers entrusted with the execution of the Statute."

(ii) Uthman Gee Industries v. CIT 2002 PTD 63

"The said circulars had been validly issued in exercise of powers under section 165 of the Ordinance and were binding on all the officers and persons employed in execution of the Ordinance under section 9 ibid (1992) SCMR 250."

The arguments of learned AR are surprising. It is correct that income for power generation is exempt but it does not mean that provisions regarding charge under deemed income also stood eliminated. Section 12(9A) speaks of an entirely different situation and has come out to protect an ordinary share holder. We have already held that it is only the income from power generation which is exempt and other sources are taxable. The language of the Power Policy, 1994 and the judgment referred does not say that the income from all sources shall be exempt. Neither it allows exemption from all sources nor it suspends Income Tax Ordinance while taxing such power generation plants from sources other than power generating itself.

It is agreed that the amount of reserve may entirely be from the income of power generation but saying that on such reserves provision of Income Tax Ordinance in terms of section 12(9A) cannot be applied cannot be agreed by us. In this regard the circular of C.B.R. is also of no help. It only says that a reserve retained due to some legal restrictions shall be treated as a reserve created under law. It does not and in fact cannot say that such reserve shall be excluded from the purview of section 12(9A). In any case since this issue has been set aside, the Assessing Officer being bound by the instructions of C.B.R. can be of more help to the assessee than us. The above referred judgments are, therefore, left for his consideration. For us the guideline is in the judgment of Central Insurance Company v. C.B.R. reported as 1993 PTD 766 = 1993 SCMR 1232.

No interference on this issue, therefore is required. The finding of the CIT(A) is confirmed.

Disallowance of "Provisions for doubtful debts^" in computation of excess reserves under section 12(9A) Assessment year 2000-2001.

The arguments of learned AR are that this issue was wrongly set aside as there is no implication of section 12(9A) in the case of appellant as elaborated above. Without prejudice to the argument that entire section 12(A) is not applicable, even otherwise for the purpose of clause (59A), Part IV of the Second Schedule to the Ordinance, after tax profit are to be computed on the basis of final accounts on the appellant as held in 2004 PTD (Trib.) 1062. Para. 9 of this judgment reads as under:

"in the circumstances supra, and in view of the order already passed by the learned Bench in the above referred cases and clarification issued by the Ministry of Finance, Economic Affairs, and circulation of direction by the learned RCIT, there remains no other course except to maintain the position that/for the purpose of section 12(9A), 40% of "after-tax-profit" are to be computed on the basis of assessee's after tax profit as declared in its final accounts and not on the basis of its assessed profits as the term after tax profits refers to profits computed, in accordance with the generally accepted and understood accounting audit principles and standards of Income Tax Ordinance, 1979."

In the light of case cited above and unambiguous position of law there was no justification to disallow provision for doubtful debts for computing after tax profit or reserve in the case of appellant.

We consider force in A.R.'s argument with regard to the above issue. Provision for doubtful debt is a claim relatable to profit and loss account. It cannot be added in the amount of reserve in defiance to clause (59A) read with section 12(9A) as well as instructions containe^d in 2004 PTD Trib. 1062. However, since here again we do not have figures and the status of the assessee claim, set aside is not disturbed^. However, the Assessing Officer is directed to strictly comply with the instructions given by us above.

Illegal Charge of Additional Tax under section 88 Assessment year 2000-2001.

The stand of the AR is that after giving a finding that `nil' return was filed, no additional tax could be imposed under section 88 of the Income Tax Ordinance. In our opinion additional tax could only be imposed if tax is not paid on the basis of the return. 1988 PTD (Trib.) 647 which says:--

"In regard to the additional tax levied under section 88 of the Income Tax Ordinance for non-payment of tax along with the return, the assessee's plea is that since nil returns were filed no tax was payable along with the returns. The learned CIT(A) has agreed with this finding but in spite of this he has set aside the orders of the ITO on this issue for all the years directing that a fresh order be passed after taking into consideration the contention of the assessee. We are of the view that after giving a finding that admittedly `nil' returns were filed, no penalty can be imposed under section 88 of the Income Tax Ordinance since penalty can be imposed if tax is not paid on the basis of the return. Since no tax was payable on the basis of nil return, no penalty could be imposed. The orders imposing penalty are accordingly vacated."

The AR says that this issue has also been decided by learned ITAT in appellant's own case in the following manner:-

(i) I.T.A. Nos.541 and 542/IB of 1998-99 (Assessment years 1995-96 and 1996-97).

"The contention that since no income had been declared by the assessee tax could not be charged under section 88 carries weight. A bare reading of the text of the section shows that additional tax is charged where the assessee fails to pay tax under section 54 or the tax so paid is less than the tax payable under that section. No return had been filed in any of the two years under appeal and therefore there was no tax payable under section 54. The provisions of section 88 could not therefore be brought into play. The case-law cited at the bar supports the contention of the assessee. Therefore there was no justification to resort to the levy of additional tax under section 88. Accordingly it is directed that the additional tax charged under section 88 be deleted.

(ii) I.T.A. No.636(IB) of 1998-99 (Assessment year 1997-98)

"We are convinced that on the basis of a nil return, there was no tax payable along with the return. As such, the provisions of section 88 of the Ordinance were not attracted and no additional tax could be levied."

The learned CIT(Appeals) was, therefore, unjustified to remand the case for re-computation of additional tax, the AR concluded his argument by giving above remarks. The DR said that the matter can be decided by the Assessing Officer hence this may also be left for him. We cannot agree with him. In a situation like this where facts are not disputed and the legal position is obvious leaving the issue undecided is not justified. Set aside or remand order is made in doubtful situations or where the determination of facts requires scrutiny of record etc. In this case no tax was payable on the basis of return. Charge of additional tax under section 88, therefore, was not justified. The same is hereby deleted.

Profit on sale of fixed assets and sale of scrap Assessment Year 1998-99 to 2002-2003 (Departmental Appeals)

The DR supporting above view said that this was a clear charge, Rule 7(b)(i) specifically provides that sale proceeds of an assets exceeding the written down value shall be deemed to be the income chargeable under the head "Income from business or profession^". The stand of AR is the same that these profits are of a power project. The exemption is not restricted to sale of electricity but any and all incomes arising from power project. This issue has been decided by Honourable Tribunal in 1989 PTD (Trib.) 1199 as under:

"Now turning to the other issue regarding addition of misc. income of Rs.7,703 and 170 as to the total income of Assessment Year 1986-87 and 1987-88, I again find that the same was rightly set off against the losses as the same was part and parcel of the business activities of the appellant. It is significant to note that the learned CIT(A) allowed the deletion of the appellant. It is significant to note that the learned CIT(A) allowed the deletion of Rs.16,736 in Assessment Year 1986-87 which was added to the total income of the appellant by the ITO though it was again on sale of fixed assets. Thus, if gain on sale of fixed assets can be taken as an income from the business, why the misc, income obtained from sale of scrapped material should not be taken as business income. So far as the finding is concerned we agree that sale of scrap is a business income. Scrap is an ancillary item of the main project. However, our agreement on this point shall again be of no help to the assessee. In exemption provisions the scope of exemption is always to the specific business and in most of the cases it is only one source. Unlike interest, scrap is an offshoot of main business. However, restrictive scope of exemption and patent law does not give us any reason to extend over arms to allow exemption to any other source than the power generation under clause (176) of the Second Schedule. The departmental appeal, therefore, stands m allowed in the manner that sale of scrap though held to be as business income is declared as not exempt from tax. It is also held that is not covered under rule 7 of the Third Schedule."

Exchange Gain Assessment year 2000-2001 and 2002-2003 (Departmental Appeals)".

The exchange-loss mainly comprised of unrealized gains and losses on conversion of foreign currency loans and favourable balances. Gain on re-valuation on foreign currency is not real income as long as the foreign currency is not actually exchanged for Pakistan rupee. Currency exchange gain is, otherwise not liable to tax as being capital in nature: This issue has been decided in 1998 PTD (Trib.) 288 as under:--

"the treatment extended to gain on re-valuation of Sterling pound was not real income as long the foreign currency was not actually exchanged for Pakistan rupees. We are also inclined to agree with the submission that even otherwise the currency exchange gain was in nature of capital transaction and therefore not liable to tax."

This issue has also been authoritatively decided by this Honourable Tribunal in appellant's own case for the assessment year 1996-97 in 541 and 542/IB of 1998-99. (para.14)

Finding on this issue of the CIT(A) seems to be as justified. The reliance .on an earlier judgment of the ITAT with identical facts, therefore, would not require our interference. All the departmental appeals fail.

Liquidated Damages Assessment Year 1998-99 (Departmental Appeal)

These charges were claimed by WAPDA as damages for delayed commissioning of project which in turn were booked against contractors as recoverable. These damages were not recovered during the year, therefore, these recoverable were taken to the balance sheet. During the next year these damages were recovered and paid to WAPDA hence deleted from accounts. This fact is verifiable from record. The CIT (Appeals) was, therefore, justified in directing to delete this addition after verification.

The facts are quite obvious. Moreover, the department has been given a chance to verify the claim from documents. The appeal on this issue was unnecessary.

Assessee in Default under sections 52/86 Assessment Year 1995-96 to 1997-98 (Cross-Appeals)

The claim of the assessee is that the orders under sections 52/86 are not maintainable inter alia for the following reasons:--

(1) In the light of ratio decided in 2004 PTD (Trib.) 2695, relevant part of which reads as under:-

"We do not agree with the view that each part of the contract is an integral whole and each part must be deemed to turn key in its own right, detached from overall project. This is not what is meant or understood by term `turn key'. The substance of the contract shows that it was on a smaller part of the overall project and could not be deemed as `turn key' project. The DCIT should not have gone by the nomenclature used in the audited accounts. He was, therefore, not justified in holding the assessee as assessee in default for not declaring the tax at the rate of 8% otherwise applicable .on execution of a `turn key' project, he also acted contrary to the explanation given by C.B.R. in Circular No.6 of 1994 where `turn key' project was understood as a project involving designing, consultancy supplies of requirement machinery and installation thereof. Any part of it such as designing but not execution, could not be held to be a turn-key project. We are therefore, clear in our mind that this was a case of misinterpretation of law by the two officers below. The charge of tax under sections 52/86 is therefore, held to be illegal and is hereby vacated"

Explaining various connotations used in section 52 and referring case-law the AR said:

The expression "default" connotes element of wilful and deliberate failure. Every default without any ulterior design and mala fide intention could not be equated with the expression "default"-Ghulam Mohammad Landkhor v. Safdar Ali PLD 1967 SC 530.

Before a person is declared to be a defaulter it is absolutely necessary that there should be a demand to make payment of a determined sum which should have been remained unpaid for a period beyond the one prescribed by law---Irfan Gul Magsi v. Haji Abdul Khalid Soomro and others 1999 PTD 1302.

Resort to section 52 as a charging provision and a new source of revenue has been disapproved strongly by this Tribunal in a number of cases such as 2002 PTD (Trib.) 3118 and (2001) 83 Tax 22 (Trib.) = 2001 PTD (Trib.) 2605.

If a case falls under presumptive tax regime (PTR) action under section 52 cannot be taken, appropriate remedy is to resort to section 52A, 2000 PTD (Trib.) 2193. Implication of ratio decided in CIT v. Asbestos Industries Ltd. 1993 PTD 459 and Noon Sugar Mills Ltd. v. CIT Rawalpindi PLD 1990 SC 1156 = 1990 PTD 768 = 1990 MLD 1977 that instead of treating a person "assessee in default", assessment should be passed directly on non-resident.

Supporting his agreement that every agreement cannot be to be a turnkey contract he said that the following agreements were signed by the appellant:

Nature of contract??????????????????? Party??????????????????????????? Relevant provision of Treaty

1. Supply contract dated???????????????????? Tomen Corp. Tokyo??????????? Article III(1) of Pak

12-9-1994?????????????????????????????????????????????????????????????????????????????????????????????? Japan Treaty

2. Civil and Design work, ?????????????????? "????????????? "????????????????????????????? "????????????? "

dated 12-9-1994

3. Civil & Erection Work,??????????????????? Tomen Power??????????????????????? Article 7(1) of Pak-

dated 24-4-1995??????????????????????????????????? Singapore (Pvt.)?????????????????? Singapore Tax Treaty

Ltd. Singapore

4. Supply Contract, dated?????????????????? Wartsila Diesel OY????????????? Article 7(1) of Pak-

12-9-1994?????????????????????????????????????????????? Finland?????????????????????????????????? Finland Treaty

As evident. from above, the contractual receipts in the hands of foreign entities were taxable subject to:--

(a) proving existence of "permanent establishment" ; and

(b) if taxable, on proportionate computational basis

The entities above however were chargeable under PTR (section 80C (2)(b) read with Proviso to section 50(4) and para. CCC(ii)(a). This has been explained by C.B.R. in its Circular No. 4 of 1995, dated July 9, 1995, C. No. 4(1) SS (WHT)/98-99, dated September 13, 1999 and confirmed by the learned ITAT in 2004 PTD (Trib.) 2695. Therefore, the action of the DCIT is void ab initio, he added.

On this issue recapitulating the facts again shall be of help:--

The assessee declared in its accounts certain payments on account of additions to plant and machinery on which tax at the rate of 4% was deducted from the supply of plant and machinery as well as for erection and testing as civil and building work. These contracts were mostly with non-resident companies the detail of which has already been mentioned by us above. As is evident from the said detail of agreements these were separate contracts of supply as well as other civil work etc. All contracts were separate and specific and category of work in each case has separately been defined therein. It is not a case of one complete contract of construction, installation and other ancillary work. Such a contract cannot be called as `turn key' contract as has rightly been challenged by learned AR. The action of the Assessing Officer on page 5 of the assessment order in itself negates its discussion on the early pages.

A turn key project is the one in which the contractor completes the project at his own in respect of every thing including starting from laying of foundation to set up the undertaking till is ready for production.

The plain reading of the above facts as well as the order of the Assessing Officer does not give any convincing reason to agree with him that it was a case of `turn key' project. Different works have been assigned to different persons. The tax calculated in addition to the tax deducted by no means is justified. Moreover, the AR has claimed that all the parties to the contract are tax payers in Pakistan, hence tax could always be charged from them which hopefully must have been charged by now.

Even otherwise the provision of section 52(A) could and still be invoked if there is some deficiency.

We, therefore, without any hesitation hold that the charge created by holding this company as assessee in default is highly unjustified. There may be a doubt with regard to the amount of dedication on account of purchase of machinery from Wartsila Diesel and Tomen Corporation. However, since both of them are being charged to tax in Pakistan and we have held the agreement to be as a normal construction and supply agreement and not a turn key one, the difference if any can always by charged from respondent companies.

In view thereof we reconfirm deletion of the tax created on account of differential of withholding tax.

All the appeals of the assessee as well as of the department therefore are decided in the manner and to the extent mentioned hereinbefore.

C.M.A./430/Tax(Trib.)???????????????????????????????????????????????????????????? Order accordingly.