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I.T.As. Nos. 445 to 447 (IB) of 1986-87, decided on 18th February, 1987.

---S. 14 & Sched. II, Part I, item 119--Notification No. S.R.O. 547(1)/79, dated 28-6-1979 as amended by S.R.O. 600(1)/83, dated 11-6-1983--Income--Exemption, claim of--Process of assembling whether manufacturing process-- Assessee, engaged in business of assembling diesel engines, distribution panels and circuit brakers --Process of assembling being as much part of manufacturing process as the production of components, claim of exemption of his income by assessee under Sched. II, part I item 1l9 of the Ordinance, held, was not unjustified.

VIJA Cycle Rikshaw Company v. C.I.T. Sales Tax, UP P L D 1959 S C 103; P L D 1965 S C 161 and I.T.As. Nos.197 & 198 (PB) of 1984-85 ref.

---S. 14 & Sched. 11, Part I, item 119--Income--Exemption, claim of- Reasons that extent of consumption of power by assessee was negligible; manufacturing licence from its parent company was not obtained; no leaflet, brochure or any written material was available in this behalf and that wages were not supported by books of accounts of assessee were devoid of force these being not the conditions governing grant of exemption under item 119--Grant of exemption thus could not be refused on such grounds.

--S. 14 & Sched (I, Part I, item 119 & S. 91--Assessee engaged in business of assembling diesel engines, distribution panels and circuit brakers--Income--Exemption--Assembly of certain parts so as to constitute machinery being a process of manufacturing and assessee thus being a manufacturer, income derived by him, held, was exempt from tax in accordance with provisions of item 119, Part I of Sched. II of the Ordinance -"Exemption having been allowed to assessee, penalties for non-payment of tax were also, held, to be ab initio illegal and were accordingly cancelled.

1986 P T D (Trib.) 384; C.I.T. Bombay v. Tata Locomotive Motor and Engineering Company Ltd.; P L D 1959 S C (Pak.) 103 and I. T. A. Nos. 197. and 198(PS) of 1984-85 ref.

Arshad Qayyum, FCA for Appellant.

Maqbool Hussain Shah, D.R. for Respondent.

Date of hearing: 17th February, 1987.

These three appeals on behalf of the assessee are directed against the impugned order of learned CIT' (Appeals) in consequence of which he confirmed assessment relating to the charge year 1983-84 and also penalties under section 91 of the Income-tax Ordinance, 1979 (hereinafter called the Ordinance), for the said year amounting to Rs.31,625 and Rs.63,256.

2. Brief facts giving rise to these appeals are that the assessee, a private limited company, is engaged in the business of assembling diesel engines, distribution panels and circuit brakers. The company was incorporated in 1979 but no business was done by it during the previous years relevant to the charge years 1981-82 and 1982-83. Therefore, for these two years no assessment was made. The assessee, however, filed its return of income for the charge year 1983-84 to declare net profit of Rs.1,63,446. In respect of this income, exemption was claimed by the assessee under item 119, Part I of Second Schedule to the Ordinance. The Income-tax Officer after examination of the case, rejected claim of the assessee for exemption. In consequence thereof, trading account of the assessee after scrutiny, was also rejected. Therefore, turnover of the assessee was estimated at Rs.80,00,000 as against Rs.74,37,150 disclosed by it. Turnover so estimated was subjected to gross profit rate of 25 so as to determine gross income at Rs.20,00,000. To the gross income so computed was added a sum of Rs.5,34,504 on account of unexplained cash credit under section 13(1)(a) of the Ordinance. Similarly after making disallowances out of certain P & L expenses and adding to it income as per P & L account, net income of the assessee was estimated at Rs.23,00,000. Income so computed was charged to tax amounting to Rs.12,65,000. Since the assessee did not clear its tax liability, penalties of Rs.31,625 and Rs.63,250 were also imposed by virtue of Income-tax Officer, Central Circle-II, Lahore's orders, dated 24-3-1986 and 23-4-1986 respectively. In this view of the matter, the assessee filed three appeals before the Tribunal; one against assessment relating to the charge year 198:3-84, white the other two against imposition of penalties for the, said year. These appeals were rejected by' virtue of learned CIT (Appeals) Orders Nos.255, 256 and 290/CC-II, dated 29-10-1986. Having failed to get the required relief from the first appellate authority, the assessee filed second appeals before the Tribunal for the redress of its grievances. In this connection, objections of the assessee are listed below:-

(i) That learned CIT(Appeals) was not justified in rejecting claim of the assessee for exemption of its income from tax under item 119, Part I, Second Schedule to the Ordinance.

(ii) That learned CIT(Appeals) order prejudiced the interest of assessee by ignoring case-law which was submitted in support of the assessee's claim for exemption.

(iii) That confirmation of rejection of trading account in consequence of which estimate of turnover as well as rate of profit was also upheld was erroneous. It was submitted that observation of learned CIT(Appeals) that the assessee had not maintained a stock register, salary register and wages register was not correct and was contrary to the factual position.

(iv) That learned CIT (Appeals) fell into an error in confirming addition of Rs.5,34,504 on account of unexplained cash credit under section 13(1)(a) of the Ordinance.

(v) That confirmation of disallowances was erroneous as the I.T.O. did not put on record any material to justify it.

(vi) That learned CIT (Appeals) committed an error in confirming penalties for non-payment of income-tax for the charge year 1983-84. It was accordingly prayed that appropriate relief may be given to the assessee by the Tribunal.

3. Mir Arshad Qayyum, FCA, on behalf of the assessee has argued at length to establish that income of the assessee is exempt from payment of tax. In this connection, he has first relied on item (119), Part I of the Second Schedule to the Ordinance, which is set out below:-

"Profits and gains derived by an assessee from an industrial undertaking set up between the first day of March, 1978, and the thirtieth of June, 1988, both days inclusive, for a period of five years beginning with the month in which the undertaking is set up or the commercial production is commenced, whichever is the later.

The exemption under this clause shall apply to an industrial undertaking, which is:

(a) set up in the province of Baluchistan;

(b) owned and managed by a company formed and registered under the Companies Act, 1913 (VII of 1913), having its registered office in Pakistan;

(c) engaged in the setting up of a hotel or in the manufacture of goods or materials or the subjection of goods or materials to such process; and

(d) an undertaking the income, profits and gains of which are not liable to be computed in accordance with the rules contained in the Fifth Schedule."

4. At this stage, it is relevant to point out here that the assessee's claim for exemption under item (119), Part I of the Second Schedule of the Ordinance was turned down at assessment stage arid was also confirmed by learned CIT(Appeals). In this connection, finding of learned CIT(Appeals) is given below:

"The assessee was required to explain why exemption had now been claimed as a manufacturer whereas earlier it had committed and declared itself - to be engaged in assembling only of diesel engines.",

5. This objection is disposed of by referring to the case of VIJA Cycle Rikshaw Company v. CIT Sales Tax, UP; in which it was held that "process of assembly is as much part of the manufacturing process as the production of components. It may be the end process but nevertheless essential to completion of the commercial commodity." Similar conclusion was drawn in two cases of Pakistan jurisdiction reported as PLD 1959 S C 103 and P L D 1965 S C 161. We also took this view in ITAs Nos.197 and 198(PB)/84-85, dated 27-5-1986. On account of the foregoing discussion, we have no hesitation in stating that assembly is "as such a part of the manufacturing process". Therefore, the assessee did not commit anything wrong when it stated earlier that it was involved in the assembly of diesel engines, distribution panels and circuit brakers. Hence, subsequently when it claimed exemption as a manufacturer under item (119), Part I, of the Second Schedule to the Ordinance, it did not commit any wrong so as to render itself ineligible for exemption under the item ibid.

6. Mir Arshad Qayyum, FCA, arguing further has stated that under SRO-547(1)/79, dated 28-6-1979 as subsequently amended by SRO-600(1)/83, dated 11-6-1983, recognized manufacturers were given preferential rates of Customs duty in respect of certain raw material and such components as were not ordinarily manufactured in the country. He has further submitted that as the assessee was a recognized manufacturer of diesel engines, distribution panels and circuit brakers, it was entitled to exemption of its income under item (119), Part I of the Second Schedule to the Ordinance. In support of this contention, he has relied on the following documentary evidence which is listed below:----

(i) The Assistant Collector, Central Excise and Land Customs (SITE Division) Karachi's letter No.5(22)-Tech/83/6159, dated 12-2-1983. For facility of reference, relevant extract of this letter is given below: -

"I, Muhammad Ali, Assistant Collector, Central Excise & Land Customs, S.I.T.E. Division, Karachi, am satisfied that the raw material and components imported by Messrs Baluchistan Agro Development Co., Ltd, 511, Uni Tower, I.I Chundrigar Road, Karachi, have been consumed in the manufacture/assembly of Diesel Engines as per details given below, in pursuance of Board's letter No.C.No.2 (37)-D/(IS)/82/I, dated 22-11-1983.

(ii) CBR's letter No.2(37)-D(IS)/82.PT.I, dated 6-11-1984.

Its relevant extract is cited below:--

"It is certified that the importers are manufacturers of diesel engines. The quantities of raw material and components required for this product have been worked out at Annexure A.

(iii) Chief Rebate and Industrial Survey, CBR's letter No.2(37)-D (IS)/52/PTI, dated 12-3-1985. The relevant part of this letter is incorporated below:-

"It is certified that the importers are manufacturers of diesel engines."

(iv) The Government of Baluchistan's letter No.01(IND)PO/81, dated 10-2-1982. In this connection, para 2 of the letter is set out below: -

"The Government of Baluchistan welcome your decision to the establishment of diesel engines and small generation sets and all types of pumps and assembly; manufacturing of Agricultural implements at Hub Chowki ..."

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7. The above evidence based on certain letters of the CBR and the Government of Baluchistan has been shown to learned DR on behalf of the department. He has not been able to controvert the contents of these letters lie has also net taken the position that based on these letters, the assessee's claim for exemption under item (119), Part II of the Second Schedule to the Ordinance was not well founded. Therefore, on facts case of the assessee falls under the head of manufacturing.

8. We shall now examine second objection of the I.T.O. which weighed heavily with learned C.I.T. (Appeals) in holding that the assessee was not a manufacturer. In this connection observation of learned CIT (Appeals) vide para 2 on page 3 of the appellate order is set out below : --

"Assembly is only the final part of manufacturing process and does not in itself constitute manufacture. To me even the claim of assembling of diesel engines and DP boxes was doubtful, "

9. This objection need not detain us much longer as we have already pointed out that in VIJYA Cycle Rikshaw v. CIT Sales Tax UP, it was held that the process of assembly is as much a part of manufacturing process as the production of components. It may be the end process but nevertheless essential to the completion of commercial commodity." A similar conclusion could be drawn from two cases of Pakistan jurisdiction reported as P L D 1959 S C 103 and P L D 1965 S C 161. We have repeated this argument because learned CIT (Appeals) also dealt twice on this point while rejecting claim of the assessee as a manufacturer. Before proceeding further, it is desirable to mention here that learned CIT (Appeals) somewhere in the body of the appellate order has himself conceded that "it was clear that the assessee company at the most was) assembler of diesel engines and DP boxes". By conceding that the 3ssessEe was assembler of diesel engines and DP boxes, learned CIT (Appeals) had in fact supported case of the assessee as "the process of assembly is as much a part of the manufacturing process as the production of the components." :

10. Another reason advanced by learned CIT (Appeals) to reject the assessee's claim as a manufacturer of diesel engines and DP boxes related to the fact that the element of consumption of power in the cost of sales was almost negligible and even the wages paid were not supported by books. Even this argument has not found favour with, is, as extent of consumption of power is not one of the conditions, which governs exemption tinder item (119), Part I of Second Schedule of the Ordinance. Similarly, even if it is conceded for a moment though fir Arshad Qayyum, learned counsel of the assessee, is not prepared no accept this position that wages were not supported by books of accounts, yet it is not one of the conditions that governs grant of exemption under item (1191, Part I of Second Schedule to the, Ordinance.

11. Learned DR has also taken the plea that as the assessee did not obtain any manufacturing licence from the parent company and as no leaflet, brochure or any written material was available with the assessee, was not entitled to exemption. Even this ground for rejecting claim of the assessee under item (119), Part I of the Second Schedule to the Ordinance, is not well-founded as such a condition has not been prescribed under it. If the assessee had not obtained a licence from its parent company, then it was a matter between the assessee and the' parent company but as far as case of the assessee for exemption is' concerned, it was not burdened with this requirement. Therefore, in our opinion, all major objections of the department for rejecting claim of the assessee for exemption have not found favour with us.

12. We shall now examine from purely legal point of view whether the assessee is entitled to exemption from tax or not

13. Mir Arshad Qayyum, FCA, has relied on a number of decided cases both of Pakistan and Indian jurisdictions to establish that the assessee was a manufacturer of diesel engines, distribution panels and circuit brakers. These cited cases are given below:----

1986 P T D (Trib.) 384.

CIT, Bombay v. Tata Locomotive Motors and Engineering Company Ltd.

P L D 1959 S C (Pak.) 103.

14. In the above cases, it has been held that assembly of certain parts so as to constitute machinery would be considered as a process of manufacturing. Similar view was taken by us in ITAs Nos.197 and 198(PB)/84-85, dated 27-5-1986. Therefore, in our opinion, the assessee is a manufacturer of diesel engines, distribution panels and circuit brakers. Hence, income derived by it is exempt from tax in accordance with the provisions of item 119, Part I of Second Schedule to the Ordinance.

15. As income of the assessee has been held to be exempt under item (119), Part I, Second Schedule to the Ordinance, it is not necessary for us at this stage to hand out a verdict with regard to the other grounds of appeals taken by Mir Arshad Qayyum, learned counsel of the assessee. Similarly, exemption having been allowed to the assessee, impugned penalties for non-payment of tax are held to be ab initio illegal and are accordingly cancelled.

16. In consequence of the above order, appeals, of the assessee succeed to the extent and in the manner indicated above.

M.B.A./372/T Order accordingly.

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