I.T.As. Nos. 1684/LB, 1685/LB, 2397/LB and 2398/LB of 2001, decided on 26th May, 2005. VS I.T.As. Nos. 1684/LB, 1685/LB, 2397/LB and 2398/LB of 2001, decided on 26th May, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 864 (2005)

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

----Ss. 30(2)(d) & 62---Income from other sources---Lease income---Increase in assets---Taxation Officer discarded lease money which was supported by a lease agreement, only .for the reason that during the years, there had been increase in the operating fixed asset but the lease money as compared to the previous assessment year had not been proportionately increased---Validity---Held, there was no dispute regarding increase in fixed assets but that was not sufficient to discard a legally executed agreement which had been accepted by the Department in two preceding assessment years---Taxation Officer had failed to bring on record any evidence to establish that the actual lease money received by the assessee was in any way more than the declared one---In case of lessee, assessments had been made by accepting the lease expenses at the amount, which had been declared by the assessee as lease money---Taxation Officer had estimated the lease money without any basis which was not only beyond comprehension but devoid of any legal support---Action of the Taxation Officer was self-contradictory as the addition in lease money in the case of a lessor was possible only by making simultaneous addition under S.13(1)(d) of the Income Tax Ordinance, 1979 in the case of lessee---Assessee company was deriving income from lease money and the same was adjusted through one general entry---Entries in ledger existed under the head "building", "associated", "repair" and "depreciation"---Said entries in the ledger had properly depicted all the transactions during the income year---Taxation Officer had failed to point out any specific defects in the books and supportive documents so the rejection of declaration version and estimation of lease money was without any legal basis--Unless and until specific defects in the books of accounts were confronted through a notice under S.62 of the Income Tax Ordinance; 1979, the book version could not be rejected--Declared lease money was directed to be accepted for both the years and appeals filed by the assessee on the issue of lease money was allowed by the Appellate Tribunal.

1998 PTD 769; PLD 1991 SC 368 1991 PTD 488; 2002 PTD 877; 2001 PTD 1180; 2002 PTD 1858; 2002 PTD 2545; 2002 PTD 63; Writ Petition No.13534 of 2001 decided on 8-1-2003; 1968 PTD 734 and 1989 PTD 909 ref.

43 Tax 149 distinguished.

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

----Ss. 30(2)(d) & 19(1)---Income from other sources---Income from house property---Distinction between the provisions of Ss. 30(2)(d) & 19(1) of Income Tax Ordinance, 1979--Provisions of S.30(2)(d) of the Income Tax Ordinance, 1979 pertaining to hire of building along with machinery is different from provisions of S.19 of the Income Tax Ordinance, 1979 which pertained to income from house property--Under S.19(1) of the Income Tax Ordinance, 1979, the Income Tax was charged on annual value of the property and under S.19(2)(b) of the Income Tax Ordinance, 1979, it had been provided that "annual value" shall be deemed to be the sum for which the property might reasonably be expected to let from year to year---No such stipulation existed in S.30(2)(d) of the Income Tax Ordinance, 1979 meaning thereby that under S.30(2)(d) of the Income Tax Ordinance, 1979, Income Tax would be on actual income derived from the hire of machinery/building and not on rental value.

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

----Ss. 32(1)(3), 17, 19, 22, 27 & 30---Method of accounting---Computation of income by the Assessing Officer on the basis and manner as he thought fit---Principles---Section 32(1) of the Income Tax Ordinance, 1979 provided that Income, profit and gains shall be computed for the purpose of Ss.17, 19, 22, 27 and 30 of the Income Tax Ordinance, 1979 in accordance with the method of accounting regularly employed by the assessee, whereas S.32(3) of the Income Tax Ordinance, 1979 was in the context of method of accounting which were universally recognized as Mercantile, Cash and Hybrid---Under S.32(3) of the Income Tax Ordinance, 1979, the tax payer was obliged to follow one of the methods of accounting regularly and if he failed to do so only then the Assessing Officer shall compute income on such basis and in such manner as he thought fit.

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

----S. 62---Assessment on production of accounts, evidence etc.---Assessment of income---Method---Under S.62(1) of the Income Tax Ordinance, 1979, the Assessing Officer is authorized to assess the total income of an assessee by an order in writing after considering the evidence on record including evidence produced by the assessee under S.61 of the Income Tax Ordinance, 1979 and such other evidence as the Assessing Officer may requite on specific points---Where the assessee provides books of accounts as evidence in support of declared version, the Assessing Officer shall, before disagreeing with such accounts, give a notice to the assessee of the defects in the accounts.

(e) Income tax---

----Lease agreement between an assessee company and an Association of Persons having the same persons as Directors and Members respectively---Tax planning or of tax evasion---Legality---Lease agreement between an assessee company and an Association of Persons was not an illegal arrangement---Company and an Association of Persons were two distinct legal entities separately chargeable to tax under provisions of Income Tax Ordinance, 1979 and were not legally debarred to enter into any agreement---In case of two different legal entities not legally debarred to enter into any agreement, any arrangement made by them by executing such an agreement could not be declared as invalid---Leasing out of mills by the assessee company to the Association of Persons made through a legally permissible agreement was a case of tax planning and not of tax evasion---So far as the possibility of any presence of intention of avoidance of proper taxation through collusive arrangement between the parties for the said purpose was concerned, the same could not be ruled out in case of any agreement even though executed between two entirely different parties---Lease agreement between an assessee company and an Association of Persons having the same persons as Directors and Members respectively was not to be considered illegal.

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

----S. 12(18)---Income deemed to accrue or arise in Pakistan---Lease of factory---Indirect loan---Construction of building---Due to associated undertaking, fixed asset was made by the lessee at his own cost which was adjustable towards lease money---Taxation Officer had not disputed the construction of building but had made the addition on the ground that even indirect loans were liable to addition under S. 12(18) of the Income Tax Ordinance, 1979---Validity---Department has failed to establish that the amounts in question were received by the assessee/lessor in cash and were claimed and shown as loan---Assessee/lessor had only shown a liability due to associated undertaking, representing unadjusted amount of cost of construction by the lessee after reducing the lease money receivable---Such liability was an accounting entry and did not constitute as receipt of any "sum" which could attract the provision of S.12(18) of the Income Tax Ordinance, 1979---Addition made in said respect was deleted and orders of both the Officers below were vacated by the Appellate Tribunal---Assessee's appeals were allowed and that of Department's were dismissed.

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

----S.11(1)---Scope of total income---Provisions of S.11(1) of Income Tax Ordinance, 1979 indicate that the deeming was of income and not of any receipts and the said deeming was in the context of geographical taxing the income in Pakistan of a resident person.

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

----S. 12(18)---Income deemed to accrue or arise in Pakistan---Deeming provision of S.12(18) of Income Tax Ordinance, 1979 had been introduced to check the back dated fictitious transactions to justify the resources---Where the source of sum was declared and it was found to be a good money, irrespective of the technical flaws in its change from one head to another, an addition would be unjustified.

?

Writ Petition No.13534 of 2001 decided on 8-1-2003 rel.

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

--S.12(18)---Income deemed to accrue or arise in Pakistan---Provisions of S.12(18) of the Income Tax Ordinance, 1979 were not attracted until unless the amount was claimed and shown as "loan" or "advance".

2002 PTD 877 rel.

Shahid Pervaiz Jami for Appellant (in 1.T.As. Nos.1684/LB and 1685/LB of 2001).

Muhammad Asif, D.R. for Respondent (in I.T.As. Nos.1684/LB and 1685/LB of 2001).

Muhammad Asif, D.R. for Appellant (in I.T.As. Nos.2397/LB and 2398/LB of 2001).

Shahid Pervaiz Jami for Respondent (in I.T.As. Nos.2397/LB and 2398/LB of 2001).

Date of hearing: 19th April, 2005.

ORDER

The above titled appeals were initially heard by the Division Bench of this Tribunal on 20-1-2001 but due to the difference of opinion among the learned members, the case was referred to the third member who vide his order, dated 22-8-2003 gave his opinion on the disputed issue but while concluding the order referred the matter to the worthy Chairman with the observation to refer the instant case to the original Division Bench for final decision. When the matter was placed before the original Bench, one of the learned members due to his personal reasons, refused to hear the matter and the matter was again referred to the worthy Chairman who has constituted this Full Bench to adjudicate the above subject appeals.

2. The assessee and the Department have filed their respective grounds of appeal. The grounds filed by the assessee are scattered over five pages for each year while the grounds filed by the Department are also argumentative and detailed.

The nutshell of the grounds filed by the assessee for both the years under review are that the assessee is aggrieved against:--

(a) Confirmation by the learned CIT(A) of estimation of annual lease money;

(b) Reduction of addition by the learned CIT(A) made by the Assessing Officer under section 12(18) of the Repealed Income Tax Ordinance, 1979 which according to the assessee should have been deleted.

(c) Confirmation of addition under the head "repair expenses".

While the Department in its grounds of appeal has objected to the relief in respect of addition made under section 12(18), which according to the Department, addition should have been confirmed. The Department has also objected the directions of the learned CIT(A) to allow tax depreciation allowance.

3. The assessee, in this case, is deriving income from leasing its feed mill since 1993. The feed mill has been leased out to the present assessee Messrs Hi-Tech Feeds Pvt. Ltd., w.e.f. 1995. The Taxation Officer has estimated the annual lease money at Rs.74,00,000 for each of the years under review, against declared at Rs.27,00,000 and has made the addition under section 12(18) of the Repealed Income Tax Ordinance, 1979 at Rs.1,40,30,000 for the assessment year 1998-99 and at Rs.27,98,242 for the assessment year 1999-2000. Another addition of Rs.2,27,701 and at Rs.2,50,000 in the repair expenses for the two years under review has also been made. The assessee filed first appeals for the two years under review before learned CIT(A) who vide his consolidated order, dated 22-3-2001 for the two years i.e. 1998-99 and 1999-2000 has confirmed the estimation of lease money but has reduced the addition made under section 12(18) to Rs.89,07,287 for the assessment year 1998-99 and to Rs.3,35,000 for the assessment year 1999-2000 by excluding the amount of lease money receivable by the assessee company. The learned CIT(A) has, however, confirmed the addition of repair expenses in both the years and has directed to allow tax depreciation allowance.

4. Both Department and the assessee have assailed the consolidated impugned order of the learned CIT(A), dated 22-3-2001 before this Tribunal. When the matter was fixed for hearing on 20-11-2001, the learned Judicial Member after hearing both the parties on 20-11-2001 directed for acceptance of the declared lease money at Rs.27,00,000 for both the years and deleted the addition under section 12(18). However, the addition made under the head "repair expenses" was upheld. The learned Accountant Member differed with the view taken by the learned Judicial Member and was of the view that the impugned order of the learned CIT(A) should have been vacated and the assessment should have been set aside for de novo proceedings in respect of lease money, as according to him, the so-called "tax planning" undertaken by the appellant company leads not to "tax avoidance" but "tax evasion" which is not permissible under the law". The learned Accountant Member deleted the addition made under section 12(18) but not for the reason given by the learned Judicial Member. On the aforesaid difference of opinion, the following question was formulated by both the learned Members which was subsequently referred by the worthy Chairman to referee Member:

"Whether in the facts and circumstances of the case, the learned Accountant Member was justified in holding that the lease agreement between the Company and the AOP, comprising of all the 3-Directors of the same Company, is not tax planning but tax evasion, holding the same to be against the law and setting aside the assessment?"

5. The learned referee Member after hearing both the parties finally held that the agreement between the assessee company the lessee/AOP is lawful and there was no justification for setting aside the issue for de novo consideration. The learned referee Member, however, in the concluding para. observed that "since as a result of the above findings, the issue raised through the grounds of assessee's appeals as reproduced on Sr. Nos. 1 and 2 of para. 18 above remains undecided in the absence of any finding given by the learned Accountant Member on this issue, the worthy Chairman is requested to refer the instant case to the original Division Bench for final decision". Later on, as stated above, this Full Bench has been constituted to adjudicate the cross-appeals.

6. The learned counsel for the assessee as well as the learned DR at the start of the hearing consented that this Full Bench may decide the cross-appeals afresh in respect of all issues subject-matter of all the four appeals for the two years under review raised from both the sides.

7. Mr. Shahid Pervaiz Jami, Advocate representing the assessee regarding the first issue of estimation of lease money has repeated the same arguments which have already been reproduced in the order of this Tribunal, dated 20-11-2001. He has contended that the first time, the Taxation Officer vide his notice, dated 29-2-2000 confronted the assessee that despite the initial increase in the operating fixed assets, there has no corresponding increase in the lease money which shows some sort of collusive arrangement due to which the lease income has remained static. He has contended that on behalf of the assessee, it was explained that the addition in fixed assets was financed by the lessee which is evident from the balance sheet and therefore, the lease money has been mutually settled at the old figures being reasonable for both the parties. According to the learned counsel for the assessee the declared lease money of Rs.27,00,000 has already been accepted while making assessment for the assessment years 1996-97 and 1997-98. The lease agreement with the present lessee executed w.e.f. 1st July, 1995 was for the period of three years and as such, the assessee was bound by the agreement in the third year of the lease relevant to the first appeal under appeal i.e. 1998-99. He has contended that as the entire addition in the fixed assets for both the years was made by the lessee at its own cost and was adjustable towards the annual lease money so the lease money agreed by both the parties continued for second term of the lease agreement starting from income year relevant to the assessment year 1999-2000. He has contended that the addition in the factory building by the lessee at its own cost is an adequate consideration for continuing with the existing lease money. He has contended that the Repealed Income Tax Ordinance, 1979 has not prescribed any specific mechanism for rejecting the lease contract and the income from lease which is assessable under section 30 as income from other source. Explaining this position, he has contended that section 19 is regarding income from house property and speaks of charging rent on the basis of annual letting value but such provision providing for rejecting lease contract is not available. Secondly, it is a lease hold arrangement in which contracting parties are at liberty to agree on a figure which suits them on the facts and circumstances of the case. He has contended that there was no evidence available with the Taxation Officer to establish that actual lease amount was higher than as has been declared. In cases of lease hold arrangement, stronger proof and evidence is required to disagree with the amount agreed and shown in any case. He has argued that the lessee in the present case is an existing tax-payer having N.T. No. and in its assessment, the declared lease expenses have been accepted for both the years under consideration and even in the subsequent years, therefore, there was no justification with the Taxation Officer to reject the declared version and estimation of lease money is unjustified and illegal. He has, in this respect, placed reliance on the decision of this Tribunal reported as 1998 PTD 769. The learned counsel has contended that the assessee, in this case, is earning lease from a property which is constructed by the lessee. Total investment in the addition made for the years under appeal is that of the lessee and the lessor is getting twofold benefits. On the face of it, this is a lease against ownership rights and not against complete ownership of the property. The learned counsel has submitted that the Hon'ble Supreme Court of Pakistan in a case reported as PLD 1991 SC 368 = 1991 PTD 488 has held that Income Tax Department cannot intervene in the contracts agreed between two Muslims in their free-will. It has been held by the Hon'ble Supreme Court that when two contracting parties agree to do something by a mutual valid contract or intend doing so and it is not prohibited by Islam, the third party which may be the Income Tax Department or even in that matter the Courts has no power to modify even the contracts or what they intend to do with it. The learned counsel has, therefore, contended that the estimation made by the Taxation Officer is without any support, either from law or from facts. The learned counsel on the query raised by the Bench has clarified that the addition in the assets has been made in the factory building/godowns/ labour quarters only and not in machinery and as such, the production capacity has not been enhanced through the addition in the assets.

8. Regarding the addition made under section 12(18), the learned counsel has contended that during the assessment proceedings, it was explained to the Taxation Officer that the figure as mentioned in the balance sheet `due to the associated undertaking' represents the amount spent on construction by the lessee and the addition in fixed assets represents the building constructed by the lessee on the premises taken on lease from the assessee company. It was explained to the Taxation Officer in reply to notice that in the balance sheet `due. from associated undertaking' represents lease money receivable and due to the associated undertaking represents addition in fixed assets made by the lessee. It was further explained that to the associated undertaking represents fixed assets made by the lessee at its own cost and adjustable towards the lease money, as there is no movement of cash as such, section 12(18) is not applicable. Since no payment for construction was made, therefore, section 50(4) is also not applicable, but the Assessing Officer in spite of explanation of the assessee made the addition. Regarding the observations made by the Taxation' Officer in the assessment order that the assessee has himself shown amounts in the ledger A/c as loan and the same were not received through banking channel, the learned counsel has pleaded that assessee has always taken the plea that the construction of building has been made by the lessee at its own cost and there is no movement of cash and the adjustment entries in the building A/c and due to the associated A/c are general entries to reflect the aforesaid factual position in accounting terms. According to the learned counsel in the balance sheet and in the ledger A/c, the figures in question were shown under the head "due to associated undertaking". The figures in question were not shown as "loan" which is a prerequisite for addition under section 12(18). According to the learned counsel, from the assessment year 1999-2000 onwards, the word "advance" has also been inserted in section 12(18) but again in the said year, the figures were not shown by the assessee as "advance". The learned counsel in support of his arguments placed reliance on the following reported decisions:

(a) 2002 PTD 877 (SC Pak)

(b) 2001 PTD 1180 (H.C.)

(c) 2002 PTD 1858 (S.C. Pak)

(d) 2002 PTD 2545 (S.C. Pak)

(e) 2002 PTD 63 (S.C. Pak)

The learned counsel has also placed reliance on unreported decision of Hon'ble High Court in Writ Petition No.13534 of 2001 decided on 8-1-2003 wherein it has been held as under:

"7. At is an established rule of interpretation of statutes that the purpose and mischief sought to be suppressed by introduction of amendment of a particular provision may be looked into for a rational conclusion. The provisions of section 12(18) had a declared purpose to suppress introduction of fictitious amounts in order to cater for the immediate needs of funds and then their return after acquiring up the accounts. Looking at the addition from that angle also makes the case of the petitioner strong that the impugned addition was bad for another reason. It was lack of a finding that these sums had either no origin or that the origin seemed dubious. Where the source of sums is declared and it is found to be a good money, irrespective of the technical flaws in its change from one hand to another an addition would be unjustified. As observed by this Court in the said judgment re: Micropak Pvt. Ltd. Lahore v. ITAT Lahore (supra) the revenue before invoking the deeming provisions and taking an amount which had already undergone the incidence of taxation must demonstrate that the action being taken was really needed to preserve and promote the system and that all along it remained within the contemplation of the law.

8. The invocation of deeming provisions as a matter of course and on hypertechnicalities hardly serves any purpose. It does not show the muscles of the revenue and the might of the State that provides blood to these muscles. However, it is extremely counter productive as it breeds contempt for the system and those who represent it. Such actions do rarely bring legitimate money to the revenue. I am of the considered view that even in cases where an invocation to the deeming provisions is legally possible a resort to these provisions should not be made on pure technical grounds and should be avoided as far as possible. In case of pure technical default it would not be a bad idea to make an instruction or even a warning to an assessee to be careful. To pounce upon an assessee on the faltering of some personal indiscretion or an inadvertence or fumbling on the part of his accountant only satisfies a primitive instinct. It needs to be kept in mind that an assessee is not an enemy whose trifles are to be exploited to the utmost extent to annihilate him. In the changed times every Collector of Revenue is himself an assessee or a person liable to pay. some duty, tax toll or case. Therefore, being of same class, he is expected to give a condoning smile to an innocent and bona fide mistake".

The learned counsel has contended that in the context of section 12(18), the expression used is "where any sum claimed, or shown to have been received as loan or advance or gift by an assessee". In the said expression, the keywords besides "claimed" and "shown" are "sum" and "received". The word "sum" has been used in the Income Tax Ordinance, 1979 at more than fifty places and at each it means cash as such and not something in kind equivalent to that. According to the learned counsel for the assessee, there is only one judgment of Pakistani origin on the interpretation of word "sum" used in section 13 of the Income Tax Act, 1922 which is in a case reported as 1968 PTD 734. The Hon'ble High Court in that case has held the 'sum' to be particular amount of money as such. The background of the decision is that as per aforesaid section, rebate on donation was available to any "sum" paid by a tax payer. The appellant in the said case donated shares to a charitable institution and claimed rebate on their value which was disallowed by the Assessing Officer on the basis that rebate is available only on "sum" donated, as such, and not in kind. The treatment was confirmed up to High Court and subsequently appropriate amendment was made and donation in kind was also made eligible for rebate. Whereas the word "received" is a past tense of word "receive" and this word has been interpreted by the Hon'ble Supreme Court of Pakistan in a case reported as 1989 PTD 909 as under:

"Whereas "receive" clearly denotes a specified sum passing into the possession of the receiver".

Learned counsel has, therefore, contended that the combined reading of the meanings of keywords used in section 12(18) clearly means that deeming provision would be attracted only where cash as such is actually received by the tax payer as loan/advance and it is so claimed and shown. Unless said prerequisite is fulfilled the provision would not be attracted.

9. The learned counsel in respect of disallowance under the head "Repair and Maintenance" has pleaded that the addition has been made on the basis that no books of accounts and vouchers, were produced and the claim has no legal co-relation with the income under section and the CIT(A) has also upheld the treatment meted out by the Taxation Officer without any basis. The learned counsel has contended that the observations of the Officers below are illegal and factually incorrect. During assessment proceedings, proportionate copies of ledger A/c were produced before the Taxation Officer and these ledgers are complete as transactions during the years are only in respect of lease income, addition in building, due to associated undertaking, repair and depreciation. According to the learned counsel, when the Taxation Officer has examined the ledger, there is no justification for distorting the factum regarding requirement of few entries during the whole year. He has submitted that in the preceding year, repair expenses claimed by the assessee have been allowed in full.

10. On the other hand, Mr. Muhammad Asif,- representing the Department is supporting the assessment made by the Taxation Officer. He has contended that total income of the assessee is to be computed under section 62 and section 30 is merely a machinery provision. According to the learned DR, section 62(3) of the Repealed Income Tax Ordinance, 1979 empowers the DCIT to compute income of the assessee on such basis and in such manner, as he thinks fit. According to him, the lease agreement in the present case is not between two independent parties rather it is between some persons who are directors of the assessee/lessor company and members of the assessee/AOP. He has contended that the decision of the Hon'ble Supreme Court of Pakistan referred by the learned counsel for the assessee is in respect of valid agreement only and this Tribunal has already discarded the said judgment in many reported judgments. According to him, there is distinguishing feature in the years under appeal wherein additional operating fixed assets were available to the assessee which warranted increase in annual lease money as has rightly been held by the Assessing Officer. He has contended that the Income of the lessee for the assessee year, 1998-99 was assessed,. on agreement basis at Rs.2,10,00,000 whereas the lessee has declared income at Rs.2,12,33,890 in its return for the assessment year 1999-2000 filed under Self-Assessment Scheme, but the lease money has not been increased correspondingly in the years under appeal. He has contended that the principle of res judicata is not applicable in the income tax cases and each year involves independent assessment, therefore, according to the learned DR, reliance on acceptance of lease money in the preceding years is not valid. He has submitted that the Hon'ble Lahore High Court in a case reported as 43 Tax 149 has held that "even if the Income Tax Authorities are unable to find any specific fault in the books of accounts, they, are competent to reject them if from the ambient circumstances, it appears to them that the entries made therein are not reliable". He has submitted that in the present case, the situation exists in which the Taxation Officer has rejected the declared version.

Regarding the additions made under section 12(18), he has re-iterated the same stance as has been taken in the assessment order that the assessee has himself shown the amount as loan and has failed to prove that the said amount was received through banking channel. The learned DR referring the provisions of section 11(1) has pleaded that total income of any person who is a recipient includes income from whatever source derived which is received or deemed to be received in the income year by or on behalf of the said person. He has contended that in view of this provision, the amount spent on construction is deemed to be received by the assessee. He has, therefore, requested for restoration of the addition made by the Taxation Officer. On query by the Bench, he has admitted that the Taxation Officer has neither admitted the contention of the assessee nor rejected it that the addition in building has been made by the lessee at its own cost and actually there is no movement of cash between the lessee and the lessor.

11. Regarding departmental appeal against the directions of the learned CIT(A) allowing tax depreciation allowance, he has pleaded that in the return of total income, only accounting depreciation was claimed and the same was allowed. He has pleaded that no allowance can be allowed which has not been claimed in the return. He has, therefore, requested for the vacation of the directions made by the learned CIT(A) allowing the tax depreciation.

12. In reply to the arguments as made by the learned .DR, the learned counsel for the assessee has submitted that the reference to sections 32(3) and 62 of the Repealed Income Tax Ordinance, 1979 as made by the learned DR is out of context and irrelevant. He has submitted that section 32(3) pertains to the method of accounting and if the same is not regularly employed then authorizes the DCIT to compute income as he thinks fit, whereas the issue in this case is not the method of accounting rather it is only the estimation of lease money. Since the mercantile method of accounting has regularly been employed by the assessee and the income is computable under this method, the provisions of section 32(3) cannot be invoked in the present case. Regarding the judgment of the Hon'ble Lahore High Court reported as 49 Tax 149 referred by the learned DR, the learned counsel has submitted that the said judgment is with reference to section 13 of the Income Tax Act, 1922 which is totally different from section 62 of the Repealed Income Tax Ordinance, 1979. According to the learned counsel, section 62 contains proviso, that the specific defects in the books of accounts are to be pointed out through a specific notice and only then, the book version can be rejected. He has contended that in the present case, complete books of accounts in the shape of computerized ledger were produced before the Taxation Officer and he has failed to point out any defect therein, so the declared lease money and books version based thereon should not be rejected. He has argued that the quantum of Income of the assessee is irrelevant for determining the lease money, as the same is governed by an agreement spread over a longer period an remains unaffected whether the lessee earns any income or sustains any losses. With reference to the arguments regarding lease agreement between the same persons, he has contended that both lessor and the lessee are separate artificial juridical person, as the lessee is a partnership firm registered under the Partnership Act, 1932 although it is being assessed as an AOP. The learned counsel has, therefore, requested for the acceptance of the declared version.

13. We have heard the learned representatives of both the sides and have also perused the impugned order of the learned CIT(A), the assessment order, case-law referred by both the sides and other relevant record of the case.

Regarding the lease money, we have found that the Taxation Officer has discarded the declared lease money which-is supported by a lease agreement, only for the reason that during the years under appeal, there has been increase in the operating fixed asset but the lease money as compared to the previous assessment year has not been proportionally increased. We do not find the reason valid and justified, specifically after considering the explanation offered by the assessee. There is no dispute regarding increase in fixed assets but that is not sufficient to discard a legally executed agreement which has been accepted by the Department in two preceding assessment years. The Taxation Officer has failed to bring on record any evidence to establish that the actual lease money received by the assessee was in any way more than the declared. It is also an undisputed fact that in the case of lessee, assessments have been made by accepting the lease expenses at the amount, which has been declared by the assessee as lease money. If the expense of the lessee is Rs.27,00,000, the income of the lessor to the extent of lease money cannot be more than that from that source. We are, therefore, of the view that the Taxation Officer has estimated the lease money without any basis which is not only beyond comprehension but devoid of any legal support. We find force in the arguments of the learned counsel for the assessee that the action of the Taxation Officer is self-contradictory as the addition in lease money in the case of a lessor was possible only by making simultaneous addition under section 13(1)(d) of the Repealed Income Tax Ordinance, 1979 in the case of lessee. While perusal of the provisions of section 30(2)(d) of the Repealed Income Tax Ordinance, 1979 pertaining to hire of building along with machinery, we have found that this section is different from provisions of section 19 of the Ordinance, 1979 which is pertaining to income from house property. Under section 19(1), the Income Tax is charged on annual value of the property and under section 19(2)(b), it has been provided that "annual value" shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. We have found that there is no such stipulation in section 30(2)(d) meaning thereby that under section 30(2)(d), Income Tax would be on actual income derived from the hire, of machinery/building and not on rental value. Likewise, the reliance of the learned representative of the Department on section 32(3) is not relevant, as it is totally out of context. Section 32(1) of the Repealed Income Tax Ordinance, 1979 provided that Income, Profit and Gains shall be computed for the purpose of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee. Whereas section 32(3) is in the context of C method of accounting which are universally recognized as Mercantile, Cash and Hybrid. Under section 32(3), the tax payer is obliged to follow one of the above methods of accounting regularly and if he fails to do so only then the DCIT shall compute income on such basis and in such manner as he thinks fit. In this case, the method of accounting of the assessee company is mercantile and the same is being regularly employed and income is properly deducible from said method and has been deduced in the preceding years while making assessment nowhere adverse inference regarding method of accounting was ever drawn. Even otherwise, the Taxation Officer in the assessment orders for the years under review has neither made any adverse comments regarding method ' of accounting nor has invoked the provisions of section 32(3). We are, therefore, of the view that the contention in this regard made by the learned DR has no force. Under section 62(1), of the Repealed Income Tax Ordinance, 1979, the DCIT is authorized to assess the total income of an assessee by an order in writing after considering the evidence on record including evidence produced by the assessee under section 61 and such other evidence as the DCIT may require on specific points. Whereas in accordance with the provisions of section 62(1), where the assessee provides books of accounts as evidence in support of declared version, the DCIT shall, before disagreeing with such accounts, give a notice to the assessee of the defects in the accounts. In the present case admittedly, the assessee has furnished before the Taxation Officer computerized ledger accounts, lease deed agreement, dated 1-7-1995, certified copy of ledger account of the associated undertaking, bank statements, and audited final accounts. During the course of arguments,' the learned counsel for the assessee has also placed before us the copy of computerized ledgers. The perusal of the same reveals that these are complete ledger of the years under review. We have found that as the assessee company was deriving income from lease money and the same was adjusted through one journal entry, therefore, there are entries in ledger under the 1 head "building, "associated", "repair" and "depreciation". We are of the view that considering the peculiar facts and circumstances, these entries in the ledger have properly depicted all the transactions during the income year. We have observed that the Taxation Officer has failed to point out any specific defects in the aforesaid books and supportive documents so the rejection of declared version and estimation of lease money is without any legal basis. It is now the settled issue that unless and until specific defects in the books of accounts are confronted through a notice under section 62, the book version cannot be rejected.

14. We are of the view that the judgment of the Hon'ble High Court reported as 43 Tax 149 which has been referred by the learned representative of the Department is not relevant in the present case. The said judgment is with reference to section 13 of the Income Tax Act, 1922 where there was no provision equivalent to proviso to section 62(1) of the Repealed Income Tax Ordinance, 1979 regarding pointing out specific defects through notice for rejecting of book version. Therefore, the referred case is clearly distinguishable.

15. In the present case in addition to the above discussed legal position, the lease arrangement stated to be between the assessee and the AOP having the common persons as directors and members is not being disputed rather it is being consistently accepted by the Department, as is evident from the assessments framed for the earlier as well as subsequent years, and the income was assessed on the basis of such lease agreement. In our view, the lease agreement in the instant case between an assessee company and an AOP is also not an illegal arrangement. A company and an AOP are two distinct legal entities separately chargeable to tax under the provisions of Ordinance and are not legally debarred to enter into any agreement. In case of two different legal entities not legally debarred to enter into any agreement, any arrangement made by them by executing such an agreement cannot be declared as invalid. It is, therefore, held that under the circumstances, the leasing out of mills by the assessee company to the AOP made through a legally permissible agreement is a case of tax planning and not of tax evasion. So far as the possibility of any presence of intention of avoidance of proper taxation through I. collusive arrangement between the parties for the said purpose is concerned, the same cannot be ruled out in case of any agreement even though executed between two entirely different parties. Thus, a lease agreement between an assessee company and an AOP having the same persons as Directors and Members respectively is not to be considered illegal.

In view of the above findings, the declared lease money is directed to be accepted for both the years. Both the appeals filed by the assessee on the issue of lease money are allowed.

16. The next issue which has been agitated by both Department and the assessee is regarding addition made by the Taxation Officer under section 12(18) of the Repealed Income Tax Ordinance, 1979 which has been reduced, by the learned CIT(A), for both the years. The addition in this regard has been made with the observation that the assessee has himself shown the amounts in question as loan. We, have examined the ledger produced by the learned representative of the assessee during the course of arguments and have found that the said amounts have not been claimed and shown as "loan" or "advance". We have further noted that the assessee in response to notice of the Taxation Officer, has explained through his reply that `due to the associated undertaking' represent fixed asset made by the lessee at his own cost and adjustable towards lease H money, as there is no movement of cash as such section 12(18) is not applicable. We have further noted that the Taxation Officer has not _disputed the construction of building but has made the addition on the plea that even indirect loans are liable to addition under section 12(18). Learned DR referring section 11 (1) of the Repealed Income Tax Ordinance, 1979 has contended that receipt can be deemed also. This stance of the learned DR impliedly admits that addition in building has been made by the lessee at its own cost but the said amount is deemed to be received by the assessee company. While perusal of section 11(1) of the Repealed Income Tax Ordinance, 1979, we have found that this section pertains to scope of total Income which according to provisions of the section is as follows:

Section 11. Scope of total income.--(l) Subject to provisions of this Ordinance, the total income in relation to any assessment year of a person (a) who is resident, includes all income from whatever source derived, which-

(i) is received, or is deemed to be received, in Pakistan in the income year by, or on behalf of "such person"; or

(ii) accrues or arises, or is deemed to accrue or arise, to him in Pakistan during such year; or

(iii) accrues or arises to him outside Pakistan during such year".

We are of the view that the aforesaid provision indicates that the deeming is of income and not of any receipts and the said deeming is in I the context of geographical taxing the income in Pakistan of a resident person.

We are of the view that as has been held by this Tribunal as well as by the Hon'ble superior Courts that the deeming provision of section 12(18) has been introduced to check the back dated fictitious transactions to justify the resources. In this regard, we may place reliance on the decision of the Hon'ble High Court in Writ Petition No.13534 of 2001 wherein, it has been observed that where the source of sum is declared and it is found to be a good money, irrespective of the technical flaws in its change from one hand to another, an addition would be unjustified.

In this case, we have examined the audited accounts and the ledger account and have found that the amounts in question were not claimed and shown as "loan" or "advance". It is now settled up to the Hon'ble Supreme Court that the provision of section 12(18) of the Repealed Ordinance, 1979 is not attracted until and unless the amount is claimed and shown as "loan" or "advance". Reliance in this regard is L placed on the decision of the Hon'ble Supreme Court of Pakistan reported as 2002 PTD 877.

We have further noted that there is overwhelming evidence that the addition in building has been made by the lessee at its own cost and there is no movement of cash between the lessee and the lessor. Learned counsel for the assessee has contested that the Taxation Officer vide his notice, dated 7-11-2000 required the assessee to provide the complete date-wise detail of construction and evidence of deduction of tax thereon under section 50(4). The assessee through his reply explained that the construction has been made by the lessee and not by the assessee and since no payment for construction were made, therefore, section 50(4) is not applicable. Therefore, the Taxation Officer has not further proceeded in the matter under section 52 in this way admitting the stance taken by the assessee.

17. After considering the above mentioned legal and factual position, we are of the view that the Department has failed to establish that the amounts in question were received by the assessee in cash and were claimed and shown as loan. The assessee had only shown a liability of `due to associated undertaking' representing unadjusted amount of cost of construction by the lessee after reducing the lease money receivable. The said liability is an accounting entry and does not constitute as M receipt of any "sum" which could attract the provision of section 12(18) of the Repealed Ordinance, 1979. The addition made in this respect for both the years under review is, therefore, deleted and the orders of both the Officers below in this respect are vacated. The appeals filed by the assessee for both the years on this issue are allowed. Consequently the two cross-appeals filed by the Department on this issue are dismissed.

18. The assessee for both the years under review has objected the disallowances of repair expenses. We are of the view that the expenses claimed by the assessee do not have directed relationship with the income. Repair expenses have been incurred by the lessee and in the period when the building was still under construction. We are, therefore, of the view that the expenses in this regard have rightly been disallowed by the Taxation Officer and the learned CIT(A) has rightly confirmed the treatment in this regard. Both the appeals filed by the assessee in this regard are, therefore, dismissed.

19. The Department for both the years under review has also contested the directions of the learned CIT(A) to allow depreciation allowance. While perusal of the impugned order of the learned CIT(A), we have found that he has directed the Taxation Officer to allow depreciation due irrespective of the fact originally claim being mandatory allowance. The directions and observations of the learned CIT(A) are in accordance with law and warrant for no interference. The appeals filed by the Department on this issue are, therefore, dismissed.

20. Both the appeals for the assessment year 1998-99 and 1999-2000 filed by the Department are dismissed while the two cross-appeals filed by the assessee are allowed to the extent and in the manner as indicated above.

C.M.A./461/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Order accordingly.