(On appeal from the judgment, dated 26-5-2000 of the High, Court of Sindh, Karachi in. Income-tax Appeal No. 778 of 1999).

(a) Income-tax---

----Penalty---Fine---Imposition---"Panalty"---Connotation---Penalty is to be levied or fine is to be imposed on account of any criminal infraction/violation of the provision of law.

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

----Ss. 23(xviii) & 136---Natural Gas (Development Surcharge) Ordinance (I of 1967), S.3(3)---Constitution of Pakistan (1973), Art. 185(3)--Allowable deduction---Interest/compensation for delayed payment---Such payment a deductible business expenses for the purpose of income-tax---Concurrent findings of fact by two forums below---High Court disallowed deductions of two sums of Rs.34.06 millions on account of late payment of gas development surcharge and Rs.39.916 millions on account of late payment of gas, bills as deductible business expenses by Income-tax Authorities for assessment year 1997-98--Validity---Interest/compensation for delayed payment had been provided in the statute as well as in the agreements, therefore, it might be non-compliance with contractual obligations on the part of the petitioner to make additional payment as interest or compensation for late payment, but the same could not be said to be violation or infraction of criminal law---Where the payments were made for the purpose of carrying on business to enable the assessee to carry on and-earn profit in business and in absence of such payment the assessee could have suffered colossal losses, such payment could not be termed as a penalty or penal interest--Such payments and disbursements made by the assessee were on account of commercial expediency to facilitate- carrying on its business ---Assessee would be entitled to deduction under S.23 of Income Tax Ordinance, 1979 as expenditures as laid out or expended wholly or exclusively for the purpose of business--Decisions of Commissioner of Income-tax (Appeals) and Income tax Appellate Tribunal were based upon concurrent findings of fact and there was no misreading or non, reading of evidence---If there was no violation of settled principles of law arising out of the orders passed by the two forums below, no interference was called for by the High Court in appeal under S.136 of Income Tax Ordinance, 1979--Petition for leave to appeal was converted into appeal and the order passed by the High Court was set aside by the Supreme Court.

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

----S.136---Appeal---Decisions of Commissioner of Income Tax (Appeals) and Income-tax Appellate Tribunal were based upon concurrent findings of fact and there was no misreading or non-reading of evidence---If there was no violation of settled principles of law arising out of the orders passed by the two forums below, no interference was called for by the High Court in appeal under S.136 of Income Tax Ordinance, 1979.

Fakhruddin G. Ebrahim; Senior Advocate Supreme Court for Petitioner.

Nasrullah Awan, Advocate Supreme Court and S. M. Abbas, Advocate-on-Record for Respondent.

Date of hearing: 8th August, 2000.

ORDER

HAMID ALI MIRZA, J.---This petition for leave to appeal is directed against the judgment, dated 26-5-2000 passed by a Division Bench of the High Court of Sindh at Karachi in Income Tax Appeal No.778 of.1999 (Commissioner of Income-tax v. M/s. Siri Southern Gas Company Limited), whereby the order, dated 24-6-1999 passed by the Income-tax Appellate Tribunal in ITA No. 1465/KB of 1998-99 was reversed/set aside resultantly the petitioner was disallowed deductions of two sums of Rs.34,036 million on account of late payment of gas development surcharge and Rs.39,916 million on account of late payment of gas price bills as deductible business expenses by the respondent for the assessment year 1997-98.

2. The facts leading to this petition are that the petitioner is a public limited company engaged, inter alia, in the business .of purification, transmission, distribution and sale of natural gas. The petitioner is required to pay the Federal Government "development surcharge" in relation to gas sold by it under section 3(1) of the Natural Gas (Development. Surcharge), Ordinance 1967 (hereinafter to be referred to as the said Ordinance). Section 3(3) of the said Ordinance provides that interest at the rate of 12 percent. per annum shall be payable in addition to the amount due under section 3(1) of the said Ordinance. if the said amount is not paid within the time specified for its payment. The petitioner purchases raw natural gas from gas supply companies and transmits and sells this gas after purifying, and processing the same under its agreement With the said gas supply companies. The petitioner is required to pay interest at various rates if the gas price bills are not paid within the stipulated period. The petitioner claimed as deductible business expenses, Rs.34.036 million paid by it as interest at the rate, of 12 percent.. per annum on the late payment of gas development surcharge to the Federal Government and Rs.39.916. million paid by it as financial charges/interest at an average rate of 14 percent. per annum on the late payment of gas price bills to five gas supply companies for the income-tax -assessment year 1997-98. The Deputy Commissioner of Income-tax, Circle 8, Companies-V, Karachi disallowed the said sums -claimed by the petitioner as deductible business expenses by regarding the same as penalties. The petitioner accordingly filed an appeal against the decision of the Deputy Commissioner Income-tax before the Commissioner Income-tax (Appeals) V, Karachi, which was allowed and the said sums were held to have been paid under the option available to the petitioner. He further held that there was no infraction of law in the 'payment of said sums, therefore, these were admissible as deductible business expenses. Respondent being aggrieved, filed an appeal before the Income Tax Appellate Tribunal, Karachi, which was dismissed by the Tribunal as per order, dated 24-6-1999. Consequently, the respondent filed Income-tax Appeal No.778 of 1999 under section 136(1) of the Income Tax Ordinance, 1979 before the High Court of Sindh, which was allowed as per impugned judgment, dated 26-5-2000 whereby order of the Income-tax Appellate Tribunal was set aside, restoring the assessment order of the Deputy .Commissioner Income-tax.

3. We have heard learned counsel for the parties and perused the record and the case-law cited.

4. The points which require determination in this petition are:--

(i) Whether the interest paid by the petitioner under section 3(3) of Natural Gas (Development Surcharge) Ordinance, 1967 on late payment of gas development surcharge is a tax deductible business expense under Income Tax Ordinance, 1979?and

(ii) Whether interest paid by the petitioner on late payment of gas price bills under its agreement with the gas companies is a ,tax deductible business expense under the Income Tax Ordinance, 1979?

The relevant provisions dealing with the `points requiring determination in this petition are as under:---

Section 23 of the Income Tax Ordinance:

"23. Deductions.--(1) In computing the income under the head "Income from business or profession" thefollowing allowances and deductions shall be made, namely--- -

(i) to (xvii) .....

(xviii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out of expended wholly and exclusively for the purpose of such business or profession."

Section 3 of the Natural Gas (Development Surcharge) Ordinance, 1967 reads:--

"3. Levy of Development Surcharge.---(1) Every company shall. pay to the Central Government a development surcharge equal to the differential margin in respect of natural gas sold by it after thirty . first day of May, 1964.

(2) The development surcharge in respect of natural gas sold before the commencement of this Ordinance shall be paid within such time after such commencement as may be specified by the Central Government or any officer authorised by it in this behalf.

(3) An interest at the rate of twelve percent. shall be payable on any amount due under subsection (1) or under subsection (2), if the amount is not paid within the time amount is not paid within the time specified for such payment."

5. An amount of Rs.3,49,36,000 is said to have been paid as interest to the Federal Government under subsection (3) of section 3 of the said Ordinance, 1967. Whereas sum of Rs.3,99,16,000 is said to have been paid as financial charges/interest by the petitioner to the gas supply companies on delayed payment of gas price in accordance with the terms of bilateral agreements. It is contended that the rate at which the interest has been paid to the Federal Government would be 12 per cent and average rate at which interest has been paid to the gas supply companies would be 14 per cent while money borrowed by assessee from. the market carried average interest of 16 per ten. It is further submitted that the petitioner by making late payment to the Federal Government and to the gas supply companies saved as much as Rs.57.24,714 by paying interest at lower rates and retaining funds for the purposes of its business whereas the Company had already been taxed on abovesaid savings as part of tie total income. Learned counsel for the petitioner submitted 'that these expenses were allowed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal on the ground that the payment was made under the option available to the petitioner under the bilateral agreements, consequently, there was no infraction of law involved as such was permissible as business expenditure. Learned counsel further submitted that the Commissioner Income-tax (Appeals) and the Income-tax. Tribunal have given concurrent findings of fact that the said sum were permissible expenditure deductions being neither penalty nor in the nature of penal interest but only interest. At best the same could be treated as compensation for making delayed payments of bills. Learned counsel placed reliance upon Pharos & Co. (Pvt.). Ltd. v. Commissioner of Income-tax (222 ITR 746), Commissioner of Income-tax v, Indo-Asian Switch Gears (P.) Ltd. (222 ITR 772), Commissioner of Income- tax v. Pachi Philip & Co. (212 ITR 75), Commissioner of Income-tax v. Veneer Mills (Pvt.) Ltd. (200 ITR 361), Commissioner of Income-tax v. Saraya Sugar Mills (P.) Ltd. (201 ITR 181), Commissioner of Income-tax v. Modi Industries Ltd. (No. 1) (1993 PTD Note 179 at p. 243), Commissioner of Income-tax v. S.S. Ratanchand Bholachand (HUF) (206 ITR 72), Commissioner of Income-tax v. Mysore Electrical Industries Ltd. (196 ITR 884), Union Drug Co. Ltd. v. Commissioner of Income-tax, West Bengal-III, Calcutta (156 ITR 197), G.G. Sanghi v. Commissioner of Income-tax (156 ITR 95), Triveni Engineering Works Ltd. v. Commissioner of Income-tax, Delhi-II (144 ITR 732), Balrampur Sugar Co. .Ltd. v. Commissioner of Income-tax, West Bengal-111 (135 I'fa 227), Mahalakshmi Sugar Mills Co. v. Commissioner of Income-tax, Delhi (123 ITR 429) and (1998 PTD (Tribunal) 889).

6. The learned counsel for the respondent submitted that the amount of bill was not paid within the due period, consequently, the petitioner had to pay additional amount for the late payment, which was in the nature of penalty, therefore, no deductions were permissible and thus the impugned judgment is legal, proper and not liable to be interfered with. Initially he placed reliance upon section 24(c) of the Income Tax Ordinance in support of his contention but subsequently after going0 through it he did not press his point and reliance on the said provision as same was not applicable to' the facts of the case.

7. Section 23(1)(xviii) of Income Tax Ordinance lays down that in computing the income under head "Income from business or profession" any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly for the purpose of such business or profession shall be liable to deduction. The petitioner in the instant case has incurred expenses of first sum towards interest under section 3(3) of said Ordinance because an amount of development surcharge in respect of gas could not be paid within time specified for such payment, while another sum was paid to the gas companies because in terms of the bilateral agreements, charges of the gas purchased could not be reimbursed within time where under 14 percent. interest was payable to gas companies. Admittedly, above two sums were paid by the petitioner to the Federal Government and to the gas companies in connection with its routine business expenses and if such expenditure had not been made, it might have resulted in suspension of the gas supply and cancellation of the agreement between the petitioner and gas companies. Considering that said sums were paid in the interest of business and to avoid further losses, it may not be out of place to observe here that the petitioner is stated to have saved a large amount by making delayed payment of the development surcharge on the gas supply and gas price and the huge amount so saved was used for carrying out the business. Aforesaid amount was shown towards total income, which was taxed by the respondent. Section 3(3) of said Ordinance also stipulates that interest at the rate of 12 % shall be payable on any amount due if the amount is not paid within the time specified for such payment. The above provision of law does not say that "penalty" shall be imposed but states that "interest" shall be payable on any amount due if the amount is not paid within the specified time for such payment. It may be pertinent to observe that penalty is to be levied or a fine is to be imposed on account of any criminal infraction/ violation of the provision of law but in the instant case there was no criminal violation of any legal provision. In the instant case interest/compensation for delayed payment has been provided in the statute as well as in the agreement, therefore, it may be non7compliance with contractual obligations on the part of the petitioner to make additional payment as interest or compensation for late payment, but it could not be said to be violation or infraction of criminal law, therefore, such payment cannot be termed as a penalty or penal interest, having regard to the fact that payments were made for the purpose of carrying on business to enable the petitioner to carry on and earn profit in business, and if the payment had not been made, the petitioner could have suffered losses. These payments and disbursements made by the petitioner were on account of commercial expediency to facilitate carrying on its business. These were essentially expenses for the purpose of business of the petitioner, as such these could not be termed to be penalty or penal interest or fine, hence petitioner would be entitled to deductions under section 23 as expenditures as laid out or expended wholly or exclusively for the purpose of business. We are fortified in our view by the precedent cases cited in paragraph 5 of the judgment.

8. So far as the case of Commissioner of Income-tax v. Premier Bank Limited, Karachi, 1999 SCMR 1213 = 1999 PTD 3005, relied upon by the learned High Court, ratio of the judgment is that every expenditure on account of infringement of statute cannot be disallowed. Only such expenditure is to be allowed, which, on account of infringement of provisions of statute, falls within the purview of fine or penalty. In the instant case, the expenditure is incidental to the business considerations and the statute viz. Natural Gas (Development Surcharge) Ordinance, 1967 provides for payment of 12% interest on late payment and 14% interest/compensation as per bilateral agreements vide Annexures II, III and IV to the petition. In the Premier Bank case (supra) business was being conducted by a banking company and the nature of the penalty was interest charged under section 36(4) of the State Bank of Pakistan Act, 1956, provisions whereof are quite different and distinguishable from the facts of the instant case.

9. In the aforesaid circumstances, we are of the considered view that the decisions of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal are based on concurrent findings of facts. Evidently there is no misreading or non-reading of evidence. No inherent legal infirmity has been pointed out. There being no violation of settled principles of law arising out of the orders passed by the two forums below, no E interference was called for by the High Court in appeal under section 136 of the Income T~4c Ordinance, 1970 Resultantly the points formulated for determination are answered in the affirmative. This petition in the peculiar circumstances is converted into appeal and the impugned order passed by the High Court is set aside. Consequently appeal is allowed.

Q.M.H./M.A.K./-S-71/SAppeal allowed.