1968 PLP 384 (PTD)

Mr. Nurul Haq sought to distinguish the aforesaid case from the one before us only on one ground. His contention is that the assessee in that case was the lender company, whereas in the case before us, the Assessee company borrowed money from the debenture holders. It appears that the contention of Mr. Afzalul Haq is supported by the following observation by S. A. Rahman, J. in that case :‑ "if, therefore, the assessee in the present case, claims a deduction on account of the interest he has to pay to his creditors in India under this clause, he must at the same time, make a representation that the money was expressly borrowed for the very business which has given rise to the assessable income." This observation was made in view of the provision of clause (iii) of subsection (2) of section 10 of the Act. We should at this stage set out subsections (1) and (2) as well as cause (iii) of section 10 of the Act, for; they would be necessary for discussion of the points involved in the case. They read as follows: "10. (1) Subject to the provisions of this Act, the tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business or vocation carried on by him. (2) Subject to the provisions of this Act such profits or gains shall be computed after making the following allowances, namely, (i) . . . . . . . (ii) . . . . . . . (iii) In respect of capital borrowed for the purpose of the business, profession or vocation the amount of the interest paid: Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without Pakistan not being interest on a loan issued for public subscription before the 1st day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in Pakistan who may be assessed under section 43 or, in case of a firm for any interest paid to a partner of the firm. We find that subsection (1) of the Section 10 provides that the tax is payable by the Assessee for the profits or gains of a business carried on by him. After having made that provision, it also laid down in subsection (2) that in computing such profits or gains certain allowances shall be made for matters contemplated in various clauses under the said subsection. We are in this case concerned with clause (iii) of subsection (2) of section

10. It appears that allowance is permissible under clause (iii) for the interest paid "in respect of capital borrowed for the purposes of the business, profession or vocation." The Assessee company claims that it has borrowed certain capital by means of floating debentures for which interest has been paid in India and it, therefore, prays that since the interest has been paid on the capital borrowed by it, the Assessee should be entitled to deduction under clause (iii) of subsection (2) of section

10. This assertion does not take notice of the expression "the business" occurring in clause (iii) itself. Every capital borrowed by the assessee for which he might be paying interest, would not entitled him to claim a deduction for the interest paid thereon by him. The capital borrowed must be a capital which was utilised "for the purposes of the business". The expression "the business" is significant. On this ground alone, it seems to me that the deduction is not permissible, for Mr. Nurul Haq had to say that the money obtained by floating the debentures was not "the money lent at interest brought into Pakistan in cash or kind." It is, therefore, clear that the money has not been utilised for the purposes of "the business" of the Assessee, and as such he is not entitled to claim deduction under clause (iii) of subsection (2) of section 10, and the passage quoted from the judgment of S. A. Rahman, J., clearly supports the contention of Mr. Haq. Mr. Afzalul Haque also submits that the allowance is not permissible on another ground as well. That ground is that clause (iii) of, subsection (2) of section 10 is subject to sub‑section (3) of section 18 which, requires deduction of the tax at the source. Subsection (3) of section 18 reads as follows :‑‑ "The person responsible for paying any income chargeable under the head "interest on securities" shall unless otherwise prescribed in the case of any security of the Central Govern ment, at the time of payment, deduct income‑tax on the amount of the interest payable at the maximum rate or the rate applicable to such amount, whichever is the greater." It appears that subsection (3) of section 18 clearly lays down that a person responsible for paying any income chargeable under the head on "interest on securities" shall deduct income‑tax on the amount of interest at the rate indicated therein. In this case assessee being responsible for paying the income, it was clearly a duty cast upon it by law to deduct the tax at the time of payment of interest so that it could pay the income -tax thereon. The assessee has to think itself if it has made payment contrary to law and its liability to make the payment ultimately does not thereby extinguish. But we have also to consider another argument of Mr. Nurul Huq in this behalf. His contention is that it would be a duty of the assessee to deduct tax at source if the income is chargeable under the Act. Mr. Nurul Haque elaborates his argument by saying that by reason of section 42 of the Act this interest not being chargeable under this Act he was not entitled to make the deduction. Therefore, subsection (3) of section 18 which imposes the duty of deduction at the source does not apply to this case. In order to appreciate the argument of Mr. Nurul Huq; material part of Section 42 should be quoted here: "All income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in Pakistan or through or from any esset or source of income in Pakistan or through or from, any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or arising within Pakistan

" Mr. Nurul Huq's contention is that the Assessee company paid interest to its creditors in India who are debenture‑holders in this case and the payment was made outside Pakistan and as such the interest was not chargeable in Pakistan for, it cannot be said that the interest paid was on account of "money lent at interest and brought into Pakistan in cash or in kind." If the assessee would have deducted the tax in Pakistan, it would have acted contrary to law inasmuch as the said income of its creditors was, not an income earned by them in this country. He, therefore, lays emphasis on the expression "money lent at interest and brought into Pakistan in cash or in kind" occurring in section

42. This contention of Mr. Nurul Huq is contrary to what he argued earlier. He submitted earlier that the assessee is entitled to deduction on account of payment of interest for the capital borrowed by the Assessee company "for the business" ; It is understood how he can now say that he is not required to deduct the tax for the amount was not brought into Pakistan for the business in question. If he is right in his present contention that it is not money lent at interest and brought into Pakistan in cash, then it was not the money utilised for the business and therefore his claim for deduction under Clause (iii) of sub section (2) of section 10 is untenable. In the case referred to above his lordship S. A. Rahman; J. considered this situation in the following terms: "The Assessee,' in my opinion, therefore, finds itself on the horns of a dilemma. If it makes out that the capital in question was not expressly borrowed for investment in Pakistan, then clause (iii) of subsection (2) of section 10, cannot be invoked to its aid. If, on the contrary it is admitted that the capital brought into the country was in fact borrowed for investment here, then the income that might accrue to the creditors by way of interest on the money lent, would seem to be covered by the expression "money lent at interest and brought into Pakistan" occurring in section

42. It would, therefore, be income chargeable in this country to tax, within the meaning of the proviso to clause (iii) of subsection (2) of section 10 and consequently the provisions of Section 18 of the Act, would be attracted thereto. I find consequently that sections 10 and 42 of the Act and re‑act on each other. Unless, therefore, in such a case either the tax on the interest income which has accrued to the Indian creditors, has either been paid or deducted under section 18, the allowances claimed would not be admissible. So whichever way the case is looked at, the decision must go against the applicant." We have no doubt that the observation quoted above fully applies to the facts of this case and the only distinction sought to be made by Mr. Nurul Haque on ground of the assessee in this case being a borrower and not a lender, is untenable. His Lordship Kaikaus, J., also observed in the aforesaid case of Howrah Trading Co., as follows: "Section 10 speaks of capital borrowed for the purposes of the business'. "The business" referred to in section 10(2)(iii) has reference to the business which is mentioned in section 10(1) and the profits and gains of which are liable to tax. The business the income from which is liable to tax is the business which is being carried on in Pakistan. Capital under section 10(2)(iii) can refer only to the capital which is being used in Pakistan. It has no reference to capital which is employed in some other country and the income from which `is not liable to the payment of the Income‑tax in this country. In order that the assessee may be entitled to a deduction under section 10(2)(iii) the assessee will have to allege and to establish that the capital on which he has paid interest is capital' which he invested in Pakistan." In accordance with the law laid down by their lordships of the Supreme Court, we are clearly of opinion, that this contention of Mr. Nurul Huq is of no substance. The only other point raised by Mr. Nurul Huque is that these debentures were floated in India long before Independence of the country and the debenture‑holders had no knowledge whatsoever that the money would be utilised subsequently in a foreign country. This is no ground for non‑payment of the tax, for the money is being now earned in Pakistan. We are of opinion that this contention is devoid of substance, for we are concerned with the seven assessment orders passed after the Independence of the country in accordance with law as it exists to‑day. It is urged by the assessee that because there was one country at the time of floating debentures, they have no knowledge that the money would be utilised for this business. This argument only supports our conclusion reached earlier in the judgment that by reason of the language employed in clause (iii) of subsection (2) of Section 10, no deduction is permissible, money not being utilised for this business. It was clearly the duty of the Assessee to deduct the tax at source. The second question should also be answered in the negative. For the reasons stated above, we answer both the questions in the negative. The assessee will pay costs to the Respondents including the costs of Appeals to the Supreme Court in pursuance of the directions of their Lordships of the Supreme Court. A. H. KHAN, J.‑I agree: A. Q. Reference answered in the negative.