VS, 2010 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1255 (2010)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss.122(5A), 39 & Second Sched., Part-I, Cl. 132---Amendment of assessment---Income from other sources---Sale of sludge and scrap sale---Re-opening of case under S.122(5A) of the Income Tax Ordinance, 2001 for the reason that the assessment was erroneous being prejudicial to the interest of revenue as the taxpayer had not offered other income for tax in the return and the tax thereon had not been paid thereon as per law---Assessee contended that scrap sales and sludge sales were not actually the income of taxpayer but was a reduction in cost of input and such an activity directly related to the use of plant for power generation income which was exempt and as such other income consisting of sale of scrap and sludge was also exempt---Validity---Profit derived by the assessee from sale of "sludge" (which according to assessee was waste) was outside the main business activities and squarely fell in the ambit of "income from other sources" chargeable to tax under S.39 of the Income Tax Ordinance, 2001---Orders of the officers below were upheld by the Appellate Tribunal and appeals filed by the taxpayer were dismissed.

2001 SCMR 1376 = 2001 PTD 2097 rel.

(b) Income Tax Ordinance (XLIX of 2001)---

----S.2(29)---'Income'---Definition---Nature---Definition in sub-S. (29) of S.2 of the Income Tax Ordinance, 2001 was inclusive and not exhaustive wherein it includes all kinds of profits and gains or receipt that were chargeable to tax under the Income Tax Ordinance, 2001.

Yousuf Saeed, F.C.A. for Appellant.

Mansoor Awan, L.A. for Respondent.

ORDER

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).-The appellant through this appeal has objected to the consolidated impugned order of the learned CIT(A) dated 18-8-2009 for the Tax Years 2006 and 2007 on the following common ground:

"That the learned CIT(A) has erred in treating the other income amounting to Rs.1,636.184 for the tax year 2006 and Rs.92,938 for the tax year 2007 under section 39 of the Income Tax Ordinance, 2001 and that other income actually a sale of sludge and does not come under the ambit of income."

The taxpayer in this case is a Private Limited Company. Returns filed by the taxpayer under section 120(1) of the Ordinance, 2001 were accepted. However, subsequently the Taxation Officer reopened the case under section 122(5A) of the Ordinance, 2001 for the reason that the assessment was erroneous so far as prejudicial to the interest of revenue as the taxpayer has not offered other income for tax in the return and the tax thereon has not been paid thereon as per law. The learned counsel representing the assessee has contended that the engines used for generation of electricity required periodical maintenance which requires change of lubricating oil at a certain frequency of time. Further the furnace oil produces waste oil because of impurities. The waste of both the types of oil is called sludge. Learned counsel has further explained that the scrap sales and sludge sales is not actually the income of the taxpayer but is a reduction in the cost of input and such an activity directly related to the use of plant for power generation income which is exempt and as such the other income consisting of sale of scrap and sludge is also exempt.

On the other hand, Mr. Mansoor Awan, has appeared as a L.A. of the department and has contended that the loss to the taxpayer from business and profession of generation of electricity is exempt from tax under clause 132 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001. But according to him by virtue of this exemption under the Second Schedule, the said business loss stands excluded from the purview of section 18 of the Income Tax Ordinance, 2001 as section 18(1) states that the income from business chargeable to tax under this head would be other than the income exempt from tax under this Ordinance. He has contended that due to this exclusion from section 18 of the Income Tax Ordinance, 2001, this loss is not available for set off against other income under section 56 of the Income Tax Ordinance as the exempt income does not fall under any head of income specified in section 11 of the Ordinance which has rightly been brought in the taxation net invoking the provisions of section 122(5A) by the Taxation officer and has been upheld by the learned CIT(A). The learned counsel in this regard has also placed reliance on the Decision of the Honourable Supreme Court of Pakistan reported as 2001 SCMR 1376 = 2001 PTD 2097 (Supreme Court of Pakistan) in the case of Sheikhoo Sugar Mills and others Versus Government of Pakistan and others wherein it has been held that:---

"Taxable activity means any activity which is carried out by any person which may include one or more than one person with pecuniary profit or without pecuniary profit with regard to supply of goods to any person for any consideration or supply of goods otherwise and the supply of goods includes any activity carried on in the form of business, trade or manufacture meaning thereby that if supply of goods has been made in the course or furtherance of business carried out for consideration putting to private business or non-business use of goods acquired, produced or manufactured in the course of the business it would fall within the definition of taxable activity."

I have considered the above referred arguments from both the sides and have also perused the consolidated impugned order of the learned CIT(A) and both the orders passed by the Taxation Officer under section 122(5A) of the Ordinance, 2001.

On behalf of the appellant it has been contended that other income related, to sale of "Sludge" as the company has installed five furnace oil engines through which electricity was generated. The oil needed replacement after use for a specified number of hours and subsequently the used oils is sold as waste when that furnace oil was used as fuel in the engines, waste oil was also produced which is due to the impurities in the furnace oil and this oil was also sold as waste and these two types of oil which were called sludged and the sale of waste recording to the appellant are not actually income of the taxpayer but a reduction in the costs of input. In this regard he has referred clause (132) of Part-I of Second Schedule to the Income Tax Ordinance, 2001 which is regarding exemption and tax concession from total income and is reproduced hereunder:---

"Profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988. The exemption under this clause shall apply to such project which is-

(a) owned and managed by a company formed for operating the said project and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan:

(b) not formed by the splitting up, or the reconstruction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and

(c) owned by a company fifty per cent of whose shares are not held by the Federal Government or Provincial Government or a local authority or which is not controlled by the Federal Government or a Provincial Government or a local authority:

Provided that the condition laid down in sub-clause (a) shall not apply to the Hub Power Company Limited [:]

[Provided further the exemption under this clause shall not apply to oil fired power plants setup on or after 22nd October, 2002.]"

Learned counsel representing the appellant referring the above clause has contended that profits and gains derived by taxpayer from an electric power generation project has been exempted which includes all the affairs of the appellant company regarding electric power generation. According to him, it is no doubt that the company was incorporated for the sole objective of generation of electricity and is enjoying exemption under clause 132 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001.

On the other hand, Learned L.A. on behalf of the department has contended that income earned by the taxpayer from sale of Sludge is outside the purview of sole objective of the company and liable to tax as income from other sources under section 39 of the Ordinance, 2001. He has contended that the contention of the appellant that the sale of waste is actually business income of the taxpayer and covered by exemption does not find support from any legal provision of law. According to learned L.A. of the Department, the definition of income has been provided in subsection (29) of section 2 according to which income includes any amount chargeable to tax under this Ordinance. He has argued that the definition in this clause is inclusive and not exhaustive wherein it includes all kinds of profits and gain or receipts that are chargeable to tax under this Ordinance. According to him the profit derived by the taxpayer from sale of waste is therefore outside the main business activities and squarely falls in the ambit of `income from other sources' chargeable to tax under section 39 of the Ordinance, 2001. He is supporting the impugned orders of the officers below and has requested that the appeal filed by the Tax Payer may please be dismissed.

I have heard the arguments from both the sides and have also perused the relevant provisions of law, the case law referred and other documents of the case. I have found that the appellant in this case is a Public Limited Company engaged in Power Generation. Returns for both the years under review have been filed declaring loss. It is to note that the appellant company enjoys exemption from charge to tax under clause 132 of Part-I of the IInd Schedule to the Ordinance, 2001. The returns were deemed assessed under section 120(1). Subsequently proceedings under section 122(5A) were initiated on the grounds mat the declared loss from the respective years included "other income" which is assessable under section 39 of the Ordinance. Since the said income was not offered for tax in the returns, the assessment under section 120(1) was treated as erroneous in so far as prejudicial to the interest of revenue in terms of provisions of section 122(5A). Consequently the Taxation Officer has amended the assessment by taking the other income under section 39 through passing separate orders. The loss from business and profession exempted from tax under clause 132 of Part-I of the Second Schedule to the Ordinance, 2001 has not been set off against other income with the observation that the exempt income did not fall under any head of income specified in section 11 of the Ordinance in terms of section 18(1) which states that the income from business chargeable to tax under this head would be other than the income exempt from tax under this Ordinance. The learned CIT(A) has upheld the treatment meted out by the Taxation Officer. After considering the facts of the case I am of the view that the appellant contention that the sale of "Sludge" being sale of waste is not actually income but a reduction in the costs of input, cannot be accepted as it does not find support from any provision of law. The definition of income has been provided in subsection (29) of section 2 according to which income includes any amount chargeable to tax. In this regard I have obtained strength from the decision of the Hon'ble Supreme Court of Pakistan referred by the learned LA wherein while explaining the definition of manufacture in the case of the Sugar Mills it has been held that "During its extrusion produces Bagasse, which is admittedly capable of being put of use differently. Therefore, squarely it falls within the definition of manufacture." It has further been held that "Sugarcane after passing through the process of extrusion does produce an intermediary product known as Bagasse which has an independent identity, status and character known to the consumer and it is also marketable in view of its utility. Bagassee is concerned it was not to be assimilated in the production of sugar and its identity remained independent from that of end product i.e. sugar. As such sales tax was leviable on it being a distinct and different item capable of use for any other purpose unless exempted from the tax." I am of the view that the definition in subsection (29) of section 2 is inclusive and not exhaustive wherein it includes all kinds of profits and gains or receipt that are chargeable to tax under the Ordinance. The profit derived by the appellant/Tax Payer in this case from the sale of "Sludge" (which according to them is waste) but is outside the main business activities and squarely falls in the ambit of "income from other sources" chargeable to tax under section 39 of the Ordinance. In view of these facts and circumstances of the case, and the legal position, I find no warrant for interference in the impugned orders of the officers below which are upheld and both the appeals filed by the taxpayer are dismissed.

C.M.A./39/Tax(Trib.)Appeals dismissed.