2000 P T D (Trib.) 1328

[Income-tax Appellate Tribunal Pakistan]

Before S.M. Sibtain, Accountant Member and Jawaid Masood Tahir Bhatti,

Judicial Member

I.T.A. No.966/KB of 1998-99, decided on 28/07/1999.

Income Tax Ordinance (XXXI of 1979)--

----S.25(b) & (c)---Deemed income---Amounts subsequently recovered in respect of deductions---Assessee, a public limited company obtained loan from the financial institutions ---Assessee who committed default in making the payment issued/transferred its fully paid-up shares to discharge its liabilities under certain limitations to the financial institution with buy-back agreements---Assessee claimed that liability of accrued financial charges was paid by it through issuance of its paid-up ordinary shares to the financial institution---Assessing Officer, however, treated liabilities converted into fully paid-up ordinary shares as "deemed income" under S.25(c) of the Income Tax Ordinance, 1979 on account of non-payment of the liabilities of financial institution on the ground of collusive arrangement between the parties---First Appellate Authority confirmed the order of the Assessing Officer---Validity---Conversion of accrued/financial charges into fully paid up ordinary shares of the assessee was not collateral because the accrued/financial charges stood paid with the issuance of shares- to the financial institutions---Neither the buy-back-agreement allowed any concession in terms of the value of the shares to the assessee nor assessee was bound to buy-back the shares---Issuance of paid-up ordinary shares of the assessee to financial institution was not established to be collusive arrangement between the parties---Liabilities having been discharged and paid in the shape of paid-up ordinary shares addition made to the assessee's account unsustainable both in law and facts---Addition was ordered to be deleted by the Appellate Tribunal.

CIT v. Bhojraj Harichand (1946) 14 ITR 277 (Lah.); McDowell & Co. Ltd. v. Commercial Tax Officer (1985) 154 ITR 148 (SC Ind.); Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC Ind.); CIT v. D.P. More (1971) 82 ITR 540 (SC Ind.); S.P. Jaiswal v. CIT (1997) 224 ITR 619 (SC Ind.); Overseas Containers (Finance) Ltd. v. Stocker (1991) 188 ITR 383 (CA); Ensign Tankers (Leasing) Ltd. v. Stokes (1994) 209 ITR 231 (HL); Elahi Cotton Mills Ltd. and others v. Federation of Pakistan 1997 PTD 1555; Pindi Kashmir Transport Co. Ltd. v. CIT (1954) 26 ITR 595 (Lah. HC); Gazdar Kajora Coal Mines Ltd. v. CIT (1972) 85 ITR 599 (SC Ind.); M.U. Sinai v. Union of India (1975) 98 ITR 209 (SC Ind.); M.U. Sinai `v. Union of India (1975) 93 ITR 209 (SC Ind.); Sitalpur Sugar Works v. State of Bihar (1963) 49 ITR 160 (SC Ind.), Famous Cine Laboratories and Studios v. CIT (1980) 121 ITR 648 (Bom.); CIT v. Dalmia Dadri Cement Ltd. (1980) 125 ITR 510 (Delhi); Central Insurance Company and others v. CBR 1993 PTD 766 = 1993 SCMR 1232; Farooq Enterprises v. CIT 1996 PTD 1110; CIT v. Farookh Chemical Industries 1992 SCMR 523 = 1992 PTD 523; Volume LXX of Corpus Juris Secundum, Vol. LXX, p.70; P. Ramanatha Aiyar's Law Lexicon, 1997 Edn., p.1397; Words and Phrases Legally Defined under General Editorship of I.B. Saunders, Vo1.4, Paton v. Inland Revenue. Commissioners (1938) AC 341; Black's Law Dictionary, 6th Edn., p.1109; Burton's Legal Thesaurus, Deluxe Edn., Vol.4 and Stroud's Judicial Dictionary, Vol.4, pp.1838-1839 ref.

Seth Kishori Lal Babulal v. CIT, U.P, (1963) 49 ITR 502 (All.) rel.

I. N. Pasha for Appellant.

Ms. Shahida Taj, D.R. for Respondent.

Date of hearing: 29th May, 1999.

ORDER

S. M. SIBTAIN (ACCOUNTANT MEMBER). ---Objections are taken in this appeal, on behalf of the assessee, against the order of the learned CIT(A) for upholding the disallowance of Rs.121,578,467 representing interest subjected, to tax under section 25(c) in the assessment years 1983-84 to 1989-90 and paid by the appellant by issuing full paid up shares to various Financial Institutions to whom interest was payable by it, for upholding the addition of Rs.22;171,842 to the income of the appellant under section 25(c) of the Income Tax Ordinance, 1979, for upholding the addition of Rs.30,894,070 made by the learned DCIT under section 25(b) of the Ordinance on the basis that it represents the benefit derived by the appellant in the assessment year 1989-90 -by way of depreciation allowance on the amount capitalised as cost of depreciable assets on account of financial charges on capital borrowed for it, for upholding reduction of WDV of fixed assets by Rs.476,559,654, for upholding addition of Rs.450,000 on account of excess perquisites under section 24(i) of the Ordinance on estimate basis and for upholding of add backs of Rs.5,500,000 out of repairs and maintenance expenses, Rs.2,500,000 out of china-ware, glass silver-ware and uniforms expenses and Rs.113,504 out of other expenses.

2. We have heard Mr. Iqbal Naeem Pasha, the learned counsel of the appellant and Mrs. Shahida Taj the learned representative of the Department.

3. Briefly, the relevant facts are that, on December 20, 1989, the Federal Government have given their consent under the Capital Issues (Continuance of Control) Act, 1947 to the Proposed issue in Pakistan by M/s. A----H------Ltd., a public company, registered in Karachi, of capital to the value of Rs.822,294,000 (Rupees Eight hundred twenty two million, two hundred ninety four thousand only) divided into 82,229,400 ordinary shares of Rs.10 each to be issued in cash in the following manner.

1. Sponsors	Rs. in million 75.030
2. General Public (Including N. I. T.)	75.030
3. PICIC
N.I.T
U.B.L.
M.C.B.
I.C.P.	672.234
H.B.L.
A.B.L.
N.B.L.
	822.294

This amount is in addition to/inclusive of the capital of Rs.71.030 m. already issued by the company. It has been obtained in pursuance of agreement signed in December, 1989 between the appellant and the Pakistan Industrial Credit and Investment Corporation Ltd. (PICIC).

4. The appellant has obtained from PICIC various loans in foreign currencies for purposes of and on terms and conditions contained in Loan Agreement, dated 11-12-1970 and 28-11-1975 (as amended from time to time) collectively referred to in the agreement supra as the "Principal Agreements", and the loans secured thereunder or under any modification or amendments thereof collectively referred to as the "Principal Loans".

5. The appellant has also secured loans from the Investment Corporation of Pakistan ("ICP") and National Investment Trust ("NIT") and certain nationalized Commercial Bank viz. National Bank of Pakistan Muslim Commercial Bank Limited, Allied Bank of Pakistan Limited, Habib Bank Limited and United Bank Limited, such banks jointly referred to in the agreement supra as the "Commercial Banks" and their loans as the "Commercial Bank .Loans". Together with ICP and NIT the Commercial Banks are referred to as the "Banks", and their loans alongwith those of ICP and NIT as the "Bank Loans".

6. The appellant has committed defaults in making repayment of PICIC's Principal Loans as provided in the Principal Agreements, resulting in accumulation of arrears. The appellant has also defaulted in the repayment of the Bank Loans:

7. At the request of the appellant and in order to provide relief to it, PICIC has offered a package arrangement to the appellant for restructuring the outstanding Principal Loans of PICIC (as also the Bank Loans), in terms of PICIC's Letter No. SPD/A-11 of 1989, dated 28-12-1989 which package arrangement has been duly accepted by the appellant.

8. The total liability of the appellant towards PICIC is determined at the sum of Rs.306,204,000 as "Total PICIC Loan", as on 31-12-1988.

9. Out of the total PICIC loan, one portion amounting to the sum of Rs.101,919,000 is called "PICIC Current Loan", and another portion equivalent of the sum of Rs.203,562,000 comprising all accrued charges, is called the "PICIC Accrued Charges".

10. The appellant has agreed to pay a sum of Rs.723,000 to PICIC immediately as down payment, out of the additional equity to be raised by it.

11. The appellant's liability towards the Bank has been determined at a total of Rs.781,813,000 is the "Total Bank Loan" as follows:

	(Rs. In 000) Total Loan	Down Payment	InterestBearing Debt	Ordinary Shares
ICP	62,233	275	20,275	41,683
NIT	41,216	----	10,440	30,776
HBL	168,157	744	69,356	98,057
UBL	169,091	749	69,241	99,101
NBP	163,557	724	68,241	94,592
MCB	98,858	437	42,088	56,333
ABL	78,701	348	30,223	48,130
Total	781,813	3,277	309,864	468,672

12. Out of the total' bank loan, one portion amounting to Rs.309,864,000 is called Banks Current Loan" and another portion equivalent of the sum of Rs.463,672,000 comprising all accrued charges is called the "Banks Accrued Charges".

13. The remaining portion of total bank loan amounting to the sum of Rs.3,277,000 is to be paid by the appellant to Banks immediately as down payment, out of the additional equity to be raised by it.

14. The appellant has agreed to repay the banks current loan to banks in 14 approximately equal half yearly instalments commencing the 1st day of January, 1993 and ending on the 1st day of July, 1999.

15. The bank current loan shall carry interest at the rate of 14 % per annum with half-yearly rests. Interest will be payable by the appellant to the banks on the first day of January and firs: day of July each year on principal amount of the banks current loan outstanding against and payable by the appellant from time to time.

16. The appellant has agreed to repay the PICIC current loan to PICIC in the same manner.

17. It has been agreed that both the bank Accrued charges' and the "PICIC Accrued Charges' shall be converted into fully paid-up ordinary shares of the appellant to be issued by the appellant to the Banks and to PICIC against Accrued Charges, and shall be referred to as the "Acquired Shares".

18. The acquired shares shall not participate in dividends unless a minimum dividend of 10% per annum is paid to the other ordinary share holders of the appellant in which event, the acquired shares would also qualify for the full amount/rate of dividend.

19. No voting rights shall be exercised by PICIC/Banks on the strength of the acquired shares, and standing proxies shall be issued in favour of the sponsors (or their nominees) of the appellant which proxies shall be liable to be withdrawn and revoked in the following situations:

(i) When in the opinion of PICIC/Banks, the management of the appellant is found to be deficient;

(ii) when, in the opinion of PICIC/Banks, the debt servicing of the appellant becomes unsatisfactory.

20. The appellant and its sponsors (or their nominee) have entered into a separate agreement with PICIC/Banks for the buy-back of the Acquired Shares. The agreed buy-back period is 10 years commencing at the end of Amortization schedule of PICIC Banks Current Loan. The Buy-Back option can be exercised by the sponsors (or, by their nominees, if any) on the basis of "per value" or "break-up value" whichever is higher.

21. The Acquired Shares shall be liable to be retained by PICIC, and to the extent issued to them, by the Banks.

22. It has been agreed that the security for the total PICIC loan already furnished to PICIC by way of first charge on all assets of the appellant in terms of the Principal Agreements shall remain uncharged. The appellant shall, however, execute such further agreements documents and papers and furnish such additional security to PICIC as may be required in the event of defaults in payments, or otherwise. The security for the total bank loan shall also remain unchanged. As a further collateral security, the appellant shall procure and deposit the entire share-holding of its Sponsors, alongwith blank Transfer Deeds, with PICIC/Banks or their nominee.

23. It is further agreed that amounts due to associated/sister concerns, if any, would remain frozen (interest free) and would not be repaid during the subsistence of debts of Institutions (viz. the total PICIC loan and the total, banks loan). The appellant shall not undertake any major capital expenditure without the prior written approval of PICIC.

24. No dividends whatsoever shall be declared by the appellant without the prior written approval of PICIC and the Banks. The present Directors/Sponsors of the appellant shall not transfer the controlling shares of the appellant to any other group/party, without the prior written approval of PICIC/Banks. The Sponsors/Directors of the appellant shall arrange credit facilities ontheir own for meeting the normal working capital

25. Operations of the appellant shall be managed by well-qualified and experienced personnel. The appellant shall appoint and keep appointed a reputed firm of Chartered Accounts as its Auditors with the prior approval and consent of PICIC. "

26. In addition to the yearly and half-yearly accounts, the appellant shall also furnish to PICIC quarterly or periodical reports, in form and substance satisfactory to PICIC, for effective monitoring of operations of the appellant. Besides the appellant shall also carry out a review of its yearly operations, and submit it to PICIC and the other creditors.

27. In the event of breach of any of the terms of the Restructuring Agreement PICIC/Banks shall have the right to take appropriate action against the appellant to safeguard its interests, including change of management of the appellant and/or filling of liquidation petitions in the High Court.

28. It is agreed between the appellant and PICIC/Banks through separate agreements that B-------L-----H------(Pvt.) Limited is the nominee of the sponsors of the appellant to fulfil the commitment of buying back the acquired shares from PICIC/Banks over a period of tax year commencing January 1, 2000 A.D. The Nominee shall furnish to PICIC/Banks a yearly schedule for the purchase of the said 'Acquired Shares.

29. The Acquired Shares' shall be bought back by the Nominee at the face value or at break-up value, whichever is higher at the time of the said purchase and in the event of the said 'Acquired Shares' not being fully purchased back by the Nominee, PICIC/Banks shall be entitled to sell, dispose of, alienate or transfer the said Acquired Shares or such part of the said shares as may not have been bought back by the said Nominee. In the open' market or in their discretion to any individual or group of individuals and either in bulk or in piecemeal, at such price as the shares may fetch.

30. It is' on the facts and circumstances supra that the appellant has claimed that the liability of financial charges incurred by it on PICIC and Bank loans has been 'paid' by it through issuance of its paid up ordinary shares to the lenders supra.

31. Consequently, the appellant has claimed under Proviso to section 25 of the Income Tax Ordinance deduction of an amount of Rs.121,578,467 that has been deemed to be its income under clause (c) of section 25 in the assessments for assessment years 1983-84 to 1989-90 on account of non-payment of the liability of financial expenses within the specified period. The break up is as under:

"Interest claimed in Assessment	Interest disallowed by the Department in the Assessment	Amount Disallowed Assessment
Year	Year	Rs
1979-80	1983-84	10,989,569
1981-82	1984-85	18,610,358
1982-83	1985-86	15,610,535
1983-84	1986-87	16,800,691
1984-85	1987-88	17,997,446
1985-86	1988-89	19,377,213
1986-87	1989-90	22,192,655
		121,578,467

32. The learned DCIT, however, has held that the contention of the appellant that the liability amounting to Rs.672,233,760 has been paid by it by converting it into its equity, viz. paid up share capital of the company, is not tenable. The reasons recorded by him in his impugned order are mainly six-fold.

(i) It does not constitute payment, as required under section 25(c) of the Income Tax Ordinance, 1979, as this is simply change of the Head of account i.e., from loan account of Capital Account.

(ii) As per clause (2) of the Agreement between the assessee and Financial Institutions such shares-shall be bought back within 10 years. This shows that the liability is not actually paid but has been deferred for a period of,10 years.

(iii) As per clause (3) of the Agreement the borrower has nominated the assessee to buy back the shares which means that the shares would again come into its control, thus, nullifying the effect of the issue of such shares. This indicates that the original liability has not been mitigated.

(iv) PICIC and Banks have been issued 'B' class shares that neither carry voting rights nor the entitlement to dividend unless dividend @ 10% or more is paid to ordinary share-holders.

(v) That PICIC/Banks cannot dispose of the shares before the expiry of 10 years.

(vi) The Banks/PICIC are not entitled to sell the shares in the open market but have to sell the sponsors, who are few in number and are owning the company and ultimate beneficiary. In other words, the beneficiaries/sponsors or nominee of the sponsors i.e., B----------L--------H------(Pvt.) Limited an associated concern-where directors/shareholders are common, when buying back the shares have undertaken to pay the interest with 10 years after 2000. A.D. The Banks and PICIC have only the security for their outstanding interest etc.

33. The learned DCIT, therefore, has not only disallowed the deduction claimed supra under proviso to section 25 of the Income Tax Ordinance, 1979 but has also made further additions as follows:

(i) An amount of Rs.22,171,842.allowed as interest in the assessment year 1987-88 is added back under section 25(c) of the Income Tax Ordinance, 1979 as unpaid liability.

(ii) Depreciation allowance amounting to Rs.30,994,070 has been made under suction 23(i)(v) in the assessment year 1989-90 on financial expenses interest, amounting to Rs.476,559,654 capitalised in the corresponding income year ending December 31, 1988 as under:

	Interest Capitalised		Depreciation Allowance
(i) On Building	335,237,916	5%	16,761,896
(ii) On Plant & Machinery	105,482,545	10%	10,548,255
(iii) Equipments	16,308,529	10%	1,630,853
(iv)Elevators and lifts	15,930,664	10%	1,953,066
	476.559,654		30,894,070

The appellant, in the opinion of the learned DCIT, has derived benefit valuing Rs.30,894,070 in respect of trading liability amounting to Rs.476,559,654, that has remained allegedly unpaid and is likely to remain unpaid in the coming 10 years as well. The learned DCIT, therefore, has deemed it to be income of appellant from business in the instant year under clause (b) of section 25 of the Income-tax Ordinance.

(iii) Further the learned DCIT has made depreciation allowance under section 23(i)(v) in the instant assessment years on the WDV of assets as reduced supra.

34. An appeal instituted before the CIT(A) against the treatment supra has been dismissed by the learned CIT(A) holding:

"Additions made under section 25(c) of:

A:Rs.121,578,467

B:Rs.22,171,842

The learned A.O. has referred to the various clauses of the 'so -called agreements' and their 'real nature and worth! In fact, on going through them, 'if one may say so, these agreements in reality boil down to this. Heads I win, talls you lose'. The perusal of the said agreement show that 'the banks/financial institutions in return for foregoing their huge payable amounts to them have gained nothing in real, terms as a result of the 'so-called issue of shares' to them at their face value either in terms of dividends or in terms of their break-up value, which with their negative break-up value as against their higher face value purchase price, and with the buy-back arrangement by M/s. B.... L.... H.... the parent co., of the appellant, where the Regd. office of the appellant is also situated but shown as the nominee of the lenders, the said buy-back arrangement being conditioned with 'so many ifs and buts', that the said 'paper device to reduce tax burden by artificial, transactions or tax heaven/tax shelter arrangement' for the appellant on the one hand but without any corresponding benefit to the lenders on the other hand, with shares minus voting rights, with shares minus dividends, with shares minus their free sale/disposal, with shares but with minus break-up value. In fact, it is a paper device with the sole purpose to only benefit the assessee at the cost of all others, including the Revenue. It is in cases like this one that the ratio of the following decisions would become material:---

1. (1946) 14 ITR 277 (Lah.) CIT

v. Bhojraj Harichand.

In ascertaining the character of the payment, the name of description which the parties may choose to give would not be decisive and its true nature may have to be ascertained from the business or accountancy point of view.

2. (1985) 154 ITR 148 (S.C. Ind.) McDowell & Co. Ltd. v. Commercial Tax Officer.

It represents a water-shed in the development of the law regarding to avoidance and tax avoidance. The views of the Supreme Court are best stated its own words:

"Given that a document or transaction is genuine, the Court cannot go behind it to some supposed underlying substance' is the well -known principle of IRC v. Duke of Westminster, (1936) AC 1: 19 TC 490 (HL). But, there came a significant departure from the Westminister and Fisher's Executors, (IRC v. Fisher's Executors, (1926) AC 395 (HL) principle in Ramsay Ltd. v. IRC, (1982) AC 300: (1931) 2 WLR 449 (HL), where the House of Lords had to consider a scheme of tax avoidance which consisted of a series or a combination of transactions each of which was individually genuine but 'the result of all of which was avoidance of tax, Lord Wilberforce:

The Supreme Court concluded.' In the very country of its birth, the principle of Westminister has been given a decent burial, and in that very country, where the shares 'tax avoidance' had originated, the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it on fiscal principles. No one now can get away with a Tax Avoidance Project with the mere statement that there is nothing illegal about it."

3. (1991) 191 ITR 667 (SC Ind.) Attar Singh Gurmukh Singh v. ITO.

The Supreme Court of India observed that in interpreting a taxing statute, the Court cannot be oblivious of the proliferation of black money which is under circulation in 'our country.

4. (1971) 82 ITR 540 (SC Ind.) CIT v. D.P. More.

The taxing authorities were not required to put on blinkers while looking at the documents produced before them.

5. (1997) 224 ITR 619 (SC Ind.) S.P. Jaiswal v. CIT.

Paper device to reduce tax burden--Held, that admittedly the transaction was nothing but a paper device designedly made to reduce the tax burden of the assessee and by no stretch of imagination it could be held to be a loan transaction by the assessee in favour of his children. Such a paper transaction intended merely to reduce the tax liability could not be held to be a loan transaction by the assessee in favour of his children.

6. (1991) 188 ITR 383 (CA) Overseas Containers (Finance) Ltd. v. Stocker.

Held, that the only purpose of the interposition of the tax-payer was to transmute the base metal of an exchange loss on capital account into the pure gold of a revenue loss. A transaction designed to achieve that fiscal alchemy is not a trading transaction.

7. (1994) 209 ITR 231 (HL) Ensign Tankers (Leasing) Ltd. v. Stokes.

Held: Thus, the Remsay trilogy of decisions establish the proposition that where, after a series of transactions, the rights and obligations of an assessee were virtually the same or unchanged, there was nothing in the doctrine of Westminister (1936) 19 TC 490 (HL) that prevented or deterred the Court from looking at them as a whole. The said new doctrine is, thus, not confined to self-cancelling "circular" transactions, but is applicable also in the case of self-cancelling preordained transactions.

8. 1997 PTD 1555 Elahi Cotton Mills Ltd. and others v. Federation of Pakistan.

The ratio of the said judgment also approves the ratio of the supra quoted decisions.

"From the ratio of the aforestated judgments, which apply to the case of the appellant as well, where the arrangement is nothing but mere paper device to reduce its tax burden, the Assessing Authority was fully entitled to pierce the veil of its corporate entity and to look at the reality of the transactions and pay regard to the economic realities behind the legal facade. He was, thus, fully justified to ignore the entries made in the books of the company having no real relation to the actual conduct of the business. The ignoring of the contention of the appellant as per the device with the lenders of interposing its parent company viz. B-----L------H-----Limited as the nominee of the said lenders for buy back arrangement of its practically worthless shares with minus break-up value, which was interposed to disguise the real fraudulent nature of the transaction and to give it the appearance of a genuine contract between two independent parties as it they were entered into at arm's length, has thus, rightly been ignored by the learned A.O. as being a mere tax 'shelter arrangement for the benefit of the appellant alone, which treatment calls for no interference, and the addition of the Rs.121,578,467 and Rs.22,171,842 in the facts and circumstances of the case, are confirmed."

35. Similarly regarding the objections taken to the deemed income under section 25(b) on account of depreciation allowance made on interest capitalised in the preceding year and thereby reducing the WDV of such assets in the succeeding year, the learned CIT(A) has held:

"The assets - viz. building, plant and machinery equipments and elevators - as a result of capitalization of the 'unpaid interest' in turn by issue of shares, had not registered any actual corresponding additions to them in tangible terms. "

In the facts and circumstances of the case, ratio of the decisions, mentioned below, may also be referred to with advantage:---

1. Pindi Kashmir Transport Co. Ltd. v. CIT (1954) 26 I-TR 595 (Lah. HC).

If circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the assessee and there has been inflation or deflation of value for ulterior purposes it is open to the Income-tax authorities to refuse to accept the price mentioned or allocation given in the deed or alleged by the assessee and to ascertain what the actual cost is or to determine the allocation between depreciable and non depreciable assets.

2. (1972) 85 ITR 599 (SC Ind.) Gazdar Kajora Coal Mines Ltd. v. CIT.

ITO is competent to go beyond the conveyance and fix a valuation of the assets .on his own if circumstances existed showing that a fictitious price has been put on the assets.

3. (1975) 98 IIR 209 (SC Ind.) M.U. Sinai v. Union of India.

The connotation of the word "actually allowed" is, thus, limited to depreciation actually taken into account or given effect to. Thus, in the case of assets acquired before the previous year, the WDV of the assets under section 43(b) would be the actual cost to the assessee less depreciation allowed to him

4. (1975) 93 ITR 209 (SC Ind.) M.U. Sinai v. Union of India.

The aggregate of the depreciation allowances granted, year after year, cannot exceed 100 % of the original cost of the asset.

5. (1963) 49 ITR 160 (SC Ind.) Sitalpur Sugar Works v. State of Bihar.

Whether depreciation allowable on expenses for shifting factory to improve business? Held, no.

6. (1980) 121 ITR 648 (Bombay). Famous Cine Laboratories and Studios v. CIT.

The original cost of any particular asset is entirely a question of fact, and if the circumstances show 'that the assessee arranged to put a fictitious price on his assets, it is open to the Income-tax Authorities to refuse to accept that price.

7. (1980) 125 ITR 510 (Delhi) CIT v. Dalmia Dadri Cement Ltd.

"Actual cost of assets" excludes collusive, initiated or fictitious cost.

Regarding the contention that as depreciation had been allowed in the immediately preceding year on the enhanced value of the assets, therefore, the learned A.O. for the assessment year under discussion should have followed suit in line with the preceding year's Departmental practice without application of section 25(b), suffice it to say that the Assessing Officer is to follow the law."

36. The learned- CIT(A) has placed reliance on the decision in Central Insurance Company and others v. CBR 1993 PTD 766 = 1993 SCMR 1232 wherein it is observed that any alleged practice cannot negate the provisions of the Ordinance. He has further referred to the decisions in CIT v. D.P. Moore (1971) 82 ITR 540 (S.C. Ind.), Farooq Enterprises v. CIT 1996 PTD 1110 and CIT v. Farrokh Chemical Industries 1992 SCMR 523 = 1992 PTD 523 to support his view that finding in one year does. not constitute res judicata for the following years. The learned CIT(A) has further held that capitalisation of interest incurred on loans as addition to the value of capital assets in 1989-90 is a mistake apparent from record warranting either rectification under section 156 or revision by the IAC under section 66-A of the Ordinance.

37. Mr. Iqbal Naeem Pasha, the learned counsel for the appellant, has submitted at the outset, that the impugned orders are flip of presumptions based on whims and surmises of the two learned officers below. He submits that the only issue to be recognised in the context of agreements for restructuring of loans is whether the liability of Rs.672,234(m) incurred by the appellant on account of interest/financial cost of the loans taken from PICIC and Banks has been ''PAID' by the appellant by issuing in Pakistan, with the consent of Federal Government, its capital to the equivalent value divided into 67,223,400 ordinary shares of Rs.10 each to be issued in cash in the manner specified in the letter of Corporate Law Authority (supra).

38. Further, according to Mr. I.N. Pasha, it has to be considered whether the conditions stipulated in the agreements supra, to the issue of such capital, do after the category of such shares. He submits that neither the learned DCIT nor the learned CIT(A) has appreciated the fact that neither the PICIC nor the Banks have any director who is a director of the appellant as well, nor any of the directors of the appellant, of the one part, and the directors of PICIC and Banks, of the other part, are in any way related to each other.

39. At such, according to Mr. Pasha, the two learned officers have not appreciated the fact that-the collusion imputed to them to the agreements supra, between the parties, is inconceivable. The reported cases ibid., cited by the learned CIT(A) in his impugned order, according to Mr. .Pasha, are distinguishable from the appellants case primarily because it has been established that the parties to the transactions/arrangements/agreements in the cases ibid are inter-related/inter-connected/not independent while in the appellant's case there is no finding based on any evidence that the agreements supra are sham, that PICIC and Banks "have gained nothing for foregoing their huge payable amounts as a result of the so-called issued of shares to them at their face value and that it is a paper device to reduce tax burden by artificial transactions or tax heaven/tax shelter arrangement".

40. Mr. Iqbal Naeem Pasha, in this context, therefore, has submitted that the shares issued to the PICIC/Banks are ordinary shares because under the Companies Ordinance, 1984 there is only one class of shares and that is Ordinary Shares under section 90(1) and 90(2); by definition under section 90 all Ordinary Shares can only be voting shares. These shares are not a promissory note, a debenture, or a collateral instrument signifying a liability. They are the "capital" and signify ownership title to the Company. By offering/issuing shares a company builds up its "capital" by collecting cash for the company's use. Similarly, by A... H... Ltd. (Company) offering/issuing the shares the appellant built up its capital by collecting cash which it has used to liquidate its liabilities of accrued interest charges.

41. As all shares have voting rights, the instrument of proxy bas been issued by the acquired shareholders in favour of M/s. B... L... H.. (Pvt.) Ltd. (B---L----) to manage tile affairs of the appellant to ensure compliance of the obligations undertaken by it. The proxies, Mr. Pasha submits, are conditional as voting rights have been conceded only to ensure that the management operates the Company efficiently thereby 'fulfilling the obligations to its shareholders/debtors.

42. The proxies are only valid subject to the management ensuring timely repayment of principal and interest as per the specified fixed, schedule to repayment of the huge loans of the appellant. Failure of the B... L... to perform its -obligations will result in revocations of proxies and management control of the Company will be removed from B... L.... and vested by the shareholders with any other hotel management company or person or entity.

43. These proxies are, 'therefore, issued to protect the interests of .shareholders as this will force the B... L.. to run the business efficiently and to meet the debt servicing of the appellant in time. This, according to Mr. Pasha, proves that the proxies are issued in favour of the B... L... purely in the interests of the shareholders. to force the Company to perform its obligations efficiently under the agreement.

44. Additionally, Mr. Pasha submits that these are "proxies with interest". B... L... with whom vests management of the appellant is bound to buy-back the shares at face. value or break-up value. This onerous responsibility of buy-back makes these "proxies with interest". Since the B... L.. has to buy-back the shares, it is in it's interest to perform under the agreement and ensure that the appellant performs efficiently so that proxies are not withdrawn and cancelled as the liability to "buy-back" the shares would still remain with B-----L-----This again protect the PICIC/Banks interest.

45. Regarding the dividend clause in the "Restructuring Agreement" Mr. Pasha submits that it states that the shares shall not participate in the dividends unless a minimum dividend of 10% per annum is paid to all the ordinary shareholders. There is, therefore, no distinction between different types of ordinary shareholders as under the Companies Ordinance, 1984 there can be no differentiation between the shareholders. This is again to protect the interest of the PICIC and banks, wherein this clause would enable to get dividend if and when the other shareholders get the dividend.

46. The learned counsel further submits that on the Board of Directors of the appellant there are three nominee directors of PICIC, ICP and NIT who are elected as directors as per the Memorandum and Articles of association of the Company (enclosed) to protect the interests of the financial institutions who hold shares of the Company and whose loans are to be repaid. These directors participate in all the meetings of the Board of Directors of the Company and look after the interest of the shareholders they represent.

47. Regarding the presumption that the agreement supra are a tax evasion device, it is submitted that on increase in the Capital of the Company by issuing fresh shares and thereby paying off the Company's accrued liabilities, the entire brought forward losses of the Company have been wiped out. This has made the appellant an assessed tax payer which otherwise would not have been possible for another 25 years.

48. Mr. lqbal Naeem Pasha continues to submit that it is in the context of the correct perspective supra that the word "paid" or the word "pay" as a verb, is to be considered. He submits that the word "pay", as a verb, is defined, in Volume LXX of Corpus Juris Secundum at page 70, as meaning "to deliver a creditor the value of the debt, either in money or in goods, to his. acceptance or satisfaction, by which the obligation of the debt is discharged; to discharge a debt in money, goods, or other things of value", and at page 71 "to transfer or deliver money or other agreed medium for the debtor to the creditors." We further find that in 1997 Edition of P. Ramanatha Aiyar's Law Lexicon at page 1397 the word 'paid' means "applied; settled; satisfied" and "in the context of a debt it is considered 'Paid' when the contract is performed pursuant to the stipulation made; but if on an agreement, something collateral is received in satisfaction, although the demand is extinguished, the debt, technically speaking, is not paid. (word and phrases).

49. The question, therefore, arises if the creditor acquires paid up shares of the debtor company against a part or whole of the credit balance, will such shares be considered something collateral received by the creditor? The answer, in our considered view is no. Reason being that as per page 344 of Aiyar's Law Lexicon (1997) Edition). "That word collateral' is of frequent use in law where it bears its ordinary signification of parallel' or 'additional'. It is used in a variety of connections, e.g., we speak of a collateral security, collateral relations, and collateral facts. There is no technical legal definition of the word "collateral" distinct from its common signification. It is an additional security for the performance of the principal obligation, and on the discharge of the latter it is to be surrendered."

50. The example of such collateral security is found in Article 5.03 of the Restructuring Agreement wherein in respect of the Principal amount of loan it provides:

"5.03 As a further collateral security, the borrower shall procure and deposit the entire share-holding of its sponsors, although blank Transfer Deeds, with PICIC/Banks or their nominee."

51. Further page 91 of the Second Edition of "Words and phrases Legally defined" under General Editorship of I.B. Saunders (Volume 4) explaining the word "payment" in the context of section 4 of the Statute of Frauds 1677 the phrase collateral undertaking is described; "if two come to a shop, and one buys, and the other, to gain him credit, promises the seller, if he does not pay you, I will; this is a collateral undertaking." The word "payment" is defined on the same page as including "a transfer of property and a set off or release of an obligation, and reference to the amount of a payment include, in relation to property transferred or to an obligation set off or released, references to the value thereof (Finance Act, 1940, section 59). Further at page 92, (section 8 of the Bills of Sale Act, .1878 enacts that a bill of sale shall set forth the consideration for which it was given.) "The consideration stated in the present case is Rs.2,000 to the mortgager paid by the mortgage 'immediately before the execution of these presents'. The question is, what do these words mean having regard to the facts. The grantor owned the grantee Rs.2,000, the balance of Rs.2,500 purchase money for a leasehold brewery' He had paid him Rs.500 in cash, and had given him a bill of sale for the balance, and this was accepted by the grantee in payment. Was this in law a payment of the Rs.2,000 to the grantor? I have no doubt that it was, or that it would support a ,plea of payment in an addition. When a transaction like this is 'a bona fide one, it has always been held to amount to payment." Re Roper, Exh. p. Bolland (88), Ch. D. 543, C.A., Per Jessel, M.R., at p.550." still further at pages 88 aid 89 explaining, the word "paid" in the context of Income-tax Act it records, "(section 36(1) of the Income Tax Act, 1918) (repealed; see now section 200(i) of the Income Tax Act, 1952) enacted that where interest payable in the United Kingdom on an advance from a bank in the United Kingdom was "paid" to the bank without deduction of tax out of profits or gains brought into charge to tax, the person by whom the interest was paid was entitled to repayment of tax on the interest of the interest.? "It is a condition of a claim for repayment under section 36 subsection (1), that the tax shall have 'paid' to his bank the interest in respect of which the claims repayment of tax. In my opinion this means that the taxpayer must really, and not merely notionally, have paid the interest there must be payment such as to discharge the debt; the payment must be a fact not a fiction." Paton v. Inland Revenue Commissioners (1938) A.C. 341, per Lord Macmillan, at p.356".

52. In the context of fact of the payment rather than a fiction, the phrase "Paid-up Stock" is defined at page 1109 of sixth Edition of Black's Law Dictionary as "Shares of Stock for which full payment has been received by the corporation", and the phrase "Paid-in-Capital is defined as "money or property given to a corporation in exchange for the corporation's capital stock; as distinguished from capital obtained from the earnings of or donations to the Corporation":

53. So, is the import of the relevant words and phrases supra as per pages 373 and 374 of Burton's Legal Thesaurus Deluxe Edition and pages 1838 and 1839, volume 4, of Stroud's Judicial dictionary.

54. Thus, the conversion of "Accrued Charges" into fully paid-up ordinary shares of the appellant is not collateral because the "accrued charges" stand paid with the issuance of the shares to PICIC and Banks. We are supported in holding the view supra by the decision in Seth Kishori Lal Babulal v. CIT U.P. (1963) XLIX ITR 502 (H.C. Allahabad) where the assessee, who had advanced a sum of Rs.51,315 to a landholder in U.P., obtained a decree against him for the principal and interest thereon amounting to-Rs.109,500. In pursuance of that decree the Collector, acting under the U.P. Encumbered Estates Act, awarded to the assessee on the 29th March, 1945, in full satisfaction of the decree amount,. U.P. Government Bonds of the face value of Rs.109,500 payable after some years. Whether amounts to receipt of income in the year the Bonds are awarded? held: yes.

55. Further we find substance in the submissions supra made on behalf of the appellant that neither the proxies given to B... L... nor the 'buy back' agreements supra have altered the status of shares into 'B' class as has been presumed both by the learned DCIT and the CIT(A). The proxies by their very purpose and conditions are meant to saddle the nominee of the sponsors with defined responsibility of efficient management. .Thus, we find that the shareholders have not surrendered the voting rights by issuing standing proxies in favour of the nominees of sponsors; instead, they have ensured that the appellant is unable to shift the responsibility for any further management lapses.

56. Regarding the 'buy back agreements' as well we find that except for allowing preeminence to acquire the shares supra, the agreements do not allow any concessions m terms of the value thereof to the appellant. Neither the appellant is bound to buy back the shares. We find that the 'acquired shares' can be sold in the market by PICIC/Banks if the sponsors are unable to buy back.

57. The learned D.R. has vehemently supported the impugned orders but he is unable to add any substance to the whims and surmises of the authors of the orders. He is neither able to submit before us a single evidence that can lead to the impugned conclusion that the agreements supra are a collusive arrangement between the two or more interdependent/ interconnected parties to suppress the real profits and gains of the appellant.

58. We, therefore, find that the issuance of paid-up ordinary shares of the appellant company to PICK and Banks against the accrued charges on the Principal amounts of loans advanced by them to the appellant is neither a collusive arrangement between non-independent parties nor it is in the nature of collateral security; instead, it amounts to payment of liability of debt in the shape of authorised issuance of share-stock of the appellant company that falls under the term of "other things of value" as used in Corpus Juris Secundum supra.

59. Accordingly, we hold that the liability of accrued charges amounting to Rs.672,233,760 stands discharged and paid in the shape of paid-up ordinary shares or the appellant issued in the names of PICIC and Banks.

60. Consequently, the impugned

upholding of the disallowance of Rs.121,578,467 claimed under proviso to section 25, the impugned upholding of addition of Rs.22,171,842 under section 25(c), the impugned upholding of addition of Rs.30,894,070 under section 25(b) of the Income Tax Ordinance, 1979 and the impugned upholding of the consequent reduction of the WD\' of the capital assets of the appellant by Rs.476,559,654 as well as the impugned upholding of making the depreciation allowance for the instant assessment year on the basis of such reduced W.D.V. are found unsustainable both in law as well as on facts; hence claim of Rs.121,578,467 allowed, additions of Rs.22,171,842 and Rs.30,894,070 deleted, capitalisation of charges incurred on loans amounting to Rs.476,559,654 to value of capital assets restored and making of depreciation allowance for the instant year on restored W.D.V. directed.

61. Regarding the upholding of addition of Rs. 4,50,000 under section 24(1) the facts, according to the assessment order are that the appellant has failed to furnish, on the prescribe pro forma, the under mentioned information in respect of benefits allowed to employees viz., executive,, and senior staff members:

"(1) Petrol expenses on vehicles.

(2) Salaries of drivers of vehicles.

(3) Telephone bills of executives.

(4) Lease rent of executives.

(5) Medical expenses of Executives.

(6) Benefits on account of gas. "

62. According to the learned DCIT, several opportunities have been allowed to furnish the details and ultimately the appellant has been asked to explain why the value of such benefits should not be estimated at Rs.450,000 and added to the amount of Rs.363,523 on amount of perquisites already worked out by the appellant to- be in excess of the limit provided under section 24(i) of the Ordinance.

63. The learned CIT(A) has upheld the impugned addition because the facts supra remained un-repelled before him and so in the case before us; hence addition confirmed and appeal on this ground dismissed.

64. Regarding the objections taken to the add backs out of expenditure claimed on repair and replacement, China, Glass and silver-ware and uniforms and 'other' the learned DCIT has recorded in the impugned order:

"During this year the repairs and replacement has been claimed at 5.77 % of sale and services whereas during last year these were claimed at 2,64% of sales and services. If for this year same ratio of such expenses is taken as was taken during last year it would result in addition of Rs.7,589,085 but considering normal fluctuation of such expenses an addition of Rs.5,500,000 is made out of repairs and replacement for being unverifiable as discussed above and being disproportionate and excessive in view of the previous claim.

In the same way during this year the China glass-ware, silver-ware and uniform has been claimed at 2.89% of sale and .services, whereas during last year these were claimed at 1.49%. If for this year .same ratio of such expenses is adopted as was taken for last year it would result in an addition of Rs.3,402,220 in this account. but after considering normal fluctuation of such exp. an addition of Rs.2,500.000 is being made out of China, glass-ware, silver-ware and uniforms etc. for being unverifiable as discussed above and being disproportionate and excessive considering all previous claims on this account. "

63. The learned CIT(A) was upheld the add backs because the finding supra has remained un-repelled before him. He has reduced the add back out of other expenses to 10% of the claim as pleaded by the learned counsel of the appellant before him.

66. The position remains the same before us; hence appeal on these grounds dismissed.

67. The appeal partly allowed to the extent and in the manner supra.

M.B.A./12/Tax (Trib.) Appeal allowed accordingly.