I.T.AS. NOS. 1384/KB AND 1183/KB OF 1982-83, DECIDED ON 17TH JULY, 1988. Versus I.T.AS. NOS. 1384/KB AND 1183/KB OF 1982-83, DECIDED ON 17TH JULY, 1988.

ORDER

MANZURUL HAQUE (ACCOUNTANT MEMBER) .-- These two appeals have been filed directly to this Tribunal against the order of the learned I.A.C. of Income-tax, Companies Range-1 Zone-B Karachi. The grounds urged before us are in respect of:

(a) jurisdiction of the learned I.A.C. to invoke the provision of section 66-A of the income-tax Ordinance, 1979.

(b) direction to I.T.O. to allow depreciation on machinery without deducting the tax credit allowed under section 107; and

(c) direction -to exclude installation charges from the cost of machinery.

2. The original assessments for the years 1980-81 and 1981-82 were finalised under section 59(1) on 22-3-1981 and 31-3-1982 respectively. On perusal of the records the learned I.A.C. discovered that tax credit allowed under section 107 of the income-tax Ordinance, 1979, to the tune of Rs.7,64,815 on total amount of Rs.50,98,764 for the assessment year 1980-81 and Rs.8,29,042 on an amount of Rs.55,26,946 in 1981-82 were not justified and prejudicial to the interest of revenue. The learned I.A.C. also discovered that a substantial amount actually represented expenditure incurred on installation of the said machinery whereas under section 107 tax credit was to be allowed only on amount invested in the purchase of plant and machinery. Therefore, for the excessive tax credit allowed by the I.-T.O. the I.-A.C. invoked the provision of section 66-A of the Income-tax Ordinance, 1979. The learned counsel raised a number of objections before the learned I.A.C. in respect of installation charges, depreciation under section 8(8)(b) but they were not considered satisfactory and the learned I.A.C. ordered for modification of both the orders as under:-

(a) that the amount of tax credit should be restricted to Rs.7,64,815, for 1980-81 and Rs.8,13,597 for 1981-82; and

(b) depreciation under the 3rd Schedule shall be allowed on the actual cost of pew plant and machinery as it works out after deducting the admissible tax credit.

3. Mr. Sirajul Haque, the learned counsel appearing before us repeated the same arguments, which he had earlier submitted before the learned I.A.C. As regards powers of the I.A.C. to invoke the provision of section 66-A of the Income-tax Ordinance, 1979, he argued, that the principle of merger has already been decided by the Hon'ble High Court of Sind at Karachi 1985 P T D 874 as well as by the Tribunal against which the department has gone in reference to the Supreme Court of Pakistan. The relevant extract from the order of the Hon'ble High Court of Sind at Karachi reads as under:-

"------A plain reading of the above section indicates that an I.A.C. has been empowered to examine the record of any proceedings under the Act and to revise any order passed therein by the I. T .O., if he considers it erroneous and prejudicial to the interest of the revenue. In our view the words 'any proceedings' are to be read with in conjunction with the words 'Income-tax Officer'. In order to invoke the above section, it is prerequisite that the order which is to be revised, must be an order of an' I.-T.O. "

In the present case, since the original assessment order was modified by the I.A.C. by his order, dated 16-10-1969, the original order of the assessment stood merged with the appellate order and hence the appellate order was holding the field and not the original assessment order ....".

4. Mr. Muhammad Farid, the learned D.R. pointed out that since the learned A.A.C. in his order did not touch the issue of tax credit under section 107, the I.A.C. correctly seized the issue, and took corrective measures under section 66-A of the Income-tax Ordinance, 1979. However, in view of the decision of the Hon'ble B High Court of Sind at Karachi, as well as the Tribunal we decline to entertain the arguments of the learned departmental representative.

5. Similarly on the issue of depreciation to be allowed under section 8(8)(b) of the 3rd Schedule to the Income-tax Ordinance, 1979, Mr. Sirajul Haque the learned counsel, pointed out that this issue also stands settled by various decisions of the Tribunal; I.T.A. No. 118/KB of 1983-84, dated 18-1-1987 and 1987 P T D (Trib.) 116 in which it was held:

"------it is thus clear that in computing the actual cost of an. asset for the purposes of initial depreciation the tax credit is not to be deducted from the value of the plant or machinery Let us also mention here that both tax credit and deduction or allowance stand on altogether different footing because the former is deducted from the tax payable either in relevant assessment year or future year or years, as the case may be, whereas the allowances or deductions are made from the total income. Thus, whatever view is taken the word 'tax credit' does not appear to be synonymous of word allowance or deduction. We, therefore, direct the Income-tax Officer not to exclude the amount of tax credit from the cost of an asset as it cannot be excluded under clause (b) of sub-rule (8) of Rule 8 of Third Schedule of the Income-tax Ordinance, 1979."

Concurring with the above decision we dispose of this issue in favour of the appellant.

6. Now coming to the last ground taken in respect of installation charges, the learned counsel relied on dictionary meaning of the words 'investment' and 'installation'. He also drew our attention to the provision of section 15-GG of the repealed Income-tax Act wherein the word used was 'cost' which also included installation charges. He drew our attention to C.B.R's. Circular No. 4 of 23-8-1979 which says that the provision of section 107 of the Income-tax Ordinance, 1979 is the same as that of 15-GG of the repealed Income-tax Act. The relevant portion of the circular, is reproduced as under:

"--------As regards the incentive of tax credit for replacement balancing, modernisation and for extension of the industrial undertakings, the same was provided under section 15-GG of the repealed Act, 1922. That section granted 10% of the 'actual cost' of machinery. Since actual cost was a known concept under the old Act and included the cost of installation as well, tax credit was granted on the total investment comprising of purchase price of machinery and the cost of its installation The same incentive was incorporated in the new Income-tax Ordinance, 1979. (In fact the incentive was further enhanced from 10 to 15%). That there was no change in the concept and the law for tax credit is evident from para. 30 of the C.B.R's. Circular quoted which is quoted verbation below:

(3) "Tax credit for replacement, balancing, modernisation etc. of machinery or plant Section 10 --

The provisions of this section are same as old section 15-GG allowing the tax credit to companies installing machinery for balancing modernisation, etc. However, the period within which such machinery could be installed has been extended to 30-6-1983 ...."

7. Mr. Muhammad Farid, the learned D.R. on the other hand, drew our attention to Circular No. 1(40) ITI/79, dated 5-2-1983 whose last line reads as under:-

".... Obviously the amounts spent on purchase of other assets or the amounts relating to plant or machinery spent for purposes other than their 'purchase' such as cost of installation etc. would not qualify for the purposes of rebate .... "

The learned D.R. explained that the first circular relied upon by the learned authorised representative was of academic nature: The real interpretation of section 107 of the Income-tax Ordinance, which has come from the C.B.R. is the one he has quoted.

8. We have given due consideration to the issue involved and have arrived at the conclusion that tax credit under section 107 is, admissible only on amount invested in the purchase of plant and, machinery for installation. If the investment is made for purchase oil machinery not intended for installation, the concession will not be allowed. The Legislature has thus clearly made distinction between:

(a) Machinery purchased for installation; and

(b) Machinery purchased not for installation (for sale etc.).

In the former case rebate under section 107 is allowable, while in the latter it is not. In order to qualify for the concession, the investment made on the purchase of machinery should be for installation and not for any other purpose. Subsection (8) of section 107 gives power to the Central Board of Revenue to make rules and lay down procedure for the operation of this section:

"107(8). The Central Board of Revenue may make rules regulating the procedure for the grant of approval under this section and, any other matter connected with, or incidental to, the operation of this section."

The Board vide its circular, dated 5-2-1983 has enunciated the policy, in respect of tax credit which does not include installation expenses.

9. However, without going into further details we feel constrained, in view of Hon'ble High Court's decision on the issue of merger, to restore the assessment finalised by the Income-tax Ordinance, 1979.

10. Both the appeals succeed to the extent as indicated above.

FARHAT ALI KHAN (CHAIRMAN). -- I have carefully gone through the order proposed by my learned brother, the Accountant Member of Karachi Bench and concurred by my brother; the learned Accountant Member of Islamabad Bench. While I respectfully agree that under the facts and circumstances of the appeals the learned Inspecting Assistant Commissioner had no jurisdiction to exercise his power under section 66(A) of the Income-tax Ordinance, 1979, yet I feel that keeping into consideration the importance of the point involved, I should deal with this point at some length.

Mr. Mohammad Farid, the learned D.R. vehemently argued that since the learned Appellate Assistant Commissioner in his order did not touch the issue of tax credit under section 107, the order of the I. T .O. did not merge with the order of learned A. A. C. and consequently the learned Inspecting Assistant Commissioner correctly exercised his jurisdiction under section 66(A) of the Income-tax Ordinance. Mr. Sirajul Haque, the learned counsel for the appellant, however, strenuously urged that if only one issue arising out of several issues of the assessment order was taken in appeal, the entire assessment order stood merged in the appellate order. He fortified his submission by putting reliance on the following decisions:-

(1) 1986 P T D 874 C.I.T., East Zone, Karachi v. Ata Muhammad Faiz (H. C. Karachi).

(2) I.T.As. Nos. 123, 124 and 125/KB of 1978-79, dated 5-3-1986, which is reported at page 40 of April, 1986 issue of Tax Observer.

(3) (1976) 105 I T R 344 J.K-. Synthetics Ltd. v. Additional Commissioner of Income-tax U.P. (All. H.C.).

Starting with Atta Mohammad's case (supra), it appears that the issue involved was not precisely the same, which has now been canvassed by Mr. Mohammad Farid, the learned D.R. In that case the assessment order framed by 'the I.-T.O. on 30th April, 1969 was set aside by the learned A.A.C. on appeal by his order, dated 23-9-1969 and the I.-T.O. pursuant to the direction of learned A.A.C. framed de novo assessment on 16th October, 1969. However, the I.A.C. of the Range issued notice under section 34(A) of the repealed Income-tax Act on 25th May, 1972 proposing to revise the original assessment order, dated 30-9-1969. It was urged before him that since the original assessment order stood merged in the order of the A.A.C., he had no jurisdiction to proceed under section 34(A) but he turned down this submission and revised the assessment order on 24th April, 1973. Having been aggrieved and dissatisfied the assessee went up in appeal before the Tribunal and the order of learned I. A.C. was set aside. This time the Department felt aggrieved and took the matter to the High Court of Sind at Karachi and their Lordships resolved the controversy in the following words:- ,

"In the present case since the original assessment was modified by the Appellate Assistant Commissioner by his order, dated 16-10-1969, the original order of the assessment stood merged with the appellate order and hence the appellate order was holding the field and not the original assessment order, dated 30th April, 1969."

Consequently the order of this Tribunal was affirmed.

However, the decision of this Tribunal relied upon by Mr. Sirajul Haque, the learned counsel for the appellant, squarely deals with .the issue involved in this appeal. In this case the assessment for the charge year 1972-73 was completed on 17th April, 1975 and then an appeal was filed which was disposed of by the learned A.A.C. on 26th July, 1975. But sometime in 1978 the learned II A.C. detected that certain payments made by the assessee-company to the Federal Government were claimed as a deduction and the same was also allowed by the Income-tax Officer. Since he was of the view that the I.T.O. should not have allowed the payments made to the Federal Government as a deduction against the income as it was inadmissible, he issued show-cause notice to the appellant-company to explain as to why the impugned payments made to the Federal Government should not be disallowed as there was no provision under the repealed Income-tax Act to allow them. Consequently the question arose as to whether the learned I.A.C. had jurisdiction to exercise his powers under section 34(A) of the repealed Income-tax Act when the order of the I.T.O. stood merged in the order of learned A.A.C The learned Accountant Member writing the main order answered the aforesaid question in the negative. On the other hand, the answer of learned Judicial Member came in an emphatic 'No'. In support of his conclusion he observed:-

"The theory that original order is merged into the appellate order has only a limited application. An aggrieved party may not necessarily challenge the entire order of the original authority and an appeal may be filed against: some of the points on which the assessee feels aggrieved. In such cases the appellate authority applies its mind only on the points, which were agitated before it. The issues which are not raised and on which an appellate authority neither applies its mind nor gives any finding cannot be called the subject-matter of appeal and. thus can never merge in the appellate order. Therefore, the original order merges into the appellate authority's order only to the extent on which the appellate authority has applied its mind and has given its decision."

Since there was a difference of opinion between the learned Members of the Bench the matter was placed before me. Starting my discussion with the peculiar nature of the jurisdiction of the first Appellate Authority, I relied on a decision reported from Bombay High Court as (1968) P T D 165 Narrandas Manordas, Bombay v C.I.T. Bombay. Thus, I made the following observation:

"In my humble judgment it is a settled law that the powers of Appellate Assistant Commissioner are different than those of any other appellate Court. I would like to fortify my view by citing a case coming from Bombay High Court and reported as (1968) P T D 165 Narrandas Manordas v. Commissioner of Income-tax. The learned Division Bench consisted of such eminent Judges like Chagla, C.J. and Tandolkar, J. interpreting the provisions of section 31(3) of the repealed Income-tax Act Chagla, C.J. observed:-

'It will be immediately noticed that in giving the power of enhancing the assessment, the Legislature has strikingly deviated from the ordinary principles that govern the Court of appeal. Although the department cannot appeal against the a order of the Income-tax Officer and although the appeal is only by the assessee, even so the Legislature confers upon the Appellate Assistant Commissioner the power to make an, order which is obviously to the prejudice of the appellant. Therefore, although the appellant may only complain of particular points in the assessment and he may be satisfied with regard to the rest of the assessment, the Appellate Assistant Commissioner's powers are not confined to consider only these points about which the assessee has a grievance but he may consider those points about which the assessee is satisfied and order the enhancement of the assessment'."

It is pertinent to note that in the aforesaid case the precise question which was before the learned Division Bench of Bombay High Court was as to whether the Appellate Assistant Commissioner could decide a question which was not raised by the assessee in his grounds of appeal under section 31(3) of the Indian Income-tax Act. It was argued that the Appellate Assistant Commissioner had no jurisdiction to go beyond the decision of the Income-tax Officer because the assessee was only complaining against the receipt, which was brought to tax. Repelling this argument the learned Division Bench made the following observation:-

"Such an interpretation of section 31(3) would not only completely clip the powers of the Appellate Assistant; Commissioner but would fail to give effect to the object that the Legislature had in conferring this rather extraordinary power upon the Appellate Assistant Commissioner. It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax) officer; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal nor in the sense of revising those about which the assessee makes a grievance but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation) arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions, which came in for consideration of the Income-tax Officer."

Justifying such exercises of the power of the Appellate Assistant Commissioner. I also pressed into service the concept of the principle of constructive res judicata and observed as under:-

"Before reverting to the views of learned Judicial Member I feel very much tempted to refer to the principle of constructive res judicata contained in Explanation II of section 11 of Civil Procedure Code. It says that any matter which might' and ought to have been made ground of defence or attack in a former suit shall be deemed to have been a matter directly and substantially in issue in any such suit and consequently would be hit by the principle of res judicata. I think that the same is the position of an appellate order recorded by Appellate Assistant Commissioner. Even if an appeal before him is taken' to agitate a certain disallowance from profit and loss account only yet, under the law, the entire assessment order remains open. Therefore, it is to be presumed that he has looked into all the issues involved in or arising out of the assessments order though he has confined himself to that very group which was canvassed before him by the appellant. Thus, the analogy of the constructive res judicata, those issues which, do arise out of the assessment order and which have not been considered by the Appellate Assistant Commissioner would be deemed to have been decided by him. As such I feel that the entire assessment order with all its points whether adjudicated upon by the Appellate Assistant Commissioner or not would stand merged in his order.;'

Now in order to repel the submission of Mr. Mohammad Farid, the learned D.R., I once again adopt and reiterate the same reasoning.

Mr. Sirajul Haque, the learned counsel for the appellant, also cited before us a decision from Allahabad High Court recorded in the case of J.K. Synthetics Limited (supra). In this case the Income-tax Officer had upheld the claim of the assessee with regard to the development rebate and depreciation on the finding that it was engaged in a Petro-Chemical Industries. The assessee, however, filed an appeal against certain disallowances made from deductions claimed. Since the learned A. A. C. did not deal with the issue of development rebate and depreciation, the Additional Commissioner of Income-tax invoked the provision of section 263(1) of the Indian Income-tax Act and thus the question arose as to whether he could revise such an assessment order, a part of which was confirmed by the learned A.A.C. on appeal. A Division Bench of Allahabad High Court again answered this question in the negative. It was held that in view of the scope and nature of the appellate power, the entire subject-matter of the assessment order was within the jurisdiction of the Appellate Assistant Commissioner. That being so the entire assessment order merged in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. In this case reliance was placed on the following decisions of the Indian Supreme Court:-

(1985) 34 I T R 130, C.I.T. v. Amritlal Bhogilal & Company, A I R 1966 SC 1332 Sheodan Singh v. Daryao Kunwar, (1967) 19 STC 144 Supreme Court State of Madras v. Madurai Mills Company Ltd. and (1967) 66 I T R 443 (SC) C.I.T. v. Raebahadur Hardulroy Motilal Chamaria.

Let me also mention here that their Lordships of Allahabad High Court also relied upon the observation of Chagla, C.J. made in the case of Narrandas (supra) as reproduced above. Moreover, their Lordships also reproduced the pertinent observation of their Lordships of Indian Supreme Court also made in Raibahadur's case (supra) in order to follow it. Their Lordships observed:-

"It would be wholly erroneous to compare the powers of the Appellate Assistant Commissioner with the powers possessed by a Court of appeal, under the Civil Procedure Code. The Appellate Assistant Commissioner is not an ordinary Court of appeal. It is impossible to talk of a Court of appeal when only J one party to the original decision is entitled to appeal and not the other party and in view of this peculiar position the statute has conferred very wide powers upon the Appellate Assistant Commissioner once an appeal is preferred to him by the assessee. It is necessary also to emphasise that the statute provides that, once an assessment comes before the Appellate Assistant Commissioner, his competence is not restricted to examining those aspects of the assessment which are complained' of by the assessee; his competence ranges over the whole assessment and it is open to him to correct the Income-taxi Officer not only with regard to a matter raised by the assessee~ but also with regard to a matter which has been considered by the Income-tax officer and determined in the course of the assessment."

Thus, in view of discussion made above, I once again respectfully agree with the conclusion of both the learned Accountant Members regarding jurisdiction of learned A. A.C. and learned I.A.C. However, I agree with Mr. Mohammad Farid, the learned D.R. that the case of Ata Muhammad Faiz (supra) is distinguishable under the facts and circumstances of this appeal.

Since all the Members agree, the appeals stand disposed of to the extent as indicated above.

M.B.A./535/T Order accordingly.