NASIM SIKANDAR, J.- This is a case stated under Section 136 of Income Tax Ordinance, 1979 by a Full Bench of the Income Tax Appellate Tribunal, Lahore. Following question of law has been referred for our consideration and reply:- "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the Central Excise Duty paid by the assessee was debitable to the manufacturing and trading account?"
2. Although the facts of the case giving rise to the aforesaid question are not material yet these need to be kept in sight in order to appreciate the exact nature of the legal proposition involved.
3. The petitioner M/s. Tanzeb Textile Industries, Faisalabad a registered firm at the relevant time operated a processing factory, It appears that on processing and printing of cotton cloth excise duty was payable till 31.12.1974 at a fixed rate on yardage of the cloth processed. However, w.e.f.
1.1.1975 that system of levy was changed and an option was given to the processors of cloth either to pay excise duty on the basis of yardage or to pay the same at a fixed rate as per types of machinery installed in the factory. For the purpose of fixed levy, different rates were prescribed for different types of the machineries. The excise duty levied on fixed basis i.e. For each type of machinery installed was to be on monthly basis irrespective of the fact whether or not the machines had actually functioned. The legal provisions qua the charge and determination of levy on production capacity basis were provided for in sub-section (4) of Section 3 of the Central Excise and Salt Act, 1944. On introduction of the scheme, two notifications Nos. SRO 1552(l)/74 and 1553(1 )/74, dated 20.12.1974 were issued. The Central Excise General Order No. 3 of 1974 was also issued for the same purpose.
4. The assessee claimed a sum of Rs.77,477.42 as an excise duty paid on capacity basis and charged the same to the profit and loss account. The Assessing Officer, however, did not agree and as done in previous years, the amount of excise duty was taken as an item of trading and manufacturing account.
5. Learned first appellate authority/AAG Faisalabad on 24.3.1979 on the authority of an appeal decided by the learned Income Tax Appellate Tribunal dated 21.1.1979 proceeded to allow the contention and directed that the excise duty paid on capacity basis should be allowed as an item debitable to profit and loss account.
6. However, on further appeal a Full Bench of the Tribunal after a detailed appraisal of their earlier judgments in that regard including the one relied upon by the learned first Appellate Authority, concluded that excise duty levied on capacity basis for all practical purposes was identical in nature to the duty levied on actual production basis and therefore, it was an item debitable to manufacturing and trading account.
7. Thereafter at the request of the assessee the learned Full Bench agreed that their order dated 12.2.1983 did give rise to the aforesaid question of law to be answered by this Court.
8. Heard the learned counsel for the parties. For the assessee-petitioner a distinction is attempted to be made with regard to the nature of duties/levies and the account to which they are liable to be charged, It is submitted that in accordance with the general accounting principles all expenses which have no direct nexus with production need to be taken to profit and loss account. Also that if any duty fixed or floating which has a nexus with production will go to trading account but if the duty, levy or fee is to be paid whether or not some production is made, it will be a proper charge to profit and loss account as then it has no direct relation with the production or its cost.
9. Learned counsel for the revenue Mr. Ilyas Khan and Mian Ashiq Hussain, Advocates, on the other hand, rely upon re: A. Sanyasi Rao and another v. Government of Andhra Pradesh and others (1989)
178 ITR 31 and (1936) A.C. 352 (House of Lords) in re: A reference under the Government of Ireland Act, 1920 in re: Section 3 of the Finance Act (Northern Ireland), 1934 to submit that it is the essential character of a particular tax or charge which is to be regarded and that it should not be mixed-up with the nature of its machinery, mode or the stage at which it is paid. Secondly, that two basic considerations in tax matters need to be noted, It is the person thing or activity on which the tax is imposed and then the amount of tax. It is stated that ratio settled in re: A. Sanyasia Rao and another (supra) the distinction between a subject-matter of tax and the standard by which the amount of tax is measured though basically pertain to the domain of interpretation of conflicting tax entries in Constitutional instruments yet these can properly be benefited while interpreting a taxation statute itself.
10. In the impugned judgment learned Full Bench of the Tribunal appears to have differed with their earlier view reported as (1978) 37 Tax 10 Trib. Recorded by a Division Bench on 17.7.1977. In that order the learned Members of the Division Bench were considering Central Excise General Order No. 2 of 1974 dated 30.10.1974 Which is also relevant in case of the present assessee. The learned Members of the Division Bench appear to have been impressed by para 5 of that order which was reproduced in their order as under:- "It is to be noted very carefully that no abetment of any kind is to be allowed on account of closures etc. Of any of the machines installed in the factory. It has to be specially noted that no abatement would be allowed during the period of option even if the manufacturers dismantle and/or remove a particular machine from their premise. On the other hand if the manufacturers install any additional machine during the course of the month then the additional duty in respect of the new machine is to be charged from the lst of the month during which the installation of such a machine takes place."
11. On a reading of the above para the learned Division Bench concluded that payment of duty on capacity basis had nothing, to do with the manufacturing process as the new capacity levy/payment of excise duty scheme was independent of the factum of production.
12. Learned Full Bench of the Tribunal however, did not share the view of the learned Division ,Bench.
They rather readily agreed with the submissions made before them that excise duty paid on production capacity basis was certainly relatable to capacity of production and therefore, it had relation to the production, According to the learned Members it was simply a change in the mode of collection brought into existence by the Central Board of Revenue in fact on the persistent demand of the processors of cloth According to them in the new method, the fixed amount/duty was to be paid in each month on the basis of machinery installed and average of production achieved by such machinery. That change in the method, in their view was being mis-interpreted by the manufacturers that the duty was leviable irrespective of the production of each unit, In the course of their judgment learned Members also made a reference to provisions of Section 3 of the Central Excise and Salt Act pointing out that the duties of Excise were leviable on the production and manufacture of all excisable goods. Therefore, it was maintained that duty of excise remained the same and could very well be treated in the accounts in the same manner as it was being treated by the assessee in the earlier years. The Full Bench also made a mention of Central Excise General Order No. 3 of 1974 and re-counted various kinds of excise duties leviable under the Central Excise and Salt Act, 1944 which included excise duty on ad valorem basis on the goods manufactured and cleared, specific duty at a fixed rate on quantity produced, ' duty on maximum capacity basis and lastly, duty on production capacity of dying and printing machines etc. The Full Bench accordingly viewed the issue in the light of proviso to sub-section (4) of Section 3 of the Central Excise and Salt Act, 1944 which provided that production capacity of machines could be taken into consideration as a factor for fixing rate of duty. Therefore, they concluded that even according to the general principles of accountancy excise duty on capacity basis like the other three basis as noted above was an expense directly connected with the production and as such it should be considered as an item to be included in the cost of production.
13., Excise duty is one of many indirect taxes which though paid by the producers at the production stage nevertheless falls on the consumer, In that sense the producer is obliged to include it in his cost of production. Like any other fiscal statute Central Excise and Salt Act, 1944 has three stages of enforcement. The first stage is charge of duty or tax otherwise also called imposition. The second stage is that of assessm ent and the third of collection or recovery. Section 3 of the Central Excise and Salt Act is somewhat different from usual fiscal statutes inasmuch as it is not only a charging section but also partakes the assessment provisions.
14. Sub-section (1) of Section 3 provides for a levy of excise on.......... "all excisable goods, produced or manufactured in Pakistan or imported into Pakistan and on such goods, as the Federal Government may, by notification in the official Gazette, specify, as are produced or manufactured in the non-tariff areas and are brought to the tariff areas, and on all excisable services, provided or rendered, in Pakistan, as and at the rates, set forth in the First Schedule."
15. Sub-section (4) of Section 3 provides that Central Board of Revenue may with the approval of the Federal Government instead of levy and collecting duties of excise on excisable goods under sub-section (1) may "by notification in the official Gazette levy and collect duties on the production capacity of plants, machinery, undertakings, establishments or installations producing or manufacturing such goods."
16. Both sub-sections (1) and (4) of Section 3 when read together one will safely come to a conclusion that these provide for the levy to be called excise duty not only on the been of the excisable goods actually produced but also on the basis of the production capacity of plants machinery producing or manufacturing excisable goods, In other words the same levy called excise duty is leviable either on the production actually achieved or on the basis of the production expected to be achieved by certain kinds of machinery or installations, In the first case the duty is charged on actual basis while in the second on expected or capacity basis, In both situations the most relevant factor remains the production of excisable goods, In one case the law takes as basis the goods actually produced and quantified for the purpose of levy, In the other it is the goods that are expected to be produced by a machinery or installation. The nature and essence of duty in both cases however, remains the same. As noted above, in case of subsection (4) of Section 3 the provisions are both charging as well as machinery in the sense that these provide for the levy on a particular kind of machinery or installations at a particular fixed rate, In this manner half of the assessm ent stage is reached and covered inasmuch as only the fixed amount of tax keeping in view the nature and number of machinery is to be calculated. The earlier method of recovery of excise duty on yardage basis and its subsequent conversion on capacity of machines basis was only a change in the method of collection of levy as the levy as such did not undergo any change whatsoever.
17. In re: Muhammad Younis v. Central Board of Revenue (PLD 1964 S.C. 113) the Hon'ble Supreme Court expressed the view that method of collection was only an accident of administration and that it was not the essence of the duty of excise which was attracted by manufacturer itself.
18. The general principles of accounting do not answer the situation in hand. These principles at times make a distinction of direct and in direct expense for the purpose of their treatment either in the trading account or in the profit and loss account. However, even there a lot of gray area remain. The nature of expense, direct or indirect, has a reference to the nature of business activity carried on by an assessee. It means that an expense of a particular nature may very well be indirect in case of one assessee and a direct expense in case of the other assessee. For the purpose of the proposition in hand, one and the same expense however will not change its nature from direct to indirect only for the reason that method or manner of calculation of levy had been changed. The second peculiar aspect of the case lies in the nature of the expense as well. First of all it is a statutory levy on manufacturing and being an indirect tax the manufacturer only collects it for the revenue. As our accounting system goes its treatment in profit and loss account would mean not only an incorrect statement of cost of production but would rather imply that the manufacturer is making a profit out of levy which when shown in profit and loss account will unrealistically enhance his expense side.
19. The learned Members of the Tribunal, therefore, very rightly observed that change of excise duty from yardage basis to capacity basis was merely change of method of calculation of the levy which did not itself undergo any change at all.
20. In our taxing system we find a number of instances where a levy is enforced in a manner which appears a negation of its very purpose and concept. For example under Sections 153 and 154 of the Income Tax Ordinance, 2001 an assessee is required to pay Income Tax only on the basis of certain receipts or turnover even if at the end of the day he sustains loss. Likewise the cost of collection of tax having increased in the recent times a novel method of advance tax has been adopted.
According to Section 147 of the Income Tax Ordinance, 2001 a number of Income Tax assessee are required to pay advance tax i.e. To pay tax before even the final computation of their income could possibly be made at the and of the assessment year. The manner and the time of collection however, does not change the original character of the levy though in practical sense it may even militate against the basic idea of the levy as in case of advance tax or turn over tax under the provisions of the Income Tax Ordinance, 2001. The fixed as well as turn over tax as contemplated in various provisions of the repealed Income Tax Ordinance, 1979 (known as presumptive tax regime) was maintained by the Hon'ble Supreme Court of Pakistan in re: Ellahi Cotton Mills v. Federation of Pakistan (PLD 1997 SC 582). In similar manner the payment of advance tax even before the final calculation of income of an assessee still remains a part of machinery sections of the Income Tax Ordinance and also within the four corners of the levy known as Income Tax.
21. Mr. Muhammad Ilyas Khan and Mian Ashiq Hussain, Advocates, for the revenue, are right in pointing out that a levy, duty or tax, floating or fixed, dose not lose its nature and character merely for the reason of change in basis for computation or collection, In the present case as observed earlier, the Central Excise Duty did not undergo any change except that only method of calculation of the levy was changed from yardage basis to the capacity of the machinery. The Central Board of Revenue on the aforesaid Circular No. 2 of 1974 elucidated in sufficient details the basis for computation of excise duty. The fact that no abatement was allowed on account of closure of machinery during a month again will not by itself change the nature of levy to enable the same to be taken to profit and loss account. A profit and loss account it will be noted is drawn after incoming and out-goings in respect of manufacturing/trading are duly settled. If a machinery or some of the installed machineries in a factory at the relevant time remained closed for some time during a year or part of the year a payment of fixed levy for that period only increased over all cost of production' made earlier or subsequently but did not as such affect the profit and loss account.
22. That being so while agreeing with the Members of the Full Bench of the Income Tax Appellate Tribunal, we will return an affirmative answer to the question to the effect that in the given circumstances the central excise duty paid by the assessee was debitable to the manufacturing and trading account.