Kot Addu Power Co. Ltd. Vs Commissioner Inland Revenue etc.

Stereo. H C J D A 38.

Judgment Sheet

IN THE LAHORE HIGH COURT AT LAHORE.

JUDICIAL DEPARTMENT

ITR No. 49320 of 2021

Kot Addu Power Co. Ltd.

Versus Commissioner Inland Revenue etc.

JUDGEMENT

Date of Hearing 23.09.2026 Applicant by: Mr. Shahbaz Butt, Advocate Respondents by: Mr. Muhammad Yahya Johar, Advocate

KHALID ISHAQ, J. This judgment shall decide the captioned Income Tax Reference Application as well as the following Reference Applications, filed under Section 133(1) of the Income Tax Ordinance, 2001 (the “Ordinance, 2001”):

i. ITR No. 49340 of 2021 ii. ITR No. 49298 of 2021 iii. ITR No. 49274 of 2021

2.For the purpose of this judgment, the facts of the present case shall suffice.

3.The Reference Applications seek opinion of this Court on the following questions of law framed vide order dated 05.10.2021, which are said to have arisen from consolidated order dated 15.04.2021 (“Impugned Order”) passed by Appellate Tribunal Inland Revenue, Lahore (“Tribunal”):

i. Whether on the facts and in the circumstances of the case, the Appellate Tribunal has erred in holding that tax credit under section 65B of the Income Tax Ordinance, 2001 has to be excluded from the cost of the asset and consequently the depreciation and initial allowance has to be allowed on the cost of assets after subtracting the tax credit claimed under section 65B of the Income Tax Ordinance, 2001?

ii. Whether on the facts and in the circumstances of the case, the Learned Appellate Tribunal has erred in law and fact, by holding that the simultaneous reading of the provisions of section 76(10) and sub-section (1) and (3) of section

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65B shows that the tax credit is an assistance in respect of the acquisition of the asset, on which no tax is chargeable under the Ordinance and therefore, the amount of tax credit is to be excluded from the cost of asset? iii. Whether the provisions of Rule 8(8)(b) of Third Schedule to the Repealed Income Tax Ordinance, 1979 are pari materia to section 76(10) of the Income Tax Ordinance, 2001? If not so:

a. Whether reliance on the law laid down and ratio settled by the Honourable Apex Court in case reported as 2017 PTD 1642 SC was correct, in view of the fact that the same is based on the interpretation of Rule 8(8)(b) of the Third Schedule to Ordinance of 1979 which is somewhat different from the provisions of section 65B(10) of the Income Tax Ordinance, 2001?

b. Whether the conclusion drawn by the Tribunal was misplaced and misconceived because of incorrect interpretation that the tax credit under section 65B of the Income Tax Ordinance, 2001 is an assistance to the cost of assets and was to be subtracted from the cost of such asset for the purposes of allowability of depreciation and initial allowance under section 22(15), 23(5) of the Income Tax Ordinance read with section 76 thereof; and c. Whether the Learned Tribunal while ruling upon the controversy involved in the instant case, has travelled beyond the scope of section 65B and 76 of the Ordinance and under misconception has held that the tax credit under section 65B of the Ordinance being “assistance to cost of acquisition of asset” and shall be subtracted from the cost for the purposes of allowance of initial allowance and depreciation?

4.Brief facts of the case are that the applicant taxpayer, a public limited company deriving income from power generation, filed its returns for Tax Year 2016,1 which was treated as deemed assessment in terms of Section 120(1) of the Ordinance, 2001. Subsequently, upon examination of the record, the assessment was found to be erroneous and prejudicial to the interest of revenue, thus, the proceedings under section 122(5A) of the Ordinance, 2001 were initiated. The controversy relevant for the present Reference Applications arose from the tax credit claimed by the applicant in terms of the provisions contained in Section 65B of the Ordinance, 2001 on investment made in plant and machinery, while depreciation and initial allowance under Sections 22 and 23 of the Ordinance, 2001, were claimed on the cost of such assets without reducing therefrom the amount of availed tax credit under Section 65B of the Ordinance, 2001. The Assessing Officer, while passing the amended assessment order dated 01.01.2020 under Section 122(5A) of the Ordinance, 2001, held that the amount of tax credit under Section 65B of the Ordinance, 2001 was required to be subtracted from the In connected ITRs, the tax years are 2014, 2015 and 2017.

cost of the assets for the purposes of computing depreciation and initial allowance under Section 22 & 23 of the Ordinance, 2001. Feeling aggrieved, the applicant taxpayer filed appeal under Section 127 of the Ordinance, 2001 before the Commissioner Inland Revenue (Appeals), which did not succeed. Being dissatisfied, the applicant taxpayer filed 2nd appeal in terms of Section 129(1) of the Ordinance, 2001 before the learned Tribunal, which also met the same fate vide the Impugned Order and the findings of the forums below were upheld. Hence, the instant and connected Income Tax Reference Applications.

5.Learned counsel for the applicant submits that the Tribunal has misconstrued the provisions of Sections 65B and 76 of the Ordinance, 2001; adds that the tax credit admissible under Section 65B of the Ordinance, 2001 is deductible from the tax payable and does not constitute part of the cost of an asset nor is there any provision in the Ordinance, 2001 requiring such credit to be deducted from the cost of the plant and machinery for the purposes of claiming depreciation or initial allowance; submits that the judgment of the Supreme Court of Pakistan reported as Commissioner of Income Tax, Karachi v. Khalid Textile Mills and others (2017 PTD 1642) relied upon by the Tribunal, was rendered while interpreting Section 107, read with Rule 8(8)(b) of the Third Schedule of the Income Tax Ordinance, 1979 (“Ordinance, 1979”) [since repealed], therefore, the same cannot govern the present controversy as the corresponding provisions of the Ordinance, 2001 are not pari materia.

6.On the other hand, learned counsel for the respondent Department submits that Section 65B of the Ordinance, 2001 confers a tax benefit directly linked with investment in the purchase of plant and machinery, whereas, Section 76(10) of the Ordinance, 2001 expressly excludes any grant, subsidy, rebate, commission or any other assistance received or receivable by a person in respect of acquisition of an asset from the cost of such asset; contends that the tax credit allowed under Section 65B of the Ordinance, 2001 being a fiscal benefit arising directly from acquisition of the plant and machinery, falls within the expression “any other assistance”

appearing in Section 76(10) of the Ordinance, 2001 and, therefore, cannot simultaneously form part of the cost for claiming depreciation and initial allowance.

7.Arguments heard. Record perused.

8.The controversy, though lying in a narrow compass, requires the analysis of the provisions contained in Sections 65B and 76(10) of the Ordinance, 2001, read together with Sections 22 and 23 thereof. Section 65B of the Ordinance, 2001 provides a tax credit equal to 10% of the amount invested by a company in the purchase of plant and machinery for extension, expansion, balancing, modernization or replacement of plant and machinery already installed in an industrial undertaking, whereas, sub-section (3) thereof provides that the amount of credit admissible thereunder shall be deducted from the tax payable by the taxpayer. On the other hand, Section 76 of the Ordinance, 2001 determines the cost of an asset for the purposes of the Ordinance, 2001 and sub-section (10) thereof expressly provides that the cost of an asset does not include the amount of any grant, subsidy, rebate, commission or any other assistance (other than a loan repayable with or without profit), received or receivable by a person in respect of acquisition of the asset, except to the extent such amount is chargeable to tax.

9.The very essence of the above becomes evident when read while juxtaposing the same with Sections 22 and 23 of the Ordinance, 2001. The depreciation under Section 22 is computed with reference to the declared value of the depreciable asset and such declared value itself takes its origin from the “cost of the asset”. Likewise, initial allowance under Section 23 of the Ordinance, 2001 is calculated by applying the prescribed rate against the cost of the permissible depreciable asset. Section 23(3) expressly makes the rules contained in Section 76 applicable for determination of such cost. Thus, the expression “cost of the asset” occurring in Sections 22 and 23 of the Ordinance, 2001 cannot be divorced from the statutory meaning assigned to cost by Section 76 of the Ordinance, 2001. It is also pertinent to distinguish between the eligibility of an asset for depreciation or initial allowance and determination of its cost for computation of such allowance.

Sections 22(15) and 23(5)(d) primarily deal with the former, whereas, once the asset qualifies for the relevant allowance, its cost has to be determined in terms of Section 76 of the Ordinance, 2001.

10.Once viewed in this statutory setting, the tax credit under Section 65B of the Ordinance, 2001 cannot be treated in isolation merely because its immediate mode of adjustment is against the tax payable. The manner or stage at which the tax credit is ultimately adjusted against the tax payable and the determination of the statutory cost of the asset are two distinct questions governed by their respective provisions. Section 65B(3) regulates the former, whereas, Section 76 determines the latter. Giving effect to Section 76(10), therefore, does not amount to shifting the adjustment of the tax credit to an earlier stage of computation. The credit arises only upon investment in the purchase of qualifying plant and machinery; its quantum is calculated by reference to the amount so invested and its availability is, therefore, inextricably connected with acquisition of the asset itself. The words “any other assistance” employed in section 76(10) of the Ordinance, 2001 are of sufficient amplitude to encompass a statutory fiscal benefit of this nature received by reason of and in respect of the acquisition of the asset. The fact that the benefit ultimately operates by reducing the tax payable does not sever its direct statutory nexus with the acquisition that generates the entitlement in the first place.

11.There is yet another aspect of the matter. Section 65B of the Ordinance, 2001 is a provision, which enables a tax credit, if the conditions supplied therein are fulfilled, but it indeed is not a tax holiday and instead a concession of a tax credit i.e. the benefit. Such a provision must be given effect to the extent of the benefit granted by the legislature but its scope cannot be enlarged by implication so as to confer a further advantage in the nature of a double benefit by simultaneously taking the benefit of the tax credit and by exclusion of the amount of tax credit for the purpose of claiming depreciation and initial allowance as no such situation is contemplated by the statutory scheme. The benefit expressly granted is the tax credit calculated on the qualifying investment. If, notwithstanding receipt

of that tax credit, the same amount was permitted to remain embedded in the cost of the asset for the purposes of claiming depreciation and initial allowance, the taxpayer would obtain a tax credit on the one hand and further deductions calculated upon the very amount representing that benefit on the other. Sections 65B, 76(10), 22 and 23 of the Ordinance, 2001, when read harmoniously, do not admit of such duplication. The exclusion of the tax credit from the cost base does not curtail the benefit granted by Section 65B rather it merely confines that benefit to the extent expressly provided by the legislature.

12.At this stage, the reliance placed upon Khalid Textile Mills2 supra also requires clarification. In the said case, the Supreme Court of Pakistan had interpreted Section 107 read with Rule 8(8)(b) of the Third Schedule to the Ordinance, 1979. Rule 8(8)(b) contained two distinct limbs; first being the grant, subsidy, rebate, commission or value of assistance received from Government or any other authority or person and second being that “any deduction or allowance admissible under this Ordinance or the repealed Act”. The Supreme Court expressly held that the tax credit did not fall within the former limb relating to grant, subsidy, rebate, commission or assistance, but fell within the latter because the statutory language specifically encompassed “any deduction” admissible under the Ordinance. Though, the very essence and position of the relevant provisions under the Ordinance, 2001 is same, however, the provisions contained in Section 76(10) are indeed not pari materia to the Rule 8(8)(b) of the Ordinance, 1979 concerning “any deduction or allowance admissible under the Ordinance”, instead, it employs its own formulation by providing that cost shall not include any grant, subsidy, rebate, commission or any other assistance received or receivable by a person in respect of acquisition of the asset. Significantly, unlike the first limb of Rule 8(8)(b), which referred to assistance received from Government or any other authority or person, Section 76(10) employs a differently structured formulation by attaching the expression “any other assistance” to an amount received or receivable “in Commissioner of Income Tax, Karachi v. Khalid Textile Mills (2017 PTD 1642)

ITR No. 49320 of 2021. Page 7

respect of the acquisition of the asset”. The emphasis under the present provision is, therefore, upon the nexus of the assistance with acquisition of the asset, and not merely upon its source. We are of the considered opinion that the provisions contained in Section 76(10) of the Ordinance, 2001 are more encompassing as compared to provisions contained in Rule 8(8)(b) of the Ordinance, 1979, therefore, despite the fact that the two provisions are not pari materia and it may be held that the enunciation of law rendered in the case of Khalid Textile Mills may not be considered binding upon the statutory provisions of the Ordinance, 2001, nonetheless, the grounds sought to be raised by the applicant taxpayer for dispelling and seeking setting aside of the Impugned Order cannot sustain on the mere ground that the reliance placed by the Tribunal on Khalid Textile Mills supra was not attracted as the submission sought to be raised for claiming depreciation and initial allowance in terms of Sections 22 & 23 of the Ordinance, 2001 while retaining the amount of cost without factoring in the tax credit already received under Section 65B of the Ordinance, 2001, is not tenable under the law.

13.The conclusion that the judgment in the case of Khalid Textile Mills may not be directly a binding precedent for this case, is also consistent with the settled principle relating to statutory reenactment. Where the legislature reenacts statutory language which has already received a settled judicial construction without material alteration, such reenactment ordinarily carries with it the existing judicial meaning. The premise disappears, however, where the later enactment materially alters the language upon which the earlier interpretation rested.3 Here, the change in the statutory formulation is substantive and, therefore, the controversy must be decided upon the true import of Sections 65B and 76(10) read with Sections 22 & 23 of the Ordinance, 2001 rather than by importing the construction placed upon Rule 8(8)(b) of the Third Schedule to the Ordinance, 1979.

14.Thus, irrespective of the fact that whether the law laid down by the Supreme Court of Pakistan in the case of Khalid Textile Mills supra was a see p. 346 | The Law of Judicial Precedent | Bryan A. Garner et al. | Published by Thomson Reuters

governing precedent or not under the Ordinance, 2001, the ultimate conclusion reached by the learned Tribunal that the tax credit admissible under Section 65B of the Ordinance, 2001 , being a statutory assistance directly relatable to acquisition of the qualifying plant and machinery, falls within the contemplation of Section 76(10) of the Ordinance, 2001 and is, therefore, liable to be excluded while determining the cost of the asset for the purposes of depreciation and initial allowance under Sections 22 and 23 of the Ordinance, 2001.

15.For what has been discussed above, the proposed questions above are answered in negative and this Reference Application is accordingly dismissed.

16.Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per Section 133(8) of the Ordinance.

(Muhammad Usman Ghani Rashid Cheema) (Khalid Ishaq) Judge Judge

APPROVED FOR REPORTING.

(Muhammad Usman Ghani Rashid Cheema) (Khalid Ishaq) Judge Judge

Awais!