(a) Income Tax Ordinance (XXJLI of 1979)---

----First Sched. Part III----Part III, First Sched. of the Ordinance is meant and intended to laying down the rates of surcharge---Expression "10% of the income-tax and super-tax, if any, payable in the year" is quite independent of the expression "total income" of any person for the income year relevant to the assessment year.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 10 & First Sched Part III---Interpretation of S. 10---Surcharge under Part III, First Sched has to be levied @ 10% of the total income as assessed and not on the income-tax and super-tax payable.

(c) Income Tax Ordinance (XXXI of 1979)---

----Ss. 53 & 10---Interpretation of S. 53---Provisions of S. 53 have been enacted for purposes of advance payment of tax only and the provisions have not to be interpreted in such a way that they come in conflict with S. 10 of the Ordinance.

For purposes of payment of advance tax, the tax payable for the latest assessment year has to be determined either under section 59 or under section 62, 63 -or 65 as the case may be. It is important to note that this section specifically lays down that the tax payable for the latest assessment year as determined under section 59, 62, 63 or 65 shall be the full amount of income -tax and super-tax without making any adjustment for any tax already paid by way of advance tax or otherwise. Thus, it may be argued that the Legislature has not included the amount of surcharge in the amount of tax payable for the latest assessment year but it - would be stretching the argument too far to submit that the surcharge is to be worked out on the amount of tax payable as shown in the demand notice. Section 53 has been enacted for purposes of advance payment of tax only and its provisions have not to be interpreted in such a way that they come in conflict with provisions of section 10 of the income-tax Ordinance.

(d) Income Tax Ordinance (XXXI of 1979)--

----S. 54---Interpretation of S. 54---Provisions of S. 54 deal with payment of tax with return and the expression "tax payable" is qualified by the expression "on the basis of such return".

(e) Income Tax Ordinance (XXXI of 1979)---

----S.85---Interpretation of S. 85---Provisions of S. 85 deal with the amount of tax payable in consequence of any assessment order which includes adjustment of tax paid in advance or deducted at source---Expression "tax payable" in S. 85 is qualified by the expression "in consequence of any assessment order".

(f) Income Tax Ordinance (XXXI of 1979)---

----S. 23(i)(vii)---Allowance of interest as a deduction under S. 23(i)(vii) of the Ordinance---Ingredients---Burden of proof was on assessee to establish by evidence on record such ingredients.

The interest is allowed as a deduction under section 23(i)(vii) of the Income Tax Ordinance if an assessee can establish that--

(i) it borrowed some loan, and

(ii) it was used for the purposes of business, and

(iii) the assessee paid interest thereon, and

(iv) the deduction is claimed in the year in which interest has been paid.

The burden is on an assessee to establish by evidence on record aforesaid ingredients.

An assessee has to establish the four conditions before its claim is allowed and the burden of proof rests squarely on its shoulders. However, it is not his duty under the law to show to the I.T.O. that the loan which it is advancing to its directors is exigent to its business. How a business is to be run is to be decided by an assessee and not by the assessing officer. How he should run the financial affairs of his business is the question to be answered by the Lessee himself and not by the I.T.O.

As such, what the officers should have found out as a fact, was as to whether the amount borrowed was used in the business of the assessee or was used for the purposes of giving loans to its directors. In the present case the I.T.O. has mentioned in his assessment order that the account books were produced before him, as far as the assessee is concerned, it had discharged its burden regarding its claim of deduction of the mark-up.

1987 P T D 587 ref.

Commissioner of Income-tax v. Vegetable Products Ltd. (1978) 88 ITR 192 distinguished.

(g) Income Tax Ordinance (XXXI of 1979)---

----S. 23(i)(vii)---Allowance of interest as a deduction under S. 23(i)(vii)-- Where the I.T.O. had before him all the relevant material to find out as to whether the amount borrowed was utilized by the assessee in its business or not, initial burden stood discharged by the assessee---Income-tax Officer instead of holding that the amount borrowed was not used for the business purposes, directed the assessee to work out mark-up on product basis, he did and consequently I.T.O. disallowed the same ---Held Income-tax Officer had not made the add back out of the interest claimed according to law.

1987 PTD 587 ref.

M.D. Gangat, F.C.A. for Appellant.

Ashrafuddin Bhatti, D.R. for Respondent.

Date of hearing: 21st December, 1991.

ORDER

FARHAT ALI KHAN (CHAIRMAN): --Mr. M. D. Gangat, F.CA., appearing for the appellant, a private limited company, vehemently argues that the surcharge under Part III of the First Schedule appended to Income-tax Ordinance, 1979 should have been levied @ 10% of the income-tax and super tax payable and not on income-tax or super-tax assessed for the relevant assessment years. In order to fortify his submission, the learned F.CA. refers to Part III of the First Schedule of the Income-tax Ordinance, which is as under:

"Where the total income of any person for the income year relevant to the assessment year commencing on or after the first day of July, 1988, exceeds two hundred thousand rupees, the surcharge shah be payable at the rate of ten percent. of the income-tax and super-tax, if any, payable for that year:

Provided that the surcharge shall not exceed the amount equal to fifty percent. of the amount by which the total income exceeds two hundred thousand rupees."

He also refers to section 53(1), section 54 and section 85(1) of the Income-tax Ordinance which are also reproduced hereinbelow:

"Section 53: -(1) Where the total income of any assessee (excluding income to which section 27 or subsections (1) and (2) of section 50 applies) for the latest assessment year in respect of which the tax payable by him has been determined under section 59, 59A, 60, 62, 63 or 65 is, in the case of a company not less than fifty thousand rupees, and in other cases not less than one hundred and fifty thousand rupees, he shall pay, by way of advance tax, to the credit of the Federal Government, on or before the fifteenth day of September, the fifteenth day of December, the fifteenth day of March and the fifteenth day of June in each financial year, an amount equal to one- fourth of the full amount of income-tax and super-tax so determined to be payable in respect of that assessment year (without making any adjustment for any tax already paid by way of advance tax or otherwise), as reduced by the tax, if any, already collected or deducted and paid under section 50 in the said financial year.

Section 54: -Every person who is required, under this Ordinance to furnish a return of total income shall pay the tax payable, on the basis of such return, on or before the date on which he is so required to furnish such return:

Provided that where such person has paid any sum under subsection (1) or subsection (2) of section 53, the Income-tax Officer shall adjust the said sum against the tax payable under this section.

Section 85.--(1) Where any tax is payable in consequence of any assessment or other order under this Ordinance, the Income-tax Officer shall serve upon the assessee, or any other person liable to any such tax on behalf of the assessee, a notice of demand in the prescribed form specifying the sum payable; and thereupon the sum so speed shall be paid to the credit of the Federal Government within the time specified in the said notice."

In order to lend further support, the learned authorised representative also relies on a decision of Indian Supreme Court reported as (1978) 88 ITR 192 (Commissioner of Income-tax v. Vegetable Products Limited). Mr. Ashrafuddin Bhatti, the learned D.R., on the other hand, relies on the impugned order of different learned Commissioners of Income-tax (A) recorded by them on 2nd September, 1990 and 28th August, 1991 relating to assessment years 1989-90 and 1990-91. In first impugned order, the learned C.I.T. (A) has rejected the same argument of Mr. Gangat firstly because the expression "tax assessed" was not used by the Legislature anywhere in the Income-tax Ordinance, as such, it could not be argued that the Legislature made any distinction between the expressions "tax payable" and "tax assessed" and secondly because the decision of Indian Supreme Court was not applicable in Pakistan. In second impugned order, the learned C.I.T. (A) after distinguishing aforesaid Indian Supreme Court decision has confirmed the levy of surcharge on total amount of tax liability as it is to be levied after determination of the total tax liability.

2. The brief facts giving rise to this controversy are that the tax liability of the appellant was assessed at Rs.2,02,39,620 and Rs.4,33,16,218 and the Income-tax Officer levied .surcharge @ 10% at Rs.20,23,962 and Rs.43,31,621 as against the case of the appellant that it should have been levied at 10% of Rs.6,73,450 and Rs.24,31,9 78 which were the amounts shown in demand notice in assessment years 1989-90 and 1990-91 respectively. Needless to say that this treatment has been confirmed by separate impugned orders.

3. We have given our serious consideration to the submission made at Bar. Undoubtedly, if we read Part III of the First Schedule of the Income-tax Ordinance, the argument of Mr. M. D. Gangat appears to carry same force for the simple reason that the expression "10% of the income-tax and super-tax, if' any, payable in that year" appears to be quite independent of the expression "total income" or any person for the income year relevant to the assessment year. But unfortunately, Part III of the 'First Schedule is meant and intended for laying down the rates of surcharge. The fate of these appeals, therefore, does not hinge on its interpretation. On the other hand, Part III of the First Schedule of the Income-tax Ordinance instantly reminds us of section 10 which in fact, lays down the authority for charging super-tax and surcharge. Its interpretation, therefore, would clinch the issue. Let us, therefore, reproduce it and it reads as under:-

"Section 10.--(1) In addition to the income tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income, or any part thereof, ref the income year or years, as the case may be, of every person, an additional duty of income tax (in this Ordinance referred to as `super-tax') and surcharge at the rate or rates specified in the First Schedule.

(2) Subject to the provisions of this Ordinance, the total income of any person shall, for the purposes of super-tax and surcharge, be the total income as assessed for the purposes of income-tax, and where an assessment has become final and conclusive for the purposes of income-tax for any year, the assessment shall also be final and conclusive for the purposes of super-tax or surcharge, as the case may be, for the same year."

4. Now from perusal of subsection (1) of section 10, it appears that the Legislature is' authorising the levy of super-tax and surcharge. However, it is specifically mentioning that it is "in respect of the total income" and the words "in respect of again leave room to accommodate the argument of Mr. Gangat. But subsection (2) of section 10 proves to be fatal for the submission of the learned F.C.A. simply because it specifically lays down that the total income of any person, for purposes of super-tax and surcharge, shall be the total income as assessed for purposes of income-tax. Here the Legislature has avoided the use of the word "tax payable" which, of course, has been used in sections 53, 54 and 85 and surely in Part III of the First Schedule of the Income-tax Ordinance. We would revert back to the analysis of sections 53, 54 and 85 but as far as Part III of the First Schedule of the Income-tax Ordinance is concerned, it leads Mr. Gangat to a dead end for the simple reason that it is to be controlled and governed by section 10 of the Income-tax Ordinance which is I charging section. Now if we read Part III of the First Schedule of the Income tax Ordinance with subsection (2) of section 10, we are left in no doubt that both the officers below have reached correct conclusion.

5. Now turning to section 53, it appears from its perusal that for purposes of payment of advance tax, the tax payable for the latest assessment year has to be determined either under section 59 or under section 62, 63 or 65 as the case may be. It is important to note that this section specifically lays down that the tax payable for the latest assessment year as determined under section 59, 62, 63 or 65 shall be the full amount of income-tax and super-tax without making any adjustment for any tax already paid by way of advance tax or otherwise. Thus, it may be argued that the Legislature has not included the amount of surcharge in the amount of tax payable for the latest assessment year but it would be stretching the argument too far to submit that the surcharge is to be worked out on the amount of tax payable as shown in the demand notice. Section 53 has been enacted for purposes of advance payment of tax only and its provisions have not to be interpreted in such a way that they come in conflict with provisions of section 10 of the Income Tax Ordinance.

6. Now as far as section 54 is concerned, it is dealing with payment of tax with return and the expression "tax payable" is qualified by the expression "on the basis of such return". Thus this section also does not come to the rescue of Mr. Gangat.

7. Now turning to section 85 of the Income Tax Ordinance, it appears from its perusal that it deals with the amount of tax payable in consequence of any assessment order which, of course, includes adjustment of tax paid in advance or deducted at source. Like section 54, the expression "tax payable" has been qualified by the expression "in consequence of any assessment order". This section, therefore, also does not support the appellant at all. Both the appeals, therefore, fail on this point. ,

8. The next argument of Mr. Gangat is against the disallowance of Rs.7,72,000 out of the claim of mark-up amounting to Rs.20,39,459 made in assessment year 1989-90. According to him, the appellant had taken a loan of Rs.6,49,99,342 out of which the investment was made in purchasing shares worth Rs.5,22,42,759 in the relevant assessment year and Rs.1,27,56,583 in immediately preceding year. He concedes that the appellant had advanced loan of Rs.4,86,37,668 to its Directors on which no interest was charged. He argues that aforesaid amount was paid out of the funds of appellant as the paid-up capital as on 30th June, 1989 stood at Rs.12,42,54,189. He argues that since the borrowed amount was used in the business of the appellant by way of purchasing of the shares, both the officers below were not justified in disallowing mark-up to the extent of Rs.7,72,000. Mr. Ashrafuddin Bhatti, the learned D.R., on the other hand, vehemently argues that it was the duty of the appellant to establish that it used the borrowed money for purposes of the business before its claim of mark-up could be allowed and since it had failed to do so, both the officers below quite rightly, disallowed aforesaid amount.

9. We have heard both the learned counsel for the appellant as well as learned D.R. From perusal of assessment order, it appears that the I.T.O. disallowed aforesaid amount with the following observation:

"The Company had made advances of a total amount of Rs.48,67,77,000 on which interest has not been charged, although assessee-company has paid mark-up on its own borrowings. Mark-up of these advances is to be added to the income of the assessee on product basis for which details and working has been obtained and placed on record. Total mark-up on these comes to Rs.7,72,000 which is being added as discussed above."

10. On the other hand, the learned C.I.T. (A) has confirmed the order of the I.T.O. with the following remark:

"The important point to be considered in this regard is whether the advancement of the said loan was exigent to the business under reference or not. As it was not proved to be so by the appellant, the advancement of loan to the directors and the resultant borrowing from the bank to the extent of loans advanced was not `for the purposes of the business of profession'."

11. But with due respect to both of them, we think that they have misdirected themselves in law. The interest is allowed as a deduction under section 23(i)(vii) of the Income Tax Ordinance if an assessee can establish that--

(i) it borrowed some loan, and

(ii) it was used for the purposes of business, and

(iii) the assessee paid interest thereon, and

(iv) the deduction is claimed in the year in which interest has been paid.

Undoubtedly, the burden is on an assessee to establish by evidence on record aforesaid ingredients. Mr. Gangat submits that he submitted his balance-sheet to the I.T.O. wherein not only the amount of paid-up capital was established but also the loans given to the Directors and the amount borrowed from the banks together with the investment in purchasing shares and securities have been shown. Thus, the I.T.O. had before him, all the relevant material to find out as to whether the amount borrowed was utilised by the appellant in its business or not. Thus, the initial burden stood discharged (for discussion on burden of proof, please see 1987 PTD 587). Thus, the ball came in the Court of the assessing officer, who instead of holding that the amount borrowed was not used for business purposes, directed the appellant to work out the mark-up on product basis, which it did and consequently the I.T.O. disallowed it. With due respect to him, we think that he has not made the add back of Rs.7,72,000 out of the interest claimed according to law.

12. Now when we turn to the impugned order, it appears that the learned C.I.T.(A) has also committed the same mistake. He appears to have confirmed the add back because the assessee had failed to prove that the loan advanced to its directors was "exigent to the business". With due respect to him, this is a clear misdirection regarding burden of proof. An assessee has to establish the four conditions as discussed above before its claim is allowed and the burden of proof rests squarely on its shoulders. However, it is not his duty under the law to show to the I.T.O. that the loan which it is advancing to its Directors is exigent to its business. How a business is to be run is to be decided by an assessee and not by the assessing officer. How he should run the financial affairs of his business is the question to be answered by the assessee himself and not by the I.T.O. Previously, such types of loans were exposed to levy of interest under section 12(7) of the Income-tax Ordinance. But now the relevant assessment year, it did not exist. In this year, neither the appellant was required to charge any interest on the amount given as loans to its Directors nor the assessing officer is competent to levy it. As such, what both the officers below should have found out as a fact, was as to whether the amount borrowed was used in the business of the appellant or was used for the purposes of giving loans to its Directors, but unfortunately, they have put the cart before the horse. Since the I.T.O. has mentioned in his assessment order that the account books were produced before him, we think that as far as the assessee is concerned, it had discharged its burden regarding its claim of deduction of the mark-up. We, therefore, allow the appeal for assessment year 1989-90 and direct the I.T.O. to allow the entire claim of mark-up. Both the appeals stand disposed of as indicated above.

13. Before parting with these appeals, let us also observe that the aforesaid case of the Indian Supreme Court has been quite rightly distinguished by both the learned Commissioners and it needs no comments from us.

M.BA./1253/TOrder accordingly