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I.T.As. Nos. 68/PB, 69/PB and 57/PB of 1985-86, decided on 28th July, 1987.

---S. 15-G G(1)--Words "actual cost of a plant and machinery"- Interpretation--Expression "actual cost" to be ascribed meaning which it carries for business community.

Challaepelli Sagar Ltd. v. C.I.T. (1975) 98 I T R 167 fol.

---S. 107(1)--Tax credit for replacement, balancing and modernisation of machinery or plant--Expression "any amount in the purchase of plant and machinery" used in S.107(1)--Interpretation and meaning-. Expression has to be understood to carry same meaning which the business community ascribes to it--Assessing Officer, under circumstances of each case to determine as to which expense has been incurred for getting the plant or machinery and allow if it is added to the value of plant and machinery purchased -Travelling expenses of directors in purchase value of plant machinery being very remotely connected with purchase of plant not allowed.

Though the legislature has not used the words "actual cost" which were used in Section 15-GG of the repealed Income-tax Act yet the intention appears to be the same. It has been decided as a matter of policy to grant tax credit to a Pakistani Company, which invests any amount in the purchase of plant and machinery for installation at any time between the relevant period. Since the legislature has put emphasis on investment of any amount in the purchase of plant and machinery and since such investment can be taken into consideration for tax credit purposes if such machinery or plant is purchased for installation purposes, therefore, the investment in. Purchasing would not be complete till the machinery or plant is received by an assessee for the purpose of installation. As such all those incidental expenses which an assessee invests in purchasing the plant or machinery and bringing it to the site of installation would be deemed to be the amount invested in the purchase of plant or, machinery and tax credit would be admissible thereon. The expenses which could be included would be C.I.F. value of the plant or machinery, the custom duty and sales tax if any, imports fees any, demurrage and wharfage, if paid by an assessee for reasons beyond its control, the octroi paid to any municipal body and the transporting charges including loading and unloading charges shall fall within the ambit of such investment. In other words all the expenses, which are directly connected with the purchase of plant and machinery, its discharge from port authorities and expenses incurred on transport etc. would be taken into consideration for the purposes of calculating tax credit. However, those expenses, which are remotely connected with the purchase of plant would not be included.

The travelling expenses of the directors in the purchase value of the plant and machinery are very remotely connected with the purchase of plant and should not be allowed.

The legislature has used the expression "purchase" in contradistinction of expression "market value". Market value if shown in the balance-sheet would not be used for working out tax credit.

Under the facts and circumstances of each case the assessing officer should determine as to which expense has been incurred for getting the plant or machinery and should allow if it is added to the value of plant or machinery purchased. However, those expenses, which are remote could be excluded by him.

The expression as used in subsection (1) of section 107 should be understood to carry the same meaning, which the business community ascribes to it.

---S. 107(1)--Expenses incurred on public offering of shares being expenditure on expanding capital of the company, could not be allowed under S.107(1).

(1972) 96 I T R 549 distinguished.

---S. 107(1)--Expenses incurred on account of installation of direct dealing system of the factory, being capital expenditure disallowed, however depreciation under third Sched. of the Ordinance was ordered to be allowed.

Irshad Shaheen, D.R. for Appellant.

Amir Alam Khan F.C.A. for Respondent.

Date of hearing: 28th July, 1987.

These three appeals are directed against the consolidated order of learned Commissioner of Income Tax (Appeals) recorded by him 1-7-1985 relating to the assessment years 1979-80 and 1980-81 and 1981-82. The first two appeals have been filed by the Department regarding assessment years 1979-80 and 1980-81 whereas the third appeal relating to the assessment year 1981-82 has been filed by the assessee, hereinafter referred to as the appellant.

2. The brief facts giving rise to these appeals are that the appellants, a Public Limited Company, derived its income from manufacturing and sale of safety matches. It appears that during assessment years 1979-80 and 1980-81 the appellant claimed tax credit amounting to Rs.2,75,401/- and Rs.66,304/- respectively a/s 107 of the Income-tax Ordinance, 1979, hereinafter referred to as the Ordinance. The appellant claimed the aforesaid amount of tax credit at Rs.20,10,938/- and Rs.4,43,360/- in each year respectively. Both these amounts included CIF value of the machinery alongwith import fees, custom duty etc., travelling expenses of directors and installation expenses and these amounts were reflected in balance sheets of each year. The Income-tax Officer, however, allowed tax credit on Rs.13,26,870 and Rs.3,98,220 the former being the total value of the machinery and plant imported and locally purchased and the latter being the CIF value of the imported machinery/ plant. Thus he allowed tax credit amounting to Rs.2,00,046 and Rs.59,733 in each year respectively. In other words, while calculating tax credit he excluded the custom duty etc., import fees, travelling expenses of the Directors and installation charges in each assessment year. Having been aggrieved and dissatisfied the appellant went up in appeal before the learned Commissioner of Income Tax (Appeals) who after excluding the installation charges amounting to Rs.31,000 from Rs.20,10,938 allowed tax credit on balance amount in assessment year 1979-80. But for assessment year 1980-81 he directed the Income Tax Officer to follow his order recorded in assessment year 1979-80. This time the department felt aggrieved and has come up in second appeal before us.

3. Mr. Irshad Shaheen, the learned D.R. vehemently argued that the learned Commissioner of Income Tax (Appeals) erred in directing the Income Tax Officer to calculate tax credit on the amount claimed on purchase of machinery/plant after excluding only installation charges. According to the learned D.R. the Income Tax Officer rightly allowed tax credit on the purchase value of the machinery/plant which did not include custom duty etc. import fees, travelling expenses of directors also. Mr. Amir Alam Khan, FCA, appearing for the appellant, vehemently argued that the purchase value of the plant machinery should be understood what it connotes in commercial parlance and not what it means in its etymological or literal sense. The learned A.R. has vehemently argued that in commercial sense the machinery is supposed to have been purchased when it actually comes in possession of the purchaser and all the expenditure incurred till then falls within the ambit of purchase price.

4. We have heard both the learned D.R. as wall as the learned A.R. at length. In order to better appreciate the respective submissions let us first re-produce subsection (1) of Section 107 of the Income Tax Ordinance, which is relevant for our purposes. It reads;

"Where an assessee being a Pakistani company invests any amount in the purchase of plant and machinery for installation at any time between the first day of July, 1976 and the thirtieth day of June, 1988 in an industrial undertaking set up in Pakistan and owned by it for the purposes of replacement, balancing or modernisation of the machinery and plant already installed therein, credit at the rate of fifteen per cent of the amount so invested shall be allowed against the tax payable by it in the manner hereinafter provided."

5. We think that it would be advantageous if we reproduce here subsection (1) of Section 15-GG of the repealed Income Tax Act which has been succeeded by Section 107 of the Ordinance. It reads:

"Where a company, not being a company declared as such under clause (5A) of section 2, installs any machinery between the first day of July, 1976, and the thirtieth day of June, 1979, for the purposes of replacing old machinery or the modernisation or balancing of its industrial undertaking, and such machinery is the property of the company and is wholly used for the purposes of such industrial undertaking, a credit equal to ten per cent of the actual cost to the company of such machinery shall be given to it against the tax payable by it, in the manner hereinafter provided- - - - - - - - - - - - - -"

6. From perusal of subsection (1) of Section 15-GG of the repealed Income Tax Act re-produced above it appears that the legislature used the words "actual cost of a plant and machinery" on which the tax credit was to be calculated. However, in subsection (1) of Section 107 the expression used is "any amount in the purchase of plant and Machinery". The expression "actual cost" as it was used in the relevant Indian legislation came on the anvil of Indian Supreme Court for interpretation and their Lordships held that the expression should be ascribed the meaning which it carries for business community (please see (1975) 98 ITR 167 Challaepelli Sugar Ltd. v. CIT). We with due respect to their Lordships of Indian Supreme Court, feel very much inclined to extend the same meaning to the words "actual cost" as used in Section 15-GG of the repealed Income Tax Act.

7. Now with this discussion in our mind when we turn to the expression used in subsection (1) of Section 107 it appears to us that though the legislature has not used the words "actual cost" which were used in Section 15-GG of the repealed Income Tax Act yet the intention appears to be same. It has been decided as a matter of policy to grant tax credit to a Pakistani Company, which invests any amount in the purchase of plant and machinery for installation at any time between the relevant period. Since the legislature has put emphasis on investment of any amount in the purchase of plant and machinery and since such investment can be taken into consideration for tax credit purposes if such machinery or plant is purchased for installation purposes, therefore, the investment in purchasing would not be complete till the machinery or plant is received by an assessee for the purpose of installation. As such we are of the view that all those incidental expenses, which an assessee invests in purchasing the plant or machinery and bringing it to the site of installation would be deemed to be the amount invested in the purchase of plant or machinery and tax credit would be admissible thereon. The expenses which could be included would be CIF value of the plant or machinery, the custom duty and sales tax if any, imports fees if any, demurrage and wharfage, if paid by an assessee for reasons beyond its Control the octroi paid to any municipal body and the transporting charges including loading and unloading charges shall fall within the ambit of such investment. In other words, all the expenses, which are directly connected with the purchase of plant and machinery, its discharge from port authorities and expenses incurred on transport etc. would be taken into consideration for the purposes of calculating tax credit. However, those expenses, which are remotely connected with the, purchase of plant would not be included. In assessment year 1979-80 the appellant included even the travelling expenses of the directors in the purchase value of the plant and machinery. The learned Commissioner of Income Tax (Appeals) has also allowed them. With due respect we are of the view that they are very remotely connected with the purchase of plant and should not be allowed. Let us also mention here that the legislature has used the expression "purchase" in contradiction expression "market value". We are of the view that market value if shown in the balance sheet would not be used for working out tax credit.

8. As a matter of general guidance we hold that under the facts and circumstances of each case the assessing officer should determine as to which expense has been incurred for getting the plant or machinery and should allow if it is added to the value of plant or machinery purchased. However, those expenses, which are remote could be excluded by him. Now as far as the merits of these appeals are concerned we uphold the conclusion of the learned Commissioner of Income Tax (Appeals) that the expression as used in subsection (1) of Section 107 should be understood to carry the same meaning which the business community ascribes to it.

9. It appears that the appellant had also claimed expenses of Rs.56,564/- incurred on public offering of its shares. The Income Tax Officer disallowed it on the ground that it was capital expenditure. The learned Commissioner of Income Tax (Appeals) also upheld it. Similarly, the appellant also claimed Rs.1,01,032/- as, expenses incurred on account of installation of direct dialling system of the factory. The Income Tax Officer again disallowed it taking it to be a capital expenditure. His order was again confirmed by the Commissioner of Income Tax (Appeals). The appellant still feels aggrieved and has come up in second appeal before us.

10. Mr. Amir Alam Khan, the learned A.R. of the appellant argued before us that in view of a decision of Indian Supreme Court reported as (1972) 96-ITR-549 we should allow the expenses incurred on public offering of the shares. He vehemently argued that the shares were offered not for the first time but subsequently in the business interest of the appellant. Mr. Irshad Shaheen, the learned D.R., however, has supported both the officers below. With due respect to the learned A.R. we feel that the authority relied upon by him was not applicable in the facts and circumstances of the appellant as in that case payment was made to a managing agent in lieu of termination of the managing agency and it was held to be a revenue expenditure, as it was found to be in the best interest of the business. Here the appellant is incurring expenditure on expanding its capital. In our judgment it is a capital expenditure pure and simple.

11. Regarding expenses incurred on installation of telephone we are of the view that it was a capital expenditure. Mr. Amir Alam Khan, A.R., in all fairness did not press this ground as well. However, he claimed that depreciation should be allowed. We agree with him and direct the Income Tax Officer to allow the depreciation as per provision of Third Schedule of the Ordinance.

12. In view of the discussions made above all the three appeals stand of accordingly.

M.B.A./417/T Order accordingly.

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