1994 P T D 1271
[Karachi High Court]
Before Imam Ali G. Kazi and Syed Khursheed Haider Rizvi, JJ
Messrs CITY BANK N.A., KARACHI
Versus
THE COMMISSIONER OF INCOME-TAX, CENTRAL ZONE-C, KARACHI
Income Tax Reference Nos.62 of 1982 and 26 of 1985, decided on 21/03/1994.
(a) Income Tax Act (XI of 1922)---
----S. 42(1)---Banking Companies Ordinance (LVII of 1962), S.13---Assessee, a non-resident company having its registered office out of Pakistan, was engaged in the. business of Banking in Pakistan---Interest earned by assessee's head office from securities deposited outside Pakistan was not liable to tax under S.42(1) of the Income-tax Act, 1922.
1991 P T D 687 fol.
(b) Income Tax Act (XI of 1922)---
----S. 42(1)---Banking Companies Ordinance (LVII of 1962), S. 13---Assessee, a non-resident company having its registered office out of Pakistan was engaged in the business of Banking in Pakistan ---Assessee was not liable to tax under S. 42(l) on income or sale/realisation of securities including treasury Bills deposited outside Pakistan.
(1981) 43 Tax 69 (Trib.) fol.
(c) Income Tax Act (XI of 1922)---
----S.10(2)(xvi)---State Bank of Pakistan Act (XXXIII of 1956), S. 36 (4) (a)-- Banking Companies Ordinance (LVII of 1962), S.25(3)(b)----Assessee, a banking company---Levy of "penal interest" by State Bank of Pakistan on violation of its directions by the banking company---Term "penalty" and "penal interest"---Connotations and distinction between the two terms---"Penal interest" charged by the State Bank of Pakistan for bursting the credit ceilings under S.25, Banking Companies Ordinance, 1962 was an admissible expense for transaction made by the assessee were admittedly integrally connected with carrying on their normal banking business entitling them to earn more profits and consequently pay an increased income tax---Such penal interest could even be computed under S.10(2) of the Income-tax Act, 1922.
In case a banking company commits violation of the directions issued from time to time by the State Bank of Pakistan in terms of section 25 of the Banking Companies Ordinance, 1962, the banking company will be liable to pay the State Bank of Pakistan penalties provided thereby. By section 36 of the State Bank of Pakistan Act, 1956 the State Bank is empowered to collect "penal interest" 'and "penalties" for such breaches. In the present case banking companies did not comply with the provisions of section 25 of the Banking Companies Ordinance, 1962 and the State Bank levied certain penal interest and recovered the same from them. The banking companies in their statements for the purpose of the income tax for certain years claimed such payments as expenses adjustable under section 10 of the Income-tax Act 1922. The Department following earlier decisions of the Income Tax Tribunal viz. "that when an assessee even though he incurs penalty during the course of his business in an infraction of law, such amount cannot be claimed as a deductible expenses", did not allow them to deduct such amount. On an application filed by the said companies, the Income Tax Tribunal had formulated the third question and referred it for answer to High Court.
Term "penalty" is an elastic term with many differentiations' of meaning. It involves an idea of punishment corporeal or pecuniary, civil or criminal, although its meaning generally is confined to. pecuniary punishment. There cannot be two opinions about such meaning of the term. But in order to understand the real import of a term in a statute, it is necessary to examine the statute itself as an aid to interpretation. The "penal interest" and the "penalty" under the Banking Companies Ordinance can be imposed under section 36(4) (substituted by Ordinance 57 of 1980) of the State Bank of Pakistan Act, 1956.
Careful examination of the two terms expressly used in two separate sub-clauses of clause (4) of section 36 of the State Bank of Pakistan Act, 1956 indicates that these are two different terms and the method of calculation of such amount that can be recovered are also different. It, therefore, indicates that even the legislatures intended to use these two terms with different meanings. Although both the "penal interest" and the "penalty" charged under the law is intended to deter the banking companies from committing violations of the directions contained in section 25 of the Banking Companies Ordinance still both terms carry different meanings.
Penalty can only be imposed under section 25 (3) (b) of the Banking Companies Ordinance read with section 36 (4) of the State Bank of Pakistan Act, 1956. In the circumstances of the present cases the action had been taken by the State Bank of Pakistan under section 36(4) (a) of the State Bank of Pakistan Act, 1956. It could not be said that any penalty had been imposed on the banking companies. The transactions made by the banks were admittedly integrally connected with carrying on of their normal banking business entitling them to earn more profits and consequently pay an increased income tax. The amount paid as penal interest could even be computed under section 10 (2) of the Income-tax Act, 1922.
(1981) 43 Tax 69 (Trib.); (1971) 79 ITR 493; 1986 PTD 52 and Black's Law Dictionary ref.
(d) Interpretation of Statutes---
---- Term used in a Statute---Interpretation---In order to understand the real import of a term used in a statute, it is necessary to examine the statute itself as an aid to its interpretation.
(e) Word and Phrases---
--- Term `penalty' and `penal interest'---Import and distinction.
Muktada Karim for the Applicant (in ITR No. 62 of 1982).
Iqbal Naeem Pasha for the Applicant (in ITR No.26 of 1985).
Nasrullah Awan for the Respondent.
Dates of hearing: 6th May and 26th September, 1993.
JUDGMENT
IMAM ALI G. KAZI J: --The two Income Tax References mentioned above involve consideration of identical questions and, therefore, were heard together.
In the first reference, I.T.R. No: 62 of 1982, reference has been made at the instance of Premier Bank Limited, Karachi, in the matter of assessment years 1973-74 and 1974-75 by the Commissioner Income Tax, Central Zone, Karachi. The question as referred is as follows:
"Whether on the facts and in the circumstances of the case, the payments of Rs. 2,36,376 in 1973-74 and Rs. 7,11,357 in 1974-75 were made on account of infraction of the statutory provisions and hence these were not admissible for allowance under section 10 (2) (xvi) of the repealed Income-tax Act, 1922?"
In the second reference, I.T.R. No. 26 of 1985 reference has been made at the instance of M/s. Citi Bank NA., Karachi for the assessment years 1974-75 to 1981-82 seeking answer to the following three questions:
"(1974-75 to 1979-80)
(1) Whether on the facts and the circumstances of the case the Tribunal was justified in holding that the applicant was liable to tax under section 42 (1) of the Income-tax Act, 1922 in respect of interest earned by its head office from the U.S. securities deposited with the National Bank of Pakistan, New York, under section 13(3) of the Banking Companies Ordinance, 1962?
(1975-76 to 1981-82)
(2) Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the applicant was liable to tax on income on sale realisation of securities including treasury bills?
(1977-78 to 1981-82)
(3) Whether on the facts and the circumstances of the case the Tribunal was justified in holding that the penal interest charged by the State Bank for bursting the credit ceilings under section 25 of the Banking Companies Ordinance, 1962 was not admissible as an expenses by placing reliance on its own decision reported as (1981) 43 Tax 69 (Trib.) dealing with penalty for violating the provisions of legal requirement contained in subsections (4), (5) and (8) of section 36 of the State Bank of Pakistan Act, 1956?"
The question No-3 in I.T.R. No. 26 of 1985, M/s. Citi Bank NA., Karachi v. Commissioner of Income Tax, Central Zone `C', Karachi is the common question referred to this Court in I.T.R. No. 62 of 1982.
Mr. Iqbal Naeem Pasha, Advocate for the applicant in I.T.R. No. 26 of 1985, Mr. Muktada Karim, Advocate for the applicant in I.T.R. No. 62 of 1982, and Mr. Nasrullah Awan, Advocate for the Respondent in both the references, have pointed out that the questions Nos. 1 and 2 in I.T.R. No. 26 of 1985 have already been decided in the negative in the decisions contained in cases reported in 1991 PTD 687 and 1985 PTD 329 respectively. We have gone ,A through those judgments and find no reason to add anything to the conclusions reached therein and we answer the reference on these two questions accordingly.
The assessee in these two income tax references are banking companies. Such companies are controlled by the provisions contained in Banking Companies, Ordinance of 1962 and the State Bank of Pakistan have been empowered to control advances made by banking companies under its section 25. Section 25 of that law is reproduced herein below-
"25.--Power of State Bank to control advances by banking companies.-(1) Whenever the State Bank is satisfied that it is necessary or expedient in the public interest so to do, -it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and, when the policy has been so determined, all banking companies or the banking ' company concerned, as the case may be, shall be bound to follow the policy as determined.
(2) Without prejudice to the generality of the power conferred by sub section (1), the State Bank may give directions to banking companies either generally or to any banking company or group of banking companies in particular:-
(a) as to the credit ceilings to be maintained; credit targets to be achieved for different purposes, sectors and regions, the purpose for which advances may or may not be made, the margins to be maintained in respect of advances, the rates of interest, charges or mark-up to be applied on advances and the maximum profit sharing ratios; and
(b) prohibiting the giving of loans, advances and credit to any borrower or group of borrowers on the basis of interest, either for a specific purpose or for any purpose whatsoever; and each banking company shall be bound to comply with any direction so given.
(3) If any default is made by a banking company in complying with the policy determined under subsection (1) or direction given finder subsection (2), every director and other, officer of the banking company and any other person -who in knowingly a party to such default shall, by order of the State Bank, be liable to a penalty of an amount which may extend to two thousand rupees and, where the default is a continuing one, of a further amount which may extend to five hundred rupees for every day after the first during which the default continues.
(4) Without prejudice to the provisions of subsection (3), the State Bank may, for the purposes of securing implementation of any special credit schemes or monetary policy or observance of credit ceiling by banking company; by order in writing require banking companies generally, or banking company in particular, to make special deposits with it for such amount and on such terms and conditions as may be laid down by the State Bank in this behalf.
(5) The amount deposited with the State Bank under-subsection (4) or any part thereof may at the discretion of the State Bank, be released by it to the banking company which deposited it as and when the State Bank deems fit either unconditionally or on such terms and subject to such conditions as the State Bank may, by order in writing, determine from time to time.
(6) Any penalty imposed under subsection (3) shall be payable on demand made by the State Bank and, in the event of refusal or failure by the director, officer or other person concerned to pay on such demand,, shall be recoverable as arrear of land revenue."
In case a banking company commits violation of the directions issued from time to time by the State Bank of Pakistan in terms of Section 25 of the Banking Companies Ordinance, 1962, the banking company will be liable to pay the State Bank of Pakistan penalties provided thereby. By Section 36 of the State Bank of Pakistan Act, 1956, the State Bank is empowered to collect "penal interest and penalties" for such breaches. It appears that the two banking companies in these references did not comply with the provisions of Section 25 of the Banking Companies Ordinance, 1962 and "-State Bank levied certain penal interest and recovered the same from: The Banking Companies in their statements for the purpose of the income tax for certain years claimed such payments as expenses adjustable under Section 10 of the Income-tax Act, 1922. The Department, following earlier decisions of tine Income Tax Tribunal---that when an assessee even though he incurs penalty during the course of his business in an infraction of law, such amount cannot be claimed as a deductible expense, did not allow them to deduct such amount. On an application filed by the said companies, the Income Tax Tribunal has formulated the third question and referred it for answer to this Court.
Mr. Iqbal Naeem Pasha, Advocate for the Applicant T.R.No.26 of 1985, in support of his case mainly contended - that penal interest recovered from the Applicants may not be equated as penalty which may deprive them of their right to adjust such claim towards expenses. According to him, both the terms "penal interest" and "penalty" have different connotations. He mainly referred to the case reported in (1971) 79 I.T.R. 493.
Mr. Muktada Karim, Advocate for the Applicant in I.T.R. No.62 of 1982 adopted the line of arguments of Mr. Iqbal Naeem Pasha, Advocate for the Applicant in the connected reference.
Mr. Nasrullah Awan, Advocate for the Respondent, relying on the case reported in 1986 PTD 52 contended that it was on account of the conduct of the business contrary to law by the assessees that the banking companies had to incur penal interest which cannot be treated as an expenditure incurred wholly and exclusively for the purpose of the business and, therefore, the decision of the Income Tax Tribunal on the point is correct.
' Term "penalty " according to the Black's Law Dictionary is an elastic term with many differentiations of meaning. It involves an idea of punishment corporeal or pecuniary, civil or criminal, although its meaning generally is confined to pecuniary punishment. There cannot be two opinions about such meaning of the term. But in order to understand the real import of a term in a statute, it is necessary to examine the statute itself as an aid to interpretation. The" penal interest " and the " penalty" under Banking Companies Ordinance can be imposed under Section 36 .(4) (substituted by Ordinance 57 of 1980) of the State Bank of Pakistan Act, 1956, which is reproduced below: -
"36 (4) If at the close of business on any day before the day fixed for the next return under the preceding subsection, the balance held at the Bank by any scheduled bank is below the minimum fixed by subsection (1) or varied order subsection (2), such scheduled bank may be ordered by the Bank to pay to the Bank:--
(a) In the case of its liabilities assumed on basis other than profit and loss sharing, in respect of such day penal interest at a rate three per cent above the bank rate on the amount by which the balance with the Bank falls short of the fixed minimum, and if on the day on which the next return is due such balance is still below the fixed-minimum as disclosed by this return, the rate of penal interest may be increased to a rate five percent. above the bank rate in respect of that day and each subsequent day on which the balance held at the Bank at the close of business on the day is below the fixed minimum; and
(b) In the case of its liabilities assumed on the basis of profit and loss sharing, in respect of such day a penalty at a rate that may be prescribed by the Bank from time to time on the amount by which the balance with the Bank falls short of the fixed minimum, and if on the day on which the next return is due such balance is still below the fixed minimum as disclosed by this return, the penalty may be increased by twenty-five per cent in respect of that day and each subsequent day on which the balance held at the Bank at the close of business on the day is below the fixed minimum."
Careful examination of the two terms expressly used in two separate sub-clauses of subsection (4) of Section 36 of the State Ban]: of Pakistan Act, 1956 indicates that these are two different terms and the method of calculation of such amounts that can be recovered are also different. It, therefore, indicates that even the legislatures intended to use these two terms with different meaning. Although both the " Penal interest " and the " penalty " charged under the law is intended to deter the banking companies from committing violations of the directions contained in Section 25 of the Banking Companies Ordinance, still both terms carry different meaning.
We are, therefore, of the opinion that the penalty can only be imposed under Section 25 (3) (b) of the Banking Companies Ordinance read with Section 36 (4) of the State Bank of Pakistan Act, 1956. In the circumstances of the present cases, the action has been taken by the State Bank of Pakistan under section 36(4)(x) of the State Bank of Pakistan Act, 1956. It cannot be said that any penalty has been imposed on the banking companies. It may also be pointed out that the transactions made by the banks were admittedly integrally connected with carrying on of their normal banking business entitling them to earn more profits and consequently pay an increased income tax. The amount paid as penal interest can even be computed under Section 10 (1) of the Income-tax Act, 1922.
For the foregoing reasons, we answer the reference on the third question in the negative.
M.B.A/C-315/K Reference answered.