1988 PLP rib (PTD)

Rs.1,78,80,849 Assessed Rs.2,16,04 ,006 Tax Rs.1,34,92,333 Surcharge Rs.10,37,750 The learned C.I.T. relying on Tribunal's decision reported as (1979) 40 Tax 47 (Trib.) decided the issue. Since the department has not reconciled with the above decision, they propose to take the issue to the Supreme Court of Pakistan. (The Hon'ble High Court vide No. ITR-48 of 1983 has decided the issue against the Department). On the other hand, Tribunal has been consistently following the above decision in a number of cases. In view of this we confirm the direction given to the Income-tax Officer by the learned Commissioner of Income-tax (Appeals) 1979-80 and 1980-81

13. For these two years the I.T.O. had disallowed a sum of Rs.1,96,602 and 22,20,863 for 1979-80 and 1980-81 respectively, claimed by the assessee bank (hereinafter called the respondent) as business expenses on account of penalty paid to the State Bank of Pakistan for bursting the credit ceiling. The learned C.I.T. (Appeals), depending on the judgment of Habib Bank Limited and United Bank Limited of her zone, deleted this addition in the following words:- I, after due consideration of facts as submitted by the I.T.O. and the learned counsel, and as discussed in the main part of this appellate order, find that the action of the I.T.O. in disallowing penal interest due to violation of credit ceiling laws is not justified. Therefore, addition on this account for the assessment year 1979-80 and 1980-81 is hereby deleted." The learned D. R. relied on Tribunal's decision in M.A. No. 30/ KB of 1986-87 and on a judgment reported in June 1981 P T D (Trib.) 71 wherein it was held: "The penal-interest, therefore, is nothing but a penalty and has to be understood and interpreted as such while considering its allowability or otherwise as an expenditure under section 10(2)(xvi) of the Act. In the facts of the instant case it is definitely not possible for us to hold that liabilities in question were in the nature of expenditure incurred on the ground of commercial expediency or with a view to indirectly facilitate the carrying on the assessee's business- - - - - -" As regards disallowance of the bad debt claimed, Mr. Mohammad Farid, the learned D.R. drew our attention to the assessment order pages 11 and 12 in which the Income-tax Officer while disallowing the claim of the respondent laid down certain principles to judge whether the debt had become bad and irrecoverable:

"Thus, in my opinion, a provision for doubtful debts cannot be made in undermentioned four categories of cases:- (i) When market value of the security exceeds the dues outstanding. (ii) Where intention has been' shown by the borrower to make the repayment. (iii) Where the borrower has the capacity to repay the dues. (iv) Where the lender has not taken any steps to recover dues. It is, therefore, necessary to examine each and every case carefully before it can be allowed as deduction. Moreover, where there is no prima facie case for making a provision for doubtful debts, the argument that the same can be offered for taxation upon subsequent recovery does not appear to be valid at all." He then disallowed a sum of Rs.6,60,000 which the learned C.I.T. (A) restored on the basis of certificate issued by the State Bank of Pakistan.

14. The learned A.R. on the other hand, argued that no penalty is levied for bursting the credit ceiling. What is required of the scheduled banks, on any day when they have exceeded the ceiling, is to deposit an amount to the extent of breach of the ceiling. This amount is blocked without interest and subsequently, when the required level is reached, the same is released.

15. So the question looms, can these deposits made to level the ceiling be termed as penalty. Before dwelling on this issue we would like to quote from a circular letter of the State Bank of Pakistan bearing No. (G) 1/127.00.81, dated 10-1-1981:- "

2. In exercise of the powers conferred on the State Bank under section 25 of the Banking Companies Ordinance, 1962 and in supersession of the previous instructions in this behalf it has been decided that with immediate effect the rate of penalty for breach of the credit ceilings, prescribed for the banks from time to time, shall be as under:- (1) If the credit ceiling, as prescribed is exceeded, the defaulting bank shall make a special deposit with the State Bank of Pakistan of an amount equal to the excess. (ii) In case the default continues into the next week, then the bank having exceeded the credit ceiling shall make a special deposit equal to 1 times excess of the 2nd week. (iii) In case the default continues into the 3rd week, the bank shall deposit an amount equal to twice the amount of excess in the third week. (iv) If the position is not regularised and the defaults persists beyond the 3rd week, then, the defaulting bank shall deposit an amount equal to three times the amount of default for the concerned week. (3) In case a defaulting bank fails to make the required special deposits: (i) in respect of the default referred to in para 2(i) above, penal interest at the rate of 5% p.a. above the Bank Rate shall be charged; and (ii) in respect of defaults mentioned in paras 2(ii) to 2(iv), the rate of penal interest shall be 7 % per annum above the bank rate on the amount required to be deposited with the State Bank in the special deposit account." Paragraph 3 of the Circular is quite clear on the issue of breach of credit ceiling. Banks are called upon to make the required special deposits when they exceed the prescribed credit ceiling. If they are not made in time then penal interest at prescribed rates are charged and realised. This being the situation we cannot hold that such expenses, clearly incurred for infraction law, are allowable under section l0(2)(xvi). The learned C.I.T. (Appeals) was, therefore, not justified in deleting them. The additions for both the years 1979-80 and 1980-81 are restored.

16. As regards bad debts, Mr. Sirajul Haque, the learned counsel, stated that the arguments advanced earlier in his appeal for 1979-80 applies to this year as well. He stated that a part of the debt is covered by the certificate issued by the State Bank of Pakistan that they are irrecoverable as the total assets of the debtors were not sufficient to meet the entire requirements. Although he conceded that it is the discretion of the I.T.O. to determine the extent the debt has become bad yet powers to be exercised ought not to be arbitrary. In 1977-78 similar debts were allowed on certification of the State Bank of Pakistan. The debts had become bad and irrecoverable since every step taken, had failed. As we have already stated in this order that the Board's Circular on which the learned A.R. has placed reliance is not applicable to these years and the fact that the case of debtor companies, gone insolvent, are still -pending in the Court, we agree wits; the learned D.R: that the claim is premature and should not have been allowed. We confirm the findings of the Income-tax Officer on this issue. The next ground taken for 1979-80 by the department is in respect of excess perquisites disallowed by the I.T.O. at Rs.2,51,82,439 which includes house rent, conveyance, medical and interest free/low interest loans. These additions were made under section 24(l) of the Income Tax Ordinance. 'The learned C.I.T. treated them as part of the salary.

1. Mr. Sirajul Haque the learned counsel drew our attention to section 240) which reads as under:- "(i) any expenditure incurred by an assessee on the provision of perquisites (allowances) or other benefits to any employees, in excess of (fifty) per cent of the salary excluding perquisites (allowance or other benefits)." He stated that the word 'perquisite' under section 24(i) was brought in by an amendment through Finance Ordinance, 1980. Before this the word 'allowance', was used which is quite different from the word 'perquisites'. 'Creating the 'allowance' as 'perquisite' is wrong. The amendment brought about is effective from 1980-81. It, therefore, does not apply to the assessment year 1979-80. He relied on I. T. A. No. 622 and 623/KB of 1981-82, dated 25-4-1985. The same principle was also enunciated by the Supreme Court in 1971 P T D 200 although on a different issue. The relevant portion reads as under:- "Apart from this, we are unable to read the earlier definition in the manner suggested by the department. It was said in the course of argument that notwithstanding the amendment it must be assumed that the previous definition of 'sale price included Provincial Excise Duty, The previous definition, however does not expressly say so. We may here observe that interpreting the taxing statute the Courts must look to the words of the statute and interpret it in the light of what is clearly expressed. It cannot imply anything, which is not expressed, it cannot import provisions in the statute so as to support assumed deficiency. On the other hand the fact that the Legislature made an express provision for including the excise duty indicates that the unamended definition of the 'sale price' did not include the Provincial Excise Duty." He also argued that definition of salary is given in the Explanation to 24(i) which means 'remuneration or compensation for services rendered'. He drew our attention to Stroud's Judicial Dictionary page 2324 for the meaning of word 'remuneration', which according to the dictionary is a 'wider term than salary'. 1.The I.T.O. had worked out the difference in rate of interest charged from the employees and added a sum of Rs.7,42,

514. The learned A.R. stated that it was not an expenditure charged to P&L account. The question of making addition to this effect, therefore, did not arise. For making any addition, there must be corresponding expenses charged to the P&L account. Section 23 relates to the expenses and section 24 details exceptions made to those expenses. Firstly the expenses should be claimed under section 23 then alone exception as laid down in section 24 shall apply. He concluded that the learned C. I. T. had very rightly deleted this amount. The learned C. I. T. depending on the decision given in the case of U. B. L. for the year 1979-80 had deleted the additions made by the I.T.O. After giving due consideration to the arguments of the learned representatives, we uphold the decision of the learned C.I.T. (A).

20. The next ground taken by the department is in respect of surcharge. The position of income returned and assessed is as under:- Income returned Rs.3,06,53,011 Income assessed Rs.6,12,98,442 Tax Rs.3,90,28,116 Surcharge Rs. 24,88,702 The learned C.I.T. relying on Tribunal's decision reported as (1979) 40 Tax 47 (Trib.) decided the issue in favour of the appellant. Since the department has not reconciled with the above decision hence they propose to file a reference to the Supreme Court of Pakistan. On the other hand, the Tribunal has been consistently following the above decision quoted by the learned C. I. T. (A). In view of this matter we confirm the direction given to the Income-tax Officer by the learned C. I. T. to follow the above decision. 1980-1981. The grounds taken for this year are in respect of additions made by the Assessing Officer at Rs.22,20,863 for bursting the credit ceiling and the same deleted by the learned C.I.T. in appeal. The same arguments have been advanced by the learned D.R. as for the year 1979-80. We dispose of this ground in accordance with our findings given supra. Bad Debt: Total claim was made at Rs.1,71,00,000 the I.T.O. disallowed Rs .1, 61, 43,

480. The learned C.I.T. issued direction that those debts certified by the State Bank of Pakistan to be irrecoverable should be allowed. In view of our findings given Supra we confirm the orders of the I.T.O. -and vacate that of the C.I.T. (A) The last ground taken by the department as in respect of surcharge. The Position of income returned and assessed is as under:- Income returned Rs. 5,10,35,724 Income assessed Rs.10,45,65,602 Tax Rs. 6,70,79,687 Surcharge Rs. 43,60,180 The learned C.I.T. relying on Tribunal's decision reported as (1979) 10 Tax 47 (Trib.) decided the issue in favour of the appellant. Since the department has not reconciled with the above decision hence hey propose to file a reference to the Supreme Court of Pakistan. On the other hand, the Tribunal has been consistently following the above decision quoted by the learned C.I.T. (A). In view of this Matter we confirm the direction given to the Income-tax Officer by the learned C.I.T. to follow the above decision. M. B.A./456/T Order accordingly.