I. T. AS. NOS. 1537/KB AND 1538/KB OF 1980-81, DECIDED ON 16TH JULY 1981. Versus I. T. AS. NOS. 1537/KB AND 1538/KB OF 1980-81, DECIDED ON 16TH JULY 1981.

ORDER

GHULAM MURTAZA KHAN (MEMBER).‑ In these four cross‑appeals, against the Appellate Assistant Commissioner's order pertaining to the charge years 1977‑78 and 1978‑79, the assesses‑appellant's grievance is that the declared trading results should have been accepted and alternatively it contends that the additions maintained, were excessive. The Department, on the other land, has objected to the reduction allowed in the additions made to the trading accounts in both the years. In the charge year 1978‑79, additional objections nave been taken against the acceptance of milk‑powder account and the allowance of depreciation on revalued cost of machinery etc. In view of common objections involved in both the years, all the appeals are being disposed of by the combined order.

2. The appellant is a private limited company engaged in the manu facture and sale of silk‑cloth. Besides own manufactured cloth, the appel lant also sells cloth purchased from other mills or the cloth manufactured against supply of raw material etc. In the charge year 1978‑1979, the appellant also dealt in the imported milk‑powder.

3. We first take up the objection of appellant's business relating to silk‑cloth. In the two charge years under consideration, sale of a self‑manu factured cloth was shown at Rs. 45,89,281 and Rs. 41,82,027, yielding gross profit rate of 13.9 % and 13.8 % respectively. The I. T. O. did not accept the declared results for the only reason that the appellant did not maintain stage wise manufacturing account as a result of which the correlation of consumption of raw material and production of finish goods was not possible. He also mentioned that the preceding year also, accounts were not accepted and, as such he made in ad hoc additions of Rs. 35,000 and Rs. 40,000, respec tively in the two years. These ad hoc additions raised the rate of gross profit to 14.5 Y. and 14.6 Y.. Similarly, in the locally purchased cloth, the gross profit rate of 2.6% was shown on sales of Rs. 3,816,926. In the charge year 1978‑79, the appellant got the cloth manufactured by supply of raw materials whose sales amounted to Rs. 3,844,864 with a gross profit rate of 8.19 %. These two accounts were also discarded by the I.‑T. U. for the simple reason that in the first year, there was a fall in the rate of gross profit whereas in the next year, the appellant's purchases were not fully verifiable because the cash memos did not bear the full names and addresses of the purchasers. These two trading accounts were also not accepted by the I.‑T.O. and ad hoc additions of Rs. 15.000 and Re. 30,000 respectively were made in the two years raising the rate of gross profit in the first mentioned year at 3.06% and in the next year at 8.9 %.

4. The appellant carried appeals before the learned Appellate Assistant Commissioner who observed that the I.‑T.O. had good reasons far discarded the declared trading results but the additions made were excessive, which in the self‑manufactured milk‑account he restricted to Rs. 20,000 and Rs. 30,000 respectively thereby allowing relief by Rs. 15,000 and Rs. 10000 in the two years. In respect of cloth purchased locally in the charge year 1977‑78 and got manufactured by supply of raw material in the charge year 1978‑79, he upheld the rejection of accounts but restricted the additions to Re. 10,000 and Re. 25,000 thereby allowing relief of Re. 5,000 in each of the two accounts in the two years. After the additions as maintained by the learned A. A. C. the rate of gross profit worked at 28 %. and 8.7 %, respectively in the two years.

5. The learned A. R. appearing on behalf of the appellant contends that the trading results of the two accounts have wrongly been discarded because the departmental officers failed to bring any worthwhile material on record to justify their action. It is contended by him that in both the years, there was substantial increase in the sales and rate of gross profit shown was also sub stantially improved as compared to the earlier years. Ho points out that in the self‑manufactured cloth, the gross profit rate declared in the two years was 13.9 % and 13.8 % respectively as against 9.4 % declared in the charge years 1976‑77 and 1975‑76. Likewise, in respect of locally purchased cloth, the fall in the charge year 1977‑78 was very nominal inasmuch as, it was lower by about 0.5 % only. In the subsequent year, however, the rate of gross profit shown was 8.19 %. This increase was primarily due to the fact that the appellant provided the raw materials to the factories. Lastly, the learned A. R. contends that as in respect of self‑manufactured goods, the depart mental officers failed to point out any specific defects in the locally purchased accounts, he contends that the mere fact that the appellant did not mention complete addresses of the buyers, could not justify the rejection of accounts when the fall, in the rate of gross profit was very nominal. For these reasons, he contends that the declared trading results should be accepted and in the alternative, if for some reasons the accounts could still be considered defective, then the appellant deserved suitable relief. The learned D. R. on the other hand, supports the orders of the departmental officers for the reasons given to their respective orders.

We have heard both the sides and we find considerable force in the con tentions of the learned A. R. that the defects pointed out by the I.‑T. O. that no day to day manufacturing record was kept did not justify outright rejection of accounts because the rate of profit shown was either the same as in the earlier years or substantially more in the charge year 1978‑79. There being a substan tial improvement both in the quantum of sales as well as the rate of gross profit disclosed, we are of the opinion that the learned A. A. C. was not justified in discarding the declared trading results. We, therefore, direct that the trading results in respect of these accounts in both the years should be accepted. In respect of locally purchased cloth accounts, we maintain the' addition made by the learned A. A. C. because there was a fall in the rate of gross profit in the charge year 1977‑78. In the subsequent year, however, the defects pointed out do not justify the rejection of accounts because the departmental officers failed to prove that the cash sales of similar items made to different parties differed or there were other reasons to believe that the sales were under‑stated. In this view of the matte, we cannot uphold the addition in this account and would direct that the trading results should be accepted. The learned A. A. C.'s orders are thus modified as indicated above.

7. In the charge year 1978‑79, the appellant imported milk‑powder which was sold for an amount of Rs. 4,10,872 resulting in a loss of Rs. 30,485. The I. T.O. discarded the declared loss because according to him the sales were not open to verification and he applied a gross profit rate of 2% declared sales which resulted in an addition of Rs. 8,217. In appeal the learned A.A.C. allowed the loss claimed because the sales were fully verifiable. In fact the learned A. R. has given a list of buyers with complete addresses. If the I.‑T.O. Suspected any of them to be fictitious, he should have got enquiries conducted, which he failed to do. We, therefore, uphold the action of the learned A. A. C.

8. We now take up the departmental appeals. In view of the facts dis cussed and the findings given by us in the assesses‑appellant's appeals relating to the relevant charge years, the departmental appeals fail being without merit in respect of silk cloth and powder‑milk etc. The only other grievance of the Department in the charge year 1978‑79 relates to the claim of depreciation allowed by the learned A. A. C. on the enhanced value of machinery on account of fluctuation in the rate of exchange. The relevant facts relating to this issue are that the L‑T.O. in his order observed that, as per books of accounts the assesses has claimed a sum of Rs. 64,225 on account of difference due to de valuation of German currency in respect of machinery imported from Germany. Since this item represents the cost of fixed assets the same is of capital nature and is disallowed as inadmissible". On appeal, the learned A. A. C. upheld the add-back as made by the I.‑T.O. but she observed that since in the assess ment order, it is mentioned that it represents the cost of fixed assets and hence it was treated as capital expenses, the I.‑T.O. should have allowed depre ciation on the same. Since the I.‑T.O. had not done it, he was directed to do it now. The Department, therefore, feels aggrieved with this part of the order of the learned A.A.C. The learned D. R. submitted that the amount in question could not legally be added to the cost of the machinery for the purpose of allowing depreciation thereon. The learned Authorised Representative of the assesses‑respondent, on the other hand, pleaded that the valuation of the asset in question stood changed owing to devaluation of German currency. The machinery in question was purchased by taking loans from I. D. H. P. and since the amount of levy was still outstanding therefore, the assessee's liability increased by Rs. 66,000 owing to the fluctuation in the rate of currency. This mount, according to the appellant's Representative, was claimed in the profit and loss account as an expense which the Income‑tax Officer disallowed treating it to be of capital nature. He, therefore, emphasised that the amount in question should have been allowed to the originally recorded value of the plant and machinery in question and, consequently the depreciation be allowed at the enhanced value thereof. In short, the learned counsel's contention is drat since the assesses had raised loans from I. D. H., P. for purchase of the machinery, the book value of the machinery purchased from these loans had to be revalued consequent upon the change in the exchange rata and hence the learned A. A. C. has rightly directed the I.‑T. O. to allow depreciation on the enhanced value of the machine.

9. We have given our earnest consideration to the submissions made bye the parties' Representatives and we are of the view that the order of tile learned A. A. C. is not sustainable. The relevant provisions of law are con tained in section 10(2Xvl) and section 10(5) of the repealed I. T. Act, 1922. By virtue of clause (vi) of subsection (2) an allowance in respect of machinery etc. is to be allowed in case of ships other than the ships ordinarily plying o inland waters, to such percentage on the original cost thereof to the assessee as may fee prescribed and in any other case, to such percentage of the Written] down Value thereof as may, in any case or class of cases be prescribed. Now in the instant case, the assessee was entitled to claim depreciation on the machinery purchased by it by raising loans from I. D. H. P. and hence the dep reciation for the year under appeal was admissible to such percentage of the Written Down Value thereof as prescribed. The expression or Written Down Value" as per subsection (5) of section 10 (means)‑‑(a) in the case of assets acquired in the previous year, the actual cost to the assessee, land (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation allowed to him under the Act. In the instant case, there fore, the depreciation is to be allowed on Written Down Value as, per clause (b) alone, since admittedly the assets were acquired before the previous year and depreciation had been allowed thereon. The learned counsel for the appellant could not draw our attention to any provision of law on the basis whereof the amount in question could be added to the original value of the asset (which was taken to be its actual cost to the assessee) for the purpose of allowing depreciation. The allowance as already stated, is admissible on the Written Down Value which in the instant case, means the actual cost to the assesses less all depreciation allowed to it under the Act. In this view of the matter the learned A. A. C. acted improperly in directing the Income‑tax Officer to allow depreciation on the machinery in question after adding the amount of exchange fluctuation to the value of assets. It is not feasible and legal to do so without a specific legislative provision, It would be appropriate if it is pointed out here that when Legislature intended to give this additional benefit to the assessee, it specifically provided for it in section 23(1)(v) and rule 8(8)(e) of the Third Schedule of the Income‑tax Ordinance, 1979 which for the sake of convenience, are reproduced hereunder :‑‑

"Section 23(1).‑‑In computing the income under the head "Income from business or profession" the following allowances and deductions shall be made, namely :‑--

(i)

(ii)

(iii) ..

(iv)

(v) In respect pf depreciation of any such building, machinery, plant fixtures or fittings, being the property of assessee, the allowance admissible under‑the Third Schedule (rules for computation of depre ciation allowance) ;

Rule 8, sub‑rule(7)

7 "WDV" means‑‑

(a) In the case of a ship, aircraft or any other asset to which sub‑rule (3) of rule 2 applies, the original cost thereof to the assessee, and

(b) in the case of other assets

(i) where the asset was acquired in the income year the actual cost there of to the assessee ;

(ii) where the asset was acquired before the income year the actual cost thereof to the assesses as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of assessment year for earlier years.

8. For the purposes of sub‑rule (7):

(a) ..

(b) .

(d) . . ..

(e) Where the assessee has acquired any plant or machinery (hereunder referred to as `asset' from a country outside Pakistan for installation in Pakistan for the purpose of his business or profession and, incon sequence of a change in the rate of exchange at any time after the acquisition of such assets and before full final repayment of any foreign loan, there is an increase or reduction in the liability of the assessee as expressed in Pakistan currency for making payment towards the whole or a part of the moneys borrowed by him from any person directly or indirectly in any foreign currency specifically for the purposes of acquiring the assets (being in either case the liability existing immediately before the date on which change in the rate of exchange takes effect) the amount by which the liability aforesaid is so increased or reduced during the income year, shall be added to or, as the case may be deducted from the actual cost of the asset and the amount arrived at after such addition shall be taken to be the actual cost of the assets ;

(f) .

(g) .

(h)

Since there is no such provision in the repealed Income‑tax .Act, 1922, the assessee's claim is unsustainable and has consequently been wrongly entertained and allowed by the first appellate authority. The assessee may revalue the cost of machinery consequent upon the change in the rate of exchange and as per the terms and conditions of the loan obtained from the I. D. H. P. for the purposes of its accounts but it would not have any effect on the admissibility of depreciation which would, at any rate, be allowed on the basis of Written Down Value.

10. In the result, the four appeals are disposed of as indicated above.

Order accordingly.