I.T.AS. NOS. 1238/KB AND 1239/KB OF 1981-82,DECIDED ON 22ND NOVEMBER, 1987 Versus I.T.AS. NOS. 1238/KB AND 1239/KB OF 1981-82,DECIDED ON 22ND NOVEMBER, 1987
ORDER
1. There are two cross-appeals for the years 1979-80 and 1980-81 while one departmental appeal for the assessment year 1978-79 against the orders of the learned Commissioner of Income-tax (Appeals) Zone-3, Karachi. Since grounds taken are almost similar in all the years, they are being disposed of by this single order.
2. 2, Arguing the case of the appellant-Bank, Mr. Sirajul Haque, the learned counsel, stated that common ground, for both the years 1979-80 and 1980-81 is in respect of disallowances of penalties amounting to Rs.50,173 and Rs.43,191 respectively, levied by the State Bank of Pakistan due to shortfall in maintaining cash reserve with them. The add-backs confirmed by the Commissioner of Income-tax (Appeals) were uncalled for and unjustified. The learned C.I.T. (Appeals) relied on Tribunal's decision I.T.A. No. 409/KB and 410/KB of 1979-80, dated 3-12-1980. The second ground taken is in respect of bad debt disallowed by the Income-tax Officer against this Board's Circular issued on this subject. Although, he argued, that bad debt was allowed during the year 1979-80 on the basis of the said Circular.
3. Explaining the circumstances in which the penalties were imposed for the years 1979-80 and 1980-81 by the State Bank of Pakistan, he stated, that each commercial bank has to maintain certain cash balances with the State Bank of Pakistan. According to. clause 36 of the State Bank of Pakistan Act, 1956:-
3. "Every scheduled bank shall maintain with the bank a balance, the amount of which shall not at the close of business on any day be less than 5% of the demand liabilities and 2% of the time liabilities of such bank in Pakistan."
4. Yet there may occur a time lag, the learned counsel argued, between the cheque issued and realised. During this gap if the level of deposit gets depleted, the State Bank charges penal interest as per subsection (4) of section 36 of the State Bank of Pakistan Act, 1956. The learned counsel took pains to make distinction between the penal interest and Penalty while former is the routine and a procedural charge devoid of mens rea, the latter is a levy to deter criminal intent of an action He also tried to distinguish the case reported as 1981 P T D (Trib.) 71 whose relevant portion reads as under:-
5. "It may be pointed out that in subsection (4) of section 36 the expression 'penal interest' has been used, but in subsection (8) of the said section, as already pointed out, it has been clearly referred to and described as a penalty. The penal interest, therefore, is nothing but a penalty and has to be understood and interpreted as such while considering its allowability or otherwise as an expenditure under section 10(2) (xvi) of the Act. In the facts of the instant case it is definitely not possible for us to hold that liabilities in question were in the nature of expenditure incurred on the ground of commercial expediency or with a view to indirectly facilitate the carrying on the assessee's business. Even at the cost of repetition it may be added that the payments of the liabilities in question cannot be characterised or treated as incidental to the assessee's business notwithstanding the fact that it may have some connection with its business. It is, however, evidently borne out from the facts, narrated above, that the assessee's liabilities arose directly from non-compliance of the mandatory provision of law to maintain a balance of not less than 5% of its demand liabilities and 2% of its time liabilities in Pakistan. It cannot by any process of reasoning be said to be incidental to the assessee's business. It is clearly a case of infraction of law and the breach of statutory obligation which has, consequently, resulted in the imposition of penalty."
6. The learned counsel persistently argued that it was a case of penal interest and not penalty. He also drew our attention to the definition of 'Penalty' given in 'Salmond on Jurisprudence' Eleventh Edition and argued that it was not intention of the appellant to break law. The section under which penal interest was charged was regulatory in nature. Therefore, the ratio of case reported as 1981 P T D (Trib.) 71 does not apply. The expense was, therefore, rightly claimed under section 10(2)(xvi) of the Income Tax Act as being an expenditure wholly and exclusively laid out for the purpose of business.'
4. The next ground taken is in respect of bad debts claimed and disallowed by the I.T.O. during the assessment year 1980-81 as under:-
7. Synthetic Chemicals Disallowed.
8. Rs. 1,07,000
9. Khanpur Textile Mills Disallowed
10. Rs. 48,00,000
11. Allied Trading Corporation Disallowed
12. Rs. 13,480
13. A. C. E. Enterprises Disallowed
14. Rs. 217 , 000
15. The above debts were certified by the State Bank of Pakistan as irrecoverable and any debt, which is certified to be irrecoverable by the State Bank of Pakistan is to be allowed as bad debt as per Circular of the Central Board of Revenue. The I.T.O. for the year 1979-80 had allowed bad debt on the basis of above circular. It was not allowed during this year for reasons best known to him. Alternatively, he argued, that these debts had become bad because all efforts to recover the same had failed and the above companies have gone into liquidation and the total assets are not sufficient to meet the entire demand which is more than the one claimed and certified by the State Bank of Pakistan. The C.B.R.'s Circular referred to by the learned counsel has been examined and found to be effective from assessment year 1983-84. It is, therefore, not relevant to this case.
6. Mr. Mohammad Farid, the learned D.R. replying to the arguments of Mr. Sirajul Haq relied on Tribunal's decision reported as 1981 P T D (Trib.) 71 and also M.A. No. 30/KB of 1986-87, dated 14-3-1987:-
16. "The fact that in that case the expenditure claimed was the amount of the penal interest does not make it distinguishable in view of the discussion made above. In our judgment if an expenditure is in contravention of some law, it would not be deemed to be as an expenditure incurred wholly and exclusively for purposes of business. Whether it is quantified or not by way of fine by a Court or other authority is a question wholly irrelevant for our purposes."
17. The learned D.R. also drew our attention to subsection (8) of section 36 of State Bank of Pakistan Act, 1956 which reads as under:-
18. "(8) The penalties imposed by subsections (4), (5), (6) and (7) shall be payable on demand made by the Bank and in the event of refusal by the defaulting bank, director or officer to pay on such demand, may be levied by a-direction of the principal Civil Court having jurisdiction in the area where an office of the defaulting bank is situated, such direction being made only upon application made in this behalf to the Court by the Bank, with the previous sanction of the (Federal Government). "
19. In subsection (4) of` section 36 of the State Bank of Pakistan Act, 1956, this levy has clearly been stated as penalty and this fact has been thoroughly discussed by the Tribunal in the case reported as 1981 P T D (Trib.)
71. If the same has been reversed by the Supreme Court of India, it is not valid in Pakistan because the Tribunal's decision still holds the field.
7. As regards bad debts he stated that the law is emphatic about it. The I.T.O. is not bound by the certificate of the State Bank of Pakistan. He drew our attention to section 23(1)(x) which reads as under:- "in respect of bad debts, such amount (not exceeding the amount actually written off by the assessee) as may be determined by the Income-tax Officer to be irrecoverable."
20. Thus, it is the I. T.O., he argued, who has to determine whether the debt has become irrecoverable or not the law does not permit any other authority to act on behalf of the Income-tax Officer. He relied on a case reported as (1965) 11 Tax 342, which lays down the ratio that it is for the I. T.O. to determine what debts had become bad or doubtful. .
21. "It is wrong to say that irrespective of other considerations as soon as an embezzlement of the employer's funds takes place, whether the employer is aware or not of the embezzle ment, there results trading loss. So long as there is a reasonable prospect of recovery of the amounts embezzled, trading loss in a commercial sense cannot be deemed to have resulted. "
8. We have heard the learned representatives for the smooth and unfettered day-to-day working of the commercial institutions. Government has laid down certain conditions to achieve the objectives in view. Breaches invite quick retribution. All scheduled banks are required to keep certain deposits with the State Bank of Pakistan and at the same time have to ensure that the level of deposit is maintained while day-to-day functions continue undisturbed. On checking weekly returns, if the State Bank of Pakistan finds the deposits on a particular date depleted and the Scheduled bank concerned had not taken steps to revive the shortfall it charges certain amount by way of penalty and the defaulting bank has to make good the shortfall alongwith the payment of penalty. There is no escape from it. This amount charged is definitely for the breach of rules and regulation laid down by the State Bank and is not procedural in nature, as argued by the learned counsel. While discussing various aspects of such cases, Tribunal in its decision; quoted as 43-Tax-69 has very deftly rebutted the arguments, of the learned counsel.
9. The 'Concise Oxford Dictionary' gives the following meaning of the word penalty:-
22. "Punishment, esp. payment of sum of money, for breach of law, rule or contract."
23. This being a clear infraction of law, we hold that ratio laid down in the Tribunal's decision M.A. 30/KB of 1986-87 and 1981 P T D (Trib.)71 apply in this case as all relevant arguments involved in this issue have properly been addressed in the above two decisions. ,
10. As regards, bad debts we find that the Board Circular relied upon by the learned counsel applies to a subsequent year and is not in any way relevant for the years under appeal. besides the legal proceedings against the debtors have not yet concluded as pointed) out by the learned counsel. In this view of the matter we therefore hold, that ratio of the case cited as (1965) 11-Tax-342 apply. We, therefore, do not find any justification in the direction of the learned C.I.T. (A) to allow only these debts, which have been certified by the State Bank of Pakistan as bad and irrecoverable. We restore the order of the I.T.O.
24. We now turn to the departmental appeals for the years 1973-79, 1979-80 and 1980-81.
25. 1978-79 .
11. It is argued that the learned C.I.T.'s direction to allow bad debt as per certificate of the State Bank of Pakistan is bad in law and should be rejected and I.T.O.'s order be restored. Total claim of bad debt for this year was made and disallowed by the, I.T.O. as under:--
26. Claimed
27. Rs.52,41,41.2
28. Disallowed by I.T.O.
29. Disallowance confirmed in
30. Rs.52,41,41.2 appeal by the learned C.I.T.
31. Rs.40,63,750
32. The balance of Rs.11,77,662 was allowed by the learned C.I.T. on the basis of certificate issued by the State Bank of Pakistan. The learned D.R.'s argument for bad debt for this year is the same as that for the year 1979-80 discussed above.
12. The next ground taken is in respect of levy of surcharge The learned D.R. supplied the following figures of income returned and assessed:
33. Income returned
34. Rs.1,78,80,849
35. Assessed
36. Rs.2,16,04 ,006
37. Tax
38. Rs.1,34,92,333
39. Surcharge
40. Rs.10,37,750
41. The learned C.I.T. relying on Tribunal's decision reported as (1979) 40 Tax 47 (Trib.) decided the issue. Since the department has not reconciled with the above decision, they propose to take the issue to the Supreme Court of Pakistan. (The Hon'ble High Court vide No. ITR-48 of 1983 has decided the issue against the Department). On the other hand, Tribunal has been consistently following the above decision in a number of cases. In view of this we confirm the direction given to the Income-tax Officer by the learned Commissioner of Income-tax (Appeals)
42. 1979-80 and 1980-81
13. For these two years the I.T.O. had disallowed a sum of Rs.1,96,602 and 22,20,863 for 1979-80 and 1980-81 respectively, claimed by the assessee bank (hereinafter called the respondent) as business expenses on account of penalty paid to the State Bank of Pakistan for bursting the credit ceiling. The learned C.I.T. (Appeals), depending on the judgment of Habib Bank Limited and United Bank Limited of her zone, deleted this addition in the following words:-
43. I, after due consideration of facts as submitted by the I.T.O. and the learned counsel, and as discussed in the main part of this appellate order, find that the action of the I.T.O. in disallowing penal interest due to violation of credit ceiling laws is not justified. Therefore, addition on this account for the assessment year 1979-80 and 1980-81 is hereby deleted."
44. The learned D. R. relied on Tribunal's decision in M.A. No. 30/ KB of 1986-87 and on a judgment reported in June 1981 P T D (Trib.) 71 wherein it was held:
45. "The penal-interest, therefore, is nothing but a penalty and has to be understood and interpreted as such while considering its allowability or otherwise as an expenditure under section 10(2)(xvi) of the Act. In the facts of the instant case it is definitely not possible for us to hold that liabilities in question were in the nature of expenditure incurred on the ground of commercial expediency or with a view to indirectly facilitate the carrying on the assessee's business- - - - - -"
46. As regards disallowance of the bad debt claimed, Mr. Mohammad Farid, the learned D.R. drew our attention to the assessment order pages 11 and 12 in which the Income-tax Officer while disallowing the claim of the respondent laid down certain principles to judge whether the debt had become bad and irrecoverable:----
47. "Thus, in my opinion, a provision for doubtful debts cannot be made in undermentioned four categories of cases:-
(i) When market value of the security exceeds the dues outstanding.
(ii) Where intention has been' shown by the borrower to make the repayment.
(iii) Where the borrower has the capacity to repay the dues.
(iv) Where the lender has not taken any steps to recover dues.
48. It is, therefore, necessary to examine each and every case carefully before it can be allowed as deduction.
49. Moreover, where there is no prima facie case for making a provision for doubtful debts, the argument that the same can be offered for taxation upon subsequent recovery does not appear to be valid at all."
50. He then disallowed a sum of Rs.6,60,000 which the learned C.I.T. (A) restored on the basis of certificate issued by the State Bank of Pakistan.
14. The learned A.R. on the other hand, argued that no penalty is levied for bursting the credit ceiling. What is required of the scheduled banks, on any day when they have exceeded the ceiling, is to deposit an amount to the extent of breach of the ceiling. This amount is blocked without interest and subsequently, when the required level is reached, the same is released.
15. So the question looms, can these deposits made to level the ceiling be termed as penalty. Before dwelling on this issue we would like to quote from a circular letter of the State Bank of Pakistan bearing No. (G) 1/127.00.81, dated 10-1-1981:-
51. "2. In exercise of the powers conferred on the State Bank under section 25 of the Banking Companies Ordinance, 1962 and in supersession of the previous instructions in this behalf it has been decided that with immediate effect the rate of penalty for breach of the credit ceilings, prescribed for the banks from time to time, shall be as under:-
(1) If the credit ceiling, as prescribed is exceeded, the defaulting bank shall make a special deposit with the State Bank of Pakistan of an amount equal to the excess.
(ii) In case the default continues into the next week, then the bank having exceeded the credit ceiling shall make a special deposit equal to 1 times excess of the 2nd week.
(iii) In case the default continues into the 3rd week, the bank shall deposit an amount equal to twice the amount of excess in the third week.
(iv) If the position is not regularised and the defaults persists beyond the 3rd week, then, the defaulting bank shall deposit an amount equal to three times the amount of default for the concerned week.
(3) In case a defaulting bank fails to make the required special deposits: (i) in respect of the default referred to in para 2(i) above, penal interest at the rate of 5% p.a. above the Bank Rate shall be charged; and (ii) in respect of defaults mentioned in paras 2(ii) to 2(iv), the rate of penal interest shall be 7 % per annum above the bank rate on the amount required to be deposited with the State Bank in the special deposit account."
52. Paragraph 3 of the Circular is quite clear on the issue of breach of credit ceiling. Banks are called upon to make the required special deposits when they exceed the prescribed credit ceiling. If they are not made in time then penal interest at prescribed rates are charged and realised. This being the situation we cannot hold that such expenses, clearly incurred for infraction law, are allowable under section l0(2)(xvi). The learned C.I.T. (Appeals) was, therefore, not justified in deleting them. The additions for both the years 1979-80 and 1980-81 are restored.
16. As regards bad debts, Mr. Sirajul Haque, the learned counsel, stated that the arguments advanced earlier in his appeal for 1979-80 applies to this year as well. He stated that a part of the debt is covered by the certificate issued by the State Bank of Pakistan that they are irrecoverable as the total assets of the debtors were not sufficient to meet the entire requirements. Although he conceded that it is the discretion of the I.T.O. to determine the extent the debt has become bad yet powers to be exercised ought not to be arbitrary. In 1977-78 similar debts were allowed on certification of the State Bank of Pakistan. The debts had become bad and irrecoverable since every step taken, had failed.
53. As we have already stated in this order that the Board's Circular on which the learned A.R. has placed reliance is not applicable to these years and the fact that the case of debtor companies, gone insolvent, are still -pending in the Court, we agree wits; the learned D.R: that the claim is premature and should not have been allowed. We confirm the findings of the Income-tax Officer on this issue.
54. Perquisites-
55. The next ground taken for 1979-80 by the department is in respect of excess perquisites disallowed by the I.T.O. at Rs.2,51,82,439 which includes house rent, conveyance, medical and interest free/low interest loans. These additions were made under section 24(l) of the Income Tax Ordinance. 'The learned C.I.T. treated them as part of the salary.
1. Mr. Sirajul Haque the learned counsel drew our attention to section 240) which reads as under:-
56. "(i) any expenditure incurred by an assessee on the provision of perquisites (allowances) or other benefits to any employees, in excess of (fifty) per cent of the salary excluding perquisites (allowance or other benefits)."
57. He stated that the word 'perquisite' under section 24(i) was brought in by an amendment through Finance Ordinance, 1980. Before this the word 'allowance', was used which is quite different from the word 'perquisites'. 'Creating the 'allowance' as 'perquisite' is wrong. The amendment brought about is effective from 1980-81. It, therefore, does not apply to the assessment year 1979-80. He relied on I. T. A. No. 622 and 623/KB of 1981-82, dated 25-4-1985. The same principle was also enunciated by the Supreme Court in 1971 P T D 200 although on a different issue. The relevant portion reads as under:-
58. "Apart from this, we are unable to read the earlier definition in the manner suggested by the department. It was said in the course of argument that notwithstanding the amendment it must be assumed that the previous definition of 'sale price included Provincial Excise Duty, The previous definition, however does not expressly say so. We may here observe that interpreting the taxing statute the Courts must look to the words of the statute and interpret it in the light of what is clearly expressed. It cannot imply anything, which is not expressed, it cannot import provisions in the statute so as to support assumed deficiency. On the other hand the fact that the Legislature made an express provision for including the excise duty indicates that the unamended definition of the 'sale price' did not include the Provincial Excise Duty."
59. He also argued that definition of salary is given in the Explanation to 24(i) which means 'remuneration or compensation for services rendered'. He drew our attention to Stroud's Judicial Dictionary page 2324 for the meaning of word 'remuneration', which according to the dictionary is a 'wider term than salary'.
60. 1.The I.T.O. had worked out the difference in rate of interest charged from the employees and added a sum of Rs.7,42,514. The learned A.R. stated that it was not an expenditure charged to P&L account. The question of making addition to this effect, therefore, did not arise. For making any addition, there must be corresponding expenses charged to the P&L account. Section 23 relates to the expenses and section 24 details exceptions made to those expenses. Firstly the expenses should be claimed under section 23 then alone exception as laid down in section 24 shall apply. He concluded that the learned C. I. T. had very rightly deleted this amount. The learned C. I. T. depending on the decision given in the case of U. B. L. for the year 1979-80 had deleted the additions made by the I.T.O. After giving due consideration to the arguments of the learned representatives, we uphold the decision of the learned C.I.T. (A).
20. The next ground taken by the department is in respect of surcharge. The position of income returned and assessed is as under:-
61. Income returned
62. Rs.3,06,53,011
63. Income assessed
64. Rs.6,12,98,442
65. Tax
66. Rs.3,90,28,116
67. Surcharge
68. Rs. 24,88,702
69. The learned C.I.T. relying on Tribunal's decision reported as (1979) 40 Tax 47 (Trib.) decided the issue in favour of the appellant. Since the department has not reconciled with the above decision hence they propose to file a reference to the Supreme Court of Pakistan. On the other hand, the Tribunal has been consistently following the above decision quoted by the learned C. I. T. (A). In view of this matter we confirm the direction given to the Income-tax Officer by the learned C. I. T. to follow the above decision.
70. 1980-1981.
71. The grounds taken for this year are in respect of additions made by the Assessing Officer at Rs.22,20,863 for bursting the credit ceiling and the same deleted by the learned C.I.T. in appeal. The same arguments have been advanced by the learned D.R. as for the year 1979-80. We dispose of this ground in accordance with our findings given supra. Bad Debt : Total claim was made at Rs.1,71,00,000 the I.T.O. disallowed Rs .1, 61, 43, 480. The learned C.I.T. issued direction that those debts certified by the State Bank of Pakistan to be irrecoverable should be allowed. In view of our findings given Supra we confirm the orders of the I.T.O. -and vacate that of the C.I.T. (A)
72. Surcharge:
73. The last ground taken by the department as in respect of surcharge. The Position of income returned and assessed is as under:-
74. Income returned
75. Rs. 5,10,35,724
76. Income assessed
77. Rs.10,45,65,602
78. Tax
79. Rs. 6,70,79,687
80. Surcharge
81. Rs. 43,60,180
82. The learned C.I.T. relying on Tribunal's decision reported as (1979) 10 Tax 47 (Trib.) decided the issue in favour of the appellant. Since the department has not reconciled with the above decision hence hey propose to file a reference to the Supreme Court of Pakistan. On the other hand, the Tribunal has been consistently following the above decision quoted by the learned C.I.T. (A). In view of this Matter we confirm the direction given to the Income-tax Officer by the learned C.I.T. to follow the above decision.
83. M. B.A./456/T Order accordingly.