(a) Practice and procedure---

---- When a Bench adopts a view different or contrary to the view earlier expressed by a Bench of equal jurisdiction, then legal propriety demands reference of case of constitution of a larger Bench or be left to be settled in appeal by higher Court.

PLD 1963 S C 296 and PLD 1995 S C 423 fol.

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

----S. 31(1)(b)---Interest income generated from Bank, deposits-- Deduction of overhead expenses from such income---Tribunal denied such deductions to assessee, though in its earlier judgments it had allowed 10% flat rate deductions to other Cooperative Housing Societies---Validity---Section 31(1)(b) of Income Tax Ordinance, 1979 did not allow deduction of expenses from income derived from other sources at a flat rate nor did the. said section permit deduction of expenses, unless same had been particularly set apart as a claim and were attributable to earning interest income---Assessee had neither claimed any ascertained sum nor had set apart any particular amount of, expenses associated with earning, generation, management and administration etc. of interest income from Bank deposits---Tribunal was justified in passing impugned judgment wherein reasons had been given for departing from its earlier judgments---High Court answered reference in affirmative.

Siraj-ud-Din Khalid for Petitioner.

Muhammad Ilyas Khan for the Revenue.

Date of hearing: 11^th March, 2003.

ORDER

Following questions have been framed by Lahore Bench of learned Income Tax Tribunal in reference to its order, dated 23-2-1995 for our consideration and reply:--

1.Whether on facts and in the circumstances of the case, the Department could re-agitate before the Tribunal in second round of litigation the allow ability of overhead expenses as may be attributable to the earning, management, control, supervision and dispensation of the interest income, which issue was decided against it in ITA No.3411-34209-LB/1986-87, dated, 22-5-1988 in the case of assessee.?

2.Whether the Tribunal was justified to observe that the mere implementation of impugned order on 30-5-1988 cannot non-suit the Department for the appeals now before Tribunal?

3.Whether the Division Bench of ITAT sitting on the appeals of the assessee could legally give different judgment to an earlier, judgment of an other Division Bench in ITA No.3381 -3391/LB/1984-85, dated 20-11-1989 without referring the Matter, to a larger Bench?

4.Whether the direction of the First Appellate Authority to allow 10% overhead expenses against the interest income of the assessee were against the provisions of section 31(1)(b)?

2. The above questions have been referred in the factual perspective that- the petitioner i.e. a Cooperative Housing, Society registered under Cooperative Societies Act in response to respective notices under section 65 of late Income Tax Ordinance, for the-dears 1176-77 to 1978-79 and ,under section 56 for the years, 1979-80 to 1985-86, submitted income returns for all the said years showing Nil income. The assessee claimed exemption from income tax.

2(i)The Income Tax Officer completed the original assessment on 23-6-1985, rejected the claim of exemption and charged to tax all the incomes accrued to the assessee.

2(ii)In appeal, the First Appellate Authority vide order, dated 23-10-1986 accepted the contention of exemption so far as income derived from admission fee, demarcation fee, maintenance cess, transfer fee, etc., on account of being derived from dealing with members. However, the exemption claimed for interest income on deposits, with bank was turned down and was directed to be assessed after adjustment of reasonable expenses against the interest income. Accordingly the assessment, was set aside and case was remanded to the ITO. Further appeals were filed by the Deptt, Before the Tribunal which were dismissed on 22-5-1988 vide its order I.T.A. No.3411-3420/LB, of 1986-87, holding:--

" ....The Commissioner of Income Tax (Appeals) is right in observing that in other similar societies the Deptt. has accepted the claim of the assessees as that income from dealings with members was exempt. One such case is that of Lahore. Cantonment Housing Society where-the Department accepted the income front dealing with member as exempt but only interest income out of deposits in the Schedule Banks was taken as income not being exempt and which was maintained by this Tribunal as well."

3. During the pendency of appeals before the Tribunal the Income Tax Officer gave effect to the CIT's order, dated 23-10-1986 on 31-1-1988 and did, not allow proportionate expenses against the interest income. The learned CIT (Appeals), in second round of litigation, directed for allowance of 10% of the overhead expenses against the taxable income from interest on deposits vide his order, dated 18-4-1988. The effect was given to the said CIT order, dated 18-4-1988 by the Income Tax Officer on 30-5-1988 by allowing 10% of the overhead expenses against the interest income. However, further appeals before the Tribunal were also filed.

4. The Tribunal, vide its order, dated 23-5-1995 accepted the departmental appeal on the main ground that the 10% allowance directed by the CIT (Appeals) was not covered by the provisions of section 31(3) as such expenses were not wholly and exclusively for the purpose of earning interest income. The assessee thereupon sought reference of above questions under section 136(1) of the repealed Income Tax Ordinance to this Court. Hence the present reference.

5. To advance the case of assessee, the learned counsel referred to the decision, dated 2-5-1988 in I.T.As Nos.3411 to 3420/LB of 1986-87 earlier made in the first round of litigation, to contend that after the said judgment, the matter could not have been re-agitated by the Department in second round of litigation as the judgment, dated 2-5-1988 was binding upon the Department being a past and closed transaction. And further that 10% of overhead expenses having been allowed by Division Bench of the Tribunal to other Cooperative Housing Societies in I.T.As. Nos.3381-3391/LB of 1984-85, dated 31-3-1986 and I.T.As. Nos.3686 -3693/LB of 1984-85, dated 20-11-1989, this case should have been referred by the learned Appellate Tribunal to a larger Bench as the earlier judgments were binding on the subsequent Division Bench of the Tribunal. Reliance was placed upon the cases reported as PLD 1963 SC 296/308 and PLD 1995 SC 423. On the question of implementation of order and allowing deduction for overhead expenses froth interest income under section 31(1)(b) of the Repealed Ordinance. Arguments raised before the learned Tribunal were reiterated with emphasize that over-all expenses claimed by the assessee should have been bifurcated proportionately to deduct expenses from interest income derived by the assessee's claim of expenses, particularly when 10% of the expenses were allowed in the earlier judgments of the Tribunal to other Housing Societies.

6. Contrarily, Mr: Muhammad Ilyas Khan, Advocate for the Department supported the impugned judgment, of the Tribunal and stated that no questions of law arise requiring resolution by this Court.

7. Having heard the learned counsel for the parties and attended to the submissions and record, we find that bare reading of order, dated 2-5-1988 passed by Lahore Bench of Income Tax Appellate Tribunal in. I.T.As Nos.3411 to 3420/LB of 1986-87 would reveal that while deciding Department's appeal in the first round of litigation, the learned Members of the Tribunal held that though society's income derived "as a result of its dealings with its members" was exempt but interest income generated from bank deposits being income from other sources under section 31 of Income Tax Ordinance was not exempt to a Cooperative Housing Society. Upon such observations, the learned Tribunal in order, dated 2-5-1988 approved the order of learned Commissioner of Income Tax (Appeals) remitting the case to I.T.O. for reassessment. The learned A.R. probably derived reinforcement from observations of learned CIT (Appeals) that:--

"I.T.O. should have assessed the bank interest only be deducting overheads as may be attributable to the earning, management, control, supervision and dispensation of the said income. Reasonable expenses as being allowed in the cases of other societies may be allowed and the assessment made accordingly. The assessment for all the years are set aside to be made afresh an accordance with the direction as above."

8. The above observations, though were generally up-held in order, dated 22-5-1988 by the Tribunal, do not advance the case of the assessee. These observations ate obviously subject to rider placed by the learned CIT (Appeals) that "the I.T.O. should have assessed the bank interest only by deducting overheads 'as may be attributable' to the earning; management, control, supervision and dispensation of the said income." As such, as per mandate of remand in first round of litigation, I.T.O. was directed by C.I.T. (Appeals) to deduct from interest income only such overheads as were attributable to the earning, management, control and dispensation etc. of the said income. We thus do not agree with the learned counsel for the assessee that order, dated 22-5-1988 earlier passed by the Tribunal estopped the Department from challenging before the Tribunal in second round of litigation, overhead expenses allowed at flat rate of 10% by Commissioner CJT or that the implementation of CIT's order, dated 18-4-1988 by Income Tax Officer on 30-5-1988 attracted the doctrine of "past and closed transaction to the present case: Such implementation of course was subject to the result of appeal which had, in the meantime, been filed by the Department before the Tribunal. The result of the earlier order was thus no doubt subject to the decision in appeal filed there against before the Tribunal.

9. Now we advert to the third question as to whether the learned Tribunal should have referred the matter for decision to a larger Bench in view of earlier judgment of a co-equal Bench in I.T.As. Nos.3381 -3391/LB of 1984-85 and I.T.As. Nos. 3686-3693/LB of 1984-85. It has been contended that in the above referred judgments, dated 31-3-1986 and 20-11-1989 passed by a learned Division Bench of Income Tax Appellate Tribunal in earlier case, deduction on account of overhead expenses at flat rate of 10% was allowed to Cooperative Housing Societies like Lahore Cantonment Housing Society from bank interest income, which could not have been denied by a subsequent Division Bench through impugned order, dated 23-5-1995 to the present assessee. In the referred judgments of Hon'ble Supreme Court of Pakistan in the cases of "Province of East Pakistan v. Dr. Aziz Islam" (PLD 1963 SC 296), and `Multiline Associates v. Ardeshir Cowasjee and 2 others" (PLD 1995 SC 223), it has been held that where a different or contrary rule was reached by an equal Bench in co-equal jurisdiction from an earlier judgment of the same Court, the matter should normally be referred to a larger Bench for decision or should be left to be raised in appeal before the Hon'ble Supreme Court of Pakistan. The ratio of these judgments is that when a Bench of co-equal jurisdiction adopts a view different or contrary to the view earlier expressed on principles by a Bench of equal jurisdiction, the: legal propriety demands reference of the case for constitution of a larger Bench or be left to be settled in appeal by the higher Court.

10. In the present ease, on the issue under consideration i.e. deduction of overhead expenses from interest income earlier Division Bench had decided to allow 10% to Cooperative Housing Societies. In the impugned order, dated 23-2-1995, learned Division Bench deciding the appeal in the case of present assessee, denied such deduction to the assessee at flat rate or otherwise by holding that:

"(7)

The relevant portion as reproduced above, without an iota of doubt, is not a statement of law as far the proposition before us is concerned. The appellant-Cooperative Society in that case was allowed 10% of overhead expenses after adjustment against interest income, the relief with which the assessee felt dissatisfied and approached this Tribunal for further relief. The prayer for enhancement in relief was refused. The eligibility of the expenses against interest income was neither mooted before the Tribunal nor it was ruled upon. The other submissions of the learned counsel before us that the Revenue not raised an objection against allowing of 10% expenses against interest income it was estopped from contesting relief allowed in the present case is also untenable at law. As said above, the Revenue was not in appeal in that case and, therefore, the allowability of the expenses was neither raised nor discussed. Even if it had been so, we do not see how it could create a kind of estoppel against the Revenue or to estop it for ever from raising this contention in any subsequent proceedings with regard to other assessee. There is no estoppel against law nor the findings in the aforesaid case created any kind of res-judicata against the Revenue.

"(8) the emphasis of the learned counsel on the aforesaid order of this Tribunal is motivated by the desire to make us accept that the alleged rata is binding upon us. Although, he has not cited a specific decision in support of his submission yet obviously his contention is that unless an earlier decision is clearly illegal or inappropriate, it is binding upon a Bench of equal strength in subsequent sitting on the same issue. In Pillani Investment Corporation Limited v. Income Tax Officer, Calcutta and another (1972) 83 ITR 217) the Supreme Court of India declined to review an earlier decision and laid down the criterion applicable in such situation. Their lordships observed that considering whether the earlier decision was clearly erroneous, the considerations to be kept in mind are whether on the earlier occasion, did some patent aspects of the question involved remain-unnoticed; or was the attention of the Court not drawn to any relevant or material statutory provision, or was any previous decision of the Court bearing on the point not noticed, As observed earlier, the finding as recorded in the reproduced para did not amount to a precedent in any sense of the term. Even if for argument sake it is so accepted, the three conditions laid down by the Full Bench in the aforesaid Indian case will justify a deviation inasmuch as the patent aspect of the question of allowing of expense against interest income remained unnoticed.

(9)

"(10)The refusal of this Tribunal in the earlier case to allow an enhancement in the expenses allowed against interest income by the First Appellate Authority can by no means be taken as an authority to allow at least 10% expenses against interest income and therefore, applicable to the facts and circumstances before us. The Revenue has contested before us the allowability of these expenses and, the aforesaid provisions of law supports the stand taken by the Revenue unequivocally. The assessee never made an expressed claim of a particular kind of expense to have been expended wholly and exclusively for the purpose of earning of interest income. Since no definite sum was claimed and no specific head was pointed out the question of its examination by the Authorities below could not arise at all. These Assessing Officer very rightly disallowed the claim. Learned First Appellate Authority by way of the impugned order clearly erred in allowing the round sum bf expenses against interest income on the alleged authority of a decision of this Tribunal. It may also be reiterated that an expense to be allowed in case of assessment of income from other source has to be established in terms of section 31 read with provisions of section 24 of the Ordinance. The stress of the legislature on the words "wholly and exclusively, for the "purpose" must be kept in mind. The use of word "purpose" in subsection (b) of section 31(1) of the Ordinance qualifies the earlier pharase "wholly and exclusively". It means that an expense must have been laid out or expended strictly with the object of earning of the income against which it is being claimed. In case of the kind before us while considering an expense against interest income the claimant as well as the Revenue Officer allowing the expense must make out a case that the interest income could not have been achieved, or at least facilitated, wholly or partly, if the claimed expenses had not been incurred.

(11)None of the qualifications as contemplated by law having been answered, the claim of around expense and its allowance as a deduction was clearly inappropriate and illegal in the circumstances of the case. We will, therefore, allow these departmental appeals by setting aside the, first appellate order insofar as the allowing of 10% of expenses against interest incomes concerned. The order of the Assessing Officer to that extent, therefore, shall stand restored.

11. In the above opinion, learned Tribunal has elaborately discussed, the reason for departing from the earlier judgments allowing 10% flat rate deduction on account of expenses. Section 31(1)(b) of late Income 'Tax Ordinance does not allow deduction of expenses from income derived from other sources at a flat rate nor does the section permit deduction of such expenses unless the same have been particularly set apart as a claim and are attributable to earning etc of income so derived which in the present case is interest income. The assessee-Society had neither claimed any ascertained sum nor had it set apart any particular amount of expenses; associable to the earning, generation, management and administration, etc. of interest income from the banks deposits Under these circumstances, the learned Member of the Tribunal were justified in passing the impugned judgment. Agreeing with the reasons set out in the said judgment of the learned Tribunal, above questions are answered in affirmative. Disposed of accordingly.

S.A.K/G-305/L Questions answered in affirmative