1981 PLP (Trib (PTD)

In all these authorities it has been laid down that where no business is done in the relevant accounting year the profit out of the sale of machinery is not table to tax. The learned D. R. on the other hand relied upon the case of C. I. T. v. Messrs West Punjab Factories Ltd., Okara (P L D 1966 Lah. 236) in which a contrary view has been taken by the Lahore High Court. Before we proceed to discuss the case‑law cited above it would be advantageous to reproduce the relevant law section 10 of the Income‑tax Act reads as under :‑

10. Business.‑‑(1) Subject to the provisions of this Act, the tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation, in respect of the profit or gains of any business, profession or vocation carried on by him. (2) Subject to provisions of this Act such profits or gains shall be computed after making the following allowances, namely sub‑clause (vii) of subsection (2) is reproduce below :‑

(vii) In respect of any such building, machinery or plant which has been sold, transferred by way of exchange or is compulsorily acquired by a competent authority under any law for the time being in force, or discarded or demolished or destroyed in the previous years the amount by which the written down value therefore exceeds the amount for which the building, machinery or plant is actually sold, transferred or compulsorily acquired, as the case may be or its scrap value:- Provided that such amount is actually written off in the books of the assessee Provided further that where the amount for which such building, machinery or plant is sold, transferred or compulsorily acquired, whether during the continuance of the business or after the cessation thereof, exceeds the written down value so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profit of the previous year in which the sale, transfer or compulsory acquisition as the case array be took place and the business, profession or vocation in which such building machinery or plant has been used shall for the purposes of subsection (1) be deemed to be carried on by the assessee in the year in which the sale, exchange, or acquisition, as the case may be took place." (3rd, 4th and 5th provisos have not been reproduced as they are not relevant for our purposes). Under the scheme of section 10, the subsection (1) creates a liability for payment of tax, in respect of profits or gains of any business, profession or vocation carried on by the assessee. Subsection (2) however provides the method of computation after making various allowances enumerated in sub sequent clauses. The allowances which have been enumerated in these clauses are concessions given by the Legislature while making computation of tax, under the head profit or gain, business profession or vocation. However, certain conditions have been attached with the allowances, such as the Legislature was competent to make. It may be pointed out that section 3 of the Income‑tax Act which is charging section defines the total income of the previous year or the previous years of every person. The total income has been described in section 4 which includes "all income, profit and gains from whatever sources derived which (a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person". Since under section 4 all the Income, profit or gain of a person from‑whatever source are taxable being included in the total income they remain taxable unless they are coveted under arty of the exceptions provided by the Income‑tax Act including those provided in various clause (vii) of subsection (2) of section 10 the main clause provided allowances in respect of building, machinery or plant which had been sold or ttau5ferred in previous year to the extent of amount by which the WDV there fore exceeds the amount for which building, machinery or plant is actually sold of its scrap value. This main clause visualises the situation where machinery of plant etc. has been sold at cost below the WDV. The situation where a building, plant etc is sold at a cost which is more than the WDV is met by the second proviso. In the case under consideration the case is governed by the second proviso as the machinery has been sold at a cost which is more than the DWV. Admittedly the assessee has received profit or gain out of the sale, The question is as to whether this is taxable under the Income‑tax Act or not. The case of the assessee before us is that the words "such building, machinery or plant" occurring in clause (vii) are referable to earlier clauses namely clauses (vi), (v) (iv) and vi(a). Clause (vi) qualifies the machinery with the words "and is used wholly for the purposes of business, profession or vocation of the assessee". Similarly clause (iv) also qualifies the building, machinery and plant with the words "used for the purposes of business, profession or vocation". It was therefore contended that in clause (vii) when the word's such building, machinery or plant' are used they have to be read with the qualification attached with them in the earlier clauses meaning thereby that clause (Vii) dealt about only that machinery, building or plant which was being used for the purposes of business, profession of vocation, Since the machinery which had been sold by the assessee was not being used, the second proviso of this clause has no application.

4. To our mind the whole argument of the A. R. is misconceived. Firstly the law has since been amended by the Finance Act, 1962. In the second proviso the underlined'' portion has been added by the Finance Act 1962. By virtue of the amended second proviso two fictions of law have been created. First the difference between the original cost and the WDV would be deemed to be the profits of the previous year in which sale or trans fer had taken place. The second fiction created is that for the purposes of subsection (1) of section 10 the business would be deemed to be carried on by the assessee in the year in which the sale etc. has taken place notwithstand ing the fact as to whether the sale etc. took place during the continuance of business or after cessation thereof. It is therefore clear that by virtue of the amendments made by Finance Act, 1956 and Finance Act, 1962 it has become irrelevant as to whether the business is still carried on by the assessee or not. Looking at from another angle supposing as the assessee wants us to believe, that the second proviso is not applicable on the facts of the case it would mean that the assessee had received certain profits and gains which are not taxable under the second proviso to clause (vii) but section 4 provides that total income includes all income, profit or gain from whatever sources which are received or deemed to be received in Pakistan in such year by or on behalf of such person. Therefore; even if the case of the assessee is taken out of the second proviso to clause (vii) the entire profits and gains thus received by the assessee would be Taxable under section‑

4. In that case the whole of the sale proceeds of the machinery would have to be included in the total income of the assessee. As has been stated above, section 10 gives a method of computing taxable income after allowing various allowances. In other words the second proviso in fact is not a charging provision under‑ which certain gains or profits have been brought to tax by creating a fiction of law which are otherwise not taxable. On the contrary only a part of the profit and gains received by the assessee out of sale proceeds of machinery or plant etc. have been made taxable. If the allowance under this proviso was not then the whole profit to be included in the total income but the Legislature has curtailed such income to the extent of the allowance provided by second proviso to clause (vii). It therefore follows that essentially the second proviso is also a clause providing the allowance to the assessee. It may be pertinent to refer to the definition of income given in section 2(6‑c): 6(c) "income" includes anything included in "dividend" as defined in (6‑A), 10 perquisites (whether convertible into money or not) which, under subsection (10) of section 7, are due or are paid to an assessee in lieu of, or in addition to any salary or wages I and anything which under Explanation II to subsection (I) 11) (the 'said) section 7 is a profit received in lieu of salary for the purposes of that subsection (12) (the values of any benefit or requisite, whether convertible into money or not arising from business or the exercise of a profession)'and any sum deemed to be profits under section 13 (xxx) clause (vii) of subsection (2) of section 10, 14 (any sum chargeable to tax under subsection (6) of section 12) 15 (and any capital gain chargeable according to the pro visions of sections (12‑B) 16 (and m the case of a company having its registered office in Pakistan, the amount) 17 (representing the face value of any bonus shares or the amount of any bonus declared, issued or paid to its shareholders with a view to increasing the paid‑up capital) (and the profits of any business of insurance carried on by a 18 (mutual insurance association) computed in accordance with rule 9 in the 18 (First) Schedule, 19 (and in the hands of a purchaser, the difference between the market value and the purchase price of any assets, excluding scrips and stock‑in‑trade sold by a Company to the (purchaser) 20 and any amount which under Explanation to subsection (1) of section 4 is to be deemed to be income) 21 but does not include, in the case of a shareholder, the amount representing the fact value of any bonus share or the amount of any bonus declared, issued or paid by a Company to its shareholders with a view to increasing its paid‑up capital) and in the case of a company, the amount by which its free reserves exceed the paid‑up ordinary share capital of the Company as on the last‑day of the previous year) ; From the underlined portion of the definition it is clear that even otherwise the sums which have been made chargeable to tax under clause (vii) have been included; in the definition of `income'.

5. Now coming to the case‑law relied upon by the learned A. R. so far as the two decisions of the Tribunal reported as (1961) 4 Taxation 71 and (1963) 8 Taxation 65 are concerned they are irrelevant for the simple reason that they relate to the periods when the amendments of 1956 and 1962 had not been brought in. As for the case of Phillips Holzman A. G. Ameejee Valijee (P L D 1968 Kar. 95) again it will not be of much help inasmuch as it has not taken into consideration the amendments brought in by the Finance Act,1962. At page 101 of this case their Lordships of the Karachi High Court observed :‑ "In 1962, the second proviso to section 10(2)(vii) referred to above was amended by the Finance Act, 1962 which still holds the field. In the present case however we are not: concerned with this last amendment. We have only to consider the scope of the amendment made by the Finance Act of 1956 in the second proviso to clause (vii) of sub section (2) of section 10 of the Act." It may be noted that 1956 amendment made addition of the words whether during continuation of the business or after cessation thereof". In the context of this amendment their Lordships in the said case observed:-- "Notwithstanding the amendment brought in 1956 unless the words 'or machinery which had been sold' had not been used in the previous year the income cannot be brought to tax. However, the amendment made by Finance Act of 1962 has met this situation and second fiction has been brought by law that the business, profession or vocation in which the building, plant or machinery has been used would be deemed to be carried on by the assessee in the year in which sale or transfer 'etc. bad taken place." Therefore even if there was any lacunae on the basis of which the ruling had been given by the Karachi High Court that having been removed by amend ment in law that case cannot be said to be applicable. Mr. R...N's in his treatise, The Law and Practice of Income‑tax In Pakistan Vol. II, pages 389 and 390, while commenting on the amendment made in the second proviso to section 10(2)(vii) observed as under :‑‑ "The said amendment in the second proviso sought to meet with the situation discussed above. Now the business will be deemed to be carried on by the assessee in the year in which the sale, exchange or acquisition, as the case may be took place. The amendment added the controversies and the rulings of the Courts of law which after amendment became a dead letter." As for the last ruling in the case of Delhi Cloth and General Mills Limited suffice it to say that in that case their Lordships have followed the case of Phillips Holzman A. G. Ameerji Valijee of Karachi High Court. It appears that the amendment in law by the Finance Act, 1962 was not brought to the notice of Their Lordships. As we‑have already held that the Karachi case is not on all fours with the facts and circumstances of this case consequently the case- law which bad followed this case has also no application. Besides there are other points which are mentioned above and have not been raised in the rulings quoted above nor they have been considered. Therefore looking at from any angle whatever the plea raised by the assessee cannot be accepted.

6. In the result both the appeals fail and are dismissed. Appeals dismissed.