I.T.As. Nos.2789/LB, 4491/LB and 5269/LB of 1999, decided on 28th July, 2004. Versus I.T.As. Nos.2789/LB, 4491/LB and 5269/LB of 1999, decided on 28th July, 2004.
ORDER
Assessment years 1997-98 and 1998-99 (under section 62)
1. These appeals by Revenue arise out of order passed by the CIT(A) Zone-I, Lahore, dated 15-4-1999.
2. In both these years the department assails the deletion of add-back made by the Assessing Officer on account of payment of service charges by the assessee to the Federal Bank for Cooperatives on account of use of credit line extended by the said bank to the assessee, The Department also contests the deletion of addition made by the DCIT on account of amount, realized by the assessee, from sale of various immovable properties of loan defaulters. For 1998-99 the Department also contests the CTT(A) direction for application of tax rate @ 20% on dividend income.
3. According to the DR the amount charged by the assessee to it's profit arid loss account in the two years does not qualify to be treated as `business expenditure' as it does not fall in any of the Heads listed in section 23(1) of the Ordinance, 1979. In fact the Department is of the view that these so-called service charges are not `expenditure' at all but a passing on by the assessee to the Federal Bank of part of the income earned by the assessee from it's member banks on account of their use of the credit line provided to the assessee by the Federal Bank. The D.R. has further emphasized that these service charges are not the payment of a, definite and ascertained amount of interest on any loan amount advanced to the assesses but is rather a peculiar and unique financing arrangement contrived in league with the Federal 'Bank on a profit and loss sharing basis for which there is no statutory sanction as admissible business expenditure.
4. As regards amount realized by the assessed from sale of the immovable properties of it's loan defaulters, the DR argues that the ambient circumstances go to show that the realized amount constitutes 'revenue' being an 'adventure in the nature of trade' and has thus rightly been included in the assessee's total income:
5. AR of assesses respondent has contested the departmental arguments and with regard to `service chargers' has argued that various appellate decisions support the assessee's stance that such service charges to qualify to be treated as legitimate business expenditure.
6. These judgments are referred to as under:
I.T.As. Nos. 1087/LB of 1989-90, I.T.As. Nos. 1105, 1106 and 3139/LB of 1992-93, I.T.As. Nos. 3819 to 3822/LB of 1997, I.T.As. Nos. 1834 and 4404/LB of 1999, I.T.As. Nos. 1075/LB of 1989-90, 599/LB/1993, I.T.As. Nos. 4491 to 4495/LB of 1997 (Assessment years 1987-88 to 1989-90 and 1991-92 to 1998-99) order dated 7-12-1999.
7. The A.R. further argues that these `service charges' are included in the definition of `interest' given in section 2(29) of the Ordinance, 1979.
8. In the case of amount realized from sales of defaulters immovable properties, the AR submits that the proceeds over and above the amount in default is a `windfall' gain and hence, exempt under the law from levy of income-tax. The assessee has referred to ITAT judgment bearing W.T.As. Nos. 1458/LB to 1462/LB of 1997 and W.T.As. Nos. 788 and 789/LB of 2000 (Assessment years 1991-92 to 1997-98), dated 15-8-2003 in support of its contention.
9. We have heard both sides and have examined the available record and perused the judgments cited and our findings are recorded as under:
"In the case of service charges Revenue has emphasized that the amounts in question are not `expenditure' at all but rather a part of the income earned by the assessee from it's member banks and are the Federal Banks share in such income. Now if this were to be, treated as correct then it follows that there is a joint venture between the Federal Bank and the assessee (as members of an AOP) and the Federal Banks alleged share in aggregate receipts of the assessee Bank must then be excluded from the assessee's income. This of course would be of no benefit to Revenue. In any case this scenario does not appear to be consistent with the factual position on the ground.
Shorn of semantics, and looking at matters in a broad perspective, the operative facts and circumstances do appear to suggest strongly that these `service charges' are the same as 'interest' as defined in section 2(29) of the Ordinance, 1979. If so, the service charges would qualify to be treated as admissible expenditure. Admittedly their placement in section 23(I)(viii) of the Ordinance, 1979 (since repealed) could conceivably pose problems but the provisions of section 23(1)(xviii) of the Ordinance do appear to come to assessee's rescue as the payment does appear to have been made wholly and exclusively for the purposes of business. There is no denying that the assessee is in the business of making available moneys to it's members on a concessional basis for common (cooperative) benefit. Thus the credit line provided to the assessee by the Federal Bank on a concessional basis (i.e. not the market rate of interest) is in turn made available by the assessee to it's members who invest the money in Government securities and any gains realized are shared by the members with the assessee who then passess on a part of such gains to the Federal Bank by way of compensation for making the credit line available to the assessee in the first place. This is clearly a `bona fide' arrangement especially taking into account it's context (i.e. the fact that it is part of a cooperative venture). That being so there appears to be no justification to treat the payment of service charges as inadmissible more so on technicalities. The judgments referred to by the assessee also lend strong and convincing support to assessee's case. It is also significant that the amount received by the assessee from member banks for making the credit line available to them has been offered for levy of Income Tax. Looking at all, pertinent aspects we will maintain the CIT(A) findings with regard to `service charges.'
With regard to gain from disposal of defaulter's immovable properties held by the assessee as collateral, the assessee's case is less than convincing. The ITAT judgment referred to by the assessee has been examined and is found to be of no avail. It deals with wealth the assessment in assessee's case and is of no relevance here. A crucial question here is assessee's `intention' when it held on to the properties after the default took place and made little or no effort to dispose them in the market and realize the amount in default. No evidence has been produced by the assessee at any stage of the proceedings to' establish that a genuine effort had in fact been made to dispose off the properties by way of auction at the time of default. Rather, the facts go to show that the assessee held on to the properties for a considerable length of time before finally selling them and making a significant gain on the transaction. In the interregnum no capital investment was made in the commercial `development' of these properties and the gain on their disposition cannot therefore be described as a `capital gain.' Admittedly these properties came into assessee's possession as collateral for loan advanced and title passed on to the assessee when the debtors defaulted. No capital outlay is thus involved for their acquisition by the assessee. The ambient circumstances are clearly compelling and in our considered view lead to the inescapable conclusion that the assessee has held on to the properties with deliberate design and it was the assessee's intention to make a profit from their sale in the market over and above the amount actually owed to the assessee by the debtors. Under these circumstances the gain cannot be treated as accidental, windfall gain but instead it is a gain contrived by deliberate design and hence an adventure in the nature of trade. The CIT(A) has not applied his mind properly to the pertinent facts and circumstances involved and has unjustifiably relied largely on `past history' in reversing the departmental treatment. Needless to say, in income tax proceedings each year is independent and is required to be so treated and, assessment is required to be finalized strictly on the basis of the operative facts, prevalent circumstances and the relevant transactions that have taken place in the given timeframe. Looking at the matter in it's entirety we hold that the CIT(A) findings with regard to gain on disposition of defaulter's immovable properties are misconceived. We therefore, vacate the order of, the CIT(A) in this regard and reinstate the findings as recorded by the Assessing Officer.
As regards departmental ground relating to tax rate on dividend, this ground has not been pressed by the D.R. in any case the CIT(A) has assigned assessee the status of banking company and has directed that the applicable tax rate available in the case of banking companies be applied in assessee's case. This direction is entirely reasonable and no interference is called for here."
10. Resultantly, the departmental appeals for 1997-98 and 1998-99 succeed to the extent and in the manner described Supra.
Assessment year 1997-98 (under section 91).
11. This is a departmental appeal arising out of order passed by the CIT(A) Zone-I, Lahore, dated 11-5-1999.
12. It is the departmental contention that the CIT(A) has unjustifiably deleted the penalty levied for non-payment of tax amount in default.
13. It is the assessee's contention that 'penalty as levied was not maintainable as the penalty action was taken at a time when the amount in question had not yet become, `due'.
14. The DR is unable to rebut the assessee's contention. Looking at the facts and circumstances we find that no exception can be taken to the adjudication as made by the CIT(A) with regard to deletion of penalty amount in question.
15. The departmental appeal is rejected.
H.B.T./321/Tax (Trib.) Order accordingly.