2000 PLP (Trib (PTD)

(1) The bonds shall be redeemable at par after three years from their respective date of roll over. (2) Profit @ 13.0% p.a. shall be paid for 3 years on the face value of a bond on half yearly basis. (3) There shall be a 10% withholding tax on profit. (4) An endorsement to the effect that the option provided for in rule 2-A of the aforesaid Rules has been exercised in respect of a bond shall be made on the bond on its presentation at the "Issuing Office".

38. The appellant Bank, therefore, rolled over all its holdings of BNFBs on the maturity thereof in March 1995.

39. In the foregoing legal perspective according to the learned CIT(A)., interest was being earned on the Bonds since 1991-92 but was not being offered for tax as the appellant contended that since it represented income from interest on securities it was chargeable to tax on receipt basis. This plea was not being accepted by the Department which had been subjecting declared accrued interest as per books to tax, and that the treatment had been confirmed by the CIT(A) in appeal for assessment years 1991-92 and 1992-93 on the strength of the Tribunal's decision reported as 1994 PTD (Trib.) 1051.

40. The Bonds eventually matured in March 1993, relevant to assessment year 1994-95. The appellant, according to the learned CIT(A), duly credited interest account with the amount of accrued interest for the year. The learned CIT(A) further found that interest accrued on other securities was also accounted for and the appellant declared total income from 'Interest' on Securities' at Rs.8,649,370,786 as per Annexure "E" to the return of income for assessment year 1994-95. It, however, deducted an amount of Rs.2,322,792,000 from the above on the ground that this amount, which had already suffered tax as interest on securities on accrual basis, actually represented capital gain on maturity of the Bonds, with the claim that it was liable to tax at the reduced rate 25%. Similar claim was also made at the time of assessment in respect of the recorded interest for assessment year 1993-94 but the appellant had not declared any capital gain in the return of income. For assessment year 1994-95, however, the appellant had duly declared capital gain of Rs.2,321,752,000 in the return also, after setting off capital losses suffered on sale of other securities and Treasury Bills etc. against the declared amount of capital gain on sale of Bonds referred to above.

41. The DCIT proceeded to treat the whole amount of interest on securities, debentures, BNFBs, Treasury bills etc. as income under section 17 and the plea for subjecting to tax the amount of 2.33 billions at the reduced rate applicable to capital gains was rejected.

42. On the facts and in the circumstances supra, the learned CIT(A) concluded in his impugned order: "It is quite clear from, the above that the Bonds in question were Government Securities, which had originally been issued at discounted rates as Zero coupon bonds without any fixed rate of interest, and were to be redeemed at their par value of Rs.100 each after the expiry of their respective specified holding periods. The position, however, changed after expire of the first holding period when the Bonds attained maturity and the option of roll over was allowed. It has to be kept to mind that the Bonds had reached their par value after the expiry of the first three years period and the roll over was allowed at Par. value. The Bonds, thereafter, became entitled to regular periodical interest in accordance with the Rules reproduced above (emphasis provided by us) It was specifically laid down that this profit was subject to tax as income from Securities. It would, thus, be seen that the nature of the Securities had undergone a complete change after their rollover." (emphasis provided by us)

43. The learned A.R. of the appellant on the other hand, had contended that the Bonds in question were its capital asset under the definition contained in section 2(12). He had further pointed out that, according to the method of computation of capital gains laid down in section 28(1), the cost of acquisition of asset was to be deducted from its sale price. According to him since cost of-acquisition of .the asset was Rs.69 and its transfer price was Rs.100, the difference between the two amounted to Capital gain.

44. However, the view supra did not find favour of the learned CIT(A) because the term transfer under clause (b) of section 27(1), included "sale, disposition, exchange or relinquishment of the asset, or the extinguishments of any rights therein and the term 'roll over' was not included in the said definition, nor, in the opinion of the CIT(A) it could be so inferred or construed. According to the learned CIT(A) neither ,any disposition, exchange or relinquishment of the assets in question had taken place, nor any right therein had been extinguished, what had actually happened was that the appellant had exercised its option to extent the holding period of bonds, which had already attained maturity in the past. Therefore, the claim that the capital asset had been transferred, either in the literal or the notional sense, was not acceptable to the learned CIT(A)

45. The learned CIT(A) was, further, of the view that even if the claim that redemption of the bonds in pursuance of Rule 2-A supra amounted to their 'transfer" were to be accepted, no capital gain would still arise because in that case, their "cost of acquisition" and "sale price" would be one and the same i.e. their par value. He, therefore, held that no capital gain had been earned by the appellant on the- roll over of its holding of "BNFBs" and the Assessing Officer had; therefore, rightly refused to allow deduction of Rs.2.33 billion claimed by- the appellant from the declared income from interest on securities in both the above noted years.

46. Regarding the question of taxability of such income on accrual or receipt basis the learned CIT(A) held that the matter stood decided by the Tribunal vide its order reported as 1994 PTD (Trib) 1051 since there was no dispute regarding the fact that the appellant was maintaining its books of accounts on the mercantile system, where all incomes were recognised on accrual basis, income from interest on securities was also chargeable to tax

47. Mr. Khaliqur Rehman, the learned A.R. of the appellant has submitted at the outset that the impugned findings of the learned CIT(A), on facts supra, suffer from self contradiction.

48. Firstly, the learned CIT(A) has himself, noted in paragraph 32 supra that "the bonds did not carry any interest" and yet he has concluded that the difference of discounted cost and face' value, gained by the appellant on maturity, was income from interest on securities under section 17 of the Ordinance.

49. Secondly, the finding of the learned CIT(A) in paragraph 40 supra regarding the treatment of the amount accruing on bonds from year to year till the date of full period of maturity in march, 1993 and the recognition of such amount in the books and statements of account in assessment years 1993-94 and 1994-95 reflects that although the appellant had been recognising in its account the amortization gain on time scale basis out no capital gain had been declared till assessment year, 1994-95 in the return of income and the charge of tax on such unaccrued gain in assessment years 1992-93 and 1993-94 treated as interest on securities on alleged accrual basis had been impugned in appeals.

50. Thirdly, the term used in SRO. 681(1)/91, dated 25-7-1991 for the amount liable to tax is "profits" and not interest.

51. Fourthly, the learned CIT(A) has himself found in paragraph 42 supra that the Bonds were originally issued at discounted price without any fixed rate of interest and that the position changed after the expiry of the first holding period. It is further found that thereafter the bonds became entitled to regular periodical interest and that it was specifically laid down that this profit was subject to tax as income from securities. The learned CIT(A), according to Mr. Khaliqur Rehman, therefore, had no basis to hold that the gain earned by the appellant on maturity of bonds in assessment year 1994-95 was income on account of interest on securities.

52. It is further submitted that the learned CIT(A) further misdirected himself, after he himself found the foregoing facts, to hold that the 'roll over' of the investment in bonds as per addition of rule 2-A (supra) was not redemption of the BNFBs. According to the learned IAC in paragraph 42 of this order, the learned A.R. submits, the position changed after the expiry of the first holding period when the bonds attained maturity; the roll over was at par value; the bonds became entitled to regular periodical interest in accordance with the Rules supra and it was specifically laid down that this profit was subject to tax as income from interest on securities.

53. The learned D.R. is supporting the impugned order for reasons recorded therein.

54. We have considered the fact and circumstances supra and the specific findings of the learned CIT(A) that the Bonds did not carry any interest, that the term used in the SRO (ibid) for charge of tax on the amount of difference of the discounted price and redeemable value of bonds is "profit' and not 'interest', that the bonds were originally issued without any fixed interest rate and that the bonds at redeemable value i.e. par value became entitled to periodical interest only after the date of redemption. We, on the basis of foregoing, are persuaded to subscribe to the view canvassed by the learned authorised representative that firstly no "interest" "profit and gains accrued on BNFBs (supra) at all under any provision of law for the assessment years 1992-93 and 1993-94 because the appellant was entitled to claim par value only on the date of maturity and not on any date prior to it and secondly that whatever accrued on the date of redemption/maturity was neither interest on securities chargeable under section 17 nor profits and gains chargeable under section 22 of the Ordinance.

55. Further, on the foregoing, fact, we are of the considered view that the stock of BNFBs held till March 1993 by the appellant, was its capital asset within the meaning of subsection (12) of section 2 and chargeable to tax as capital gain under section 27 at the rate prescribed under the law.

56. We further find that the learned CIT(A) is not justified in holding, on account of roll over of the par value of Bonds, that the redemption of the BNFBs (supra) did not occur on the date of maturity.

57. Firstly, the reliance of the learned CIT(A), in this regard, on the inclusive definition of the term 'transfer' given under clause (b) of sub section (2) of section 27 of the Ordinance in our considered view, is misconceived because the definition, admittedly, is not exhaustive.

58. Secondly, the learned CIT(A) has himself recorded the finding that a change has occurred in the nature of investment in Bonds on the date of redemption/maturity Le., the BNFBs have been booked at par value for the purposes of the option to avail the fresh offer of roll over of such

59. Thus, a book redemption of BNFBs on discounted price has taken place on the date of maturity and a book reinvestment of such par value in SNFBs on revised terms has taken place which amounts to "transfer" as envisaged under subsection (1) section 27 of the Ordinance.

60. The word 'transfer' in parlance of law means "convegance of property esp. of stocks of shares, from one person to another." P.3367: The New Shorter Oxford English Dictionary, published in the United States by Oxford University Press Inc. New York Oxford University Press 1973,

61. According to Blacks Law Dictionary, Sixth Edition. St. Paul Minn., West Publishing Co. 1990, "Transfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption. Bankruptcy Code 101." Thus, transfer includes redemption.

62. Accordingly, we set aside the impugned order on this issue and direct the learned DCIT to charge the gain on BNFBs under section 27 of the Income Tax Ordinance, 1979:

63. The next objection common in all these appeals is taken to the finding of the learned CIT(A) that the learned DCIT is justified in charging tax on interest on Government Securities on accrual basis instead of cash basis.

64. This issue already stands settled in favour of the Department and the impugned orders do not warrant any interference except that the capital gain on BNFBs, held by us supra to be chargeable under section 27 of the Ordinance, is to be excluded from the income charged as interest from securities, in the relevant years. Accordingly, the impugned orders on this issue except to the extent supra are confirmed and the appeals on this ground are dismissed.

65. The objection taken against setting aside instead of cancelling the assessment of income under the head "Interest Suspense Account" has become infructuous the learned DCIT has passed revised order under section 62-A again holding it as chargeable to tax and the learned CIT(A) has upheld it. His upholding order is impugned by the assessee in I.T.A. No.592/KB/1998-99 (A.Y. 1995-96: under section62/132/156). Accordingly I.T.A. No.2439/KB of 1996-97, on this issue is dismissed as infructuous.

66. Objection taken on ground No.7 in I.T.A. No.2439/KB of 1996-97 (A.Y. 1995-96) is not pressed by the learned A.R., hence dismissed.

67. The objections taken to upholding of the action of the DCIT to charge tax on interest suspense account in I.T.A. No.592 (supra) (A.Y. 1995-96) is already helot by the Tribunal unsustainable in. Accordingly, appeal on this ground is dismissed.

68. The next objection taken on this appeal is that the learned CIT(A), has erred in allowing an incorrect amount of DITR of Rs.108,196,673 as against the correct amount of Rs.287,741,383.

69. The impugned order is modified by directing the DCIT to allow the correct amount of DITR after verification.

70. Another separate objection is taken in assessment year 1996-97 is that the learned CIT(A) has erred in confirming the action of the learned DCIT in taxing income of Rs.509,325,271 from Bearer National Fund Bonds (BNFB).

71. Briefly the facts were that the income from Government Securities had been offered on cash basis at Rs.10,018,508,563 in the return of income on the consistent basis in relation to the previous year. However, the amount of accrual of such income was Rs.14,787,082,149; hence net difference between accrual and cash basis was Rs.4,768,573,586.

72. The income from WAPDA and BNFB was recognized on accrual basis and offered to tax in the return of income on accrual basis as well. However, with respect to BNFB, which was rolled over, the income had been claimed as capital gain, but had been recognized on accrual basis.

73. The learned DCIT asked for the details of investment in BNFBs, quantum of investment by original purchase and roll over and to file details of how the figures of profit on BNFBs have been worked out or arrived regarding to profit. He further asked for the copy of ledger of gross income account for 18 months from 1-1-1995 to 30-6-1996, which may show the claim that BNFBs interest was credited to this account for the three 6 monthly accruals.

74. It was responded on behalf of the assessee vide letter dated 15-5-1997 reiterating that BNFB is recognised on accrual basis but no details were filed.

75. The learned DCIT, therefore, held that the interest accrued to assessee on BNFBs could not be treated as capital gain and he charged it as income from interest on securities.

76. The learned CIT(A) has upheld the impugned treatment because the findings supra were not repelled before him.

77. The position remains the same before us and we have already found that the nature of income on rolled over BNFBs changed from capital gain on stocks to interest on securities. 78, Accordingly, the impugned order is confirmed and appeal

79. Objections taken on ground Nos.7, 8 and 10 in the appeal for 1996-97 are not pressed as these have become infructuous; hence appeal on the foregoing grounds dismissed as infructuous.

80. The only other objection of the assessee in this last appeal is against setting aside the action of DCIT in treating the dividend income of Rs.80,868,687 as income from business and taxing it, at 60% as against 5% rate applicable on dividend income.

81. The learned Assessing Officer has noted regarding dividend income in his order. "Assessee bank has declared dividend income of Rs.129,018,365 and offered it for tax @ 5 % . Assessee did not compute its income in the manner provided in the Ordinance. Dividend income is assessable under section

30. I would not have ventured to go for allocation, had there been small investment as part of business activity. The Bank has in fact invested huge amounts in shares against which dividend of Rs.129 million is claimed to have been received. Principle of section 15 read with section 30, and definition of total income gives this idea that income under each head is to be separately booked. For investment in chares, the bank does not have that much liquidity or their own funds to put in this specific portfolio, this is out of pool money created out of deposits of their customers, therefore, cost of funds is to be allocated against income from dividend. Calculation of costs of funds is given as under: Total Financial Dividend Income Cost X Declared

= Cost of Finance Gross Receipts Incurred on Dividends 15940236652 X 129018365

= 80868687 75411144477. Income from dividend as declared Rs. 129,018,365 Less: Cost of Funds Rs. 80.868,687 Net dividend income Rs. 48,149,678

82. Computation of total income and tax payable thereon done by the learned DCIT in his order is as under:, "Total income (except dividend income) Rs. 5,990,999,493 Add: Net Dividend Income 48,149,678 Total income Rs. 6,039,149,171 Tax on income of Rs.5,990,999,493/@ 60% Rs. 3,504,599,696 Tax on dividend income of Rs.48,149,678 @ 5 % 2,407,484 Total Tax Rs.3,597,007;180

83. The objection taken before the learned CIT(A) on this issue was as under: "The learned DCIT erred in treating the Dividend income of Rs.80,868,687 as income from business and taking it, at 60% as against 5 % . "

84. The learned CIT(A), on the foregoing facts, has held: "Dividend income of Rs.80,868,687 has been taxed as business income at 60 % as against 5%. The reasoning followed by the Assessing Officer is neither sound, logical nor intelligible. The assessment on this point ix set aside for fresh decision after necessary notice under section 62 and by means of a speaking order. "

85. We find, on the facts and circumstances of the case supra that the very objection taken before the learned CIT(A) was misconceived and it did not arise from the impugned order. As such interference in the impugned order of the learned CIT(A) supra is found unwarranted; hence confirmed.

86. Assessment year 1996-97: Order under section

86. This brings us to the last appeal instituted as the instance of the Department against the impugned finding of the learned CIT(A) that the provisions of section 86 did not apply to the assessee Bank as no tax had been deducted at source under section 50 by the assessee Bank itself. This section can only be invoked against those assessees who fail to deduct tax or deposit the same after having deducted the - same under section

50. The Assessing Officer has failed to establish that the assessee Bank had made a default by non-compliance with the provisions of section 50 for the reason that the amounts under consideration related to Custom and other duties and Income-tax which were collected by Custom Authorities and- deposited with the assessee as a treasury. Moreover, it was the Customs Authorities and not the appellant who was required under the law to deduct tax under section 50 on the import value of goods at the time of clearance The appellant's role in the whole affair was that of the Government Treasury, and thus, it could not be held as an assessee in default which is a pre-condition for levy of additional tax under section 86.

87. The learned D.R. is unable to rebut the facts supra on which the impugned finding is based.

88. Accordingly, no interference is warranted in the impugned order which is confirmed and the appeal is dismissed

89. All the appeals are disposed off in the manner supra. C.M.A./M.A.K./5/Tax(Trib.) Order accordingly.