1986 PLP (Trib (PTD)

The issue of surcharge is involved in assessment year 1979‑80 of 1980‑

81. According to Mr. M.... F.... the respondent declared its profit as per Profit and Loss Account to the tune of Rs. 1,17,43,185 but its income was assessed at Rs. 85,40,880 whereon the Income‑tax Officer determined the tax amounting to Rs. 42,70,

440. Similarly in assessment year 1980‑81 the respondent declared its income as per Profit and Loss Account at Rs. 1,02,79,499 which was, however, assessed at Rs. 1,60,15,502 but the Income‑tax Officer determined tax thereon at Rs. 80,07,751, He treated the amount of taxes payable in both the assessment years as un‑retained income and levied surcharge thereon amounting to Rs.2,13,522 and Rs. 8,40,387 respectively. The respondent however, felt aggrieved and went up in appeal and the learned Commissioner of Income‑tax (Appeals) relying upon a decision of this Tribunal since reported as 1979 P T D (Trib.) 37 directed the Income‑tax Officer not to levy surcharge on amount of taxes payable. The department felt aggrieved and has filed appeals in both the assessment years. Mr. F

the learned Departmental Representatives submitted that the direction of learned Commissioner of Income‑tax (Appeals) was erroneous inasmuch as the decision of the Tribunal had not attained finality for the simple reason that several Reference Applications were pending in High Court in which precisely the same question required adjudication. Mr. K . . . . . the learned counsel for the respondent, however, argued that the learned Commissioner of Income‑tax (Appeals) had no alternative but to follow the decision of the Tribunal, hence his direction was unexceptionably sound. It is true that several Reference Applications were pending in High Court in which the question as to whether the surcharge is leviable on amount of taxes payable requires adjudication. Nevertheless, this Tribunal has been consistently following its decision, mentioned above, and, under the facts and circumstances of this case, there appears to be no reason available to us riot to follow it in these appeals. In our view the learned Commissioner of Income‑tax (Appeals) was right in issuing the direction to follow our decision, mentioned above. We, therefore, see no reason to interfere with his direction, which is hereby confirmed. This takes us to the issue of tax credit under section 107 of the income‑tax Ordinance. In assessment year 1980‑81 the respondent claimed 15 % tax credit under section 107(() and/or 107(4) of the Income‑tax Ordinance. The Income‑tax Officer did not allow it under section 107(1) from the simple reason that the respondent had not spent any amount in the purchase of plaint and machinery for the purposes of replacement, balancing or modernization. He also did not allow the claim under section 107(4) of the Income‑tax Ordinance but this time he said: "I am, afraid that benefit under provision of subsection (4) of section 107 can only be allowed to such units which are 'installed on or after first day of July, 1978. In the instant case, as is evident from above analysis the assessee was sanctioned this unit prior tai the statutory date mentioned in the Ordinance and expenditure was substantively incurred prior to the date of July, 1978. Thus, this unit cannot be construed to have been extended after first day of July, 1978, therefore, no rebate can be allowed under subsection (4) section

107. Subsection (4) clearly stipulates and there is emphasis on word "installed", The plant was not installed in its real sense because it did not operate properly. It was in the process of installation when it developed mechanical defects as admitted by the assessee in his audited account vide note 1(c). On appeal, however, the learned Commissioner of Income‑tax (Appeals) vacated the order of Income‑tax Officer with the following observation:‑ "He disallowed this depreciation because the plant in his view had not started working. Now he is refusing the rebate under section 107(4) because he thought that the plant was installed prior to July, 1978. He cannot below hot and cold at the same time. The word `installation` has been defined in Chambers Twentieth Century Dictionary as "a placing in portion for use" By this definition on the plant was Installed during this year and the rebate under section 107 (4) is allowable the income‑tax Officer is directed to allow the rebate." Mr. M

F

the learned Departmental Representative sub mitted at Bar that the respondent was having two separate independent kilns. According to him, in the year 1975 the respondent was sanctioned a third kiln of one thousand ton's capacity. Referring to the Balance Sheet of the respondent for the year ending on 30th June, 1977 the learned Departmental Representative pointed out that the capital shown in shape of Work‑in‑progress amounted to Rs. 12,10,81,659 whereas in the immediately preceding year ending on 30th June, 1976 the expenditure shown amounted to only Rs. 19,68,

875. Mr. M

F

the learned Departmental Representative, argued that tax credit could be given under section 107(4) of the Ordinance only to those units which were installed on or after 1st day of July, 1978 but in the case of the respondent the sanction was granted in the year 1975 and capital work in progress continued from that period onwards. Quoting the figures of subsequent years the learned Departmental Representative pointed out that the value of work‑in‑progress on 30th June, 1978 stood at Rs. 23,95,45,062 whereas on 30th June, 1979 and 10th June, 1980 it stood at Rs. 32,24,15,383 in each year. Referring to the functioning of various departments of the mills of the respondent the learned Departmental Representative pointed out that as per statement of the respondent itself the following departments went into production from the dates mentioned as follows:‑ (1) Crusher was commissioned on 19th September, 1979. (2) P. V. C. was commissioned on 24th September, 1979. (3) The raw mill on 1 parts commissioned on 28th November, 1979 and 12th December 1979. (4) 3rd kiln was commissioned on 25th December, 1979. (5) Cement mill was commissioned on 25th February, 1980. Thus, packing plant was commissioned on 23rd March, 1980. The learned Departmental Representative further pointed out that total sales of cement in assessment year 1980‑81 went up to Rs. 1,58,50,

000. He, therefore, concluded that since the investment was made and the machinery or plant was installed, for purposes of extension, before 1st day of July, 1978, the respondent was not entitled to any claim under subsection (4) of section

107. Mr. K

the learned counsel for the respondent, on the contrary, argued that the case set up by the learned Departmental Representative was substantially different from that which the Income- tax Officer had discussed in the assessment order. The learned counsel, however, conceded that the respondent had invested the money on or before 30th June, 1978 but he vehemently argued that since the plant machinery was finally installed on 23‑3‑19130, i.e. after 1st day of July, 1978, the respondent was entitled to tax credit under section 107(4) of the Ordinance. We have given our careful consideration to the submission made at Bar. With due respect to Mr. M

F

the learned Depart mental Representative, we are unable to subscribe to his view that before a tax credit is granted to an assessee, it must prove that the expenditure had started after 1st July, 1978. The learned 13cpartmental Representative has quoted all the figures in support of his this contention but we find no force in it. Dilating upon this issue let us point out that in the repealed income‑tax Act, 1922, section 15‑GG dealt with the issue of the tax credit. Its subsection (1) is relevant for our purposes and we reproduce it hereunder. It reads:‑ "15‑GG. Tax credit on investment in balancing or modernization or replacement of machinery.‑(1) .Where a company, not being a Company declared as such under clause (5‑A) of section 2, installs any machinery between the first day of July, 1976 and the thirtieth day of June, 1979 for the purposes of replacing old machinery or the modernization or balancing of its industrial undertaking, and such machinery is the property of the Company and is wholly used for the purpose of such industrial undertaking, a credit equal to ten percent of the actual cost to the Company of such machinery shall be given to it against the tax payable by it, in the manner hereinafter provided Provided that, in respect of any such Company which installs any machinery between the first day of September, 1977 and the thirtieth day of June 1979 the subsection shall have effect as if for the words ten per cent. the words fifteen percent were substituted." Subsequently, when the Income‑tax Ordinance came into force, aforesaid provision was substituted by section 107 of the Income‑tax Ordinance. For the purposes of comparison and proper appreciation of both the provisions, we reproduce subsections (l), (2), (3) and (4) of section 107 which are relevant for our purposes as they originally stood. They are as follows: "

107. Tax credit for replacement, balancing and modernisation of machinery or plant.‑(1) Where an assessee being a Pakistani Company invests any amount in the purchase of plant and machinery for installation at any time between the first day of July 1976 and the thirtieth day of June, 1983 in an industrial undertaking set up in Pakistan and owned by it, for the purposes of replacement, balancing or modernisation of the machinery and plant already installed therein, credit at the rate of fifteen per cent of the amount so invested shall be allowed against the tax payable by it in the manner hereinafter provided. (2) The amount of credit admissible under this section shall be deducted from the tax payable by assessee in respect of the income year in which the machinery or plant in the purchase of which the amount referred to in subsection (1) is invested is installed. (3) Where no tax is payable by the assessee in respect of the assess ment year relevant to the income year in which such plant or machinery is installed, or where the tax payable is less than the amount of the credit, the amount of the credit or so much of it as is in excess thereof, as the case may be, shall be carried forward and deducted from the tax payable by the assessee in respect of the following assessment year, and so on, but no such amount shall be carried forward for more than two assessment years so, however, that the deduction. made under subsection (2) and this subsection shall not exceed in the aggregate the limit specified in subsection (1). (4) The provisions of subsections (1) and (2) shall also apply in like manner to any plant, or machinery installed on or after the first day of July, 1978 for the purpose of extension of the industrial undertaking." It appears from even a cursory comparison between the provisions of the Act and the Ordinance that the emphasis in the former was on the installation of any machinery for replacement, modernisation or balancing, whereas the investment is high lighted in subsection (1) of section 107 of the Ordinance. It is pertinent to note that the word 'invest' has been introduced in the Ordinance, which was conspicuous by its absence in the parallel provision of the Act except from the heading. With due respect, in our view, if both subsections (l) and (4) of section 107 of the Income‑tax Ordinance are read together, the result can be summed up in the following words. "Where an assessee being a Pakistani Company invests any amount in the purchase of plant or machinery for the purpose of installing it on or after the 1st day of July, 1978 in order to extend its industrial undertaking, it shall be allowed tax credit @. 15 % of the amount so invested against the tax payable by it in the manner hereinafter provided." In our judgment, the installation is not a single or solitary act but continuous process, which may take considerable time depending upon the nature of the plant or machinery to be installed. As such, even if investment was started by the respondent immediately after the sanction of third kiln in 1975, it is wholly immaterial because the process of installation started and finally the plant for machinery was installed for the purposes of extension of the industrial undertaking of the respondent on 23rd March, 1980 as pointed out by M

K

But it is important to note that according to Mr. F

the third kiln was commissioned on 25th December, 1979. With due respect, in our judgment, the respondent rightly claimed tax credit in assessment year 1980‑81 as the process of installation culminated to the accounting period corresponding to this assessment year which is after the 1st day of July, 1978. In view of the discussion made above we think that the distinction between commercial operation anti trial operation is purely of academic nature. We, therefore, feel inclined to agree; with the observation of learned Com missioner of Income‑tax (Appeals) that income‑tax Officer blew hot and cold in the same breath when he disallowed depreciation because the plant had not gone into production before 1st July, 1978 and then disallowed tax credit because it was installed before that date. We are unable to gather any support from the test of section 107(1: and (4) of the Income‑tax Ordinance for the proposition of Mr. M . . . . . F . . . . . the learned Departmental Representative that the expenditure should start after 1st July, 1978 before tax credit is given under section 107(4) of the Ordinance. We, therefore, confirm the finding of learned Commissioner of Income‑tax (Appeals) on this point as well. However, before parting with this issue let us mention that not only section 107 has been amended so as to extend its benefit to various other industrial undertakings but the word "invested" has also been explained by Central Board of Revenue by there Circular Letter No. 1(40) IT1/79 Vol. 2 dated 5th February, 1983 in which it has been explained that the tax credit should not be restricted to the invoice value or landed cost of the plant or machinery but all the expenses incurred on installation of the plant should also be included in the amount of investment on which tile tax credit is to be given. The last point of dispute agitated by the Department in assessment, year 1980‑81 is regarding additional tax under section

88. The Income -tax Officer had imposed it for the reason that the respondent had failed to pay tax due under section 54 of the income‑tax Ordinance, 1979. On appeal however the learned Commissioner of Income-tax (Appeals deleted it on the ground that the return furnished by the respondent was showing loss and there was no liability under section

54. Mr. M . . . . . F . . . . . the learned Departmental Representative has not seriously contested the finding of learned Commissioner of Income‑tax (Appeals). M. K

undoubtedly has supported the finding of learned Commissioner of Income‑tax (Appeals). In our judgment, the reason advanced by learned Commissioner of Income‑tax (Appeals) is sustainable in law. We, therefore, confirm his finding on this point as well. In view of discussion made above, all the four departmental appeals stand disposed of in the manner and to the extent as indicated above. M. Y. H. Appeals accepted.