INCOME-TAX APPEAL NO. 120/KB OF 1983-84,DECIDED ON 9TH AUGUST, 1986. Versus INCOME-TAX APPEAL NO. 120/KB OF 1983-84,DECIDED ON 9TH AUGUST, 1986.

ORDER

FARHAT ALI KHAN (MEMBER).‑‑ This departmental appeal is directed against the order of learned Commissioner of Income‑tax (Appeals), Companies Circle C‑1. ,Karachi recorded by him on 6th December, 1982 relating to assessment year 1979‑80.

2. The brief facts giving rise to this appeal are that the respondent, an individual included in his declared income Rs.4,550 and Rs.7,039 as income earned from interest calculated at tile rate of 611/2% on loans given to Messrs G.A. and H. S. A. M. In his wealth statement the respondent also disclosed a loan having been advanced to Mst. S.I. but in his return he had not shown any income from interest derived from this loan. The Income‑tax Officer was, however, of the view that the interest should be charged at the rate of 2$ above the bank rate. He. therefore, calculated interest at the rate of 13% and added Rs.9,100 and Rs.14,079 as interest income derived from loans given to Messrs G.A. and H. S. H. M. He further calculated interest at the rate of 13% on amount of Rs.1,00,000 as loan given to Mst. S.I. and also added to the total as interest income. Thus, he taxed Rs.26,179 as interest income derived from aforesaid three loans. The respondent felt aggrieved and went up in appeal. It was contended before the learned Commissioner of Income‑tax (Appeals) that as far as loan to Mst. S.I. was concerned, it was not open to levy of any business or profession and secondly because it was given on 31st of August, 1977 i.e., before 1st July, 1979 when, the Income‑tax Ordinance came into force. It was further contended that toe loan was advanced to Messrs G.A. on 31st December, 1975 and since it was also made prior to 1st July, 1976 when the explanation (8) of section 4(1) of the repealed Income‑tax Act was inserted, it could not be subjected to levy of deemed interest for the simple reason that aforesaid explanation being a charging provision was not applicable retrospectively. In this connection reliance was placed on a decision of this Tribunal recorded in Income‑tax Appeal No. 718/KB of 1979. The loan to Messrs H. S. H. M. was allegedly made on 31st March, 1979 and it was also alleged to be outside the mischief of section 12(7) of the Income‑tax Ordinance, 1979. All the arguments found favour with the learned Commissioner of Income‑tax (Appeals) and deemed interest calculated on the loans made to Messrs G.A. and Messrs H. S. H. M. was ordered to be deleted after confirming that both the loans were carried forward from a period prior to 1st July, 1979. Regarding loan to Mst. S.I., the learned Commissioner of Income‑tax (Appeals) was of the view that firstly it was not clear as to whether the loan was advanced to her prior to 1st July, 1979 and secondly there was no evidence on record to show that she was engaged in any business or profession. He, therefore, set aside the assessment order regarding interest charged on loan made to Mst. S.I. and sent the issue back to Income‑tax Officer to re‑examine both the points mentioned above. This time the department felt aggrieved and has come up in appeal.

3. Mr. Muhammad Farid, the learned Departmental Representative firstly inviting our attention to a decision of a larger Bench of this Tribunal recorded in I.TA. No. 818/KB of 1979‑80 and others, dated 19th December, 1985 argued that in view of aforesaid decision the material point for consideration was as to whether in the income year of the relevant assessment year the loan was shown outstanding or not. According to learned Departmental Representative the date on which the loan was made was material only and only for application of the rate of interest and for no other purpose. The learned Departmental Representative, therefore, argued that the order of learned Commissioner of Income‑tax (Appeals) deleting the interest regarding loans advanced to Messrs G.A. and H.S.H.M. was not legal and the order of the learned Commissioner of Income‑tax (Appeals) should be reversed and that of the Income‑tax Officer be restored. Regarding loan made to Mst. S.I., the learned Departmental Representative contended before us that in view of the admission of Mst. S.I. herself that she had invested the loan in purchasing the shares for investment purposes, it was established beyond any doubt that she carried on the business. He, therefore, vociferously argued that the learned Commissioner of Income‑tax (Appear) should not have set aside the order for investigation as to whether she carried on any business or not. The learned Departmental Representative further argued that the point as to whether the loan was advanced in a period prior to 1st July, 1979 was not relevant in view of her own admission contained in her certificate which was produced before Commissioner of Income‑tax (Appeals). It was well established, argued learned Departmental Representative that the loan was outstanding in the income year of the relevant assessment year hence the learned Commissioner of Income‑tax (Appeals) erred in sending this matter back to the Income‑tax Officer for further investigation. Mr. G.M. Gangat, C.A., appearing for the respondent, however argued before us that the decision of the larger Bench of this Tribunal was not applicable in the case of the appellant as he was an individual whereas that case dealt with the loans advanced by companies. Alternatively he argued that even in view of the larger Bench of this Tribunal the loans advanced to H. S. H. M. and Messrs G.A. were exposed to levy of deemed interest under section 12(1) of the Income‑tax Ordinance, 1979, the rate of interest applicable was above 2% of the bank rate prevalent on the date of the loan which was 31st December, 1975 in case of Messrs G.A. and 31st March, 1979 regarding loan advanced to Messrs H.S.H.M.

4. Regarding loan to Mst. S.I. Mr. Gangat submitted that as she did not carry on any business or profession, section 12(7) of the Income‑tax Ordinance, 1979 was not applicable in her case. In this connection he put his reliance on Central Board of Revenue's Circular No. 14 of 1979, dated 7th November, 1979. He also produced before us certain certificates issued by G.B.L. and H.B.L. to show the bank rate prevalent on 30th June, 1978, 30th June, 1977, 30th March, 1976 and 13th December, 1975. The assessment order of Mst. S.I. for assessment year 1978‑79 has also been produced before us to show that she derived her income only from dividend and interest.

5. We have heard both the learned Departmental Representative as well as the learned Authorised Representative of the respondent at length and have also gone through assessment as well as impugned order and the relevant law. To start with let us reproduce here section 12(7) of the Income‑tax Ordinance, 1979 which reads as under:‑‑

"Where an assessee has made any loan or advanced to any person on which no interest has been charged is less than the rate there in after referred to as the 'said rate', arrived at by adding two per cent to the bank rate notified by the State Bank of Pakistan as applicable on the date on which the loan or advance was made, the amount not charged or the amount equal to the interest computed at the said rate as reduced by the interest actually charged shall be deemed to be the income of the assessee and shall be included in his total income:

Provided that nothing contained in this subsection shall apply to‑‑

(a) any loan or advance made by an assessee to an employee in accordance with the terms and conditions of his employment and for such purpose; or purposes: or supply to him by such other person, on a date subsequent to the date on which the loan or advance is made, of any goods or materials or services, as the case may be;

(b) Such assessee or persons or classy or classes of assessees or persons, as may be specified in this behalf by the Central Board of Revenue by notification in the official Gazette."

6. From its perusal it appears that the legislature vested the C . B. R. with the power to specify such assessees or persons or class or classes of assessees or persons who did not fall within the mischief of aforesaid provision of deemed interest. In exercise of their powers the Central Board of Revenue firstly issued S.R.O. 750(1)/79 on 23rd August 1979 and specified those class or classes of assessees or persons who were not hit by the mischief of aforesaid subsection. For our purposes clause (c) of aforesaid S. R.O. is relevant which we reproduce lien, in below:‑‑ Any person making a loan or an advance to another person where the said another person has not used, directly or indirectly such loan or advance for purposes of any business or profession carried on by him, or for investment in securities, stocks and shares, debentures, or deposit certificates issued by, or accounts maintained with banks (including co‑operative banks, Post Offices savings banks, National Saving Centres and investment, credit, holding or financial institutions or funds)."

7. Let us point out that the above quoted clause (c) of the S.R.O. 750 was substituted by S. R. O. 197 (1) /81 of 7th March, 1981.

8. However, the confusion still prevailed and C.B.R. were constrained to explain the concept of deemed interest by their Circular No. 4 of 1979, dated 23rd August, 1979. It was clarified by this circular that section 12(7) did not apply to:‑‑

"(i) Any assessee who has made a loan to any person where such person has utilised a said loan for the purposes other than any business or profession;

(ii) Any assessee who has made a business loan or advanced to any other person for the supply of goods, materials or services in connection with the business of the assessee;

(iii) Any assessee, being a Director of the Pakistani Company, making a loan or advanced to such company to enable it to tide over financial difficulties."

9. It appears that notwithstanding this circular the C.B.R. still felt that clause (c) of S. R.O. 750 was not properly understood with reference to the borrower. The Central Board of Revenue therefore, issued Circular No. 14 of 1979 on 7th November. 1979 and explaining clause (c) of S. R.O. laid down that excluded loans made to:‑

(a) all persons not carrying on any business or profession;

(b) all persons carrying on a business or profession provided such persons do not utilize loans directly or indirectly in business or for investment in securities, shares, etc.

This circular also superseded above quoted paragraph of circular No. 4 of 1979, dated 23rd August, 1979.

10. With this history in mind, if we refer to the submission of Mr. Gangat we find considerable force in it. It appears that clause (c) introduced originally by S.R.O. 750 and amended by S.R.O. 197 protected the person who was making loan if the person to whom the loan was made did not:

(a) use it directly or indirectly for purposes of his business or, profession, or

(b) for investment in securities stocks and shares, etc. ;

11. It is thus clear that if the borrower used the loan or advance for purposes of any business or profession or invested it in securities or shares, etc., the loan fell within the clutches of subsection (7) of section 12 of the Income‑tax Ordinance, 1979.

12. Now when we come to Circular No. 14 of 1979 it appears to us that it categorizes the borrower in three categories. They are:‑‑

(i) Those persons who are not carrying on any business or profession at all.

(ii) Those persons who are carrying on business. or profession but do not utilise loan directly or indirectly in business or for investment in securities or shares, etc.

(iii) Those persons who are carrying on a business or profession and use such loan directly or indirectly in business or for investment in securities shares etc.,

13. It thus excludes first 2 categories from the ambit of subsection of section 12 of the Income‑tax Ordinance. If the loans are made to those persons who are not carrying on any business, or profession or who, though carrying on business or profession, do not utilise the loan directly or indirectly in business or for investment in securities and shares, etc. no deemed interest could be levied on such loans. Mr. Gangat has argued that Mst. S.I. did not carry on any business or profession hence fell within the first category mentioned above. The learned Commissioner of Income‑tax (Appeals) has set aside the B assessment order on this issue because he felt that there was no evidence on record to show as to whether she was engaged in any business or profession. Of course, Mr. Gangat has produced before us the assessment order of aforesaid Mst. S. I. but‑we decline to look into it because the assessment record of Mst. S.I. is not available with the department at the moment. Moreover, Mr. Gangat has not challenged the impugned order on this point in separate appeal. We, therefore, think it just and proper to confirm the order of the learned Commissioner of Income‑tax (Appeals). The respondent would be at liberty to lead such further and additional evidence before the Income‑tax Officer to show as to whether Mst. S.I. carried on any business or profession or that the loan was advanced to her at a date which was prior to 1st July, 1979. This takes us to the loans advanced to Messrs H.S.H.M. and Messrs G. A.

14. From perusal of the impugned order it appears that the learned Commissioner of Income‑tax (Appeals) has upheld the contention of Mr. Gangat that those loans which were made prior to 1st July, 1979 were not hit by the provision of section 12(7) of the Income‑tax Ordinance. He has thus impliedly held that section 12(7) were charging provisions hence could not be applied retrospectively. Apparently the learned Commissioner of Income‑tax (Appeals) has arrived at this conclusion following a decision of a Division Bench of this Tribunal recorded in I.T.A. No. 718/KB of 1979. However, we agree with Mr. Muhammad Farid, the learned Departmental, Representative that in view of the decision of the larger Bench the legal position stands completely changed. We have held in that decision that if the loan is found outstanding in income year applicable to assessment year 1979‑80, the application of section 12(7) of the Income‑tax Ordinance would not be retrospective. We have further held in that case that the rate of interest, however, applicable would be 2% above the bank rate which was prevalent at the date of the loan, thus the order of learned Commissioner of Income‑tax (Appeals) is not sustainable in law. Let us also point out that the order of learned Commissioner of Income‑tax (Appeals) was also untenable because he ordered deletion of even that interest which was offered for tax by the respondent himself. Mr. Gangat has produced before us some certificates showing the bank rate in certain years, however, this aspect has not been examined by the Income‑tax Officer at all. We would, therefore, set aside this part of the impugned order as well so that the Income‑tax Officer can find out the date of the loans advanced to Messrs H.S.H.M. and Messrs G.A. and then charge interest 2% above the bank rate obtaining at that particular point of time.

15. Before parting with this appeal let us advert to one submission of Mr. Gangat also. He argued that the case before larger Bench of this Tribunal was that of a company whereas this was a case of an individual. We, however, do not see any force in it. We have already reproduced provision of section 12(7) of the Income‑tax Ordinance and the word 'an assessee' has been used therein. A company or an individual both can be an assessee. We have discussed at length in our larger Bench decision the purpose and policy of the law of deemed interest which we need not reproduce here. For our purposes it would be enough to say that if any amount of loan was found outstanding against any person in the income year relevant to assessment year 1979‑80 it could fall within the mischief of section 12(7) of the Income‑tax Ordinance.

16. Let us also point out at this juncture that the submission of Mr. Muhammad Farid, the learned Departmental Representative that purchasing of shares was itself tantamount to carrying on business was also devoid of any merit. Hiza argument was that when it was admitted that Mst. S.I. invested the money in purchasing shares, it could not be said that she was not carrying on any business. With due respect to learned Departmental Representative we find ourselves unable to subscribe to his point of view. In common parlance earning of income from interests on securities might be called carrying of a business but for the purposes of Income‑tax Ordinance the income from interest on securities has been treated differently than income from business or profession. The former is chargeable under section 17 and the latter is exposed to tax under section 22 of the income‑tax Ordinance. Moreover, from the historical developments regarding exclusions of persons from the mischief of section 12(7) and the purpose and policy of law, it is clear that the C. B. R. have put the borrowers in three categories as we have discussed above and if a borrower not carrying on any business or profession is given a loan and even if he invest it in purchasing shares, he would not fall within the clutches of section 12(7) of the income‑tax Ordinance, 1979. We have arrived at this conclusion simply because even the C. B. R. have laid emphasis on other two categories of those persons who are firstly carrying on business or profession and secondly who utilise or do not utilise directly or indirectly the loan in their business or for investment in securities. In cases of these two categories the first does not carry on a business or profession but in the second even if a person is carrying on a business or profession but he has not utilised the loan directly or indirectly in business or for investment in securities or shares but used it for any other purpose, his loan is also not covered by the provisions of section 12(7) of the Income‑tax Ordinance. The Central Board of Revenue have introduced Circular No. 14 of 1979 to further clarify the effect of clause (c) of S.R.O. 750 as substituted by S.R.O. 197 simply to create the effect which we have discussed above.

17. Now, to conclude we set aside the order of learned Commissioner of Income‑tax (Appeals) and send the matter back to Income‑tax Officer so that he could find out the date of loan and the rate of interest obtaining on that date in case of all three borrowers namely Messrs G.I., Messrs H.S.H.M, and Mst. S.I. The Income‑tax Officer would further find out as to whether Mst. S.I. was engaged in any business or profession. If his finding is in the affirmative, he would also enquire as to whether she utilized the loan in business directly or indirectly or used it for investment in securities and shares, etc. However, if he found that she was not carrying on any business or profession he will not charge any interest under section 12(7) of the Income‑tax Ordinance.

M.Y.H. Case remanded.