AMERICAN EXPRESS BANK LTD. VS COMMISSIONER OF INCOME TAX, 2009 PTD-KARACHI-HIGH-COURT-SINDH 1776 (2009)

2009 PTD 1776

[Karachi High Court]

Before Muhammad Athar Saeed and Syed Mahmood Alam Rizvi, JJ

Messrs AMERICAN EXPRESS BANK LTD.

Versus

COMMISSIONER OF INCOME TAX

I.T.R. No. 179 of 1997, decided on 08/06/2009.

Income Tax Ordinance (XXXI of 1979)---

----S. 27---Profit on investment on government securities declared by assessee/Banking Company was a part of its business and revenue profits and was therefore, taxable as business or revenue income.

Messrs Habib Bank Ltd. v. Commissioner of Income Tax I.T.A. No. 882/1999; Punjab Cooperative Bank Ltd. v. Commissioner of Income Tax, Punjab (1940) 8 ITR 635 (PC) and Grindlays Bank Ltd. v. CIT; 1985 PTD 329 distinguished.

2000 PTD (Trib.) 1299; Investment Limited v. C.I.T. (1966) 62 ITR 269 (Madhya Pradesh); Commissioner of Inland Revenue v. The Scottish Automobile and General Insurance Co., 16 TC 381; Grindlays Bank 'Ltd. v. CIT; 1985 PTD 329; 2003 PTD (Trib.) 494 and 2006 PTD (Trib.) 882 ref.

Dr. Farogh Naseem for Applicant.

Muhammad Aqeel Qureshi holding brief for Jawed Farooqui for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.--The Income Tax Appellate Tribunal had vide its order dated 11-1-1995 in R.A. No. 21/KB of 1994-95 to R.A. No.30/KB of 1994-95 pertaining to assessments years 1976-77 to assessment years 1984-85 and 1989-90 referred the following questions for the opinion of this Court.

1. "Whether on the facts and in the circumstances of this case the Tribunal was justified in holding that income derived from Sale and maturity of the Government Securities was regular banking income of the Bank and not capital gains?

2. "Whether on the facts and in the circumstances of this case the Tribunal had any relevant material to hold that the Government Securities were stock in trade of the Bank and not investments and capital assets"?

3. "Whether on the facts and in the circumstances of this case the Tribunal was justified in holding the Head Office Administration and supervision expenses were correctly allowed under the Rule 20(1)(a) instead of Rule 20(1)(b) of the Income Tax Rules, 1982"?

4. Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the penal interest charged by the State Bank for bursting the credit ceilings under section 25 of the Banking Companies Ordinance, 1962 was not admissible"?

2. We had vide our short order dated 22-1.2009 reframed questions No.3 to read as under:

"Whether the Tribunal correctly held that the question of Head office expenses will be dealt with under the provisions of the Income Tax Ordinance and not under the provisions of the treaty"?

And for the reasons quoted in that short order answered this question in negative in favour of the applicant and against the respondent. Whereas, we had answered the question No.4 for the reasons stated in the short order in affirmative in favour of the respondent and against the applicant.

3. As far as questions No.1 and 2 are concerned we had answered them in affirmative against the applicant and in favour of the respondent for reasons to follow.

4. The reasons in support of the answer to questions No.1 and 2 as mentioned in paragraph 11 of our short order are detailed below.

5. Dr. Farogh Naseem learned counsel for the applicant within a period of less than 24 hours very ably had prepared his case and had relied on a number of judgments in support of the contention that the discount received on the redemption of securities can be treated only as capital gain and not as business income.

6. The learned counsel had also filed a synopsis of his arguments, which are reproduced for the sake of convenience:---

"The question before the Court is whether the gain represented by the "discount" received by the applicant on Government securities amounts to:--

(a) interest from securities; or

(b) business income; or

(c) capital gains.

2. The admitted facts in this regard can be appreciated from the portion of the assessment order which is available at typed pages 9, 10, 11 and 12 of the paper book. In terms of what has been mentioned in the assessment order the relevant facts are as follows:

(b) certain treasury bill/Government securities were purchased by the applicant at a discount;

(c) upon maturity of the above bills, the applicant received the full payment on face value of the said securities.

(d) in other words, the applicant returned gain, being the differential of the cost price of the bills (i.e. received at a discount) and the actual amount received at the maturity of these bills. Thus, the discount received by the applicant upon redemption of the bills at maturity date was a gain in the hand of the applicant.

3. The amount received by the applicant upon the redemption of the bills at the date of maturity can by no stretch of imagination be construed as interest. Interest is the periodical profit on any security. The amount in question did not constitute a periodical gain; but rather a gain on the principal value upon redemption at the maturity date. In coming to the above conclusion. I am fortified by the following.

(a) HBL v. C.I.T., I.T.A. No.882/1999 dated 19-12-2008 (un reported, decided by the Sindh High Court):

In this case at para 48 of the judgment it has been clearly held that any premium received by a person at redemption of a bond at the maturity date can either be treated as capital gain or income from business or profession depending upon the facts of the case but not as interest income. In terms of such a clear finding the inescapable conclusion is that the gain received upon redemption at the maturity date cannot be interest income. Copy of this judgment is enclosed herewith as Annex' A;

(b) 2000 PTD (Trib.) 1299;

In this case at paras 54 and 55 of the Tribunal's order it has been held that any gain made by the assessee upon redemption of a Government bond/security neither constituted interest on securities nor was it income from business; the same only constituted capital gains. This order is available as Annex-B.

4. The amount in question is capital gain and does not constitute income from business. The legal test in this regard is that where the assessee does not regularly trade in the securities, the same will only constitute a capital gain or capital loss; however, where the assessee regularly trades in such securities the latter will be treated a stock in trade; the consequence will either decipherable from the following:--

(a) Punjab Cooperative Bank Ltd. v. Commissioner of Income Tax (1940) 8 ITR 635 (Privy Council);

In this case the Privy Council clearly held that in order to constitute business profile it must be shown that the assessee was actually carrying on/carried out the business of buying and selling of securities. In this case it was' held that the purchase and sale of shares/securities were also much linked with deposits and withdrawals of the clients that they constituted part of the banking and hence profits arising therefrom were assessable to income tax as business income. This judgment is enclosed herewith as Annex-C;

(b) Investment Limited v. C.I.T. (1966) 62 ITR 269 (Madhya Pradesh):

In this case it was held that the assessee had invested in government securities in which it did not trade. Thus the loss occasioned upon sale of such securities was capital in nature. It was further observed that it did not make any difference that one of the objects of the assessee-company was to invest and deal in securities. In other words, the actual dealing/transaction had to be taken into account. This judgment is enclosed as annex-D;

(c) Commissioner of Inland Revenue v. The Scottish Automobile and General Insurance Co., 16 TC 381:

In this case the assessee, an Insurance Company, invested in British Government securities, the holding of which from time to time(sic). Certain profits were incurred by the assessee upon sale of such securities. It was held that the profit did not arise out of trading; in other words, profit did not constitute business income. This judgment is attached as Annex-E.

(d) Grindlays Bank Ltd. v. CIT; 1985 PTD 329:

In this case a Division Bench of this honourable Court was pleased to hold that the Government securities held by the Grindlays bank were not stock in trade but were for the purposes of investment. Hence it was held that since the assessee had not effected purchase and sales on securities so as to show trading profits, any loss arising from the sale of securities did not constitute a trading loss. This judgment is enclosed as Annex-F (see in particular page 333 of this law report);

(f) CIT v. NBP 2007 PTD 1670:

In this case the profits on Government securities were held by a Division bench of this Court to constitute business profits because the assessee was not able to show that the purchase of securities was not effected by way of long term investment. In this regard reference is invited to the portion of para 18 of the judgment which appears at page 1675 of the law report. This judgment is attached as Annex-G;

(h) 2003 PTD (Trib.) 494;

In this case after a survey of the available judgment on the point it was correctly held by the Tribunal that where the securities were purchased as investment then the gain or loss on disposal of these securities constituted capital gain/loss and where the securities were purchased as stock in trade, the loss or gain on their disposal constituted a revenue loss or gain. It was further held that where the securities are purchased so as to meet some statutory requirements then any loss or gain arising therefrom has to be treated as capital in nature. But where the assessee actually deals/trades in such securities the same is to be treated as stock in trade and the resultant loss/gain is to be construed business income or loss. This order is enclosed as Annex-H;

(i) 2006 PTD (Trib.) 882 (g):--

In this case also since the assessee did not deal/trade in the Government securities. The Tribunal found the gain on the Government securities to be capital in nature (see head note (g) or page 895 of the Law Report). This order is enclosed as Annex--I;

5. From the above survey of the case law the irresistible conclusion is that the. amount in question, being the discount/gain received by the applicant upon redemption of the treasury bills at the maturity date can by no stretch of imagination be construed as business income but the same only constitutes capital gains in the view of the following:-

(a) The applicant did not trade in the said Government securities. There is nothing to show that the purchase and sale of the treasury bills were linked with deposits and withdrawals of the clients as held in the Punjab Cooperative Bank Case decided by the Privy Council;

(b) There is nothing to show that the applicant actually carried out any trade in the treasury bills. The fact that the treasury bills were purchased and then only surrendered at the maturity date confirms that no trading occasioned in relation thereto;

(c) As held in the Grindlays Bank's case (cited supra) decided by the Sindh High Court, since the applicant did not show that profit on surrendering of securities in the trading account, the same cannot be treated as business profits.

(6) In light of the above it is respectfully prayed that this Honourable Court may kindly be pleased to hold that the amount representing the discount/gain received by the applicant upon redemption of the said treasury bills at the maturity date is nothing but capital gain. There is nothing to show otherwise."

7. Mr. Muhammad Aqeel Qureshi learned counsel for the respondent had supported the order of the learned Tribunal and submitted that the applicant had treated the- discount received on securities as Capital gain and claimed redemption. After examining the return the Income Tax Officer had confronted the applicant with detailed reasons for treating the above gain as a revenue income and after receiving the reply of the applicant had rebutted each and every argument of the applicant through detailed reasons and treated the above income as revenue income and his action had been upheld for some years by the C.I.T. (Appeals) and for all the assessment years by the learned Tribunal and the learned Tribunal has also given cogent reasons for holding the subject income to be revenue income. He relied on the judgment of this Court in the case of C.I.T. v. National Bank of Pakistan reported in 2007 PTD 1670 and submitted that judgment is the latest judgment of this Court in which the matter has been exhaustively dealt with by this Court and resolved in favour of the department. He therefore, prayed that the questions may be answered in affirmative in favour of the department.

8. We have examined questions No.1 and 2 in the light of the arguments of the learned counsel for the parties and have also carefully perused the contents of the synopsis of arguments filed by the learned counsel for the applicant and judgments relied on by him.

9. On examination of the assessment order we have seen that the Income Tax Officer had in the notice confronting the applicant as to why the profit of sale of investment may not be treated as a revenue profit had mentioned in first paragraph of his notice that in the case of applicant being a banking company it is a mandatory requirement of the State Bank of Pakistan, which has to be complied with by all the banks that they should invest 35% of their liabilities in approved governments securities. Besides this the Income Tax Officer had given other reasons also for treating the income as revenue income.

10. An examination of the reply of the applicant's counsel show that in the first para. the applicant had stated that they do not indulge in the purchase and sale of any merchandise as part of their main business activity or even partly so and the investment in Government securities by them is not by choice but because it is a statutory requirement. Besides this statement in the explanation other reasons had also been stated in support of their contention that the income could not be treated as revenue receipt but at the most could be treated as capital gain, which was exempt.

11. We have seen that Income Tax Officer had, after rebutting the explanation of the assessee to the best of his ability, discarded the explanation and treated the profit on sale of investment as revenue profit.

12. A perusal of the order of the Tribunal revealed that before the Tribunal the applicant was confronted to show whether the securities, which are the subject-matter of this controversy, were held in accordance with the requirements of the State Bank of Pakistan to maintain a liquidity ratio or as long term investment or both and he was further asked to show that if the securities were held for both the reasons then he should provide a breakup of securities held to maintain liquidity ratio and those held for the purpose of investment. However, the learned A.R., who was representing the applicant before the Tribunal had expressed his inability to furnish this kind of information, despite the fact that before the Income Tax Officer a plea had already been taken that these securities were held to fulfil the mandatory requirement of the State Bank of Pakistan.

13. In the light of this factual position we have perused the extracts from the judgment relied on by thee learned counsel for the applicant. The learned counsel had also relied on a judgment authored by one of us i.e. Muhammad Athar Saeed, J. in the unreported judgment of this Court in the case of Messrs Habib Bank Ltd. v. Commissioner of Income Tax and had relied on para 48 of the judgment and in the synopsis had submitted that this Court has clearly held that any premium received by a person on redemption of a bond at the maturity date can either be treated as capital gain or income from business or profession depending upon the facts of the case but not as interest income.

14. We have perused para-48 of this judgment and we have seen that the learned counsel had not correctly comprehended the provisions of para-48 because in that para we had held that the bonds cannot be encashed before the maturity date and if the purchaser wants to encash the bonds before the maturity date then perhaps the only way open for the purchaser to retrieve the interest before maturity date is selling the bonds at premium but then profit on such transaction will either be taxed as capital gains or as income for business and profession depending on the facts of each case and not as interest income. Whereas, from the interpretation given by the applicant's counsel it seems that we had not held as above but had held that any premium received by a person on redemption of a bonds at the maturity date cannot be treated as interest, which is definitely not what we had held in that case and this misconstruction is apparent from a plain reading of paragraph-48 of the said judgment.

15. The learned counsel then relied on the case of Punjab Cooperative Bank Ltd. v. Commissioner of Income Tax, Punjab where a finding of fact was .given by the Privy Council that since the purchase and sale of the shares and securities by the Punjab Co-operative Bank Ltd, were so much linked with deposits and withdrawals of clients that they were part of the assessee's business of banking and profits arising therefrom were assessable to income tax.

16. The reliance on Messrs Grindlays Bank Ltd quoted supra is also misconceived as in that case the Court had only upheld a finding of fact given by the Tribunal and no opinion on the point of law was given.

17. The learned counsel has also relied on a extract from the judgment of this Court in the case of national Bank of Pakistan quoted supra in which this Court had made an observation as under:

Thus so far the investment in Government Securities in order to comply with the statutory requirement is concerned it was undisputed fact, but no evidence was produced at any stage to prove that it was made by way of long term investment.

18. Although this is an observation made in this case whereas the ratio decidendi is different but even the above factual position goes against the applicant in the present case because in this case also the applicant had initially stated that the investment on Government securities was in order to comply with the statutory requirements of the State Bank of Pakistan and in this case also no evidence was produced at any stage to prove that it was made by way of long term investment. In fact in this case the applicant had in response to the information sought by the Tribunal expressed his inability to provide bifurcation between the securities held in accordance with the requirements of the State Bank of Pakistan to maintain a liquidity ratio and as long term investment.

19. We have carefully perused the judgment of this Court in the National Bank of Pakistan's case and we have seen that the Court after analyzing the provision of section 29 of the Banking Companies Ordinance, 1962 and after examining the judgment in the case of Grindlays Bank Pakistan Ltd. quoted supra and all other judgments relied on by the learned counsel for the applicant held as under:--

"We respectfully agree with the above findings and hold that the profit earned on sale of securities and treasury bill purchased in pursuance of compulsory statutory obligation under section 29 of the Banking Companies Ordinance, 1962 is a part of normal banking business. The investments made in such securities and treasury bills remain part of the circulating capital and do not become part of the capital investment of the Bank. The profit earned thereon, therefore, amounts to revenue gain and are liable to be subject to tax".

20. We are not only bound by the above judgment of this Court. but also respectfully agree with this judgment and since as already pointed out by us earlier, the facts of the present case are completely familiar to the case of National Bank of Pakistan quoted supra, therefore, we hold that the profit on investment on Government securities declared by the applicant company is a part of its business and revenue profits and is therefore, taxable as business or revenue income and therefore, no exception can be taken to the judgment of the Tribunal on this point and no interference is called from this Court and therefore, we had answered questions No.1 and 2 in affirmative in favour of the respondent and against the applicant.

21. A copy of this judgment may be sent under the seal and signature of the Registrar of this Court to the Income Tax Appellate Tribunal for passing orders in consonance with the judgment of this Court.

M.B.A./A-100/KReference answered.