ITAS. NOS. 1449/KB, 1450/KB, 1451/KB OF 1985-86, 4263/KB, 4264/KB OF 1987-88, VS ITAS. NOS. 1449/KB, 1450/KB, 1451/KB OF 1985-86, 4263/KB, 4264/KB OF 1987-88,
1993 P T D (Trib.) 722
[Income Tax Appellate Tribunal Pakistan]
ITAs. Nos. 1449/KB, 1450/KB, 1451/KB of 1985-86, 4263/KB, 4264/KB of 1987-88, 230/KB, 72/KB of 1989-90 and 1395/KB of 1990-91, decided on 09/12/1992.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 50---Assessee, a non-resident company carrying on business through its branch in Pakistan---Head Office, outside Pakistan, allegedly borrowed money from share holders abroad and- it was brought to Pakistan to meet the requirements of Banking Companies Ordinance, 1963 and those of State Bank of Pakistan---Assessee, out of said money purchased government securities and claimed interest on such borrowing---Held, such an expense claimed as interest would only be allowed when any of the two requirements were met with i.e. either the tax on the interest had been deducted or it had been paid.
Howrah Trading Company (Private Limited) v. Commissioner of Income Tax East Pakistan (1963) 8 Tax 59 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1)(xx), Explanation (b), 18, 24 & 31---Expression "paid" as used in S.23(1)(xx), Explanation (b) and Ss.18, 24 & 31 means actually paid or incurred according to the method of accounting upon the basis of which the income is computed.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 50(3), 23(1) (xx), Explanation (b)---Words "paying" and "the time of payment" in S.50(3) mean the actual payment or the payment made as per method of accountancy regularly employed by the assessee and its application could be stretched to S.50(3) for deduction at source---Word "paid" has to be considered in the context of method of accounting regularly and term "time of payment" is the same time at which the payment has been made according to the method of accounting.
As per clause (b) to explanation to section 23(1)(xx) the expression "paid", as used in sections 23, 18, 24 and 31 means actually paid or incurred according to the method of accounting upon the basis of which the income is computed.
The words used in S.50(3) are "paying" and the "time of payment", which mean the actual payment or the payment made as per method of accounting regularly employed by the assessee.
The word "paid" as used in Ss.23, 18, 24 and 31 has to be considered in the context of the method of accounting regularly employed by an assessee.
The time of payment is the same time at which the payment has been made according to the system of accountancy maintained by assessee which in case of a mercantile system means the time at which credit entries for the same are made in the books of accounts.
When assessee claims such an expense as having been paid then that is treated as paid and the time of payment is the same as the date on which the credit entries are made in the books maintained by the assessee on the mercantile system.
Howrah Trading Company (Private Limited) v. Commissioner of Income Tax East Pakistan (1963) 8 Tax 59 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss. 50(3) & 23(1)(vii)---Provisions of Ss.23(1)(vii) & 50(3) act and react on each other and are inter-related.
Section 23(l)(vii) is to be read alongwith the provision of section 50(3) because they act and react on each other. Both these things arc inter-related. Under section 23(l)(vii) such a claim could only be made if the payment had been made and not otherwise. The very fact that the assessee was claiming this expense means that he himself is treating it as an amount having been paid. The attempt to differentiate between the two positions that clause (b) to the explanation to section 23(1)(xx) was a provision which was limited in scope to the extent as to determine whether the expense can be allowed or not under section 23(1)(vii), was not correct.
Sections linked with each other have to be taken as acting and reacting on each other and the impact of clause (b) of explanation to section 23(1)(xx) cannot be taken as limited in its operation to the provisions of section 23(1) only.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 50---Assessee, a non-residential company carrying on business through its branch. in Pakistan---Assessments were transferred through a general financial pool from the Head Office abroad---Held, even if tax had been deducted at source the claim of amount of interest by assessee as cost of funds could not be made.
I.N. Pasha for Appellant.
Naseer Ahmad, D.R. for Respondent.
Date of hearing: 9th December, 1992.
ORDER
The assessee is a non resident company carrying business through its branch in Pakistan. Appeals have been filed by the assessee for the assessment years 1982-83 to 1989-90. It is hereby clarified that originally income for 1982-83 was returned at Rs.21,420,418 and was accompanied by audited accounts. However, it was revised on 13-12-1982 with income al Rs.18,782,818 and again revised with the same income. To justify 1st revision the reason given was "The revision has been made to incorporate the bank's claim of cost of Finance against assigned capital as in the attached computation. With third return the income given is the same as in the 1st revised return but the reason given for revision has been changed saying "Revision has been made to disclose the bank's claim for cost of funds borrowed for investment in Government securities pursuant to the statutory requirements under section 13(3) of the Banking Companies Ordinance, 1962 under the appropriate head of income viz. interest on securities. Department is also in appeal for the assessment years 1986-87 and 1989-90. Assessee's appeals only stand disposed of as under:---
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ASSESSEE'S APPEALS
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. 2. The first issue involved in all these years is about the cost of funds which pertained to meeting statutory obligation as required by the State Bank of Pakistan. The facts of the case are that the assessee has paid up capital of Rs.26,000,000. The head office, outside Pakistan allegedly borrowed money from share-holders abroad and it was brought to Pakistan to meet the requirements of Banking Companies Ordinance, 1963 and those of the State Bank of Pakistan. Out of this money the assessee purchased Government securities and claimed interest on this borrowing for all the years in appeal as under:---
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| ASSESSMENT YEAR | INTEREST CLAIMED |
| 1982-83 | Rs.26,37,000 |
| 1983-84 | Rs.39,45,800 |
| 1984-85 | Rs.44,41,600 |
| 1985-86 | Rs.54,05,400 |
| 1986-87 | Rs.56,44,537 |
| 1987-88 | Rs.52,85,520 |
| 1988-89 | Rs.65,20,061 |
| 1989-90 | Rs.70,72,365 |
The ITO added back all these interests claimed in all the years because no deduction of tax at source had been made under section 50(3) of the Income Tax Ordinance. He also relied on the case cited as Netherland Trading Society Karcahi, decided by the High Court of West Pakistan Karachi Bench for assessment year 1951-52 dated 5-12-1956. In that case interest payment had been made by the Pakistan Branches in Chittagong to their head office in Amsterdam in the Netherland which was disallowed by the 1T0 and this treatment was confirmed by the Honourable High Court. The learned CIT(A) has confirmed this treatment for the reasons given by the ITO.
3. The learned A.R. of the assessee argued before us that Supreme Court of Pakistan in the case cited as 1963-8 Tax 59 vide their order, dated 1-5-1963 in the case of Howrah Trading Company (Private Limited) v. Commissioner of Income Tax East Pakistan had criticised the observation of the High Court on page 72 and so this case could not be relied as a precedent, The observation made by the High Court in the case of Netherland Trading Society was in the following words.
"in cases coming under subsection (1) of section 42 of the Act a nexus or connection is established between the' taxable territories and the person who lent the money at interest, by reason of the fact simpliciter that the source of income is in the taxable territories". The Supreme Court criticised the above observing in following words. "I agree with the comment of my Lord that this proposition is too widely stated, Such a view, if adopted, would bring within the purview of the Pakistan Tax Laws income pertaining to a series of transactions that preceded the actual advance to a borrower who brings money for investment into Pakistan. Every such previous transaction need not necessarily be within the Taxation Provisions and such an inference would not probably be in. conformity with the intention of the legislature:"
4. No doubt the Honourable Supreme Court has commented adversely on this particular observation made by the High Court but as far as the real issue is concerned the Supreme Court of Pakistan upheld the addition made for the reasons given in their order. The concluding finding given by the Honourable Supreme Court when confirming the addition made was that:
"Unless, therefore, in such a case either the tax on the interest income which has accrued to the Indian Creditors, has either been paid or deducted under section 18, the allowances claimed would not be admissible."
It is hereby clarified that in this concluding remark the words "section 18" referred to the Repealed Income Tax Act the equivalent section of which in the Ordinance is 50. So it is very clear from the order of the Honourable Supreme Court that for such interest to be allowed deduction under section 50(3) of the Income Tax Ordinance has to be made or the amount has to be paid. To make it further clear we are of the view that it means that such an expense claimed as interest will only be allowed when any of the two requirements are met with that is either the tax has been deducted or it has been paid. When confronted with this position the learned A.R. of the assessee took the plea that simple reading of section 50(3) of the Income Tax Ordinance makes it very clear that such a deduction has to be made "at the time of payment". He stressed that here in this section the time of payment means the time of actual payment. It was maintained by him that as no actual payment of interest had been made during the years, the assessee was not under legal obligation to make any deduction under section 50(3). It was pointed out by us to the learned A.R. that in clause (b) to explanation to section 23(1)(xx) it has been laid down that the expression "paid", as used in this section and sections 18, 24 and 31 means actually paid or incurred according to the method of accounting upon the basis of which the income is computed. The learned A.R. tried to make a tine distinction by asserting that in clause (vii) of section 23(1) it has been laid down that any interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed. It was vehemently stressed by him that clause (b) to the explanation was a special provision in the context of the provisions of section 23(1) and its application could not be stretched to section 50(3) for deduction at source. We have applied our mind to this proposition made by the learned A.R. but we differ with his opinion because when the words used are "paying" and the "time of payment", they mean the actual payment or the payment made as per method of accounting regularly employed by the assessee. There is a plethora of case law wherein various judicial forums in the country have held that the words "paid" have to be considered in the context of the method of accounting regularly employed by an assessee. Coming to the term "time of payment" logically it can be said that the time of payment is the made according to the system of assessee which in case of a mercantile system means the limo at which credit entries for the sage are made in the books of accounts. Here we will like to further point out that the assessee had not even applied to the State Bank of Pakistan for making the remittance abroad. This means that it has been deliberately done under the wrong notion that by not remitting the money abroad they will be able to take the plea that the interest claimed as an expense had not been actually paid. We will further like to say that in our opinion section 23(1)(vii) is to be read alongwith the provision of section 50(3) because they act and react on each other. Both these things are inter-related. Under section 23(1)(vii) such a claim could only be made if the payment had been made and not otherwise. The very fact that the assessee was claiming this expense means that he himself is treating it as an amount having been paid. The attempt of the learned A.R. to differentiate between the two positions that clause (b) to the explanation to section 23(1)(xx) was a provision which was limited in scope to the extent as to determine whether the expense can be allowed or not under section 23(1)(vii), in our view is not correct. The learned A.R. has conveniently ignored the fact that when he claims such an expense as having been paid then that is treated as paid and the time of payment is the same as the date on which the credit entries are made in the books maintained by the assessee on the mercantile system. We are supported in this view by the finding of the Honourable Supreme Court of Pakistan, in the case referred to before at page 73 that sections 10 and 42 of the Repealed Income Tax Act, act and react on each other which is equally true in case of sections 23 and 12 of the Income Tax Ordinance. This means that sections linked with each other have to be taken as acting and reacting on each other and the impact of clause (b) of explanation to section 23(1)(xx) cannot be taken as limited in its operation to the provisions of section 23(1) only. In view of this opinion of ours and the precedents set in we do not feel like agreeing with the further argument of the learned A.R. that if this expense claimed was not treated a5 having been paid as laid down under section 50(3) there will be ultimately no loss in revenue because any amount claimed as the expense and not actually paid could be added after three years of the expiration of the income year under section 25(c) of the Income Tax Ordinance. We are not considering here whether or not no loss of revenue is ultimately involved in rupee terms. Because firstly such an assertion in an inflationary economy is not tenable because loss in real terms is there and secondly whether or not an expense has to be allowed in a particular year has to be decided on its own merits. Relying on the decision of the Honourable Supreme Court in the case of Howrah Trading Company and of High Court in Netherland Trading Society and for the reasons given by us we are of the opinion that interest amounts claimed for all these years as cost of funds had rightly been disallowed and calls for no interference.
5. We wilt also like to point out that although the plea taken by the learned A.R. of the assessee was that the amount was advanced to the assessee by the head office from loans taken from share-holders abroad yet he could not give us the names of the share-holders from whom such loans were taken. It appears that this plea has been taken just to make an attempt for justifying the adjustment made in the revised returns for the so-called "cost of funds". Without giving a finding as to whether or not the amounts received by the Pakistan branch were out of the loans obtained from share holders abroad because no evidences haves been produced in support of this claim. Our feeling is that the amounts transferred from the head office to the branch in Pakistan have been through a general financial pool. There is a general concept that no interest can be charged for borrowings from self because no person is supposed to pay interest to itself on using the cash available with it. The very idea behind the concept of interest is that there is one party which advances an amount to another party and receive interest for the financial sources transferred. So we arc of the further view that even if tax had been deducted at source the claim of interest could still not be made. This is another reason for which we have confirmed the add-backs made by the ITO under this head. We also got the impression that the assessee's attempt to give two different reasons when tiling two revised returns showed that somebody had just advised the assessee to take a chance without being very clear about the reasons for the claim. We arc fortified in this opinion because no such claim of interest was made at the time of filing the original return although the accounts were properly audited. This opinion of our is just an obiter dictum whereas the add? backs have been upheld for the reasons given in detail in the appeal order. Remaining part of the order is omitted.
M.B.A./2249/T ?????????????????????????????????????????????????????????????????????????????????? Order accordingly.