I.T.A. No.114/KB of 1990-91, decided on 30th August, 2004. VS I.T.A. No.114/KB of 1990-91, decided on 30th August, 2004., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 882 (2004)

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

----S. 23---Deductions---Provision for bad and doubtful debts--Disallowance of---Assessing Officer made disallowance for provisions and claim for doubtful debts for the reasons that market value of the securities exceeded the dues outstanding; that the borrower had the intention and capacity to pay the dues and that the lender had not taken any steps to recover the dues---First Appellate Authority set aside the order with the direction to Assessing Officer to accept the assessee's claim, if found consistent with the certificates from the State Bank of Pakistan read with Central Board of Revenue's Circular/instructions---Validity---Since relief had been allowed subject to certificate from the State Bank of Pakistan in terms of C.B.R.'s Circular/instructions, there appeared no reason to set aside the order---Allowing relief in this context would be justified and judicious and the setting aside of order in respect of specific provision for bad/doubtful debts would be of no legal consequence---Assessing Officer was directed by the Appellate Tribunal to allow the claim of the assessee.

1990 PTD (Trib.) 731 and 1991 PTD 569 rel.

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

----S. 23---Deductions---Loss on account of fraud---Claim had been made in terms of business loss and First Appellate Authority had not recorded any finding whether such nature of claim could be made in terms of business loss---Appellate Tribunal confirmed the setting aside order passed by the First Appellate Authority.

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

----S. 24(i)---Deductions not admissible---Leave, fair assistance---Assessing Officer treated the expenditure on leave fair assistance as expense on perquisites resulting in add-back to the taxable perquisites---Fist Appellate Authority maintained the same---Assessee contended that expenses were incurred on the quick leave provided to one set off officers in order to make sure of their working by a successor group to avoid pitfalls and maladministrative practice and such expenses were allowable as normal expenditure in a banking concern---Validity---Such type of practice finds no support from other banks and it was a decided issue at the level of the Appellate Tribunal---Appellate Tribunal found no merit in the arguments and the order of the First Appellate Authority was maintained.

?

I.T.As. Nos.377 and 378/KB of 1977-78, decided on 28-8-1978 rel.

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

----S. 23---Income Tax Rules, 1982, R.20---Agreement for the Avoidance of Double Taxation---Deductions---Proportionate head office charges---Disallowance of proportionate head office charges made by invoking R.20 of the Income Tax Rules, 1982 was confirmed by the First Appellate Authority---Validity---Claim was allowable subject to verification---Order was set aside by the Appellate Tribunal---Reasonable head office expenses were to be allowed by the Assessing Officer in pursuance of provisions of Cl. (4) of Articles III & XVI of the "Agreement for the Avoidance of Double Taxation"---Assessing Officer was directed to re-examine the matter and to allow reasonable claim after proper verification, keeping in view the treaty provisions.

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

----S. 23---Banking Companies Ordinance (LVII of 1962), Ss. 25 & 84---Deductions---Penal interest---Disallowance of---Assessing Officer disallowed penal interest paid on account of exceeding credit ceiling limits and penal interest on shortfall in maintenance of statutory cash reserves and liquid assets---Assessee contended that penalty was not imposed because of criminal offence as provided for in S. 84 of the Banking Companies Ordinance, 1962---Payment in terms of penalty not being for a criminal offence was an allowable expense against the taxable income---Order of First Appellate Authority confirming the treatment observing that, the amounts paid in terms of penal interest was inadmissible being in the nature of penalty for infringement of banking loss, was not in accordance with the provisions of law---Validity---Penal interest paid due to infringement of the policies to control advances by Banking Companies was in the nature of the penalty---Since it was a penal interest payable to the State Bank, it may not be treated as an error incidental to the normal course of business of a Banking Company, as such the payment of penal interest or penalty without taking cognizance under S.84 of the Banking Companies Ordinance, 1962, did not mean that it was not a penal action---Penalty imposed was not an allowable expense.

1999 SCMR 1213 rel.

PLD 2001 SC 201 = (2001) 83 Tax 113 (S.C.) Pak) distinguished.

(f) Banking Companies Ordinance (LVII of 1962)---

----Ss. 83, 84 & 25---Sections 83 & 84 had nothing to do with sub-sections (a), (3), (4) & (6) of S.25 of the Banking Companies Ordinance, 1962, which simply provide penalty and not an imprisonment like S. 83 of the Banking Companies Ordinance, 1962, and deal with the powers of State Bank to control advances, wherein penalty was provided in case of infringement---Taking cognizance under S.84 of the Banking Companies Ordinance, 1962 of the offences falling under S.83 of the Banking Companies Ordinance, 1962, was a different matter.

(g) Income-tax---

----Capital gain---Appellate Tribunal allowed Assessee's appeal against the order of First Appellate Authority confirming the treatment whereby capital gain realized on sale of Government securities was treated as revenue gain.

Dated 1-12-2001 passed in ITA Nos. 141 of 143/KB of 1990-91 and 1985 PTD 329 rel.

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

--------S. 23(vii)---Deductions---Bifurcated interest expenses---Disallowance of---Assessing Officer disallowed the bifurcated interest expenses---First Appellate Authority remanded the case to Assessing Officer for re-examination after affording an opportunity of hearing to the assessee---Validity---Investment was purely an income earning business activity---Profit on this activity was offered for tax and it was a matter of evidence that the investment in prize bonds was made through borrowed capital attracting the provisions of S.23(vii) of the Income Tax Ordinance, 1979, which required re-examination---Order of First Appellate Authority was not interfered with by the Appellate Tribunal.

Iqbal Naeem Pasha and Nadeem Ahmed Dawoodi for Appellant.

Muhammad Farid, Legal Advisor, Ali Hasnain, D.R. and Javed Iqbal Rana, D.R. for Respondent.

Date of hearing: 20th March, 2004.

ORDER

The assessee a non-resident Banking Company, in this appeal pertaining to assessment year 1985-86, has taken following objections to the impugned order, dated 22-8-1987:--

"That the learned CIT(A) has erred in:

(i) remanding the case to the learned ITO regarding disallowance of specific provision for bad/doubtful debts amounting to Rs.742,652;

(ii) confirming the disallowance of specific provision for "loss on account of frauds" amounting to Rs.159,695;

(iii) confirming the order regarding disallowance of expenditure of Rs.730,215 on "leave fair assistance";

(iv) confirming the disallowance of Rs.292,182 as "proportionate head office charges" by invoking Rule 20 of the Income Tax Ordinance, 1979;

(v) confirming disallowances of penal interest aggregating to Rs.330,158;

(vi) confirming the order treating gain of Rs.60,050 realized on Government securities as revenue gain, and

(vii) confirming the disallowance of bifurcated interest expenses of Rs.1,439,616".

DISALLOWANCE FOR SPECIFIC PROVISION FOR BAD AND DOUBTFUL DEBTS

?2. The first objection relates to disallowance for specific provision for bad and doubtful debts. The Assessing Officer made disallowance for provisions and claim for doubtful debts for the following reasons:--

(i) market value of the securities exceeded the dues outstanding;

(ii) the borrower having the intention and capacity to pay the dues; and

(iii) the lender not having taken any steps to recover the dues.

3. Further details reveal that the assessee made specific provision for bad and doubtful debts during the income year ended on 31-12-1984 for Rs.43,58,783 as per statement No.19, out of which specific provision utilized for right off debts, amounting to Rs.330,147 has been claimed separately which after separate discussion, has been deducted leaving aggregate specific provision of Rs.40,28,636. The detail thereof, is hereunder:

"(1)????? Messrs Hashmi Can Co. Ltd.??????????????? Rs.4,000,000

(2)??????? Messrs F.J. Hamberts (Pak) Ltd.????????? Rs. 8,824

(3)??????? Mr. Behzad Ali Khan??????????????????????????? Rs. 19,813"

4. The Assessing Officer disallowed above referred two claims being premature for the reason that no step for recovery of this sum has been taken, whereas the amount of Rs.19,813 pertaining to Behzad Ali Khan, was disallowed at Rs.15,113, as it was recredited to the 1984 profits, which is not offered for tax. The Assessing Officer disallowed the remaining claim Rs.7,400 being premature.

SPECIFIC PROVISIONS OF FRAUD AND FORGERIES

5. So far as specific provisions of fraud and forgeries (Rs.159;695) is concerned, it is stated that it comprised of the following figures:--

(1) Loss on account of fraud committed??????????????????????????????????? 64.694

Mr. L. Ferhandes an ex-employee

(2) Loss on account of fraudulent cheques???????????????????????????????? 95,000

drawn on account of R.H.B Javat.

Total??????????????????????????????????????????????????? 159, 694

6. The claim in respect of fraud committed by Mr. L. Ferhandes, an ex-employee as specified provisions has been disallowed considering it to be premature claim as fraudulent cheques are subject-matter of Court's proceedings.

7. The learned CIT(A) discussed both the issues jointly and thereafter directed the ITO to accept the appellant's claim, if found consistent with the certificates from the State Bank of Pakistan read with Board's Circular/instructions in this behalf.

8. The learned counsel for the assessee namely Mr. Iqbal Naeem Pasha, argued that no justification appears to set aside the order on this issue, directing the Assessing Officer to re-assess the claim and to pass a fresh order, as complete details of claim of specific provision for bad/doubtful debts and for loss on account of fraud, were duly furnished which are evident. It is pointed out that there is a shortfall in the realizable value of the securities held by the assessee as compared to the debt outstanding in the name of borrowers, besides specific provisions are equal to the shortfall. It is added that in case of assessee, cash and credit represent the stock in trade and their valuation as on 31st December, 1984 is accounted for at cost or market value whichever is lower, hence adjustments are necessary to arrive at the correct value of closing stock in trade and, therefore, it is necessary to make specific provision for bad/doubtful debts and for loss on account of fraud, which are written off against year end profits in accordance with universally accepted mercantile basis of accounting. The learned counsel further urged that the amounts received subsequently are offered for tax in the year of receipt as provided for under section 25(aa)(i) of the Income Tax Ordinance, 1979 and in order to record year end adjustments so as to arrive at the correct value of closing stock in trade i.e. debts and cash, making of specific provision, is necessary. Accordingly the provisions for bad/doubtful debts and specific provisions for frauds respectively are shown on the assets side of the balance-sheet to reflect writ of relevant assets, hence the disallowance in the above heads on the ground that suits are pending or have not been filed, amounts to redundant the provisions of section 25(aa)(i) of the Income Tax Ordinance, 1979.

9. The learned counsel relied upon the following case laws:-

(i) 1990 PTD (Trib.) 731

---Ss.23(x) & 25---Word "irrecoverable" occurring in S.25(x)--Connotation---irrecoverable only means that "prima facie the amount within all probability, is irrecoverable"---Law thus presumes that such an amount is not absolutely irrecoverable but there is always a possibility of recovery---Provision of section 25 takes care of such a situation viz. where an amount is written off as bad debt and, thus allowed a deduction under section 23 of the Ordinance, then if it is recovered subsequently, it is to be treated as income of the assessee and such income would be treated as income from business or profession for that year."

(ii) 1991 PTD 569

"Income Tax Act, 1922 (XI of 1992)---Section 10(2)(xi)---Bad debt---Assessee a non-resident banking company---Bad debts claimed by assessee---A part of the claim was disallowed. by the Income Tax Officer on the ground that the suits were pending and was still hope for recovery---Another amount of the claim was rejected on the ground that no legal action was taken for recovery---Tribunal directed the Income Tax Officer to admit the claim---Whether justified---Held, yes---Whether a finding of fact could be challenged---Held, no."

10. In view of the above judgments, the learned CIT(A) was justified to agree with the contentions of the learned counsel for the assessee to accept the appellant's claims. Since the relief has been allowed subject to certificate from the State Bank of Pakistan in terms of the Board's Circular/instructions in this behalf, hence no reason appears to set aside the order. In the circumstances supra, allowing the relief in this context would be justified and judicious and the setting aside order in respect of specific provision for bad/doubtful debts amounting to Rs.742,652, would therefore be of no legal consequence. Consequently the Assessing Officer is directed to allow the claim of the assessee.

11. In respect of specific provisions for loss on account of fraud amounting to Rs.159,695, we find reasons in confirming the setting aside order as present claim has been made in terms of business loss and the learned CIT(A) has not recorded any finding whether such nature of claim can be made in terms of business loss.

LEAVE FAIR ASSISTANCE

12. The ITO treated the expenditure on leave fair assistance (Rs.730,215) as expense on perquisites incurred in income year ended on 31-12-1984 resulting in add-back of a further sum of Rs.124,729 (i.e. disallowed sum of Rs.21,72,056 less offered by the assessee at Rs.20,47,327) to the taxable perquisites computed under section 24(i) of the Income Tax Ordinance, 1979.

13. The learned CIT(A) maintained the order as the ITO has relied upon the Tribunal's decision in this context referred as I.T.As. Nos.377 F and 378/KB of 1977-78, dated 28-8-1978.

14. The learned counsel for the assessee argued that the expenses are incurred on the quick leave provided to one set of officers in order to make sure of their working by a successor group to avoid pitfalls and maladministrative practice, hence expenses are allowable as normal expenditure in a banking concern. This argument does not appear to be cogent, and this type of practice finds no support from other banks, beside as recorded above, it is a decided issue at the level of the Tribunal, hence we find no merit in the arguments, whereby the order of the learned CIT(A) is maintained.

PROPORTIONATE HEAD OFFICE CHARGES

15. The next objection relates to order confirming disallowance of Rs.292,182 as proportionate head office charges made by invoking Rule 20 of the Income Tax Rules, 1982.

16. Record reveals that the ITO disallowed proportionate head office charges at R.292,182 against the aggregate sum of Rs.47,27,693 claimed by the assessee as deductible expense. The learned CIT(A) maintained the order. It is argued that the provision of Rule 20 of the Income Tax-Rules, 1982 is contrary to the provision of clause (4) of Articles III and XVI of the "Agreement for the avoidance of Double Taxation" between Pakistan and United Kingdom whereas tax treaty is covered under the saving clause i.e. section 166(p) of the Income Tax Ordinance, 1979 and Rule 20 cannot override the tax treaty, being contrary and conflicting.

17. This issue had also been the subject-matter in the assessment year 1984-85, wherein the ITAT accepted the contention of the assessee in view of clause (4) of Articles III and XVI of the "Agreement for the avoidance of Double Taxation". For the above reasons, we find that the claim is allowable subject to verification, hence set aside the order in this G context. Since reasonable head office expenses are to be allowed by the Assessing Officer in pursuance of provisions of clause (4) of Articles III and XVI of the "Agreement for the avoidance of Double Taxation", hence the Assessing Officer is directed to re-examine the matter and to allow reasonable claim after proper verification, keeping in view the treaty provisions.

DISALLOWANCES OF PENAL INTEREST AGGREGATING TO RS.330,158

18. This issue pertains to order confirming disallowances of penal interest aggregating to Rs.330,158.

19. The learned ITO disallowed penal interest paid on account of exceeding credit ceiling limits to Rs.280,616 and (ii) penal interest on H shortfall in maintenance of statutory cash reserves and liquid assets to Rs.49,542. Record reveals that the assessee paid penal interest on exceeding credit ceiling limits in accordance with subsections (3), (4) and (6) of section 25 which deals with powers of the State Bank to control advances by Banking Companies.

20. The learned counsel for the assessee, however, argued that subsections (3), (4) and (6) of section 25, said to be the basis of present additions in terms of penalties, are meant to implement the policies of State Bank of Pakistan as regards advances and credits, whereas, these provisions provide for penalties and fines, which are attracted as an automatic procedure meant to compensate the State Bank of Pakistan for loss of revenue resulting from advances exceeding the prescribed limits laid down in its policy declaration. The learned counsel further pleaded that subsections (3), (4) & (6) of section 25, are directly related to subsection (6) and (7) of section 83 and for any offence falling under section 83, it is provided vide section 84 that the cognizance would be taken by the Hon'ble High Court only on a written complaint by an Officer of the State Bank. Since directions above have not been complied with, hence no penalty can be imposed, as such any action to impose penalty for any payment in such terms, would be illegal. It is added that penalty is not imposed because of criminal offence as provided for in section 84, therefore, payment in terms of penalty not being for a criminal offence, is an allowable expense against the taxable income, hence the order of learned CIT(A) confirming the treatment observing I that, the amounts paid in terms of penal interest is inadmissible being in the nature of penalty for infringement of banking loss, is not in accordance with the provision of law referred to above.

21. After perusal of the above referred provisions of law and the nature of penalty, we do not find ourselves in agreement with the learned counsel for the assessee. The penal interest paid on account of exceeding credit ceiling limits at Rs.280,616 and penal interest on shortfall in maintenance of statutory cash reserves and liquid assets of Rs.49,542 is in accordance with subsections (3), (4) & (6) of section 25 of the Banking Companies Ordinance, 1962, hence before further discussion, it would be necessary to refer the relevant provisions of the Ordinance referred above to:--

"(3) If any default is made by a banking company in complying the policy determined under subsection (1) or direction given under subsection (2), every director and other officer of the banking company and any other person who is knowingly a party to such default shall, by order of the State Bank, be liable to a penalty of an amount which may extend to two thousand rupees and, where the default is a continuing one, of a further amount which may extend to five hundred rupees for every day after the first during which the default continues.

(4) Without prejudice to the provisions of subsection (3), the State Bank may, for the purposes of securing implementation of any special credit schemes or 'monetary policy or observance of credit ceiling by a banking company, by order in writing, require banking companies generally, or any banking company in particular, to make special deposits with it for such amount and on such terms and conditions as may be laid down by the State Bank in this behalf.

(6) Any penalty imposed under subsection (3) shall be payable on demand made by the State Bank and, in the event of refusal or failure by the director, officer or other person concerned to pay on such demand, shall be recoverable as arrear of land revenue."

Section 25 empowers the State Bank to determine policy in relation to advances, to be followed by the Banking Companies generally or by any Banking Company in particular. Section 25(2) further empowers the State Bank to, (i) impose penalty in case of continuing default, infringement or violation of its direction, and, (ii) further penalty per day till observance of the policy framed by the State Bank under section 25(1). Subsections (2) to (6) of the section 25 further empower the State Bank to provide loan ceiling etc. and to take further measures to ensure implement of policy, as such section 25 contemplates complete financial control of the State Bank of Pakistan over the Banking Company. Since section 41 of the said Ordinance also empowers the State Bank to give directions from time to time to the Banking Companies, generally or in particular, hence the accumulate effect of subsections of section 25 is to inter alia provide effective financial and administrative control of the State Bank of Pakistan over the Banking Company generally or in particular.

Subsection (3) of section 25 in particular deals with the case where there is default due to non-compliance of the policy determined by the State Bank under subsection (1) and direction under subsection (2), as such any person including director and officer of the Banking Company, who is knowingly a party to such default, shall also be liable to a penalty along with the Banking Company.

As against above provision of law, subsections (1) and (2) of section 84, deal with the terms "cognizance of offences" punishable under subsections (1), (1-A) (1-B) (1-C) and (1-D) of section 83 on. a complaint in writing to be made by an officer of the State Bank. Object of section 84 is to enable the officers of the State Bank to launch prosecution in respect of the offences punishable under section 83 if committed by the Banking Company or bank officials. In all such cases the trial powers are vested with the High Court vide subsection (2) of section 84. Since section 84 directly relates to offences falling within the ambit of section 83, hence the conditions laid down in section 84, would only be applicable to offences defined in section 83 of the Ordinance. In the circumstances, sections 83 and 84 have nothing to do with subsections (a), (3), (4) and (6) of section 25, which simply provide j penalty and not an imprisonment like section 83, and deal with the powers of State Bank to control advances, wherein penalty is provided in case of infringement. Taking of cognizance under section 84 of the offences falling under section 83 is a different matter, hence it could not be said that the penal interest paid due to infringement of the policies to control advances by Banking Companies, is not in the nature of the penalty. Since it is a penal interest payable to the State Bank, it may not be treated as an error incidental to the normal course of business of a K Banking Company, as such the payment of penal interest or penalty without taking cognizance under section 84 of the Banking Companies Ordinance, does not mean that it is not a penal action. In this context, the reliance is placed on case-law reported as 1999 SCMR 1213. The ratio of the order is as under:

"Repealed Income Tax Act, 1922, section 10(2)(xvi)---Deductions penal interest---Assessee failed to maintain credit balance levels---Assessee claimed deductions on payment of penal interest---Disallowed by the ITO A.A.C. accepted the assessee's appeals ITAT reversed the AAC's order, High Court held the transactions made by the respondents being connected with their normal business of banking---Whether justified--Held, no---Whether liabilities incurred on account of payment of penal interest can be claimed as deduction under section 10(2)(xvi), Held, no---Whether ITO rightly excluded the expenditure from deductions---Held, yes.

??even if deductions are claimed under section 10(1), the question to be determined would still remain in the same. As has been pointed out earlier, the payments made by the respondent were in the nature of fine, therefore, in any case, they cannot be held to have been laid out wholly or exclusively for the purpose of its business. Therefore, it cannot be excluded as allowable expenditure for the purpose of determining profits or gains of the business carried on by the said respondent. Consequently, such expenditure appears to have been rightly excluded by the Income Tax Officer from the deductions claimed by the respondent."

The learned counsel in rebuttal relied upon judgment of Hon'ble Supreme Court of Pakistan in case of Sui Southern Gas Company reported as PLD 2001 (S.C.) 201 = (2001) 83 Tax 113 (S.C. Pak). The ratio of the order is hereunder:--

"Income , Tax Ordinance, 1979 (XXXI of 1979)---Sec?tions 23(xviii) & 136---Natural Gas Development Surcharge Ordinance (1 of 1967), section 3(3)---Deduction---Interest or compensation for late payment---No violation or infection of criminal law by assessee---Payment and disbursement made by the assessee were on account of commercial expediency to facilitate carrying on its business---Deduction disallowed---Validity---Assessee public limited company purchased raw natural gas from gas supply companies and sold after purification under agreement---Claim of deduction paid as interest at higher rate on account of late payment of gas price bills disallowed by DCIT---Treated same as penalties---CIT(A) allowed deduction and held payments as deductible business expenses---Departmental appeal before Tribunal failed---High Court restored assessment order of DCIT in appeal---Challenge to---Concurrent finding of facts below---Interference by High Court---Scope and extent---Criminal infraction or violation of law---Concept of---Whether penalty was to be levied or fine was to be imposed only on commission of any criminal infraction or violation of provision of law---Held, yes---Whether where payments were made for carrying on business to earn profits, could not be termed as penalty or penal interest, but these payments were on account of commercial expediency and assessee was entitled to deduction---Held, yes---Whether if there was no violation of settled principles of law arising out of orders passed by two forums below, no interference was called for by High Court in appeal---Held, yes.

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 non-compliance 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 of 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 expenditure as laid out or expended wholly or exclusively for the purpose of business".

The above reported case of Premier Bank Ltd. relates to a Banking Company wherein the controversy resolved by the Supreme Court of Pakistan, refers to penal interest as in case of assessee, as such more relevant, whereas the case-law relied upon by the assessee reported as PLD 2001 (SC) 201 is in respect of Sui Southern Gas Company Ltd., which is not a Banking Company, besides in this case the payments have been made by the assessee in terms of penalty/compensation for delayed payment of gas development charges as contractual obligation already settled between the parties, thus the issue involved in this came viz. claim of deduction paid as interest at higher rate on account of late payment of gas price bills has no match with the case of the assessee, being irrelevant and containing inconsistent facts. We, therefore, find that the present judgment, although latest one, is irrelevant so far as appellant's case is concerned. As a result thereof, we have no hesitation to find that it is unsafe to rely upon the case of Sui Southern Gas Company Ltd.

It is worth-mentioning that in judgment of Sui Southern Gas Company, the case of Commissioner Income Tax v. Premier Bank Ltd. has been considered at para. 8, wherein the Hon'ble Supreme Court of Pakistan, has itself distinguished the above two cases in following words:--

"8. So far as the case of Commissioner of Income-tax v. Premier Ban 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 stature cannot be disallowed. Only such expenditure is to be .allowed, which, on account of infringement of provisions of stature, falls within the purview of fine or penalty. In the instant case, the expenditure is incidental to the business consideration and the statute viz. Nature 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, 1II 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."

As a result thereof, placing reliance on Sui Southern Gas Company Ltd. cited as PLD 2001 (SC) 201 as against the case of Premier Bank Ltd. reported as 1999 SCMR 1213 would be unsafe due to clear verdict recorded in case of Sui Southern Gas Company Ltd. to distinguish it with the case of Premier Bank Ltd. viz.

PLD 2001 SC 201 (Sui Souterh Gas Company Ltd. v. CIT Cos. V, Karachi).

"????..These payments and disbursements made by the petitioner were on account of commercial expediency not 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 expenditure as laid out or expended wholly or exclusively for the purpose of business.

8?????..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."

22. Before parting with the present issue, it would not be unaccustomed to refer subsection (6) of section 25 which provides that penalty imposed under subsection (3) shall be recovered as arrears of land revenue in case of default, whereas Land Revenue Act provides various measures for effecting recovery viz. notice of demand on the defaulter, arrest and detention of his person, sale of his movable property, attachment of the holdings in respect of which the arrear is due, by annulment of assessment of debt holding and by proceeding against immovable property of defaulter. It means that it is a sort of penalty for the recovery of which, coercive measures reported above, L have been provided in the statute. A bare perusal of the above provision leaves no doubt that the penalty imposed, is not an allowable expense. The appeal in this context stands dismissed.

CAPITAL GAIN OF Rs.60,050.

23. The assessee's next argument relates to order confirming the treatment whereby capital gain of Rs.60,050 realized on sale of M Government securities, was treated as revenue gain. This is in fact a decided issue in favour of the assessee vide order, dated 1-12-2001 passed in I.T.As. Nos. 141 to 143/KB of 1990-91. The perusal of order reveals that the appeal in this context was allowed because of a similar issue, decided in assessee's own case at the. appellate level earlier. In this context, a reference in assessee's own case, was dismissed vide judgment reported as 1985 PTD 329 and in the preceding year also, relief has been allowed to the assessee on the basis of this judgment. We, therefore, find N reason to accept the version of the assessee, whereby the appeal on this issue stand allowed.

DISALLOWANCE OF BIFURCATED INTEREST EXPENSES OF Rs.14,39,616

24. The next issue is in respect of the order confirming the disallowance of bifurcated interest expenses of Rs.14,39,616. The learned CIT(A) remanded the case back to the ITO on this issue for re-examination after affording an opportunity to the assessee of being heard.

25. Record reveals that the investment as alleged was purely an income earning business activity, the profits on this activity were being offered for tax. It is a matter of evidence that the investment in prize bonds is made through borrowed capital attracting the provisions of section 23(vii), which require re-examination. The order, in this context, lo requires no interference.

26. The appeal is disposed of to the extent and in the manner indicated above.

C.M.A.1443/Tax (Trib.)?????????????????????????????????????????????????????????????????????? Order accordingly.