2003 PLP (Trib (PTD)

The assessee has offered Rs.3,417,094 as other income as per Note No.25 in this year. As per Note No. 14 the only deferred FUN income is Rs.1,605,951 which is included in the other income. The said amount is already assessed and offered for tax. The order passed by the Deputy Commissioner of Income‑tax is not erroneous and also not prejudicial to the interest of revenue. It is requested that proceedings initiated under section 66‑A may lease be dropped." "This is with reference to your Notice No. J/2251 dated 11th December, 2001, we submit that cylinders are used for filling gas. The gas has a definite pressure and the life of cylinders is limited. This is a movable asset either assessee has to claim the depreciation or deterioration on the movable assets. The assessee claimed 6% deterioration instead of 10% depreciation as per Third Schedule. The Assessing Officer rightly allowed the said allowance in the trading account. The order passed by the Inspecting Additional Commissioner of Income‑tax is neither erroneous nor prejudicial to the interest of revenue. It is requested that proceedings under section 66‑A of Income Tax Ordinance, 1979 may please be dropped."

3. The replies submitted by the assessee were found to be unsatisfactory by the Departmental Authorities and they proceeded to make additions of Rs.76.44,168 and Rs.71,85,518 on account of deterioration of Cylinders for both the assessment years under consideration. However, addition under the head deferred income amounting to Rs.11,69,356 was made only for the assessment year 1997‑

98. Feeling aggrieved with the same the assessee/appellant is in appeal before us.

4. Both the parties have been heard and relevant orders perused. The learned A.R. has vehemently argued the case and contended that cylinders are part of plant and machinery and not stock in trade as treated by the Department. He further submitted that accountant of the company wrongly used term of deterioration allowance which is as a matter of fact is a depreciation allowance which is admissible @ 10%. He further argued that expenses on account of deterioration allowance works out @ 6% instead of admissible depreciation allowance @ 10%. He averred that if expenses claimed are lesser than admissible expenses, it means more income has been declared entailing more tax. Continued to argue that payment of more tax by the assessee due to reduced claim of detrioration/depreciation does not amount to an act prejudicial to the interest of revenue, therefore, proceedings under section 66‑A had been wrongly initiated.

5. As regards the other issue which is the subject‑matter, the learned A.R. vehemently contested the addition of Rs.11,69,356 under the head deferred income. It was contended by the learned A.R. for the assessee that appellant had entered into an agreement with the leasing company and this financial agreement had wrongly been held as yielding profit. He submitted that agreement with the leasing company does not amount to sale, hence no profit said to have been arisen from such arrangement.

6. To substantiate his contentions the learned A.R. of the assessee relied upon various judgments of the Tribunal as‑well as from the Indian jurisdiction. The first judgment which was cited at the bar is reported as 173 ITR page

100. This is the judgment of Rajasthan High Court wherein section 43 of the Income Tax Act, 1961 which provides for definition of word "plant" came for discussion, it was observed by their Lordships that definition of plant under section 43 of the Income Tax Act, 1961 is an inclusive definition and the intention of the Legislature to give it a wide meaning is evident from the fact that articles like books and surgical instruments have been expressly included in the definition of "plant". It was further observed that this inclusive definition of plant must be understood to mean, in its ordinary sense, as including all apparatus used by a businessman for carrying on his business but not as stock‑in‑trade. Since it was a case where Court has to determine whether depreciation could be allowed on bottles and shells used for soft drinks, it was concluded that: "Whether an assessee manufactures soft drinks, bottles and shells .used for bottling soft drinks would constitute `plant' and the assessee would be eligible for depreciation and development rebate in respect of them."

7. While deciding the supra judgment, their Lordships of the Rajasthan High Court sought strength 'from the judgment of Supreme Court of India reported as CIT v. Taj Mahal Hotel (1971) 82 ITR 44(SC) wherein the august Court held that sanitary and pipeline fittings installed in the hotel fell within the definition of "plant" hence liable to depreciation. Similarly, in the judgment of 'Supreme Court reported as (1986) 157 ITR 86 (SC) wherein the question arose whether drawings, designs, charts, plants, etc. were within the definition of "plant" where the assessee's' business was to manufacture scientific instruments. The question was also answered in the assessee's favour. The next judgment cited by the learned A.R. of the assessee at the bar was reported as ITR 126 page 196 (CIT v. National Air Products Ltd.) which appears to be applicable on all fours to the assessee's case. In the said case the Appellate Tribunal held that gas cylinders used by the assessee were to be treated as "plant" within the meaning of Income Tax Act, 1961. To arrive at this conclusion they relied upon the definition of "plant" contained in section 43(3) as including ships, vehicles, books, scientific apparatus and surgical equipment and therefore observed that the assessee was entitled to depreciation on .gas cylinders. On a reference filed by the Department before the Delhi High Court, it was answered in affirmative. The Honourable High Court dilated upon the issue and adjudicated that: "It is not necessarily confined to an apparatus which is used for mechanical operations or process or is employed in mechanical or industrial business. It would not, however, cover the stock in trade, that is goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on. An article to qualify as `plant' must, furthermore, have some degree of durability and that which is quickly consumed or worn‑out in the course of a few operations or within a short time cannot properly be called plant. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity therefore, is consumed while being employed in carrying on business. In the ultimate analysis, the inquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is does it fulfil the function of plant in assessee's activity? Is it the tool of the taxpayer's trade? If it is, then it is plant, no matter that it is not very long‑lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose."

8. Lastly, the learned A.R. placed reliance on a recent judgment of the Lahore High Court in the case of CIT v. Heavy Mechanical Complex Ltd., Taxila reported as 2001 PTD, 1354. In the supra cited case the question which came before the Lahore 'High Court for determination was that whether Railway Sidings and Roads owned by the industrial. establishment were covered by the term of plant and entitled to depreciation? Their Lordships rejected the reference filed by the Department with the following observation: "Learned counsel for the Revenue has not been able to state any authoritative pronouncement against the view adopted by the Tribunal that word 'plant' had much wider meaning when used in the context of factory. Also that in its factual meaning it includes not only the main structure but also the ancillary ones which are in use as integral part of the factory. Therefore, the conclusion drawn by them that roads, and railways sidings in question were a necessary part of the factory is not open to exception. Particularly, when the Revenue failed to dislodge the claim of the assessee that without these facilities viz. roads and railway sidings it was not possible to transport the capital goods manufactured to and from its premises."

9. The learned A.R. also placed on file assessment orders relating to Mehran LPG (Pvt.) Ltd. and Ranjha Enterprises (Pvt.) Ltd. In both of the cases, the assessees are involved in the business of selling LPG wherein cylinders were considered as a part of plant and machinery and not stock in trade.

10. On the other issue of deferred income the learned A.R. of the assessee contended that addition of Rs.11,69,356 under the head deferred income is not justified as same has arisen out of lease back arrangement and lease back arrangement is not sale but only financial arrangement. In support of his contention he placed reliance on the following two judgments of the Tribunal:‑‑‑ (i) 1999 PTD (Trib.) 14. (ii) I.T.A. No.624/LB of 1999, dated 20‑1‑2000 in the case of Medipak Ltd., Lahore.

11. The learned D.R. on the contrary controverted the arguments advanced by the learned A.R. and submitted that the, is no provision of law to allow provision for deterioration of cylinders: It was submitted by the learned D.R. that cylinders owned by the company were assets and any loss or gain on their disposal may be considered under 3rd Schedule as business loss or business gain as the circumstances may arise. He further argued that since no disposal of assets were made during the year, therefore no expense as per Rule 7 of the 3rd Schedule may be allowed. It was stressed by the learned D.R. that in fact cylinders are kept by the assessee as stock in trade as is evident from the note shown in the balance‑sheet. He also referred to section 23 as well as Rule 3 of the 3rd Schedule to the Ordinance which provides as follows: (3) No allowance under this Rule shall be made unless‑‑‑ (a) at the time of filing a return of total income such as particulars as may be prescribed and such further information of documents as the (Deputy Commissioner) may require, are furnished; and (b) such building, machinery, plant of furniture has been so used 6[***] during the income year. Section 23(v).‑‑‑In respect of depreciation (including first year allowance of reinvestment allowance or Industrial Building Allowance) of any such building, machinery, plant, furniture or fittings, being the property of the assessee the allowance admissible under the Third Schedule [except depreciation (or first .year allowance) on assets given on lease shall be allowed against income from lease rentals only]:

12. On the issue of deferred income the learned D.R. supported the observations made by the Departmental Authorities while passing the order under section 66‑A of the Ordinance.

13. We have heard the learned counsel for both the parties and have gone through the relevant orders as well as the judgments and the law cited at the bar in support of their contentions. We are of the considered view that the Departmental Authorities erred in law while invoking section 66‑A of the Ordinance in the instant case. Before we embark upon the real issue which is involved in the case that whether cylinders used by the assessee‑company are to be considered as part of plant and machinery or not, we would like to observe that word `deterioration' used by the Accountant of, the assessee‑company was synonymous for the word `depreciation' which has been used in the Income Tax Ordinance, 1979. So the Department cannot get any benefit out of this mistaken use of the word `deterioration'. After having observed so, there is no cavil to the proposition that `depreciation' on cylinders are allowable. Our stance, on the issue stands fortified by the judgments cited at the bar particularly' the judgment of the Delhi High Court in Re: CIT v. National Air Products Ltd. reported as ITR 126 page 196 wherein business of manufacturing of Oxygen Gas which is almost identical to the business of the assessee was held to be one where depreciation was allowed. It is also worth‑noting that in the recent judgment of the Honourable Lahore High Court while deciding in favour of the assessee, and their lordships extended the definition of word `plant', thus stretching it to railway sidings and roads laid on the factory premises of the industrial establishment.

14. For the foregoing reasons the impugned finding of the learned I. A .C. on this issue is vacated and assessment orders stand restored.

15. As regards deferred income, the order of ‑the learned I.A.C. is also vacated since the learned representatives of both the parties have not been able to clear their position on this point. Therefore, in the interest of justice this issue is remanded to the Assessing Officer to re‑examine the issue and if deferred income has resulted from lease back arrangements then he is directed to allow exemption in the light of above .two judgments on the issue and if it is out of any other source the taxability of the same should be decided on the basis of facts and in accordance with the law after affording an opportunity to the assessee of being heard

16. As a result of above discussion appeals of the assessee succeed in the manner indicated above. C. M. A./634/Tax(Trib.) Appeals succeeded.