1986 PLP (Trio (PTD)

3. The Income Tax Officer, on the other hand, was of the opinion that the accounts books were being intentionally with held by the appellant. He, therefore, on the pattern of the previous history of the case rejected the declared version and made lump sum additions in the declared turnovers to the tune of Rs.75,000, Rs.40,000, Rs.25,000 and Rs.90,000 for the assessment years 1977‑78, 1978‑79, 1979‑80 and 1980‑81 whereby gross profit rates of 34.9%. 30.23%. 26.9% and 33.4% respectively were evolved. Similarly, as against the claim of Rs.1,05,524, Rs.2,11,758 and Rs.1,16,329 and Rs.1,10,135 on account of profit and loss expenses, the Assessing Officer allowed expenses to the tune of Rs.50,000, Rs.1,00.800, Rs.81,024 and Rs.85,359 for the charge years 1977‑78, 1978‑79, 1979‑80 and 1980‑81 respectively.

4. During the assessment year 1980‑81, the appellant had also disposed of the lease of a Bauxite mine, situated at Katha, Tehsil Khushab, by assignment to Messrs Kohsar Minerals Limited (of which the appellant is the Managing Director), for a consideration of Rs.10,00,

000. The appellant, however, claimed exemption from tax on this deal under the provisions of clause (26) of the Second Schedule to the Income‑tax Ordinance, 1979, being casual and non‑recurring receipts and under section 27 of the said Ordinance read with clause (79) of the Second Schedule thereof being a capital gain. This claim, however, did not find favour with the Income Tax Officer who made addition of Rs.10,00,000 in the income of the appellant for the relevant 'year considering the assignment of lease to be an adventure in the nature of trade for the purpose of earning profit.

5. The appellant contested all these assessments in appeal. The learned Commissioner of Income‑tax (Appeals) who disposed of the said appeals by virtue of the impugned order set aside the assessments with the directions that, instead of making lump sum additions, the assessing Officer should apply the proper rate of gross profit or make additions in the turnovers only if he was in a position to bring out any positive material on the record. Likewise, he directed for re‑examination of the expenses claimed by the appellant particularly the salaries paid to his employees which according to the learned Commissioner of Income‑tax (Appeals) should have been debited to the trading account. He also directed that the expenses claimed on account of extraction of silica sand should be examined afresh in the light of the provisions of Part II of the Fifth Schedule to the Income‑tax Ordinance, 1979, and the rules made on the subject under the repealed Income‑tax Act, 1922. Similar directions were also issued for grant of depletion allowance. The learned Commissioner of Income Tax (Appeal) also accepted the claim of the appellant that the amount of Rs.10,00.00 it derived by sale of Bauxite mine was not liable to tax under the provisions of section 27 read with clause (79) of the Second Schedule to the Income‑tax Ordinance, 1979. Accordingly, he deleted the said amount from the income assessed for the charge year 1980‑81.

6. The appellant being not satisfied with the directions of the learned Commissioner of Income‑tax (Appeals) has preferred the present appeals assailing the impugned order on the various grounds including that the learned Commissioner of Income‑tax (Appeals) should have himself disposed of the matter finally accepting the declared results instead of setting aside the assessments The Department, on the other hand, being aggrieved of the deletion of the amount of Rs.10,00,000 derived by the assessee by assignment of Bauxite mining lease during the charge year 1980‑81, has objected only to that part of the findings of the learned Commissioner of Income‑tax (Appeals).

7. It is apparent from the assessment orders that while making lump sum additions and thereby evolving a higher rate of gross profit than the declared one, the Income‑tax Officer had not cited any parallel case nor such additions appear to have been made on any rational criteria. No doubt that the appellant has a history of rejection of accounts but simply the history does not provide a sound basis for the lump sum additions in the turnovers. No doubt that because of non‑production of the books of account the Income‑tax Officer had no option but to make assessments to the best of his knowledge. But obviously while exercising his discretion the Assessing Officer should have carried out a proper enquiry to correctly ascertain the extent of business. In this respect, he could also obtain the necessary data from the Industries Department regarding the size of the silica mines, the lease period average rate of production average market rate of silica sand, etc. Such enquiry was all the more necessary because of withholding of the books of account. In this context, we agree with the observations of the learned Commissioner of Income‑tax (Appeals) that the lump sum additions in the trading results have not been made on any rational basis. Mr. Zahid Latif, Advocate, the learned counsel for the assessee nevertheless the learned Commissioner of Income‑tax not justified in making observation that like coal, the silica sand might also be fetching higher rate of profit. It is correct that in his order which is impugned before us, the learned appellate authority had indicated that like coal, the mining operations carry, handsome and substantial profits, but obviously he had not given any direction for applying the same rate as was being applied on extraction of coal. He has rather very clearly mentioned therein that the Income‑tax Officer should examine the issue regarding the rate of profits in a judicious manner and apply the same rate as was being applied in parallel cases. Hence, the learned Commissioner Income‑tax (Appeals) had, in fact, left the field open for the Assessing Officer for making assessment in a rational manner. Consequently, there should be no cause of grouse for the assessee as he would also be entitled to produce the relevant data before the Income Tax Officer for the purpose of arriving at a just conclusion. Since the lump sum additions were not made on proper basis, we confirm the deletion of the same and B re‑consideration of the matter in proper perspective. We are sure that while making re‑assessment, the Income Tax Officer will carry out independent enquiries in applying the reasonable rate of profit and would provide a reasonable opportunity to the assessee to explain his point of view without being motivated of the passing remarks of the learned appellate authority. ,

9. As regards the setting aside of assessments for fresh determination of the extent of admissibility of the profit and loss expenses, the learned, counsel for the assessee contended that learned Commissioner of Income Tax (Appeals) was not justified to remark that the salaries of the staff were debit able to the trading account. We do not find anything wrong with the observations of the learned appellate authority which for facility of reference are reproduced below:‑ "Furthermore the I.‑T.0 who framed the assessments for the subsequent three years failed to examine the expenses claimed under different heads, particularly the salaries paid to different employees The break‑up of the salary statements furnished with the returns filed for the assessment years 1978‑79 and 1979‑80 show that bulk of the expenses claimed under this head are debit able to the Trading account. Since the salaries paid to Work Supervisor, Wagon loading mate, truck loading mate, road labour and site Chowkidar are debit able to the mining account, the I.T.O. was expected to add back the salary of the mine workers on the ground that the same was covered by the G.P. rate. Since it has not been done, this issue is also remitted to the I . T .O. for making necessary add backs out of salary ,account as well as other expenses claimed reasonability or otherwise of the same."

10. Obviously, the salaries and wages of the mining staff who were directly concerned with the extraction of silica sand and were thus debit able to the trading account and not to the profit and loss account. Even otherwise, since this matter has also been remitted to the Income Tax Officer for fresh adjudication, he will surely examine this matter in a broader perspective to ascertain as to the wages and salaries of which category of the employees were debit able to the trading account. Hence, in principle, we uphold the aforesaid findings of the learned Commissioner of Income Tax (Appeals). In fact, he had categorically opined that the allowance of P & L expenses in round figure of Rs.50.000 for the assessment year 1977‑78 was arbitrary'. Even the later part of the findings fully support the claim of the assessee as is apparent from the following extract of the impugned order:‑ "While framing assessments for the assessment years 1978‑79 onwards, the I.‑T.O. has disallowed the entire claim of expenses which were due for allowance as expenses under section 2 of Part II of the fifth Schedule as well as the Depletion allowance admissible under the Schedule. While doing so, he made the observations that silica sand was not a mineral of wasting nature. This observation does not carry any sense since the business carried on by the appellant consists of explanation and extraction of mineral deposit of wasting nature. The original cost of plant and machinery purchased or acquired for extracting the one was to be allowed in full in the year these were used for the first time, under section 4 of the Third Schedule of Rules framed under the repealed Income‑tax Act and under section 4 of Part II of fifth Schedule of the Income‑tax Ordinance. Similarly, the depletion allowance is also admissible under section 4‑A (b) of the earlier Schedule and section 3 (1) of the latter Schedule. It is, therefore, quite clear that both, these allowances are legally admissible";

11. The learned Commissioner of Income ‑tax (Appeals) had also rightly held that the additions out of profit and loss expenses were not made in a rational manner particularly because as the Income‑tax Officer had not properly examined the claim of the assessee on account of extraction of silica sand in accordance with the provisions of the rules made under the Third Schedule to the repealed Income‑tax Act, 1922, and the Fifth Schedule of the Income Tax Ordinance, 1979. In this respect, the learned Commissioner of Income‑tax (Appeals) had also made it clear that the depreciation and depletion allowance should be allowed strictly in accordance with the provisions of laws. For depletion allowance, he had specifically directed that the said allowance was admissible under the law for the assessments year 1978‑79 and onwards (no such claim had been made for the year 1977‑78) as a special reserve had been created in this behalf and had also been disclosed in the balance sheet. In the circumstances, we fail to understand as to how the impugned order hurts the assessee particularly when he had himself failed to provide any proper details of the accounts.

12. We are, therefore, of the considered opinion that the order of the learned Commissioner of Income‑tax (Appeals) in respect of setting aside the assessments was not open to objection and that he had rightly set aside the assessments for fresh determination and the depletion allowance in accordance with the facts and the provisions of law.

13. As regards the deletion of amount of Rs.10,00,000 derived by the assessee on account of assignment of a isauxite mine to Messrs Kohsar Minerals Limited as agitated in the departmental appeals, we do not find ourselves in agreement with the conclusion arrived at by the Commissioner of Income‑tax (Appeals). In this respect, in his written explanation submitted through his Authorised Representative to the Income‑tax Officer, the assessee had claimed exemption of this amount from tax on the following two grounds:‑ "(a) Since the business of our client is the extraction of minerals from the mines and not the assignment of lease of mines to other persons, as such the goodwill received on assignment of good will to Messrs Kohsar Minerals Ltd., is a receipt not related to business and is, therefore, in the nature of casual and non recurring, exempt under item (26) of the second schedule to the Income‑tax Ordinance, 1979. (b) It is also to be treated as Capital Gain under section 27 of the Income‑tax Ordinance, 1979 exempt under item (79) it is a receipt in respect of extinguishments of rights in the mining lease. Such rights being the capital asset as defined under clause 12 of section 2 of the Income‑tax Ordinance, 1979 under the said clause the Capital asset has been made to include property of any kind and the property included lease hold interest as mentioned at pages .263 and 548 of the Kanga and Palkhivala's Seventh Edition (Vol. I)."

14. The assessing Officer had, however, not agreed with this claim of the assessee for the reasons that the assignment was made for the purpose of business and that the intention of the assessee in disposal of the Bauxite mine was nothing except to earn profits therefrom. On the other hand, the learned Commissioner of Income‑tax (Appeals) was of the opinion, that since the amount derived by the assessee on transfer of the mining lease was a "capital gain" within the meaning of section 27 of the Income‑tax Ordinance, 1979, the same was exempted from tax under item (79) to the Second Schedule thereof. It is true that the view taken by the learned Commissioner of Income Tax (Appeals) is not without force but as we will discuss hereunder, we consider that before arriving to the said conclusion he had not taken all' the facts into his consideration.

15. Under clause (12) of section 2 of the Income‑tax Ordinance, 1979, a 'capital asset means a property of any kind held by the assessee'. Now the said property can be moveable or immovable, except stock in trade, consumable stores or raw material held for the purpose of business or profession, personal effects and agriculture land. Further. Under clause (79) of Second Schedule to the Income‑tax Ordinance, 1979 (as it was before its substitution by virtue of the Finance Ordinance, 1981, 'any income chargeable under the "capital gain" derived by an assessee in respect of any assessment year ending on or before the 30th day of 1984' was exempt from tax. Section 27 of the Income‑tax Ordinance, 1979, also provides that any profit or gain arising from the transfer of a capital asset shall be a 'capital gain'. In this context, we have no iota of doubt that a mining lease is a 'capital gain' within the meaning of clause (12) of section 2 of the Income‑tax Ordinance, 1979. In this respect, we draw support from the definition 'immoveable property' as given in clause (25) of section 3, of the General Clauses Act, 1897, where under an immovable property includes the benefits arising out of a land. Section 105 of the Transfer of Property Act, 1882, also makes it clear that 'a lease of immovable property is a transfer of a right to enjoy such property'. Similarly, it has been laid down in clause (16) of section 2 of the Stamps Act, 1899, that a 'lease' means a lease of immovable property, and also includes a Patta ands Kabuliyat.

16. Now the next question arises whether in the instant case, the transfer of the mining lease being a capital asset would also be a 'capital gain' Without any hesitation, our answer to this question is in negative. The reason being that sub‑clause (ii) of clause (a) of section 27 of the Income‑tax Ordinance, 1979, clearly provides that for the purposes of that section, the expression "capital asset" does not include any immovable property. Therefore, the transfer of Bauxite mining lease being an immovable property shall not be considered as a 'capital asset' for exemption from tax under clause (79) of the second Schedule to~ the Income‑tax Ordinance, 1979.

17. The other question needs determination is whether the transfer of Bauxite mine was in the nature of casual and non‑recurring income and was thus exempt from tax under item (26) of the aforesaid Second Schedule [by virtue of Finance Ordinance; 1981, this item has since been re‑numbered as clause (65)]. It was claimed on behalf of the assessee that his business was to extract minerals from the mines and not the assignment of the mines to other persons, therefore, the transfer of the mine under consideration was exempt from tax under clause (26) ibid. We, however, do not subscribe to this view, for the reasons that the assessee had acquired the lease of said mine for extraction of Bauxite and had transferred the same to Kohsar Minerals Limited. In other words, he had transferred his rights of extraction to another concern dealing in the similar line of business. Therefore, it cannot be said that the transfer of mining lease had no connection with his main line of business. Even otherwise, it transpires from the record that this was not a solitary transaction as the assessee had, even in the past, transferred certain marble mining leases at Sassi and Shah Batoat in favour of Messrs Kohsar Minerals Limited, Rawalpindi. The assignment of the said mines was approved by the Government of Pakistan on the 28th April, 1980, by its Letter No. ME/119/79. These transfers of mining leases tend to show that the assessee had been dealing in transfer of mining leases not casually but on regular basis. Nevertheless this fact cannot be lost sight of that even a solitary transaction, if, made with an intention to earn profit, is liable to tax. In a case reported at 1985 PTD (Trib) 267, the Appellate Tribunal had held that keeping in view the definition of the word "casual" a receipt which is foreseen or anticipated or is provided for by an agreement, written or otherwise, cannot be regarded as casual receipt even if it is not likely to recur again. In the instant case, we had asked for the agreement under which the assessee and Messrs Kohsar Minerals Limited had agreed for transfer of the mining rights of Bauxite mine, but without specifically denying the existence of such an agreement, the same was not produced fur our examination whereby it could be presumed that the assessee was intentionally withholding the same.

18. The main issue which thus emerges out is as to whether the income accrued by the transfer of the Bauxite mine vas in the nature of the capital receipts or such transaction was an adventure in trade and made with an intention of acquiring profits therefrom. It is an admitted fact that the said mining lease was granted in favour of the assessee on the 5th December, 1975, for a period of 35 years and was old to Messrs Kohsar Minerals Limited in March, 1980, for lump sum consideration of Rs. 10,00,

000. The lease was operated for a short period and as the mine contained large quantity of Bauxite and other minerals, the assessee thought it appropriate to dispose it of to Messrs Kohsar Minerals Limited, Rawalpindi, which possessed the expertise and resources to extract the minerals therefrom. In this connection, the learned counsel fear the assessee had candidly stated at the bar that the assessee had made extractions from the said mine for sometimes, but since there were large deposits of sulphur etc., which the assessee could not extract himself because of limited resources, he deemed it expedient to dispose of the mine to Messrs Kohsar Minerals which had all the resources to make extraction from the said mine.

19. This statement clearly proves that the assessee had completed information of the deposits and the reserves of the mine and had disposed it of with full knowledge about its potentiality of deriving profits in future. In other words, the assessee appears to have transferred the Bauxite mine knowing well and keeping in view the extent of the profit which would have accrued to him during the unexpired term of the lease of the mine. The intention of the assessee that the transfer of the mining lease was an adventure in trade is also clear from the application made by him to the Director of Mineral Development, Government of the Punjab, by his Letter No. S1500/BXT KTA, dated the 16th March, 1980, whereby he had requested for transfer of the lease of the Bauxite mine in favour of Kohsar Minerals Limited, particularly, emphasising that the said concern had all the capabilities, expertise and resources for development of the mines. This intention further becomes manifestly clear from his following assertions:‑ "T'he task of mineral development is tremendous and needs accusrL0atlve efforts of a devoted group of right type of persons with sound financial background, good business contracts within and outside Pakistan. With Grace of Allah, Kohsar Minerals Limited adequately fulfils these essential pre‑requisites and she is capable of capturing handsome export business of Bauxite to certain European friends, who have since accepted our Bauxite quality and visited out site for qualitative reserves of Bauxite. We are: hopeful of getting into joint venture with for our foreign friends, besides obtaining handsome export order of Bauxite from them."

20. Tile learned counsel for the assessee relying upon Rajander Mines Syndicate v. Commissioner fl Income‑tax Andhra Perdesh (1961) 46 ITR 460 further contended that the transfer of the mine in favour of Kohsar Minerals Limited were in fact, capital receipt as rights of the assessee had completely extinguished by such transfer. It may, however, be pointed out that the said authority is not relevant in the instant case. The reasons being that in the said case, although the High Court of Andhra Perdesh had held that the transfer of the mining lease was a capital asset but it did not lay down that the sale of such asset was exempt from income tax. It rather held that any excess of such capital asset over the cost was liable to Capital Gains Tax.

21. In cases where the question as to the nature of a payment resulting from a transaction arises, the whole transaction is to be looked into. As case have discussed above, it is abundantly clear that the assessee had transferred the mining lease being fully conscious of the profitability of the mine. The consideration received in lieu of transfer of Bauxite mine was also, in fact, a lump sum profit calculated for the unexpired term of the lease. In this respect, we also draw support from Commissioner of Income Tax, Calcutta v. Christain Mica Industries Limited (1977) 36 Tax 292 (H.C. Ind.) wherein on similar facts, the sale of mining lease, et‑, by the assessee company to its subsidiary company was held to be a transaction as an adventures in the nature of the trade as was determined from the total of transaction.

22. In view of the afforesaid discussion the assessee appeals are hereby dismissed while the departmental appeal relating to the charge year 1980‑81 succeeds to the extent and in the manner as indicated above. M.B.A. Order accordingly.