2001 PTD 2119 (PLP)

NASIM SIKANDAR, J.‑‑‑-This is a case stated by the Lahore Bench of the Income‑tax Appellate Tribunal. The following question of law has been framed for our' consideration and reply:‑‑‑ "Whether on the facts and in the circumstances of this case the Tribunal was right in holding that the advance of Rs.33,79,391 made by the assessee company to Messrs Lahore Engineering & Foundry Works Ltd., in the year, 1971 and outstanding since then was not hit by the provisions of Explanation 8 of subsection (1) of section 4 of the Income‑tax Act, 1922?"

2. The assessee‑respondent at the relevant time in the assessment year, 1976‑77 ran a textile mill. In the return filed to get an interest expense was claimed at Rs.1,30,52,259 on account of over draft/loan enjoyed by the company. The Assessing Officer noted that the company had advanced a sum of Rs.33,79,391 to Messrs Lahore Engineering & Foundry Works Ltd., Lahore on which no interest was charged. Therefore, he proceeded to curtail the claimed interest amount by a sum of Rs.5,40,050 being the proportionate amount of interest chargeable on the loan advanced to the said subsidiary Messrs Lahore Engineering & Foundry Works Ltd., Lahore.

3. The learned Appellate Commissioner deleted the addition on the ground that the amount advanced was not a new loan but was given in 1971 and was being brought forward in the accounts year after year. The Departmental appeal against the deletion failed for similar reasons.

4. Heard the learned counsel for the Revenue. He maintains and we will agree that the learned Tribunal was not justified in holding that the provisions of Explanation 8 of subsection (1) of section 4 of the Income‑tax Act, 1922 were not attracted to the facts of the case. The aforesaid explanation as added by the Finance Act, 1976 is reproduced below:‑‑‑ "Explanation 8.‑‑‑Where a company has made any loan to any person and has not charged any interest thereon, or the amount charged is at a rate which is less than the specified rate, then interest calculated at the specified rate, as reduced by the amount of interest, if any, received by the company in respect of such loan, shall be deemed to be the income of the Company and for the purposes of this Explanation. (i) Specified rate means rate of interest two per cent above the bank rate notified by the State Bank of Pakistan, as applicable on the date the loan is made by the company; and (ii) " loan does not include any loan made by the company to any of its employees for a specific purpose and in accordance with his terms and conditions of service." A simple glance at the aforesaid Explanation makes it clear that after introduction of Explanation any loan whether it was existing and had been brought from the previous years or was made during the assessment year 1976‑77 or thereafter the Assessing Officer was required to do accrual of interest at the specified rate. The wording of the Explanation did not in any manner expressly or impliedly provided an exemption to existing loan or those coming from the previous years: The mere fact that loan advanced to the subsidiary was being brought forward from year to year since 1971 did not allow exemption from the application of the explanation introduced in the year 1976. The only requirement being that advancement of a loan is claimed in the year of introduction of the explanation or any subsequent year.

5. The effect of the subsequent nationalization of the subsidiary however is not a moot point nor it was given any importance by the Tribunal as well as the First Appellate Authority. Therefore, that aspect of the matter does not require any further consideration. For the aforesaid reasons we will return a negative answer to the aforesaid question. M.B.A./C‑75/L Answered in negative