ORDER FARHAT ALI KHAN, CH. & MANZOOR-UL-HAQUE, MEMBER.-1. In these appeals filed against the order of the learned C.I.T. (A) Zone-1, Karachi, a number of grounds have been taken but the preliminary objection raised by learned counsel, Mr. Siraj-ul-Haque, relates to rejection of assessee's claim for exemption under clause (125) of the Second Schedule. There are also cross appeals filed by the department against grant of exemption to the assessee under clause (125) of the Second Schedule to the Income Tax Ordinance, 1979. Since identical issues are involved in all these appeals we propose to dispose them of by this combined order.
2. Presenting the sequence in which the company was granted exemption by the department and also refused in certain years, Mr. Siraj-ul-Haque, the learned counsel pointed out that during the year 1984-85 exemption was claimed for the first time when the industrial undertaking was set up under clause (125). The I.T.O, for reasons explained in the assessment order refused to grant exemption which was later confirmed in appeal by the learned A.A.C. In 1985-86 the claim for exemption was again refused but in appeal the learned A.A.C. Granted the exemption. Again for the assessment years 1986-87 and 1987-88 the learned C.I.T. (A) granted the exemption. Although for both the years exemptions claimed were refused by the Assessing Officer. In the assessment year 1988-89 while the I.T.O, consistently refused the grant of exemption the learned CJ.T. (A) this time 3. Giving the brief history of the case, it is pointed out that company was incorporated on lst June, 1974 for manufacture and export of garments besides general business done by the assessee. He also drew our attention to the provisions of clause (125) of the Second Schedule Part 1 to the Income Tax Ordinance which reads as under:-- "Clause (125).--Profits and gains derived by an assessee from an industrial undertaking set up between the first day of July, 1978, and the thirtieth day 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) engaged in the manufacture of garments from cloth manufactured in Pakistan; and (b) owned and managed by a company formed and registered under the Companies Act, 1913 (VII of 1913), having its registered office in Pakistan."
4. He submitted that the appellant's claim for exemption was fully covered by the provision of the clause cited above as the industrial undertaking was set up for the purpose of manufacturing and export of garments during the periods lst day of July, 1978 and 28th June, 1988. Notwithstanding the setting up of the commercial undertaking way back in 1974. In that year, no doubt, the commercial undertaking was set up for carrying multifarious type of business as is evident from the return of income filed and the assessm ent finalised. In the year 1974-75, being the first year of business, a nominal stitching charges for garments exported abroad amounting in all to Rs. 16,000 were claimed besides other business done by the appellant. The leamed counsel pointed out that no machinery was purchased for the garment industry nor any depreciation claimed during the year as well as subsequent years until the assessment year 1984-85. This aspect is clearly reflected in the balance-sheet of the assessee filed from 1974-75 to 1983-84. However, in the year 1984-85 the appellant purchased sewing machines worth over Rs. 84,000 and also claimed depreciation which has been allowed by the I.T.O. He, further maintained that there is no bar in setting up of a commercial undertaking which can later engaged itself in the manufacture of garments and also fulfil the conditions laid down in clause (125) which are as under:- (a) that it must be an industrial undertaking; (b) with capital machinery and labour force etc.; (c) must be set up between July, 1978 to June, 1988; and engaged in the manufacturing of garments; (d) from cloth manufacture in Pakistan; and (e) owned and managed by a company formed and registered under the Companies Act, 1913; (f) having its registered office in Pakistan.
5. The I.T.O.'s contention that since the company already existed in 1974 it does not qualify for exemption even if it starts manufacturing and export of garments between the periods laid down in clause (125). The I.T.O.'s contention as contained in assessme nt order is. Reproduced as under:-- "The above explanation of the assessee-company is not tenable in the eyes of law for the reasons that the company was in existence before the lst day of July, 1978. The type of industrial undertaking which can claim exemption from tax under clause (125) of the Second Schedule should also fulfil the requirements of section 48(2)(c) of the Income Tax Ordinance, 1979 which says that the undertaking should not have been formed by the subletting or reconstruction or reconstitution of business already in existence or by transfer of a new business of any machinery or plant used in the business which was being carried on in Pakistan at any time before the commencement of new business. However, in the case of the assessee-company, the above condition is not fulfilled. The company was in existence before lst day of July, 1978. The machinery used by the assessee was already in existence before the stipulated date. The nature of business of the assessee- company right from the beginning i.e. From the assessm ent year 1975-76 was manufacturing of garments which is also clear from the assessm ent order the assessment year 1975-76. Keeping in view the above facts of the case and as held in the assessme nt order for the immediate preceding assessment year, the claim of exemption under clause (125) of the Second Schedule is rejected. The declared income from export account shall be subjected to tax in accordance with law."
6. Mr. Siraj-ul-Haque, the learned counsel, objected to the above observation of the Assessing Officer and submitted that they are not borne out by the facts available on record. Firstly, he argued that provision of section 48 are not applicable to the case. Section 48 deals with exemption from tax of newly- industrial undertaking and the calculation of tax in such cases. It has nothing to do with the total exemption claimed under clause (125) of the Second Schedule to the Incorr' Tax Ordinance, 1979. It is true that the company existed prior to lst July, 1978 but it was never engaged in the manufacture of garments although, as pointed out by the learned D.R., it was included in the functions of the company as contained in the Memorandum of Association. The learned counsel submitted that the premises where the factory is situated were taken on lease in January, 1984 and it was laid down in the agreement that the premises could be used only for installing sewing machines for manufacturing garments. It had no machinery in the earlier years to manufacture the garments as is evident from the balance-sheets filed year after year since 1975-76 to 1983-84 Machineries for this industrial establishment were purchased in 1984-85.
7. We have gone through the impugned order and have given our anxious consideration to the submissions of the learned representatives.
It is true that the company was incorporated on lst June, 1974. It is also true that during the year 1975-76 it exported garments on very small scale amounting to Rs. 16,000. And it also did general business. There is no evidence on record to suggest that the company was engaged in the manufacturing of garments prior to the year 1984-85. We have examined the balance-sheet of the company. There are no assets much less the machinery used for manufacturing garments. Sewing machines were purchased in 1984 and depreciation was claimed for the first time and allowed by the I.T.O, during assessm ent year 1984-85. To say that the company was engaged in the manufacture of garments during the years prior 1984-85 is far from the truth. In our view the company, although incorporated prior to the year 1978, started manufacturing of garments from the assessm ent year 1984-85. Although it was doing general business prior to the year 1984-85.
There is no such bar in clause (125) of the Second Schedule for the existing companies who start manufacturing garments, to claim exemption. The only bar is that they must fulfil the conditions laid down in clause (125) of the Second Schedule. Judge for this angle, to us it appears that the company fulfilled all the conditions. Namely-- (a) the company was an industrial undertaking which started manufacturing garments in 1984-85; (b) it manufactured garments from cloth manufacture in Pakistan; (c) it ws a company registered under the Companies Act, 1913; and (d) it had its head office in Pakistan.
8. For the above reasons the learned C.I.T. (A) for the years 1986-87 and 1987-88 has accepted the claim of the appellant for exemption in the following words: "The contentions are examined. These are well founded in view of the additional facts being placed by the learned counsel for which it appears that the appellant was not engaged in manufacturing of garments in 1975-76 but only from 1984-85, the claim of exemption is accepted." In view of above discussion we hold that company was fully justified in claiming exemption under clause (125) of the Second Schedule of the Income Tax Ordinance, 1979. Therefore its income, for the years 1984-85 to 1988-89 were exempt from tax.
9. All the appeals filed by the department as well as the appellant stand disposed of accordingly.