AHMED ALI VS INCOME TAX APPELLATE TRIBUNAL, LAHORE and 2 others, 2006 PTD-LAHORE-HIGH-COURT-LAHORE 2602 (2006)

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

----Ss. 12(18) & 136(1)---C.B.R. Circular No. 3 of 1992, dated 27-1-1992---Bearer cheques---Effect---Assessee claimed to have obtained loan from his company through two bearer cheques---Although genuineness of both the cheques was beyond doubt, yet Assessing Officer declined to give any benefit to the assessee for, the reason that the cheques were not crossed, as required under S.12 (18) of Income Tax Ordinance, 1979---Plea raised by assessee was that subsection (18) had been introduced with a specific purpose which was to check fictitious loans and to discourage introduction of back dated cash credits to meet financial liabilities---Validity---Central Board of Revenue committed no excess of jurisdiction in issuing Circular No. 3 of 1992, dated 27-1-1992---As the assessee had obtained loan through bearer cheques, which fact was verified by the concerned bank, therefore, order passed by Income Tax Appellate Tribunal was set aside---High Court declared that the Assessing Officer could not make addition under S.12(18) of Income Tax Ordinance, 1979, of the amount received by assessee through bearer cheques---Appeal was allowed in circumstances.

1997 PTD (Trib.) 276; Central Insurance Company and others v. C.B.R. and others 1993 PTD 766 and Utman Ghee Industries v. Commissioner of Income Tax 2002 PTD 63 ref.

Dr. Ilyas Zafar for Appellant.

Muhammad Ilyas Khan for Respondents.

Date of hearing: 7th March, 2006.

JUDGMENT

SYED HAMID ALI SHAH, J.---This is an appeal under section 136(1) of the repealed Income Tax Ordinance, 1979 (hereinafter "the Ordinance") as it stood at the relevant time. Through this appeal the appellant/assessee has sought setting aside of the judgment passed by the Income Tax Appellate Tribunal (ITAT) in I.T.A. No.6453/LB of 1995 dated 15-12-1998 and deletion of the addition made in the income of the appellant of Rs.4,80,000 under section 12(18) of the Ordinance.

2. The appellant, who is director of Messrs Surgeon Surgical (Pvt.) Ltd., filed his Income Tax Return for the assessment year 1992-93 declaring income of Rs.51,716 from salary. During the relevant Income Year the appellant had obtained loan from his company through two bearer cheques for Rs.3,00,000 and Rs.1,80,000 dated 18-4-1992 and 28-4-1992 respectively. The Assessing Officer confronted his intention to the appellant to add the amount to his income under section 12(18) as the loan had not been obtained through a crossed cheque. The appellant replied that this subsection could not be invoked in case of genuine loans duly verified by the bank and in support of his contention referred to Circular No.3 of 1992 dated 27th of January, 1992 wherein it had been clarified that this subsection had been added to check fictitious loans and to preclude back-dated introduction of credits in the books of accounts; however, the Assessing Officer did not agree with the contention of the appellant and added the entire amount of Rs.4,80,000 to the income of the appellant under section 12(18) as in his opinion the loan has been received through bearer cheques which was in violation of the said section. The appellant did not succeed before the first appellate authority and consequently filed the second appeal before the ITAT.

3. In view of divergence of views of various Benches of the ITAT on the question to addition under section 12(18) the appeal of the appellant was heard by a Full Bench of the ITAT which considered the issue, as given in para. 1 of the impugned judgment, "First, if a transaction though not done through a crossed cheque but is otherwise through banking channels will still be hit by the mischief of section 12(18) of the Income Tax Ordinance as it existed before substitution by Finance Act, 1998. Second, whether a purposive approach and interpretation of the provision as suggested by the C.B.R. through Circular No.3 of 1992 dated January 27, 1992 is legally possible." After considering the rival arguments; and the case-law relied upon, the Full Bench approved the ratio of the judgment of the Division Bench of ITAT at Peshawar reported as (1997 PTO (Trib.) 276) and held that every transaction of claimed loan otherwise than by a crossed cheque drawn on a bank was hit by the mischief of section 12(18) as it existed before its substitution by Finance Act, 1998; and also that the C.B.R's. Circular No.3 of 1992 dated 27-1-1992 and others issued earlier, being against the express provisions of the statute, could not be considered to interpret section 12(18) favourably to taxpayers.

4. The learned counsel for the parties have been heard and the record has been perused.

5. It is an admitted position between the parties that the subject loans .were obtained by the appellant from his company through two bearer cheques which were encashed by him; and a certificate to that effect was produced by him from the concerned bank which was also not disputed. The Assessing Officer made the addition on the sole ground that the loan had not been obtained through crossed cheque as required under section 12(18) of the Ordinance. The assessee had contended that as the genuineness of the loan was beyond doubt and that subsection (18) had been introduced with a specific purpose which was to check fictitious loans and discourage the introduction of back-dated cash credits to meet financial liabilities the same could not be invoked in his case; and in support of his contention referred to Circular No. 3 of 1992 dated 27-1-1992 which is as under:---

"It has been brought to the notice of the Board that genuine loans Shown to have been received from identifiable persons through the Banking channels are being deemed to die the income of the assessee under subsection (18) of section 12 of the Income Tax Ordinance, 1979, merely on the ground that the amount of loans has not been received through crossed bank cheques.

(2) The matter has been considered in the Board. Since the basic purpose of the aforesaid provision of law is to check fictitious loans and to preclude back-dated introduction of creditors in the books of accounts, Assessing Officers should not invoke the provisions of section 12(18) in respect of genuine loans received by way of crossed cheques, pay orders, demand drafts or telegraphic transfers etc., through the Banking channels.

(3) In any case, where the nature and source of the amount of money in not satisfactorily explained, addition to the income of the assessee can still be made under section 13, notwithstanding the claim that any loan was received through crossed bank cheque, pay order, demand draft, telegraphic transfer of any other instrument."

6. Subsequently in pursuance of these Circulars Nos. 11 of 1992 dated 4-5-1992, 12 of 1992 dated 19-5-1992 and 1 of 1993 dated 11-1-1993 were also issued; however, it is important to note that Circular No.3 of 1992 was never revoked. The Assessing Officer and the Commissioner of Income Tax (Appeals) did not accept the contention of the appellant for the only reason that the loan had not been obtained through crossed cheque as was provided in the subsection at the relevant time. They did not as such consider the contention of the appellant that his case was not covered by the mischief of the subsection as explained in the Circular No.3 of 1992. However, the ITAT has specifically dealt with this aspect of the case and has held in the impugned judgment that as the Circular was in clear violation of the language used in sub-section (18) of section 12; the same was in excess of jurisdiction and that the Assessing Officer had rightly ignored it. It has further been held that, in case of fiscal statutes, where the language of the statute was clear no contrary or different interpretation could be given of the same on the touchstone of purposive approach to interpretation of statutes. In coming to this conclusion the ITAT has relied upon the judgment of Hon'ble Supreme Court in the case of "Central Insurance Company and others v. C.B.R. and others" (1993 PTD 766).

7. Section 12 (18) as well as the various Circulars issued in reference thereto came under the scrutiny of Hon'ble Peshawar High Court in the case of Utman Ghee Industries v. Commissioner of Income Tax (2002 PTD 63). Through this common judgment the Hon'ble Court disposed of two tax references and three FAOs relating to assessment years 1992-93 and 1993-94 posing common questions of law. The Tax Reference No.33 of 1997 which pertained to the case of Utman Ghee Industries was against the judgment of the ITAT reported as 1997 PTD (Trib.) 276; and it was the same judgment whose ratio has been approved in the impugned judgment. Therefore, the issue before us has already been very effectively decided by a learned Division Bench of the Peshawar High Court. The learned counsel for the Revenue has not been able to produce before us any judgment to the contrary. Ratio of the above referred judgment was summed up by the Hon'ble High Court on pages 79 and 80 of the report which is as under:

"Whether any amount received through crossed cheques, cash or any other Banking channel is liable to tax under section 12(18) of the Income Tax Ordinance, 1979? And

Whether Income Tax Appellate Tribunal has rightly declared Circulars Nos. 3, 11 and 12 of 1992 and Circular No.1 of 1993 ultra vires of section 12(18) of the Income Tax Ordinance, 1979?"

8. After thoroughly analyzing the judgments on the subject both from Pakistani as well as the Indian jurisdictions the Hon'ble Court drew the following conclusions:---

"Firstly, through these Circulars, the genuine transactions of the assessees which were verifiable and identifiable were given protection.

Secondly, though the Circulars were benevolent and beneficial to the assessees, the basic and first principle of construing a beneficial legislation is to interpret its provisions to advance purpose rather than thwart or subvert it by specious sophistry. (1992 SCMR 2166)

Thirdly, the aforementioned Circulars were issued to tone down the rigors of the law and to ensure a fair enforcement of the provisions of section 12(18) of the Ordinance. The said Circulars were issued for purpose of just, proper and efficient management of the work of assessment in the public interest and for proper administration of fiscal law so that no undue hardship could be caused to the assessees and the fiscal laws be correctly applied. (1999 PTD 3752).

Fourthly, certain relaxations were given to the assessees in order to promote justice and it is also a recognized principle of law that Court has to take into consideration the object for which a particular Circular was made and the mischief intended to suppress and if two possible constructions of a provision of such an instrument are possible, one which favours the class of persons for whose benefit the circular has been made would be preferred. (1998 SCMR 440)

Fifthly, the legislation itself has felt that insertion of sub-section (18) in section 12 of the Ordinance has created hardships and difficulties, therefore, the said provisions were held in abeyance vide Notification S.R.O. No.838(I)/87, dated 26-10-1987 till 30-6-1990. Moreover, the pith and substance of the four Circulars was later on incorporated in law in the shape of sub-section (18 A) which remained on Statute book till 1996. The loans or advance taken by any means if not paid within five years were made taxable after the expiry of five years, which means that the Federal Government had itself accepted the validity of the four Circulars issued by the C.B.R.

Sixthly, the said Circulars have been validly issued in exercise of powers under section 165 of the Ordinance and were binding on all the Officers and persons employed in execution of the Ordinance under section 8 ibid, (1992 SCMR 250)

Seventhly, through the abovementioned Circulars, neither interpretation of any section of law was made by C.B.R. nor the same could be made in view of the judgment of the august Supreme Court of Pakistan in Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others (1993 SCMR 1232)

Lastly, the above-quoted four Circulars were neither against the spirit of section 12(18) of the Ordinance nor the C.B.R. had deviated from the provisions of the Ordinance by issuing the said Circulars."

9. In view of the above it is held that the C.B.R. committed no excess of jurisdiction in issuing the aforementioned Circulars; and as the appellant/assessee had obtained the loan through bearer cheques which fact was verified by the concerned Bank. The instant appeal is allowed, impugned order dated 15-12-1998 is set aside and it is declared that the Assessing Officer could not make the addition of Rs.4,80,000 under section 12(18).

M.H./A-166/LAppeal allowed.