I.T.AS. NOS. 2551/KB AND 2252/KB, 2672/KB, 2673/KB OF 1987-88, 1627/KB OF 1986-87, 2667/KB, VS I.T.AS. NOS. 2551/KB AND 2252/KB, 2672/KB, 2673/KB OF 1987-88, 1627/KB OF 1986-87, 2667/KB,
1996 P T D (Trib.) 411
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman, Khawaja Farooq Saeed,
Judicial Member and S.B: Sibtain, Accountant Member
I.T.As. Nos. 2551/KB and 2252/KB, 2672/KB, 2673/KB of 1987-88, 1627/KB of 1986-87, 2667/KB, 2668/KB 1987-88, 1282/HQ, 710/HQ of 1989-90 603/KB of 1991-92, 2202/KB, 2203/KB of 1987-88, 1176/KB of 1988-89 666/KB of 1991-92, 8148/KB, 1932/KB of 1992-93, 3373/KB, 3979/KB 2663/KB and -2664/KB of 1987-88, decided on 14/09/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.24(b)---Deduction---Interest paid to non-resident Bank---Interest claimed by assessees which they had paid to the non-resident Banks who were operating in Pakistan through their permanent branches and were liable to tax in Pakistan and interest paid to such Banks had already suffered incidence of tax in the hands of non-resident, being regular assessees, was allowable.
(1960) 2 Tax (V-389) and Maharaja of Patiala v. Commissioner of Income Tax, Bombay (1943) 11 ITR 202 rel.
(1981) ITR 759 (SC) fol.
(1993) PTD 1100 ref.
(b) Precedent---
----Court having similar authority may undo some earlier judgments but not without favourably discussing the same on its merits.
(1993) PTD 1100 fol.
(c) Interpretation of statutes---
------Taxing statutes---Interpretation---Long-standing interpretation of a provision of a taxing statute by Courts---Deviation from---Damaging effect- Interpretation of a provision in a taxing statute rendered years back and accepted and acted upon by the Department should not be easily deviated from while reconsidering the decision long time back---Courts cannot ignore the damage likely to happen by unsetting law that has once been settled.
(1981) ITR 759 (SC) fol.
(1993) PTD 1100 ref.
I.N. Pasha for Appellant (in I.T.As. Nos. 2251/KB and 2552/KB of 1987-88).
Muhammad Yousuf Butt, D.R.. for Respondent (in I.T.As. Nos. 2251 /KB and 2552/KB of 1987-88)
Muhammad Yousuf Butt, D.R. for Appellant (in (I.T.As. Nos.2672/KB and 2673/KB of 1987-88)
I.N. Pasha for Respondent (in (I.T.As. Nos.2672/KB and 2673/KB of 1987-88).
Muhammad Yousuf Butt, D.R. for Appellant (in I.T.As. Nos. 1627/KB, 2667/KB of 1986-87, 2668/KB of 1987-88, 1282/HQ of 1988 89, 710/HQ of 1989-90 and 603/KB of 1991-92)
I.N. Pasha for Respondent (in I.T.As. Nes.1627/KB of 1986-87, 2667/KB, 2668/KB of 1987-88, 1282/HQ of 1988-89, 710/HQ of 1989-90 and 603/KB of 1991-92)
I.N. Pasha for Appellant (in I.T.As. Nos.2202/KB, 2203/KB of 1987-88, 1176/KB of 1988-89, 666/KB of 1991-92, 8148/KB and 1932/KB of 1992-93).
Muhammad, Yousuf Butt, D.R. for Respondent (in I.T.As. Nos.2202/KB, 2203/KB of 1987-88, 1176/KB of 1988-89, 666/KB of 1991-92, 4148/KB and 1932/KB of 1992-93)
Muhammad Yousaf Butt, D.R. for Appellant (in I.T.A. No. 3373/KB of 1987-88).
Nemo for Respondent (in I.T.A. No. 3373/KB of 1987-88)
Muhammad Yousuf Butt, D.R. for Appellant (in I.T.A. No. 3979/KB of 1987-88).
Nemo for Respondent (in I.T.A. No. 3979/KB of 1987-88).
Muhammad Yousuf Butt, D:R. for Appellant in (I.T.As. Nos.2663/KB and 2664/KB of 1987-88).
Pir Muhammad Diwan, A.C.A. for Respondent (in I.T.As. Nos.2663/KB and 2664/KB of 1987-88).
Date of hearing: 9th August, 1995.
ORDER
KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).--This Full Bench has been constituted to resolve the differences of opinion between the two Division Benches. The point which requires consideration is whether disallowance can be made by recourse to provision contained in section 24(b) of the Income Tax Ordinance, 1979, out of interest claimed by the assessee which has been paid to the non-resident banks who are operating in Pakistan through their permanent branches and are liable to tax in Pakistan and the interest paid to such banks has already suffered incidence of tax in the hands of non-resident, being regular assessees. The point in issue has been referred to the Full Bench by a Division Bench of this Tribunal while hearing I.T.As. Nos.2202 and 2203/KB of 1987-88 wherein the two conflicting decisions came to the notice of Division Bench. It was pointed out before the Division Bench that in I.T.A. No.401/KB of 1985-86 it has been held vide order, dated 30-10-1989 that amount of interest paid to the non-resident banks cannot be disallowed by invoking provisions of section 24(b) of the Income Tax Ordinance, 1979 because the non-residents were operating in Pakistan through well-established branches and have already paid tax on the interest received by them. The judgment pertained to the assessment year 1983-84 and in this judgment the Circular, dated 5th of July, 1987 issued by the C.B.R., to the effect that foreign banks having branches in Pakistan were not required to deduct tax at source under section 50(3), was not considered and the findings were given on an interpretation of provision contained in section 24(b) itself. The point in issue came up for consideration by another Bench in I.T.A. No.47/KB of 1986-87 and it was contended before the Division Bench by the counsel for the assessee that by an amendment vide Finance Act, 1987 in section 50(3) a proviso has been added to the effect that nothing contained in subsection (3) of section 50 shall apply to any payment made, by way of return or finance, to a branch in Pakistan of non-resident banking company. It was, therefore, ascertained that the disallowance made by the I.T.O. by invoking provision of section 24(b) was not justified. It was held by the Division Bench that amendment in section 50(3) by Finance Act, 1987 was not retrospective and, therefore, the disallowance was justified. This finding was given without considering the purpose and purport of the provisions contained in section 24(b) and the earlier decisions of this Tribunal on the point, were neither cited nor considered by the subsequent Division Bench which expressed the contrary view. Oil taking notice of the above fact the learned Members of the Division Bench recommended for constituting of Full Bench, for resolving the conflicting opinions.
2. As earlier observed, the relevant facts succinctly stated are that the assessees borrowed loans from various non-resident banks on which interest is payable, which was claimed as en expenditure. The I.T.O. by applying provisions contained in section 24(b) disallowed these expenses on the ground that the assessees have not deducted and paid tax thereon. The assessee preferred appeals and the learned C.I.T.(A) deleted the additions. The Department feeling aggrieved, preferred appeals before us.
3. We have heard Mr. Yousuf Butt, learned representative for - the Department and Mr. I.N. Pasha, learned counsel for the respondents.
4. Mr. Yousuf Butt, D.R. has asserted in his arguments that the assessee was legally bound to make deductions from the interest payable to the Bank and then deposit the same in the Government treasury. He contended that having not done so, the assessee is not entitled for the allowance of this claim in his Profit and Loss Account as a deduction.
5. He submitted that according to rules of interpretation of fiscal statutes the provisions of law in discussion should always be strictly construed. According to him, redundancy or superfluity cannot be attributed to the law makers. He urged that section 24(b) read with section 50(3) creates a legal duty on the resident taxpayers to deduct and tax from all the payments which may be made to the non-residents on account of interest, fee, technical services, commission, brokerage, salary etc. In his opinion, the word 'paid' as used in the first part of the section was covered by the rest of the provision. He maintained that the I.T.O's were very well within their right to disallow the expenditure claimed by the assessee, is none of them had deducted tax while making payment of interest.
4. On behalf of the assessee representatives from all the companies were present but the case was mainly argued by Mr. I.N. Pasha. The learned A.R. started his arguments from plain reading of the section 24(b). While advancing his arguments in respect of relevant provision, he produced copies of the judgments in the case of M/s. Cynamid (Pak.) Ltd. and M/s. Berger. Pakistan Limited. He argued that the Income Ta& Appellate Tribunal has very elaborately thrashed out this issue in these two judgments: Referring to M/s. Cynamid (Pak.) Ltd., he drew our attention to the following observations:---
" The third and last issue which pertains to assessment year 1985-86 relates to addition of Rs.69,24,908 under section 24(b) of the Income Tax Ordinance, 1979. The I.T.O. noticed that the respondent had paid interest to three banks, which are not resident in Pakistan. The total payments made on this account are equal to Rs.69,24,908. Before making payments to the non-resident banks the respondent did not deduct any tax under section 50(3) of the Income Tax Ordinance. Section 24(b) says that if any payment is made-to a non-resident and tax thereon is not deducted or paid, the amount will not be allowed as business expenditure. When the matter was agitated before the learned C.I.T.(A) he deleted the addition. There is no doubt that payment was made to non-residents, who are operating in Pakistan through well established branches. According to section 50(3) tax should have been deducted at the time of making payment to these banks until and unless a bank possessed a certificate from the I.T.O. to the effect that no tax should be deducted under section 50(3). Admittedly, the three banks did not possess such certificates. Thus, the respondent did not comply with provisions of section 50(3). The respondent can be punished for his failure to follow the provisions of section 50(3). Out of different ways of penalising, the I.T.O. adopted the one given in section 24(b) which is reproduced below:
"24. Deduction not admissible ........... ... ... ................. ... ... .. ... ... ........... ...(b) any sum paid to a non-resident on account of interest, fee for technical services, brokerage or commission or any other sum chargeable under the provisions of this Ordinance, unless tax thereon has been paid or deducted and paid under section' 50, as the case may be; "
It is clear from the above quotation that the amount of interest paid to the non-resident banks can be disallowed in case none of the following two conditions is fulfilled:
(a) Tax is not deducted or deducted but not paid under section 50;
(b) tax on the interest income is -not paid by the recipients.
In this case, the three non-resident banks to whom interest was paid by the respondent are regularly paying tax in Pakistan. The I.T.O. has not given any finding to the effect that these three non-resident banks had not paid tax on the interest received from the respondent. In view of this, provision of section 24(b) cannot be invoked in this case.
The learned A.R. continued that the issue has further been discussed in the case of M/s. Barger Paint Ltd. decided by the Income Tax Appellate Tribunal, Lahore. To further dilate the issue relevant part is reproduced which is as follows:---
"Regarding the allow-ability of interest paid to the non-resident banks which was added back by the I.T.O. under section 24(b), it would be useful to, reproduce the relevant provisions:
"24. Deductions not admissible. --Nothing contained in section 23 shall be so construed as to authorise the allowance or deduction of--
(b) any sum paid to a non-resident on account of interest, brokerage or commission or any other sum chargeable under the provisions of this Ordinance, unless tax thereon has been paid or deducted and paid under section 50, as the case may be:
It is quite clear that payments to non-residents are inadmissible unless tax thereon has been paid or deducted and paid under section 50.
To us it is quite clear that if the non-resident recipient has paid the tax on the interest involved, then this would be an admissible expenditure and may not be disallowed merely on the ground that tax was not deducted under section 50. We, therefore, set aside the orders of the learned C.I.T.(A) and the I.T.O. on this issue with the direction that the I.T.O. should verify whether tax on the sums involved has been paid or not. "
7. The learned A.R. further argued that the provisions of section 50(3) only comes into picture after I.T.O. is satisfied that the non-resident recipient bank- has not paid any tax within the boundaries of the country. His contention is that section 50(3) cannot be applied if I.T.O. is satisfied that the said bank is a tax payer. Emphasis in the section is also noted in the aforementioned judgments is, on payment of tax which arises out of the following constructions:---
(a) unless tax thereon has been paid or deducted and paid.
The Legislature, he argued has brought this legislation to ensure that the State is not deprived of its due share on tax payable by the non-residents. The circumstances, in respect of various payments are different. In the impugned cases, the amount of interest, is not paid by the resident company and in fact is only debited by the banks in their personal accounts on quarterly or yearly basis, as per agreed arrangements. This means no physical transfer takes place in term of interest. This he said is a distinguishable factor in the case of interest as against payment of salary, commission etc. Further elaborating section 50, subsection (3), he said, here again the language is--
"any person responsible for paying to a non-resident any sum chargeable under the provision of this Ordinance. "
The requirement of law is to deduct tax from the payment made to non resident by the, person who is disbursing this amount to said non-resident while the appellant companies do never physically bifurcate the payment of principal sum or the interest thereon. This, however, he offered as a counter argument as in his opinion, section 50(3) does not come into picture if the recipient non resident himself is paying taxes.
Before proceeding further, we consider it appropriate to go back to the history of the impugned section 24(b) which is synonymous to old section 10(2)(iii) of the Income tax Act, 1922. For the convenience and ready reference the same is reproduced below:---
"10. Business.--
(1) ..
(2) Subject to the provisions of this Act, such profits or gains shall be computed after making the following allowances, namely:---
(i) ........................................
(ii).......................................
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid:
Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without Pakistan not being interest on a loan issued for public subscription before the first day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in Pakistan who may be assessed under section 43 or, in the case of a firm, for any interest paid to a partner of the firm;
The clause though carry slightly different language, is the same in its intention; It says: "except interest on which tax has been paid or from which tax has been deducted under section 18." (Underlining is ours).
The intention here is also very clear. The Legislature has made an attempt to ensure that nothing paid outside the country goes free of charge and the National Exchequer gets due share from the income earned by non-resident within the boundaries of Pakistan. It may either be paid by the recipient or otherwise deducted by the payer. Our observation is also fortified from the judgment reported as (1960) 2 Tax (V-389). This judgment was based on a judgment from Indian origin cited as Maharaja of Patiala v. Commissioner of Income Tax, Bombay (1943) 11 ITR 202. The relevant portion is as follows:
"We now come to the assessment year 1952-53. The first objection relates to interest. of Rs.24,229 paid to a non-resident. Since no tax was deducted at source, the Income Tax Officer disallowed the item under the proviso to section 10(2)(iii). It was represented to the Appellate Assistant Commissioner that the amount was in fact paid in Pakistan and has been charged to tax on the hands of the recipient by the Income Tax Officer, Nowshera. It was further pointed out that the amount was payable at Mardan. If these are the facts then there can be no doubt that the disallowance was unjustified and had no basis for it. As was pointed out in the Maharaja of Patiala v. Commissioner of Income Tax (Central), Bombay (1943) 11 ITR 202 where the interest had already been charged to tax in the hands of the recipient, it is as good as a case in which there is an agent in British India (Taxable territories) who may be assessed under section 43. The Appellate Assistant Commissioner Was, therefore, not wrong in asking the Income Tax Officer to verify the facts and to allow the interest if what was represented by the assessee was found to be correct. "
The ratio decided in the above case is the same as in the cases of M/s. Cynamid and M/s. Berger Paints mentioned supra, i.e. the non-residents having paid tax in Pakistan there was no question of deduction of tax at the time of payment of interest by the resident taxpayer. Coming to the dissenting order given by our learned Members Mr. Abdul Malik, A.M. and Mr. Syed Kabirul Hasan, J.M., let us go through the operating part which is as follows:---
"However, with regard to claim of the assessee of interest paid to Middle East the learned C.I.T. (A) observed that the hardship contained in the provisions of section 24(b) was mitigated through an amendment vide Finance Act, 1987 by adding proviso to section 50(3); since this provision is not with retrospective effect it will not apply to the case of the assessee. This remedial provision is not with retrospective effect it will not apply to the case of the assessee. This remedial provision cannot be invoked. The A.R. argued before us that remedial provisions are applicable retrospectively. It is difficult for us to agree with the A.R: as the provision does not relate to procedure but fixed at liability on the assessee and, therefore, is not applicable retrospectively, under the circumstances will have to stand and there is no ground for interference with the order of the learned C. I. T.(A)."
We would respectfully point out that the observations relating to the interest paid to Middle East Bank is based on assumption that there was some hardship in the provisions of section 24(b) which has been mitigated by provisions of section 50(3). Without going into the merits of the observation regarding its being retrospective or not we would only hold that the provisions of section 24(b) in its application is clear and does not contain any hardship. Our judgment also finds support from the case referred above.
The observation is also pointer of fact that the judgments earlier given by this Tribunal on this issue have not been brought to the notice of the learned Division Bench at the time of hearing which under the law of precedent were binding on Division Bench. In our support we would like to refer the reported judgments cited as (1981) I.T.R. 759 (S.C.) wherein the Hon'ble Supreme Court of India gave following judgment:
"Interpretation of a provision in a taxing statute rendered years back and accepted and acted upon by the department should not easily be deviated from while reconsidering the decision rendered long time back particularly under taxing statute the Courts cannot ignore the damage likely to happen by unsettling law that has once been settled. "
The ratio of above judgment is fully applicable in our case,. A law which stood settled not only under Income tax Act, 1922 but also under the Income Tax Ordinance, 1979 cannot simply be unsettled without bringing on record some forceful arguments for disagreement. The Court having similar authority may undo some earlier judgments but not without formally discussing the same on its merits. In this regard the judgment of the Income. Tax Appellate Tribunal reported as (1993) P.T.D. 1100 may also be referred.
Keeping in view the above discussion and the referred judgments we are of the view that the findings given by the learned Members in the case .of M/s. Corapak (Pvt.) Ltd. does pot depict the correct spirit of section 24(b). The finding given by the Tribunal in its earlier judgment is the correct view. We also feel that the judgment arrived at in the subsequent case is only on account of non citations of earlier judgments and lack of assistance. We, therefore, have no hesitation in holding that recipient banks having paid taxes in Pakistan the I.T,O. was not justified in disallowing the claim of deduction on account of interest paid by the assessee companies. The learned C.I.T.(A) was, therefore, fully justified in deleting the additions in all the above cases to which no exception can be taken. The contention raised on behalf of department is repelled. The appeals shall be placed before Division Benches for disposal of other issues.
M. B. A./162/T Order accordingly.