W.T.As. Nos. 585/LB, 1919/LB to 1921/LB of 2002, decided on 5th December, 2003. VS W.T.As. Nos. 585/LB, 1919/LB to 1921/LB of 2002, decided on 5th December, 2003.
2006 P T D (Trib.) 85
[Income-tax Appellate Tribunal Pakistan]
Before Syed Nadeem Saqlain, Judicial Member and Javed Tahir Butt, Accountant Member
W.T.As. Nos. 585/LB, 1919/LB to 1921/LB of 2002, decided on /01/.
th
December, 2003. Wealth Tax Act (XV of 1963)---
----Ss. 2(5)(ii), 7, 17 & 134---Wealth Tax Rules, 1963, R.8(8B)-Leasing out flour mill along with building and machinery---Levy of wealth tax---Appeal to Appellate Tribunal---Assessee, a private limited company leased out flour mill along with building and machinery and Assessing Officer levied wealth tax under S.2(5)(ii) of Wealth Tax Act, 1963 and first appellate authority affirmed order of Assessing Officer---Assessee had challenged 'impugned order in appeal before Appellate Tribunal alleging that both Assessing Officer and Appellate Authority had wrongly interpreted S.2(5)(ii) of Wealth Tax Act, 1963 which had provided for definition of "assets" which were liable to incidence of wealth tax---Said definition of assets had provided that, in case of company, immovable property held for the purposes of business of sale or letting out property was liable to wealth tax---Explanation added to said section 2(5)(ii) of Wealth Tax Act, 1963, had provided that immovable property held for the purposes of letting out or business of letting out of property was liable to be taxed under wealth law---Pre requisite of bringing on immovable property of a company into wealth tax was that it was held for the purpose of letting out---Object of company in question as given in its Memorandum of Association was milling of flour and said property was never held for the purpose of letting out or business of letting out---Assessee had contended that company in question was incorporated for the purpose of running a flour mill with the sole object of milling flour and leasing out of same was never contemplated by it at the time of commencement of business and that adverse and unfavourable circumstances had compelled it to let out flour mill---As company was formed with sole object of milling flour as evident from Memorandum of Association and that property was not held for the purpose of letting out, it did not come within definition of "assets" given in S.2(5)(ii) of Wealth Tax Act, 1963 and was not liable to wealth tax---Impugned order passed by Assessing Officer and affirmed by First Appellate Authority was vacated and assessments made by Assessing Officer for all the years under consideration, were cancelled.
2000 PTD (Trib.) 1826; PLD 1970 SC 29; PLD 1959 SC (Pak.) 453; 2000 81 Tax 7 (H.C. Lah.) = 2000 PTD 497; Indian Bank Ltd. v. CIT (1985) 153 ITR 282 (Mad.); CIT v. F.X. Periera and Sons (Travancore) (P) Ltd. (1990) 184 ITR 461 (Ker.); Perumai Naicker v. T. Ramaswamy Kore AIR 1969 Mad. 346; AIR 1940 Mad. 527; B.P. Biscuit Factory v. W.T.O. Karachi 1981 PTD 217; 1996 SCMR 1470; Abdul Razzak v. The Collector of Customs 1995 CLC 1435; 2000 PTD (Trib.) 1396; 2002 PTD 63 and CIT Lahore v. Muhammad Allah Bukhsh PLD 1977 Lah. 170 = 1977 PTD 13 ref.
Muhammad Arshad, I.T.P. for Appellant.
M. Moazzam Bashir, D.R. for Respondent.
Date of hearing: 22nd November, 2003.
ORDER
SYED NADEEM SAQLAIN (JUDICIAL MEMBER).---The titled appeals pertaining to the assessment years, 1996-97 to 1999-2000 at the behest of the assessee/appellant have been directed against two separate orders, dated 24-10-2000 and 5-1-2002 passed by the learned CWT(A), Zone-I, Lahore. The common grounds agitated by the assessee in all the years under consideration are as under:---
(1) That both the learned officers below erred in interpreting the provisions of section 2(1)(5)(ii) of the Wealth Tax Act, 1963 treating the machinery as immovable property which in no case to be treated so even through stretch of any fiction of law.
(2) That not only each enactment other each section has different existence creteria and cannot be subjected to any other one, therefore, resort to any other extraneous enactment cannot be made.
(3) That without prejudice to above grounds of appeal the company and its Directors are different entities in the eyes of law, which can sue and be sued by each other, therefore, anything owed by one to the other is liability i.e. share deposit money etc. which must had been allowed but both the learned officers below erred in not allowing.
2. Briefly stated facts of the case are that the assessee is a private limited company, deriving income from leasing out of flour mill along with building and machinery. Wealth Tax returns were filed in response to notice under section 17 of the repealed Wealth Tax Act, 1963 (hereinafter referred to as the Act) declaring nil wealth but the liabilities A were shown amounting to Rs.23,143,436 for the assessment year 1996-97 and 1997-98 and Rs.22,164,639 for the assessment year 1998-99. The Assessing Officer levied wealth tax on the basis of GALV under section 2(1)(5)(ii) of the Act. On appeal, the treatment accorded to the assessee was confirmed by the learned first appellate authority, hence the further appeals on behalf of the assessee.
3. Mr. Muhammad Arshad, ITP appeared on behalf of the assessee while Mr. M.M. Moazzam Bashir, DR represented the Revenue. Both of them were heard and record of the case was perused.
4. The learned AR has vehemently contested the assessment framed by the Assessing Officer as well as the confirmation thereof by the learned first appellate authority through the impugned findings recorded by him on assessee's appeals. It was contended by the learned AR that both the lower officers have wrongly interpreted the section 2(1)(5)(ii) of the Act. He submitted that the company was incorporated for the purposes of running a flour mill with the sole object of milling flour. It was contended that leasing out of the flour mill was never contemplated by the assessee at the commencement of business. However, adverse and unfavourable circumstances compelled the assessee to let out the flour mill. He elaborated that factory was neither constructed for sale nor for the purposes of letting out after constructing the same. Further stated B that apparently due to circumstances beyond the control of the assessee, assessee had to opt for the second alternate of letting out instead of keeping it shut and incurring, unbearable losses. The learned AR also averred at the Bar that the machinery of the mill installed therein and let out along with building does not fall under the definition of immovable property. In this respect he took us through the relevant provision of law i.e. section 2(5)(ii) of the Act which is also being reproduced for the sake of convenience.
(5) not relevant
(ii) in the case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a company, immovable property held for the purpose of the business of construction and sale, or letting out,, of property;
Explanation:
(i) immovable property held for the purpose of letting out, or business of letting out, of property;
(ii) immovable property held for the purpose of construction and letting out of property; and
(iii) immovable property held for the purpose of construction and sale of property.
5. Commenting upon (supra) provision of law, which provides for definition of the immovable property, the learned AR referred to explanation to section 2(5)(ii) which is attracted to the assessee's case i.e. immovable property held for the purposes of letting out or business of letting out of property. He emphasized that the plain reading of the explanation added to section would show that the immovable property which is subjected to levy of tax must be held for the purposes of letting out or business of letting out of property. Further argued, that the facts of the case which has been relied upon by the Assessing Officer as well as the learned first appellate authority are distinguishable to the facts of the present case as well as interpretation placed on the word "immovable property" in the said case. He elaborated that in the aforementioned cited case, the object of the company stated in the memorandum of association was letting out apart from milling of the flour. The learned AR categorically stated that in the case of the assessee, the company was incorporated with the sole object of milling flour and the letting out was never mentioned being an object in the memorandum of association to the company. The learned AR further argued that the explanation (i) which is relateable to the case of the assessee refers to immovable property held for the purposes of letting out or business of letting out of property. He elaborated that of purposes of imposition of income tax the assessee is being assessed under section 30 which falls under the head of income from other sources. He clarified that for the income tax purposes assessee's case is neither covered by section 19 of the Ordinance (income from property) and nor is it covered by section 22 of the Ordinance (income from business). This also clearly indicates that the assessee's case does not fall within the ambit of section 2(5)(ii) for the purposes of definition of assets liable to incidence of wealth tax.
6. As regards the placing of reliance by the learned lower officers on the judgment reported as 2000 PTD (Trib.) 1826 of the Islamabad Bench of the Tribunal wherein the learned Division Bench observed that the, plant and machinery used by the flour mill and leased out also comes within the definition of immovable properly, the learned AR argued that the learned Bench was not properly assisted. He stressed that everything embedded or attached with the earth does not become immovable property. Further submitted that if thing attached to earth still have utility after removal of the same from the earth, then it is a movable property e.g. electrical pole and railway tract etc. He further contended that the learned Division Bench wrongly interpreted definition of immovable property given in General Clauses Act, 1897.
7. Before we embark upon dilating the issue, around which the controversy revolves in the present case, we have to determine the applicability of section 2(5)(ii) which provides for the definition of assets which are liable to incidence of wealth tax. The aforementioned section has already been reproduced while discussing the arguments of the learned AR. Initially the definition of assets provided that in the case of firm, association of person, individuals/company, immovable property held for the purposes of business of construction and sale or letting out of property was liable to wealth tax. However, an explanation was added for removal of doubt to elaborate the section 2(5)(ii) wherein it was provided that immovable property held for the purpose of letting out or business of letting out of property. We do not need to go further since this explanation is relevant for the disposal of present appeal. If we glance at the wording of the said explanation it would clearly evince that immovable property held for the purpose of letting out or business of letting out is liable to be taxed under the wealth tax law. Obviously the word "purpose" is the key word in the said provision of law. Since this word has not been defined in the repealed Act, we have to take recourse to the dictionary meaning of the word "purpose". In this regard the Blacks Law Dictionary 6th Edition provides as under:
"That which one sets before him to accomplish or attain, and end, intention, or aim, object, plan, reject."
Looking at the meaning given by the Blacks Law Dictionary one can easily come to the conclusion that the word "purpose" also includes the objects. If we look at the explanation to section 2(5)(ii) of the repealed Act in conjunction with "object" of the company incorporated in memorandum of association of the company, we should have no difficulty in reaching at the conclusion that the object of the company as given in the memorandum of association was milling of flour and this property was never held for the purpose of letting out or business of letting out as held by the learned Assessing Officer. This observation is also fortified by the fact that the company was incorporated with the sole object of milling of flour and the memorandum did not show any other object.
8. We are also constrained to observe that the Legislature never intended to impose wealth tax on leased out industrial/commercial units which is evident from the fact that on 3rd May, 1981, sub-rule (4B) was added to Rule 8 of the Act, providing valuation of leased out factories and mills, but was withdrawn on 10th June, 1981 before it could be enforced even for one valuation date. The imposition of wealth tax on such assets by S.R.O. 404(I)/81, dated May 3, 1981 and its immediate withdrawal through S.R.O. 575(I)/81, dated June 10, 1981 confirms beyond doubt that the Legislature immediately realized that leasing out of factories and mills was not the subject-matter of wealth taxation after enlarging the scope of assets chargeable to tax in the case of AOPs, firms and companies through the Wealth Tax (Amendment) Ordinance, 1980.
The prerequisite of bringing an immovable property of a company into wealth tax net is that it is held for the purpose of letting F out. Section 7 of the Act clearly says that:
"The value of any asset, other than cash, for the purpose of this Act, shall be estimated by the Deputy Commissioner in accordance with the rules made under section 46 of the Act."
In the rules framed read in exercise of powers conferred under section 46 of the Act, there is clear intention of the Legislature not to tax leased out mills and factories as sub-rule (4B) was added to Rule 8 on 3rd May, 1981 providing valuation of leased out factories and mills, but was withdrawn on 10 June 1981 before it could be enforced even for one valuation date. The omitted sub-rule (4B) is reproduced below:--
"(4B) Factories and mills.---Where a factory or a mill is leased out, the value shall be estimated with due regard to the nature and size of the property, the amenities available and the price prevailing for similar property (excluding cost of furniture, plant and machinery) in same locality or in the neighbourhood of the said locality and the lease money shall include any amount by way of advance or security which is not adjustable against the lease money payable at regular intervals...."
9. In the absence of any rule for valuation of leased out mills and factories, section 7 is not attracted and no question of chargeability of such assets arises. Rule 8(3) is only meant for lands and buildings. As per C.B.R's. own interpretation of this rule vide C. No.1(2)/WT/24, dated 17-7-1994, it applies to residential houses/apartments, commercial buildings and open plots. Had it been the intention of the Legislature to tax leased out mills and factories there would have certainly been a specific rule to this effect in operation, but the same, which was inserted and omitted, proves beyond doubt that at the moment there is no concept of taxability of such assets. Had it also been the intention of the Legislature to evaluate factories and mills under rule 8(3) as done by the learned Tribunal in 2000 PTD (Trib.) 1826 there would have been no need to formulate a specific rule i.e. rule 8(4B). The intention of the Legislature not to tax the industrial units is also evident by the fact that rule (4D), relating to cold storage and rule (4E), relating to cinemas, though inserted on 3-5-1981 were immediately withdrawn on 6-6-1981 before coming in force. Even in respect of hotels, inns, motels etc. only that part of the property which is let out for commercial purposes such as shops offices, show-rooms, stalls etc. were subjected to tax. Relevant para. of C.B.R.'s letter C. No. 8(9)-WT/IT-V/79, dated 26-7-1983 is reproduced as under:
"(3) If a Firm, an AOP or a private company owns immovable property and also runs a hotel therein, wealth tax is levied on the value of only that part of the property which is let out for commercial purposes such as shops, offices, show-rooms, stalls etc. However, that part of the property which is used as suites and rooms for visitors who stay in the hotel is not subject to Wealth-tax."
10. This is further apparent from "Form B" under which returns are to be filed by the AOPs, firms and companies wherein Annexure I to IV taken into account four types of assets viz. Open residential or commercial plots,, construction on such residential or commercial plots, properties completed and sold and not let out and residential or commercial buildings given on rent. This is evident from the fact that even in the return there is n concept of chargeability of industrial assets i.e. factories and mills owned and leased out by companies.
11. In our considered view, the judgment given by the learned Division Bench of the Income Tax Appellate Tribunal namely 2000 PTD (Trib.) 1826 is per incurium. In this judgment the word "immovable property" has not been properly thrashed out. According to sub-section (2) of section 2 of Act, the words and expressions used but not defined in the Act have the meaning assigned to them under the Income Tax Ordinance, 1979. In Income Tax Ordinance, 1979 too there is no specific definition of the term "immovable property". A very strict construction of section 2(5)(ii) of Act is to be made as under this scheme assets are taxed twice by fiction of law, firstly in the hands of partnerships/directors and secondly in the hands of AOP, firms and companies themselves. Therefore the learned Division Bench had to avoid borrowing meanings from other statutes. The Supreme Court of Pakistan in PLD 1970 SC 29 observed that while interpreting a deeming clause in a statute, the Courts are bound to ascertain for what purpose and object that provision has been enacted. But the learned Bench of the Tribunal at Islamabad found it convenient to jump directly over to General Clauses Act instead of searching the purpose/objective of that provision and intentions of Legislature with reference to fiscal statutes. The rule of interpretation of fiscal statutes is different from non-fiscal statutes as is apparent from the following reported cases:--
(i) PLD 1959 SC (Pak) 453.
"A fiscal statute should be construed strictly and no question of equitable construction arises."
(ii) 2000-871 Tax-7 (H.C. Lah.) = 2000 PTD 497
"Before proceeding further, we feel necessary to reiterate three well-know rules of construction of fiscal statute. Firstly, that fiscal statutes are to be construed strictly and a citizen is to be taxed within the letter and spirit of a charging statute. Briefly, the imposition of tax must be effected by plain words of Legislature."
12. The intention of Legislature of dealing with the cases where plant and machinery and inseparable from a building is, otherwise, clear by the following facts:
(a) Where a situation arises when plant and machinery are inseparable from building, the Legislature clubs building with plant and machinery and treats it as a movable property. This is evident from section 30 of Income Tax Ordinance where the income from letting out of such units (including building) is assessable under section 30 of the Income Tax Ordinance, 1979. Had it been the intention of the Legislature to include inseparable plant and machinery in the definition of immovable property, it would definitely tax such units under section 19 which deals in letting out of immovable properties.
(b) In section 2(12) the words `capital assets' include movable and immovable property. However, there is a consensus in Pakistani and Indian judgments that a going concern becomes movable assets and becomes taxable although a part of it consisting of immovable property is not chargeable to tax. Following cases are authority which prove that any industrial undertaking as a going concern is not an immovable property:
(i) `Capital asset' will definitely include an `undertaking' and the cost of acquisition of an undertaking. Indian Bank Ltd. v. CIT (1985) 153 ITR 282 (Mad.).
(ii) Running business is a capital asset - A business as a going concern would constitute a capital asset. CIT v. F.X. Periera and Sons (Travancore) (P.) Ltd. (1990) 184 ITR 461 (Ker.).
(c) In the judgment on which learned CIT(A) placed reliance, even the word "immovable property" as defined in General Clauses Act (section 3(25)) has not been properly thrashed out. In various judicial pronouncements, it has been held that for a chattel to become an Immovable property there should be no possible removal. In Perumai Naicker v. T. Ramasmay Kore AIR 1969 Mad. 346 at 348 it was held that an oil engine attached to earth is only a movable property. In another case reported as AIR 1940 Madras 527 it was held:
"if a thing is embedded in the earth or attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached, then it is part of the immovable property. If the attachment is merely for the beneficial enjoyment of the chattel itself then it remains a chattel even though fixed for the time being so that it may be enjoyed."
13. The learned Bench in its order, has relied upon B.P. Biscuit Factory v. W.T.O., Karachi 1981 PTD 217. In an appeal against this judgment, the Honourable Supreme Court disapproved this judgment reported as 1996 SCMR 1470 and accepted the appeal. Due to lack of assistance on the part of the Bar, the learned Bench, in the above referred case did not take cognizance of the fact that the case relied upon by it has already been overruled by the apex Court in terms of Article 189 of the Constitution of Pakistan, the judgment of the ITAT is not enforceable. Since the judgment was reached per incurium, it is not binding even on a lower Court. This principle of law has been explained in the following reported judgments.
(i) Abdul Razzak v. The Collector of Customs 1995 CLC 1435 (Karachi High Court).
"As per incurium decision, even of the highest Court, does not bind any other Court and it matters little that such Court itself be at the lowest rung of the hierarchy of Courts."
(ii) 2000 PTD (Trib.) 1396
"The findings of the Assessing Officer that the judgment of Hon'ble Sindh High Court in the case of Raleigh Investment Company is per incurium is upheld.... Consequently to the above finding the treatment given by the learned two officers before is not open to any exception which is hereby maintained."
Since order is violative of Article 189 of the Constitution for the above reasons, it is not enforceable in the eye of law.
14. It is an admitted position that C.B.R. itself directed the officers not to treat leasing out of commercial assets as property income meaning thereby that such assets are not immovable property per se. The C.B.R., relying upon a decision reported as PLD 1977 Lah 170 = 1997 PLD 13 Lahore, issued Circular No. 9 of 1977 wherein it gave instructions to treat such income as normal business income. It has been held by the Courts that beneficial circulars are binding on taxation officers 2002 PTD 63. An "industrial unit" in its totality represents "production capacity that it generates" and not immovable property as such. The land and building on which an industrial unit situates becomes its integral part and not a independent entity. In the Explanation added in 1991, the expression elaborated was "immovable property" held for the purpose of letting out, construction and sale as business or otherwise in cumulative or being separate activity. How can this expression "immovable property" be equated with industrial undertaking? Whenever an industrial undertaking is given out on lease, the lessee intends to exploit its production capacity and not the land and building per se.
15. In case of leasing of industrial units, lessee pays consideration for using production capacity and not enjoying the benefits of land and building. The judgment passed by the learned Bench (supra) is per incurium as this aspect that specific omission of sub-rule (4B) of Rule 8 relating to valuation of leased out factories and mills confirms beyond doubt that no such taxation exists, has not been thoroughly probed. The following points were totally ignored by the learned Bench.
(a) The commercial exploitation of an industrial unit has always been held as business income by the higher Courts and not income under the head `house property'. Leasing out of an industrial unit does not constitute letting out of immovable property. Commissioner of Income Tax Lahore Zone, Lahore, v. Mohammad Allah Bux PLD 1977 Lah. 170 = 1977 PTD 13.
(b) The Central Board of Revenue in Circular No.9 of 1977 held that:
"In a case reported as CIT Lahore v. Muhammad Allah Bukhsh PLD 1977 Lah. 170 = 1977 PTD 13, the Court has held that the yield of income through the use of plant, machinery or furniture is profit of the business, irrespective of the manner in which the plant and machinery it is exploited by the owner; which he may do by either using the plant and machinery etc. himself or by letting it out to someone else provided that the assets do not cease to be commercial assets.
(2) The above decision lays down a good precedent and has bestowed judicial approval on the well-established principle, that income of commercial assets, regardless of the manner of their operation, would be business income so long as they remain assets."
Needless to say that the above-quoted judgments and C.B.R.'s instructions were not cited before the learned ITAT and therefore due to lack of assistance on the part of the AR a per incurium decision was reached in 2000 PTD (Trib.) 1826 on which much reliance is placed by the Assessing Officers and CITs (Appeal).
16. In the light of above discussion, we have no option but to observe that the both the learned lower officers while giving the findings erred in law by placing reliance upon per incurium the judgment cited in the respective assessment order as well as the first appellate order. We would like to further add that in the present case before us, the company was formed with the sole object of milling flour as is evident from memorandum of association. Since the property was not being held for the purpose of letting out, it does not come within the ambit of definition of assets given in section 2(5)(ii) of the repealed Act, hence not liable to wealth tax.
17. For the foregoing reasons we vacate the impugned order passed by the learned CIT(A) and cancel the assessments framed by the learned Assessing Officer for all the years under consideration.
18. The ground No.3 was taken by the assessee as an alternate ground. Since we have given our findings on the initial two grounds in favour of the assessee we do not feel necessity to dilate upon the ground H No.3.
19. As a result of the above discussion, the appeals filed by the assessee are accepted to the extent indicated above.
H.B.T./456/Tax (Trib.)Order accordingly.