1989 PLP (Trib (PTD)

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).- This appeal is directed against the order of learned C.I.T. (A), Zone-6, Karachi dated 10-12-1984.

2. Briefly stated the relevant facts are that the assessee (hereinafter referred to as the respondent) is engaged in deriving income from manufacturing cotton yarn. The respondent has its industrial units at Kotri as well as Dhabeji Industrial areas. He claimed tax credit under section 107 in respect of both the units. The tax credit in respect of industrial unit at Kotri was rejected by the I. T.O. for the following reasons: (i) Since the investment has been made in tax free area at Kotri, benefit by way of tax credit under section 107 cannot be availed of against income arising from undertaking situated at taxable area at Dhabeji, and (ii) Since tax credit can be carried forward for two years only, while tax holiday is available for a period of 4 years, this benefit in any case cannot.

3. The respondent felt aggrieved with the above treatment and preferred first appeal before the learned C.I.T. (A) contending that it is not the industrial undertaking but the company which is entitled to tax credit under, section 107 of the Income-tax Ordinance, 1979. It was urged that the only requisites laid down in subsection (1) of section 107 are as under. (i) The claimant should be a Pakistani company: (ii) the amount invested in the purchase of machinery should be between 17-1976 and 30-6-1983; and (iii) the investment should be for the purpose of replacement, balancing, modernization and extension of the machinery or plan already installed in the industrial undertaking.

4. The contention found favour with the learned C.I.T. (A) who held that the respondent company having compiled with the requirements of section 107 was entitled to tax credit under the said provision. The fact that the profits of industrial undertaking owned by a Pakistani company are exempt for a certain period is not relevant to the entitlement or otherwise of the claim under section

107. He, therefore, directed the I.T.O. to allow the tax credit after processing the necessary evidence. This time the Department felt aggrieved and preferred the above appeal before us.

5. Mr. Shahid Jamal, learned Departmental Representative is present for the Department. None present for the respondent though duly served with the notice of hearing. The service of notice is held good and the appeal is heard in the absence of respondent. Mr. Shahid Jamal, the learned D.R. has supported the disallowance made by the I.T.O. and has assailed the finding of learned C.I.T. (A). His contention is that the tax credit has been rightly disallowed by the I.T.O. as the concession granted under section 107 of the Income-tax Ordinance, 1979 is available to the industrial units whose gains and profits are subject to the levy of tax. The industrial undertakings situated at Kotri are enjoying tax holiday and, therefore, the profits and gains derived by the respondent from such industrial undertaking is exempted from the tax payable under the Ordinance, under section 48 of the Income-tax Ordinance, 1979. Elaborating his point of view Mr. Shahid Jamal has submitted that section 107 provides that credit at the rate of 15% of the amount invested in purchase of plant and machinery for the purpose of replacement, balancing or modernization of the machinery shall be allowed against the "tax payable by it. According to Mr. Shahid Jamal the words, "payable by it" denote the tax payable by the industrial undertaking on which the tax credit is claimed. He has further referred to Rule 48 of the Income-tax Rules, 1982 and has invited our attention to the provision that tax credit for replacement, balancing, modernization or extension of machinery under section 107 shall be allowed to an undertaking at the time of assessment on production of the following documents." Mr. Shahid Jamal has maintained that the words "shall be allowed to an undertaking" are indicative of the intention of the legislature that the tax credit is to be allowed to an undertaking. Since the tax credit is to be allowed to an undertaking on the tax payable by it, therefore, it shall' be admissible only if any tax is payable by the industrial undertaking and conversely if an industrial undertaking is exempt from the payment of tax the tax credit shall to appreciate the contentions raised by Mr. Shahid Jamal the provisions of section 107, section 48 and Rule 48 of the Income-tax Rules, 1982 need to be examined. For the sake of convenience section 48 (1), Section 107 (1) to (4) and relevant part of Rule 48 are reproduced below: "Section

48. Exemption from tax of newly established industrial undertakings.-- (1) Subject to the provisions of this section, there shall be exempt from the tax payable under this Ordinance so much of the profits and gains derived by an assessee from an industrial undertaking, to which this section applies, as does not exceed an amount computed with reference to the capital employed in the undertaking as hereinafter provided." "S.

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, 1988 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 in" r hereinafter provided. Explanation.--As used in this subsection:- (a) "amount", in case of plant and machinery acquired on lease, means the amount expended by the lessor in the purchase of the said plant and machinery; an (b) "Purchase of plant and machinery includes acquisition of plant and machinery on lease from a scheduled bank, a financial institution or a leasing company on such terms and conditions as may be approved by the Central Board of Revenue. (2) The amount of credit admissible under this section shall be deducted from the tax payable by the assessee in respect of the income year in which the machinery or plant in the purchase of which amount referred to m subsection (1) is invested is installed. (3) Where no tax is payable by the assessee in respect of the assessment 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 deductions made under subsection (2) and this subsection shall not exceed in the aggregate the limits specified in subsection (1). (4) The provisions of subsections (1) and (2) shall also apply in the like manner to any plant and machinery installed, for the purposes of extension of the industrial undertaking:- (i) On or after the first day of July, 1978, and before the thirtieth day of June, 1983 in the territories of Pakistan; or (ii) On or after the first day of July, 1983, in the territories of Pakistan (excluding Talukas of Karachi and Hyderabad, and Tehsils of Faisalabad and Lahore, and such adjoining areas of Lahore tehsil as may be notified in this behalf by the Federal Government)." Rule

48. Procedure for grant of tax credit for replacement, balancing, modernisation or extension of machinery under Section 107 (1) Tax credit for replacement, balancing, modernization or extension of machinery under section 107 shall be allowed to an undertaking at the time of assessment on production of the following documents ...."

7. A perusal of section 48 above shows that the exemption from the tax payable under this Ordinance has been allowed to the profits and gains derived by an assessee from an industrial undertaking to which section 48 applies. The exemption available under section 48 is to the profits and gains derived by an assessee from an industrial undertaking and thus the exemption is attached with the industrial undertaking to which provisions of section 48 are attracted. On the other hand, a perusal of section 107 shows that the tax credit is allowed at 15% of the amount invested by an assessee against the tax payable by it. Thus the tax credit permissible under section 107 has not been tagged with any particular or specified undertaking but it has been allowed against the tax payable and when the entire subsection (1) of section 107 is read it becomes abundantly clear that the tax payable by it refers to assessee used in the opening words of the subsection and does not refer to the industrial undertaking. The contention raised by Mr. Shahid Jam al is not tenable for the reason that the tax is payable by an assessee and not by any industrial undertaking or any business or property, generating income. The industrial undertaking is only a device for deriving profits and gains and it shall become taxable only when it becomes income in the hands of an assessee. We are, therefore, of the considered opinion that the words "tax payable by it" refer to the assessee and not to the industrial undertaking. We are fortified in our views with the words of subsection (2) of section 107 which provides that the amount of tax admissible under this section shall be deducted from the tax payable by the 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. Subsection (2) of section 107 has manifested the intention of legislature that the tax credit is to be deducted from the tax payable by the assessee irrespective of the consideration whether the income generated from such industrial undertaking suffers incidence of tax or not. Subsection (3) of Section 107 further clarifies the position wherein it is provided that the tax credit shall be admissible even if no tax is payable by the assessee in respect of the assess men year relevant to the income year in which such plant or machinery is installed. Subsection (4) of section 107 further leads to the same direction according to which the provisions of subsections (1) and (2) shall apply to the industrial undertaking where any plant or machinery is installed for the purpose of extension on or after the first day of July, 1978 and before the 30th day of June, 1983 in the territories of Pakistan (emphasis provided). If the intention of legislature would have been to allow the benefit of tax credit under section 107 (1) to those industrial undertakings which do not enjoy tax holiday under section 48 of the Income-tax Ordinance, it could have clearly provided that the provisions of section 107 shall apply to those industrial undertakings only which are situated in the territories of Pakistan excluding tax-holiday areas as it has been provided in para. 2 of subsection (4) of section 107 which says that the provisions of subsections (1) and (2) of Section. 107 shall apply to any plant and machinery installed for the purpose of extension of industrial undertaking on or after the first day of July, 1983 in the territories of Pakistan (excluding Talukas of Karachi and Hyderabad, and Tehsils of Faisalabad and Lahore and such adjoining areas of Lahore Tehsil as may be notified in this behalf by the Federal Government.)

8. Now coming to Rule 48 on which Mr. Shahid Jamal has placed reliance, it provides that, "tax credit for replacement, balancing, modernisation or extension of machinery under section 107 shall be allowed to an undertaking at the time of assessment on production of the following documents" .... Subsection (8) of Section 107 provides that the C.B.R. may make rules regulating the procedure for the grant of approval under this section and any other matter connected with, or incidental to the operation of this section. Rule 48 is, therefore, to be read alongwith and in conjunction with Section 107 of the Income-tax Ordinance, 1979. It is established principle of the interpretation of statutes that the rules made under statutory laws are in the nature of subordinate legislation and the main provisions of statute have to govern the subordinate legislation. The rules are made for carrying out purposes of the statutory legislation and, therefore, they will not override the provisions contained in the main statute but shall be subservient to the intention of legislature as contained in the main body of the statute. The rules being in the nature of subordinate legislation are to be read alongwith the provisions of main legislation and have to be interpreted in consonance and harmony with the main statute. When the provisions contained in Rule 48 are examined in the light of above principle the only conclusion to which we are drawn is that the purpose of Rule 48 is to devise the procedure for the grant of tax credit claimed for the replacement, balancing, modernization or extension of machinery under section 107 of the Income-tax Ordinance. The tax credit is not allowed under the provisions of Rule 48 but it is allowed under the provisions of section 107 of the Income-tax Ordinance. Rule 48 of the Income-tax Rules, 1982 is meant to channelize the procedure of examining the genuineness of claim and calculation thereof. Any procedural provision cannot be relied upon for defeating the substantive provision of statutory law more particularly when the procedural law is in the nature of subordinate legislation and the substantive law is contained in the main body of the statute.

9. For the foregoing reasons we are not persuaded to agree with the contention of Mr. Shahid Jamal that the tax credit is admissible to an industrial undertaking whose income suffers the incidence of tax. Mr. Shahid Jamal has attempted to argue that there should be a nexus between the income suffering incidence of tax and the tax credit admissible under section 107 probably by treating the tax credit as a deduction or allowance. Since the tax credit is nether deduction nor allowance, therefore, in the absence of any specific provision in the Income-tax Ordinance, 1979 no nexus is required to be established between the tax credit and the income suffering the incidence of tax on the analogy that an allowance or deduction permissible under the Income-tax Ordinance is not admissible on an income which enjoys exemption from the sufferance of tax. Since subsection (2) of Section 107 clearly provides that the tax credit admissible under section 107 shall be deducted from the tax payable by the assessee, therefore, it would not be proper for any Income-tax authority to say that the tax credit is to be allowed from the tax payable by an assessee out of income earned from the industrial undertaking in which any plant and machinery has been installed for the purpose of replacement, balancing, modernisation or extension. Such interpretation would amount to making addition in the statute, which is not: permissible under any of the principles of interpretation of statutes.

10. For the foregoing reasons we are of the considered opinion that the learned C.I.T. (A) has rightly directed the I.T.O. to allow the' talc credit, claimed under section 107 notwithstanding the fact whether or not the -profits of any industrial undertaking are taxable. The impugned order of learned C.I.T. (A) is confirmed. The departmental appeal stands dismissed. M.BA./669/T Order accordingly.