I.T.AS. NOS. 41/IB, 81/IB AND 84/IB OF 1988-89 AND 1155/IB TO 1157/IB OF 1986-87, VS I.T.AS. NOS. 41/IB, 81/IB AND 84/IB OF 1988-89 AND 1155/IB TO 1157/IB OF 1986-87,
1991 P T D (Trib.) 894
[Income-tax Appellate Tribunal Pakistan]
Before Sayed Amjad Hussain Bokhari, Judicial Member and Junejo M. Iqbal,
Accountant Member
I.T.As. Nos. 41/IB, 81/IB and 84/IB of 1988-89 and 1155/IB to 1157/IB of 1986-87, decided on 03/04/1990.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1), 24(b) & 31---Where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him or conversion in the nature of currency, such profit or loss would ordinarily be treated as profit or loss account if the foreign currency is held by the assessee on revenue account or as a trade assets or a part of circulating capital employed in the business---Where profit or loss arises to an assessee on account of appreciation or depreciation in value of foreign currency then such profit should be attributable either to capital or revenue if amount was held either as capital or as revenue---Character of the assets thus would decide capital nature or revenue nature---Loss claimed on account of conversion of foreign currency loan obtained for meeting the working capital requirements of the company which were debitable to the profit and loss account could not be disallowed.
C.I.T. v. Groz Baekert Saboo Ltd. (1979)116 ITR 125 (SC) fol.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 12(3)(a)---Interest payable by assessee to the non-resident company was income within the purview of S. 12(3)(a) so far as non-resident was concerned.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss, 50(3), 23(1), Expln., 24 & 31---"Paid" in S. 23(1), Expln.---Definition-- "Paid" means the amount actually paid or incurred according to the method of accounting on the basis of which income is computed---Such meanings have not been extended to the expression "payment" as used under S. 50(3) of the Ordinance which would mean that tax paid or deducted and paid either at the time of actual payment or accrual during the income year, as the case may be-- Profits thus have to be taxed where they are found.
Aggarwal Chamber of Commerce v. Canpet Rei Mire Lal (1958) 33-ITR 245-252; Williams v. Singer (1920) 7 TC 387 and Stahl v. Education Association Methodist Church 54 Kar. 542: 38 Pac. 795 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 50(3)---Provisions of S. 50(3), Income Tax Ordinance, 1979, which are mandatory have to be strictly interpreted.
(e) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1), 24(b) & 50(3)---Non-deduction of allowance of interest payments could be allowed under Ss. 23(1) & 24(b) if the tax thereon had not been deducted at source and paid to the national exchequer under S. 50(3).
C.I.T., Kerala v. Lakshmi Lines Company (1976) 102 1TR 196 ref.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 50(3)---Expression "payment" used in S. 50(3) has to be strictly interpreted.
(g) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1), 24, 31 & 50(3)---Any interest accrued or arisen on a loan obtained from a non-resident is chargeable to tax in Pakistan unless covered by cl. (75) of the Second Schedule to the Ordinance or the person himself acts as an Agent under S. 78 of the Ordinance---Interest, however, is allowable as an expense debitable to the profit and loss account of the resident assessee in Pakistan only if tax thereon has been deducted and paid under S. 59(3) at the time of actual payment or accrual during the income year as the case may be, on the principle of taxing the profits where they are found.
I.TA. No. 56/113 of 1985-68; LTA. Nos. 1671 to 1673; 1986 PTD (Trib.) 105; I.T:A. No.1671 to 1673; 1990 PTD 248; C.I.T., Hyderabad v. Nagaria Oil Mills (1953) ITR 258; C.I.T. v. Groz Backer Saboo Ltd. (1979) 116 ITR 125 (SC); Aggarwal Chamber of Commerce v. Canpet Rei Mire Lai (1958) 33 ITR 245-252; Williams v. Singer (1920) 7 TC 387 and 411; Stahl v. Education Association Methodist Church 54 Kar. 542: 38 Pac. 795 and C.I.T., Kerala v. Lakshmi Lines Company (1976) 102 ITR 196 ref.
C.I.T., Hyderabad v. Nagaria Oil Mills (1953) ITR 258 distinguished.
(h) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1), 24(b) & 31---Depreciation can be allowed on an asset before deduction of tax rebate under S. 107 of the Ordinance.
I.TA. No. 1671 to 1673 fol.
Oliver Peter Pervez, ITP for Appellant (in 41/IB of 1988-89, 1155/IB to 1157/IB of 1986-87).
Muhammad Jahangir Khan, D.R. for Respondent (in 41 /1B of 1988-89, 1155/IB to 1157/IB of 1986-87).
Muhammad Jahangir Khan, D.R. for Appellant (in 81/IB to 84/IB of 1988-89).
Oliver Peter Pervez, ITP for Respondent (in 81/IB to 84/IB of 19889).
Date of hearing: 3rd April, 1990.
ORDER
JUNEJO M. IQBAL (ACCOUNTANT MEMBER).---These are eight cross-appeals relating to the assessment years 1983-84 to 1986-87 four each by the assessee and the department, contesting the order of the learned C.I.T.(A), Rawalpindi, in Income Tax Appeals Nos.3699, dated 22-6-1986, 2131 and 2180 dated 4-5-1987 and 2317, dated 30-12-1987. The objection taken by the department in respect of all the four years under appeal relates to allowance of loss due to fluctuation in the foreign exchange rates. The other common ground raised by the department in respect of the charge years 1985-86 and 1986-87, calls in question the justification for allowing depreciation on the cost-of assets without deducting claim of tax credit under section 107 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance). The assessee on the other hand, contests the disallowance of interest accrued on foreign currency loans in respect of all the four years under appeals. As the issues involved are common, the same are disposed of by this consolidated order.
2. Relevant facts briefly stated are that a Private Limited Company, deriving income from the manufacture and sale of pharmaceuticals, was a regular assessee with the calendar years as the income years. Returns were filed for the charge years 1983-84, 1984-85, 1985-86 and 1986-87, showing income at Rs.59,73,342, Rs.1,04,75,159, Rs.1,50,74,779 and- Rs.1,18,46,691, respectively, During the course of examination of accounts, the 1.T.0. noticed that the assessee had claimed deductions on account of exchange loss and accrued interest on foreign currency loans iii all the four years as shown against each. Further depreciation was also claimed on the cost of the assets without deducting tax rebate under section 107 of the Ordinance in the charge years 1985-86 and 1986 87 as shown hereunder:--
| | 1983-84 | 1984-85 | 1985-86 | 1986-87 |
| 1. Loss on conversion of foreign exchange. | 19,92,594. | 2,68,153 | 9,66,464 | 2,82,424 |
| 2. Accrued interest in foreign currency loan. | 10,00,456 | 9,48,283 | 9,77,059 | 5,30,747 |
| 3. Tax credit under | | | 53,906 | 17,868 |
3.The I.T.O. treating these claims as inadmissible added back the amounts to the income of the assessee alongwith other additions, which are not the subject matter of these appeals.
4. Feeling aggrieved from the treatment meted out by the I.T.O., the matter was agitated before the learned C.I.T.(A), who accepted the claim of the assessee with regard to the loss on conversion of foreign exchange in all the four year relying on the decision of the Income Tax Appellate Tribunal in ITA No.56/IB 1985-86 Assessment year 1983-84. He further accepted claim of the assessee that while allowing depreciation on an asset, the tax credit under section 107 of the Ordinance should not be deducted from its costs in the years 1985-86 and 1986-87, when such claims were lodged. He decided this issue in the light of Tribunal's decision in ITA Nos. 1671, 1672 and 1673 dated 17-9-1986, in the case of I.T.O., Company Circle-8, Karachi v. National Printing & Package Limited. Karachi. He, however, agreed with the departmental view point that accrued interest on the foreign currency loans could not be allowed in all the four years under appeals. The department as well as the assessee have taken exception to the decision of first appellate authority and have preferred further appeals before: this Tribunal.
5. Mr. Oliver Peter Parvez, I.T.P., appearing on the behalf of the assessee Company submitted that there was a full Bench decision of the Income Tax Appellate Tribunal regarding the claim of loss on account of conversion of foreign exchange, which has been reported as (1986) P T D (Trib) 105.
6. As regards the disallowance of depreciation on the cost of assets without deducting tax credit under section 107 of the Ordinance this issue has also been settled by the Income Tax Appellate Tribunal, in ITA Nos. 1671, 1672 and 1673, decided on 17-9-1986 in the case of I.T.O., Company Circle-8, Karachi v. National Printing & Package Limited, Karachi.
7. The learned A.R. continuing his arguments, submitted that the learned C.I.T.(A) did not allow interest accrued on foreign currency loans obtained for meeting working capital requirements of the company due to erroneous interpretation of the law. He submitted that the disallowance was based on the interpretation of clause (b) of section 24 of the Ordinance which reads as under:-
"24. Deductions not admissible: --Nothing contained in section 23 shall be construed as to authorise the allowance or deduction--
(a).................................
(b) any sum paid to a non-resident on account of interest, brokerage or commission or by any sum chargeable under the provision of this Ordinance, .unless tax .there has been paid or deducted and paid under section 50 as the case may be:"
8. Continuing further the learned A.R. submitted that the' I.T.O. misdirected himself in interpreting the expression "paid" used in section 24(b) of the Ordinance while disallowing the interest secured on foreign currency loans. According to the I.T.O. the amount of interest claimed in P&L account should have actually been paid and tax thereon should have been deducted under section 50(3) of the Ordinance in order to be qualified to claim the deduction under section 23 of the Ordinance. The learned A.R. submitted that the expression "paid" used in this section means either actually paid or incurred according to the method of accounting on the basis of which the income is computed. In order to comprehend the meaning of the word "paid" appearing in section 24 of the Ordinance, one has to refer to section 50(3) of the Ordinance which states as under:--
Section 50. Deduction of tax at source.---
(I) ...............................................
(2)..............................................................................................................................
(3) Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance (other than income to which subsection (1) or subsection (2) applies) shall, unless such person is himself liable to pay tax thereon as an agent, deduct, at the time of payment at the rates specified in the First Schedule.
9. Dilating upon the subject, the learned A.R. submitted that tax is only to be deducted at the time of physical payment of the amount which may have accrued on the basis of mercantile system of accounting. In this regard, the learned A.R. referred to the decision of the Karachi High Court reported as (1990) P T D 248 wherein the expression "paid" as used in sections 10(2), 10(5) of the repealed Income-tax Act, 1922 has been interpreted. It was held in that case that if an assessee was employing mercantile system of accounting, provision made by such assessee for payment of bonus to its staff in its books of accounts without having yet paid the same is liable to be allowed under section 10(2)(x) of the repealed Income Tax Act. It was further held that the actual payment made afterwards in the next assessment year will not deprive the assessee of the benefit of section 10(4)(x).
10. The learned A.R. placed further reliance on a case of Indian jurisdiction, namely, C.I.T., Hyderabad v: Nagaria Oil Mills, reported as (1953) I T R 258. The learned A.R. was of the view that the facts of this case were on all fours with the facts of the, instant case. In the reported case, the word payment appearing in sections 12, 24(4)(12) of the Hyderabad Income Tax Act corresponding to sections 12(2)(iii)(5), 18(3-A)(7) of the Indian Income Tax Act, 1922, were interpreted to mean actual payment. This was a case of the firm maintaining its accounts on mercantile systems who credited certain non-residents with interest on monies borrowed from them and this interest was allowed as revenue deduction under section 12(2)(iii) of the Hyderabad Income Tax Act corresponding to section 10(2)(iii) of the Indian Income Tax Act. The Income Tax officer, however, held that as no tax was deducted from the interest, the assessee should pay on that amount the income tax at the maximum rate under section 24(12) of the Hyderabad Income-tax Act corresponding to section 18(3A) of the Indian Income Tax Act. It was held by the Hyderabad High Court that payment under section 24(4) corresponding to section 18(3A) should be interpreted as meaning actual payment and, therefore, crediting of interest amounts to the accounts of the lender could not be deemed to be the payment within the meaning of section so as to attract the provisions of section 24(12) of the Hyderabad Income Tax Act corresponding to section 18(7) of the Indian Income Tax Act. The order of the I.T.O. demanding the tax from the assessee was therefore, held to be not in accordance with law. Continuing his arguments, the learned A.R. submitted that the I.T.O. disallowed the claim of interest accruing on foreign currency loans by stating that "since the assessee admittedly maintained accounts on mercantile system and interest had been credited to the non-resident company account and the same was also charged to the profit and loss account, therefore, the interest as per provisions of law stood "paid". As such, it was obligatory for the assessee to have deducted the tax therefrom. The learned Authorised Representative submitted that in the light of the decision of the Hyderabad High Court, the word "payment" under section 24 of the Hyderabad Income Tax corresponding to section 18(3A) of the Indian Income Tax Act, which in turn corresponds to section 50(3) of the Pakistan Income-Tax Ordinance, .1979, should be interpreted as meaning actual payment. Since physical payment in the instant case under appeal was not made but only interest amount was credited to the account of the money-lender, the deduction of tax under section 50(3) of the Ordinance was not required. Therefore, the embargo, placed by section 24(b) that, "any sum paid to a non-resident on account of interest unless tax thereof has been paid or deducted under section 50 of the Ordinance" was not applicable to the facts of the present case. Under the circumstances, the I.T.O. was not justified in disallowing the claim of interest accrued on money borrowed from a non-resident in all the four- years under appeal.
11. Responding to the arguments put forth by the learned A.R. for the assessee Mr. Muhammad Jehangir Khan the learned D.R. submitted that the Income Tax Officer had disallowed the loss on account of conversion of foreign exchange because the foreign loan was repaid and was still outstanding alongwith interest accrued thereon. The loss would have accrued only if there was a physical payment of the loan which was premature to claim exchange loss on foreign currency loan. The I.T.O., therefore, had rightly disallowed the claim in all the four years under appeal.
12. As regards the disallowance of accrued interest, the learned D.R. submitted that the assessee had maintained the books of accounts on the mercantile system of accountancy and had charged the interest from the non-resident company. It was, therefore, mandatory for the assessee to -have deducted tax thereon and paid into the Government Treasury. Continuing further, the learned D.R. submitted that no doubt the explanation (b) to section 23(1) of the Ordinance states that the expression "paid" as used m that section and in sections 18, 24 and 31 means actual payment or acrual according to the method of accounting upon the basis of which income is computed, yet section 24(b), clearly limits the allowance or deduction of any sum paid to a non-resident on account of deduction of any sum paid to a non-resident on account of interest fee for technical services, brokerage or commission or any other sum chargeable under the provisions of this Ordinance unless tax thereon has been paid or deducted and paid under section 50(3) as the case may be. If this limitation, had not been there, the learned A.R.'s contention that it was not necessary to deduct the tax from interest charged to the account of the money-lender which would be done at the time of physical payment as provided under section 50(3) of the Ordinance would have been correct. The main obstruction in the way of the assessee for claiming the deduction for interest accrued and credited to the account of the lender was disability provided by section 24(b). Had this not been there then the loss of revenue would have been caused because any resident assessee could disappear without discharging the tax liability of a non-resident assessee. Continuing the learned D.R. submitted that section 50(3), explanation (b) to section 23(1) and section 24(b) have to be read together m order to arrive at the correct import of these provisions. According to the provisions contained under section 50(3), the tax on any sum chargeable under the provisions of this Ordinance should be deducted at the time of making payment to the non-resident and on the other hand, section 24(b) provides that deduction under section 23 would not be admissible to an assessee if any sum paid to a non-resident on account of interest, brokerage or commission or any other sum chargeable under the provisions of this Ordinance unless the tax thereon has been paid or deducted and paid under section 50 as the case may be. It was, therefore, very clear that in the instant case, the tax not having been deducted or paid under section 50, the assessee was not entitled to claim any allowance or deduction under section 23 and the I.T.O. had rightly disallowed the same in all four years under appeal.
13. Having regard to the allowance of depreciation without deducting the tax rebate under section 107 from the actual cost of the assessee the learned D.R. submitted that they had not accepted the decision of the Tribunal, which was against the department and had contested the issue in a reference. They would like to contest the same in- the present appeal as well.
14. We have heard the averments made by the learned representatives at the Bar at length and have given a serious thought to the issues involved in the present eight appeals. There are three issues involved in the present appeals requiring our decision. They are:
(i) Whether the loss can be allowed on account of fluctuation in the foreign exchange value of the loan obtained by the assessee for meeting its working capital requirement.
(ii) Whether interest secured on the foreign currency loan obtained from a non-resident can be disallowed where tax has not been deducted under section 50(3) of the Ordinance?
(iii) Whether depreciation can be allowed on the cost of the assets without deducting the tax credit under section 107 of the Ordinance?
15. Our answer to the issues involved in seriatim are as under:-
(I) Whether the loss can be allowed on account of fluctuation in the foreign exchange value of the loan obtained by the assessee for meeting its working capital requirement?
We think that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him on conversion in the nature of currency, such profit or loss would ordinarily be treated as profit or loss account if the foreign currency is held by the assessee on revenue account or as a trade assets or a part of circulating capital employed in the business. The point for consideration, however, is as to whether this profit or loss which arose on appreciation or depreciation, at what point of time a profit or loss arose on conversion of the currency into another currency. When the amount currency is devalued or revalued there is an appreciation or depreciation. At the point of time, there may be no question of conversion. Sometimes, conversion takes place later on. At that point of time, the profit should be computed and to which year would that profit or loss be attributable, that aspect needs consideration. We think that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency then such profit should be attributable either to capital or revenue if amount was held either as capital or as revenue. It is, therefore, character of the assets, which would decide nature or revenue nature.
16. Resorting to the facts of the present case, the record shows that loss has been claimed on account of conversion of foreign currency loan obtained from a non resident company which according to the I.T.O. has not yet been repaid and this loan has been obtained for meeting the working capital requirements of the company. As far as objection of the I.T.O. that loan has not been repaid, we would like to observe that in mercantile system of accounting physical payment is not necessary. Conversion can be considered on notional basis in such a case. Reduction in liability or consequent increase in taxable surplus would reflect at the end of the accounting year. The I.T.O.'s assertion would have been correct if the company had followed cash system of accounting which it did not. It is also well-settled as held by the Supreme Court of India in a case reported as C.I.T. v. Groz Backer Saboo Ltd. (1979) 116 I T R 125(SC) that where an assessee converts his capital asset into stock-in-trade (since this would be cost to the business and not the original cost to the assessee). With respect we hold that the I.T.O. was not justified in disallowing loss claimed on account of conversion of foreign currency loan obtained for meeting the working capital requirements of the company. Same was debitable to the profit & loss account. We, therefore, uphold the decision of the learned C.I.T.(A) in this regard.
17. Now coming to the second issue before us, let us frankly admit it was very difficult to arrive at the correct conclusion since both sides have very forcefully advanced convincing arguments in support of their points of view. The question to be considered is as to whether the interest arising outside Pakistan to the non-resident company in Pakistan is chargeable under the Ordinance. If it is, the assessee company having not paid or deducted tax thereon as provided under subsection (3) of section 50 of the Ordinance, whether is entitled to deduct interest payable to the non-resident company in computing its income chargeable under the head "profits" arid gains of business or profession".
18. Under section 9 of the Ordinance, the Income Tax shall be charged, levied and paid in respect of total income of every person for each assessment year. The total income has been defined under section 2(44) of the Ordinance to mean "total amount of income referred to in section 11 computed in the manner laid down in the Ordinance and includes any income which, under any provision of the Ordinance is to be included in the total income of an assessee.
19. Turning to section 11 of the Ordinance, we find that subsection (1) thereof, speaks of total income of the assessee and subsection (2) thereof, deals with the total income of the non-resident and under subsection (2) all income from whatever source derived.
(a) as received or deemed to be received in Pakistan in the income year by or on behalf of such person or
(b) accrues or arises or is deemed to accrue or arise to him in Pakistan during such year;
is the total income of a non-resident person.
20. Section 12 uses the words "all income accrued or arisen in Pakistan" and section 12(3) reads as under:
Section 12(3). Any income by way of interest payable by (a) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person outside Pakistan for the purposes of making or earning income from any source outside Pakistan; or
(b) a person who is a non-resident where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person in Pakistan or for the purposes of making or earning any income from any source in Pakistan shall be deemed to accrue or arise in Pakistan.
20. The interest payable by the assessee-company to the non-resident is therefore, the income coming within the purview of section 12(3)(a), extracted above so far as non-resident is concerned. Now the question arises as to whether the failure on the part of a Pakistani assessee company to deduct any tax and pay the same under section .50(3) of the Ordinance, would entitle it to claim deduction of interest payable to the non-resident and debit the same to its P&L account.
21. Before proceedings further, it would be advantageous to refer to a decision of the Supreme Court of India in the case of Aggarwal Chamber of Commerce v. Canpat-Rai-Hira Lal (1958) 33 I T R 245, which quoted with approval a passage from the decision of the Viscount Craves in Willams v. Singer (1920) 7 TC 387, 411(HL) which runs as under:
"The fact is that, if the Income Tax Acts are examined. it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but person in actual receipt and control of the income which it is sought to reach. The object of Acts is to secure for the State a portion of profits chargeable and this end is achieved (Speaking generally) by the simple and effective expedient of taxing the profits where they are found:"
22. With this principle in mind, we will examine the provisions which are relevant for present purposes namely 23(I), 24(b), 31 & 50(3) of the Ordinance. The perusal of the definition "paid" as given in Explanation to section 23(1) clearly indicates that it means the amount actually paid or incurred according to the method of accounting on the basis of which income is computed. Same meaning has been attached to the expression "paid" as used in sections 24 and 31 of the Ordinance as well. However, it is very clear that this meaning has not been extended to the expression "payment" as used under section 50(3) of the Ordinance which would naturally mean the tax paid or deducted and paid either at the time of actual payment or accrual during the income year, as the case may be. This view finds, support from the principle enunciated in the judgment of Viscoun Craves in Williams v. Singer (Supra) that profits are taxed where they are found. This view further finds support from the judgment of Mr. Brewer as appears from the quotation from his opinion in Stahl v. Education Association Methodist Church (54 Kan. 542: 38 Pac. 795), appearing at page 507 of Crawford Statutory Construction (1940 Edition) which as under:--
"All property receives protection from the State. Every man is secured in the enjoyment of his own no matter to what use he devoted it. This security and protection carry with them the corresponding obligation to support. It is an obligation, which rests equally upon all. It may require military service in the time of war or civil service in time of peace. It always requires pecuniary support. This is taxation. The obligation to pay taxes is coextensive with the protection received. An exemption from taxation is a release from this obligation. It is the receiving of protection without contributing to the support of the authority, which protects. It is an exception to a rule and is justified and upheld upon the theory of peculiar benefit received by the State from the property exempted. Nevertheless, it is an exception, and they who claim under an exception must show themselves within its terms:'
23. Part V of the Income Tax Rules, deals with Deduction of Tax at source, Procedure and Statements and rule 50 of the Income Tax Rules, 1982, provides the mode of payment of . tax deducted other than by or on behalf of the Government requiring every payer to deposit the amount deducted into the Government Treasury or authorised State Bank of Pakistan or National Bank of Pakistan within one week of such deduction and submit a statement in this regard to the Income Tax Authorities prescribed under rule 51 for the purposes of submission of such information duly supported by the Income Tax challan. Any one claiming either exemption from deduction or deduction at a lower rate under section 50(3) has to apply to the I.T.O. for issuance of a certificate in this regard under rule 59. It would, therefore, be observed that this machine has been envolved to safeguard interest of revenue by the Government in the light of principle enunciated earlier that the profits may be taxed where they are found.
24. Apart from the above observations, it would be noticed-that non-compliance with section 50(3) results in an additional tax at the rate of 15% per annum on the amount not paid for the period commencing from the date on which he was required to pay such tax to the date of payment thereof. Since the penalty by way of additional tax has been prescribed, for non-compliance with the provisions under section 50(3) the said section i.e. 50(3) has to be interpreted strictly being mandatory enactment. Therefore, non-deduction can be allowed under section 23(I) if the tax thereon has not been deducted at source and paid to the national exchequer under section 50(3) of the Ordinance. In arriving at this conclusion, reliance has been placed on Kerala High Court's decision in the case of C.I.T. Kerala v. Lakshmi Lines Company, reported as (1976) 102 I T R 196, where under the similar circumstances, interest paid to the non-resident without deduction of tax on the interest payable, was not allowed as an expenditure.
25. We have not been able to bring ourselves to agree with the proposition advanced by the Hyderabad High Court in the case of Nagaria Oil Mills (supra) for the simple reason that a strict interpretation has to be attached to the expression "payment" as used in section 50(3) of the Ordinance as a concession is being claimed to the assessee for a deduction from its income.
26. The upshot of the whole discussion is that any interest accrued or arisen on a loan obtained from a non-resident is chargeable to tax in Pakistan unless covered by clause (75) of the Second Schedule to the Ordinance or the person himself acts as an Agent under section 78 of the Ordinance. However, it is allowable as an expense debitable to the P&L account of the resident assessed in Pakistan only if tax thereon has been deducted and paid under section 50(3) at the time of actual payment or accrual during the income year as the case may be, on the principle of "taxing the profits where they are found".
27. In the present case, since no tax had been deducted at source under section 50(3) of the Ordinance, the embargo placed by section 24(b) was automatically activated disqualifying the assessee from allowance of interest payments under section 23(1) of the Ordinance. Both the officers below had correctly disallowed interest payable to the non-resident debited to the P&L account, and we maintain their orders on this score.
28. The third issue as to whether depreciation can be 'allowed on an asset before deduction of tax rebate tinder section 107, it has already been settled by the Tribunal in ITA No.1671 to 1673, decided on 17-3-1986, in the case of Income Tax Officer Company Circle-8, Karachi v. National Printing & Packing Ltd., which is against the department.
29. For the foregoing reasons, the impugned order of the learned C.I.T.(A) is maintained and all the appeals filed by the assessee as well as the department are hereby rejected.
M.BA./1195/TAppeals dismissed.