I. T. AS. NOS. 389(PB) TO 391 (PB) OF 1981-82, DECIDED ON 14TH APRIL, 198 3. Versus I. T. AS. NOS. 389(PB) TO 391 (PB) OF 1981-82, DECIDED ON 14TH APRIL, 198 3.
ORDER
1. MUHAMMAD MAZHAR ALI (CHAIRMAN) .--The facts giving rise to these three appeals one filed by S-------C------P----an Association of Persons and the other two by the two members of the said Association of Persons, are these. All the three appeals pertain to charge year 1979-80 for which the corresponding Accounting period ended on 30-6-1979. They are directed against the combined order of the learned Appellate Assistant Commissioner, Range A P------------The appellant Cinema, an Association of Persons (Hereinafter referred to as "the assessee") derived income from lease of cinema house known as "S-----C------P------It filed return disclosing the income of Rs.36, 499. It was processed under self-assessment scheme. On 31-3-1980 the Income-tax Officer made the assessment under section 59(1) of the Income-tax Ordinance, 1979 (hereinafter called "the Ordinance") by accepting the total income of the assessee on the basis of the return filed. The returned income was allocated among the two members of the Association of Persons, the other two appellants above-named as under:--
(1) Mst. S---S----
2. Rs.21,900
(2) Mr. A----A ----
3. Rs.14,599
4. Later on, the Income-tax Officer learnt that the assessee had disposed of the cinema on 11-8-1978 for Rs.30 lakh. Being of the view that the assessee's income chargeable to tax under Income--tax Ordinance had escaped assessment, the Income-tax Officer initiated additional assessment proceedings under section 65 of the Ordinance, against all the appellants abovenamed. In response to the said notice the assessee filed a return declaring the same income as originally returned, i.e. Rs.36,499. The Income-tax Officer observed that two separate registered sale deeds had been executed by the assessee one in respect of the building of the cinema and other for the machinery, furniture air-conditioners, etc. The sale consideration of the building was shown at Rs.18 lakh and that o: the machinery, etc. at Rs.12 lakh. During the additional assessment proceedings the Income-tax Officer worked out the profits at Rs.15,54,746 in respect of building and Rs.10,69,651 on sale of furniture and fixtures etc. as detailed below:--
5. Original cost
6. Depreciation for 1979-80 to 1972-72
7. W.D.V for 1979-80
(1) Building
8. Rs.4,46,197
9. Rs.2,00,942
10. Rs.2,45,256
(2) Machinery.
11. Rs: 45,137
12. Rs. 39,912
13. Rs. 05,225
(3) Electric-fittings
14. Rs. 32,577
15. Rs. 18,453
16. Rs. 14,124
(4) Air-Conditioners
17. Rs.1,90,956
18. Rs.1,08,754
19. Rs. 82,202
(5) Furniture and fixture
20. Rs. 43, 659
21. Rs. 19; 854
22. Rs.28,788
23. Rs.7,63,519
24. Rs.3,87,915
25. Rs.3,75,604
26. Building
27. Furniture fixture and Air conditioners
28. Total
29. Sale Price
30. Rs.18,00;000
31. Rs.12,00,000
32. Rs.30,00,000
33. Less W.D.V. at the time of sale.
34. Rs. 2,45,256
35. Rs. 1,30,384
36. Rs. 3,75,604
37. Rs.15,54,746
38. Rs.10,69,651
39. Rs.26,24,396
40. (There are very minor errors in the Income-tax Officer's calculation).
41. Relying upon rule 7 of the Third Schedule to the Ordinance, 1979 (hereinafter called "the Schedule") the Income-tax Officer formed on opinion that the excess of sale-proceeds over the W.D.V. constituted the income of the assessee liable to tax and that it had escaped assessment. He, therefore, issued a specific notice under section 65 to the assessee asking it to show cause as to why the profits on sale o: the cinema be not treated as income and subjected to tax. Similar notices were issued to both the members of the Association of persons as well. I n reply thereto, the assessee pleaded that profits on sale of cinema building were exempt from income-tax. He further claimed to have spent a sum of Rs.15,000 towards registration expenses and a further sum of Rs.7,178 on payment of capital gain to Excise and Taxation Department. With regard to the movable assets, the assessee came out with a plea that the old air-conditioners were replaced by two new air-conditioning plants, that a sum of Rs.30,500 was spent on the repairs and alterations of the furnitures and fixtures and a sum of Rs.25,500 on the replacement of spare parts. The Income-tax Officer did not agree with the assessee's contentions, keeping in view .the provisions of rule 7 of the Schedule coupled with the Federal Government's Notification No.S.R.O. -885(1)/79, dated 2-10-1979. The Income-tax Officer adopted the original cost of the cinema building viz. Rs.4,46,197 as the cost price, and thus worked out the deemed profit liable to tax under rule 7 of the Schedule at Rs.2,00,942 (Rs.4,46,197 (-) Rs.2,45,256 = Rs.2,00,942).
42. 2 He worked out the profits earned from the sale of movable assets Rs.9,21,854 in the following manner:
43. Movable Assets.
(1) Sale price of movable assets.
44. Rs.12,00,000
(2) (a) W.D.V. of Assets
45. Rs.1,30,348
(b) Add (i) costs of Air-conditioner
46. Rs.2,00,000
(ii) Additions to furniture and spare parts
47. Rs. 30,000
48. Rs.2,30,000
49. Rs.3,60, 348
(c) Less W.D.V. of old air-conditioners as per asset record
50. 88.82,202
51. Rs.278,146
52. Rs.9,21,854
53. The additional assessment was thus completed on 17-6-1981 at a total income of Rs.11,59,295 (including the income of Rs.36,499 already assessed). The income so assessed was allocated to the two members of the Association of Persons as under:-
(1) Mst. S----S---- at the rate of 60%.
54. Rs.6,95,577
(2) Mr. A----A---- at the rate of 40%
55. Rs.4,63,718
56. Total
57. Rs.11,59,295
3. Aggrieved by the orders of assessment so made the assessee abovenamed as well as the two members of the Association of Persons led appeals to the learned Appellate Assistant Commissioner, Rang-A, P----who dismissed the appeal of the Association of Persons. Messrs S----C----but partially allowed the appeals of the two members of the Association of Persons in respect of the levy of additional tax under section 88 of the Ordinance. Hence, second appeals.
4. Before recording and considering the contentions raised before us we would like to reproduce the relevant provisions of law, namely, sections 31 and 167 of the Ordinance and rules 7 and 8 contained in Schedule to which our attention has been invited and on the basis of which, the` parties' representatives have advanced their arguments. These sections and rules read as under:
58. "Section---31.--Deductions.--In computing the income under the head "Income from other sources" the following allowances and deductions shall be made, namely:
(a) ...........
(b) .........................................................
(c) In the case of income to which clause (d) of subsection (2) of section 30 applies, any allowance or deduction computed in accordance with the provisions of clauses (iii), (iv) and (v) of subsection (1) of section 23."
59. (N.B.)--Clause (c) was inserted vide S.R.O. 751(1)/79, dated 23rd August, 1979, issued by the Federal Government in exercise of the powers conferred on it by subsection (1) of section 167 of the Ordinance, 1979. Later on, vide section 6(12) of the Finance Act, 1980 (Ordinance No. XXV of 1980) section 31(1) of the Ordinance was amended inter alia inserting clause (c) in similar terms as was done, vide S.R.O. 751(1)/79.].
60. "Section 167. Removal of difficulties.--(1) if any difficulty arises in giving effect to any of the provisions of this Ordinance, the Federal Government may, by Notification in the Official Gazette, make such provisions as it thinks fit for removing that difficulty."
61. The Third Schedule.--[Rules for the computation of Depreciation Allowance].
62. "Rules 7: Disposal of assets and treatment of resultant gains or losses. Notwithstanding anything contained in this Ordinance or the repealed Act, where, in any income year,
(a) any asset or class of assets is disposed of by an assessee, no allowance under rule 1, 3, 4 or 5 shall be made in respect thereof in that year:
(b) any class of assets is disposed of by an assessee,
(i) if the sale proceeds thereof exceed the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable under the head "Income from business or profession", and
(ii) If the sale proceeds are less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year; and
(c) any asset (but not all assets) included in a class of assets is disposed of by an assessee, the written down value of the said class of assets shall be reduced by the sale proceed thereof, and where the said sale proceeds exceed the said written down value, no further allowance for depreciation shall be made in respect thereof and the excess shall be deemed to be income chargeable under the head "Income from business or profession" of the year in which the disposal takes place. and the business or profession of the purposes for which the said class of assets or asset, as the case may be, was used before its disposal, shall be deemed to be carried on by the assessee during that year and all the provisions of this Ordinance shall apply accordingly."
63. Rule 8(5)--"sale proceeds" means:--
(a) where the assets actually sold, the sale price thereof or the fair market value, whichever is the higher;
64. [Clauses (b) to. (g) are omitted being not relevant for our purpose.] and in each such case, the asset shall, for purposes of rule 7, be deemed to have been disposed of by the assessee;
65. Provided that in the case of building the term "sale proceeds" shall mean an amount equal to the lower of the following namely:--
(a) Original cost, and
(b) sale price or fair market value, whichever is higher. " (inserted vide S.R.O. 885(1)/79, dated 2-10-1979).
66. Rule 8(7)--"written down value", means:--
(a) ........................................
(b) in the case of other assets, or class of assets:--'
(i) ------------------------------------------------
(ii) where the asset was acquired before the income year, the actual cost thereof to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of the assessments for earlier years."
5. Mr. M------A-----B---the learned counsel for the appellant developed his arguments on the premises that in inserting clause (c) in subsection (1) of section 31, vide S.R.O. 751(1)/79, dated 23 rd August, 1979, the Federal Government has acted beyond the authority vested in it under section 167 of the Ordinance. He submitted that the allowance of depreciation on assets in the case of composite lease of the type involved in the instant case, was purposely left out by the Legislature and no difficulty was spelled out by the Federal Government in justification of enacting the said provision which was a condition sine qua non for the exercise of the power vested in it under section 167 of the Ordinance. He maintained that there was no authority given to the Federal Government to amend the law, which was the exclusive function of the Legislature. He sought to support his contention by an authority of the Supreme Court of Pakistan, reported as P L D 1963 SC 486. He emphasised that even if' it is held to be valid piece of legislation then too it could not be given effect in retrospection, i.e. with effect from 1st July, 1979, instead of 23rd August, 1979 on which date it was actually inserted. Mr. A------B-----further urged with vehemence that under the newly-inserted clause (c) the assessee became entitled to some deductions and allowances but it could not be saddled with liability as it had happened in the instant case. In short, his stand was that the assessee was not liable to pay tax on the fictional income in question. The fiction according to him could not be extended to the disposal of assets other than business assets. The said fiction was thus not relevant to the facts of the instant case. Lastly, the counsel vehemently urged that the legislation in question tantamounts to levying income-tax on Capital Gains on sale of immovable property and hence it was void ab initio.
6. The learned Departmental Representative urged that the action of the Federal Government in inserting clause (c) in subsection (1) of section 31 of the Ordinance was within its competence and jurisdiction. Similar provision, according to him, did exist in the repeated income-tax Act (hereinafter called "the Act") and its omission from the Ordinance was quite accidental. This lacuna was done away with by the Federal Government by enacting clause (c) in subsection (1) of section 31 of the Ordinance. He further contended that the provision in question was for the benefit of the assessee. He maintained that there was no question of talking of capital gain. The contention of the learned counsel for the appellant, in this behalf, according to him, was wholly misconceived.
7. There is no doubt the facts that the assessee had acquired the assets in question before the income year and that it had been allowed depreciation under the Act in respect of assessments for all the char g years. The expressions "sale price" and "W.D.V." are defined, respectively, by rules 8(5) and 8(7) of the Schedule, The assessee's liability to pay tax in respect of this fictioning income directly arose under rule 7(5)(b) of the 'Rules for the computation of depreciation as embodied in the Schedule. Rule 7, as already reproduced above, manifestly mentions that notwithstanding anything contained in this Ordinance or the repealed Act, where, in any year any asset or class of assets is disposed of by an -assesses, if the sale-proceeds thereof exceed the W.D.V. the excess shall be deemed to be the income of the) assessee of that year chargeable under the head "Income from business or profession". Rule 7 of the Schedule is, therefore, quite independent) of the provisions of the Ordinance or of the repealed Act. It is a self-contained provision of law by virtue of which if an assessee who disposes of any class of assets and the sale proceeds thereof exceed the W. D. V is liable to be taxed in respect of such excess as a deemed income. We may here at the outset make a mention that the learned counsel of the appellant did not assail the computation of the deemed income. He has based his case, as already stated, on the vires of clause (c) of subsection (1) of section 31 as inserted by the Federal Government vide S.R.O. 751(1)/79, dated 23rd August, 1979.
8. It is again pertinent to note that this fictional income has been specifically made chargeable under the head "Income from business or profession". In the presence of this specific provision there remains even no room for the argument that the Third Schedule is relevant only to the income chargeable under the head "income from business or profession". It is thus evident that with the insertion of clause (c) in subsection (1) of section 31 the appellant before us has suffered no injury or liability whatsoever. The contention of the learned counsel for the appellant in this behalf is, therefore, wholly misconceived. For the reasons already assigned the assessee could not escape the liability to pay tax on the fictional income in question. The argument, of the learned counsel for the appellant that the legislation in question has resulted in levying income-tax ran capital gain on sale of immovable property is ex facie, untenable. It is in respect of a deemed income, that the assesses has been subjected to tax. Similar provisions, as' rightly pleaded by the learned Departmental Representative, existed in the Act and it was never assailed before any forum on this plea. We do not find any substance in the contention of the learned counsel and repel it accordingly.
9. In the view taken, it is not necessary to express our opinion on the question ok vires of clause (c) of subsection (1) of section 31, which was thoroughly agitated by the parties' representatives before us. In the facts and circumstances of the case we are firmly of the view that nothing turns on the introduction of the said clause (c).
10. In the result, all the three appeals fail and are dismissed hereby.
67. M. Y. H. Appeals dismissed.