W.T.A. No.1230/LB of 2005, decided on 23rd May, 2006. VS W.T.A. No.1230/LB of 2005, decided on 23rd May, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 295 (2006)

Wealth Tax Act (XV of 1963)---

----Ss. 2(1)(5)(ii), 3, 16(2) & 17---Wealth Tax Rules, 1963, R.8(3)---Assets---Assessee, a company deriving income from running a Textile Mill/lease income---Mill was leased out and lease income was declared---Wealth tax was charged under the provisions of S.2(5)(ii) of the Wealth Tax Act, 1963 on the ground that the assessee himself assigned the purpose of his immovable property held for the purpose of letting out in the Memoranduiri and Articles of Association---Validity---Memorandum and Articles of Association of the assessee company contained undoubtedly a specific sub-clause regarding the objects and purposes of the assessee company wherein to lease, let out, hire, mortgage etc. were among the objects, but this object was one among more than 37 objects, which had to be adjudged in its totality, which were in fact "to erect, establish and work weaving, spinning, embroidery, bleaching sizing, dyeing, printing, twisting, calendering, and finishing for the manufacture of all kinds of cotton, woollen, silk linen, art silk, rayon, and mixed textile and articles---Legislature had never intended to impose wealth tax on leased out industrial/commercial units---Even if, in one of the object clauses, the object of the company had been mentioned as the purposes of the company as to lease, let out etc. that clause was not conclusive and was of general nature, as the purpose had been defined as the ultimate use of the company, which had never been said to be let out or to lease---Assessee had not held the immovable property for the purpose of letting out, or business of letting out, but the purpose of the assessee company as was evident from its title was the textile and general mills---First Appellate Authority had rightly cancelled the order---Order of the First Appellate Authority was upheld and the appeal tiled by the Department was dismissed by the Appellate Tribunal.

(2004) 89 Tax 234 (Trib.) rel.

2002 PTD (Trib.) 2370; (1997) 76 Tax (SC Pak.); 1990 PTD (Trib.) 671; 2006 PTD 406; 2006 PTD (Trib.) 5 and W.T.As. Nos.191 to 195/LB of 2003, dated 18-1-2005 ref.

2000 PTD (Trib.) 1826 per incurrium.

Mahmood Aslam, I.A.C. for Appellant.

M. Iqbal Kh. for Respondent.

ORDER

Through this appeal, the Department has objected to the impugned order of the learned CWT(A), dated 21-6-2005 for the assessment year 2000-2001 cancelling the assessment made under section 16(3) of the revoked Wealth Tax Act, 1963 and deleting the wealth tax liability holding to be legally not maintainable.

Assessee, in this case, is a Public Limited Company deriving income from running 'a Textile Mills/Lease Income. Assessing Officer while perusal of the record of the assessee found that Unit No.1 of the assessee-Mill was leased out to Messrs Margalla Textile Mills Ltd. and A lease income of Rs.45,00,000 was declared for the year under consideration. Notice under section 17 of the revoked Wealth Tax Act, 1963 was issued on 24-3-2003 by the Assessing Officer, which is reproduced as under:--

"Perusal of your income tax record shows that Unit No. l was let out to Messrs Margalla Textile Mills Ltd.. and lease income of Rs.45,00,000 was declared for the year. Please note that letting out of commercial assets including immovable property and plant and machinery embedded therein is held to be taxable under the Wealth Tax Act, 1963 within the provision of section 2(5)(ii) of the Act by the Income Tax Appellate Tribunal in number of cases cited as:

2000 PTD (Trib.) 1826 and 2002 PTD (Trib.) 2370.

As Unit No.1 was given on lease on the valuation date i.e. 30-6-2000 hence you were liable to file return of tax under section 14 of the Wealth Tax Act; 1963. The needful has not been done. You are requested to explain your position in this regard. Also find attached notice under section 17 of the Wealth Tax Act, 1963 requiring you to tile your return of wealth for the said year till 29-3-2003 positively on account of wealth escaped from tax as discussed above.

Please also note, that in a parallel case at NTN. 30-5-0657802 letting out of spinning unit having comparable plant and machinery has been recently upheld to be taxable under the Wealth Tax Act by CIT(A), Zone-III, Lahore vide his order No.4106,. dated 4-1-2003 for assessment years 1996-97 to 2000-2001. The annual letting value for the purpose of levy of Wealth Tax at 10-times of the annual rent. You are required to provide details' of machinery and number of spindles in unit No.1, which is let out by you. Also provide a copy of ,rent agreement and if the' rent is found to be understated in view of the parallel case 'mentioned above the same shall be estimated accordingly.

Please note further the detail of any liabilities claimed against net wealth assessable to Tax may be furnished along with documentary evidence. Please note that the capital of the company is not a "debit owned" against the total wealth as has been discussed at length by the Income Tax Appellate Tribunal, Islamabad Bench in a ease ref': 2002 PTD (Trib.) 1826. Please note further that in case of claim of long term loan as liability, date of sanction of loan and' proof of its utilization for purpose of fixed assets installed in Unit No.1 (& not in the other unit under Self' use) may please be furnished. In case of unsatisfactory reply claim of liabilities shall be restricted accordingly.

Please note that only the original loan obtained for purpose of machinery shall be allowed as a liability against the assets as subsequent interest charged including re-scheduled interest, if any, is a liability owned subsequently and not against purchase of assets. Therefore, the said interest is liable to be charged against income under the Income Tax Ordinance and is not a liability incurred or a debt owned in a relation to purchase of assets being subject to Wealth Tax. Please explain your point of view on the matter. Reply of the above show cause and return under section 17 may please be furnished on 29-3-2003."

Return in this case was filed by the assessee in response to above said notice under section 17 of the revoked Wealth Tax Act, 1963 with the notice that "Not Taxable on valuation date i.e. 30-9-2000 as per Wealth Tax Act, 1963 Lease Income not matured on 30-6-2000". Wealth Tax Officer then issued notice under section 16(2), dated 7-4-2003, which is reproduced as under:--

"It is contended that the taxability of a subject arises only after closure of accounting period and not before. You have referred to the famous case of Supreme Court of Pakistan reported as (1997) 76 Tax (S.C. Pak) in this regard. Please note that the ratio of referred judgment of Honourable Supreme Court of Pakistan does not apply to your case as taxability of income with reference to assessment year under the Income Tax Ordinance, 1979 was discussed in the said para quoted by you and context of the case was totally different from the issue under reference. Under the Income Tax Ordinance income of the assessee pertaining to a particular income year comprising of a 12-months .period is to be determined.

Whereas under the Wealth Tax Act, 1963, the net wealth of the assessee on the valuation date i.e. 30th June of the relevant year is to be taken under consideration. Section 3 of the Wealth Tax Act, 1963 determines the chargeability of the tax under the Act which is reproduced for ready reference:--

"Charge of wealth tax.---Subject to other provisions contained in the Act, there shall be charged for every financial year commencing on and from the first day of July, 1963, a tax (hereinafter referred to as wealth tax) in respect of the net wealth (or assets) on the corresponding valuation date of every individual, Hindu undivided family, firm (association of persons or body of individuals, whether incorporated or not) and company at the rate or rates specified the Schedule. (Provided that wealth tax shall not be chargeable in respect of any assessment year commencing on or after the first day of July, 2001)."

It is apparent from the above section that the chargeability of wealth tax is subject to the provision of Wealth Tax Act only and tax is to be charged for every financial year (commencing or from the 1st day of' July, 1963) on the corresponding valuation date.

Valuation date with reference to financial year is defined under section 2(24) of the Wealth Tax Act, 1963 as the last day of the year previous to the year for which tax is chargeable under this Act. It is clear that the year refers to financial year as per section 3 read with section 2(24) of the Wealth Tax Act and there is no concept of a special year in contrast to that provided under the Income Tax Ordinance, 1979.

Please note further that as per proviso added to section 3 of the Wealth Tax Act the wealth tax is not chargeable in respect of any assessment year commencing on or after the first day of July, 2001, whereas in your case, the valuation date of 30-6-2000 corresponds to assessment year 2000-2001 starting front 1st July, 2000 hence the net wealth as determined under rule 8(3) is chargeable to tax.

In your return filed under section 17 of the Wealth Tax Act, 1963 on 4-4-2003 the valuation date is stated as 30-9-2000 which is not according to law as no valuation date other than 30th June is recognized under the Wealth Tax Act.

In view of the above facts, you are required to explain your position and show cause why the wealth tax may not be charged on letting out of your factory premises as per ALV determinable on the valuation date. In this regard, you are required to provide copy of lease agreement and details of plant and machinery and

building or the let out unit so the meaningful comparison may be made with the parallel case at NTN.30-05-0657802 as discussed in detail in this Office Notice under section 17, dated 24-3-2003. The reply of the above notice may please be made on 14-4-2003."

The reply of the assessee on the above said notice was as under:

"We maintain our earlier reply, dated 4-4-2003 and filing of wealth tax return under section 11 of Wealth Tax Act, 1963 being Textile Industry.

In addition to our earlier reply dated 4-4-2003 even on following working, there is no taxable wealth on which wealth tax can be levied.

Lease money received (as per Lease Rs.4,500,000 Agreement) From 1-1-2000 to 30-9-2000

(Assessment year 2001-2002)

10 time value for the purpose of charge of???????????????????????????????????????????? Rs.45,000,000

wealth tax

(i) Long Term Loan as per B/Sheet?????????????????????????????????????????????????????? Rs.57,487,000

Note No.4

(ii) Custom debentures as per??????????????????????????????????????????????????????????????? Rs. 1,101,608

B/Sheet Note No.7

Taxable Wealth??????????????????????????????????? Rs. (13,588,608)

From the above working, it is clear that there is no wealth which could be charged to wealth tax. We, therefore, request to drop the proceedings of notice under section 16(2), dated 7-4-2003."

The Assessing Officer again sent a notice, which was replied by the assessee as under:--

"We have leased out Unit No, l and not Unit No.2 as observed and mentioned by your goodself in notice. Thus it may be cleared.

The machinery of Unit No. 1 is 1960 model and outstanding long term of Rs. 57.478 (M) was obtained in earlier years for replacement of old machinery thus it was rightly claimed as liability.

The amount of loan Rs.24.487 (M) was transferred under the head current maturity under accounting policy. Thus it does not show reduction of overall liability of loan.

It has remained as liability and was shown in Note No.7 reducing it from Note No.4. Thus it could not be excluded from overall liability A/c.

Liability of Custom debentures Rs.1,101,608 was rightly claimed due to deferred Customs duty on import of 2-Ring Frames. To confirm this fact, photocopies of 2-underakings (guarantees) from HBL in this regard submitted to Customs authorities are enclosed for information and record. The payments arc appearing at page 3 i.e. Rs.1,058,338 + 43,270 = Rs.1,101,608 of this guarantees as such our claimed liability under this head is in order and may kindly be accepted. Keeping in view the above explained position, our claim of liability in our letter, dated 21-4-2003 may kindly be accepted."

The Assessing Officer being dissatisfied with the above said reply has made the assessment with the observations as under:--

"Reply or the assessee was considered and found to be unsatisfactory. The claim of liability on account of long term loan and custom debenture at Rs.57,487,000 and Rs.1,101,608 respectively cannot be allowed on the ground that an amount of Rs.24.987 (M) has already been transferred to the current maturity as short term liability and figure of the long term loan in the balance sheet is Rs.32.500 (M) only. It is pertinent to point out that long term loan from HBL, Lahore and FAF loan i.e. against exports and debentures of Rs.1,101,608 has already been transferred to current maturity. Moreover, the liability claimed is not allowable on the plea that the assets were not generated from these borrowed capital and assessment is made as under:--

Lease Income?????????????????????????????????????????????????????????????????????????? Rs. 45,00,000

Ten times 45,00,000 x 10???????????????????????????????????????????????????????? Rs. 4,50,00,000

Less statutory exemption?????????????????????????????????????????????????????????? Rs. 25,00,000

Balance Taxable Wealth?????????????????????????????????????????????????????????? Rs. 4,25,00,000

Wealth Tax?????????????????????????????????????????????????????????????????????????????? Rs. 10,37,500

Surcharge @ 10%??????????????????????????????????????????????????????????????????? Rs. 1,03,750

Total Wealth tax?????????????????????????????????????????????????????????????????????? Rs. 11,41,250

Addl. Tax under section 31-B?????????????????????????????????????????????????? Rs. 6,41,953

Total Wealth tax payable????????????????????????????????????????????????????????? Rs. 17,83,203

The Wealth Tax Officer has charged wealth tax as well as additional tax referred supra against which assessee filed appeal before the learned CWT(A), who has cancelled the order passed by the Wealth Tax Officer placing reliance on the judgment of this Tribunal reported as (2004) 89 Tax 234 (Trib.) wherein it has been held that "where company was formed with sole object of milling flour and the purpose of the company was not of letting out, it does not come within the ambit of definition of "assets", as given in section 2(1)(5)(ii), and is not liable to wealth tax".

The learned counsel for the assessee has placed before us the Memorandum and Articles of Association of the assessee company. The Clause III of the Memorandum says that "the objects for which the company is established are all or any of the following (and in construing the following sub-clauses, the scope of no one of such sub-clauses shall be deemed to limit or affect the scope of .any other of such sub?clauses):--"... and in sub-clause (27), it has been specifically given that "To lease, let out, hire, mortgage, sell or otherwise dispose of the whole or any part of the undertaking of the company, or any lands, business, property, rights or assets of any kind of the company or any share of interest therein respectively in such manner and for such consideration as the company, may think fit, and in particular for shares, debentures, or securities of any other corporations having objects altogether or in part similar to those of the company".

In view of the above said position, Mr. Mehmood Aslam, learned representative of the Department has contended that as in this case, the-assessee himself has assigned the purpose of his immovable property held for the purpose of letting out, therefore, the leased out unit of the assessee comes under the provisions of section 2(5)(ii) of the B revoked Wealth Tax Act, 1963 liable to wealth tax and the Assessing Officer has rightly charged wealth tax and additional tax. He has, in this respect, placed reliance on the decisions of this Tribunal reported as 2000 PTD (Trib.) 1826 and 2002 PTD (Trib.) 2370.

On the other hand, learned counsel for the assessee has emphasized that immovable property, which is to be subjected to levy of wealth tax must be held for the purpose of letting out or business of' letting out of property and the above referred cases by the Department are distinguishable, as the assessee company was incorporated with the object of running a Textile Unit and letting out was never an object. He is of the view that the explanation to section 2(5)(ii) refers to the immovable property held for the purpose of letting out or business or letting out of property and the case of the assessee does not fall within the ambit of section 2(5)(ii) for the purpose of definition of assets liable to incidence of wealth tax. He has contended that the object clause is very general in nature and cannot be made basis for stretching it to apply the section regarding definition of assets. He has, in this respect, placed before us decision or this Tribunal reported as 1990 PTD (Trib.) 671 wherein it has been held that "object clause of Memorandum and Articles of Association of the company is not Conclusive and is of general nature, thus cannot be relied". He has also placed before us the decision of the Hon'ble Lahore High Court reported as 2006 PTD 406 wherein the word "purpose" has been defined as "the ultimate use". According to the learned counsel, in the case or the present assessee factory was on lease only for 10 and half months i.e. from November, 16, 1999 to September 30, 2000. He has, therefore, contended that the learned CWT(A) has rightly cancelled the order passed by the Wealth Tax Officer.

The learned representative of the appellant Department has, however, contended that the factory was on lease and the Wealth Tax Officer has rightly charged wealth tax and additional tax, which has been cancelled by the learned CWT (A) without any justification.

We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CWT(A), the assessment order, the case law referred by the learned counsel for the assessee and the Memorandum and Articles of Association of the assessee company.

We have found that in the Memorandum and Articles of Association of the assessee company, there is undoubtedly specific sub-clause (27) in Clause-III regarding the objects and purposes of the assessee company wherein to lease, let out, hire, mortgage etc. are among the objects, but we are of the view that this object or the assessee company as mentioned in sub-clause (27) of Clause-III of the Articles of Associations is one among more than 37-objects, which has to be adjudged in its totality, which are in fact "to erect, establish and work weaving, spinning, embroidery, bleaching, sizing, dyeing, printing, twisting, calendering and finishing mills for the manufacture of all kinds of cotton, woollen, silk linen, art silk, rayon, and mixed textile and articles (including gold, silver and other metal threads and other textile fabrics) etc. in all their branches", as has been provided in sub-clause (1) of Clause-III. On behalf of' the assessee, decision of this Tribunal reported as 2006 PTD (Trib.) 5 has been placed before us, wherein the issue of subject-matter of this appeal has been discussed in detail. Although in that case in the Memorandum and Articles of Association, the purpose/object was not mentioned as letting out, but this Tribunal after detailed study on the subject has finally held in para. 15, the decision of this Tribunal reported as 2000 PTD (Trib.) 1826 to be as per incurium for the reasons as under:

"(15) In case of leasing of industrial unit, 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. Muhammad Allah Buksh PLD 1977 Lab. 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 Buksh 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 (Appeals)".

This Tribunal in another order, dated 18-1-2005 in W.T.As. Nos.191 to 195/LB of 2003 (Assessment years 1996-97 to 2000-01) in the case of Messrs Olympia Blended Fibre Mills Ltd. Lahore has also taken the same view placing reliance on the above referred decision reported as 2006 PTD (Trib.) 85. Although in that case, sub-clause (12) of clause III is the same as in the instant case of the assessee in hand. In that case of Messrs Olympia Blended Fibres Mills Ltd. among the objects, to lease, let out or hire etc. being mentioned with the object clause, this Tribunal has cancelled the impugned orders of the Officers below regarding charged wealth tax.

We are of the view as has already been held in so many cases that it is not the multi-fariousness of objects of an industrial undertaking, but is the formation of company exclusively for such undertaking to determine its status under the law. For the purpose of wealth tax keeping in view the provisions of law, as has been discussed in the detailed judgment of this Tribunal reported as 2006 PTD (Trib.) 85 that the legislature has never intended to impose wealth tax on leased out industrial/commercial units. Even if, in one of the object clauses, the object of the company has been mentioned as the purposes of the company as to lease, let out etc. that clause is not conclusive and is of general nature, as the purpose has been defined as the ultimate use of the company, which has never been said to be let out or to lease. The assesses, in this case, has not held the immovable property for the purpose of letting out, or business of letting out, but the purpose of the assessee company as is evident from its title is the textile and general mills. We, therefore, have no option except to follow the decisions of this Tribunal referred supra. The learned CWT(A) has rightly cancelled the order. The impugned order of the learned CWT(A) is upheld and the appeal filed by the Department is dismissed.

C.M.A./149/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Appeal dismissed.