1. The question before this Court is whether tax credit(s) available under Section 107 of the erstwhile Income Tax Ordinance, 1979 (the Ordinance) were to be excluded while computing the actual cost of an asset in order to determine it’s written down value for the purposes of calculating depreciation allowance in terms of Rule 8(8)(b) of the Third Schedule to the Ordinance.
2. The brief facts (in Civil Appeals No.1590 to 1592 and 1595 to 1597/2006) are that the respondents (assessees) are companies (both public and private limited) deriving income from various industrial activities. In their returns pertaining to various assessment years, they claimed tax credit(s) and depreciation allowance under the Ordinance on their plants and machinery. The assessment orders calculated the depreciation allowance after subtracting tax credit(s) from the written down value of the assets, thereby curtailing the respondent’s claim of depreciation allowance (note:- in Civil Appeal No.1597/2006, in the original assessment order, depreciation allowance was calculated without subtracting tax credit. However when the original assessment was re-opened under Section 66-A of the Ordinance, Inspecting Assistant Commissioner of Income Tax ordered that depreciation allowance be calculated after subtracting tax credit from the written down value of the assets, thereby curtailing the respondent’s claim of depreciation allowance). The learned High Court passed the impugned judgments in Income Tax references (references) in favour of the respondents by relying upon Gulshan Spinning Mills Ltd. and others Vs. Government of Pakistan and others (2005 PTD 259) (note:- in Civil Appeal No.1595/2006, the learned High Court relied upon the impugned judgment rendered in Civil Appeal No.1590/2006, i.e. ITR No.13/1999). This Court granted leave vide order dated 5.10.2006 to consider the following:-
“(i) Whether on the facts and circumstances of this case Hon’ble High Court and Income Tax Appellate Tribunal was justified in holding that assessee in (sic) entitled to depreciation calculated on the W.D.V. of assets without reducing there from (sic) the amount of tax credit u/s 107 of the Income Tax Ordinance, 1979, despite of specific provision as laid down under rule 8(8)(b) of 3rd Schedule of the Income Tax Ordinance, 1979.
(ii) Whether on the facts and circumstances of this case Hon’ble High Court after holding that tax credit u/s 107 not being in the nature of exemption, allowance and deduction, has rightly allowed to exclude tax credit from depreciation calculated on the W.D.V. of assets under rule 8(8)(b) of 3rd Schedule of the Income Tax Ordinance, 1979.”
It bears mention that leave in these cases was granted on the basis of the leave granting order dated 14.6.2005 passed in Civil Appeal Nos. 612 to 636/2005 and although the noted cases were disposed of vide order dated 3.4.2008 that was done on the basis of the parties’ consent. Therefore, the aforementioned question of law remains to be determined by this Court.
3. Learned counsel for the appellant department (in Civil Appeal Nos.1591 to 1594/2006) argued that tax credit applicable on plant and machinery under Section 107 of the Ordinance fell within the expression “value of assistance” received by an assessee from Government or any other authority or person appearing in Rule 8(8)(b)
which (expression) had a wide connotation and the only type of assistance it specifically excluded was that of any loan repayable with or without interest. He submitted that Rule 8(8)(b) applied to tax credits under Section 107 and therefore the impugned judgments were liable to be set aside. According to him, when an assessee claimed tax credit at the rate of 15% of the assets, the actual cost of the asset to the assesse was accordingly reduced, as in terms of Rule 8(7)(b) the written down value was to be calculated on the basis of the actual cost to the assessee and not the total cost of the asset. His arguments were adopted by the learned counsel for the appellant in Civil Appeal Nos.1590/2006 and 1595/2006.
4. Learned counsel for the respondents (in Civil Appeal Nos.1590, 1591, 1593 to 1595, 1597 and 1598/2006) argued that tax credit under Section 107 was claimed on the actual cost of plant and machinery which was to be deducted from the tax payable for the year and not from the taxpayer’s income, therefore, tax credit was not a grant, subsidy, rebate, commission, deduction or allowance under the Ordinance. According to him, the learned High Court rightly held that Rule 8(8)(b) was not applicable to tax credits under Section 107. He relied on the case of Gulshan Spinning Mills (supra).
5. Heard. The relevant portions of Section 107 and Rule 8 (of the Third Schedule) of the Ordinance are reproduced. Chapter X of the Ordinance, particularly Sections 105 to 107AA, which pertained to tax credits for various types of investments, is instructive in this regard. A tax credit is an incentive or relief given to the taxpayer, usually for the purposes of promoting certain industries or activities. Section 107 of the Ordinance allowed for tax credit at the rate of 15% of the amount invested for the replacement, balancing and modernization of machinery or a plant against the tax payable. According to Section 107(2) the amount of credit was to be deducted from the tax payable by the assessee in respect of the income year in which the said machinery or plant was installed. Tax credit was not defined in the Ordinance. Black’s Law Dictionary (9th Ed.) defines it as “an amount subtracted directly from one’s total tax liability, dollar for dollar, as opposed to a deduction from gross income”. P. Ramanatha Aiyar’s Concise Law Dictionary (4th Ed.) states, “Tax credit is a legal provision permitting taxpayers to deduct specified sums from their tax liability”. The Oxford Advanced Learner’s Dictionary of Current English (8th Ed.) provides that tax credit is “money that is taken off your total tax bill”. Thus tax credit is an amount which is directly offset against or adjusted/deducted from the tax liability and not the gross income.
6. The relevant provision with regard to depreciation allowance was Section 23(1)(v) of the Ordinance according to which for the purposes of computing income under the head “income from business or profession”, certain allowances and deductions were admissible in terms of the Third Schedule in respect of depreciation; including First Year Allowance or Reinvestment Allowance or Industrial Building Allowance, of any building, machinery, plant, furniture or fittings, being the property of the assessee, except depreciation or First Year Allowance on assets given on lease which was to be allowed against income from lease rentals only, and such depreciation allowance was to be computed in terms of the rules in the Third Schedule.
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