COMMISSIONER OF INCOME TAX, COMPANIES ZONE-I, KARACHI VS GLOBE TEXTILE MILLS (OE) LIMITED, KARACHI, 2007 PTD-KARACHI-HIGH-COURT-SINDH 463 (2006)

Income Tax Ordinance (XXXI of 1979)---

----Third Sched. Rr.1(3A) [as inserted by Finance Act (VII of 1992) w.e.f. 1-7-1992) & 8(7)(b)(ii)---Central Board of Revenue Circular No.23/88---Depreciation admissible in tax holiday period---Reduction of depreciation from actual cost of assets for working out written down value---Scope---Rule 1(3A) of Third Sched. of Income Tax Ordinance, 1979 as inserted by Finance Act, 1992 had no retrospective effect---Depreciation admissible but not allowed on account of tax holiday could not be reduced from actual cost of assets for determining written down value---If depreciation could be reduced from actual cost of assets without allowing same in tax holiday period, then there would have been no necessity of enacting a deeming provision through R.1(3A) of Third Sched. of Income Tax Ordinance, 1979---Wear and tear caused to plant, machinery or building would not be relevant for purpose of depreciation, which was not allowable on basis of actual amount of wear and tear, but on basis of fixed formula contained in Third Sched. of Income Tax Ordinance, 1979---When assessee suffered more loss than prescribed rate of depreciation, then same would not be allowed in excess of such rate---When value of assets actually increased, then depreciation would not be refused, but would be allowed in accordance with prescribed rate---When asset was used for business for first time in assessment year enjoying tax holiday, then actual cost and written down value both would be same on expiry of tax holiday period---With effect from 1-7-1992 on account of deeming provision inserted through R.1(3A) of Third Sched of Income Tax Ordinance, 1979, admissible depreciation would be reduced from actual cost through fiction of law.

Jawaid Farooqui for Appellant.

Iqbal Salman Pasha for Respondent.

Date of hearing: 13th October, 2006.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---The above appeal was admitted to regular hearing to consider the following questions of law:---

"(1) Whether on the facts and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in holding that after completion of period of lax holiday the depreciation for assessment year from which the post tax holiday period commences, is to be allowed at the actual cost of plant, machinery and building and not on Written Down Value?

(2) Whether on the facts and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in holding that depreciation allowed as per depreciation schedule during the period of tax holiday is of no significance even in presence of huge wear and tear caused to the plant, machinery and building, and in the presence of rule 1(3A) of the IIIrd Schedule?

The relevant facts giving rise to the above questions of law are that the respondent is a public limited company deriving income from manufacturing of Cotton Yarn. The respondent was enjoying tax holiday for a period of 5 years, to wit, assessment years 1985-86 to 1989-90. The assessment year 1990-91, which is subject-matter of this appeal was the first year after expiry of tax holiday period. The respondent while claiming depreciation calculated the same on the basis of original cost for the reason that the question of charging depreciation during the tax holiday period does not arise. The Assessing Officer did not accept the contention holding that in view of instructions contained in, Circular No.23 of 1988 issued by the C.B.R., the WDV of the depreciable asset was to be calculated after deduction of normal depreciation allowable from year to year during the tax holiday period. The Assessing Officer worked out the WDV of the assets accordingly and thereafter calculated the depreciation allowance which was allowed.

The respondent being aggrieved preferred appeal before the Commissioner of Income Tax, contending that the Income Tax Officer was not justified in allowing depreciation on the WDV after giving effect to the depreciation for the tax holiday period, which was never allowed. It was contended that in the case of tax holiday company's depreciation would be allowed on the original cost in the first year after tax holiday period and thereafter on the basis of WDV as calculated on the above basis. The learned C.I.T.(A) accepted the contention and directed the Assessing Officer to allow depreciation as claimed by the assessee.

Feeling dissatisfied with the above direction the department preferred appeal before the learned Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal), contending that the direction given by the learned C.I.T.(A) was violative of the C.B.R. Circular No.23/88. The learned Tribunal did not accept the plea observing that C.I.T.(A) has directed to allow the depreciation on original cost by following an earlier D.B. judgment of the Tribunal. The direction given by the learned C.I.T.(A) was therefore, confirmed.

Being still dissatisfied the Department preferred this appeal before this Court contending that during the tax holiday period, the respondent had been submitting the return of total income along with depreciation schedule showing the depreciation on the assets. It is also contended that after expiry of tax holiday period the respondent again claimed depreciation at original cost. It is also averred that the properties were being used for the period of 5 years and the respondent having been claiming depreciation during the period of tax holiday on written down value on the basis of huge wear and tear and, therefore, the Assessing Officer was justified in not accepting the claim which was not in accordance with the C.B.R. Circular No.23/88. It is stated in the ground that the properties were under use for a period of 5 years and therefore, their value could not remain and be taken at actual cost for the purpose of depreciation.

We have heard learned Advocates for the parties and have gone through the material available on record.

Mr. Jawaid Farooqui, learned counsel for the department has reiterated the contentions raised in the memo. of appeal.

On the other hand, Mr. Iqbal Salman Pasha, has submitted that so far, rule I (3A) through which a deeming provision has been enacted was inserted by Finance Act, 1992. This provision has not been enacted with retrospective effect and, therefore, it is not applicable to the assessment year 1990-91. He has further submitted that since the deeming provision was not on the statute book in the assessment year 1990-91, therefore, the depreciation was required to be allowed in accordance with the law as prevailing in the said assessment year. The depreciation was to be allowed on the written down value which has been defined in Rule 8(7) of the IIIrd Schedule to the Income Tax Ordinance, 1979, to mean, the actual cost thereof to the assessee if it was acquired in the income year and where the asset was acquired before the income year the actual cost thereof to the assessee as reduced by aggregate allowance allowed to an assessee under the Income Tax Ordinance, 1979 or under the repealed Income Tax Act, in respect of the assessment years for earlier years. Mr. Pasha has submitted that the expression `allowed' used in the definition is very important and the connotation thereof shall resolve the controversy. He has argued that during the tax holiday period the total income and tax payable thereon is not worked out with the result that no depreciation is allowed to an assessee enjoying tax holiday. The depreciation is allowed after the expiry of the tax holiday period and on that account the legislature introduced a deeming provision through Rule 1(3A) of the IIIrd Schedule to the Income Tax Ordinance, 1979. He has submitted that a bare perusal of the deeming provisions shows that no depreciation is allowed during the tax holiday period and consequently, by fiction of law it is enacted that the depreciation admissible under sub-rule (1) of Rule 1 shall be deemed to have been allowed in respect of the said income and after expiration of the exemption period written down value of said period shall be determined in accordance with sub-clause (ii) of clause (b) of sub-rule (7) of Rule 8. So far, Circular No.23/88 is concerned, Mr. Iqbal Salman Pasha has submitted that the Hon'ble Supreme Court has already held in the case of Central Insurance Company that the C.B.R. has no authority to interpret the law as it is, a judicial function and the C.B.R. does not exercise any judicial function under the scheme of law. He has further maintained that the C.B.R. can issue directions to the subordinate tax officials but any direction which is violative of the statutory provision is not to be acted upon for the simple reason that the administrative instructions, clarifications or decisions cannot override the statute law. Mr. Pasha has fully supported the decision of the learned Tribunal.

In order to appreciate the contentions raised by the learned Advocates, it would be appropriate to reproduce Rule 1(3A) as well as Rule 8(7)(b)(ii) of the IIIrd Schedule to the Income Tax Ordinance, 1979.

"Rule 1(3A).---Where any building, furniture, machinery or plant is used for the purposes of business or profession during any income year for which the income from such business or profession is exempt from tax, depreciation admissible under sub-rule (1) shall be deemed to have been allowed in respect of the said income year and after expiration of the exemption period written down value of such assets shall be determined in accordance with sub-cluse (ii) of cluse (b) of sub-rule (7) of rule 8.

Rule 8(7)(b)(ii):

(7) written down value means-(b) in the case of other assets,

(i) ..

(ii) where the asset was acquired before the income year, the actual cost thereof to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of the assessments for earlier years."

A perusal of the above provisions shows that Rule 1(3A) inserted by Finance Act, 1992 is not with retrospective effect. The admitted position is that the assessee was enjoying tax holiday from the assessment years 1985-86 to 1989-90 and after expiry of tax holiday period the assessment year 1990-91 was the first year pi assessment. The result is that no depreciation was allowed to the respondent in the assessment years 1985-86 to 1989-90 and therefore, the depreciation which was admissible but was not allowed on account of tax holiday could not be reduced from the actual cost of the assets for working out the written down value and allowance for depreciation. We find force in A the contention of Mr. Iqbal Salman Pasha, that if the depreciation could be reduced from the actual cost of the assets without allowing the same in the tax holiday period, as opined by the C.B.R. in Circular No.23/88, then there was no necessity of enacting a deeming provision through Rule 1(3A).

For the foregoing reason it is held that Rule 1(3A) of the IIIrd Schedule to the Income Tax Ordinance, 1979 which was inserted by Finance Act, 1992, is not applicable to the assessment year 1990-91 and in the absence of any such deeming provision the depreciation which was not allowed to an assessee on its assets on account of tax holiday could not be reduced from the actual cost of the asset for the purpose of determining the WDV.

Consequent to the above finding, it is held that the learned Tribunal has rightly confirmed the direction given by the learned C.I.T.(A) which is in accordance with the law as prevailing in the assessment year 1990-91.

We would further like to clarify that the contention about wear and tear caused to the plant, machinery or building is not relevant for the purpose of depreciation because depreciation is not allowed on the basis of actual amount representing wear and tear to the assets but on the basis of fixed formula contained in IIIrd Schedule to the Income Tax Ordinance, 1979. If in any case, the assessee suffers more loss than the rate of depreciation prescribed, it shall not be allowed in excess of the rate. Likewise if value of some assets actually increases the depreciation shall not be refused and shall be allowed in accordance with the provisions contained in IIIrd Schedule to the Income Tax Ordinance, 1979. We would further like to clarify that in case where an asset is used for business for the first time in the assessment year enjoying tax holiday the actual cost and the written down value both shall be same on the expiry of tax holiday period. However, with effect from 1st July, 1992 on account of deeming provision inserted through Rule 1(3A) the admissible depreciation shall be reduced from the actual cost through fiction of law.

For the foregoing reasons, both the questions reproduced in the earlier part of this judgment are answered in affirmative.

After hearing learned Advocates for the parties on 13-10-2006, the appeal was allowed and the questions were answered in affirmative through a short order. These are the detailed reasons in support thereof.

H.B.T./K-29/KAnswer in affirmative.