1989 PLP (Trib (PTD)

MIAN ABDUL KHALIQ (JUDICIAL MEMBER).--These are five further appeals; four filed at the instance of an assessee and one by the Department assailing three separate orders passed by the learned C.I.T (A) Zone-1, Lahore dated 31-5-1987, 30-7-1987 and 12-5-1988. The assessee's appeals are for the charge years 1984-85, 1985-86, 1986-87 and 1987-88. The departmental appeal relates to assessment year .1984-85.

2. The assessee, a Public Limited Company, was incorporated in pursuance of the contents of the Promotors Agreement executed on 28-7-1981 between Pakistan Automobile Corporation i.e. PACO. a 100% Government owned Corporation and M/s. Habib Management Ltd. The corporate structure of the Company is as under:

PACO 30% NDFC 16% 51% NIT 05% Habib Management 24% Fiat of Italy 05% 49% Public 20% The assessee-company derived income from assembly-cum-manufacturing of tractors. The assessee's common grievances in all the four years are: (a) exemption claimed under clause (122) of the Second Schedule of Income-tax Ordinance, 1979 (hereinafter called the Ordinance) (d) disallowance of:- (i) sub-licence fee paid to PACO. (ii) disallowance of management fee paid to M/s. Habib Management Services Ltd. (iii) Super-tax rebate to the assessee-company as a Public Limited Company. (c) levy of workers welfare fund on the assessee-company, (d) disallowances in the, profit and loss account expenses. The other grievances of the assessee-company are: (a) Levy of additional tax under section 88 of the Ordinance for the charge years 1986-87 and 1987-88. (b) disallowance of reyality in the assessment year 1987-88. (c) disallowance of interest at Rs.5,892,309 in the assessment year 1984-85. In the departmental appeal solitary grievance relating to charge year 1984-85 is on the issue of deletion of unexpired warranty commission.

3. The objectionwise discussion is as under:-- CLAIM OF EXEMPTION UNDER CLAUSE 122, OF THE SECOND SCHEDULE TO THE ORDINANCE Initially assessment for the charge year 1984-85 was made on 30-4-1985 under section 62 of the Ordinance at an income of Rs.8,13,50,815 against returned version of Rs.2,56,85,

948. This assessment was set aside in appeal by the learned C.I.T. (A), Zone-1, Lahore vide order dated 21-9-1985 for de novo decision after affording proper opportunity to the' assessee. Thereafter on 8-1 1986 the I.T.O. issued notice under section 62 of the Ordinance seeking the assessee's clarification on various points. The assessee's claim of exemption was discarded on the ground that commercial production was not undertaken in the year ending 30-6-1984. This conclusion was maintained by the first appellate authority. In the assessee's appeal for the charge year 1984-85 there is no merit in the grievance regarding claimed exemption. The assessee vide letter dated 14-1-1985 admitted that production for training purposes was undertaken in this year. The assessee's accounts sufficiently establish that no commercial production could be commenced. When confronted with this situation, the assessee's AR did not press grounds Nos. 2, 3 and 4 relating to claimed exemption.

4. Before dealing with the assessee's claimed exemption for the remaining years, we deem it appropriate to bring on record clause 122 of the Second Schedule to the Ordinance which is as under:- Clause 122: Profits and gains derived by an assessee from an industrial undertaking set up between the first day of July, 1980, and the thirtieth day of June 1988 both days inclusive, for a period of five years beginning with the month in which undertaking is set up or commercial production is commenced, whichever is the later. The exemption under the clause shall apply to an industrial undertaking, which is: (a) set up in an industrial estate approved by the Central Board of Revenue in any of the following areas, namely:-- (i) the North-West Frontier Province: (ii) the districts of Mianwali, Bhakhar Rajanpur and Dera Ghazi Khan, and tehsil Khushab in the district of Sargodha, in the province of the Punjab; and (iii) the districts of Shikarpur, Jacobabad, Tharparker, Dadu and Sukkur in the province of Sind: (b) owned and managed by a company registered under the Companies Act, 1913 (VII of 1913), having its registered office in Pakistan. (c) engaged in the manufacture of goods or material or the subjection of goods or materials to such process; and (d) an undertaking the income, profits and gains of which are not liable to be computed in accordance with the rules contained in the Fifth Schedule: Provided that, in respect of the districts of Dera Ghazi Khan and Rajanpur, this clause shall have effect as if the words, "in an industrial estate approved by the Central Board of Revenue" were omitted." The I.T.O. held that the assessee was not entitled to claim exemption of profit and gains from Dera Ghazi Khan unit as clause 122 envisaged exemption from tax by an assessee from an industrial undertaking engaged in the manufacturing of goods or material. The I.T.O. was of the view that the assessee company was not engaged in the manufacture of tractors rather its nature of business was assembly of tractors. As per I.T.O. process of manufacturing was distinguishable from assembling and manufacturing meant to make or fabricate from raw material and work into a form suitable for use by one or more complicated process. The I.T.O. concluded that assembly was not included in the process of manufacturing. While disallowing the assessee's claim the I.T.O. after' making discussion held as under: "The assessee company assembles different parts into a tractor by a simple process. Eighty percent of the parts going into the tractors are imported from principal and only 20% are manufactured locally. Locally' manufactured 20% parts referred above are manufactured and supplied by local parties. Assessee-company in no way is involved in the manufacturing of any kind of spare parts. Engines are imported in the CKD and PICD form alongwith transmission. Imported and locally manufactured parts are assembled together. Even the name "FIAT" is lent by the principal company and all the main parts such as engines and transmission are manufactured abroad and imported in Pakistan for the purposes of assembling. In short assembling is only the last item of the process of manufacture and does not in itself constitute the entire manufacturing process. Keeping in view the above fact claim of exemption from tax under clause 122 of the Second Schedule of the Income Tax Ordinance cannot be allowed and the same merits rejection. Above view is further strengthened on the fact that under section 15-BB of the Income Tax Act, 1922, it was clearly laid down that manufacturing process includes assembling process. Whereas under Clause 122 of the Income Tax Ordinance such distinction has not been drawn." For the charge years .1986-87 and 1987-88 the I.T.O. disallowed the assessee's claimed exemption on the basis of discussion made by him in the assessment year 1985-86. No independent finding was recorded.

5. On appeal, the learned C.I.T. (A) repelled the assessee's grievance holding that manufacturing is a much wider term than assembling and as a matter of fact assembling is only the last part of manufacturing process. Comparison was also made by the first appellate authority of the language used by the legislature in clause 98 of the Second Schedule to the Ordinance wherein exemption was allowed in manufacturing of agricultural machinery specifically excluding the element of assembling. It was concluded that the word manufacturing used in clauses 98 and 122 of the Ordinance when read together establish that intention of the legislature was of not allowing exemption for assembling. The learned. C.I.T. (A) held that the Tribunal while delivering judgment in the case reported as 1986 P T D 384 omitted to consider the distinction in the use of word `manufacturing' in clauses 98 and 122 of the Second Schedule to the Ordinance.

6. The appellant's AR contended that both the departmental officers failed to appreciate that assembling of imported components in CKD condition tantamounts to manufacturing. It was further stated that the assessee company established the whole complex 'for complete assembly and, special assembly line was working through hydraulic cranes all over the shed carrying on grinding, welding and painting etc. It was further stated on behalf of the assessee-company that an elaborate system of testing also existed in the laboratory for undertaking various tests before final assembling of the tractors. The D.R. reiterated the plea as advanced by the learned C.I.T. (A).

7. After giving due consideration to the submissions of the representatives of the parties and on going through the contents of clauses 98 and 122 of the Second Schedule to the Ordinance it does not take us long to hold that both the clauses are independent of each other and the departmental officers erred in refusing the assessee's claimed exemption under clause 122.

8. Under section 60 of the repealed Income Tax Act exemption was allowed to income derived from manufacturing of agricultural machinery anywhere in Pakistan to every assessable entity. That exemption was adopted in clause 98 of the Second Schedule. In the Notification issued under section 60 of the repealed Income Tax Act as well as in clause 98 of the Second Schedule exemption was allowed in manufacturing of agricultural machinery and not of assembling. Clause 122 of the Second Schedule to the Ordinance was inserted vide Finance Ordinance, 1980 whereby exemption was restricted to: (i) such industrial undertakings which were owned and managed by a company only; (ii) Which were set up in an under-developed region, the obvious purpose being regional dispersion. (iii.) Which were engaged in manufacturing of goods or material. Thus notwithstanding the fact that clause 122 was inserted in 1980 i.e. 12 years after the notification issued under section 60 of the repealed Income Tax Act, the expression used therein was not adopted in the special provision. The other distinction is that- in clause 98 after mentioning the word manufacture word "not assembled" was mentioned within brackets. The very fact that notwithstanding the awareness of the rule making authority that the words "not assembled" appeared after the word "manufactured" in clause 98, these words were not included in clause 122, indicates the intention of the legislature that the expression subjecting the goods or material to manufacturing process included the process of assembly. Both the provisions are thus independent of each other. The word not assembled having not been adopted in clause

122. The learned C.I.T. (A). misdirected himself in law by reading the expression used in clause 98 in clause 122 also. On the issue whether the activity of the assessee-company can be termed to be manufacturing, the I.T.O. admitted that 80% components of the tractors were imported in CKD condition and 20% locally manufactured items were used. In somewhat similar circumstances in the cases reported as P L D 1965 SC 16 and P L D 1959 SC 103 it was held that assembling of motorcycles from components imported in CKD condition involved manufacturing process. In (1968) 681T.R. 325 it was held that assembling of automotive buses or truck chasis from imported parts in CKD condition was an activity of manufacturing. The Tribunal in its decision in I.T.A. No.688 (PB) of 1981-82 reproduced the following observations of Allahabad High Court wherein after considering a large number of authorities it was concluded: "Reverting to the present case it seems to us that a manufacturing process is involved when the component parts ova cycle arc taken and put together. What emerges is an article known popularly as cycle and commercially sold as such. It is new article, different from that of which it is made. The components by themselves considered individually or collectively do not constitute a cycle. It is when they are assembled that a cycle comes into being. Unassembled components cannot be put .to use to which a cycle can. The process of assembly produces,, to use the felicitous language of Dixon, J., in Jack Zinader Pty. Ltd (1q49) 78 C.L.R. 336, a different entity having a new identity: That is so although the original parts are still identifiable and have not lost their basic for essential properties. The process of assembly is as, much a part of the manufacturing process as the production of the components. It may be the end process, but nevertheless essential to the completion of the commercial commodities:" In three cases decided by the Tribunal in I.TA. Nos. 688-B of 1981-82 dated 6-1-1986; I.TA No. 197/198 (PB) reported as (1986) P T D 384 and a case reported as 1987 P T D 362, the three undertakings which were engaged in the business of assembling motorcycles, scooters and diesel engines were held as being engaged in the process of manufacturing and were allowed exemption. In the case reported as (1987) P T D 362 (Trib.) after taking into consideration the other decision the Tribunal concluded: "This objection is disposed of by referring to the case of VIJA Cycle Rikshaw Company v. C.I.T Sales Tax UP; in which it was held that "process of assembly is as much part of the manufacturing process as the production of components. It may be the end process but nevertheless essential to completion of the commercial commodity." Similar conclusion was drawn in two cases of Pakistan jurisdiction reported as P L D 1959 SC 103 and P L D 1965 SC

161. We also took this view in I.T.A. Nos.197 and 198 (PB)/ 1984-85 dated 27-5-1986. On account of the foregoing discussion, we have no hesitation in stating that assembly is "as such a part of the manufacturing process". Therefore, the assessee did not commit anything wrong when it stated earlier that it was-involved in the assembly of diesel engines, distribution panels and circuit brakers. Hence, subsequently when it claimed exemption as a manufacturer under item (119), Part I of the Second Schedule to the Ordinance, it did not commit any wrong so as to render itself ineligible for exemption under the item ibid." In the case reported as (1971) 21 Sales Tax Cases 573 assembling of cycles and rickshaws was held to be an activity of manufacturing. It was held that process of assembly is as much a part of manufacturing process as the production of components. In the light of the aforementioned case-law we are of the considered view that the word manufacture used in clause 122 is wide enough to include the process of assembly. In this view of the matter, we modify the orders of the departmental officers for the charge years 1985-86, 1986-87 and 1987-88 holding that manufacturing of tractors under-taken by the assessee-company at Dera Ghazi Khan unit enjoyed, exemption under clause 122 of the Second Schedule to the Ordinance. Disallowance of Interest Expenses at Rs.5.892.309 in A.Y. 1984-85. The relevant facts of this issue are that the assessee-company was incorporated on 26-7-1983. In pursuance to Promotors Agreement dated 28-7-1981, at the time of incorporation it took over the following assets: (a) Fixed assets of PACO in respect of Truck Division. (b) Current assets of PACO in the form of stocks. (c) Current liabilities of PACO as on 26-7-1983. (d) Liabilities to pay the L.C. payment.4 made by PACO in August 1983 on behalf of the assessee-company. The I.T.O disallowed the assessee's claimed interest holding that the payment having been made to acquire the concern only whereby for bringing into existence an asset of enduring benefit the amount paid was of capital nature. This conclusion was maintained by the learned C.I.T. (A) holding that expenses incurred by the assessee-company for acquisition of business could not be equated with "interest" paid on capital "borrowed" for the purposes of business itself. The assessee's AR stated that the interest paid in the year under review pertained to acquisition of actual stocks of parts as available and CKD parts in transit. The case of the assessee's AR was that in the books of the Company value of machinery, plant and tools amounting to Rs.1,05,39,240 was debited under the head fixed assets whereas value of stocks of CKD parts alongwith LC payments in respect of stock in transit amounting to Rs.10,16,10,218 was debited to the cost of sales. Claimed interest was stated to be on prorata basis, interest on fixed assets and interest on current assets. For resolving this issue, we deem it appropriate to reproduce bifurcation of the break up of the agreed price as narrated by the learned C.I.T. (A) in the impugned order. The break up was: (a) Value of fixed assets Rs. 1,05,39,240 (b) Value of current assets i.e. stocks of parts and trucks Rs. 56,98,36,677 LESS Current liabilities Rs. 52,18,50,152 Net value of stocks Rs. 4,79,86,525. (ii) LC payment for import of CKD parts made by PACO on Behalf of the appellant-company in August, 1983. Rs. 5,36,23,693 Total of stock and L.C. Payments for parts of tractors- Rs. 10.16.10,218 Total value agreed Rs. 11,21,49,458 From this narration it is evident that the part of interest aggregating to Rs.58,92,309 pertained to acquisition of actual stocks of parts as available alongwith CKD parts in transit. In support of the plea of the claimed interest, the assessee's AR relied on the case of Bombay Steam Navigating Co. Ltd. v. C.I.T. reported as (1965) 56 I.T.R. 52 wherein it was held that interest paid by the assessee on the unpaid purchase price on fixed as well as current assets though not permissible deduction under section 10 (2) (iii) was allowable under section 10 (2) (xvi) as expenditure incurred for the purposes of business. A contradictory view was taken by the Karachi High Court m the case reported as (1985) P T D 359 where in the case of C.I.T. v. Pakistan Progressive Cement Industries Ltd. it was held:-- "It was on the basis of the said tests that the Supreme Court in both the cases found that the transaction was so closely related to the business that it could be viewed as an integral part of the conduct of the business and therefore, the payment of interest in both the cases was held to be revenue expenditure laid out wholly and exclusively for the purpose of business. But in the case on hand, taking all the facts and circumstances thereof into consideration we have already stated the conclusion reached that the payment of interest was for acquisition of the two factories, capital assets. We must state here that we are clear in our mind that the payment of interest on account of acquisition of the two factories could not be considered to be so closely related to the business carried that it could be viewed as an integral part of the conduct of the business, for, as already stated, the payment of interest had to be made alongwith the instalments of purchase price in the same manner as money itself irrespective of whether the assessees carried on business or not. In any case, it could not, on the facts and in the circumstances of this case, be said that the payment of interest was wholly and exclusively for the purpose of business which is the second condition required to be fulfilled to claim its deduction as an allowance under clause (xvi) of subsection (2) of section 10 of the Act. Indeed the liability to pay interest arose directly out of purchase of capital assets and payment of interest could only be attributed to capital expenditure and nothing else. It may be recalled that assessee was a newly-formed company and started its business with the acquired assets. This also answers the second question posed by us in paragraph above." This judgment of the Karachi High Court was reversed by the Supreme Court of Pakistan in an appeal styled as M/s. Pakistan Progressive Cement Industries Ltd. v. C.I.T. bearing Civil Appeals Nos.42 to 44/K of 1986 dated 25-5-1988. In the light of judicial pronouncements, the orders of the departmental officers for disallowing interest on prorata basis amounting to Rs.5,53,729 for acquisition of fixed assets do not call for any .interference as the same cannot be held as permissible deduction under section 23 (1) of the Ordinance. However, payment of 'interest amounting to Rs.53,78,580 for acquiring current assets being an allowable deduction is allowed. The assessee company claimed sub-licence fee paid to PACO @ Rs.200 per tractor sold. After seeking the assessee's explanation the I.T.O. rejected the assessee's claim holding that the facility provided by PACO was in the form of acquisition of licence and as such expenditure incurred therein was of capital nature. The learned C.I.T. (A) confirmed the findings of the I.T.O. holding that the claim of sub-licence fee being for acquisition of licence to conduct, business was not allowable being of capital nature. The assessee's AR contended that according to Articles 5-1, 5-2 and 5-3 of Industrial collaboration agreement between FIAT and PACO licence was given for. User of PATENTS and knowhow. The case of the assessee's AR was that as per clauses (c) & (d) of preamble to Registered Users Agreement executed on 26-4-1986 between FIAT and sub-licensee i.e. the assessee-company, duration of agreement was from 28-7 1983 to-17-5-1992 i.e. only for nine years and as per clause 9 after expiry of the agreement the sub-licensee had to discontinue the use of the trade marks. On this basis it was pleaded that the departmental officers erroneously disallowed sub -licence fee on the pretext that it was for acquisition of licence to conduct business and as such an expenditure of capital nature. The assessee's AR relied on the case titled as M/s. Time Aid (India) Private Ltd. v. C.I.T. reported as (1979) 112 I.T.R

328. In that case the assessee had entered into an agreement with a foreign company to manufacture alarm clocks agreeing thereby to pay royalty @ 5% of the sale price of the products -in consideration of certain facilities and supply of tools, dyes, technical knowledge, information, advice etc. Agreement in that case was made for a period of five years, Royalty payment made by the assessee was allowed but expenses incurred on payments towards technical knowhow fee were disallowed on the pretext of being of capital nature. The assessee's claim was held to be allowable as the parties themselves described the agreement as licensing agreement for a fixed duration of five years and the knowhow itself being in the initial stages for assembling the clocks out of the imported parts and in the later stages for manufacturing the parts themselves indigenously for the purposes of assembling the clocks. It was also concluded that there being nothing in the agreement that even after the expiry of the period of agreement the assessee was entitled to make use of the knowhow for manufacturing the clocks in question. It was clearly indicative that if payment was made for licence fee for the use of technical knowhow for manufacture of clocks and hence allowable as deduction. The facts of the assessee's case arc on all fours with that case as the assessee- company's agreement was for a period of nine years and thereafter on termination of the agreement the assessee was precluded from using the trade mark of FIAT for manufactured tractors. In the assessee's case in terms of contents of the Registered User Agreement it was provided that: (i) Right of the sub-licence to use knowhow and patents of FIAT was for a period of nine years; (ii) Sub-licence was not for sale; (iii) After expiry of sub-licence, the sub-licensee had to give the use of the trade mark or patent of FIAT on tractors manufactured by it; (iv) the sub-licensee had to treat the knowhow as strictly confidential. In the light of aforementioned terms of contract and taking into consideration the decided case (supra) and factum of payments, Weir modify the impugned orders directing allowance of the assessee's claim under this head for all the years. DISALLOWANCE OF MANAGEMENT FEES PAID TO HABIB MANAGEMENT SERVICES LTD. For the respective years under review the assessee claimed to have paid Rs.15,00,000, Rs,19,26,400, Rs.1,70,000 and Rs.14,35,000 to Habib- Management Services Ltd. The assessee claimed these payments on the basis of Promotors Agreement dated 28-7-1983 read with Addenda to Promotors Agreement dated 20-8-198.1. For the charge year 1984-85 the I.T.O. held that perusal of the Promotors Agreement established the payment as to have been made in the nature of Managing Agency Commission. The I.T.O. was of the view that the managing agency commission having been done away with, claimed commission was inadmissible. Another aspect of the matter taken into consideration by the I. T.O. was that the assessee's accounts for this year were closed on 30-4-1984 whereas provision of payment of Rs.200 per tractor made as per Addendum dated 20-8-84 could not be applicable retrospectively. In the charge year 1985-86 while dealing with this issue, the I.T.O. discarded the assessee's clam being in the nature of managing agency commission. It was also observed that the payment under consideration did not constitute salary therefore, it was not admissible under any provision of the Ordinance. On similar basis the assessee's claim under this head for the succeeding years under review was disallowed. On appeal the learned C.I.T. (A) maintained the disallowance made by the I.T.O. on the ground that the Addendum dated 20-8-1984 added to the Promotors Agreement dated 28-7-1983 could not be made applicable retrospectively. For the succeeding years the assessee's claim disallowed by the I.T.O was maintained on the reason that the same amounted to managing agency commission, which was not admissible. The assessee's authorised representative contended that the departmental officers failed to appreciate the factual as well as legal aspects of the matter concerning payment of management fee made to M/s. Habib Services Ltd. It was stated by the assessee's AR that as per clause 3.3 of Article III of the Promotors Agreement dated 28-7-1983 it was provided that the Managing Director who will manage the company shall always be the nominee of M/s. Habib Management Services Ltd. Under clause 4.3 of Article IV of the Promotors Agreement dated 28-7-1983 it was provided that M/s. Habib Services Ltd. or its nominee shall be entitled to fees as may be mutually agreed upon at the earliest, if possible within thirty days from the effective date. The case of the assessee's AR was that the Promotors Agreement dated 28-7-1983 was duly approved by the Ministries of Finance, Law and Production as per letter dated 7- 11-1983. The quantification of the management fee was made by the Ministry of Production in July, 1984 intimation whereof was given to PACO on 26-7-1984 and to M/s. Habib Management Services Ltd. on 16-8-1984. As per this decision of Ministry of Production M/s. Habib Management Services Ltd. was made entitled to management fee of Rs.200 per tractor. It was on receipt of intimation regarding quantification of management fee that addendum to Promotors Agreement was executed on 20-8-1984 providing that in view of provisions of clause 4.3 of Article IV of the Promotors Agreement and the approval accorded by the Ministry of Finance Production, it is agreed that the Addendum shall have effect from 28-7-1983 in regard to agreed management fee of Rs.200 per tractor. In this background the assessee's- case was that in the light of contents of the Promotors Agreement read with addendum there remained no doubt that the assessee company was liable to pay management fee @ Rs.200 per tractor to M/s. Habib Management Services Ltd. The method of accountancy employed by the assessee-company being mercantile, the relevant year will be the income year in which the liability to pay management fee accrued and not the income year in which the liability was quantified. Reliance in this behalf was placed by the assessee's AR on the cases reported as (1959) 37 I.T.R. 1 (SC) and (1980) 122 I.T:R.817 (SC): "Before dealing with the merits of the case, we deem it appropriate to discuss the impact of the cases cited by the assessee's AR. In the case reported as (1980) 122 I.T.R. 817 (SC) the assessee was liable to pay price of sugarcane to the sugarcane growers at the rates to be settled in future. The liability was quantified after the close of the relevant previous year. It was held by the Supreme Court that: "The liability of the assessee-company to pay the price for sugarcane fixed by statutory orders was in respect of the full amount including the so-called rebate: It was the assessee-company which was liable to pay the entire sum as the price of the cane purchased by it. The liability was hence there, though the assessee-company did not clear it in the' assessment year in question. The claim, therefore, cannot be repelled on the ground that- the liability did not arise. The subsequent decision with the aid of the Government was only quantification of the liability. Which undoubtedly accrued at the time of the purchase of the sugarcane in the year 1957-58. Since the liability was quantified during the pendency of the assessment proceedings, the quantified amount alone was allowable as deduction." We feel that the departmental officers erred in law in disallowing the assessee's claim of management fee on the ground that the expenditure was inadmissible as the management' agency system stood done away with. The legal position of that issue is as under: (a) By President's Order No.2 of 1972 dated 15-1-1972 Section 4 provided: "Termination of managing agency agreements and contracts: (i) All agreements or contracts entered into by a company with its managing agent shall stand terminated forthwith and the managing agent and the Directors of the company nominated by the managing agent shall cease to hold their respective offices." (b) Vide Act NO.LIII of 1973 dated 30-7-1973 President's Order No.2 of 1972 was amended by insertion of Section 15-A as under:- Power to Exempt The Federal Government may by notification in the official Gazette, exempt any of the following classes of agreements or contracts from the operation of the provisions of Part II of this Order; namely: (a) an agreement or contract with an investment adviser in relation to an investment company registered under the Investment Companies and Investment Advisers Rules, 1971; and (b) an agreement or contract, at proved by the Federal Government, with a foreign collaboration in relation to a company which owns hotel in Pakistan." (c) Vide Ordinance No. XXIX of 1980 dated 26-6-1980 subsection (15-A) of the President's Order No.2 of 1972 was further mended as under:- CLAUSE 2, AMENDMENT OF ARTICLE 15-A, PRESIDENTIAL ORDER 2 of 1972:-- In the Companies (Managing Agency and Election of Directors Order of 1972 (P.O. No.2 of 1972) in Article 15-A, in, Clause (1): (a) In paragraph (a) the word "and" shall be omitted. (b) In paragraph (b) for the full stop at the end the comma and word "arid shall be substituted: and after paragraph (b) amended as aforesaid the new paragraph shall be added namely: (c) an agreement or contract approved by the Federal Government in relation to a company formed for setting up, in collaboration with one or more public sectors, financial institutions and an industrial undertaking which, in the opinion of the said Government, is likely to contribute the economic development of Pakistan." The impact of amendment made in Article 15-A of P.O. No.2 of 1972 is that the Federal Government become empowered for allowing managing agency commission. In consequence of this amendment Production Ministry of the Federal Government approved the Promotors Agreement dated 28-7-1983 and as a result addendum to that agreement was added on 20-8-1984. In this view of the matter, provisions for allowance of managing agency commission having been made during the pendency of assessment proceedings for the charge year 1984 85, the assessee's claim could be considered by the Income-tax Officer particularly in view of amendment of Article 15-A vide P.O. No.2 of 1972 providing for appointment of managing agent subject to necessary notification by the Federal Government. We, therefore, modify the impugned order and set aside the assessment on the issue involved with the directions that the Income Tax Officer will give an opportunity to the assessee of showing that any notification was issued by the Federal Government in the official Gazette in the light of Section 15-A of Act No. LIII of 1973 as amended by Ordinance No.XXIX of 1980 in respect of agreement in the form of addendum relied upon by the assessee. The admissibility of the assessee's claim will be reconsidered by the Income Tax Officer in the light of these directions. NOYALTY In the assessment year 1987-88 assessee claimed sum of Rs.41,44,000 on account of royalty payable to the principals. Royalty was claimed by the assessee- company for the first time in this year. The I.T.O. disallowed the assessee's claim holding the same to be expenses of capital nature and being just a provision. The learned C.I.T. (A) maintained this disallowance. The assessee's AR explained that in terms of industrial collaboration agreement between PACO and FIAT the assessee company was required to pay a sum worked out at the rate of 1.5% of the value of local components effective from the point of time when deletion is achieved at 40% or more. The case of the assessee's AR was that this amount was still payable with reference to deletion programme and as such it was an allowable expense irrespective of the fact that it was only a provision. It was further stated by the assessee's AR that method of accounting of the company being mercantile arid the royalty having been duly quantified, ascertained and determined, the claim had to be allowed in the year under review. Reliance in this behalf was placed on (1971) 81 I.T.R 243 (Calcutta High Court) 1983 P T D 120 (Delhi High Court) and (1956) 30 I.T.R 286 (Andhra High Court). After examining the case law cited by the assessee we find that the facts of all the three cases are not on all fours with the assessee's case. Royalty was held to be an admissible expense in those cases on different facts whereas in the assessee's case it was only a provision made for the first time in this year and as such was rightly disallowed. No further interference is called for therein. DISALLOWANCE OF SUPER TAX REBATE OF 5% AND LEVY OF WORKERS WELFARE FUND The I.T.O. disallowed the assessee's claim of super tax rebate of 5% and levied workers welfare fund in all the years under review. The assessee claimed super tax rebate of 5% under para. A (1) (i) of Part-II of the First Schedule of the Ordinance as a Public Company but the I.T.O. treated the assessee-company as a Private Limited Company for the purposes of calculation of tax. The reason for this conclusion was that more than 50% shares were not directly held by the Government in the assessee-company. This treatment was maintained by the first appellate authority for the charge year 1984-85 holding that shares held by NDFC PACO and NIT having separate entity from the Federal Government the same cannot be treated as shares of the Government. I.T.O s action of treating the assessee as a Private Limited Company for the purposes of calculation of tax was maintained. For the charge year 1985-86 the I.T.O. did not discuss the issue and before the first appellate authority the assessee's AR pleaded that facts were distinguishable from the preceding year as in this year shares of the assessee- company were quoted at Karachi Stock Exchange. The learned C.I.T. (A) held: "The I.T.O. will verify claim that shares of the appellant-company remained quoted on the Stock Exchange upto the end of the income year and if so super tax rebate of 5% will be allowed as a Public Company." The assessee's AR contended that in the equity of the company 51 % shares were held by PACO, NDFC and N.I.T. All the three Corporations being 100% ownership of the Federal Government the learned C.I.T. (A) erred in law in holding that the Federal Government did not hold majority of the shares in the equity of the assessee-company. Reliance in this behalf was placed on the Supreme Court judgment in the case of CBR v. SITE Ltd. reported as P L D 1985 SC 97 wherein it was held that income of SITE was income of the Government of Sind and hence exempt from chargeability of tax under the Income-tax Act, 1922/I.T. Ordinance, 1979. Firstly limb of this judgment was nullified by introduction of Article 165 (A) (1) in the Constitution of Islamic Republic of Pakistan in 1985. As a result of t4at amendment income or SITE remained taxable. The finding given by the Supreme Court in that case that SITE was Department of the Federal Govt. ceased to hold the field. On the ratio decidendi of that judgment, the assessee's AR contended that 51% shares of the Company being ownership of the Federal Government, super tax rebate of 5% was allowable as a Public Company. After gong through the reported case of Supreme Court and the amendment made in Article 165 (A) (1) of the Constitution we are of the view that the verdict of the Supreme Court regarding SITE to be ownership of Government of Sind stood nullified by the amendment in the Constitution. We do not feel any justification for interference in the directions given by the learned C.I.T. (A) for de, novo decision of the assessee's claim for the charge years 1985 86 to 1987-88 that if the shares of the company remained quoted on the Stock Exchange, super tax rebate of 5% will be allowed as a Public Company. For the charge year 1984-85 initially at the time of arguments the assessee's authorised representative had pressed this grievance vehemently. Subsequently vide an application dated 25-1-1989, the assessee's authorised representative requested that he did not press this grievance for the charge year 1984-85. For the subsequent years the assessee has been allowed super tax rebate by the I.T.O. In this view of the matter without entering into discussion on merits of the case, we confirm the orders of the departmental officers disallowing super tax rebate of 5% for the charge year 1984-85. Regarding levy of workers' welfare fund both the departmental officers held that majority shares of the assessee-company being not of the Government Workers' Welfare Fund was rightly levied under section 2 of the Workers' Welfare Fund Ordinance, 1979. For the charge year 1984-85 the assessee received sum of Rs.46,61,033 @ 0.5% of total imports as warranty commission in accordance with the terms of the Agreement. In this year the assessee duly accounted for Rs.15,00,000 and the I.T.O. issued show-cause notice seeking the assessee's explanation as to why the balance amount should not be accounted for towards profits of the company. The assessee's reply being unsatisfactory a sum of Rs.25,00,000 was added as the assessee's income on account of warranty commission. On appeal this addition was deleted and the learned C.I.T. (A) accepting the explanation of the assessee-company that warranty was issued to all the customers for a period of one year from the date of sale for replacement and servicing of the tractors in terms of industrial collaboration agreement dated 1 12-1981 and the Italian Suppliers remitted the money for providing after sale facility during the warranty period @ 0.5% of the value of CKD imports. The first appellate authority held that though the Italian Suppliers parted with the money permanently but the same cannot become the revenue of the assessee-company so long as the warranty period did not expire. The assessee-company having maintained accounts on mercantile basis it was justified to treat the amount as advance till the expiry of the warranty period. The departmental grievance on this issue is unfounded as the reasons advanced by the learned C.I.T. (A) for allowance of the claim could not be demolished by the D.R. The assessee-company having maintained accounts on mercantile basis, the amount was rightly taken as advance till expiry of warranty period. The departmental grievance being devoid of merits, the departmental appeal for the assessment year 1984-85 is dismissed. LEVY OF ADDITIONAL TAX UNDER SECTION 88 For the assessment years 1986-87 and 1987-88 the learned C.I.T. (A) maintained the I.T.O s action of levy of additional tax as the assessee-company was found to be in default of payment of tax alongwith the return. It was held that assessee's objection regarding levy of additional tax is of consequential nature and relief will be allowable accordingly. The assessee's AR contended that for both the years declared version of the assessee-company being loss neither any tax was payable nor any additional tax could be levied under section 88 of the Ordinance. Reliance in this behalf was placed by the assessee's AR on the Tribunal's decision in I.TA. No.462/463/KB/ 1978-79 dated 6-2-1979. In that case the assessee had declared nil income and the assessments were made on varied incomes. Initially the I.T.O did not charge additional tax under section 45-A of the Repealed Income Tax Act but the same was charged by rectification order. The Tribunal held that no additional tax was chargeable under section 45-A in case nil income was declared. Relevant portion of the Tribunal's order runs as under: "It was pointed out by the learned counsel that the return of Income was filed on 5-8-1974 declaring 'NIL' income and the assessment was framed on 12-5-1975 determining total income at Rs.4,98,

985. As at the time of assessment additional taxes under sections 45-A and 18-A were not charged rectification was made by invoking the provisions of Section 35 of the Income Tax Act and the impugned order was passed. The learned counsel submitted that Section 45 contemplated two eventualities. The first was when the assessee failed to pay the tax 'due' from him and, the second, when the tax paid under Section 22-A fell short of the prescribed limit when judged on the basis of the assessment completed under Section 23 of the Income Tax Act. In the opinion of the learned counsel, none of the two defaults were committed by the assessee and hence the provision of Section 45-A could not be invoked. It was further contended that as `NIL' return was filed, no tax was `due' from the assessee, hence, they could not be held guilty under section 45-A (a). Furthermore, as no tax under Section 22-A was paid at all, this clause also was not applicable in their case. The learned counsel drew our attention to subsection (2-A) of Section 20 of the Income Tax Act which, according to him, took care of such assessee who did not pay any tax under Section 22-A of the Act but clauses (b) and (ii) of Section 45-A were, in any case, not attracted in the cases of those who did not make any payment under Section 22-A of the Income Tax Act. We feel inclined to agree with the argument of the learned counsel for the assessee that the default of non-payment of tax under Section 22-A cannot be taken cognisance of under Section 45-A because this section can be pressed into service only when "Any assessee fails to pay the tax due" under Section 22-A,, or when the "Tax so paid is less than 80% of the tax payable under Section 22-A (B). We are of the view that those assessees who do not make payment under Section 22A on the plea that no tax was 'due' stand exposed to a severer penal action under subsection (2A) of Section 28 of the Income Tax Act. In this case, therefore, cognisance of breach of provisions of clause `a' of Section 45 A could be taken under Section 28 (2A) but levy of Additional tax under Section 45-A were not exigible. The appeal on this score, therefore, SUCCEEDS." Following the Tribunal's order (supra), we delete the levied additional tax for both the years under review. The last grievance of the assessee's AR pertained to disallowances made under various heads of General and Administration expenses as well as selling and distribution expenses. The disallowances made by the I.T.O varied from 4% to 30% of the claim. The plea of the assessee's AR was that company having been run by qualified professionals and the entire expenses being verifiable, the departmental officers misdirected themselves in making disallowances under various heads. A bare perusal of the orders of the departmental officers establishes that disallowances were made on general observations of unverifiability. It is established that the assessee-company was run by qualified professionals majority of whom were Chartered Accountants. In the absence of any specific instance" of unverifiability under various heads, we do not deem it feasible to examine the details at second appeal stage. The I.T.O is directed to re examine the assessee's grievance on the issue of disallowances of expenses as maintained by the learned C.I.T. (A) afresh. As a result of the above discussion appeals filed at the instance of the assessee for all the four years succeed to the extent indicated above. The departmental appeal being devoid of any merits is dismissed. M.B.A./646/T Order accordingly