INCOME-TAX APPEALS NOS. 818/KB OF 1979-80 AND 14 OTHERS, 429/KB OF 3981-82 AND 16 OTHERS Versus INCOME-TAX APPEALS NOS. 818/KB OF 1979-80 AND 14 OTHERS, 429/KB OF 3981-82 AND 16 OTHERS
ORDER
1. GHULAM SADIQ (MEMBER).-- In all these departmental appeals the main question centres round the retrospectively as well as applicability of the Explanation 8 to subsection (1) of section 4 of the Repealed Income-tax Act, 1922 and the application of the corresponding subsection (7) of section 12 of the Income-tax Ordinance, 1973 . .. . .
2. There are other objections and grounds of appeals but we are disposing of only the main issue or question common in all appeals pertaining to the charging of interest, under section 4(I) Explanation and subsection (7) of section 12. This main issue has arisen from the facts and circumstances that the assessee-companies had made loans in previous years prior to the previous year relevant to assessment year 1976-77 or even in the previous year relevant to assessment year 1976-77 or made in any earlier previous year but remained unpaid in the subsequent previous years relevant to assessment years 1976-77, 1977-78, 1978-79, 1979-80 and 1980-81 which are under appeal. Further interest either was not charged or charged by the assessees at a lower rate than the one prescribed in clause (i) of the Explanation 8 to section 4(i). In the latter case the reason for charging lower rate being that there were arrangements or agreements for charging the rate as was prevalent in that year when loan was made but in later years continuously the rate was being raised by the- State Bank of Pakistan but due to the agreement no change in rate was made by the assessee. The Tribunal in its latest order bearing I. T. A. No. 1462/ KB of 1978-79 mentioned above and other orders all dated 28-10-1984 on the basis of these facts delivered the Judgment holding that:
3. "Since the income-tax is to be paid on the actual income of the previous year, all facts and transaction which stated during the previous year and are related to that year have to be taken into consideration. It is, therefore, obvious that the Finance Act, 1976 was applicable to all transactions within the meaning of Explanation 8, which were made during the previous year. It has to be kept in mind that the Explanation 8 has been added to section 4(I) and has to be read as part of it. In section 4(I) since the total income is of previous years. Explanation 8 is also applicable to the previous year only. In the words 'where a company has made any loan', occurring in Explanation 8, the words 'in the previous year' have to be read in 'between. Thus, it would read 'where a company has made any loan in the previous year'. Therefore, Explanation 8 will have no application where the loan had not been made earlier to the previous year. If any loan had not been advanced in the previous year but is related to the earlier period, it cannot be said that the Explanation 8 is applicable."
4. The Tribunal further had held that the Explanation 8 would only be applicable for loans advanced during the previous year relevant to the assessment year 1976-77 and to the subsequent assessment years. Explanation 8 cannot be held to be applicable in the case of the respondent-assessee (the assessee had advanced loans prior to the commencement of the previous year relevant to the assessment year 1976-77).
5. However, the learned Accountant Member disagreeing with the above order passed a dissenting order wherein he relied on the judgment of the Tribunal, Karachi Bench, cited as (1983) 48 Tax 58 (I.T.A. No.80/ K.B of 1980-81 for Assessment year 1978-79) and also on other Division Bench cases. Keeping all these facts in view, and with this background, we now discuss the arguments advanced on behalf of the department as an appellant and as respondent in cases of appeals filed by the assessee and also on behalf of the assessees as appellant and as respondent in cases of appeals filed by the department. The learned counsel Messrs Ali Athar, I.N. Pasha, Wadood, Sirajul Haq, Advocates, Messrs Ebrahim Dahudwala Minoo Bamjee, C.As.,. Messrs Shaban and Ayub I. Lambot, I. T. Ps. attended on behalf of the assessees who are appellant as well as respondents in departmental appeals. Mr. Ali Athar, the learned Advocate, first objected to the formation of the larger Bench as the matter had already been settled by the Full Bench in favour of the assessee and subsequent judgments were also given on that basis: The judgment referred to by him was I.T.A. No. 682/K.B. of 1978-79, dated 14-4-1979 and I.T.A. No. 1718/K.B. of 1979-80, dated 30-3-1980, (1983) 47 Tax 5 (Trib) (D.B.) and I.T.A. No. 1461/K.B, 1462/K.B., 1463/K.B. of 1978-79 (Assessment years 1976,-77, 1977-78 and 1978-79) dated 28-10-1984 (Full Bench). He vehemently argued that there being number of decisions of the Division Bench and Full Bench, the formation of a larger Bench is not according to law. In support he cited a paragraph from the decision of -the Supreme Court of Pakistan cited as P L D 1966 SC 854, 890 as under:-
6. "It should be mentioned that earlier a Special Bench of three learned Judges of the same High Court headed by Sattar, J., dealt with 19 writ petitions challenging the constitution of Unions and Committees and unanimously held that section 57 aforesaid was intra vires of the National Assembly, and was not vitiated, in respect of efficacy as law, by the rule of excessive delegation. The Judgment here under appeal reverses the findings of the Special Bench. The legality and propriety of such an action by the High Court will be considered in due course."
7. He also referred the decision cited as (1973) I.T.R. 349.
8. Mr. I.N. Pasha, the learned Advocate, argued that in such cases where the loan was not advanced during the previous year relevant to the assessment year 1976-77 but in earlier years then the Explanation 8 to section 4(I) as amended by Finance Act, 1976 cannot be applied retrospectively. He referred to the word "has" having been used in the Explanation in the sense that the action was just completed. He also referred to the decision in the case cited as (1965) 57 I.T,R.
149. Mr. Pasha also referred to the decision cited as 12 Tax 95, I.O. and 8 Tax 193.
9. Mr. Sirajul Haq, the learned Advocate, challenged the vires of the amendment and he referred to page 1155 of the Law and Practice of Income-tax by Kanga, and Palkhiwala, 7th Edition, Volume I, in this respect. He also referred to two cases cited as 26 I.T.R. 758 and 21 I. T. R. 458 and also referred to a decision, cited as 40 I. T. R. 142 of the Supreme Court of India. Besides, he urged that the definition clause defining "income" is formidably wide and vague and that the constitution has not defined the word "income" and does not mention the word also. He referred to Items Nos. 47 and 50 of the constitution's list of items as well as Article 227. Lastly, he argued that comparable law could be invoked in aid in this respect and he referred to the Indian Income-tax Act and its section 2(6)(A)(E) which pertained to loans advanced to shareholders. He relied on the decision cited as 49 I. T. R. 287 in support of his view.
10. Mr. A.A. Dareshani, the learned counsel for the Department argued that interest was levied only on such advances made by the assessee which remained unpaid on 1-7-1976 and that no retrospective effect has been given. He also argued that if it is charged In assessment years commencing on any date prior to 1-7-1976 then it would be retrospective. He also stated that plain meaning should be given to the plain words. The words used in the statutes are simple, i.e., "has made", which reflects that it is a past action. He also argued that there could be no discrimination between tax-payees i.e., a person who has made loans earlier and persons who made the loan subsequent to the insertion of Explanation 8 to section 4(I). He also vociferously argued that loan does not cease to be a loan by passage of time and there is a continuity in the process so long it remains unpaid. The person who owes the debt does remain a debtor and the debt as such does exist and remains until it is written off or paid by the debtor.
11. The learned Departmental Representative, Mr. Farid has referred to the Judgment of the Full Bench of the Tribunal bearing No. I.T.A. 551/K.B. of 1978-79 (Assessment year 1976-77), dated 28-10-1984 and argued that it is not based on sound principles of interpretation as this Explanation was first inserted by the Finance Act of 1976 and is not being applied to assessment year 1976-77 and not be earlier assessment years. He further argued that the object was to bring within the orbit of taxation by a fiction of law, the national interest on diverted corporate funds for purpose other than business of the assessee either at no interest or at rate of interest lower than the bank rate. He argued that the Explanation 8 does cover all such loans which were outstanding in the previous year relevant to the assessment year beginning on 1-7-1976 apart from the loans which were given in the subsequent period. In his support he quoted the following observation from the decision of the Supreme Court of India reported as Narain Rao v. Kishwarlal Bhagwandas (1965) 57 I.T.R. 149, 167.
12. "It is a well-accepted principle of construction of statute that even if a provision of law may not have been expressly made retrospective, it could be deemed to be so if the circumstances justify the inference that the legislature intended that it should be retrospective."
13. He argued that every clause of a statute is construed with reference to the context and other clauses of the Act so as there is a consistency in the interpretation of the whole statute. He further argued that section 4 clearly reflects that legislature if it wanted to give retrospective effect it would have provided so but here it was not necessary and, therefore, not provided. In support of his contention he relied upon a reported decision of the Tribunal cited as (1985) PTD 235 wherein the Tribunal had held that the Explanation 5 of subsection (1) of section 4 was inserted by the Finance Act, 1968 but for purposes of calculating the excess free reasons the un appropriated profits of a company brought forward from earlier years to the previous year ending June, 1968, have also, to be taken into account. He also referred to a case of Karachi High Court in Constitutional Petition bearing No. 1240 of 1978 Rustam F. Kawasji son of late Fakirji Kawasji and others v. C.B.R., Ministry of Finance decided on 10th March, 1985 wherein their Lordships held that though section 45 of the repealed Act was enacted vide the Finance Act', 1963 and was enforceable from 1-7-1963 yet the additional tax under section 45-A could be levied in respect of the taxes which had become due and were payable or outstanding prior to 1-7-1963. On the analogy of these judgments he argued that firstly it is not being applied retrospectively to 1976-77 assessment year as charging to tax the notional interest or the interest to be calculated fictionally, is the interest on loans appearing in the balance-sheet of the accounting year relevant to the assessment year 1976-77 or secondly, whatever loans were outstanding on the first day of the previous year relevant to the assessment year 1976-77. He further argued that it should be charged at 2% above bank rate on the date the loan was made by the assessee. He also referred to an Indian decision cited a. (1959) 35 I.T.R. 408, 413 to the effect that if fiction of law is create it 'hall be accepted without any interference. He also referred in this respect Simon Tax Cases 1964-65 Volume I Page 49.
14. Lastly, he argued that even assuming that there is a flaw (though not conceding) in the language used by the legislature still it should not be allowed to nullify or render nugatory the provisions made by the legislature. In support he cited a Lahore High Court's reported case 1977 P T D 183, 197 wherein it was held that incorrect phraseology of the draftsman cannot and should not nullify a provision made by the legislature which is consistent with existing legal norms. Finally, he referred to the decision of the Supreme Court of India in the case of Punjab Distilling Industries Ltd. v. C.I.T. (1956) 57 ITR (SC) wherein it was held that "the entries in the legislative list cannot be read in a narrow or restrictive sense; they should be construed most liberally and in its widest amplitude".
15. Mr. Farid, the Departmental Representative, alternatively urged that the Tribunal was not competent to examine the vires of the provisions of the statute whose creation it is. He accordingly prayed that the departmental action in all cases under appeal by the department, should be upheld and the orders of the C.I.T.(A) or A.A.C. should be vacated in all' the departmental appeals and in the assessee's appeals all the orders of the officers below should be confirmed. Firstly, we consider the objection of the learned counsel Mr. Ali Athar regarding the formation of the larger Bench of the Income-tax Appellate Tribunal. This has to be viewed in the light of the relevant rules of the Tribunal. The Supreme Court's decision as such is not relevant in the instant case. Further a Bench of the Tribunal consisting of 5 members was constituted to decide Income-tax Appeal No. 51 of 1968-69 (Assessment year 1963-64), dated 6-3-1971 cited as 1971 P T D (Trib.) 80 while adjudicating the question of applying the provisions of section 42(1) on income which had clearly accrued and arisen in Pakistan by virtue of the appellant's managing agency business where actual conduct of the business was in Pakistan and no part of the income was directly or indirectly attributable to the activities allegedly carried on by the managing agents outside Pakistan. Prior to this on nearly identical facts the Karachi Bench of the Tribunal for the years 1959-60 and 1960-61 in I . T . A. Nos. 405 and 406 of 1964-65 had considered such facts and on more or less the same facts delivered the judgments on 27-11-1965 holding as under:
16. "In conclusion our findings are that the income in this case accrued and arose to the assessee in Pakistan within the meaning of section 4(1) of the Act. It is apportionable on general principles as the services earning it were rendered both in Pakistan and the United Kingdom. Reassessment framed in respect of the year 1959-60 is annulled being opposed to the principles of equity and natural justice, while assessment for the year 1960-61 is set aside to be made de novo after ascertaining the extent of services done in each of the two countries and income apportioned accordingly, to tax purposes."
17. Hence the objection of the formation of larger Bench is without any merit if the larger Bench is considering the same issue on identical facts. Nextly, the question of vires had also been raised on behalf of the respondents. In this respect, undoubtedly the learned Author in Palkhiwala, of the well-known book "The Law and Practice of Income-tax" the Edition, has observed on page 1155 that:
18. "It is submitted that the above prepositions require reconsideration. The correct principle is that a creature of a statute cannot go into the question of the validity or vires of the statutory provisions which gave it birth and jurisdiction, 'because the jurisdiction of a statutory authority to entertain any question presupposes the legal existence of that authority and any exercise of the power to decide an issue presupposes the valid conferment of that power. Accordingly, the Income-tax authorities and the Tribunal cannot decide upon the validity or vires of those sections under which they are appointed or constituted, or of the sections from which their powers and functions are derived. But they are not debarred from considering the validity or vires of the other provisions of the Act."
19. In this respect we are of the opinion that the matter has been set at rest by the superior Courts and there are number of decisions by the High Courts and Supreme Court of India where they have held that the Income-tax Appellate Tribunal and the tax authorities being creatures of the Income-tax Act cannot pronounce upon the vires any provision of the Act or the constitutional validity. They also held that the subject-matter of reference to the High Court has to be necessarily a question which arises from the order of the Income-tax Appellate Tribunal and if such a question does not arise then it can never be the subject-matter of reference and accordingly of any subsequent appeal to the Supreme Court. The following decisions could be referred to with advantage in this respect:
(1) Beharilal Shyamsunder v. S.T. 60 I.T.R. 112 (S C ).
(2) Senthilnathan Chettiar v. State of Madras 60 I,T.R. 260 (SC). (3) C.I.T: v. Deoria Sugar Mills Ltd. 67 I.T.R. 102, 105 (S C). (4) Dhrangadhra Chemical Works Ltd. v. C.I.T. 80 I.T.R. 408.
20. Further in the case cited as C.I.T. v. Straw Products 60 I.T.R., 156, 163-4 (SC), the Supreme Court of India held that the authorities appointed under the Income-tax Act are incompetent to adjudicate the question of the validity of any order amending the Act. Hence this objection raised about the vices of the Explanation 8 to section 4(I) also fails being without merit.
21. Before we consider and proceed to record the arguments and contentions advanced on behalf of the assessee' representatives as well as the departments on the real issue of the applicability and retrospectively of the Explanation 8 to section 4(I) it is mere appropriate and convenient to set out the provisions of section 4(1) and Explanation 8 which are the relevant provisions of the law on the basis whereof the arguments were advanced and the dissenting decisions were given by the Tribunal. These read:
22. Sec. 4(1). Application of Act.-- Subject to the provisions of this Act, the total income of any provision of year of any person includes which:-
(a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person; or
(b) if such person is resident in Pakistan during, such years:-
(i) accrue or arise or are deemed to accrue or arise to him in Pakistan during such year, or
(ii) accrue or arise to him without Pakistan during such year, or
(c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year.
23. Explanation 8.-- Where a company has made any loan to any person and has not charged any interest thereon, gar the amount charged is at a rate which is less than the specified rate, the interest calculated at the specified rate, as reduced by the amount of interest, if any received lay the company in respect of such loan shall be deemed to be the income of the company; and for the purpose of this Explanation:
(i) 'Specified rate' means rate of interest two per cent, above the bank rate notified by the State Bank of Pakistan, as applicable on the date the loan is made by the company; and
(ii) loan does not include any loan made by the company to any of its employees far a specific: purpose and in accordance with the terms and conditions of service." .
24. The language of section 12 (7) of the Ordinance is nearly identical with the provisions of Explanation 8 to section 4(1) of the repealed
25. Act.
26. Firstly, the most important point raised on behalf of the assesses is that the department has given a retrospective effect to the amendment which was made by the Finance Act XLVII of 1976 and that Explanation 8 was added to subsection (1) of section 4 of the Repealed Act and that this Explanation should be applied to such loans which are given on or after Ist July, 1976 as it had become the law on this date.
27. Taking up first the question of adding an explanation we get guidance from the observations of the learned Judges in the case of Colony Sarhad Textile Mills Ltd. v. Collector of Central Excise and Land Customs cited as P L D 1969 Lab. 228, 233. While discussing the charging provisions contained in section 3 read with section 15-A of the First Schedule it was observed by their Lordships as under:
28. "As a matter of fact, the object of adding an Explanation to. a statutory provision is only to facilitate its proper interpretation and to remove any possible confusion or extinguish a liability which is to be spelt out only from the main provision sought to be interpreted with the assistance of the Explanation. In other words, an Explanation is to be relied upon only as a useful guide or an aid to the construction of the main provision contained in section 3 of the Act read with Item 15-A of the Schedule I."
29. Nextly, the addition of an explanation to a section or, subsection could never be construed to be tantamount to a charging provision with retrospective effect. Reliance could be placed on the ratio laid down by the Supreme Court of Pakistan in the case cited as P L DI : 970 S C 80 in the following words:
30. "No rule is more firmly established than the rule with regard to retrospective operation of Statute law. It is a fundamental rule of law that no Statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication..."
31. When retrospective effect to a Statute is not given by express words, one must, apart from a language employed look to the general scope and purview of the Statute, and at the remedy sought to be applied and consider what was the former state of the law and, what it was that the Legislature contemplated."
32. In this respect reference could further be made to the decisions of the Supreme Court of India cited as C. I. T. v. Scsindia Steam Navigation Co. Ltd. 42 I.T.R. 589 (SC) and Karim Tharuvi Tea Estates Ltd. v. P. Karala 60 I.T.R. 262 wherein it was laid down that if any amendments are introduced in the Act but come into force after the 1st day of the financial year then amendments would not be applicable to the assessment year for that year in spite of the assessments having been made after the date of such amendments. Thus, the above decisions made it very clear that what type of amendments would not be applicable to assessment year 1976-77). The ratio decided laid down in the case of Maharaja of Pithapuram v. C. I. T. 13 I. T. R. 221 P. C. and Mishrimal Gulab Chand 18 I. T. R 75 is to the effect that the law as it stands amended on the Ist day of the financial year must apply to the assessment for that in year in the law as on 1-7-1976 (after the amending Bills become an Act shall be applicable to assessment year 1976-77. Reference could also be made to the very scheme of the charging of Income-tax which envisages that the subject of charge in the income of the previous year on which according to the law as it stands on the 1st day of the relevant assessment year, income is quantified or computed and tax is also levied at the rate as prescribed in the Finance Act of that year, though the income which is the subject of assessment is earned prior to the insertion of such amendment in the Act unless there are clear provisions extending exception to the contrary. This principle was confirmed by the Supreme Court of India in the case of C.I.T. v. Isthmian Steamship Lines 20 I.T.R 572 and also by the Supreme Court in Deivanayagam Pillai v. I.T.O. 35 I.T.R. 549, 551. Normally the amendments are made after the income of any previous year under reference is earned. In the case under reference the amendment Bill came in June, 1976 and became the law on Ist July, 1976 but even if the income year expired somewhere before the month of June, 1976 at any time in the preceding months of the financial year 1975-76 or even on 30th June, 1976, the new law was made applicable to the income earned (pursuant to such new law in the previous year relevant to 1976-77 assessment year.) This principle has been affirmed in the cases cited as C.I.T. v. Vankaran 11 ITR 308 and Manek Lal Parikh v. C.I.T. 72 ITR 637.
33. The word 'retrospective' normally is used to convey different aspects and also in different senses which undoubtedly does create a L certain amount of confusion, but the main and real issue always in each case is about the extent to which it is permissible or possible to refer to such particular enactment with full regard of its language and the object which is clear and discernible from the perusal of the statute as a whole as well. Further it may be added that in construing any word or words or expression we may refer with advantage to the observation made by Justice Venkatarama Aiyer in the case cited as State of Madras .v. Gannon Dunkerlay Co. A I R 1958 S C 560, 573 as under:-
34. The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense and that, accordingly, the legislature must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law.
35. It is a generally recognised rule that words have to be taken in legal sense unless contrary intention appears clearly. Now considering the words of the Explanation 8 "has made any loan" in the light of the principles of accountancy we have to appreciate the connotation of the word "loan" according to the mercantile system. We may refer with great advantage to the observation of the then Chief Justice Sir Iqbal Ahmed, who examined the scope of the relevant section and described the mercantile system in the following words in the Full Bench case cited as C.I.T. v. Singari Bai 13 I.T.R 224, 227:
36. "The assessee, a professional money-lender, regularly kept her accounts according to what is known as the 'mercantile' accountancy system' or the 'book profits system of accountancy or the 'complete double entry book-keeping'. Under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realized in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it, is actually disbursed."
37. Keeping this principle in view we have to appreciate only those credits which had become legally due and were not actually received. For instance, if some goods are sold to a person and he accepts the delivery of the goods and the transaction is fully accomplished but he does not pay the consideration of sales such purchaser owes to the seller, then the amount of consideration, as this is understood by everyone, is a debt on outstanding amount recoverable by the seller and payable by the purchaser. If instead of any sale of goods any money is advanced to another- person neither as a part payment of any amount for ally future delivery of goods nor for any trading purpose, nor against any future liability, then such advancement of money assumes the characteristics of 'loan'. It may assume many shapes in the way it has been parted with; for instance in the case of a bank it may be an overdraft against goods; it may be a clean overdraft; it may be by encumbering any property through registered deed etc. In whatever manner such advances or loans, one may analyse, but the fact remains that particular amount is due to creditor 'A' by debtor 'B'. The factual position boils down to this that the amount is legally due to 'A' and under the law is enforceable from 'B' having remained unpaid by him. For the sake of clarity it may be added at this juncture that a mere claim never assume the shape of a debt unless the claim is finalized and accepted by the parties with mutual consent or decreed by the Court after an arbitration or otherwise etc. In short what is a debt or loan recoverable by the creditor is a debt or loan payable by the debtor having become legally due and not having been actually received. A reference could also be made for further elucidation to the process of comparison suggested for calculating profits from business long' back by the learned Justice Molton in the case cited as Re Spanish Prospecting Co. Ltd. (1911) 1 C.H. 92, 98 as under:
38. "'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets at the two dates."
39. The only exception as pointed out by the same Lord Molton is to the effect that the rule ceases to apply when the rights of revenue are involved. These observations have been cited and relied upon frequently by the Supreme Court of India and the House of Lords as well. In the light of above observation if we refer to the provisions of section 10(2)(xi) we again come across the word 'loans' made in the ordinary course of business which are irrecoverable or become statute-barred but not exceeding the amount actually written off as irrecoverable in the books of accounts subject to certain conditions. Now whatever profits are arrived at by any assessee he does take into consideration such loans which are bad and irrecoverable under section 10(2)(xi) and in normal cases such loans are always given in earlier years and could very rarely be of that very same year. In other words it is rather an impossibility that any loan is also given or any advance is made and within few months it is written off. Thus, the inescapable conclusion to which we arrive finally is that what is written off in subsequent years is actually the loans which are outstanding in the earlier years, naturally having remained unpaid, and having been brought forward. The process of bringing forward continues so long and so far as the creditor feels that there is no ray of hope and it is totally infructuous to keep it in the books of account and what was legally due to him is not at all possible to be recovered from such debtors for a number of reasons. Thus, the issue which becomes crystal clear is that according to the mercantile system the carried forward 'debt' in the following year on the 1st day of the new year (previous year) automatically becomes a debt which is legally recoverable from the debtor and the act of bringing forward such debt in the name of the debtor in the books of account maintained under the mercantile system, is tantamount, beyond any shadow of doubt to making a loan or advancing a loan, so much so that as discussed supra, if the businessman or trader feels it to be irrecoverable and accordingly write: it off in the books of accounts then it does rank for admission as a "bad debt" ranking for admission as an expenditure in the relevant subsequent year whenever the trader so chooses. Of course his option for such claim is subject to the fulfilment of the conditions as laid down in section l0(2)(xi) but for all practical purposes what is clearly reflected is that till that particular date when the trader or businessman chooses to write it off as irrecoverable or to claim it as a bad debt, it does stand in the name-of the debtor as a 'debt' recoverable. Being see the contention that the loan should have been made in the previous year relevant to the assessment year 1976-77 and not earlier than or were to be made after the amendment becoming law for the assessment year 1976-77 i.e. Ist July, 1976 is a mis-appreciation of the world "loan" used in this Explanation 8. Thus, there is no doubt that the language of the explanation -in its ordinary meaning and grammatical construction, if the contentions of the learned counsel are accepted, leads to manifest contradiction of the apparent purpose of the insertion of this explanation read with section 4(1) and, perhaps, even to an absurdity which the legislature never visualized. In our opinion it is an attempt to modify the very meaning of the word "loan" as is normally understood and as also understood under the mercantile system of accountancy. Hence all loans or advance made by the assessee in the earlier years (excluding all debts resulting due to trading transactions do fall within the ambit of this explanation having all the characteristics of a loan for not having been paid by the debtor or for not having been written off by the creditor as irrecoverable. It would be very pertinent to add at this juncture that what the Explanation 8 to subsection 4(1) requires of an Assessing Officer is to find out simply the existence of or debt, in the previous year and whether the company has charged any interest which it should have charged or it charged it at a lesser rate than the specified rate. The question of time when the loan was advanced by the Company to any person is automatically relegated to the background. In our humble opinion the cause for the springing up of this confusion 'is because of the attempts made to interpret the explanation with the help' of the words "where a company has made a loan" and such approach is also reflected in some earlier decision. However, a deeper consideration has resulted in coming to the conclusion that the deemed income was income from interest and it would be deemed to accrue or arise when, either it is undeclared or under-declared. Moreover, such interest cold be deemed to arise only and only when there is either any loan which was given in the previous year or was brought forward from an earlier years. Further it may also be pointed out that the words "has not' charged any interest" have been used with reference to the closing of the relevant previous year of the assessee. To further remove all ambiguity and doubt it may be stated, hat if the Income-tax Officer finds any amount as loan shown in the books of an assessee-Company and: the Income-tax Officer also finds that the assessee has either not declared or under-declared the interest on such outstanding loans then the explanation clothes him with the authority to charge the interest at the specified rate. This would also be in line with the fact that the words "has made any loan" have been used again with reference to the closing of the relevant previous year. Both the expressions i.e., "has made any loan" and "has not charged any interest" have been used in present perfect tense and indicate and action completed. If a person has made any loan and has charged any interest at the closing of the previous year then it is a completed act on the date of closing of the previous year but if he has not charged any interest at the closing of the previous year then there is an absence of an act of charging of any interest at the closing of the previous year. What the legislature simply wants is that in case of such an absence in charging any interest at the closing of the relevant previous year, the Income-tax Officer shall resort to this explanation for charging interest under the said explanation at the prescribed rate. This could be further explained by an illustration. When we say "we have taken a cup of tea" it means that we have already finished the process of taking the tea when we made the statement. At what time the tea has been taken is not indicated when we say "we have taken the tea". We might have taken the tea just a few minutes before we were making the statement or an hour or several hours earlier. It all depends upon the context in which we were making the statement "we have taken the teal'. If we look in the light of the principles of accountancy the meaning and significance of both the expressions "has made" and "has not charged" it becomes crystal clear and need no further hair splitting arguments at all. The legislature in its wisdom has also used the words "loan is made" and "loan made" in paras. 1. and 2 of the Explanation 8 respectively. In our humble opinion these words are entitled to be interpreted in such a manner that there remains no conflict or lack of reconciliation between any provisions-of Explanation 8 to section 4(1). However, in any case both these expressions have to be interpreted with reference to the chargeability of tax on the income as is referable to the closing of the relevant previous year.
40. As far as the Ordinance is concerned, the subsection (7) of section 12 of the Ordinance is the new corresponding section of the Explanation 8 to section 4(1) of the Replaced Act with the change that here the word "assessee" has been used instead of the word "company" and the same reads as under:-
41. "Where an assessee has made any loan or advance to any person on which no interest has been charged or the rate at which interest has been charged is less than the rate (hereinafter 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) . .. . . . (b) . . . . . . . ."
42. The Explanation 8 if read with the opening words of subsection (1) of section 4 of the Repealed Act, it speaks "subject to the provisions of this act the total income of an previous year of any person includes all incomes, profits and gains from whatever source ...." Further in order to appreciate the words "total income" we have to refer to subsection (15) of section 2 of the Act which reads as under:- "'total income' means total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act; and 'total world income' includes all income, profits and gains wherever accruing or arising except income to which, under the provisions of subsection (3) of section 4 this Act does not apply and except any capital gain which is .not includible in the total income of an assessee."
43. Firstly, in our opinion there is no necessity of adding or inserting any word and there is no necessity of reading any words in the statute. If we are obliged to read the words "in the previous year" in between the lines then it will give a very inconsistent interpretation and a most limited effect to the Explanation and besides not being in harmony with the main section 4(I). It will mean that Explanation 8 will have no application where the loan had been made in any year earlier to the previous year and also in a year later to the previous year. To make it clear we will give the following illustration. If 'A', an assessee gives a loan in any financial year ending before the previous year relevant to the assessment year 1976-77, for instance, in 1972-73 or 1973-74 or 1974-75 it would not be applicable and that it would be applicable only for one year, i.e., assessment year 1976-77 and that it would not be applicable even for 1977-78 or subsequent years. This interpretation by this precondition inserted to be read in between the words "in the previous year" would have the effect as if the Explanation was inserted for only one year: Had it been so what is being read in between the lines would have been incorporated to that effect by the legislature On the contrary, well look at Explanation 7 appearing just before. There the legislature have used the words "in any previous year". Similar words are absent in Explanation 8. Secondly, the principles of statutory interpretation place an embargo on making any addition or substitution of words as was laid down by the Privy Council in the) case cited as Remula Bose Smt. v. Rai Manmathnath Bose A I R 1945 P C 108 and followed subsequently by the House of Lords in number of cases and also followed by the Supreme Court of India in the case cited as Assessing Authority-cum-excise and Taxation Officer v. East India Cotton Manufacturing Company Ltd A I R 1981. S C 1610, 1615 Where in it has been observed that 'It is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so". It was held in the case of Brutus v. Cozens (1972) 2 All E R 1297 (H L) to the effect that "We have been warned time and again not to substitute other words for the words of a statute. And there is very good reason for that. Few words have exact synonymous. The overtones are always different"
44. Further it is also a recognized principle that a matter which should have been but has not been provided for in any statute cannot be supplied by Courts, as to do so will be 'legislation' and not 'construction'. This view has been expressed in number of cases by the Privy Council and also followed by the Supreme Court of India. Some of these cases are quoted below:--
45. Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Co. Ltd. A I R 1933 P C 63: Kamalranjan Roy v. Secretary of State A I R 1938 P C 281; Commissioner of Sales Tax v. Mangal Sen Shymial A I R 1975 S C 1106, 1110 and Tarulata Syam Suit. v. Commissioner of Income-tax , West Bengal A I R 1977 S C 1803.
46. However, in case we are forced to add any words then it could be to make the interpretation logical coupled with objectivity and harmoney. Now for the sake of argument we read the words "in any previous year" which appear to be not only appropriate but proper as well and in line also with the language of the opening words as mentioned above in section. 4(1) i.e., "total income of any previous year ." Further if we refer to the different explanations attached thereto there are no such words in Explanation 1 or Explanation 2 or Explanation 3 or Explanation 4; Explanation 5 omitted by Ordinance of 1971 and Explanation 6 excepting Explanation 7 as aforementioned. Hence if we are at all obliged to insert pr read in between any words the words could be "in any previous year" which would not only be keeping in with the object but also with the language and this object presumably might have been before the legislature. As already stated above that any amendment of this nature remains in the statute book for the coming years as well and is not operative only for a single year. Lastly, it would also result in a very strange and startling factual position inasmuch as that the Explanation 8 will be applicable only for one year, i.e., the year when such loan or advance was made and then for all the subsequent years in spite of the loan remaining unpaid and not also having been recovered will not attract this explanation read with section 4(1) of the Act. This is simply rendering the amendment as nugatory and nullifying the very object of the amendment. Hence there is no necessity at all of insertion of any words as already stated supra. There is hardly any necessity of reading incorrect words in between the lines and such reading would simply frustrate the object of the insertion of this explanation by the legislature besides also being against the principles of interpretation. Reading the explanation as it is, then it would be applicable to all such loans irrespective when made but which remain unpaid during the previous year relevant to the assessment year. This interpretation will be wholly in line with all the other explanations of section 4(l) excepting Explanation 7 where the words have been specifically used "in any previous year". Finally we may add few words about "retrospectivity" which in simple words means that this insertion is made applicable to assessment year 1975-76 and earlier years as is applicable to assessment year 1976-77.
47. Words of the statute have to be given an ordinary and plaint meaning as has been held in the case cited as C .I . T, v . Shahzada Nand and Sons (1966) 60 I T R 392, 400 S C of India.
48. "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. .
49. 'To this may be added a rider: in a case of reasonable doubt the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the, game for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just and expedient. The expressed intention must guide the Court'."
50. One has to keep in view also the principle that in cases where there are two competing constructions, the one that is more logical and rational and does not claim anomaly should be adopted as the law bristles with anomalies. To this effect we can place reliance on the case cited as C.I.T. v. "The Hindu" 1950 18 I T R 237, 250:
51. "Words used in the sections of Income-tax Act are presumed to have been used correctly and exactly, in the sense in which those words have been defined in the Act and it is for those, who assert that is not the case, to show by something in the context or subject-matter that the words have not been used in the sense in which they have been defined but in 'a loose, inexact or popular sense. In the case of an evenly balanced uncertainly or where one has to choose between two competing constructions the probability of an equitable, logical and rational purpose underlying the enacted words may turn the scale. With regard to the meaning of 'previous year' in the context of section 25(4).
52. Lastly, one has also to keep in mind whether the interpretation results in irrational or absurd conclusion. In the case cited as C.I.T. v. Kishorsingh Kalyansingh Solanki 1960; 39 I T R 522, 532 later on approved by the Supremes Court of India in the case cited as C.I.T. National Taj Traders 1980, 121 : R 533, the observation of their Lordships reds as under.--
53. "As a general rule, interpretation must depend on the language of the section and not upon the consequence that may follow upon it. But this rule of interpretation of literal construction cannot be rigidly adhered to if it leads to manifest absurdity. In such a case the Court acts under the influence of an irresistible conclusion that the Legislature could not possibly have intended what its words may signify, The cardinal rule of literal construction and linguistic clearness must not be pushed so far as to result in irrational or absurd conclusion."
54. As for proper function of an explanation is concerned it has been held in the case cited as Messrs Cochin Co. v. C. I. T. 1978, 114 ITR 822, 833 "That the proper function of an explanation is to make plain or elucidate what is enacted and not be added or subtracted from it. An explanation is different in nature from a proviso, for the latter excepts, excludes or restricts while the former explains or clarifies".
55. Next we come to the objection raised on behalf of appellant about the specified rate which has been defined in clause 1 of Explanation 8 to section 4(i). Here the words used are that the specified rate means rate of interest at 2% above the bank rate notified by the State Bank of Pakistan as applicable on the date the loan is made by the company. Now in spite of the facts and circumstances of each case being different and irrespective of the term and conditions of the agreement or arrangement, this clause would be operative accordingly. For instance, if the agreement to obtain the loan is that the rate of interest has to be charged at a specified rate then there would be no deviation from the terms and conditions as entered into by the debtor and creditor amongst themselves for all Purposes of monetary transaction, i.e. the debtor will be bound to pay the interest at the agreed rate to the creditor irrespective of whatever be the bank rate unless the agreement is with reference to the bank rate: but as far this clause of Explanation 8 to section 4(1) is concerned, it will be applicable and cognizance would be given to the date falling any, time before the previous year', the loan was made by the company and in the previous year if the loan also was made in the pervious year for purposes of charging fictional interest. The year when the loan was advanced prior to the relevant previous year is of significance and the rate entered into (even if it is less than the current bank rate of the relevant previous year) would be applicable to the creditor company.
56. In our view the inescapable conclusion is that the addition of Explanation 8 to subsection (I) of section 4 of the Repealed Act, 1922 by the Finance Act, 1076 is beyond any, shadow of doubt a substantive Charging provisions in spite of being an Explanation. There is least doubt as such in our mind that there being no clear intention of the legislature making it operative in retrospection, it is not at all retrospective as for as charging of any interest under the fiction of law for any assessment year prior to assessment year 1976-77 is concerned; i.e. to assessment year 1975-76 or earlier assessment years. However, we are very clear in our, mind and hold that the loan in spite of having been made in any previous year whether relevant to the assessment year 1976-77 or earlier assessment years but the loan having remained unpaid was reflected in the balance-sheet by virtue of having been brought forward from earlier years and not having been 1 written off, is the "loan" which the explanation does envisage and due to this fiction of law the "loan" having remained unpaid in the previous year relevant to the assessment year 1976-77, interest calculated at the prescribed rate on such loans has to be included in the total income oft the assessee as well as for all subsequent years whether Explanation 8 applies or the subsection (7) of section 12 of the 1979 Ordinance, if the loan remains unpaid and the relevant provision remain in the statute took. We, therefore, in all the departmental appeals, restore the orders of the I.-T. Os and vacate the order of the learned C.I.Ts. or A. A. Cs. as the case may be, and in all the appeals filed by the assessees. There being no merit in the appeals we maintain the order of the learned Commissioner, Income-tax (Appeals) or A.A.Cs and dismiss all the appeals of the assessee on this issue only.
57. ABRAR HUSSAIN NAQVI (MEMBER) -- I have carefully gone through the proposed order of my learned brothers. I agree with the reasoning and conclusion in regard to all other issues except oil the retrospective application of Explanation: 8 of the repealed Income-tax Act and section 12(7) of the Income-tax Ordinance, 1979. Explanation 3 to section 4(l) of the repealed Income-tax Act (hereinafter referred to as the Act) and section 12(7) of the Income-tax Ordinance, 1979 (hereinafter referred to as the Ordinance) are charging sections and, therefore, are part of the substantive taw. It is settled principle of interpretation that a substantive law in contrast to a procedural law, has always prospective application unless the legislature has clearly given a retrospective effect in clear words. Here a paragraph from Maxwell on the interpretation of Statutes Twelfth, Edition page 21.6 is reproduced below:---
58. "One of the most well-known statements of the; rule regarding Retrospectivity is contained in this passage, from the judgment of R. S. Wright, J. in. Re At Athlumney: 'Perhaps no rule of construction is more firmly established than this--that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided 'without doing violence to the language of the enactment. If the enactment is expressed in language which, is fairly capable of either it interpretation, it ought to be construed as prospective only.' The rule has, in fact,' two aspects for it involves another and subordinate rule, to the effect that a statute is not to be construed so as to have a greater retrospective operation than its language renders necessary."
59. In Explanation 8 to section 4 the words used are, "has made any loan". The tense used is Present Perfect Tense which cannot be read also to include Past Perfect Tense. Since section 4(1), to which the Explanation has been added, has application on a previous year, therefore, by necessary implications the Explanation 8 has to be read alongwith .the section 4(1) as it is part of it. This Explanation was added on 28-6-1976 when the Finance Act, 1976 was passed. Therefore, the Explanation 8 came into force on 28-6-1976. Similarly, the Ordinance came into force with effect from 1st of July, 1979 and, therefore, section 12(7) will also be applicable from that date. Thus, the Explanation 8. which talks about the deemed income, has to be applied on the deemed income of the previous year and it cannot be stretched to the deemed income of the earlier years as the subject of the charge of the income is the previous year. The income-tax is paid in the succeeding year on the results of the previous year. Thus, all facts and transactions which existed during the previous year and are relatable to that year have to be taken into consideration while computing income of the previous year. Therefore, the Finance Act, 1976 which brought into operation Explanation 8 was applicable to all transactions made during the previous year relevant to the assessment year 1976-77. If any other meaning is given to Explanation 8 and it is stretched to transactions made even in the earlier years, it will lead to absurd results. For instance if a person made loan, say, 20 years before coming into force of the Finance Act, 1976, could it be said that any notional interest would be considered as income of the person as deemed income? Obviously a person who had advanced loan 20 years back could not visualize that in future he had to pay tax on a notional income. A citizen cannot be burdened with a tax of which he had no option. For instance, if a person had advanced a loan which had become time-barred when the amendment 'was brought in', the assessee is burdened with the notional W income while he received none and. even his principal amount is not recoverable. He has no option either. In the same instance supposing a person is left with no other source of income, the result would be that he would be paying a tax on a. fictional income while in fact he has no income at all. Obviously the law cannot be interpreted -in such a manner which is unfair with the subject. A third instance could also be quoted where a person advance loan under a legal contract in business expediency and in the course of business either he does not charge any interest or charges interest on nominal rate of interest. Now before 1976 such a person could not be visualize that he would be burdened with tax on an income which he cannot receive. Obviously he would be bound by the legal contact already executed and he would not be able to change the terms of the contract. Despite this fact he has to pay tax on a deemed income 'which he was not receiving. Here the Maxwell is quoted again in support of my reasoning.. At page 218 (supra) it has been stated:
60. "The rule under discussion has been applied chiefly in cases in which the statute in question, if it operated retrospectively, would prejudicially affect vested rights or the legality of past transactions, or would impair contracts, or would impose new duties or attach new disabilities in respect of past transactions."
61. Therefore, to my mind Explanation 8 to section 4(l) of the Act as well, as section 12(7) of the Ordinance are applicable prospectively and have no retrospective effect to transactions entered into before the start of the previous year 1976. However, from the very nature of the Finance Act, it is applicable on a previous year, therefore, notwithstanding its prospective effect, the transactions which were undertaken and loans advanced in the previous year relevant to the assessment year 1976 are hit by Explanation 8.
62. It may be noted that where the legislature had intended to apply certain provisions of section 4 retrospectively, it specifically made it clear in the wording used in the earlier Explanation. For instance, in Explanation 4 to subsection (1) of section 4 in regard to the bonus shares issued or paid by a company to a shareholder out of reserves, it has been specifically stated that "reserves or profits of the company of that year or accumulated profits of the company of earlier years," would be deemed to be income of the company during that year. Similarly in Explanation 6 of the same section it has been specifically mentioned "export proceeds, of goods exported before the 12th May, 1972 including goods in respect of which a bill of export had been delivered before that date". In Explanation 7 of the same section also a different wording has been used conveying the intention oh the legislature that it was being applied retrospectively. In that Explanation the wording used is "any income derived by an assessee in any previous year from business, profession or vocation which has been or was discontinued at any time during or before commencement of the said previous year shall be deemed to be income so chargeable..........." In Explanation 8 under discussion a different wording has been used. If there was an intention of the legislature that Explanation 8 was to be applied to the earlier transactions as well, the same language would have been used as was used in Explanation 7. While defining specified rate in Explanation 8 the wording has been used which conveys clear intention of the legislature that it was being applied prospectively and not retrospectively.
63. The definition reads as under:-- specified rate means rate of interest two per cent above the Z bank rate notified by the State Bank of Pakistan, as applicable on the date the loan is made by the company . . . . . . . . . ."
64. Therefore, to my mind Explanation 8 as well as section 12(7) of the Ordinance are prospective in nature and do not apply to the transactions made in the years earlier to the previous year. Even otherwise this is a settled principle of interpretation of taxing statute that where two interpretation are possible, one in favour of the subject should be adopted.
65. GHULAM MURTAZA KHAN (MEMBER).-- In conformity with the opinion of the majority all the appeals are disposed of in the manner proposed by my learned brother, Ghulam Sadiq.
66. M. Y. H. Appeals dismissed