HANSA ENTERPRISES, SIALKOT VS REVENUE, 2006 PTD-LAHORE-HIGH-COURT-LAHORE 774 (2005)

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

----S. 12(18)---C.B.R. Circular No.3 of 1992, dated 27-1-1992---Income deemed to accrue---Payment, made by a sister concern of assessee to third parties on behalf of the assessee under advice to the assessee for their entries in its books of accounts---Transaction shown in the ledger account of the assessee clearly indicated that the payments made by the sister concern were on behalf of the assessee---Most part of the payments were made to third parties by the sister concern through banking channel---Reliance of assessee on C.B.R. Circular No.3 of 1992 dated 27-1-1992 was therefore, relevant as said circular had provided that S.12(18) of the Income Tax Ordinance, 1979 was only to check fictitious loans and entries in the books of accounts by the assessee---Amount in question during the assessment year 1992-93 could be added and deemed as income with reference to the provisions of S.12(18) of the Ordinance only if it had been claimed or shown to have been received as a loan and not as advance by the assessee---Assessee, in the present case, had been successful in demonstrating on the basis of the copies of ledger which were earlier examined by the Assessing Officer, that credit entries made in favour of sister concern were neither claimed nor were factually a loan---Treating such the payments made by the sister concern on behalf of the assessee by the Assessing Officer as `loan' and not advance was clearly unjustified as such payments could not be treated as unrecorded or offensive to the purposive approach of the provisions of S.12(18) of the Income Tax Ordinance, 1979---Appellate Tribunal, in circumstances, was also not justified in maintaining the payments made by the sister concern to be liable as additions under S.12(18) of the Ordinance---"Loan" connotation.

Utman Ghee Industries v. Commissioner of Income Tax 2002 PTD 63 and Messrs Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others 2001 PTD 1 180 fol.

(b) Words and phrases---

----Loan---Connotation.

Messrs Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others 2001 PTD 1180 ref.

Dr. Ilyas Zafar for Appellant.

Shahid Jamil Khan for Respondent.

Date of hearing: 6th December, 2005.

JUDGMENT

NASIM SIKANDAR, J.---In this reference application under section 133 of the Income Tax Ordinance, 2001 the assessee, a registered firm engaged in business of manufacturing and export of leather garments claims that following questions of law arise out of the impugned order of the Income Tax Appellate Tribunal, Lahore Bench Lahore, dated 9-1-2003:

(a) Whether under the facts and circumstances of the case the Tribunal was justified to confirm the addition under section 12(18) of the late Income Tax Ordinance, 1979 treating the business transactions between sister-concerns as loan?

(b) Whether under the facts and circumstances of the case the Tribunal was justified to hold that the payments made by sister-concern could not be treated as payments by the assessee, although the Raw Material was given by the assessee to settle this amount?

2. Earlier on 23-6-2003 a Division Bench of the Tribunal refused to refer these questions to this Court.

3. For the period relevant to the assessment year 1992-93 the assessee returned an income of Rs.767,114. However, the Assessing Officer on 28-6-1993 framed assessment at Rs.27,72,871. The total income so computed included a sum of Rs.12,48,709 added by invoking the provisions of section 12(18) of the late Income Tax Ordinance, 1979. The relevant part of the assessment order reads as under:--

"Income under section 12(18)

As discussed in detail in the foregoing paras. of this order Messrs Hansa Garments (Pvt.) Ltd., a sister-concern has been making payment on behalf of the assessee, admittedly to the creditors of the assessee, in cash or by bearer cheques. As per copy of account of Messrs Hansa Garments (Pvt.) Ltd., (copy placed on file) peak credit amounts to Rs.12,48,709. As per debit invoices obtained and placed on file, Messrs Hansa Garments (Pvt.) Ltd. has been making the payment to 3^rd parties on behalf of the assessee and later on sending the advice to the assessee for entering the same in the assessee's books of accounts. As such these transactions amount to loan to the assessee made otherwise than through cross cheques. The assessee was accordingly confronted and its explanation obtained and also discussed in the foregoing part of the order, found unsatisfactory and accordingly the peak credit of Rs.12,48,709 appearing in the account of Messrs Hansa Garments (Pvt.) Ltd. is treated as income of the assessee firm under section 12(18) of the Income Tax Ordinance, 1979."

4. The assessee failed before the Commissioner of Income Tax (Appeals), Sialkot Zone, Sialkot. In his order, dated 20-3-1995 the learned Commissioner (Appeals) merely recorded his agreement with the observations made by the Assessing Officer, as re-produced above.

5. On further appeal the Tribunal by way of the impugned order observed that though payments made by Messrs Hansa Garments (Pvt.) Limited, a sister-concern of the assessee to third parties were duly reflected in the accounts of the appellant as credit, yet the amounts having not been paid by the assessee through cross cheques these were hit by the mischief of the provisions of section 12(18) of the late Ordinance. Therefore, in the view of the learned members of the Tribunal the payments made by a sister-concern to the third parties and credited to the account of the assessee needed to be treated as loan.

6. We have heard the learned counsel for the' parties in the perspective of the aforesaid findings of the Assessing Officer as well as the learned Tribunal. At the outset we are in agreement with the petitioner that the payments made by Messrs Hansa Garments (Pvt.) Limited, a sister-concern of the assessee to third parties on its behalf could not be treated as a "loan" as contemplated in the erstwhile provisions of section 12(18) of the late Ordinance. The Assessing Officer himself found that on making payments to the third parties the sister-concern sent advices to the assessee for their entries in its books of accounts. It is an admitted fact that the transactions shown in the ledger account of the assessee clearly indicated the payments made by the sister-concern on behalf of assessee mostly through banking channel. The reliance of the assessee on C.B.R. Circular 3 of 1992, dated 27-1-1992 was, therefore, pertinent and relevant. In that circular the Board expressed the opinion that the purpose of the provisions of section 12(18) of the late Ordinance was only to check fictitious loans and back dated entries in the books of accounts by an assessee.

7. The issue in hand was considered by a Division Bench of the Peshawar High Court in re. Utman Ghee Industries v. Commissioner of Income Tax, (2002 PTD 63). The Hon'ble Bench oil consideration of various authoritative precedents and keeping in view Circular No.3 of 1992, dated January 27, 1992, Circular No.11 of 1992, dated May 4, 1992, Circular No.12 of 1992, dated May 5, 1992 and Circular No.1 of 1993, dated January 11, 1993 in para-19 of the report observed as under:

"The intention and purpose to insert subsection (18) in section 12 of the Ordinance was to prevent evasion of tax. It is a matter of common knowledge that most of the assessees would adopt device that whenever income or any other sum chargeable to tax was received, they used to introduce the same in their Books of Accounts as a loan to avoid taxability. A check was kept on fictitious loans and to stop such assessees from making back dated entries of false creditors in their Books of Accounts. However, the Assessing Officers were directed not to invoke the provision of section 12(18) of the Ordinance in respect of genuine loans received by way of cross-cheques only. Later on through the above-quoted Circular No.3 issued in January, 1992, the Assessing Officers were directed not to invoke the provisions of section 12(18) in cases of genuine loans received by way of crossed cheques, pay orders, demand drafts or telegraphic transfers through the banking channels. Thereafter through Circular No. 11 issued on 4-5-1992 and Circular No.12, dated 19-5-1992, which were in continuation of Circular No.3 mentioned above, further relaxations were given and it was" directed that loans received by way of bearer cheques, cash transactions/cash flow between the sister companies and firms having common directors and partners should not fall within the ambit of section 12(18) of the Ordinance. Likewise a clarification was made through Circular No.1 of 1993, dated 11-1-1993 whereby it was clarified that the contents of Circulars Nos. 11 and 12 of 1992 would be applicable in respect of transactions referred to in the said Circulars (Nos. 11 and 12) undertaken during the final year ending on 30-6-1991 irrespective of the assessment year of the taxpayer."

8. We are also in agreement with the petitioner that the impugned amount during the assessment year 1992-93 could be added and deemed as income with reference to the aforesaid provisions of the late Ordinance only if it had been claimed or shown to have been received as a loan and not as advance by the assessee. In the case in hand the assessee has been successful in demonstrating on the basis of the copies of ledger which were earlier examined by the Assessing Officer that credit entries made in favour of sister-concern were neither claimed nor were factually a "loan", as we understand the word in its dictionary meaning and commercial significance. In re. Messrs Micropak (Pvt.) Ltd. Lahore v. Income Tax Appellate Tribunal Lahore and 2 others, (2001 PTD 1180) which was authorised by one of us (Nasim Sikandar, J.) the word "loan" juxtaposed with the term "share deposit money" was considered. It was observed that share deposit money could never be or amount to a "loan", which was necessarily a sum to be returned after a certain or uncertain period with or without an increase called interest on profit. It needs to be noted that in the case in hand the amount paid by the sister concern on behalf of the assessee was not treated as an advance but a loan simplicitor. Such treatment on the part of the Revenue was clearly unjustified inasmuch as the amount credited to the account of the sister concern was merely a book entry which was obviously settled at a later stage probably as an advance against supplies of raw material. The situation would have been slightly different if the Revenue had treated the payments made by the sister-concern to the third parties as an advance for goods to be received from the assessee. In that situation as well the present assessee has a good defence inasmuch as for the most part the payments were made to third parties by the sister-concern through banking channel. Even in that form at this stage these payments could not be treated as unrecorded or offensive to the purposive approach of the provisions of section 12(18) of the late Ordinance.

8. Therefore, our answer to the two questions stated in para-1 of this order is in the negative. In other words it is held that the Tribunal was not justified in maintaining the payments made by the sister-concern to be liable as addition under section 12(18) of the late Ordinance.

M.B.A./H-3/LReference answered.