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S.T.As. Nos. 32/KB to 35/KB of 1982-83, decided on 28th August, 1986.

---Ss. 2(12) & 27(1)--Sales-tax--Gas consumption-- Assessee purchasing gas locally and consuming same in dismantling ship and through this breaking getting scrap of ship--Sales lax Officer not allowing sales tax on consumption of gas but allowing 2/3rd of claim and disallowing 1/3rd, basing his judgment on fact that only one-third scrap sales had been subjected to sales tax--Appellate Assistant Commissioner, however, deleting disallowance--Held, Gas not partly manufactured goods; 2/3^rd of finished goods exempt from tax coupled with further fact that concessional rate was directed to be levied instead of normal rate- Department's treatment for allowing refund by taking into consideration all circumstances of case on 2/3rd of consumption of gas was rather magnanimous at cost of incorrect application of law--Since Department was in appeal to the extent of restoring its original disallowance of refund of one-third of claim against allowance of full refund by Appellate Assistant Commissioner, the impugned order was modified and that of Sales Tax Officer restored.

65 I T R 252; 47 I T R 853; 31 I T R 294; 49 I T R 293, 299; (1974) 94 I T R 107; (1977) 107 I T R 347 and 21 Tax 56 (Trib.) ref.

Commissioner of Sales-tax v . Amin Jute Mills, Chittagong P L D 1966 Dacca 456 rel.

---S. 15--Powers of Tribunal whether includes power to tax liability in absence of ground taken in appeal--Point raised, argued but left undecided.

Amin-e-Ajam, D.R. for Appellant.

Sirajul Haq for Respondent.

Date of hearing: 10th August, 1986.

--These are four appeals filed by the department for assessment years 1975-76, 1976-77, 1978-79 and 1979-80, recorded by the Appellate Assistant Commissioner of Income-tax 'D' Range, Karachi, in S.T.As. Nos. 47, 48, 80; and 81/82, dated 10-12-1982. The appeals are against the orders under section 27 (1). For these four years the only point which is under appeal is about the claim of gas consumption purchased locally and used in the dismantling of the ship and through this breaking process to get the scrap of the ship. The Income-tax Officer did not allow the sales tax on consumption of gas but allowed 2/3rd of the claim disallowing 1/3rd basing his judgment on the fact that the whole scrap sales had not been subjected to sales tax. The relevant figures for these years are as under:---

2. Mr. Muhammad Farid, the learned Departmental Representative urged that section 2 (12) read with section 27 (1) gives no entitlement of refund to the assessee. He referred to page 24 of the commentary by Raza Naqvi on the Law of Sales Tax in Pakistan 9th Revised Edition, June 1979. The relevant para. is quoted below for the sake of convenience and easy reference:

"Partly manufactured goods (CI. (12).--The goods which are not finished or are component part of another article may be called partly manufacturer goods. The tax will not be chargeable if the partly manufactured goods are sold by a licensed manufacturer to another licensed manufactured or by a licensed wholesaler to another licensed wholesaler or if those are imported by the licensed manufactured.

Explaining the definition of "partly manufactured goods" the Dacca High Court in C. I. T. v. Amin Jute Mills Ltd. Chittagong observed that the article for which the partly manufactured goods are used must be taxable. In other words if the finished goods are exempt from tax, the furnished goods incorporated into it cannot be termed as 'partly manufactured goods'."

He urged that 2/3rd of the sales were exempt from tax and 1/3rd were liable to tax and that relief for refund on gas consumption has wrongly been allowed. Mr. Muhammad Farid, also urged that the Tribunal has the power to enhance but such order of enhancement has to be done after serving a show-cause notice to the appellant. He referred to page No. 584 of the said commentary. He further referred to the corresponding sections of the Repealed Income-tax Act and section 33(4) of the said repealed Act and urged that the words used in the said subsection (4) of section 33 are "thereon". Exact wording of the said subsection (4) of section 33 is given for reference as under:

"The Appellate Tribunal may refer giving both parties to the appeal an opportunity of being heard pass such order thereon as it thinks fit and shall communicate the order to the assessee and the commissioner of Income-tax."

Mr. Muhammad Farid urged that, in Sales Tax Act words are on the appeal" and he urged that the Tribunal has complete authority to enhance the wrongly allowed refund.

3. The learned counsel Mr. Sirajul Haq referred to Income-tax Ordinance and Wealth Tax Act and urged that unlike these Acts there is no specific directions in the Sales Tax Act. He placed reliance on page 334 of the Law of Sales Tax in Pakistan 1971 Edition by the same learned author Raza Naqvi. He urged that on page 334 the learned author has observed that the Tribunal has no authority to enhance. He further placed reliance on several decisions discussing this question of enhancement and cited the following cases:---

He also placed reliance on the commentary on Income-tax, by the famous author Sundaram, 11th Edition, 1982 Volume (III) page 3154. He urged that there is an inbuilt restriction limited to subject-matter and that the Tribunal has no authority to go beyond the grounds of appeal. He also referred to the interpretation of law by Crawford page 440 para. 234. He urged that had there been intention of Legislature the same would have been done by amendment by insertion of the words "enhancement" to that effect.

4. He further referred to the words "partly manufactured goods" and explained that the word 'incorporate' also means 'merge' and it could also be construed to be used or consumed. In this respect he referred to the use of "polish" which does not become part of the manufactured goods but used in certain cases. He also urged that oxygen has been used or consumed in dismantling of the ship and that ships so broken is the subject-matter of appeal and as such the gas shall be treated to be partly manufactured goods having been consumed for purposes of manufacture, i.e. breaking of the ship. He accordingly urged that the order of the Commissioner of Income-tax (Appeals) should be confirmed and that there could be no occasion to enhance the demand by curtailing the refund. Mr. Muhammad Farid, the learned Departmental Representative in reply to the argument advanced urged that there would have been no powers to the Tribunal in this case, had there been no appeal by the department. In view of the appeal by the department the Tribunal, has got the full authority to enhance the demand or to curtail the refund. He further urged that no investigation of facts is involved and only question of law is involved here and therefore, the Tribunal could enhance on the basis of the wordings of section 15 (5) of the Sales Tax Act which speak of such orders on the appeal as it thinks fit. Mr. Muhammad Farid also referred to the commentary of Income-tax by Kanga and Palkhiwala, 7th Edition, page 1141. It has been opined by the learned author that the Tribunal would be entitled to enhance the assessment as it stands after the First Appellate Authority's order in an appeal or cross-objection by the department for that purpose. Mr. Muhammad Farid urges that in case of the appeal by the department such power does exist with the Tribunal. He further referred to the definition and urged that in the alternative this could be entertained as an additional ground of appeal as well by the Tribunal and that the omission was not intentional on the part of the department. Lastly he urged that in the alternative only 1/3rd refund on the gas consumed was allowable at the most in view of what has been urged and 2/3rd is not at all allowable.

5. Mr. Muhammad Farid, the learned Departmental Representative further urged that only one point is involved about the admisibility of sales-tax on gas consumption. He urged that there was an agreement between the ship-breaker' s Association and the Central Board of Revenue by virtue of which only 1/3rd of the total turnover on account of sale price of the scrap of ship was to be subject to sales-tax at the rate of 7 % as against the normal rate of 20% and 2/3rd was to be treated to be exempt from sales tax paid on purchase of gas allegedly consumed was disallowed by the Income-tax Officer at 1/3rd which was in order and that the Appellate Assistant Commissioner was not correct in deleting the disallowance. He urged that the treatment in the past given is distinguishable as in the past 1/3rd of the turnover was not subjected to tax as well as the rate was normal i.e. 20% as against 7% S.T. leviable this 1/3rd taxable turnover fixed for purposes out of the total turnover.

6. Mr. Sirajul Haq, the learned counsel for the respondent referred to page 2 of the impugned order of this case and also placed reliance on 21 Tax 56 (Trib). Besides he referred to the letter of the Central Board of Revenue bearing No. 1010/TST/76, dated 30-8-1978. He also urged that the Appellate Assistant Commissioner was justified in deleting the disallowance made by the Sales Tax Officer.

7. After hearing both the learned representatives notwithstanding the fact that we have at length heard the representatives of the parties regarding the powers of enhancement of the Appellate Tribunal yet we de not consider it a fit case wherein we should record a definite finding on this issue. The Central Board of Revenue has entered into a deal with the assessee through the ship-breakers association thereby agreeing to tax the value of the goods manufactured by it at concessional rate of 7 % as against the normal rate of 20% after exempting 2/3rd of the turnover the tax being actually 2.5% on the gross-sales.

8. Now we deal with the main appeal. After hearing both the learned representatives we refer to section 27, Chapter 14 of the Sales Tax Act which speaks as under:

"."Where partly manufactured goods are purchased by a manufacturer and tax has been paid on those goods on importation or on any previous sale, a refund of the amount of the tax so paid shall be made to the manufacturer."

By virtue of the above section the sales tax authorities are statutorily bound to allow adjustment of sales tax paid on purchase of "partly manufactured goods" or if sales-tax has been paid on the goods on importation in the case under reference. There is no doubt about the payment of sales tax on gas but gas is not at all a partly manufactured good forming component part but has been used for the dismantling of the ship and could,, not enjoy any benefit of sales tax paid on gas. In these circumstances the assessee prima facie is a sufferer on account of the absence of proper directions in favour of the assessee However, there is another aspect of the case and that is under section 2(12) there is a definition of "partly manufactured goods" which reads as under:----

"Partly manufactured goods" means only goods which are to be incorporated into and form a constituent or component part of an article which is subject to the tax."

9. The Dacca High Court in the case of Commissioner of Sales Tax v. Amin Jute Mills Chittagong P L D 1966 Dacca 456 observed that the articles for which the partly manufactured goods are used must be taxable. In other words if the finished goods are exempt from tax unfinished goods incorporated into it cannot be termed as partly manufactured goods. In the case under reference here firstly the goods, are not partly manufactured goods in the light of the above definition besides 2/3rd of the finished goods are exempt from tax coupled with the further fact that the concessional rate of 7 % has been directed to be levied instead of normal 20%. In view of these circumstances the department's treatment for allowing refund by taking into consideration all the circumstances of the case on 2/3rd of the consumption of gas was rather magnanimous at the cost of incorrect application of law. However, since the department is in appeal to the extent of restoring their original disallowance of refund of 1/3rd of the claim against the allowance of full refund hence the order of the Appellate Assistant Commissioner is modified and the order of the Sales Tax Officer is restored.

10. The appeal succeeds to the extent as indicated above.

M.Y.H. Appeal accepted.

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