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

----Sched. I, Part IV, Para. B(2)(a)---General Clauses Act (X of 1897), S.3(21)---Central Board of Revenue Circular No.6 of 1981---Bank of Punjab Act (XII of 1989), Preamble ---Assessee a corporate body formed by or under any law for the time being in force has the status of a company for the purpose of assessment under the Income Tax Ordinance, 1979---Word `Government' as used in Sched. I, Para IV, B(2) of the Ordinance would cover the Provincial Government as well---Where 60% shares of a corporate body (Bank) were held by the Provincial Government that body being a `public company' within the meaning of para. B(2)(a) and Part IV, First Sched of the Ordinance was consequently liable to charge of tax at the rates prescribed in the First Schedule for a public company.

Assessee being a body corporate formed by or under any law for the time being in force (i.e. Bank of Punjab Ad, 1989) has thus the status of a company for the purpose of assessment under the Income Tax Ordinance. The Income Tax Ordinance requires an assessing officer to determine the income and to determine the tax payable for which the First Schedule contains the rates (etc.). Part IV at paragraph B defines certain terms `as used in Schedule'. Here a `public company' has been defined at clause 2(a) to mean a company in which not less than 50% of the shares are held by the Government'. The Government having not been defined in the Income Tax Ordinance it is imperative to refer to the General Clauses Act which at section 3(21), leaves no room for doubt that the word `Government' as used in paragraph B(2) of Part IV of the First Schedule would cover the Provincial Government as well. Therefore, where 60% (later on 51%) shares are held by the Government of Punjab the body corporate known as the Bank of Punjab is a `public company' within the meaning of Paragraph B Clause 2 of Part IV to the First Schedule of the Income Tax Ordinance and consequently, entitled to charge of tax at the rates prescribed in the First Schedule for a `public company'. It is significant that the definition of `public company' has been differently worded in section 2(16) of the Ordinance vis-a-vis Para. B(2) of Part IV of the Schedule. Therefore, C.B.R. Circular No.6 of 1981 dated 17-3-1981 was issued with a view to clarify scope of the definition of `public company' for purpose other than the First Schedule. It thus clearly emerges that for purpose of charge of tax (of which rates as prescribed in the First Schedule) only that definition is to be adhered to as is obtaining in Para. B(2) of Part IV of this Schedule. The assessee is fully covered by the definition at 2(a) of Para. B of Part IV of the First Schedule, to be categorised as a `public limited company' for charge of tax.

(1965) 58 ITR 429; 1980 PTD 329; PLD 1985 SC 97 and ITA No.4509(LB) of 1986-87 ref.

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

----S. 23(1)(xvui)---Words `wholly and exclusively'---Connotation---Bifurcating the income between the `activity taxable' the `activity exempt' and the `activity liable to tax at a lower rate' by Assessing Officer was erroneous.

1992 PTD (Trib.) 1141 fol.

(1976) 33 Tax 23 (Trib.); 1980 PTD (Trib.) 68; 1965 PTD 515; (1976) 33 Tax 23 (Trib.); (1978) 115 ITR 519; (1979) 40 Tax 27 (Trib.) and (1984) 50 Tax 196 (Kar.) ref.

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

----S. 23(1)(vii) & (xviii)---Assessee, a banking company---Interest expense relating to banking business would qualify for deduction in computing income from business or profession.

Banking business being a composite activity cannot be bifurcated into sub-trades for computing income; that interest paid on borrowed capital invested in a tax free source is a permissible deduction against business income; and that there is no warrant in law to disallow a proportionate part of the interest expense. Moreover, that dividend income of any investment company has to be assessed under the head income from business or profession and not under income from other source. The entire income of the assessee whether from interest, dividend (etc.) would fall under the head `income from business or profession because all these generate income in pursuance of the activity of banking business. The logical conclusion is that the interest disbursed by the assessee is clearly attributable to the capital borrowed for the purpose of their banking business and consequently an admissible deduction. Therefore, whichever way one looks having in mind clause (vii), or clause (xviii) of subsection (1) of section 23 of the Ordinance he finds the interest expense (as claimed) relating to banking business and thus qualified for deduction in computing income from business or profession.

(1976) 33 Tax 23 (Trib.); (1979) 40 Tax 27 (Trib.) and 1992 PTD (Trib.) 1141 ref.

Ahmad Shuja Khan, Naeem, Advocate Akhtar CA. and Muhammad Khalid, Advocate for Appellant.

Ilyas Khan, CA., Munir A. Sheikh, IAC/DR and Abid Hussain, ITO for Respondent.

Date of hearing: 17th January, 1993.

ORDER

A.A. ZUBERI (ACCOUNTANT MEMBER).--- This appeal has been filed at the instance of a company to impugn order dated 6-5-1992 passed by the learned Commissioner (Appeals) Zone I, Lahore in respect of the assessment year 1991-92.

The learned counsel for the appellant (Mr. Ahmad Shuja Khan, Advocate explained that the appellant, known as the Bank of Punjab, came into existence by virtue of the Bank of Punjab Act, 1989 gazetted on 30-7-1989. Though a statutory body, the appellant is not a company in the conventional sense. It commenced its business on 16-11-1989 and the first accounts were closed on 31-12-1990 hence the present assessment 1991-92 is the first assessment for a period of 13.5 months. Return was filed declaring income at Rs.10,643,350 and the assessment framed at a total income of Rs.37,874,163. The assessing officer assigned the status of a Private Limited Company to the appellant as against the claim of status of Public Limited Company. In addition to this controversy, the appellant is aggrieved by the treatment meted out to the claim of interest expenses at Rs.122,383,100 against which the assessing officer allowed Rs.104,025,635. These two issues are discussed and adjudicated hereafter.

STATUS: The learned counsel submitted that subsection (2) of section 3 of the Bank of Punjab Act, 1989 stipulates the Bank to be a body corporate, a fact which has been admitted by the assessing officer in the body of his order. Section 7 of the same Act prescribes that Government shall be shareholder to the extent of 60% of the shares at all times (later this percentage was changed to 51%). The learned counsel then took us to section 17 of the Bank of Punjab Act relating to the votes of shareholders and to section 10 thereof, pertaining to the constitution of the Board of Directors. To demonstrate that there was no provision in the Bank of Punjab Act placing any restriction on the purchase and sale of shares nor there was any in respect of the voting powers of the shareholders, our attention was drawn to Part II of the Prospectus of the Bank of Punjab from which it is manifest that the Bank `shall be a commercial bank' and confine its business within the geographical boundaries of the Province of Punjab and that its operational functions include `activities those of scheduled commercial banks'. Here also Mr. Ahmad Shuja Khan, the learned AR emphasised, there was no restriction on the purchase/sale of shares nor on the voting powers of the shareholders. It was admitted by the learned counsel that the shares of the appellant were not quoted on any stock exchange in Pakistan till 31-12-1990. The learned counsel then referred to the definition of a company as obtaining in subsection (16) of section 2 of the Income Tax Ordinance and made a particular reference to the following clauses:

"S. 2(16) (a) ..................................................

(b) a body corporate formed by or under any law for the time being in force; or

(bb) ..................................................................

(c) ..................................................................

(d) The Government of a Province

(e) ??????????????"

The learned counsel attempted to develop the argument `that since the appellant is a body corporate formed under any law for the time being in force (i.e. the Bank of Punjab Act, 1989), it qualified to be treated as a company under clause (b) of subsection (16) of section 2 of the Ordinance. Moreover, since more than 50% of the shares were owned by the Government of Punjab it equally qualified to be a company as per clause (d) if treated as the Government of a Province. After demonstrating that there is no dispute that the appellant is a company under the Income Tax Ordinance Mr. Ahmad Shuja Khan, the learned AR, proceeded to establish that the appellant is a public company, for which reference was made to para. B(2) of Part IV to the First Schedule of the Income Tax Ordinance where the explanation `Public Company' has been defined as under:--

"Public Company" means--

(a) a company in which not less than fifty per cent. of the shares are held by the Government;

(b) a company whose shares were the subject of dealings in a registered stock exchange in Pakistan at any time during the income year and remained listed on the stock exchange till the close of that year; or

(c) a trust formed by or under any law for the time being in force.

In this connection, to our notice was brought CBR Circular No.6 of 1981, dated 17-3-1981 reported as (1981) 343 Tax 115 (Statutes) where `public company' has been assigned the same meaning as in the Companies Act, 1913, unequivocally proclaiming that the words `Government' and `the Government' shall include Federal as also Provincial Governments. To further develop his argument the learned counsel drew our attention to certain provisions of the Income Tax Ordinance, such as sections 50(7-A), 53(4) etc. to canvass that the Ordinance has consciously used the words Federal Government, or the Provincial Government where such particular Government was to be specifically referred to, but where the intention is to refer to both the Federal or Provincial Governments, more encompassing expressions: Government, or the Government, were used. It was submitted that the officers below erred in restricting the interpretation of the word `Government' to mean the Federal Government of Pakistan alone, so as to oust the appellant from the status of a `public company' for the charge of tax under the First Schedule and to subject it to income-tax at 30% and super-tax at 20% in the status of a `private limited company' Had they assigned the status of a `public company', as claimed the rates would have been lower. In support of his arguments, the learned counsel placed reliance on decisions by the superior Courts reported as (1965) 58 ITR 429 (HC India), 1980 PTD 329, P L D 1985 SC 97 and ITA No.4509(LB) of 1986-87, dated 17-4-1989. The learned counsel concluded that in the light of foregoing arguments it was clear that the appellant is entitled to be treated as a Public Limited Company because admittedly it is a company and not less than 50% of the shares are held by the Government (i.e. the Government of Punjab) as required by paragraph B(2)(a) of the Part IV of the First Schedule to the Income Tax Ordinance.

In the alternative, it was pleaded by the learned counsel that the appellant applied on 24-1-1990 to the Karachi Stock Exchange and on 28-1-1990 to the Lahore Stock Exchange for `listing' so that their shares become subject of dealings in a recognised stock exchange. These remained withheld for no reason and finally on 17-7-1991 and 6-3-1991 (without any further documentation or query) the appellant was `listed' with the result that the delay in quoting of their shares on the stock exchanges was not due to any fault of the appellant but due to an act of omission on the part of the stock exchanges. In this background Mr. Ahmad Shuja Khan, the learned AR pleaded that the permission granted by the two Stock Exchanges should be related back to the date on which applications were moved. On this basis, according to the learned counsel, the appellant would further qualify to be treated as a public company as per clause (b) of section 2 of Para. B of Part IV of First Schedule to the Income Tax Ordinance.

The learned Legal Advisor Mr. Muhammad Ilyas Khan, Advocate appearing for the Department conceded that the appellant is a public company being a body corporate and emphasised that though created by a statute, the appellant was not declared a scheduled bank by the State Bank of Pakistan for conducting banking business as required by section 5(b)/(c) of the Banking Companies Ordinance, 1962. Mr. Ilyas Khan, the learned I.A. referred to clause 32 of section 2 of the Income Tax Ordinance where definition of person includes (among others) every artificial juridical `person' and to clause 31 of section 2 where `Pakistani Company' means (among others) a body corporate formed by, or under any law for the time being in force in Pakistan. It was frankly conceded by the learned Legal Advisor that the term the Government as appearing in the Income Tax Ordinance, such as in paragraph B(2)(a) of Part IV to the First Schedule of the Ordinance, would cover both the Federal and Provincial Governments because no definition of this expression is obtaining in the Income Tax Ordinance hence reliance is to be placed on section 3(21) of the General Clauses Act.

Having applied our mind to the arguments advanced from the two sides, we are of the view that there is no controversy as respect the appellant being a body corporate formed by or under any law for the time being in force (i.e. Bank of Punjab Act, 1989) and that it has thus the status of a `company' for the purpose of assessment under the Income Tax Ordinance. Now, the Income Tax Ordinance requires an assessing officer to determine the income and to determine the tax payable for which the First Schedule contains the rates (etc.). Part IV at paragraph B defines certain terms `as used in Schedule'. Here a `public company' has been defined at clause 2(a) to mean a `company in which not less than 50% of the shares are held by the Government'. The Government having not been defined in the Income Tax Ordinance it is imperative to refer to the General Clauses Act which at section 3(21), leaves no room for doubt that the word `Government' as used in paragraph B(2) of Part IV of the First Schedule would cover the Provincial Government as well. Therefore, the inference is inescapable that in a situation where, 60% (later on 51%) shares are held by the Government of Punjab the body corporate known as the Bank of Punjab is a `public company' within the meaning of paragraph B, Clause 2 of Part IV to the First Schedule of the Income Tax Ordinance and consequently, entitled to charge of tax at the rates prescribed in the First Schedule for a public company. It is significant that the definition of `public company' has been differently worded in section 2(16) of the Ordinance vis-a-vis para. B(2) of Part IV of the Schedule. Therefore, in C.B.R. Circular No.6 of 1981 dated 17-3-1981 = (1981) 43 Tax 115 (Statute) was issued with a view to clarify scope of the definition of `public company' for purpose other than the First Schedule. It thus clearly emerges that for purpose of charge of tax (of which rates as prescribed in the First Schedule) only that definition is to be adhered to as is obtaining in para. B(2) of Part IV of this Schedule. As an upshot the appellant is held by us fully covered by the definition at 2(a) of para. B of Part IV of the First Schedule, to be categorised as a public limited company' for charge of tax.

INTEREST EXPENSES: The learned counsel explained that on their borrowings they had disbursed interest at Rs.122,383,100. The assessing officer, however, allocated the expense to investment in FEBCs at Rs.11,014,479 and NIT units at Rs.7,342,986 because from these, income is either exempt or taxable at a lower rate. The reliance by the appellant on this Tribunal decision reported as (1976) 33-Tax-23 (Trib.) was turned down by the officers below despite the Tribunal having held that a trade cannot be sub-divided into sub?-trades such as the exempt or the taxable activity. It was pleaded by the learned counsel that the claim was allowable both under clause (vii) and clause (xviii) or subsection (1) of section 23 of the Ordinance. Mr. Ahmad Shuja Khan, the learned AR was emphatic that the deposits by the clients of a Bank represent capital borrowed for purposes of business consequently the interest paid thereon was to be allowed under clause (vii) of section 23(l). Looking from another angle, the expenditure on account of interest disbursement was "not in the nature of a capital expense or a personal expense" and was in fact "laid not or expended wholly or exclusively for the purpose of such business" thus permitting deduction under clause (xviii) of section 23(1). Therefore, the officers below unnecessarily laboured to attribute part of the interest claim to income from FEBCs and part to dividend income from NIT, the former being exempt and the latter liable to tax at a lower rate. It was submitted that the banking activity conducted by the appellant warrants prudent and safe investment of sums received as deposits, thus the' earnings (as also disbursements) from all sources are to be taken as business income particularly when the entire borrowing was for the purpose of running the banking business. It was immaterial whether the expense related to sources, which were exempt, or liable to lower rate, or totally chargeable to tax. It was the composite result of the entire activity which was to be worked out and the assessing officer had no authority in law to allocate expenses to any particular source of income.

As an alternative plea, learned counsel, Mr. Ahmad Shuja Khan, submitted that if at all the interest expenses is to be allocated between the taxable income and the other income (exempt etc.) then the allocation should be on the basis of actual investment and not the investment standing on the closing date which the assessing officer has made a basis. For this the learned counsel placed before us the date wise position of various investments. In support of his stand, the learned counsel referred to certain decisions on this issue such as 1980 PTD (Trib.) 68. He further quoted decisions reported as 1965 PTD 515, (1976) 33 Tax 23 (Trib.), (1978) 115 ITR 519 (SCI), (1979) 40 Tax 27 (Trib.) and (1984) 50 Tax 196 (Kar.). The arguments about the interest were addressed to us by the learned counsel for the appellant on 17-1-1993 resuming the inconclusive hearing from 16-1-1993. Unfortunately neither the DR appeared on this date nor the legal advisor for the Department showed up. The ITO (viz. Mr. Abid Hussain) who was present expressed his inability to advance any arguments because he was expected only to make the record available while the arguments were to be addressed by the DR and the legal advisor.

After an appraisal of the contentions at issue and on going through the record we need not take long to refer to this very Bench decision reported as 1992 PTD (Trib.) 1141 where having considered the provisions of clause (xviii) of section 23(1) of the Income Tax Ordinance, we had observed that the significant words in this piece of legislation are "wholly and exclusively" thereby indicating that only such expenditure "shall" be allowed as are clearly relatable to a particular income. We had finally held: --

"It appears that to avoid such minute (but fruitless) labour, the framers of law thought it fit in their wisdom to restrict the expenditure to the extent as is `wholly and exclusively' spent on the earning of such income. We are, therefore, of the view that the interpretation of this particular provision of law rules out `allowances or deduction' in respect of those expenses which are not susceptible to co-relation and can only be determined (if at all) through a painstaking process of allocation (or bifurcation) for particularisation as attributable to the earning of dividend income. The principles for interpretation for fiscal statutes are so well-settled that no authority need be cited to hold; nothing should be read in a taxing statutes, which is not evident from the plain language used by the legislature and that no sophistry be employed to enlarge the scope beyond the one emerging from the unambiguous words of the enactment. On this beneficial construction of law, we do not subscribe to the view that expenditure which the present appellant does not claim to have been incurred wholly and exclusively for the purpose of earning dividend income should be thrust upon them simply because the income from dividend has a different (or a lower) rate of tax In forming this view we have immensely benefited from a ruling reported as 1988 PTD 626 in re: PICIC where the learned Judges of the Karachi High Court had in mind their earlier decisions in 1984 PTD 341 and 1984 PTD 390 to rule `no part of the total administrative and other expenses and interest should be allocated against dividend income which was exempt from tax and other income which was not so exempt'. In the appeal before us the controversy is of lesser magnitude inasmuch as it does not entail total exemption but simply a lower rate of tax for the dividend income. Respectfully following the decision (ibid), we vacate the treatment by the officers below with the result that the appeal on the issue succeeds."

The circumstances in the appeal in hand are markedly identical. Therefore, adhering to our above-quoted view, we need not take long to UNDO the treatment meted out by the assessing officer and to hold that it was erroneous to bifurcate the income between the activity taxable, the activity exempt and the activity liable to tax at a lower rate.

Although the impugned add back out of interest expense has been deleted by us it may still be of advantage to reaffirm that this Tribunal has already held in (1976) 33 Tax 23 (Trib.) that banking business being a composite activity cannot be bifurcated into sub-trades for computing income; that interest paid on borrowed capital invested in a tax free source is a permissible deduction against business income; and that there is no warrant in law to disallow a proportionate part of the interest expense. Moreover, it was held in (1979) 40 Tax 27 (Trib.) that dividend income of any investment company has to be assessed under the head `income from business or profession' and not under `income from other sources'. The cumulative effect of these findings supports the view canvassed by Mr. Ahmad Shuja Khan that the entire income of the appellant whether from interest, dividend (etc.) would fall under the head `income from business or profession' because all these generate income in pursuance of the activity of banking business. The logical conclusion is that the interest disbursed by the appellant is clearly attributable to the capital borrowed for the purpose of their banking business and consequently an admissible deduction. Therefore, whichever way we look having in mind clause (viii), or clause (xviii) of subsection (1) of section 23 of the Ordinance we find the interest expense (as claimed) relating to banking business and thus qualified for deduction in computing income from business or profession.

To sum up: adhering to the view expressed by this Tribunal in (1979) 40 Tax 27 (Trib.) and m 1992 PTD (Trib.) 1141 we tees no hesitation in deleting the add back of Rs.18,357,465 out of claim for interest expenses.

Before parting with this appeal, it appears appropriate to acknowledge the diligence of the learned counsel (Mr. Ahmad Shuja Khan, Advocate) for digging out sufficiently old but highly relevant case-law and also for his industry in setting out facts in a logically convincing manner. This enabled us to appreciate the points at issue and helped their resolution.

For the reasons recorded hereinabove, the appeal SUCCEEDS on the two issues brought to us for adjudication.

M.BA./2116/T ?????????????????????????????????????????????????????????????????????????????????? Appeal allowed.