I.T.AS. NOS. 5931/LB OF 1991-92, 6785/LB AND 730/LB OF 1992-93 VS I.T.AS. NOS. 5931/LB OF 1991-92, 6785/LB AND 730/LB OF 1992-93
1997 P T D (Trib.) 1241
[Income-tax Appellate Tribunal Pakistan]
Before Nasim Sikandar, Judicial Member and
Inam Ellahi Sheikh, Accountant Member
I.T.As. Nos.5931/LB of 1991-92, 6785/LB and 730/LB of 1992-93, decided on 11/04/1997.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.23(1)(xv) & 23(l)(xviii)---Admissible deductions---Distinction between Ss.23(1) (xv) & 23(1)(xviii) of the Income Tax Ordinance, 1979.
There is distinction contained in sub-clauses (xv) and (xviii) of section 23 which provides for admissible deductions while computing income under the head "income from business or profession". Sub-clause (xv) says, "any expenditure laid out or expended on the training of any person, being a citizen of Pakistan, in connection with a scheme approved by the C.B.R., for the purposes of this clause". Sub-clause (viii) is of residuary nature and provides that "any expenditure (not being 0 nature of capital expenditure or personal expense of the assessee) laid out of expended wholly or exclusively for the purpose of such business or profession".
(b) Income Tax Ordinance (XXXI of 1979)---
----S.23(1)(xvii)---Admissible deductions-- -Expenses on employee going for training abroad to the principals under a scheme duly approved by the Government---Expenses so incurred, held, were covered by cl. (xviii) of S.23(l) of the Income Tax Ordinance, 1979 and were allowable in toto.
CIT, East Pakistan v. Messrs Engineers Limited, Dacca PLD 1967 SC 524 fol.
1991 PTD (Trib.) 531; 1986 SCMR 968; Packages Limited v. CIT 1993 PTD 753; Industrial Engineer Agencies v. CIT 1992 PTD 954 = PLD 1992 SC 562 and PTD 1991 (Trib.) 351 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.24---Inadmissible deduction---Payment of royalty to the principals-- Disallowance---Neither a notice in that behalf was served on assessee before the intended action nor the reason made for the disallowance was otherwise convincing---Amount of advance tax having been deducted from the amount earmarked for payment as royalty on the very day of the payment thereof, disallowance could not be sustained, as sufficient compliance of law had been made.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.23 (1) Expln. (b)---Word 'paid' as used in S.23(1), Income Tax Ordinance, 1979, includes the payments "incurred according to method of accounting upon the basis of which the income is computed".
(e) Income Tax Ordinance (XXXI of 1979)---
----S.50(3)---Expression "shall deduct at the time of payment, tax at the rates specified in the First Schedule" as contained in S.50(3), Income Tax Ordinance, 1979 has to be read in the light of definition of word "paid" as given in S.23(1), Expln. (b) of the Income Tax Ordinance, 1979.
(f) Income Tax Ordinance (XXXI of 1979)---
----S.24, Expln. (b)---Provision of S.24, Expln. (b) Of the Income Tax Ordinance, 1979 takes care of the situation and permits the creation of provision both for the expense as well as the amount of tax at source.
(g) Income Tax Ordinance (XXXI of 1979)---
----S.24---Payment of royalty to the principal ---Assessee an agent assembling franchised goods---Payment of royalty to the principals ---Assessee maintaining mercantile system of accounting---Revenue objected that tax on payment of royalty was not actually deducted and paid before the end of the accounting period and disallowed the amount---Validity---Held, Assessing Officer had not acted in accordance with law by not allowing the amount of expenses either in the period preceding closure of accounts in one year or in the next year when it was actually disbursed.
In the instant case the assessee maintained accounts on mercantile system of accounting. The provision providing for royalty and the amount of tax at source was not questioned by the Revenue on any other ground except that it was not actually deducted and paid before the end of the accounting period. Also that it was deducted and paid some two months after closing of accounts. The objection was not relevant. Payment of amount set also as provision before the end of the accounting period could not happen at all. A provision is setting apart of an appropriate amount for any known or existing liability. In case of the assessee it could be made, ascertained and provided for only with respect and in proportion to other items of balance-sheet i.e. sales and assembly of franchised goods. The provision or the payment of royalty could not precede closing of accounts for the year. Therefore, its actual payment happened after the end of the accounting period in all Ease years. As a matter of fact the expense having not been refused on any Per ground it had to be allowed either in the year in which the provision vas made or in the year it was actually paid and the tax deducted at source. For income-tax liability nothing could change for or against the interest of the Revenue because if the expense was not allowed in one year, it was to be allowed in the next year when actually paid and the tax deducted. The assessing officer did not allow the amount in next year either when the amount provided for the payment was actually disbursed and the tax admittedly deducted and paid to exchequer. This was factually unfair ltd legally improper. The expense was admissible and the tax at source was duly deducted before the payment of the amount. Therefore, the assessing officer did not act in accordance with law by not allowing the amount of expense either in the period preceding closure of accounts in one year or in the next year when it was actually disbursed. Keeping in view the nature of accounts maintained by the assessee and the fact that tax at source was deducted Old paid before the framing of assessment, sufficient compliance of the legal provision was made to entitle the assessee to the deduction.
CIT, Lahore v. Mst. Wazir-un-Nisa Begum 1972 SCMR 116; 1971 PTD (Trib.) 894 and 1996 PTD (Trib.) 411 ref.
(h) Income Tax Ordinance (XXXI of 1979)---
----S.23(1)(vii)---Admissible deductions---Interest paid on capitalborrowed---Admissibility---Claim of interest was not questioned on any of three ingredients contemplated in S.23(1)(vii) of Income Tax Ordinance, 1979---No finding of fact was brought on record to challenge borrowin8 of capital, its use for the purpose of business of the assessee and the' actual payment of the claimed interest---Held, in the absence of 193ch findings disallowance was rightly disapproved by the Appellate Authority.
1991 PTD (Trib.) 531; 1986 SCMR 968; Messrs Packages Limited v. The CIT 1993 PTD 758; CIT v. Khairpur Textile Mills 1989 SCMR 61; Pakistan Industrial Engineering v. CIT, Karachi 1987 PTD 149; CIT v. Indian Oxygen Ltd. (1978) 113 ITR 109; Ravi Machine Tools Ltd. v. C.I.T (1978) 11 ITR 459; (1979) 120 ITR 37; (1976) 103 ITR 715 and (1958) 34 ITR 265 ref.
(i) Income Tax Ordinance (XXXI of 1979)---
----S.24 (1)(vii)---Admissible deduction---Making out a clear case of non- business use of borrowed capital by Assessing Officer---Essentials.
An assessing officer can always make out a clear case of non -business use of borrowed capital. However, in most of such situations, the one before us can be quoted as an example, the assessing officer hesitated an in depth enquiry and instead made resort to general remarks. Where a capital has been borrowed by an assessee and it is used with other capital or reserve at its disposal an assessing officer has to pin7point and identify the exact amount which was not used for the business of the assessee before he can disallow a claim of interest expenditure. To identify and crystallize an exact amount the assessing officer must be equipped with the latest accounting techniques and ability to read the accounting documents prepared by an assessee. In most of cases it is observed that either the assessing officer is not possessed with the quality of knowledge or he hesitates in undertaking the required exercise. Therefore, instead of doing the necessary labour he attempts at a short-cut which in legal domain cannot work. To burden an assessee with an additional liability or to disallow an expense efforts are needed to spot-light both the quantum as well as the reasons for disallowance. In case of interest claimed as a deduction each and every penny of borrowed money will have to be identified which went down the drain on non-business purposes. The claim of the assessee that giving advances to workers/employees was incidental to its business could not be accepted on its face value. It was rightly ignored by the assessing officer. However, he should have moved one step ahead to co-relate the borrowed amount with the advances to the most exact extent. Generally speaking such an exercise is arduous as most of the assessees may not be maintaining a separate and independent in-flow and out-flow of borrowed sums. These are most likely to be made part of the other resources already available in the pool. However, the lenders normally being bankers and financial institutions following the borrowed funds to the end use cannot be impossible.
In the findings so recorded every penny of borrowed money diverted to non-business pr non-professional use will have to be brought home by the Revenue to disallow the claim of interest exactly to that extent. This having not been done, the claim could not be disallowed.
CIT v. Sheikh Muhammad Ismail 1986 SCMR 968; 1992 PTD 513; 1991 PTD 531 and 1994 PTD Note 110 at p.141 ref.
Mian Javed-ur-Rehman, D.R. for Appellant.
Nasim Zafar, I.T.P. for Respondent.
Date of hearing: 16th September, 1996.
ORDER
The assessee appellant in these cross appeals for the years 1990-91 to 1992-93 is a listed company and is engaged in assembling, manufacturing and sales of tractors. In the three years incomes were respectively disclosed at Rs.9,63,33,807, Rs.6,11,49,402 and Rs.53,14,275. However, assessments were made at Rs.11,39,75,102, Rs.7,27,67,924 and Rs.3,79,95,863. In the process, inter alia, claimed expenses on employees training respectively at Rs.4,75,282, Rs.5,30,974 and Rs.5,84,650 were disallowed and confirmed by the first appellate authority through separate orders recorded for these years on 15-12-1991, 10-2-1993 and 26-9-1993. These expenses were allegedly incurred on air passage and travelling allowance of the employees visiting the principals in U.K. M/s. Messey Furguson. The main reason for the disallowance according to the assessing officer, being non-admissibility of the expense under clause (xv) of section 23(1) of the Ordinance. The contention of the assessee that the clause referred to by the assessing officer was not attracted in its case did not impress him. It was also pleaded that this clause meant only for those cases where employees were sent to certain specific institutions. In the case of the assessee, it was contended the employees were sent to get themselves familiarize with the manufacturing process in the factory plant of the principal which either directly supplied the entire material or made up drawings for manufacture in Pakistan with their approval. These submissions were not accepted by the first appellate authority either which for most of the part refused interference without examining the issue in any detail.
2. While framing the three assessments the assessing officer also disallowed sums of Rs.48,57,000, Rs.82,50,073 and Rs.63,37,872 allegedly paid by the assessee company to their principal as royalty. In the first year viz. 1990-91 it was disallowed only for the reason that total amount paid at Rs.3,30,30,110 as against last year paid at Rs.1,65,75,779 was excessive as the sales during the year did not increase to the same proportion. Thus, the balance of Rs.1,64,54,331, Rs.3,30,30,110, Rs.1,65,75,779 was disallowed. However, this figure was further slashed to Rs.48,57,000 through a rectification order recorded under section 156 of the Ordinance to proportionate it with the decline in sales during the year. Before the first appellate authority it was complained that neither the proposed action was properly confronted to the assessee nor the assessing officer really appreciated the nature of payment which had no direct relation to the sales. At any rate, it was further argued, the royalty was payable in U.K. Sterling Pound and, therefore, even if sales did not increase the amount of royalty increased due to increase in exchange rate of the pound. The submission was accepted by the learned first appellate authority through its order recorded on 15-12-1991. During the year 1991-92 the assessing officer held that out of the royalty charges at Rs.2,61,62,000 no deduction under section 50(3) of the Ordinance was made in respect of a sum of Rs.82,50,079 within the year ending on 30-6-1991. It was accordingly disallowed to the extent of this amount. The appellate authority through its order dated 10-2-1993 agreed with the assessee that both factually as well as legally the disallowance was improper. It was found as a fact that tax was deducted at source on the same day the part of the royalty amount was remitted to the principal. It was also agreed that deduction of tax at source was neither necessary nor possible to be made before the time of payment as erroneously thought by the assessing officer. It was noted that the amount of tax was paid in two instalment on 20-8-1991 and 9-10-1991 when relating amounts of royalty were remitted. The appellate authority also appears convinced with the stand taken that the assessee also being an agent for the non-resident no prejudice resulted to the Revenue on account of delay deduction. For, as argued by the assessee before the appellate authority, an assessment could always be made directly on the assessee as an agent for the recovery of the tax due since it was liable to be treated as an agent under section 50(3). The contention in short being that provisions of clause (b) of section 24 invoked for the disallowance were not attracted in the facts of the case. In the year 1992-93 tax deduction was made in respect of amounts brought forward except for the sum of Rs.63,37,872 within the year ending on 30-6-1992. Of the total claim of royalty paid during the year at Rs.2,68,55,000 the expense incurred for the year stood at Rs.1,81,26,000 while a sum of Rs.85,29,000 was- brought forward as payable from the last year. The assessing officer again found that since payment under section 50(3) was not made within the year on the said sum of Rs.63,37,872 the expense, royalty, to that extent could not be allowed under section 24(b) of the Ordinance. Before the first appellate authority it was claimed that though a sum of Rs.1,85,59,600 remained unpaid during the year yet tax at source had already been deducted and paid on all but Rs.63,37,872 only. According to the procedure explained by the assessee the accounts prepared for each quarter or month were submitted to principals which examined them and at a time raised queries taking some time to be answered and the objections removed. The irregular intervals in payment of royalty were attributed to the time consumed in correspondence with the foreign principals and the actual receipts of royalty bill for payment after settlement of accounts and the related issues. The first appellate authority while accepting the explanation through its order dated 26-9-1993 also referred to the earlier discussion made by its counter-part in the year 1991-92. The Revenue is aggrieved of these findings in the three years.
3. Next grouse of the revenue pertains to the deletion of addition made on account of interest allocated to work in progress as well as of initial depreciation in respect of computers and electric components. The assessing officer disallowed sums of Rs.54,65,000, Rs.23,36,50p and Rs.40,91,000 on account of interest allocable to work in progress. In ply to the notice of the assessing officer as to why proportionate interest with regard to work in progress shown at various sums should not be disallowed the assessee disputed the intended action for three reasons. Firgtly, that it was in possession of reserves and equity which was more thail the amount spent in work in progress. Secondly, the assessing officer has to see only if the capital borrowed was for the purpose of business of the assessee and thirdly, whether the borrowed capital was used for the assessee's business. The assessing officer in the year 1990-91 rejected the conflations only for the reason that the assets created out of borrowed money had not been used during the period relevant to the assessment year. The amount of interest allocable to work in progress was thus disallowed and the same action was repeated in the later two years via 1991-92 and 1992-93, The first appellate authority allowed the claim in the first year on the ratio pf reported decision of the Tribunal cited as 1991 PTD (Trib.) 531 where the principle settled by Supreme Court of Pakistan in 1986 SCMR 968 re: Sh. Muhammad Ismail & Company was followed. In the next two years same findings were recorded by the appellate authority supporting its order with come other reported decisions from Indian jurisdiction. In the year 1992-93 while accepting the claim reference was also made to a decision of the Supreme Court of Pakistan cited as 1993 PTD 753 re: Packages Limited v. CIT 1992 PTD 513 re: Industrial Engineer Agencies v. CIT.
4. In case of initial depreciation on the cost of "electric components" the claimed amounts at Rs.1,65,182 and Rs,1,00,775 wife disallowed in the years 1990-91 and 1991-92. It was held that computers did not qualify for the allowance either as a machinery or a plant. The fiat appellate authority on the other hand found that the assessing officer allowed normal depreciation on these assets as part of machinery and plant. Therefore, by referring to C.B.R. Circular No.20 of 1957, dated 2nd of October, 1957, the appellate authority opined that where normal depreciation was allowed on any asset the initial or additional depreciation should follow as a corollary. The claims were accordingly allowed in both the years Hence the grievance of the department.
5. In the year 1992-93 the assessing officer found that the assessee company had advanced interest-free loans to its employees to the tune of Rs.1,26,45,000 for purchase of shares of the company. Finding it not related to the business of the company, proportionate interest cyst at Rs.13,83,459 was disallowed. Before the first appellate authority the 35sessee repeated its stance taken in assessment proceedings; that the assessee had enough funds of its own and that short terms borrowing at Rs.454(M) increased in the period under review only by Rs.2(M) when compared with tile last year when it stood at Rs.452(M). The appellate authority after agreeing that the amount advanced to employees represented only a fraction of the interest-free funds available to the assessee in the form of capital and reserves etc. allowed the prayer and deleted the addition. To support the contention the CIT(A) again referred to the ratio settled in re: Sh. M. Ismail (supra) and re: Industrial Engineer Agencies (supra) and 1991 PTD (Trib.) 351 (supra).
6. To sum up the assessee has only one grievance in the three years and it relates to disallowance of sums claimed as expenses on employees training abroad. The department on the other hand is feeling aggrieved of deletion of part of amounts claimed as royalty, deletion of addition on account of interest allocable to work in progress and allowing initial depreciation in respect of computers. In the last year viz. 1992-93 another ground seeks indulgence against interest allocable to advances made to the employees.
7. Parties have been heard. The revenue supports the disallowance of training expenses for the reasons earlier stated by the assessing officer while the findings recorded by the appellate authority in the aforesaid three appellate orders allowing relief under various heads is disputed for various reasons. Learned A.R. for the assessee, conversely, contests the said disallowance and supports the impugned orders on rest of the aspects.
8. Taking up the grievance of the assessee first we find that the issue needs to be addressed in terms of distinction contained in sub-clauses (xv) and (xviii) of section 23 which provides for admissible deductions while computing income under the head "income from business or profession". Sub-clause (xv) says, "any expenditure laid out or expended on the training of any person, being a citizen of Pakistan, in connection with a scheme approved by the C.B.R., for the purposes of this clause". Sub-clause (xviii) is of residuary nature and terms an allowance or deduction" any expensed (not being in nature of capital expenditure or personal expense of the assessee) laid out or expended wholly or exclusively for the purpose of such business or profession". In reply to show-cause notice against such claim, the assessee, in the year 1990-91 explained that the scheme of training was provided in the contract between the principals M/s. Messey Furguson which was approved by Government of Pakistan. Therefore, the expenditure was admissible both under sub-clause (xv) as well as (xviii) of section 23(1) of the Ordinance. The contentions were rejected on the ground that clause (xv) of section 23(1) provided for a scheme of employees training which was approved by C.B.R. and since no such approval had been obtained the question of allowing the expense did not arise at all. The assessing officer, however, did not say anything about the claim of the assessee that the expense was allowable under clause (xviii) as well. The disallowance in the rest of the two years were repeated with reference to the findings recorded in 1990-91 and was confirmed by the first appellate authority in the three years for similar reasons.
9. The contention of the assessee that the claim is allowable under clause (xviii) of section 23(1) finds support from the ratio settled by the Supreme Court in re: CIT East Pakistan v. M/s Engineers Limited, Dacca cited as PLD 1967 SC 524. The assessee in that case was a private limited company and derived income -from constructional work including building of concrete bridges in former East Pakistan. In the year 1959-60 the company sent two of its Engineer Directors for training and the claimed amount spent on this venture under the head "travelling and conveyance". The assessing officer disallowed the same on the finding that the expenditure was of capital nature as the benefit derived by the assessee was of enduring nature and, therefore, was not covered by clause (xvi) of section 10(2) of the late Act of 1922. This clause of section 10 of the Act provided "any expenditure not being in nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation". The assessee had, as an alternate plea relied upon clauses (xii) and (xv) of the same section. These are equivalent to clauses (xii) and (xv) of section 23(1) of the Ordinance. On rejection of claim the assessee approached the first appellate authority, which held the claim to be covered by clauses (xii) and (xvi) of sub-clause (2) of section 10. It was further found that alternatively if the expense was of capital nature it was allowable under clause (xiv). Therefore, the claimed expense was allowed. The Tribunal also found for the assessee and held that the amount incurred on training was not in the nature of capital expense and being wholly and exclusively in the interest of business of the assessee was allowable under clause (xvi) of section 10. In the alternate, the amount was held deductible under clause (xiv) which provided for allowance of "any expenditure of a capital nature on scientific research related to the business". The reference in the High Court was answered against the Revenue. The Supreme Court upheld the view. It was held that expense incurred could not be described as of capital nature; that it was a revenue expense and as such was covered by clause (xvi) of section 10(2) of the Act. The Honourable Court also rejected the plea of the Revenue that clause (xvi) was not attracted in case of the assessee because it was of general and residuary nature and, therefore, stood excluded by other specific provision dealing with the claim of the assessee. The contention of the revenue rested on the rule that a special provision in a statute excludes the application of a general provision of similar nature. The Court did not agree with the invocation of the principle and held:
"The scope of clause (xvi) which is of residuary nature .is thus wholly different from the sums included in clauses (xii), (xiv) and (xv). There being no similarity of subject-matter between clauses (xii), (xiv), (xv) and (xvi) of section 10(2) the rule generalibus derogant was clearly not attracted."
10. In the case of the assessee no finding was recorded against its claim that expense incurred was laid out wholly and exclusively for the purpose of its business. The Supreme Court in the above case found that maxim generaliabus special derogate things special derogate from things general was not applicable in such cases as there was not similarity of subject-matter between various clauses of section 10(2) of the Act. The situation before us is exactly identical. The revenue did neither doubt the actual incurring of the expense nor the fact that it was of revenue nature. Therefore, we will hold that it was covered by clause (xviii) of section 23(1) and was allowable in toto in the three years involved.
11. Next come the departmental appeals. The first issue relates to disallowance of provision for royalty. As noted earlier in the year 1990-91 a part of its was disallowed on the ground that the amount provided for under this head was almost double of the amount paid as royalty in the immediate preceding year. Learned appellate authority did not approve the action after agreeing with the assessee that neither a notice in this behalf was served before the intended action nor the reason made for the disallowance was otherwise convincing. The appellate authority also accepted the fact that amount of tax having been deducted from the amount earmarked for payment as royalty the disallowance could not be sustained. It. was accordingly deleted and we find no reason to disagree with the findings so recorded. Particularly when the learned D.R. has not disputed the findings of fact and also the claim of the assessee before the appellate authority that tax on the royalty amount shown at Rs.2,29,80,000 in profit and loss account was duly paid. A similar disallowance of provision at Rs.82,50,073 in the year 1991-92 ended on 30-6-1991 was made after finding that tax on royalty provided at Rs.10,25,004 was not paid. The assessing officer noted that the said amount of tax was paid on 20-8-1991 and 9-10-1991 i.e., after closing of the accounting year. By referring to the provision of section 24(b) he held that in absence of deduction and payment of tax at source the claimed provision could not be allowed. The contention that assessee was maintaining accounts on accrual basis also failed to convince him. He found the deductions under section 23 to be allowable only if these were not hit by mischief of the conditions prescribed under section 24. It was further recorded that payments to non-residents having expressly been provided for in clause (b) of section 24 and made subject to the restriction "unless tax thereon has been paid or deducted and paid under section 50" the claimed amount could not be allowed. The provision was accordingly disallowed. The order was reversed by the appellate authority on finding that payment of tax having been made on the day the royalty was remitted, sufficient compliance of the law had been made. Earlier the appellate authority remarked that section 50(3) speaks of deduction of tax only at the time of payment and that it was neither possible nor necessary to deduct it before payment. Reference in this regard was also made to C.B.R. Circular No.22 of 1992, dated July first, 1992 to say that actual payment was a prerequisite for tax to be withheld. The other submission that status of the assessee being that of an agent, it was always available for an assessment of the sums being made directly upon it. Learned A.R. for the assessee has supported the three appellate orders for the reasons contained therein. In the year 1992-93 a sum of Rs.63,37,872 paid as a royalty was disallowed under section 24(b) of the Ordinance. It was found that the tax on this amount at Rs.7,97,234 was paid in December, 1992. Therefore, the expenses could not be allowed. The appellate authority deleted the addition following the order of its predecessor. We are persuaded to agree with the conclusions reached by the first appellate authority though not exactly for the same reasons.
12. The issue without doubt needs to be examined in the light of the provisions contained in section 50(3), Explanation (b) to section 23(1) and section 24(b) of the Ordinance. A bare reading of Explanation (b) to section 23 indicates that the word "paid" as used in the earlier part of the section also includes the payments "incurred according to method of accounting upon the basis of which the income is computed". The expression "shall deduct at the time of payment, tax at the rates specified in the First Schedule" as contained in section 50(3) needs to be read in the light of the above definition of word "paid". The interpretation of sub-clause (b) of section 24 by the assessing officer, was rigid and pedantic. In the kind of accounting method being followed by the assessee actual payment of either royalty or the tax at source was simply impossible. As said above, Explanation (b) to section 24 takes care of this situation and permits the creation of provision both for the expense as well as the amount of tax at source. It may be noted that in a similar situation where deduction at source at the time of payment of salaries was not made the C.B.R. explained the corresponding provision of the repealed Act through Circular Letter C.No.4(131) T. 3/71, dated July 22, 1971. It stated, recourse to section 10(4)(a) may be taken in cases where the employer has not paid the tax on salaries before the completion of account. This clause may not be invoked merely on the ground that the tax was not deducted or paid during the relevant previous year". Thus, according to the C.B.R. where an assessee failed to deduct tax at the time of paying salaries but subsequently deducted the same at any time before the assessment was completed a compliance with the requirement of law was presumed. The case of the assessee also merited a similar treatment.
13. The interpretation of the word "paid" as used in section 16(2) of late Act of 1922 by the Supreme Court of Pakistan in 1972 SCMR 116 re: CIT, Lahore v. Mst. Wazir-un-Nisa Begum also supports the stand taken by the assessee before us. In 1971 PTD (Trib.) 894, Junejo M. Iqbal learned Accountant Member though favoured a strict Interpretation of the expression "payment" as used in section 50(3) of the Ordinance yet the word "paid" as contained in explanation to section 23 was held to mean "the amount actually paid or incurred according to the method of accounting on the basis of which income is computed". The assessee in that case failed due to the reason that tax at source on the interest payable to the foreign company was not paid either at the time of accrual or its actual payment.
14. In 1996 PTD (Trib.) 411 a Full Bench of this Tribunal considered slightly different angle of the issue. In that case the assessee borrowed money from a non-resident bank. The interest payable was disallowed by the assessing officer The provision of section 24(b) were invoked to hold that the assessee having failed to deduct and pay the tax thereupon was not entitled to the claimed expense The order was not approved by CIT (A). Before the Tribunal the Revenue argued that section 24(b) read with section 50(3) created a duty on the resident taxpayers to deduct and pay tax on all payments made to non-residents on account of interest, technical services, commission, brokerage etc. For the assessee on the other hand it was submitted that non-resident bank operating through local branches having paid interest on its income, including interest received, the disallowance made by the assessing officer was illegal. The Full Bench agreed and for that reason the first appellate order was maintained.
15. In the instant case the assessee maintained accounts on mercantile system of accounting. The provision providing for royalty and the amount of tax at source was not questioned by the Revenue on any other ground except that it was not castaway deducted and paid before the end of the accounting period. Also that it was deducted and paid some two months after closing of accounts. The objection was not relevant. Payment of amount set apart as provision before the end of the accounting period could not happen at all. A provision is setting apart of an appropriate amount for any known for existing liability. In case of the assessee it could be made, ascertained and provided for only with respect and in proportion to other items of balance -sheet i.e. sales and assembly of franchised goods. The provision for the payment of royalty could not precede closing of accounts for the year. Therefore, its actual payment happened after the end of the accounting period in all these years. As a matter of fact the expense having not bean refused on any other ground it had to be allowed either in the year in which the provision was made or in the year it was actually paid and the tax deducted at source. For income-tax liability nothing could change for or against the interest of the, Revenue because if the expense was not allowed in one year, it was to be allowed in the- next year when actually paid and the tax deducted. We have noted that the assessing officer did not allow the amount in next year either when the amount provided for the payment was actually disbursed and the tax admittedly deducted and paid to exchequer. This was factually unfair and legally improper. The expense was admissible and the tax at source was duly deducted before the payment of the amount. Therefore, the assessing officer did not act in accordance with law by not allowing the amount of expense either in the period preceding closure of accounts is in one year or in the next year when it was actually disbursed. Keeping in view the nature of accounts maintained by the assessee and the fact that tax at source was deducted and paid before the framing of assessment, we will hold that sufficient compliance of the legal provision was made to entitle the assessee to the deduction. The first appellate orders on this issue, accordingly, are not disturbed.
16. Next comes the issue of allocation of interest to work in progress. The assessee showed work in progress at Rs.5,17,73,000 in the year 1990-91. In reply to the notice expressing an intention to disallow proportionate interest allocable to work in progress on the ground that assets created out of the borrowed money were not used during the year, the assessee replied that he had reserves and equity amounting to Rs.314(M). Also that investment of Rs.51,773(M) in work in progress could easily be said to have been financed from this source. It was further stated that using the assets created out of borrowed capital was not necessary nor any provision of the Ordinance stipulated that the usage of such assets was a prerequisite for the allowance. The reply was rejected and a sum of Rs.5,46,500 was disallowed. Similar disallowances for similar reasons for rest in the two years, 1991-92 and 1992-93 at Rs.23,36,500 and Rs.40,91,000 were made. Before the first appellate authority the assessee succeeded by placing reliance on 1991 PTD (Trib.) 531 in which the judgment of Supreme Court in 1986 SCMR 968 re: Sheikh M. Ismail & Company was followed. In the year 1991-92 the appellate authority referred to five reported decisions from Indian jurisdiction to find that user of amounts created out of borrowed capital was not condition for claiming and allowing of interest. The appellate authority further agreed with the A.R. of the assessee that use of the assets during an assessment year was only required for a claim of depreciation and had nothing to do with the allowance of interest on borrowed capital. In the year 1992-93 the submission was further strengthened by a reported decision of the Supreme Court of Pakistan in re: M/s. Packages Limited v. The CIT 1993 PTD 758 wherein it was held that deduction of interest must be allowed in full regardless of the fact whether the stage in respect of an additional machine was of pre-production or otherwise. The case was that of an on-going concern already in production. Reference was also made to the decision of Supreme Court in 1989 SCMR 61 re: CIT v. Khairpur Textile Mills and 1987 PTD 149 (Karachi) re:- Pakistan Industrial Engineering Agencies v. CIT, Karachi.
17. Before us learned A.R. has supported the appellate order while the learned D.R. repeats the reasons for disallowance that since assets created out of the borrowed money were not used during the period relevant the assessment year, the disallowance was justified. We will not agree, Although the relief allowed by the first appellate authority in first two years was based upon the above reported decisions particularly re: CIT v. Khairpur Textile Mills (supra) and Pakistan Industrial Agencies which were not relevant yet the legal preposition remains that the reasons for disallowance was improper. The claim of interest was not questioned on any of the three ingredients contemplated in section 23(1)(vii) of the Ordinance and examined in 1991 PTD (Trib.) 531. No finding of fact was brought on record to challenge borrowing of capital, its use for the purpose of business of the assessee and the actual payment of the claimed interest. In absence of such findings the disallowance was rightly disapproved. The first appellate order in the year 1991-92 mentions the ratio settled in a number of cases from Indian Jurisdiction. Particular reference is made to the following remarks of the Calcutta High Court in re: CIT v. Indian Oxygen Ltd. (1978) 113 ITR 109:
"Looking at the position from another point of view it appears to us that the moment capital is utilized for the purposes of acquiring any assets for a business, whether the asset itself is actually used in the business or not, so far as the capital is concerned, it continues to be employed in the business. "
The other cases relied upon being (1978) 114 ITR 459 re: Ravi Machine Tools Ltd. v. CIT (1979) 120 ITR 37, (1976) 103 ITR 715 and (1958) 34 ITR 265.
18. Learned L.A. has not quoted either a provision of law or an authoritative pronouncement to support the reason for disallowance viz non user of assets created out of borrowed capital in the year of claim of interest. In M/s. Packages Limited v. CIT 1993 PTD 758 the Supreme Court considered the case of an assessee with a running business, which obtained loan for the purpose of adding machinery. Noting that the loan was not taken for a new product but to add efficiency to the production already in existence their Lordships reversed the judgment of the High Court. It was found that amount of interest paid by the assessee being an integral part of profit earning process relating to the conduct or carrying on of business was well within the folds of section 10(2)(xvi) of the late Act of 1992 to qualify for deduction. Also that deduction of interest under section 10(2)(iii) had to be allowed in full regardless of fact whether the stage was pre-production or otherwise. The claim of the assessee accordingly is supported by the ratio settled in the above reported decisions from Indian as well as Pakistani jurisdiction. We will, therefore, refuse to interfere with the first appellate orders in this respect.
19. In the first two years 1990-91 and 1991-92 the assessing officer disallowed initial depreciation on computers on the ground that these did not fall in the category of machinery and plant. The first appellate authority disagreed. It was noted that the assessing officer himself allowed normal depreciation on this asset considering it a part of machinery and plant. Therefore, relying on the principle explained in C.B.R.'s Circular No.20 of 1957 dated 2-10-1957 the disallowance was deleted. In the referred Circular it was explained that "once it is conceded that an asset is machinery or plant and the normal depreciation is admissible, allowance for initial and additional depreciation followed as a corollary". Learned D.R. does not deny the preposition. Also we have noted that this kind of disallowance was not made before or after the first two years before us. The Revenue has not challenged the claimed status as machinery or plant even in the ground of appeal. Therefore, no interference in this regard is made either.
20. Last issue in the departmental appeal for the year 1992-93 relates to the deletion of addition of Rs.13,83,459 earlier made on account of interest allocable on advances to employees. The assessing officer noted that the Company advanced a sum of Rs.1,26,45,000 to its employees for purchase of its shares. The disbursement of amount and the activity was found unrelated to the business of the Company. In response to notice as to why proportionate interest cost on this item may not be disallowed again the assessee took up the position that it had enough non-interest bearing funds of its own to enable it to make the impugned advance without having to borrow. It was pointed out that at the relevant time it had the share capital and free reserves to the tune of Rs.34,55,80,000 and differed taxation at Rs.1,03,75,000. Thus according to company the disbursement of an amount of Rs.12.6(M) was not of any significance. It was further added that short term running finance during the period did not register any mentionable increase. Last year these stood at Rs.452(M) while during the year these amounted in all to Rs.454(M) only. The extra borrowing according to the assessee during the year under review did not exceed by more than Rs.2(M) when compared with the borrowing of last year. Before the appellate authority the assessee contended that loans were advanced to bona fide employees of the assessee company and in accordance with the decision of the Board of Directors. Also that advancement of the sums closely related to the business activities of the company. Therefore, the assessee pleaded, that interest on the advanced amount even if had been out of borrowed money could not be disallowed. From the latest balance-sheet the assessee demonstrated that its shareholders equity was far more than the sum advanced to the employees. This was besides other funds available at its disposal as mentioned above. The appellate authority agreed with the submissions which were further supported by the ratio settled in re: CIT v. Sheikh Muhammad Ismail (supra) and re: Industrial Engineering Ltd. v. CIT supra. Reference was again made to the aforesaid reported decisions of this Tribunal cited as 1991 PTD 531 in which both the above cases of the Supreme Court were relied upon. Another decision of the Tribunal 1994 PTD Note 110 at p.141 was referred wherein it was held that interest, expenditure could not be disallowed and allocated towards dividend income earned by a bank nor even against tax-free income. On facts the appellate authority concluded that the disallowance was made without placing on record any evidence that the capital borrowed was not used for the purpose of business.
21. The above case-law referred while allowing relief does not bear a direct relevance to the issue before the first appellate authority. Nevertheless we are not persuaded to disturb the relief allowed for other reasons. It is emphasized that an assessing officer can always make out a clear case of non- business use of borrowed capital. However, in most of such situations, the one before us can be quoted as an example, the assessing officers hesitate an in depth enquiry and instead make resort to general remarks. Where a capital has been borrowed by an assessee and it is used with other capital or reserves at its disposal .an assessing officer has to pin-point and identify the exact amount which was not used for the business of the assessee before he can disallow a claim of interest expenditure. To identify and crystallize an exact amount the assessing officer must be equipped with the latest accounting techniques and ability to read the accounting documents prepared by an assessee. In most of cases it is observed that either the assessing officer is not possessed with the quality of knowledge or he hesitates in undertaking the required exercise. Therefore, instead of doing the necessary labour he attempts at a short-cut which in legal domain cannot work. To burden an assessee with an additional liability or to disallow an expense efforts are needed to spot-light both the quantum as well as the reasons for disallowance. In case of interest claimed as a deduction each and every penny of borrowed money will have to be identified which went down the drain on non-business purposes. The claim of the assessee that giving advances to workers/employees was incidental to its business could not be accepted on its face value. It was rightly ignored by the assessing officer. However, he should have moved one step ahead to co-relate the borrowed amount with the advances to the most exact extent. Generally speaking such an exercise is arduous as most of the assessees may not be maintaining a separate and independent in-flow and out-flow of borrowed sums. These are most likely to be made part of the other resources already available in the pool. However, the lenders normally being bankers and financial institutions following the borrowed funds to the end use cannot be impossible. The ratio settled in re: CIT v. Sheikh Ismail & Company can be cited as a support. In that case the Supreme Court refused to interfere for the Revenue on the ground that "In this case the entire accounts including the cash book and the bank accounts were before the I.T.O. who completed the assessment under subsection (3) of section 23 but he failed to show that any part of the borrowed money was not used in business and was diverted to the personal use of the director". Their Lordships further noted that the Revenue had not challenged the findings of fact rendered by the I.T.A.T. that there was no evidence on record to show that the advances made to the said director of the Company were out of the borrowings that were obtained from various banks. This finding of fact, as said earlier, is a condition precedent for disallowing the kind of claim before us. It may be added that in the findings so recorded every penny of borrowed money diverted to non-business or non-professional use will have to be brought home by the Revenue to disallow the claim of interest exactly to that extent. This having not been done, as said above, we will not disturb the first appellate order.
22. These being the reasons the assessee succeeds in all four appeals while the Revenue fails on all counts.
M.B.A. /342/Trib. Appeal allowed.