APPELLATE TRIBUNAL INLAND REVENUE, DIVISIONAL BENCH-I,
ISLAMABAD
ITA No.1430/IB/2018
& MA (AG) No.02/IB/2020
(Tax Year 2015)
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M/s Foundation Wind Energy-I Limited,
68-Tipu Road, Fauji Foundation Head Office, Chaklala Cantt. |
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Appellant |
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VS |
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Commissioner Inland Revenue, Corporate
Zone, RTO, Rawalpindi |
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Respondent |
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Appellant by |
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Mr. Aazar Abdul Hameed, FCA |
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Respondent by |
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Mr. Muhammad
Zaheer Qureshi, DR |
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Date of hearing |
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01.09.2020 |
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Date of order |
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01.09.2020 |
O R D E R
M. M. AKRAM (Judicial Member): The titled
appeal has been filed by the Appellant/taxpayer against an Order No.1314 dated
16.04.2018 passed by the learned CIR (Appeals-III), Rawalpindi on the grounds
as set forth in the memo of appeal. Subsequently, the appellant also filed the
additional grounds in the titled appeal in respect of levy of minimum tax under
section 113 of the Income Tax Ordinance, 2001 (“the Ordinance”).
2. The
facts, in brief, are that the Appellant Company is engaged in the business of
sale of electricity generated through a wind energy power plant. It had filed
its return of income for the Tax Year 2015 declaring net revenue/sales at
Rs.358,785,127/- and a net loss of Rs.3,695,944,975/-. The appellant also paid
Alternate Corporate Tax (ACT) in
terms of section 113C of the Ordinance amounting to Rs.548,305/-. The return so
filed by the Appellant was treated to be an assessment order in terms of
section 120(1)(b) of the Ordinance. Later on, during the course of examination
of return and audited accounts, the Additional Commissioner Inland Revenue (ACIR) observed that the deemed
assessment was erroneous in so far as prejudicial to the interest of revenue on
the ground that the Appellant Company paid ACT in terms of section 113C of the
Ordinance amounting to Rs.548,305/- whereas it was required to pay minimum tax
in terms of section 113 of the Ordinance amounting to Rs.3,587,851/- being
higher of the two. Accordingly, a show-cause notice was issued to the Appellant
wherein it was confronted on the non-payment of minimum tax on declared
turnover and intended remedial action under section 122 (5A) of the Ordinance.
In response thereto, the AR of the Appellant attended the proceedings and also
submitted his written replies from time to time wherein he took the plea that
the Appellant’s income is exempt in terms of Clause 132 of Part-I of the Second
Schedule to the Ordinance. Thus, the Appellant was not liable to pay income tax
including the minimum tax under section 113 of the Ordinance. However, the
Assessing Officer was not convinced with the arguments of the learned AR on the
grounds that the Appellant has not claimed an exemption and offered its income
for taxation in its return of income and also paid ACT in terms of section 113C
of the Ordinance. He further observed that the Appellant Company did not
qualify the claim of exemption as the required conditions for exemption
stipulated under Clause 132 (a) & (b) of Part-I of the Second Schedule to
the Ordinance were not fulfilled. Accordingly, the Assessing Officer held the
deemed assessment order as erroneous in so far as prejudicial to the interest
of revenue in terms of section 122 (5A) of the Ordinance and charged minimum
tax @ 1% of the turnover declared at Rs.358,785,127/-. Being aggrieved, the
Appellant preferred the appeal before the learned CIR (A) who vide Order No.246
dated 15.09.2017 rejected the appeal of the Appellant. Still feeling aggrieved,
the Appellant Company filed a second appeal before this Tribunal. The said
appeal was heard and disposed of by this Tribunal vide combined order dated
23.01.2018 whereby the case was remanded back to the learned CIR(A) with the
following directions: -
“In view of the above scenario, we hold it appropriate to remand the case back to the learned CIR (A) to properly adjudicate upon ground No.iv, v, vi and viii of the grounds of appeal put forth before him and a judicious order to be passed within forty days of receipt of this order. This order mutatis mutandis applies to appeals in ITA No.1502/IB/2017 for the Tax Year 2016, ITA No.1503/IB/2017 for the Tax Year 2015, and ITA No.1504/IB/2017 for the Tax Year 2016.”
In compliance with
the order of this Tribunal, the learned CIR(A) again fixed the appeal and heard
the Appellant. This time too, the learned CIR(A) confirmed the order of the
Assessing Officer vide his Order No.1314/2018 dated 16.04.2018. Aggrieved with
this order, the Appellant has preferred an appeal before this Tribunal and
assailed the impugned appellate order on a number of grounds.
3. The titled appeal came up for hearing
before this Bench on 01.09.2020. The learned AR of the Appellant has opened his
arguments by stating the brief formations of the Appellant Company with
supporting documents. He then went through Clause 132
of Part-1 of the Second Schedule to the Ordinance in some detail to highlight
the intent, purpose, and scope of the Clause. It was submitted that the
financial statements of the company clearly provide that it did not have any
plant and machinery on the balance sheet at the time of sales of shares by M/s
Beacon Energy Limited (BEL) to the
Appellant. He vehemently contended that initially, the project owned by BEL was not in business but only on
paper/feasibility stage well after the purchase of 100% shares by the Appellant
Company. Thus, the question of the reconstitution
of the power generation project does not arise. The learned AR argued that both
the authorities below have erred in law in holding that the power generation
project in question was formed by reconstitution of business already in
existence or allegedly by transfer of the new business of plant and machinery
which was previously used in a former project owned by BEL rendering the
Appellant Company ineligible to claim the exemption in terms of sub-clause (b)
of Clause 132 ibid. It has been stated that the plant and machinery were
purchased by the appellant after the acquisition of 100% shares of the former
company BEL which could not have been construed as reconstitution of the project
as observed by both the authorities below. To substantiate the foregoing
submissions, the learned AR has placed on record the relevant documents and
case laws relied upon in support thereof.
He, therefore, pleaded that the appeal be accepted.
4. On the other hand, the learned DR opposed
the arguments of the learned AR and contended that the order passed by the
learned CIR(A) is a speaking order and there is no infirmity in the impugned
order. All the grounds raised by the Appellant have duly been considered and
adjudicated upon by the learned CIR(A) with sound reasoning. He, therefore,
prays for the rejection of the appeal.
5. Arguments heard and record perused.
Before we consider the questions of law, it is necessary to deal with the
factual and procedural aspects involved. After thoroughly perusing the record
and documents submitted by the Appellant at the time of hearing of the appeal,
the
formation of the Appellant’s Company is tabulated in the following manner:-
Foundation Wind
Energy-I Ltd [Formerly: Beacon Energy Ltd]
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Date of incorporation of Beacon Energy Limited (BEL). |
June 16, 2005 |
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Sponsors |
Beacon House group |
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Letter of Intent was issued by NEPRA |
April 2005 |
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Feasibility study filed with Alternate Energy Board, Govt. of
Pakistan. (AEDB) |
October 2006 |
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Sale of shares by sponsors to Fauji Group |
July 2010 |
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Further share capital issued by sponsors to Fauji Group |
N/A |
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Change of name of the Appellant Company through SECP |
December 27, 2010 |
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Financing tentative terms sheet by Banks |
August 15, 2011 |
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Award of design, construction contracts for the project |
August 23, 2011 |
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AEDB approval of feasibility of the project. |
August 29, 2011 |
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Submission of Tariff petition to NEPRA |
September 8, 2011 |
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Generation License issued by NEPRA for a period of 20 years |
December 22, 2011 |
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Award of levelized Tariff by NEPRA |
March 16, 2012 |
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Commercial operation date (COD) |
April 11, 2015 |
The above table
clearly suggests that the project
owned by the Appellant Company was in the feasibility stage well after the
acquisition of 100% shares from the sponsors of the company BEL to Fauji Group
and not project in business as per Clause (132)(b) of Part-I of Second
Schedule to the Ordinance. In addition to
aforesaid, the audited financial statements of the Appellant’s Company as on
the relevant dates have further supported the contentions of the AR of the
appellant as under:
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June 30, 2010 |
June 30, 2011 |
June 30, 2015 (Year of commencement of business) |
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Property plant & Equipment – cost |
Nil |
Nil |
12,628,934,518 |
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Issued paid-up Capital & advance against the issuance
of shares |
164,743,170 |
164,743,170 |
3,502,494,950 |
It can be seen from the table that the Appellant’s
did not have any plant and machinery on the balance sheets at the time of
purchase of shares from BEL.
6. Now,
we come to the controversy involved in the instant case. The perusal of the
record shows that originally the Assessing Officer rejected the Appellant’s
claim of exemption from income tax under Clause 132 of Part-I of Second
Schedule to the Ordinance on the following two counts: -
i. The management and operation rights of the project was
transferred to Operation and Maintenance (O & M) Contractor by the Appellant
Company by virtue of which it became ineligible in terms of sub-clause (a) of
Clause 132 ibid.
ii. The power generation project in question was formed by reconstitution of business already in existence or by transfer to new business of plant and machinery which was previously used in a former project owned by BEL in terms of sub-clause (b) of Clause 132 ibid.
The learned CIR(A) in the impugned order, after
considering the arguments of the Appellant and perusing the relevant record,
has accepted the plea of the Appellant with respect to sub-clause (a) of Clause
132 by observing that mere awarding of a O & M Contract to a consortium
cannot be construed as a transfer of ownership and management rights to the
Contractor. Admittedly, the Department has not come up with this Tribunal on
the said point therefore the issue to this extent has attained finality. Now at
this stage, the controversy between the parties is limited only to the extent
of interpretation of sub-clause (b) of Clause 132 ibid. The following question emerges from
the record for determination and dilated upon by this Tribunal while deciding
the instant appeal: -
Whether under the facts and in the circumstances of the case, the acquisition of 100% shares of the M/s BEL by M/s Fauji Foundation and thereafter changing the name of the company as M/s Foundation Wind Energy-1 Limited amounted to the reconstitution of a business already in existence or not?
The Appellant
is a company limited by shares and incorporated under statute dealing with the
incorporation of companies in Pakistan. Moreover, under the said law, it is
treated as a separate legal entity different from its members and shareholders.
This implies that the company is an artificial juridical person whose birth is
certified by a Certificate of Incorporation issued by the Securities and
Exchange Commission of Pakistan under the Companies Ordinance, 1984 (now Companies
Act, 2017). Though the said person does not have flesh and blood, it is
governed under the Company Law, its members/shareholders have control over its
corporate spirit, the Board of Directors regulates its brain, and finally, it
speaks through its resolutions. In the case titled Chand Textile (Spinning) Mills Ltd Vs Deputy
Commissioner of Taxes, 1995 PTD 360 (HC Bangl.), it
was held that the assets and liabilities of a juristic person remain that of
such person and change in ownership of such juristic person has no bearing.
Relevant extracts are reproduced below for ease of reference: -
“2.
The case of the petitioner is that
it is a manufacturing company carrying on the business of spinning textile
thread. The business of the company was nationalised under the President's
Order No.27 of 1972. Later on, after the legal proceeding, the company was
denationalised and the possession of the same was handed over to the original
shareholders and promoters of the company on 8-12-1982. The present management
received possession of the mill after retransfer in a ramshackle state and
before they could fully gear up with confidence to resume the business.
……………………………
…………………………………………………………….
11. The present case is not a case of succession. The mill remains as it was before and after nationalisation and denationalisation. Only the management has been changed and the present management was delivered possession of the mill after re-transfer with all assets and liabilities. It is the Mill which has separate and independent legal existence and is a juristic person which is liable for any dues against it whoever is in the management. The provision of section 88, therefore, has no application to the present case. ……………………” (Emphasis supplied)
Similarly, in the
case reported as (1983) 47 TAX 197 (H.C. Ind), it has also held that a
body corporate is a legal juristic person separate from its shareholder.
As
stated above, the Appellant Company was originally established under the
Companies Ordinance, 1984 in 2005 under the name and style of M/s Beacon Energy
Limited, and the shareholders sold their 100% shareholdings to new members in
July, 2010. The new members/shareholders, later on, decided to change the name
of the company from M/s BEL to M/s Foundation Wind Energy-1 Limited and
accordingly, changed the name on 27th December, 2010. However, the
nature of business and the constitution of the company, the MOA/AOA had
remained the same. In the case reported as 2009 CLD 839 (Lah H.C) the
question before the Hon’ble Lahore High Court was with respect to registration
of transfer deeds under sections 39 and 40 of the Registration Act, 1908 and it
was held that mere change of name of the company did not require to get fresh
transfer deeds registered from the previous name to new name as the identity of
the Company had not changed. Further, the record shows that prior to the sales
of shares to the Appellant Company, M/s BEL was under feasibility stage and the
project was not in business as per Clause 132(b) ibid. Before going any
further, it would be beneficial if the relevant provisions of the Ordinance i.e
Clause 132 of Part-1 of Second Schedule to the Ordinance is reproduced
hereunder at this juncture: -
“(132) Profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988. The exemption under
this clause shall apply to such project which is--
(a) owned or managed by a company formed for operating the said project and registered under Companies
Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan;
(b) not formed by the
splitting up, or the reconstruction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a
business which was being
carried on in Pakistan at any time before the commencement of the new business; and
(c) owned by a company
fifty percent of whose shares are not held by the Federal Government or ……..” (Emphasis supplied)
7. For the purpose of interpretation of
sub-clause (b) of Clause 132 ibid, we have applied the doctrinal approach,
reviewed the relevant legislative instruments in the legislative framework of
the United Kingdom, and also analysed the case laws of Pakistani and Indian
jurisdictions. In our considered opinion, the expressions “reconstruction” and “reconstitution”
used in sub-clause (b) of Clause 132 has a similar meaning and are commonly
used to signify the same set of events of restructuration, but in the context
of two different forms of business organizations, that is, an unincorporated
partnership and a body corporate (Company or Limited Liability Partnership (LLP), respectively. Both the
expressions have neither been defined in the Ordinance nor the General Clauses
Act, 1897 (1987 Act). There is no concept of “reconstitution” of a company
under Pakistan laws, however, under the Ordinance, the term has been used and
adjudicated upon repeatedly vis-a-viz Partnerships (Association of Persons).
The dictionary meanings of both the expressions are as under: -
a) The expression “reconstruction” as per Black’s law dictionary 11th Edition:-
“reconstruction. (16c) 1. The act or process of rebuilding,
re-creating, or reorganizing something, an expert in accident
reconstruction>. See ACCIDENT RECONSTRUCTION. 2. Patents. A rebuilding of a
broken, worn-out, or otherwise inoperative patented article in such a way that
a new article is created, thus resulting in an infringement <the replacement
of the machine’s essential parts was an infringing reconstruction rather than a
permissible repair>. Cf. REPAIR DOCTRINE. 3. (often cap.) The work that is
done to repair damage to a city, country, industry, etc., esp. after a war;
esp., the process by which the Southern states that have seceded during the
Civil War were readmitted into the Union during the years following the war
(i.e., from 1865 to 1877) <the 13th, 14th and 15th
Amendments to the U.S. Constitution are a lasting legacy of
Reconstruction>.” (Emphasis supplied)
b) As per Webster’s New World Dictionary 3rd
College Edition: -
“reconstruct …. vt. 1. to construct again; rebuild; makeover
2. to build up, from remaining parts or other evidence, a concept or
reproduction of (something in its original or complete form)
reconstruction
… n. 1 a) the of reconstructing b) something reconstructed –[R-] 1 the process,
after the Civil War, of reorganizing the Southern States which had seceded and
re-establishing them in the Union 2 the period of this (1867-77)”
c) The expression “reconstitute” as per Black’s law dictionary 11th
Edition:-
“reconstitute, vb. (1842) To form (an organization,
group, etc.) again in a different way.” (emphasis
ours)
d) Webster’s New World Dictionary 3rd
College Edition: -
“reconstitute …. to constitute again or a new; reconstruct, reorganize, or recompose; specif., to restore (a dehydrated or condensed substance) to its full liquid form by adding water – reconstitution.” (Emphasis supplied)
However, an
analysis of different statutory provisions, as mentioned in footnotes, supports
this conclusion. In this respect, we take this opportunity to highlight that in
U.K. Company and LLP Law, a restructuration of a company or LLP, amongst
others, is said to be “reconstructed”[1],
and it is never said to have been “reconstituted”.
On the other hand, a restructuration of a non-body corporate/unincorporated
partnership is never meant to be "reconstructed"
but is always said to be “newly
constituted”[2]. In other words, we have not noticed that
legislature having ever used the term that a partnership is formed,
reconstructed, taken over, amalgamated, or entered into an arrangement. These
latter terms are always used in the context of a corporate entity, and more
precisely, a Company or a LLP[3].
Conversely, in the event of a restructuration of a non-body
corporate/unincorporated, partnership form of business organisation, the
legislature had invariably used the term, “constitution”
to signify a similar event in the kind of a reconstruction of a partnership
firm.
8. We believe that following the same legislative traditions, the drafter in the legislation relating to body corporates, such as the Company Law has also used the term of formation, reconstruction, etc., and have not used the term reconstitution to demonstrate the event of restructuration of a company. We have minutely gone through the Companies Ordinance 1984, and we can confirm that the said legislation has not used the term “reconstitution” even once. Similarly, the current Companies Act, 2017 has also not used “reconstitution” at all. Likewise, in the case of limited liability partnership, which is legislation dealing with a body corporate partnership form of the business organisation formed under Limited Liability Partnership Act, 2017, a similar term of “reconstruction” is used to connote restructuration of a LLP; and it has not used the term of “reconstitution” in any context. On the other hand, the Partnership Act, 1932, which deals with the standard partnership form of business organisation, which is not a body corporate, the Legislature, has used the terms of “constitution”[4] and “reconstitution”[5] in its different provisions. Apart from Pakistan, the Union of India, People’s Republic of Bangladesh also share similar legislative culture, and despite the fact that we have not analysed their legislation in a likewise context, but we believe that they also follow the aforesaid set of legislative terminology in the same manner.
9. In view of the above analysis of the U.K.
and P.K. legislation relating to body corporate and non-body corporate entities
(but not sole proprietor), it appears that the terminology of
"reconstruction", and "reconstitution" is used to connote a
similar event restructuration or reorganisation of a business entity. However,
the difference is that the word “reconstruction” signifies restructuration of a
limited liability body corporate, that is, a company and LLP; and
“reconstitution” is invariably used to imply restructuration of a non-body
corporate without limited liability, for example, a standard partnership formed
under Partnership Act, 1932.
10. Now we apply the above-described conclusion
to the Income Tax Ordinance, 2001 to test its veracity. Any analysis of
different provisions of the Ordinance reveals that the statute has used the
terms of “splitting up, reconstruction
or reconstitution” of an undertaking or a business at different provisions.
In this respect, it is pertinent to point out that the drafter has used the
above-quoted terms in the context of a business or such undertakings and not a
body corporate (Company or LLP) alone. This means that the same terms
disjunctively associate with different forms of business organisations, which,
undoubtedly include Companies, LLP’s, and unincorporated partnerships; and
following the above criteria/legal test, it would be safer to conclude that the
terms reconstruction is associated with restructuration or reorganisation of a
body corporate (Company or LLP) and the term reconstitution is used in the
Income Tax Ordinance to signify restructuration or reorganisation of an
incorporated partnership. Nevertheless, some may argue that this conclusion is
not the safest because in Section 2(59A)(iii) of the Income Tax Ordinance 2001,
the drafter has clearly used the term “reconstitution” in the context of a
company and not an unincorporated partnership; however, on this, we would
highlight that this Section 2(59A)[6]
was not part of the original legislative scheme/framework and further that this
is a single provision in the legal framework of Pakistan, which is inconsistent
with the legislative code of Pakistan. On this basis, there is a strong
presumption that this is a drafting error, which entails clarification.
However, this one incident is not enough to cast away conclusions based on
longstanding practice, spread over 90 years, of use of the term
“reconstitution” in the context of an unincorporated partnership; and
“reconstruction” in the context of a body corporate, in the form of a company
or limited liability partnership. Hence, the correct connotation of the term
reconstitution is associated with unincorporated business/a standard form of
partnership and the findings by both the lower authorities that the subject
company has been “reconstituted” is a misnomer. They may well say that the
Appellant Company has been “reconstructed”. However, this leads to another
question that whether the subject company, which is reconstructed, is entitled
to exemption as claimed? The answer to this question lies in the determination
of a fact that whether the change of name or its members/shareholders amounts
to the reorganisation or restructuring of a company. In our opinion, the answer
is absolute “No”.
11. A Company normally goes for reorganisation
or restructuring, when it is suffering loss for several past years and
suffering from financial difficulties. In other words, when a company's balance
sheet shows huge accumulated losses, heavy fictitious and intangible assets, or
is in financial difficulties or is to overcapitalized, and then the process of
reconstruction has resorted. It may be either internal reconstruction or
external reconstruction of a company. The scope of these terms is explained in
the following paragraphs: -
i.
External
reconstruction: When a company
is suffering losses for the past several years and facing a financial crisis, the
company can sell its business to another newly formed company. Actually, the
new company is formed to take over the assets and liabilities of the old
company. This process is called external reconstruction. In other words,
external reconstruction refers to the sale of the business of an existing
company to another company formed for the purpose. In external reconstruction,
one company is liquidated, and another new Company is formed. The liquidated
company is called "Vendor Company" and the new company is called
"Purchasing Company". Shareholders of the Vendor Company become the
shareholders of the purchasing company.
ii. On the other hand, internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption, and external reconstruction.
12. In view of the above discussion, it can be
concluded that a mere change in the name of a company or change of its
members/shareholders, though altogether, does not amount to the reconstruction
of a company. We are in our mind, that if this interpretation is incorrect,
then the death of a single member forming a single-member Company (as defined
in section 2 (49) of Companies Act, 2017) would automatically amount to the reconstruction
of a company, in as much as, 100% shareholding would be transferred to his or
her nominee or the legal heirs.
13. It is important to mention that
share-holding in companies listed on the stock exchange is never static and
keeps on changing throughout their tenor of operation. Therefore, the transfer
of share-holding is a matter of investment and does not alter the status of the
structuration of the business of a company. For understanding the intent of the
legislature in using the words “reconstruction or reconstitution, of
a business already in existence” one may interpret Clause 132(b) using
the principle of elimination of probabilities. It would be expedient to note
that reconstitution cannot be done without first having a state of loss or
absence of a constitution and similarly, reconstruction presupposes loss or
absence of construction. Here, the revenue has not made a case to prove that
there existed a state of absence of constitution or construction of the
business of the company and then a reconstitution or reconstruction came into
existence by way of the arrangement which has not been accepted by the forums
below.
14. In conclusion, we find that the lower
authorities have misconstrued the provisions of Clause 132 of Part-1 of the
Second Schedule to the Ordinance and as such, committed an error of law. The
findings of the lower authorities in this matter are unlawful, and the
Appellant Company has entitled to exemption under Clause 132 ibid because the mere
change of name and its members/shareholders does not amount to the reconstruction
of a company. Consequently, the Appellant Company is not obliged to pay minimum
tax under section 113 of the Ordinance in terms of Clause (11A) of Part IV of
the Second Schedule to the Ordinance.
15. For what has been discussed above, the
appeal of the Appellant Company is accepted in the manner stated above.
16. This order consists of (12) pages and each
page bears my signature.
Sd/-
(M. M. AKRAM)
Sd/- Judicial
Member
(IMTIAZ AHMED)
Accountant Member
CERTIFICATE U/S 5 OF THE LAW REPORT ACT
This case is fit for reporting as it settles the principles highlighted above.
(M. M. AKRAM)
JUDICIAL MEMBER
[1] Section 1(2)(b) of [U.K.] Partnership Act,
1890; Section 7, 8, 94(7)(b), 900 and 974 of [U.K.] Companies Act, 2006
[2] Section 17(3) of [U.K.] Partnership Act, 1890
[3] Part 26 of [U.K.] Limited Liability Partnership Act, 2000
[4] Sections 17, 38, 42, 63 of
the Partnership Act, 1932
[5] Sections 17(a) and 32(2) and (4) of the Partnership Act, 1932
[6] Inserted by the Finance Act, 2005.
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