2003 PLP (Trib (PTD)

This also may be worth mentioning that the contract specifically declares itself to be as "not a hire purchase agreement" and states that it is only a contract of lease. This is where mentioning of the other arguments of learned AR shall be of relevance. It is said that the International Accounting Standard has given guidance for accounting the terms of lease. He highlighted following paras of the same: "Finance lease a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred." The classification of leases adopted in this Standard is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be presented by the expectation of profitable operation over the asset's economic life and of gain from appreciation in value or realization of a residual value, "in the case of finance leases the substance and financial reality are that the lessee acquires the economic benefits of the use of the leased asset for the major part of its useful life in return for entertaining into an obligation to pay for that right an amount approximately to the fair value of the asset and the related finance charge." "It is therefore, appropriate that a finance lease be recorded in the lessee's balance‑sheet both as an asset and as an obligation to pay future rentals." "(4) Under a finance lease substantially all the risks and rewards incident to ownership are transferred by the lessor and thus the lease rentals receivable are treated by the lessor as repayment of principal and finance income to reimburse and reward him for his investment and services." He remarked that the accounts have been prepared on the basis of the same. The assessee is not the actual owner by virtue of this method of account and the assets therefore, have been declared in the hands of the lessee companies. The treatment given by the lessor of not considering the same as a part of its property, therefore, as per IAS which support their contention that they are not the actual owner of these fixed assets and are not chargeable to capital assets. We appreciate his effort; however, we are not convinced that this method is applicable on the facts and circumstances of this case. From the contents of the agreement mentioned by us in the earlier paras it is apparent that the lease is not a hire purchase agreement. In. fact the contract itself says that it is not. It is a regular lease agreement, which also is apparent from the details, mentioned by us supra. This is the case of a regular lease rental which has separately been explained by the International Accounting Standard as "an agreement whereby the lessor conveys to the lessee .in return for rent use an asset for an agreed period of time." The method of accounting for leased asset separately mentioned in IAS‑6 speaks as follows:‑‑ "(6) Transactions and other event sought to be accounted for and presented in accordance with their substance and financial reality and not merely with legal form. While the legal form of a lease agreement is that the lessee may acquire no legal title to the leased asset." The learned AR earlier had not referred this part for the reason that he considered his lease arrangement to be a purchase and lease back which fact is missing from the copies of the lease agreement produced by him. His remarks with regard to financial lease, therefore, do not require adjudication, in his case, as this is not a case of financial lease at all. The contents clearly spell out that in the instant case the agreement is or an ordinary lease rental in which the asset is not compulsorily sold on completion of lease rental agreement. The factual position of the above contract, therefore, is that the assessee is owner of the assets leased out and this is not a case of a hire purchase agreement. In the contracts, where an option has been given to the lessee for purchase of the assets on culmination of the lease contract, the language of them also does not support the contention of learned AR. In fact even in the said second contract the asset remain ownership of ALC. In this agreement which has been made on 21st day of May, 1991 between Service Industries Ltd. and ALC, the option to purchase is there but this also is subject to the lessor discretion. It is solely on his sweet‑will that he may sell the items to the lessee at such price and such terms mutually agreed at that time. The relevant Article of the above contract speaks as follows:‑‑ ARTICLE FIVE (Option to Purchase) 5.01. In the event of the ALC conferring an option on the lessee in the schedule to purchase the equipment/machinery/properties, it is agreed that:‑‑ (a) The said option can only be exercised by the lessee after strict compliance by it of all the terms and conditions herein, and (b) The conferment of the said option shall not in any event detract from the legal rights of the ALC in relation to the said equipment/machinery/properties as set out herein and the ALC shall be entitled to take all such legal actions against the lessee for any defaults of the lessee in complying with any provisions of this agreement as if no such option had been conferred on it. 5.02. Upon expiry of the period of this lease in respect of the items of equipment/machinery/properties as specified in the schedule, in whatever condition or state such items of equipment/machinery/ properties are, the lessor may at its discretion sell the items of equipment/machinery/properties to the lessee at such price, and on such terms as may be mutually agreed between the parties. Above provision is self‑explanatory. The ownership obviously I remains with the ALC and the lessee is only a beneficiary as he is to utilize this machinery on payment of rental. The lessee does not have right to claim ownership in any form. Even the option to buy is subject to total discretion of the seller who may or may not sell it. Moreover, it only says that even if an option to purchase is given still ALC holds exclusive right to take a decision whether to sell or not or to whom. Further Article‑8 of the said contract also confirms that the property shall for all practical purposes remain ownership of ALC (lessor) and he may at his own discretion decides to sell or not to sell it. The Article‑8 speaks as follows:‑‑ ARTICLE EIGHT (Selection of Equipment) 8.01. In the event of the equipment/machinery/properties for purposes of importation/supply of the same at the total risk and responsibility of the lessee. It shall be the obligation of the lessee to take all requisite steps for the transfer/shipment/ importation and clearance taxes obtaining delivery of insurance, custom duties, taxes, octroi and/or other charges of whatsoever nature, without prejudice to the ALC's right of title and ownership in relation thereto. In case the equipment/machinery/ properties are required to be imported/purchased in the name of lessee, the lessee shall sell/transfer the same to the ALC immediately upon acquiring title thereto in terms of the agreement between the supplier and the lessee. Notwithstanding any delay on the part of lessee in completing safe/transfer under the preceding sentence the equipment/machinery/properties concerned shall be deemed to have been transferred to the ALC immediately upon transfer of title thereto in favour of the lessee and thereafter the same shall be deemed to be the property of the ALC. Other clauses of agreement also at no stage give the impression that this asset belongs to the lessee or at any stage or upon culmination of the contract he shall be given the right to opt for purchase of the same as integral part of the contract. Conversely Article‑11 speaks of (return of Equipment/Machinery/Properties). 11.01. Upon the expiration or earlier termination of this Agreement by the ALC in respect of the equipment/machinery/properties, the lessee shall return the same to the ALC in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted, in the following manner as may be specified by the ALC. Furthermore the ALC (Lessor) have the right to transfer the lease to a third party but the lessee does not have any right to further sublet or transfer any part of the leased machinery. The learned AR has called this arrangement as security to recover the leased, amount. All this in his opinion is done with the purpose of protecting the loan amount as the assets remain in custody of the lessee. Still further in the schedule attached with the agreement in the case of ALC and Qadri Textile Mills also does not give any such impression that an unequivocal option has been given to the lessee for purchase of property. Another important aspect which also needs mentioning is that in the agreement the term used in respect of amount of lease is `rent'. All the above discussion in respect of two contracts provided to us leads to the conclusion that the property in question has been purchased by the ALC and is not alienable to any other party as a compulsion. Every independent owner has got the right to sell its property at his own convenience. One may surrender the same but obviously through clear words. Nowhere in the above contracts such situation exists where a person can say with authority that the lessor is under compulsion to transfer the machinery in lease to lessee on a fixed or determined value at a subsequent stage. In documents the ownership has been transferred and is to remain in the name of the ALC while the right of alienation also remains with ALC. It has been given on rent by the said organization and no one else has got any right to call this property as his belonging. Rather the lessee is bound to conspicuously advertise that he is not the owner of the machinery, which he is using. All these circumstances lead to the obvious conclusion. The A.R. has produced to us the sale agreements, which have been prepared on the pads of Service Industry (Pvt.) Ltd. It appears from them that Messrs Service Industries has sold machinery to ALC. Subsequently Asian, Leasing Company has sold it back to the Service, Industry. This sale receipt does not indicate as to what were the circumstances in which the ALC opted to sell the machinery back to Service Industry. It. only obtains that this is on the basis of the agreement, dated 20 May, 1991 but does not disclose as to under what clause and under what provision of the same. On the other hand we have dilated upon various parts of the contract and have not been able to find any clause, which could support the AR's contention. In this regard we are conscious of our decision which this Tribunal gave in respect of purchase and lease back arrangement by holding them, as a transaction not covered within the definition of supply. The Tribunal has held such an arrangement to be a financial arrangement and in particular circumstances have held that this is not fully covered within the definition of word sale either. However, the facts and circumstances therein are quite distinguishable. The issue and the provisions of law applicable was also not of CAT. We, therefore, without any further discussion or dilation hold that the assets under discussion, i.e, machinery etc. was fully owned by the IAC. If the other company has shown it as his asset, this cannot be used as a lever for misapplication of a provision of law. The ALC is fully liable CAT on the Assets that belong to this company, hence we uphold the order of the Assessing Officer to the extent of the same. This leaves us to the issue regarding penalty and additional tax. It is true that by holding the assessee liable to CAT we confirm the charge. However, we are not in favour of charge of any additional tax or penalty in any form. This cannot be ignored that the controversy regarding charge of this assets in the hands of this company remained under discussion till this appeal. The fact that it has been held to be as chargeable in the hands of this company apparently is a decision of first impression. There were many other related issues in addition to above, which have been decided by the ITAT in few recent judgments except that the most important issue with regard to constitutionality of the charge was decided by the Supreme Court of Pakistan quite a few years back. We, therefore, have no hesitation in disapproving the charge of additional tax or penalty on the Assessees Company. In this regard this Tribunal has already given so many judgments latest of which is in the case of Messrs Ali Akbar Spinning Mills Ltd. Lahore vide W. T. A. No. 1338/LB of 2000 decided on 30‑1‑2002. The result of above discussion is obvious. The charge of CAT in the hands of Assessee‑Company is maintained while additional tax and penalty is deleted in toto. C.M.A./786/Tax(Trib.) Order accordingly.