(a) Income Tax Ordinance (XXXI of 1979)---

----S.65, 17, 32(1) & 62---Additional assessment---Definite information-- Income from interest on securities---Method of accounting ---Assessee maintained accounts on Mercantile System and income from interest on securities were recorded in the books of accounts on accrual basis-- Assessment was finalized under S.62 of the Income Tax Ordinance, 1979 and declared actual receipts on the basis of previous history were accepted-- Assessment was re-opened on the ground that income had been under assessed to the extent of difference between the figures of income from interest on securities recorded in the books on accrual basis and the amounts taxed under S.62 was on the declared actual receipt basis and it was considered as "definite information" for re-opening the case ---Assessee contended that notice under S.65 of the Income Tax Ordinance, 1979 could not be issued on the basis of same facts available at the time of the assessment as the assessee had disclosed income both on receipt and accrual basis, in its Return---Department stated that notice under S.65 could be issued on the basis of existence of a binding judgment which constituted "definite information" if the Assessing Officer had failed to take into consideration such judgments of superior Courts at the time of framing assessment---Validity---proceedings initiated under S.65 of the Income Tax Ordinance, 1979 were declared ab initio void in law in circumstances by the Appellate Tribunal after considering the judgments of superior Courts as referred and impugned orders were cancelled---Appeals were allowed accordingly.

1994 PTD (Trib.) 1051; 1990 PTD 873; 1995 PTD 761; 1993. PTD 766 and 1.A.C. v. Pakistan Herald Limited 1997 SCMR 1256 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.27(2)(a), 2(12) & 80-D---Capital gains---Capital assets---Turnover tax- Government securities---Sale of ---Profit/gains---Chargeability of tax---First Appellate Authority found that profit/gains on sale of Government securities were chargeable under S.17 of the Income Tax Ordinance, 1979 as capital gain and department objected such treatment---Validity---Stocks and shares were capital assets as defined in S.2(12) of the Income Tax Ordinance, 1979 and gain on such trading could not be excluded under S.27(2)(a) of the Income Tax Ordinance, 1979 for incidence of tax on such gain on capital assets and it did not constitute "turnover" under S.80-D of the Income Tax Ordinance, 1979---Order of First Appellate Authority was confirmed by Appellate Tribunal.

I.T.A. No. 1635/KB of 1997-98, 1887 to 1890/KB of 1998-99 and 2220 and 2221 /KB of 1994-95 rel.

(c) Income Tax Ordinance (XXXI of 1979)---

----S.23(1)(vii)---Deduction---Borrowed capital---Interest on---Allowable expenditure---Interest incurred on borrowed capital invested in Prize Bonds, sold by the assessee on commission which was offered as taxable income, was an allowable expenditure.

I.T.A. No. 1297/KB of 1991-92 rel.

(d) Income Tax Ordinance (XXXI of 1979)---

----S.23(1)(x)---C.B.R Circular of 1993---Banking Companies Ordinance (LVII of 1962), S.41---Deductions---Bad debts ---Assessee's claim of bad debts on the basis of letter of Pakistan Banking Council was disallowed by the Assessing Officer on the ground that approval of such bad debts by the State Bank of Pakistan did not exist---First Appellate Authority found that letter approved the Bank's final audited accounts only and it could not be construed as certified approval of bad debts issued by State Bank of Pakistan as required under the Central Board of Revenue Circular of 1993-- Disallowance was confirmed by the Appellate Tribunal.

1976 PTD 237 ref.

(e) Income Tax Ordinance (XXXI of 1979)---

----S.14---Second Sched., Part I, cl. (128)---Export processing Zones Authority Ordinance, 1980---Exemption---Assessee was a Bank having its branch in Export Processing Zone and income of such branch was not exempted from tax by the Assessing Officer---Validity---Appellate Tribunal set aside the order with the direction to allow exemption claimed on such income.

I.T.As. Nos. 19/KB; 172; 176/KB of 1988-89; 1656/HQ of 1989-90; 1273/HQ of 1990-91 and 1297/KB of 1991-92 rel.

(f) Income-tax---

----WAPDA Bond---Income from---Tax liability ---Assessee was a Bank and derived income from WAPDA Bonds which was taxed by the department-- Validity---Order was set aside by the Appellate Tribunal with the directions to decide the issue afresh after seeking clarification from Central Board of Revenue.

I.T.As. Nos. 19/KB; 172; 176/KB of 1988-89; 1656/HQ of 1989-90; 1273/HQ of 1990-91 and 1297/KB of 1991-92 rel.

(g) Income Tax Ordinance (XXXI of 1979)---

----Ss.27(1) & 17---Public Debt Act (XVIII of 1944), S.28---Bearer National Fund Bonds Rules, 1985, R.2-A---SRO 807(1)/91, dated 21-8-1991---S.R.O. 986(1)/92---Bearer National Fund Bonds---Capital gain---Interest on securities---Roll over of Bearer National Fund Bonds---Assessment years 1992-93 and 1994-95---Income from Bearer National Fund Bonds arising on the amount of difference .between the discounted price and redeemable value of bonds was charged under S.17 of the Income Tax Ordinance, 1979 as interest on securities on sale of capital assets (B.N.F.B.)---Validity---No interest, profit and gains was accrued on Bearer National Fund Bonds at all under any provision of law for the assessment years 1992-93 and 1993-94 because the assessee was entitled to claim par value only on the date of maturity and not on any date prior to it and secondly that whatever accrued on the date of redemption/maturity was neither interest on securities chargeable under S.17 of the Income Tax Ordinance, 1979 nor profits and gains chargeable under S.22 of the Income Tax Ordinance, 1979---Stock of B.N.F. Bs. held till March 1993 by the assessee was its capital assets within meaning of subsection (12) of S.2 of Income Tax Ordinance, 1979 and chargeable to tax as capital gain under S.27 of the Income Tax Ordinance, 1979 at the rate prescribed under the law--First Appellate Authority was not justified in holding, that on account of roll over of the par value of Bonds, the redemption of the B.N.F.Bs. did not occur on the date of maturity-- Redemption of B.N.F.Bs. on discounted price had taken place on the date of maturity and a book reinvestment of such par value in SNFPs on revised terms had taken place which amounted to "transfer" as envisaged under S.27(1) of the Income Tax Ordinance, 1979---Order of First Appellate Authority was set aside by the Appellate Tribunal with the direction to charge the gain on B.N.F.Bs. under S.27 of the Income Tax Ordinance, 1979.

1994 PTD (Trib.) 1051 ref.

(h) Income Tax Ordinance (XXXI of 1979)---

----S. 27(1)---"Transfer"---Meaning---Transfer includes , redemption.

New Shorter Oxford English Dictionary, p.3367 and Black's Law Dictionary, Sixth Edn., St. Paul Minn., West Publishing Co., 1990 ref.

(i) Income Tax Ordinance (XXXI of 1979)--

----Ss.86 & 50---Charge of additional tax for failure to deduct and pay tax-- Assessee was a Bank---Assessing Officer levied additional tax under S.86 of the Income Tax Ordinance, 1979 for non-deduction of tax under S.50 of the Income Tax Ordinance, 1979 on import value of goods at the time of clearance---Validity---First Appellate Authority found that amounts under consideration related to Custom and other duties and income-tax which were collected by Customs Authorities and deposited with the assessee (Bank) as a treasury---Customs Authorities and not the Bank who was required under the law to deduct tax under S.50 of the Income Tax Ordinance, 1979 on import value of goods at the time of clearance ---Assessee's role in the whole affair was that of the Government Treasury, and thus, it could not be said to, be an assessee in default which was a pre-condition for levy of additional tax under S.86 of the Income Tax Ordinance, 1979---Finding of First Appellate Authority was confirmed by the Appellate Tribunal and appeal of the Department was dismissed.

Words and phrases---

----"Transfer"---Meaning.

Khaliqur Rehman, C.A. for Appellant (in I.T. As. Nos.27/KB to 29/KB of 1995-96).

Fahimul Haque, D.R., Tariq Masood, D.R., Ayaz Elahi, D.R. and Javed Farooqi for Respondent (in I.T.As. Nos.27/KB to 29/KB of 1995-96).

Fahimul Haque, D.R., Tariq Masood, D.R., Ayaz Elahi, D. R. and Javed Farooqi for Appellant (in I.T.As. Nos.1352/KB and 13531KB of 1994-95).

Khaliqur Rehman, C.A. for Respondent (in I.T.As. Nos. 1352/KB and, 1353/KB of 1994-95).

Khaliqur Rehman, C.A. for Appellant (in I.T.As. Nos. 1512/KB, 1513/KB of 1994-95, 30/KB, 31/KB of 1995-96, 2439/KB of 1996-97, 487/KB of 1997-98 and 592/KB of 1998-99).-

Fahimul Haque, D.R., Tariq Masood, D.R., . Ayaz,. Elahi, D. R. and Javed Farooqi for Respondent (in I.T.As. Nos.. 1512/KB, 1513/KB of 1994-95, 30/KB, 31/KB of 1995-96, 2439/KB of 1996-97, 487/KB of 1997-98 and 592/KB of 1998-99).

Fahimul Haque, D.R., Tariq Masood, D.R., Ayaz Elahi, D.R. and Javed Farooqi for Appellant (in I.T.A. No-2196/KB of 1996-97).

Khaliqur Rehman, C.A. for Respondent (in I.T.A. No.2196/KB of 1996-97).

Date of hearing: 21st August, 1999.

ORDER

Ten appeals out of these 13 appeals are instituted at the instance of the assessee and 3 appeals are instituted at the instance of the Department. We are deciding the appeals as under;

2. Assessment (ears 1988-89 1989-90 and 1990 91 Decisions of CIT(A) on orders under section 65/63.

Mr. Khaliqur Rehman, the learned authorised representative of the appellant submits that the admitted facts in all the three years are that the appellant; inter alia, derives income from Interest on Securities which was liable to be taxed under section 17 of the Income Tax Ordinance for the years under appeal. The appellant maintained accounts on the mercantile system and Income from interest on securities was being regularly recorded in the books of accounts on accrual basis. However, while filing returns under section 55 of the Income Tax Ordinance, the appellant offered only actual receipts under this head, on the basis of the previous history of the case. The Assessing Officer accepted the declared income under this head in the original assessments framed under section 62. Later on, for the subsequent years, the Assessing Officer changed the pattern of assessment, on the basis of the provisions of section 32(1), and started charging income under this head to tax on accrual basis.

3. On 18-9-1993, the Tribunal decided the appeals instituted at the instance of another public limited banking company holding that the impugned order for charging interest on Government Securities on accrual basis was in accordance with the provisions of section 32 of the Ordinance because the method of accounting regularly employed by the appellant was on mercantile system. The decision was reported as 1994 PTD (Trib.) 1051.

4. The Assessing Officer thereupon issued notice under section 65 to the appellant for the above noted three years as, according to him, there was definite information that the income for the three years (supra) had been under assessed to the extent of the difference between the figures of Income from Interest on Securities recorded in the books on accrual basis and the amounts taxed under section 62 on the declared actual receipt basis. The appellant challenged the validity of the notice before the Honorable Sindh High Court which granted stay of the proceedings vide its order in C.P. No. 1508 of 1994 dated 15-9-1994. The stay, however, expired on 14-3-1995 and the Assessing Officer re-initiated the proceedings on 3-4-1995. Adjournments were allowed on the request of the appellant. However, since neither returns were filed nor notices under section 61 were complied with, the Assessing Officer framed the assessments under section 63 of the Income Tax Ordinance and re-determined the appellants' total income by adopting the figures .of Income under section 17 on accrual basis, as disclosed in the original returns, Being aggrieved with this treatment, the appellant preferred appeals before the learned CIT(A).

5. The appellant objected to the orders, inter alia, on the ground that the learned DCIT, on the facts of the case supra, was legally unjustified to assume jurisdiction under section 65 of the Ordinance.

6. It was submitted before the learned CIT(A) that notices under section 65 issued on the basis of the same facts which were available before the Assessing Officer at the time of making the original assessments, represented a change of opinion as the appellant had disclosed Income on Interest from Securities, on receipt and accrual basis both, in its returns. The Officer who framed the original assessment had duly considered the matter and had consciously accepted the appellant's version keeping in view the prevalent legal position. According to the learned A.R., the notice issued under section 65 subsequently were, thus, ab initio illegal as assessments could not be reopened on the basis of a change of opinion in respect of the same facts. He placed reliance on several reported cases including 1990 PTD 873 and pleaded that the proceedings may be declared void and illegal on the basis of their ratios.

7. The learned WIT repelled the arguments (supra) by placing reliance upon the latest judgments of the Hon'ble Sindh High Court reported as 1995 PTD 761 Karachi and Hon'ble Supreme Court reported as 1993 PTD 766. According to him the Hon'ble High Court had held that notice under section 65 could be issued on the basis of existence of a binding judgment of a competent Court of law/forum. Such notice would not suffer from any infirmity under section 66(2) as the such judgment would constitute the definite information which is a pre-requisite for issuance of such notice.

8. The learned CIT contended that in the present case the judgment of the Tribunal referred to earlier constituted 'definite information' in terms of the observations of the learned Supreme Court of Pakistan and, therefore, the appellant's objection that there was no definite information available with him to initiate the proceedings under section 65 was misplaced.

9. The learned CIT(A) agreeing with the submissions of the learned DCIT' (supra) held:

"The rule laid down by the Hon'ble Supreme Court squarely covers the facts of the present case. Since the legal position regarding taxability of income from interest on securities had under gone a drastic change with the deliverance of the judgment of the Hon'ble Tribunal referred to above, the proceedings were correctly initiated under section 65 in this case. The preliminary objection of the appellant is accordingly repelled."

10. The first common objection taken in the three appeals (supra) is against the foregoing impugned finding of the learned CIT(A).

11. Mr. Khaliqur Rehman, the learned authorised representative of the appellant has submitted that the learned CIT(A) has misdirected himself- in reading the decision reported as 1995 PTD 761, in the case: Adamjee Insurance Company Limited and others v. ITO and others, out of context. Reference to paragraph 26 of the decision of the Supreme Court of Pakistan in the case of Central Insurance Company and others v. C.B.R. 1993 PTD 766 = 1993 SCMR 1232 was made by the High Court in the case of Admajee Insurance (ibid) to support the view that if the Assessing Officer has failed to take into consideration a binding decision of a superior Court existing at the time of framing the assessment the discovery of the authority (supra) subsequent to the framing of issue may constitute a definite information in terms of section 65 of the Ordinance.

12. We have perused the decision (ibid) and we find that regarding the principle of law enunciated by the Supreme Court of Pakistan in the case of Central Insurance Company (ibid), Saleem Akhtar, J. delivering the decision in the case I.A.C. v. Pakistan Herald Limited 1997 SCMR 1256 has observed (P.136):

"In this case the assessee had disclosed all the material facts without any concealment on the basis of which assessment was consciously completed by the Assessing Officer, but such assessment was sought to be reopened under section 65 relying on a circular issued by the Income Tax Department and the same was not treated to be a definite information. In the present case, there is no concealment of facts. Everything had been declared right from the very beginning and even after 1980 the legal position did not charge as section 34-A was not applicable to the respondent. In these circumstances, the opinion of the petitioners that a definite information has been received as it was discovered that section 34-A was ignored, was completely misconceived and based on mis-appreciation and misapplication of law. Where an assessment has been framed consciously by applying mind and there being no concealment of facts by the assessee, discovery of the fact that a provision of law had been ignored or not applied cannot be called a definite information. In Central Insurance Co., it was observed that the expression 'definite information' will include factual information as well as information about the existence of a binding judgment of a competent Court of law-forum for the purposes of section 65 of the Ordinance'. This dictum will not cover a case where after framing assessment consciously, the Assessing Authorities realise that any provision of law has been ignored, not applied or misapplied. Such discovery does not fall within the ambit of term 'definite information' as used in section 65 of the Ordinance."

13. Precisely the Supreme Court of Pakistan observed in paragraph 27 of the decision in Central Insurance Company case:

"27. We may point out that the Court, while construing the provisions of Order XLVII, C.P.C. which relates to the review of judgments/orders, have held that a subsequent binding decision after the disposal of the case cannot be said to be discovery of a new important matter or of a mistake or an error apparent on the face of record and that mere conflict or devergence of opinion cannot amount to an error apparent on the face of record in terms of Rule 1 of Order XLVII, C.P.C. In this behalf, reference may be made to the case 9f Lachhmi Narain Balu v. Ghisa Bihari and another (AIR 1960 Punjab 43), the case of Board of Revenue and another v. Syed Akbar Shaib (AIR 1973 Kerala 235) and the case of Gyan Chandra Devinedi v. 2nd Additional District Judge, Kanpur and others (AIR 1987 Allahabad 40). Though Order XLVII, Rule 1, C.P.C. cannot be equated with section 65 of the Ordinance on account of difference in language and scope of the respective provisions but the above principle will be applicable even in case of section 65 of the Ordinance. However, if the Income-tax Officer failed to take into consideration a decision of a superior Court which was binding on him at the time of framing of an assessment order, discovery of the above authority subsequent to the framing of issue may constitute a 'definite information' in terms of section 65 of the Ordinance. We may also observe that even change in law cannot justify-re-opening of a past and closed transaction in the abseence of express provision providing retroactive effect."

14. Accordingly, we find that the proceedings initiated under section 65 by the learned DCIT for the assessment years 1988-89, 1989-00 and 1990-91 are ab initio void in law and the learned CIT(A) is not justified in upholding the impugned assessment order; hence the impugned assessment orders cancelled and the appeals in all the three assessment years allowed. Objections taken on other grounds need not be adjudicated upon.

Assessment years 1991-92 and 1992-93

15. Objection taken on behalf of the Department, against the finding of the learned CIT(A) that profit/gains on sale of Government securities amounting to Rs.6,173,247 in 1991-92 and Rs.4,902,000 in 1992-93 are chargeable under section 27 as capital gain, is common in the two appeals. Besides, it is the only ground for appeal instituted at the instance of the Department in assessment year 1991-92.

16. Admittedly the term "stock" includes the national debt of a country and fully paid shares in a company. It has been already held in the decisions in I.T.A. No.1635/KB of 1997-98 (A.Y. 1996-97), dated 24-11-1998, I.T.As. Nos.1887 to 1890/KB of 1998-99, dated 9-6-1999 and I.T.A. Nos.2220 and 2221/KB of 1994-95, dated 27-9-1999 that stocks and shares, even if traded in, are capital assets as defined in subsection (12) of section 2 of the Income Tax Ordinance and gain on such trading is not excluded under clause (a) of subsection (2) of section 27 of the Income Tax Ordinance for incidence of tax on such gain on capital asset; hence does not constitute "turnover" under section 80D. Accordingly, the impugned orders are confirmed, and the appeals are dismissed.

17. We are respectfully deviating from the findings of the Tribunal relied upon by the learned DCIT in his impugned orders because those are either inapplicable due to the fact that the provision of Income-tax Act, 1922 R (repealed) were not in para materia with the provisions of the Ordinance (supra) or these are per incurium because the provisions of sections 2(12) and 27(2)(a) have not been duly considered therein.

18. The next and the only other objection taken on behalf of the Department in 1992-93 is against the finding of the learned CIT(A) that interest incurred on borrowed capital invested in prize bonds, sold by the respondent on commission which is offered as taxable income, is an allowable expenditure.

19. The issue has already been considered in I.T.A. No.1297/KB of 1991-92 (A.Y. 1990-91) and decided in favour of the respondent vide order dated 3-6-1998.

20. Accordingly, the impugned order is confirmed and the appeal is dismissed.

21. Assessee's Appeals: Assessment years 1991-92 to 1996-97 Orders under section 62.

The first objection common in all these appeals except the appeal for the assessment year 1992-93 is taken against the upholding of disallowance of claims on account of bad debts. It has been submitted before the learned CIT(A) as well as before us on behalf of the appellant that the claims were not mere provisions; the debts were written off and as such allowable as per decision of High Court in appellant's own case reported as 1976 PTD 237. It was further submitted that the Tribunal has allowed bad debts on the same basis for assessment years 1966-67 to 1973-74. The learned authorised representative of the appellant has also submitted that the learned DCIT has erred in regarding that approval of State Bank of Pakistan does not exists. He has produced copy of the letter of Pakistan Banking Council dated 25-9-1991 wherein the amounts of bad debts are mentioned. He, therefore, has submitted that entries of amounts in the book was bad and doubtful debts are made in accordance with the stipulations of the State Bank of Pakistan contained in the regulations framed from time to time, the compliance whereof is mandatory on the banks under section 41 of the Banking Companies Ordinance, 1962.

21-A. The learned CIT(A) after perusal of the facts on record has concluded that the fact remains that the appellant has actually claimed deduction on the basis of mere provisions. Regarding the evidence based on the letter of Banking Council (supra), lie has found that it is a letter approving the bank's final audited accounts only and it cannot 'tie construed as certified approval of bad debts issued by State Bank Pakistan as required under the Central Board of Revenue Circular of 1993. He has further found that the learned Assessing Officer has already allowed bad debts duly certified by State Bank of Pakistan under that arrangement described in the Central Board of Revenue Circular (supra). The learned CIT(A), therefore, has upheld the impugned disallowances.

22. The findings of facts recorded by the learned CIT(A) in the impugned orders remains un-repelled before us. Accordingly no interference in the impugned orders is warranted on this issue; hence that impugned disallowances confirmed and the appeals on this ground dismissed.

23. The next objection common in all the appeals (supra) except the appeal for the assessment year 1992-93 is against the impugned finding of the learned CIT(A) that the income of appellant's branch situated in the Export Processing Zone is not exempt from tax.

24. The learned authorised representative of the appellant has submitted that this issue has been considered at length by the Tribunal in I.T.A. No. 19/KB of 1988-89 (A.Y. 1985-86); I.T.As. Nos. 172/KB and 173/KB of 1988-89 (A.Ys. 1986-87 and 1987-88) I.T.A. No.1656/HQ of 1989-90 (A. Y. 1988=89). I. T. A. No. 1273/HQ of 1990-91 (A. Y. 1989-90) and I. T. A. No.1297/KB of 1991-92 (A.Y. 1990-91) and it has been held vide order dated 3-6-1998:---

" 19. Having given our careful consideration to the foregoing facts and circumstances as well' as the submissions made by the learned representatives of the two sides we find that the Bank Branch set up by the appellant in the Export Processing Zone, Karachi, is an industrial undertaking as defined in clause (e) of section 2 of .the EPZ Authority Ordinance, 1980 within the meaning of "the providing of such services as are specified in this behalf by the Federal Government" under Rule 5 read with Rule 15 of the EPZA Rules, 1981 (supra). We further find that the activities of the appellant's Branch are approved in this behalf by the Federal Government as enumerated in sub-rules (4) and (5) of Rule 10 and sub-rule (1) to sub rule (5) of Rule 11 and in view of the provisions of sub-rules (1)(b), (3), (4) and (6) of Rule 10. as well as the provisions of Rule 11 (supra), we are persuaded to agree with the learned A.R. of the appellant that one cannot 'escape the conclusion that the income accruing or arising to the Bank Branch from activities of the Branch, approved by the Federal Government (supra), is the income according or arising to the Branch outside Pakistan for the purposes of clause (128) of Part I of the Second Schedule to the Income Tax Ordinance, 1979; hence exempt from tax under Income Tax Ordinance, 1979. In our view, there can be no insinuation of intendment in the foregoing conclusion. "

25. Accordingly, the impugned orders on this point are found unsustainable; hence set aside with the direction to allow the exemption claimed on such income.

26. Grounds Nos.6, 7, 8 and 9 taken in the appeal for the assessment year 1991-92 have not been pressed by the learned authorised representative of the appellant because relief has already been allowed by the learned DCIT in pursuance of the order of the learned CIT(A) setting aside the assessment on these issues. Accordingly, the appeal on the foregoing grounds is dismissed as not pressed.

27. Similarly in the appeal for the assessment year 1992-93 grounds Nos.4, 5 and 6 are not pressed for the same reason and the 'appeal on such grounds is similarly dismissed.

28. The next objection common in all these appeals is taken against upholding of the impugned assessment orders taxing income received from WAPDA Bonds.

29. This issue has also been considered at length in the decision of the Tribunal dated 3-6-1998 (ibid) whereby this issue in the assessment years 1985-86 to 1990-91 have been set aside with the directions:---

"24. Since the contradiction in terms, in the S.R.0.603(1)/89, dated 6-6-1989 and SRO. 745(1)/89, dated 11-7-1989 is evident and needs to be resolved by the C.B.R. and the (Budget Wing) of the Finance Division, Government of Pakistan, the order on the impugned' disallowance is set aside with the direction to decide the issue afresh after seeking clarification from the Central Board of Revenue. "

30. Accordingly, the impugned orders are set aside on this point with the directions supra.

31. Another objection taken only in assessment year 1994-95 is to the upholding of the treatment of learned DCIT in respect of 'capital gains' arising on sale of capital assets (BNFB) as interest on securities under section 17.

32. Briefly, the facts are that the appellant had purchased Bearer National Fund Bonds (BNFBs) of the book value of Rs.6,000,480,000 in March, 1990. These Bonds were first issued by the Government of Pakistan in 1985. According to the Rules framed by the Federal Government at the time of the first issue, the Bonds did not carry-any interest but had been issued at discounted rates of Rs.89, Rs.79, Rs.69 against their face value of Rs.100, in accordance with their period of holding i.e. for one year, 2 years and 3 years respectively. (emphasis provided by us)

33. The banks had been debarred from purchasing these Bonds at the time of their initial issuance. The accrued income, receivable on redemption of such Bonds, had been .exempted from tax under clause 170 of the Second Schedule. Later on, after maturity of the original Bonds, banks were also allowed to purchase such Bonds.

34. Subsequently vide S.R.O. 68.1(1)/91, dated 25-7-1991 issued in exercise of the powers conferred by section 28 of the Public Debt Act, 1944 (XVIII of 1944), whereby the Federal Government was pleased to direct the following amendment in the Federal Investment Bonds Rules, 1990:

"In the aforesaid Rules, for rule 8 the following was substituted, namely

8. The profits on the Bonds shall be liable to tax under the Income-tax Ordinance, 1979 (XVIII of 1979), the profits shall also be subjected to deduction of Tax at source according to the provisions of the said Ordinance'."

35. It was followed by Circular No.4 of 1992 issued by the Central Board of Revenue vide C.No.ITJI-1(31)/85, dated 27-1-1992. The Central Board of Revenue said in the Circular that the Bearer National Fund Bonds did not carry any interest and the holders of such bonds on redemption were not required to pay tax on the amount received on maturity in view of the exemption provided under clause (170) of Part I of the 2nd Schedule to the Income-tax Ordinance, by virtue of Finance Division's SRO 821(1)/91, dated 22nd August, 1991, the holders of such bonds maturing in fiscal year 1991-92 and thereafter have been allowed an option to roll over their holdings for a period of 3 years with profit @ 12.5 % on the face value of a bond on half yearly basis. It has been further clarified that the interest will be subject to withholding tax @ 10% which shall not be treated as full and final discharge of tax liability. Final tax liability in each case will be determined at the time of assessment of income under the head interest on securities in accordance with the relevant provisions of law.

36. Further in exercise of the powers conferred by section 28 of the Public Debt Act, 1944 (XVIII of 1944), the Federal Government vide S.R.O. 807(1)/91, dated 21-8-1991 was pleased to insert the new Rule 2-A in the Bearer National Fund Bonds Rules, 1985, namely:

"2-A. The Federal Government may allow option to holders of maturing bonds to roll over their holding for such further period and on such terms and conditions as may be notified in the official Gazette. ".

37. Later in pursuance of Rule 2-A of the Bearer National Fund Bonds Rules, 1985, the Federal Government vide S.R.O. 986(1)/92 was pleased to allow to holders of bonds maturing in fiscal year 1992-93, the option to roll over their holdings for a period of .3 years on the following terms and conditions, namely:

(1) The bonds shall be redeemable at par after three years from their respective date of roll over.

(2) Profit @ 13.0% p.a. shall be paid for 3 years on the face value of a bond on half yearly basis.

(3) There shall be a 10% withholding tax on profit.

(4) An endorsement to the effect that the option provided for in rule 2-A of the aforesaid Rules has been exercised in respect of a bond shall be made on the bond on its presentation at the "Issuing Office".

38. The appellant Bank, therefore, rolled over all its holdings of BNFBs on the maturity thereof in March 1995.

39. In the foregoing legal perspective according to the learned CIT(A)., interest was being earned on the Bonds since 1991-92 but was not being offered for tax as the appellant contended that since it represented income from interest on securities it was chargeable to tax on receipt basis. This plea was not being accepted by the Department which had been subjecting declared accrued interest as per books to tax, and that the treatment had been confirmed by the CIT(A) in appeal for assessment years 1991-92 and 1992-93 on the strength of the Tribunal's decision reported as 1994 PTD (Trib.) 1051.

40. The Bonds eventually matured in March 1993, relevant to assessment year 1994-95. The appellant, according to the learned CIT(A), duly credited interest account with the amount of accrued interest for the year. The learned CIT(A) further found that interest accrued on other securities was also accounted for and the appellant declared total income from 'Interest' on Securities' at Rs.8,649,370,786 as per Annexure "E" to the return of income for assessment year 1994-95. It, however, deducted an amount of Rs.2,322,792,000 from the above on the ground that this amount, which had already suffered tax as interest on securities on accrual basis, actually represented capital gain on maturity of the Bonds, with the claim that it was liable to tax at the reduced rate 25%. Similar claim was also made at the time of assessment in respect of the recorded interest for assessment year 1993-94 but the appellant had not declared any capital gain in the return of income. For assessment year 1994-95, however, the appellant had duly declared capital gain of Rs.2,321,752,000 in the return also, after setting off capital losses suffered on sale of other securities and Treasury Bills etc. against the declared amount of capital gain on sale of Bonds referred to above.

41. The DCIT proceeded to treat the whole amount of interest on securities, debentures, BNFBs, Treasury bills etc. as income under section 17 and the plea for subjecting to tax the amount of 2.33 billions at the reduced rate applicable to capital gains was rejected.

42. On the facts and in the circumstances supra, the learned CIT(A) concluded in his impugned order:

"It is quite clear from, the above that the Bonds in question were Government Securities, which had originally been issued at discounted rates as Zero coupon bonds without any fixed rate of interest, and were to be redeemed at their par value of Rs.100 each after the expiry of their respective specified holding periods. The position, however, changed after expire of the first holding period when the Bonds attained maturity and the option of roll over was allowed. It has to be kept to mind that the Bonds had reached their par value after the expiry of the first three years period and the roll over was allowed at Par. value. The Bonds, thereafter, became entitled to regular periodical interest in accordance with the Rules reproduced above (emphasis provided by us)

It was specifically laid down that this profit was subject to tax as income from Securities. It would, thus, be seen that the nature of the Securities had undergone a complete change after their rollover." (emphasis provided by us)

43. The learned A.R. of the appellant on the other hand, had contended that the Bonds in question were its capital asset under the definition contained in section 2(12). He had further pointed out that, according to the method of computation of capital gains laid down in section 28(1), the cost of acquisition of asset was to be deducted from its sale price. According to him since cost of-acquisition of .the asset was Rs.69 and its transfer price was Rs.100, the difference between the two amounted to Capital gain.

44. However, the view supra did not find favour of the learned CIT(A) because the term transfer under clause (b) of section 27(1), included "sale, disposition, exchange or relinquishment of the asset, or the extinguishments of any rights therein and the term 'roll over' was not included in the said definition, nor, in the opinion of the CIT(A) it could be so inferred or construed. According to the learned CIT(A) neither ,any disposition, exchange or relinquishment of the assets in question had taken place, nor any right therein had been extinguished, what had actually happened was that the appellant had exercised its option to extent the holding period of bonds, which had already attained maturity in the past. Therefore, the claim that the capital asset had been transferred, either in the literal or the notional sense, was not acceptable to the learned CIT(A)

45. The learned CIT(A) was, further, of the view that even if the claim that redemption of the bonds in pursuance of Rule 2-A supra amounted to their 'transfer" were to be accepted, no capital gain would still arise because in that case, their "cost of acquisition" and "sale price" would be one and the same i.e. their par value. He, therefore, held that no capital gain had been earned by the appellant on the- roll over of its holding of "BNFBs" and the Assessing Officer had; therefore, rightly refused to allow deduction of Rs.2.33 billion claimed by- the appellant from the declared income from interest on securities in both the above noted years.

46. Regarding the question of taxability of such income on accrual or receipt basis the learned CIT(A) held that the matter stood decided by the Tribunal vide its order reported as 1994 PTD (Trib) 1051 since there was no dispute regarding the fact that the appellant was maintaining its books of accounts on the mercantile system, where all incomes were recognised on accrual basis, income from interest on securities was also chargeable to tax

47. Mr. Khaliqur Rehman, the learned A.R. of the appellant has submitted at the outset that the impugned findings of the learned CIT(A), on facts supra, suffer from self contradiction.

48. Firstly, the learned CIT(A) has himself, noted in paragraph 32 supra that "the bonds did not carry any interest" and yet he has concluded that the difference of discounted cost and face' value, gained by the appellant on maturity, was income from interest on securities under section 17 of the Ordinance.

49. Secondly, the finding of the learned CIT(A) in paragraph 40 supra regarding the treatment of the amount accruing on bonds from year to year till the date of full period of maturity in march, 1993 and the recognition of such amount in the books and statements of account in assessment years 1993-94 and 1994-95 reflects that although the appellant had been recognising in its account the amortization gain on time scale basis out no capital gain had been declared till assessment year, 1994-95 in the return of income and the charge of tax on such unaccrued gain in assessment years 1992-93 and 1993-94 treated as interest on securities on alleged accrual basis had been impugned in appeals.

50. Thirdly, the term used in SRO. 681(1)/91, dated 25-7-1991 for the amount liable to tax is "profits" and not interest.

51. Fourthly, the learned CIT(A) has himself found in paragraph 42 supra that the Bonds were originally issued at discounted price without any fixed rate of interest and that the position changed after the expiry of the first holding period. It is further found that thereafter the bonds became entitled to regular periodical interest and that it was specifically laid down that this profit was subject to tax as income from securities. The learned CIT(A), according to Mr. Khaliqur Rehman, therefore, had no basis to hold that the gain earned by the appellant on maturity of bonds in assessment year 1994-95 was income on account of interest on securities.

52. It is further submitted that the learned CIT(A) further misdirected himself, after he himself found the foregoing facts, to hold that the 'roll over' of the investment in bonds as per addition of rule 2-A (supra) was not redemption of the BNFBs. According to the learned IAC in paragraph 42 of this order, the learned A.R. submits, the position changed after the expiry of the first holding period when the bonds attained maturity; the roll over was at par value; the bonds became entitled to regular periodical interest in accordance with the Rules supra and it was specifically laid down that this profit was subject to tax as income from interest on securities.

53. The learned D.R. is supporting the impugned order for reasons recorded therein.

54. We have considered the fact and circumstances supra and the specific findings of the learned CIT(A) that the Bonds did not carry any interest, that the term used in the SRO (ibid) for charge of tax on the amount of difference of the discounted price and redeemable value of bonds is "profit' and not 'interest', that the bonds were originally issued without any fixed interest rate and that the bonds at redeemable value i.e. par value became entitled to periodical interest only after the date of redemption. We, on the basis of foregoing, are persuaded to subscribe to the view canvassed by the learned authorised representative that firstly no "interest" "profit and gains accrued on BNFBs (supra) at all under any provision of law for the assessment years 1992-93 and 1993-94 because the appellant was entitled to claim par value only on the date of maturity and not on any date prior to it and secondly that whatever accrued on the date of redemption/maturity was neither interest on securities chargeable under section 17 nor profits and gains chargeable under section 22 of the Ordinance.

55. Further, on the foregoing, fact, we are of the considered view that the stock of BNFBs held till March 1993 by the appellant, was its capital asset within the meaning of subsection (12) of section 2 and chargeable to tax as capital gain under section 27 at the rate prescribed under the law.

56. We further find that the learned CIT(A) is not justified in holding, on account of roll over of the par value of Bonds, that the redemption of the BNFBs (supra) did not occur on the date of maturity.

57. Firstly, the reliance of the learned CIT(A), in this regard, on the inclusive definition of the term 'transfer' given under clause (b) of sub section (2) of section 27 of the Ordinance in our considered view, is misconceived because the definition, admittedly, is not exhaustive.

58. Secondly, the learned CIT(A) has himself recorded the finding that a change has occurred in the nature of investment in Bonds on the date of redemption/maturity Le., the BNFBs have been booked at par value for the purposes of the option to avail the fresh offer of roll over of such

59. Thus, a book redemption of BNFBs on discounted price has taken place on the date of maturity and a book reinvestment of such par value in SNFBs on revised terms has taken place which amounts to "transfer" as envisaged under subsection (1) section 27 of the Ordinance.

60. The word 'transfer' in parlance of law means "convegance of property esp. of stocks of shares, from one person to another." P.3367: The New Shorter Oxford English Dictionary, published in the United States by Oxford University Press Inc. New York Oxford University Press 1973,

61. According to Blacks Law Dictionary, Sixth Edition. St. Paul Minn., West Publishing Co. 1990, "Transfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption. Bankruptcy Code 101." Thus, transfer includes redemption.

62. Accordingly, we set aside the impugned order on this issue and direct the learned DCIT to charge the gain on BNFBs under section 27 of the Income Tax Ordinance, 1979:

63. The next objection common in all these appeals is taken to the finding of the learned CIT(A) that the learned DCIT is justified in charging tax on interest on Government Securities on accrual basis instead of cash basis.

64. This issue already stands settled in favour of the Department and the impugned orders do not warrant any interference except that the capital gain on BNFBs, held by us supra to be chargeable under section 27 of the Ordinance, is to be excluded from the income charged as interest from securities, in the relevant years. Accordingly, the impugned orders on this issue except to the extent supra are confirmed and the appeals on this ground are dismissed.

65. The objection taken against setting aside instead of cancelling the assessment of income under the head "Interest Suspense Account" has become infructuous the learned DCIT has passed revised order under section 62-A again holding it as chargeable to tax and the learned CIT(A) has upheld it. His upholding order is impugned by the assessee in I.T.A. No.592/KB/1998-99 (A.Y. 1995-96: under section62/132/156).

Accordingly I.T.A. No.2439/KB of 1996-97, on this issue is dismissed as infructuous.

66. Objection taken on ground No.7 in I.T.A. No.2439/KB of 1996-97 (A.Y. 1995-96) is not pressed by the learned A.R., hence dismissed.

67. The objections taken to upholding of the action of the DCIT to charge tax on interest suspense account in I.T.A. No.592 (supra) (A.Y. 1995-96) is already helot by the Tribunal unsustainable in. Accordingly, appeal on this ground is dismissed.

68. The next objection taken on this appeal is that the learned CIT(A), has erred in allowing an incorrect amount of DITR of Rs.108,196,673 as against the correct amount of Rs.287,741,383.

69. The impugned order is modified by directing the DCIT to allow the correct amount of DITR after verification.

70. Another separate objection is taken in assessment year 1996-97 is that the learned CIT(A) has erred in confirming the action of the learned DCIT in taxing income of Rs.509,325,271 from Bearer National Fund Bonds (BNFB).

71. Briefly the facts were that the income from Government Securities had been offered on cash basis at Rs.10,018,508,563 in the return of income on the consistent basis in relation to the previous year. However, the amount of accrual of such income was Rs.14,787,082,149; hence net difference between accrual and cash basis was Rs.4,768,573,586.

72. The income from WAPDA and BNFB was recognized on accrual basis and offered to tax in the return of income on accrual basis as well. However, with respect to BNFB, which was rolled over, the income had been claimed as capital gain, but had been recognized on accrual basis.

73. The learned DCIT asked for the details of investment in BNFBs, quantum of investment by original purchase and roll over and to file details of how the figures of profit on BNFBs have been worked out or arrived regarding to profit. He further asked for the copy of ledger of gross income account for 18 months from 1-1-1995 to 30-6-1996, which may show the claim that BNFBs interest was credited to this account for the three 6 monthly accruals.

74. It was responded on behalf of the assessee vide letter dated 15-5-1997 reiterating that BNFB is recognised on accrual basis but no details were filed.

75. The learned DCIT, therefore, held that the interest accrued to assessee on BNFBs could not be treated as capital gain and he charged it as income from interest on securities.

76. The learned CIT(A) has upheld the impugned treatment because the findings supra were not repelled before him.

77. The position remains the same before us and we have already found that the nature of income on rolled over BNFBs changed from capital gain on stocks to interest on securities.

78, Accordingly, the impugned order is confirmed and appeal

79. Objections taken on ground Nos.7, 8 and 10 in the appeal for 1996-97 are not pressed as these have become infructuous; hence appeal on the foregoing grounds dismissed as infructuous.

80. The only other objection of the assessee in this last appeal is against setting aside the action of DCIT in treating the dividend income of Rs.80,868,687 as income from business and taxing it, at 60% as against 5% rate applicable on dividend income.

81. The learned Assessing Officer has noted regarding dividend income in his order.

"Assessee bank has declared dividend income of Rs.129,018,365 and offered it for tax @ 5 % . Assessee did not compute its income in the manner provided in the Ordinance. Dividend income is assessable under section 30. I would not have ventured to go for allocation, had there been small investment as part of business activity. The Bank has in fact invested huge amounts in shares against which dividend of Rs.129 million is claimed to have been received. Principle of section 15 read with section 30, and definition of total income gives this idea that income under each head is to be separately booked. For investment in chares, the bank does not have that much liquidity or their own funds to put in this specific portfolio, this is out of pool money created out of deposits of their customers, therefore, cost of funds is to be allocated against income from dividend. Calculation of costs of funds is given as under:

Total FinancialDividend Income

CostX Declared

-------------------------------------------=Cost of Finance

Gross ReceiptsIncurred on Dividends

15940236652 X 129018365

------------------------------------------ =80868687

75411144477.

82. Computation of total income and tax payable thereon done by the learned DCIT in his order is as under:,

83. The objection taken before the learned CIT(A) on this issue was as under:

"The learned DCIT erred in treating the Dividend income of Rs.80,868,687 as income from business and taking it, at 60% as against 5 % . "

84. The learned CIT(A), on the foregoing facts, has held:

"Dividend income of Rs.80,868,687 has been taxed as business income at 60 % as against 5%. The reasoning followed by the Assessing Officer is neither sound, logical nor intelligible. The assessment on this point ix set aside for fresh decision after necessary notice under section 62 and by means of a speaking order. "

85. We find, on the facts and circumstances of the case supra that the very objection taken before the learned CIT(A) was misconceived and it did not arise from the impugned order. As such interference in the impugned order of the learned CIT(A) supra is found unwarranted; hence confirmed.

86. Assessment year 1996-97: Order under section 86.

This brings us to the last appeal instituted as the instance of the Department against the impugned finding of the learned CIT(A) that the provisions of section 86 did not apply to the assessee Bank as no tax had been deducted at source under section 50 by the assessee Bank itself. This section can only be invoked against those assessees who fail to deduct tax or deposit the same after having deducted the - same under section 50. The Assessing Officer has failed to establish that the assessee Bank had made a default by non-compliance with the provisions of section 50 for the reason that the amounts under consideration related to Custom and other duties and Income-tax which were collected by Custom Authorities and- deposited with the assessee as a treasury. Moreover, it was the Customs Authorities and not the appellant who was required under the law to deduct tax under section 50 on the import value of goods at the time of clearance The appellant's role in the whole affair was that of the Government Treasury, and thus, it could not be held as an assessee in default which is a pre-condition for levy of additional tax under section 86.

87. The learned D.R. is unable to rebut the facts supra on which the impugned finding is based.

88. Accordingly, no interference is warranted in the impugned order which is confirmed and the appeal is dismissed

89. All the appeals are disposed off in the manner supra.

C.M.A./M.A.K./5/Tax(Trib.) Order accordingly.