2005 PLP (Trib (PTD)

2. The, brief facts leading to this appeal are that the company installed a power generating plant four years prior to the assessment year under consideration, income of which is exempt under Clause 176 of the Second Schedule of the Income Tax Ordinance, 1979. For the year impugned the assessee in addition to the income earned by him on account of generating power declared interest earned from the security deposit with the Sui Gas Department. The said amount was also claimed as exempt by saying that it is a composite business income, hence was not chargeable to tax. The Assessing Officer did not accept the contention of the assessee by holding that the interest income is a separate charge covered under the provisions of section 30 and has got nothing to do with the industrial undertaking the income of whom on account of electricity power generation was exempt. His remarks, therefore, were that the assessee is entitled to the exemption only to the extent of that income which he has earned as result of electricity production. Any other income be that from any source is not covered within the language prescribed by clause

176. The income on account of interest was charged separately and was accordingly assessed.

3. In appeal before the first appellate authority, the assessee claimed that the entire income of the industrial undertaking set up to generate electricity be that from any other source is exempt. The income tinder discussion even otherwise being a windfall for which no intentional or separate transaction was carried out falls within the meaning of the exemption clause

176. The learned CIT(A) appreciated arguments partly and set aside the case for the consideration of the Assessing Officer and for review of the issue in the light of the referred clause of the Second Schedule.

4. The assessee before us has again repeated his earlier stance and has claimed that the earning of interest under the circumstances was without any effort or planning. The assessee was under a legal obligation to deposit security in Sui Gas Department, in relation to set up of the industrial undertaking for the purpose of establishment of a power generating plant. This being an essential ingredient in respect of the establishment and a compulsory deposit the amount received by the assessee on the said security as interest is necessarily the business related transaction of the industrial undertaking and should have been declared as exempt categorically by the first appellate authority. In support of his argument, he has produced before me two unreported judgments of the Income Tax Appellate Tribunal, Karachi. In both of the said judgments on the basis of the similar deposit the income earned has been held to be as exempt. The judgments are registered as I.T.A. No.1765/KB of 1996-97 (Assessment year, 1992-93) order, dated 22-10-2002 and I.T.A. No. 136/KB of 1998-99 order, dated 22-10-1998. In both of the judgments, the Tribunal has considered the sale of depreciated assets and sale of waste as part of the regular business. In the second case, which in- the opinion of the learned A.R. is more relevant i.e. I.T.A. NoA36/KB of 1998-99 it is held that the interest income earned by the assessee from the Bank Deposit is a part of the profits and gains of the electric power plant. The opinion of the Court was that opening of the Bank Account for a large project like this is part and parcel of the same. Accrual of interest thereon being ancillary to the said deposit therefore forms part of the same and is a composite business profit of the said power generating plant.

5. I have full respect for the judgments referred by my learned brother A.R. However, I have before me a judgment of the Supreme Court of Pakistan recently reported as 2004 SCMR 1319, which has in clear terms held that it is only the profit and gains from electric power generation which is exempt from total income. Any other income be that from interest of any kind of, deposit cannot be covered in the provisions of clause

176. The Hon'ble Court, therefore, has finally set the issue at rest by observing as follows:-- "Item 176 of "Second Schedule of the Income Tax Ordinance, 1979 provides in clear terms that "profits and gains derived by an assessee from Electric Power Generation Project, set up in Pakistan on or after 1st of July, 1998 shall be exempted from total income tax". Essentially, profits and gains from the Electric Power Generation Project is distinct and different from the interest being obtained by the Company on the deposit of share capital in the Banks, during the financial years for which the return of income under the relevant provision of Ordinance is filed and the exemption is claimed from the payment of income tax under Item 176 of Second Schedule of the Ordinance. Electric Generating Plants of companies had started functioning in 1994-95 but they instead of claiming exemption on the profits/gains from Power Generation, claimed it from the deposit of the share capital lying-in the Banks. It. is to be seen that as soon as a company goes in production it cannot claim exemption of income-tax on the interest of share capital deposited in Banks because on commencement of the production, profits and gains are to be earned out of the income of Electric Generation independently."

6. Obviously after the judgment of the Supreme Court of the country no further discussion or dilation would be required. However, I would respectfully add that in case of exemption provisions the rules of interpretation are not the same as in the case of the charging provisions. The common rule of interpretation of a fiscal statute which applies on all kinds of the provisions is that the law should be applied as it is. The language should not be expanded to go beyond the purpose of legislation or to deceive the intendment. The other rule is that if in a charging provision two interpretations are equally possible then one favourable to the assessee should be adopted. However, this rule is not applicable it the case of the exemption provisions. The golden rule of interpretation of the provisions granting exemptions is the same as in the case of charging provision i.e. to remain within the language of law. However, in case two constructions are possible one favourable to the department should be adopted. In the case before us, the Government has proposed to provide facility to power generating plants in view of general scarcity of electric power in the country. Power generating plants in private sector have been given incentives so that they may contribute in this national cause by establishing such projects. They are undoubtedly entitled to exemption earned from sale of electricity but not from other sources. The above principle is now equally known to the judicial forums but however for ready reference I quote 2002 PTD (Trib.)

783. In the present case, the assessee deposited a sum as security on which he has been paid interest amounting to Rs.1,33,

100. It is not disputed that the security was deposited under a legal obligation and as a necessary ingredient for installation of Sui Gas Connection on which in turn was essential for equally essential for other units and exempt unit is no exemption. Even for small business houses as well as residential connec tions, same security is deposited before Sui Gas Authorities. In the case of exemption under section 176 referred above only such profit or gain shall be exempted which has relationship with the sale of electricity generated by the said power generating plant. In fact this Tribunal has even charged to tax the amount received by such power generating plants on delayed payments of the electricity bills by the buyer consumer as penalty or additional charge. Reference is again 2002 PTD (Trib.) 383.

7. Coming to the clause under discussion the same speaks as follows: "(176) Profits and gains derived by an assessee from an electric Power generation projects set up in Pakistan on or after the 1st day of July, 1988. 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 Federation 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. "

8. A plaits reading of the above clause makes it clear that it is the electric power generation project whose profits and gains are exempt. This opinion stands further supported by the sentence in para. (a) which says "owned and managed by a company formed for operating the said project" (Emphasis added). The accumulative reading in the light of the decisions above leads to the conclusion that it is only the income from power generation project which is exempted. The income from security deposit may be income of the company but not of the power generation project. Similarly, if said industrial undertaking is engaged in trading with its surplus fund or keeps its surplus fund at a place from where it generates some profit or gain, obviously it cannot be allowed a exemption.

9. I, therefore, respectfully hold that no other income except the one, which is earned by the power generation plant on sale of electricity qualifies for exemption under clause 176 of the Second Schedule of the Income Tax Ordinance, 1979. The interest income is not a composite E income in terms of clause 176 as above. The claim of the A.R. that it should have been deleted is not well within the language of law prescribed as above. Since it is an appeal by the assessee and it is against set aside of an order, I have no option but to reject the case on the basis of the arguments mentioned by me supra. H.B.T./331/Tax (Trib.) Appeal rejected.