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Petitioner: Ibrahim Siddat, CA. for Appellant. VS Respondent: Ilyas Shaikh, D.R. for Respondent.
Court Name: Income Tax Appellate Tribunal Judge(s): Muhammad Mujeebullah Siddiqui, Iqbal Muhammad Qureshi Title: Ibrahim Siddat, CA. for Appellant. vs Ilyas Shaikh, D.R. for Respondent. Case No.: I.TA. No.341/KB of 1986 Date of Judgment:1991-05-04 Reported As: 1991 PTD 917 Result: Appeal dismissed
Judgment ORDER MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).---This appeal is directed against the order dated 17-6-1986 by the learned C.I.T.(A) Zone 4, Karachi in ITA No. C.I.T. (A)/Z-IV/918/1983-84. 2. Briefly stated the relevant facts giving rise to this appeal are that in the assessment year 1983-84 the appellant enjoyed income from: (1) K's Poultry Feed. (2) K's Poultry Appliances. (3) K's Poultry Farm (4) K & N's Agriculture & Poultry Breeding Farm. 3. Return of income was filed declaring income at Rs.2,73,007 in Part 1 of the return, and income of Rs.39,88,065 claimed to be exempt being income from poultry farm in Part II. During the course of proceedings the appellant revised original return of income. Income declared according to the original and revised return is as follows: 4. During the course of proceedings it further transpired that the appellant transferred 78,393 bags of poultry feed to poultry unit at cost, to wit, Rs.119.80 per bag, whereas the appellant sold such feed in open market at the average rate of Rs.134.39 per bag. The assessing officer formed view that in this way portion of income relating to poultry feed has been transferred to poultry farm unit, the income of which is exempt from tax. The appellant was confronted with these facts vide letter dated 24-1-1985 reproduced below: ------..On perusal of your trading account in respect of poultry feeds it transpired that you have sold 2,94,446 bags of poultry feed during the whole year. Out of which 78,393 bags have been transferred to your own poultry farm at the cost of Rs.119.88 per bag. Whereas the remaining 1,16,053
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bags have been sold in the open market at the average rate of 134.39 per bag. Your income from poultry farm is exempt, whereas the income from poultry feed is liable to income tax- by transferring the goods manufactured in a unit income of which is liable to tax you have transferred the income of a taxable unit to a unit, income of which is exempt. I have gone through various case-laws and come to the conclusion that where an assesses carries on several distinct businesses, the profit of each business must be computed separately and allowances must be confined to the appropriate business, i.e., the allowance can be claimed computing the profit of only that business to which they relate, as has been held in South Indian Insurance Co. Ltd. v. C.I.T. And Ganeshilal Bhattanwala. Further in another case reported as Rahehandra Munnalal v. C,I.T., it has been held that where an assessee carries on different varieties of trade, commerce of manufacturing activities each variety will have to be regarded as separate business for the purposes of computing the income. I intend to include the difference of Rs.11,37,482 on 78,395 bags at the average rate of 14.51 per bag to the income of your poultry feed unit to which it actually relates. 5. The appellant furnished following explanation: "2-A. You have stated in your letter that you intend to add a sum of Rs.11,37,482 to the returned income of our client being the difference between cost and sale value of feed bags consumed by poultry farm. You have worked out the amount of Rs.11,37,482 by multiplying Rs.78,393 bags consumed by poultry breeding farm with the average rate of Rs.14.51 per bag, which you feel is the margin between cost and sale value. 2.2. At the outset we would like you to appreciate the facts that the two limbs of the same business, i.e., poultry farm and poultry feed are being run and managed by the same proprietor. The self consumption of 78,393 feed bags by farm had to be accounted for at cost since the said consumption in a normal commercial parlance cannot be treated as sale as no transfer is taking place between two different persons who may be ordinarily called a buyer and a seller. It is an established principle of commercial law that it is practically and legally impossible for anyone to be simultaneously a buyer and seller in the same transaction. The doctrine of mutuality so often upheld and applied by superior Courts, that no man can make profit out of himself is squarely applicable in the present case. Since the assessee cannot be construed to have made profit out of his own feed business by including in purchases and sales with himself to the extent of the feed consumed by himself at his own farm. It is submitted that transaction entered into by commercial man must be looked into from a practically commercial point of view and in trying to determine whether a transaction can yield or result in a profit, the substance of the transaction must be taken into consideration and not its form whatsoever it may be. If we have to consider that the feed consumed by our client's farm constitutes a business transaction then it would means that our clients have made profit from himself, which we believe cannot be the proposition of law. It is to be appreciated that the two departments of the same owner's business, i.e., Poultry Farm and poultry feed, are being run and managed by one and the same person and it would be wholly unreal and artificial to separate two segments of the same owner's business from its owner and treat them as if they were separate entities trading with each other and by means of fictional sale introduce fictional profit which in truth and in fact is non-existent. 2.3. Yet from another standpoint it is submitted for your consideration that what is construed as "Business" is not a unilateral act. Business is brought about by a transaction between two or more persons and if there is an activity which is a business activity and that activity is carried on between two persons, then alone it can be said that each is carrying on business with the other. In the present case therefore, no business transaction is taking place between two parties since the feed produce has been consumed by the same person. There is no bar in law, that a person cannot consume or utilize for whatever purpose, any goods he is dealing in and any such self-
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consumption would not partake the nature of sale or buying and selling simply because one, limb of the business owned by the same sole proprietor is taxable while the other is tax-free. In fact the taxability or exemption does not determine whether a transaction fulfills the fundamental characteristics of sale, it is only to be taxed when a transaction made is deemed to be a sale and be liable to tax unless specifically excepted. Unless the following primarily elements are present in any transaction it is anything but sale. (a) There should be two parties to a transaction to make a sale, a buyer and a seller. (b) The sale should result in transferring ownerships from a seller to a buyer. (c) The transaction should be accomplished on the ultimate transfer of title in the goods from one independent person usually a buyer and a seller; and (d) there should be a physical delivery of goods from a person to a yet another person. 2.4. The pertinent fact to be appreciated is that the two limbs are being run and managed by one and the same person and, therefore, feed consumed by farm cannot mean and include a business transaction between farm and feed business. For to say so would mean that although the proprietors of the two departments are same he is said to have done business with himself and thereby made profit. This we reiterate can never be the proposition in law. 2.5. We further wish to state that business has been defined in section 2(11) of the Ordinance to mean and we quote. "Business includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce manufacture:" There must be at least more than one party to a transaction in regard to any trade commerce, manufacture, or adventure or concern in the nature of trade before such trade, commerce or manufacture can yield or produce any profit chargeable under the Ordinance. Feed self- consumed would not be business within the meaning of the term business as defined in the Ordinance, because for any arrangement which can be termed as a business transaction there has to be naturally two parties. The operation of feed consumed by the farm run and managed by the same proprietor cannot constitute business and therefore cannot yield a profit chargeable under the Ordinance. 2.6. It is common knowledge that most of the poultry farms usually prepare their own feed out of the feed ingredients purchased from the market and the feed so produced is consumed by farm owned by such owners. If by consuming the feed produced by them, a 'Sale' is said to result in practical and commercial terms then the primary question arises, who the two parties in that transaction are? Obviously one, in the same premises if a department consumes it, no sale by any stretch of imagination could be said to occur. 2.7.Had self-consumption been capable of being treated as `sale' the income-tax law could have specifically made provision therefore in this context, reference to section 2(15) read with 3(6) of the Sales Tax Act would be found to be of great relevance wherein the intention of the legislature has been made so very categorical that "self-consumption" although not (sale) but for the limited purpose of Sales Tax Act is to be construed as such, because clause (d) of the said section 3(6) provided as under :-- (d) When goods are manufactured not for sale but for the manufacturer own use. 2.8. Even talking of the income-tax law, section 15BB of the repealed Act is relevant where reference to a situation was envisaged in which a business concern may manage two units, one enjoying tax holiday and the other ' taxable. In order to preclude transaction between two units run by the same company wherein stock may be transferred at cost, proviso was added in section 158B of the repealed Act which we reproduce below:--- "Provided that the transfer of any raw materials, stock sand store from an existing industrial undertaking to newly set up industrial undertaking whose income profits and gain have been
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exempted under this subsection shall be at market rates and not at cost notwithstanding the fact that such newly set up industrial undertaking or such expansion of an existing industrial undertaking is branch or a subsidiary of the existing industrial undertaking." According to the proposition laid down by you even if two concerns are being run and managed by the same (person) the transfer of stocks or its self-consumption would automatically be at market value. If we consider your proposition to be tenable in law we would like to submit that it would not have been necessary for the addition of the provision in section 15BB for transfer of stocks from taxable unit to non-taxable unit at market value and not at cost. The addition was made simply to make it legally obligatory for transfers at market value for in its absence it would have been at cost. It is a settled proposition in law that no man can make a profit out of himself, arid to state otherwise would not be legally and factually correct." 6. The assessing officer considered the explanation furnished by the appellant and observed as follows: "In short the assessee in his letter noted above has contended:'' --self-consumption has no profit,-- --No transfer has taken place between two different persons. --Application of doctrine of mutuality. --Self-consumption would not partake the nature of sale, or buying and selling simply because one limb of two businesses owned by the same person is taxable while the other is exempt. --Absence from Income Tax of (sic) of specific clause like (a) Clause (d) to section 3(6) of Sales-tax Act, and (b) Provisions of 15BB of the Repealed Act, 1922. --The case-laws applicable in his case are:-- (i) C.I.T. Bombay City v. Sir Home Mehta ITR 28 (1955) (ii) C.I.T. v. Publix Industries-Taxation 28 IT'R 35 (iii) C.I.T. v. Mazagaon Dock Ltd. (1955) 28 ITR 35. (10) The contentions of the A/R of the assessee have no force in this c se as there are two separate and distinct units each of which has separate nature of income or expenditure and income of one unit is liable to tax while the income of other unit is exempt from tax. What the assessee has done is that he has reduced the income of taxable unit i.e. Poultry feed unit by Rs.11,35,482 and has transferred this profit to poultry farm and poultry farm breeding, whose income is exempt and has thus enhanced his exempted income by Rs.11,37,482. By employing this method the assessee has also avoided payment of Income-- tax on Rs.11,37,482 which is actually the income of taxable unit i.e. Poultry feed unit. Had the assessee purchased the feed from open market he would have paid Rs.134/39 per bag which -is the market rate, thereby the profit of the exempted unit would have been less by the difference of amount of (Rs. 134.39 - Rs. 119) i.e. Rs.11,37,482. It is therefore crystal clear that the assessee has only transferred the profit of a taxable unit to a non-taxable unit. (11) The doctrine of mutuality as contended by the A/R of the assessee in his explanation in para reproduced above, is not applicable in this case. There are two separate units each having separate nature of business and independent source of income. One unit enjoys exemption from tax and the other unit is taxable and here it is the unit of poultry feed, the income of which is being determined for taxation purpose and by stretch of no law is exempt from tax to which the doctrine of mutuality is not applicable. ' (12) The contention of the counsel of the assessee with respect to non--existence of specific provision like clause (d) of section 3(6) of Sales-tax Act and the proviso to section 15BB of repealed Income-tax Act in the Income-tax Ordinance, it may be stated that the existence. And non--
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existence of specific provision like Sales-tax Act has no relevancy with the case. Sales tax Act is quite an independent Act and the provisions of the said Act cannot be applied in the Income Tax matter unless specific provision or reference is made to the same. Anyhow the existence and non- existence of the proviso to section 15BB of repealed Act has far reaching relevancy in the case. Section 15BB of repealed Act as it stood in the repealed Act itself does not find any place in the Income Tax Ord., 1979, but the existence of the same in the repealed Act much reflects the general scheme of the Act that the income liable to tax under the disguise of exempt income should not be allowed to go untaxed. (13) The Income Tax Ordinance/Act has given a definite scheme to levy tax on the income, which is not specifically described as exempt in the Act/Ordinance. Thus the action of determining the accrued income of poultry feed unit is in conformity with the basic principle of Scheme of the Act/Ordinance. The receipt of income by a person not itself of a character to fall within the definition of exempt income specifically described in the Act/Ordinance cannot assume the character of exempted income by reason of the method by which it is calculated or determined. Thus the arguments advanced by the counsel of the assessee in this respect have no force. (14) As regards the argument of the counsel with respect to non--payment of tax by unit of poultry farm enjoying exemption from tax on poultry feed produced by them for their own consumption in their poultry farm have also no relevancy. The mere fact that a unit the income of which is liable to tax or unit the income of which is exempt from tax is owned by the same person does not alter the character of the income of each unit." 7. The assessing officer ultimately came to the following conclusion: "Here in this case the position is that a single person is enjoying income from different varieties of trade, commerce, or manufacturing activities, each will be treated as a separate unit and profit of one unit cannot be determined in or transferred to other unit in any way. Owing to the close connection between the two units (rather being managed by the same person in this case) the course of transaction, if so arranged that the taxable unit makes either no profit or makes less profit than the ordinary one reasonably expected in that unit, such an arrangement would deprive the department of tax which, would otherwise be payable by the taxable unit. In such cases the provisions of section 32 of I.T. Ord. Are attracted and the taxable unit may be charged in respect of the profits which it has not in fact made but which it might reasonably be expected to have made had it done the business on ordinary commercial terms. The department has authority under section 32 of determining the quantum of notional profits in respect of which the taxable unit may be charged under the Act. It is the income of the poultry unit, which has to be determined for taxation purposes and not of poultry farm unit. For income tax purpose it is irrelevant to consider whether or not the poultry farm unit, the income of which is exempt made any profit through such dealing with poultry feed units, what really matters is that how much profit the poultry feed unit earned though no profit might have occurred to the poultry farm unit. What the assessee has done is this. He has transferred the manufactured goods, viz. 78,393 bags of poultry feed from its taxable unit namely poultry feed unit to its tax free unit namely (1) Poultry farm Unit (2) Agricultural and poultry breeding farm unit. This transfer has been done at cost of Rs.93,98,775 instead of the average market price of Rs.1,05,37,042. This way the assessee has transferred its taxable income amounting to Rs.11,38,266. (Rs.1,05,37,042 the average sale minus Rs.93,98,776 the cost price) to its non-taxable unit named above. This is out and out a case of transaction which is not bona fide transaction and is sham. The assessee should have credited to its account of taxable unit, the average market price of 78,393 bags of poultry feed which it has transferred to its tax free unit and not its cost price .Of Rs.93,98,776. If any authority is needed in support of this view that is available in a case reported as Sharkee (Inspector of Taxes) v. Warner
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(HL) 1956-29-962 ITR. In the instance case, as it has been discussed above the sole intention of the assessee is to reduce its tax liability by transferring its taxable income to its tax free unit and this has deprived the Govt. Exchequer of its rightful dues, which is not allowable under the law. It is therefore clear that the difference between average sale price and the cost price viz. Rs.11,38,266 is liable to tax." 8. Being aggrieved with the above treatment the appellant preferred first appeal reiterating the same contentions, without any success and hence this second appeal before us. 9. Heard Mr. Sidat Hyder, CA., learned Representative for the appellant and Mr. Ilyas Shaikh, learned Representative for the Department. Mr. Sidat Hyder has reiterated and canvassed the same points before us as agitated before the learned two officers below. The learned D.R. Has also vehemently supported the impugned orders of the learned two officers below. Our findings are as follows: FINDINGS We have extensively cited from the assessment order with the purpose that a clear picture of the facts and circumstances of the case may emerge before us. Since there is no dispute about the facts, therefore, we need not repeat or discuss the facts while dealing with the issue under consideration. The main stress has been laid by Mr. Sidat Hyder before the two officers below and before us as well, on the doctrine of mutuality. He has submitted that the business of poultry farming and poultry feed are run and managed by the same proprietor and, therefore; the two units, one enjoying exemption from taxation and the other subject to levy of tax are the two limbs of the same business. According to Mr. Sidat Hyder the feed consumed by farm cannot mean and include the business transaction because nobody can be buyer and seller at the same time. He has submitted that since nobody can earn profit out of himself, therefore, there is no question of earning any income on self-consumption of feed by one department of the business which was produced by another department of the same business. On the other hand, the learned D.R. Has strenuously supported the orders of the learned two officers below. He has contended that the goods have been transferred from taxable unit to exempt unit at cost rate instead of market rate and thereby incidence of tax on the taxable unit has been decreased which is not permissible in law. He has submitted that the law has granted exemption to the income derived by an assessee from the business of poultry farming. The appellant by the device of transferring goods produced by the poultry feed unit at cost price has attempted to avail exemption of income earned by taxable unit in the garb of self-consumption which is not permissible. The learned D.R. Has submitted that although while interpreting taxation laws, the interpretation beneficial to an assessee is to be adopted but in case of exemptions, the law has to be construed strictly and exemption is to be allowed strictly to the extent granted in law. He has maintained that the exemption cannot be allowed to be extended by resort to a device which has the effect of enlarging the scope of exemption. He has further submitted that the doctrine of mutuality is not applicable to the cases where an assessee transfers goods or stock-in-trade from taxable unit to non--taxable unit. He has submitted that by crediting cost price of 78,393 bags in the poultry feed account and debiting the same amount in the poultry farm account the appellants have themselves negatived their contention. If there is no sale transaction there is no question of debiting and crediting the two accounts representing the price of feed bags transferred from poultry feed account to poultry farm account. The learned D.R. Has submitted that the only point for consideration is, as to what price is to be determined in respect of 78,393 feed bags transferred from poultry feed account to poultry farm account. He has submitted that the only reasonable price would be the market price and not the cost price as done by the appellant. 11. The learned representatives for the parties have cited some cases in support of their respective contentions but after going through the case-law relied upon by the parties we are constrained to
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observe that all the cases cited by the yearned representatives for the parties are wide off the mark. The learned representatives for the parties have cited following cases before us: (i) C.I.T. v. Publix Industries PLD 1969 Kar. 606. (ii) C.I.T. v. Sir Homi Mehta, (1955) 28 ITR 828, (Bom. H.C.) (iii) C.I.T. v. Mazagaon Dock Ltd., (1955) 28 ITR 35 (Bom. H.C.) (iv) Ram Chandra Munna Lal v. C.I.T. (1949) 17 ITR 394 (E. Punj. H.C.) 12. As already observed facts of the above cases are distinguishable from the facts of the present case, therefore, we need not dilate on the above rulings. We have been able to lay hand on three cases, two from English jurisdiction and one from Indian jurisdiction, involving the facts and circumstances which are on all fours to the facts and circumstances of the present case. 11. The learned representatives for the parties have cited some cases in support of their respective contentions but after going through the case-law relied upon by the parties we are constrained to observe that all the cases cited by the learned representatives for the parties are wide off the mark. The learned representatives for the parties have cited following cases before us: (i) C.I.T. v. Publix Industries PLD 1969 Kar. 606. (ii) C.I.T. v. Sir Homi Mehta, (1955) 28 ITR 828, (Bom.H.C.) (iii) C.I.T. v. Mazagaon Dock Ltd., (1955) 28 ITR-35 (Bom. H.C.) (iv) Ram Chandra Munna Lal v. C.I.T. (1949) 17 ITR 394 (E. Punj. H.C.) 12. As already observed facts of the above cases are distinguishable from the facts of the present case, therefore, we need not' dilate on ,the above rulings. We have been able to lay hand on three cases, two from English jurisdiction and one from Indian jurisdiction, involving the facts and circumstances which are on all fours to the facts and circumstances of the present case. 13. The first case is Watson Bros. v. Hornby, (1942) 24 Tax Cases 506. The facts of this case are that the assessee carried on the business of poultry breeding as well as hatchery which produced chicks primarily for sale as day-old chicks. Most of the chicks were sold but some of them were transferred…
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