I.T.As. Nos.69/PB and 70/PB of 2001-02, decided on 6th August, 2004. VS I.T.As. Nos.69/PB and 70/PB of 2001-02, decided on 6th August, 2004., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2465 (2004)

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

----S. 23(1)(xxi)---Deductions not admissible---Mark-up reserved---Assessee was a banking company---Unrealized portion of mark-up from the clients for the assessment year 1998-99 and 1999-2000 was not allowed by the First Appellate Authority---Assessee contended that effect of amendment of Cl. (xxi) of subsection (1) of S.23 to the Income Tax Ordinance, 1979 was retrospective in nature and mark-up reserve account as claimed during the said assessment years should have been allowed---Validity---Insertion of Cl. (xxi) of subsection (1) of S.23 to the Income Tax Ordinance, 1979 not being curative or clarificatory but of substantive in nature with specific date of effectiveness i.e. on or after 1st day of July, 2000 with unambiguous intendment, whereas the fiscal statute should be construed in its strict sense if a new enactment had been made or a new definition was added or a deeming provision was inserted or the scope of a provision particularly a substantive/charging provision was enlarged or extended it shall not have the retrospective effects until and unless specifically specified so by the legislature---Insertion of the clause being of substantive nature having specific date of operation i.e. on or after 1st day of July, 2000 leaves no room for ambiguity about its date of operation and thus, it would operate prospectively---Finding of First Appellate Authority was upheld by the Appellate Tribunal.

Elahi Cotton Mills and others v. Federation of Pakistan PLD 1997 SC 582 = 1997 PTD 1555; 1993 SCMR 73; Order of ITAT (LB) in W.T.A. No. 1253/1257/(LB) of 2001 and Iftikhar Hussain Alvi v. CIT Reference No.44/97/2002; 2003 PTD 812 distinguished.

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

----S. 23---Deductions not admissible---Bad debts---Assessee, a Banking Company, contended that doubtful debts had been made in accordance with prudential regulations and State Bank of Pakistan directions---State Bank of Pakistan had issued their reports regarding the provision of bad debts---Since assessee had completed the formality regarding claim of bad debts as required under the Income Tax Laws, the same should have been allowed---Validity---Certificate verifying the irrecoverable debts was not available at the time of assessment, subsequently, it had been provided by the State Bank of Pakistan, therefore, it should be allowed---Appellate Tribunal set aside the order of lower authorities on the issue with the direction that in the light of certificate from State Bank of Pakistan verifying the irrecoverable debts it should be decided accordingly.

Abdul Ghafoor, F.C.A. for Appellant.

Faheem Muhammad, D.R. for Respondent.

ORDER

JAVED IQBAL (JUDICIAL MEMBER).---This order will dispose of the above titled appeal instituted on behalf of assessee challenging the impugned combined order on the following common grounds:--

"That the L/CIT(A) has not allowed relief on the mark-up reserve account amounting to Rs.1,56,64,000 for the assessment year 1998-99 and Rs.4,39,38,000 for the assessment year 1999-2000, this mark-up reserve is actually unrealized portion of mark-up from the clients. The government has already provided in the Income Tax Ordinance, 1979 that from 1-7-2000, the provisions made under the head mark-up reserve account is allowable expense for the banking company. As per ruling of the Supreme Court of Pakistan in the case of Elahi Cotton Mills and Other cases of Superior Courts. The effect of this amendment is retrospective in nature. It is requested that the mark-up reserve account as claimed during the assessment years 1998-99 and 1999-2000 may please be allowed.

That the above bank has provided for doubtful debts amounting to Rs.2,10,26,000 for the assessment year 1998-99 and Rs.5,03,43,000 for the assessment year 1999-2000. These provisions have been made in accordance with prudential B regulations and State Bank of Pakistan directions. The State Bank of Pakistan has issued their reports regarding the provision of bad debts, since the above assessee has completed the formality regarding claim of bad debts as required under the Income Tax Laws, it' is requested that this claim at Rs.4,80,24,000 may please be allowed.

That the bank has claimed Rs.4,80,24,000 being diminution in value' of investment. As per Income Tax Law in case of fixed assets, depreciation is an allowable expenses and in case of current assets when these assets loose their value on the above basis it is requested that diminution in value of current assets may please be allowed."

Department was represented by L/DR Mr. Fahim Muhammad, while assessee was represented through L/AR Mr. Abdul Ghafoor, FCA, their arguments considered the relevant orders and the provision of law perused.

Briefly facts of the case are that assessee is a banking company, derives income from the business of the banking. Assessment were completed under section 62 of repealed Ordinance and feeling aggrieved with the assessment, assessee went in appeal where CIT(A) decided the issues of appeal. Being still dissatisfied the assessee has instituted the present appeals before us.

L/AR of assessee on the issue of mark-up on suspense account stated that on this issue of interest accrued on non-performing loan credited to mark-up suspense account is in allowable expenses for a banking company and the amendment brought by Finance Bill, 2000 being beneficial has retrospective effect and in his support L/AR of assessee referred the following cases law:

(i) Elahi Cotton Mills and others v. Federation of Pakistan reported as PLD 1997 SC 582 = 1997 PTD 1555, (ii) 1993 SCMR 73, (iii) Order of ITAT (LB) in W.T.As. Nos. 1253/1257/(LB) of 2001 (Unreported) and (v) Judgment of Hon'ble Peshawar High Court in the case of Iftikhar Hussain Alvi v. CIT vide Reference No.44/97 of 2002, dated 14-2-2002 reported as 2003 PTD 812.

As regard the case-law reported in the case of Elahi Cotton Mills and others v. Federation of Pakistan reported as PLD 1997 SC 582 = 1997 PTD 1555, the ratio of the same is not applicable to the present situation as in that case the implications of special and general law has been discussed and dilated upon where it was held that if at the same time the special and, general law are in field the special law will prevail over the general law.

The ratio of judgment of L/Bench of the Tribunal recorded in I.T.As. Nos.1253-1257/LB of 2001 where the learned Tribunal while deciding the question of new insertion to section 31B(1)(b) to Wealth Tax Act, 1963 inserted vide Finance Act, 1998 about charging of additional wealth tax in favour of assessee has placed reliance on the judgment of Honourable Supreme Court of the country. However the insertion of section 31B(1)(b) being procedural in nature with no specific date of its operation is distinguishable from the present matter therefore the ratio of the above quoted case is not applicable in the light of below discussion.

While the operative portion of the other two cases-law i.e. 1993 SCMR 73 and 2003 PTD 812 relied upon by the AR of the assessee are reproduced as under:--

1993 SCMR 73 in this case the insertion made in subsection (6) of section 18A of the Income Tax Act, 1922 about the levy of additional tax on a question of law referred by the Tribunal for seeking the opinion the Hon'ble Sindh High Court by answering the question delivered its findings in the following manner:--

"In our view, as the amending provision under consideration had been inserted in subsection (6) of section 18-A to remedy a wrong that was being done to the assessee, and the amending provision does not affect any vested right or create any new obligations, the amending provision is to be given retrospective operation for extending benefit to the affected parties in pending cases, to give effect to the intent of the legislature. As observed earlier, a wrong was being done to the assessee by providing for an indefinite period during which they were made liable for payment of additional tax at the rate of 2% per mensum and this wrong was sought to be remedied by the remedial and curative amendment brought about by the Finance Act, 1973. If the intention of the Legislature had been that this remedy should be available only in respect of assessment for the year 1973-74 and subsequent years, the legislature would have used appropriate words to express such intention. No such appropriate words are mentioned in the amending provision. There is no reason why the remedial provision of the amending law should not be applied to pending proceedings. In fact, this appears to be the intent of Legislature."

The above findings of the Hon'ble Sindh High Court were affirmed by the august Supreme Court of Pakistan with the following observations:--

"However, nothing has been adduced before us in support of the last-mentioned submission. As explained in "Statutory Construction" a statute relating to fiscal law may properly, in several instance, be given retrospective operation and we are of the opinion that as the amendment in the instant case was introduced to redress an injury which in the words of Circular No. 6 of 1973 (Income Tax) issued on 7th July, 1973 by the Central Board of Revenue itself was "designed to soften the law in favour of taxpayers who could previously be charged to additional tax up to the date of assessment even though the finalization of assessment was delayed due to no fault of theirs." This was a proper case in which retrospective operation, to the extent the High Court gave to it, could be given to the amending law."

From the above "reproduction it reveals that in the above quoted case-law it was held that amending provision of subsection (6) of section 18A by the Income Tax Act, 1922 had not affected any vested rights and obligations, whereas the legislature had not mentioned the appropriate words about the date of operation of insertion.

In the case-law reported as 2003 PTD 812 on a question of law referred by the Income Tax Appellate Tribunal that:

"Whether in the facts and circumstances of the case Income Tax Appellate Tribunal was legally justified in holding that the benefit of clause (8) of the Part-IV of the 2nd Schedule to Income Tax Ordinance, 1979 is not available in a case which was pending finalization when said clause was inserted in Income Tax Law?

The honourable, Peshawar High Court while answering the referred question, his Lordship Mr. Justice Tallat Qayum Qureshi has held:

"Para 10" "So far as the other argument of the learned counsel for the petitioner that clause (8) has retrospective application preventing the Assessing Officer to probe into source of income under section 13(1)(aa) of the Ordinance is concerned, the same also has a force in it for the following reason:--

Firstly, in clause (8) the word "invested" has been used which is of key importance as it has been used in past participle form. It had covered all those investments which had been made in the industrial undertaking whose income was assessed under clauses (118C), (118D) and (18E) of Part-I of the 2nd Schedule of the Ordinance at the time of insertion of clause (8). It is worth-mentioning here that Messrs Kaghan Ghee Mills (Pvt.) Ltd. had been set up prior to the issuance of Notification S.R.O. 1283(I)/90, dated 13-12-1990 and pursuant to the said Notification the said company was treated as set up and assessed under clause (118C).

Secondly, in the Notification S.R.O. 1283(I)/90 13-12-1990 no date has been given for application of clause (8), therefore, there is no bar imposed by the authorities which issued the said Notification to interpret retrospectively.

Thirdly, clause (8) is beneficial in nature. It is also by now established principle of law that if any Notification/Circular is of benevolent nature, the same would go to the assistance of assessee. In this regard reliance can safely be placed on the following judgments:

(i) The Commissioner of Income Tax, East Pakistan, Dacca v. Noor Hussain PLD 1964 SC 657, (ii) Laxmichand Hirjibhai v. CIT Gujrat-III (128 ITR) (sic), (iii) Gurjargravures Pvt. Ltd. v. Income Tax Officer, Company Circle-VIII Ahmedabad and another (154 ITR 786), (iv) Rajan Ramkrishna v. Commissioner of Wealth Tax, Gujarat-I (127 ITR 1), (v) Navnil Lal C. Zaveri v. K.K. Sen (56 ITR 198), (vi) Ellerman Lines Ltd. v. CIT (82 ITR 913), (vii) Bechardas Spg. and Wvg. Mills Co. Ltd. v. CIT (1TR 153 of 1976), (viii) Tata Iron and Steel Co. Ltd. v. N.C. Upadhyaya. (ITR 96 I, (ix) Navnit Lal Ambalal v. CIT (1976) (105 ITR 735), (x) M.M. Annaiah v. CIT (76 ITR 582 Mys.), (xi) Dr. T.P. Kapadia v. CIT (87 ITR 511 Mys.), (xii) Dattatraya Copal Shette v. CIT, Poona Range, Poona Kania (sic), (xiii) CIT Kerala-I v. B.M. Edward India Sea Foods, Cochin (119 ITR 334), (xiv) Raja Rajeswari Weaving Mills v. Income Tax Officer "A" Ward, Cannanore and others (113 ITR 405), (xv) CIT Assam, Nagaland, Meghalaya, Manipur and Tripura (102 ITR 408), (xvi) (150 ITR 460), (xvii) UCO Bank v. CIT (237 ITR 889), (1999 PTD 3752), (xviii) T.R. No. 33/97 (Usman Ghee Industries v. CIT) and (xix) CIT v. Muhammad Kassim (2000 PTD 280).

Fourthly, the purpose of insertion of clause (8) was to encourage industrialists to promote the investment in the industrial undertaking without fear of probing their source of income, therefore, employing clause (8) retrospective would be in line of necessary that retrospective application is found in express words. In the absence of express words whenever there is intendment to the effect that some provisions will be retrospective in its application, effect can be given to that intendment. In this regard reliance can be safely placed on Alif Din v. Noor (PLD) 1969 Peshawar 62)"

Before parting further it will be useful to reproduce the insertion and amendment of law as discussed and concluded by the Hon'ble higher and august Court of the country in the above quoted cases-law and the present insertion of clause (xxi) to subsection (1) of section 23 of the Income Tax Ordinance, 1979.

Subsection (6) of section 18A inserted vide Finance Act, 1973 to Income Tax Act, 1922.

"(6) Where in any year an assessee had paid tax under subsection (2) or subsection (3) on the basis of his own estimate and the tax so paid is less than eighty per cent of the tax determined on the basis of the assessment under section 23, hereinafter called regular assessment, and calculated in the manner laid down in subsection (1) so far as such tax relates to income to which the provisions of subsections (2), (2A) and (2B) of section 18 do not apply an additional amount of tax at the rate of two per cent per mensem from the first day of April in the year in which the tax was paid up to the date of the said regular assessment shall be payable by the assessee upon the amount by which the tax so paid falls short of the said eighty percent. "

Clause (8) of Part-IV of the 2nd Schedule to the Income Tax Ordinance, 1979:--.

"(8) The provisions of section 13, Chapter XI or Chapter XII shall not apply in respect of any amount invested in the purchase of shares of a company owning and managing an industrial undertaking the profits and gains from which are exempted under clause (118C) or clause (118D) or clause (118E) of Part-I of this Schedule:

Provided that the letter of credit for the import of plant and machinery required for the setting up of the industrial undertaking has been opened before the thirtieth day of June, 1992 and in the case of locally manufactured plant and machinery, a firm order for its purchase has been placed before the said day."

Section 23 of the Income Tax Ordinance, 1979.

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

(i) ____________

(ii) ____________

(iii) ____________

(iv) ____________ to (xx)

(xxi) inserted vide Finance Ordinance, 2000 "any interest accrued on or after the first day of July, 2000, on a non-performing loan credited to suspense account by a banking company in accordance with the Prudential Regulations for Banks issued by the State Bank."

In the above quoted cases-law it reveals that the insertions of subsection (6) to section 18A of Income Tax Act, 19,22 and of clause (8) of Part 1st of the 2nd Schedule to the Income Tax Ordinance, 1979 are of curative and clarificatory nature, through these no new rights or obligations have been created. Also the date of effectiveness has not been specified.

Whereas insertion of clause (xxi) to subsection (1) of section 23 to Income Tax Ordinance, 1979 not being curative or clarificative but of substantive in nature with specific date of effectiveness i.e. on or after 1st day of July, 2000, with unambiguous intendment, whereas it is settled principle of law that the fiscal statute should be construed in its strict sense if a new enactment has been made or a new definition is added or a deeming provision is inserted or the scope of a provision particularly a, substantive/charging provision is enlarged or extended it shall not have the retrospective effects until and unless specifically specified so by the legislature, whereas in the present matter the insertion being of substantive nature having specific date of operation i.e. on or after 1st day of July, 2000 leave no room of ambiguity about its date of operation. In this context we are of the view that it would operate prospectively. So in the light of above discussion we are not inclined to accept the plea of assessee, therefore, the impugned finding is upheld.

While regarding the issue of bad debts the LIAR contested that ' certificate verifying the irrecoverable debts was not available at the time of assessment, however subsequently it has been provided by the SBP, therefore in the light of same, it should be allowed. We are of the view that the contention of the LIAR of the assessee seems genuine and in the interest of natural justice we deem it proper to set aside the, order of lower authorities on this issue with the direction that in the light of certificate from SBP verifying the irrecoverable debts it should be decided accordingly.

Regarding the diminution in the value of investment amounting to Rs.4,80,24,000 relevant to assessment years 1998-99 the AR contended that the investments have been reduced due to the reduction of face value of shares to the extent of the said amount.

While on the issue of diminution the LICIT(A) has rightly justified his action by holding that the diminution represents the fall in the value of shares held by the bank which are quoted on stock exchange and the appellant has not incurred any loss as these shares were not sold by the bank as such no loss accrued to the bank on this ground.

However, if these are sold and loss accrues the same is accounted for under the speculative or capital loss. So in the light of above discussion the appeal instituted on behalf of assessee on the issue of bad debts set, aside, while on the remaining issue it has been rejected.

In this way appeals are disposed of accordingly.

C.M.A./95/Tax (Trib.)Order accordingly.