I.T.AS. NOS. 1780 TO 1785/1-13 OF 191(7-G1(, DECIDED ON 23RD OCTOBER, 1994. VS I.T.AS. NOS. 1780 TO 1785/1-13 OF 191(7-G1(, DECIDED ON 23RD OCTOBER, 1994., 1995 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1158 (1994)

Income Tax Ordinance (XXXI of 1979)---

----S.23(vii)----Deduction---Capital borrowed---Interest---Penal interest paid on capital borrowed is an admissible deduction under S.23(1)(vii), Income Tax Ordinance, 1-979.

M/s. City Bank NA, Karachi v. The Commissioner of Income Tax Central Zone-C, Karachi 1994 PTD 1271 fol.

Javed Aziz, D.R. for Appellant.

Nemo for Respondent.

Date of hearing: 23^rd October 1994.

ORDER

ABDUL MALIK (ACCOUNTANT MEMBER).---In this case the Department is in appeal for the assessment years from 1981-82 to 1986-87 against orders of the AA.C. When called out none attended for the respondent and case was taken up with help of learned D.R.

2. The assessee is operating an ice Factory and filed appeal before the AA.C. on the issue of adoption of sale rate per block, adoption of G.P. rate, meltage allowance and disallowance of penal interest. The Department is now in appeal against order of the A.A.C. enhancing meltage allowance from 10% to 20%. This Bench in a number of other cases has considered that the meltage allowance which in fact is a bad weather allowance should be taken at 15%.

3. For the years 1983-84, 1984-85, 1985-86 and 1986-87, the Department has agitated against the direction of the A.A.C whereby he allowed penal interest paid by the assessee for these years.

The facts are that the assessee borrowed capital for the factory from bank and could not repay the sums-in-question at the material time. The bank charged penal interest as follows:---

1983-841984-851985-86 1986-87

Rs.20, 743Rs.22, 743Rs.21, 224Rs.21, 124

The AA.C. allowed these sums holding them to pertain to carrying on business of the assessee. This issue came up before their Honourable Bench of the Karachi High Court. The Honourable Judges in their judgment in I.T.R. No.26 of 1985, dated 21-3-1994 in the case of Citi Bank observed that penalty and penal interest are distinguishable from each other. On the basis of this distinction, which was noted by their Lordships they allowed penal interest paid by the bank to State Bank of Pakistan. It can be seen that this penal interest is charged not on a loan but for busting credit ceilings. If penal interest underthese circumstances is not a penalty then the interest paid by the assessee can easily be termed as not carrying any element of penalty. Under these circumstances the direction of the learned AA.C. is in-accordance with law and is upheld.

4. For the year s 1984-85, 1985-86 and 1986-87, the A.A.C. reduced the applied sale rate per block. We have held in number of other cases a rate of Rs.28 per block is fair, we accordingly direct that this rate should be applied for these years.

5.Appeals stand disposed of in the manner indicated above.

M.BA./114/T Order accordingly.