NASIM SIKANDAR,. J.--- These further appeals under Section 136(1) [Appeal to High Court] of the late Income tax Ordinance, 1979 assail a consolidated order recorded by the learned Income Tax Appellate Tribunal on 4.9.1997 relating to assessment years 1988-89 and 1989-90.
2. The appellate is a private limited company and during the period relevant to the assessment years 1988-89 and 1989-90 derived income from manufacturing and sale of cloth, dyeing, printing and finishing of cloth, manufacturing of carpets and sale of cotton yarn. The Assessing Officer while framing assessm ent in the year 1988-89, inter-alia, rejected the declared receipts in dyeing and printing sections. It was observed that the disclosed version was not supported by gate register, parties ledger, stock and production register, dyeing master's report and quantity of goods received. Also that parties-wise list of the receipts furnished by the assessee were not open to verification due to lack of complete addresses. It was further observed that during the period under review the appellant added machinery to this existing manufacturing capacity.
3. The reply submitted by the assessee to the notice served in that regard was found unsatisfactory. The reliance of the appellant-assessee on the parallel cases were also rejected on the ground that of assessee had better and sophisticated machinery at its disposal. Accordingly his receipts from calendaring, dyeing and printing were adopted on the basis of consumption of Sui-gas at the ratio of 1:10 making additions of Rs. 25,58,990/- and of Rs. 29,27,486/- in the dyeing and printing section.
4. In the assessm ent year 1988-89 another addition of Rs. 46,78,245/- was made by invoking the provisions of section 25(c) [Amounts subsequently in respect of deductions] of the late Income Tax Ordinance, 1979 after finding that the assessee had failed to ray the trading liabilities claimed and allowed in the previous three years. They relevant part of the order of the Assessing Officer reads as under:--- Addition u/s 25(c).
As per the balance sheet for the period ending 30.6.88 total bank liabilities have been shown at Rs.
3,46,43,117/-. The amount includes overdraft of Rs. 2,62,93,498/- from National Industrial Cooperative Finance Corporation Lahore. Scrutiny of these liabilities show that this amount includes interest claimed from year to year which is still unpaid. The amount relating to National Industrial Finance Corporation shown at Rs. 262,93,496/- include unpaid interest of Rs. 76,50,297/-, which had been the period ending 30.6.1985 and the assessee had duly claimed this amount as an expense in the P & L against business profits. Since the said amount of Rs. 76,50,207/- attracted the provisions of section 25(c) of the Income-Tax Ordinance, 1979 and was thus liable to be treated as income from the year under review, the assessee was confronted on this issue vide notice u/s 62 dated 4.4.1989. The assessee vide it's A.R's reply dated 10.4.1989 contended that the amount of unpaid interest is not a trading liability. It was further contended that amount of unpaid interest becomes the part of the loan for the subsequent year and thus does not remain a trading liability, but becomes a part of the principal amount.
The contention of the assessee has been considered and found to be misconceived and thus not acceptable. The amount of interest payable against capital borrowed for business purpose is a trading liability as held by the I.T.A.T. in case reported as (1983) 48 Tax 46 (Trib). The assessee has also derived benefit by way of claiming interest as a P & L expense in the earlier years. The amount of interest expense cannot be termed as the principal amount of loan by any definition. The contention of the assessee on this issue is therefore, rejected. ..............................
According to the provisions of section 25(c) of the Income Tax Ordinance, 1979, any trading liability which is not paid within three years of the expiration of the income year in which it was allowed shall be deemed to be the income of the assessee. The information furnished by M/s. National Industrial Cooperative Finance Corporation shows the unpaid interest upto 3.6.1984 was of Rs.
46,78,245/-. This amount is therefore, treated as income of the assessee u/s 25(c) the Income-Tax Ordinance."
5. On appeal against order of assessment for the year 1988-89, Commissioner of Income Tax (Appeals), Lahore on 8.12.1991 directed adoption of the receipts under the finishing and calendaring sections at Rs. 50 lacs and the subject them to a GP rate of 42%. In dyeing and printing sections the declared sale of Rs. 97.98,815/- were directed to be increased by margin of 31.2% keeping in view the treatment accepted by the assessee in the immediate preceding year in that section. As regards addition under Section 25(c), the appellate authority directed deletion of the addition after holding that deduction on account of interest could be treated as income within the meaning of clause (a) of section 25 of the late Ordinance only if it was received back by the assessee. It was observed that sub-clause (c) of section 25 attracted only to the liabilities arising in relation to the purchases made by the assessee which remained unpaid for a period of three years or more.
Therefore, in view of the appellate authority the interest liability which remained unpaid for a period of three years or more. Therefore, in view of the appellate authority the interest liability which got added to the principal did not exist separately as a part of the liability. Accordingly, as observed above, the addition of Rs. 46,78,245/- under section 25(c) of the late Ordinance, was directed to be deleted.
6. In the assessm ent year 1989-90 against the Assessing Officer rejected the declared results in calendaring, dyeing and printing sections and proceeded to estimate receipts in the ratio of 1:10 of the Sui-gas consumed. Learned CIT (Appeals) by way of its order dated 30.1.1993 directed acceptance of the declared dyeing and printing receipts on the basis of the history of the case as also the application of the GP rate of 31.02%. In case of calendaring section the estimated receipt was directed to be reduced to Rs. 35 lacs as per estimation made by the Assessing Officer as Rs.
67,2,450/-. Also it was directed that GP rate of 45% be applied as earlier decided by his predecessor in the assessm ent year 1988-89. The learned Tribunal keeping in view its findings recorded in respect of assessm ent year 1988-89 again directed estimation of sales in these section in ratio of 1.8.
7. The learned Tribunal by way of the impugned consolidated order observed that the learned A.R. of the assessee had accepted that sophisticated machinery was acquired by the assessee in the period relevant to the assessm ent year 1988-89 (that observation is denied by the learned counsel for the appellant). However, allowing partial relief, it was directed that the receipts be worked out in both years in the ratio 1:8 of the consumption of the Sui-gas both in case of dyeing/printing and calendaring sections. As regards addition under section 25(c), the learned Members of the Tribunal while setting aside the order of the CIT (Appeals) observed that there was a long established practice in the department that if the liability on account of interest was not paid within the period specified in sub-clause (c) of section 25 of the late Ordinance an addition was made and whenever the assessee discharged the liability on account of interest they deducted the same in the computation of income in the year of payment. Accordingly disallowance made by the Assessing Officer was restored.
8. Although in the statement of the case the assessee has proposed as many as nine questions yet at the time of arguments learned counsel pressed only following four question in the year 1988- 89:--- "(v) Whether in the facts and circumstances of the case the respondent No. 1 has misinterpreted section 25(c) of the ordinance by holding the unpaid interest as trading liability.
(vi)Whether in the facts and circumstances of the case there was any legal basis for estimating the receipts in dyeing, printing & calendaring section on the basis of Sui-gas expenditure at the ratio of 1:8 particularly in view of the parallel cases decided by the respondent No. 1 itself where ratio of 1:4 was adopted.
(vii) Whether in the facts and circumstances of the case the respondent No. 1 has subject the appellant to discrimination by estimating the sales and receipts on the basis of Sui-gas consumption at the rate of 1:8 against the declared ratio 1:5 while in other cases the respondent No. 1 has adopted the sales at the ratio 1:4. Thus there has been violation of Article 4 of the Constitution.
(viii) Whether in the facts and circumstances of the case the respondent No. 1 could modify the order of the respondent No. 2 for estimating the receipts in dyeing, and printing sections when the respondent No. 2 had only followed the order of the respondent No. 1."
9. According to the assessee in the year 1989-90 following questions of law arise out of the impugned order of the Tribunal:--- "(i) Whether in the facts and circumstances of the case there was any legal leasis for estimating the receipts in dyeing, printing and calendaring sections on the basis of suit gas expenditure at the ratio of 1:8 particularly in view of the parallel cases decided by the respondent No. 1. itself where ratio of 1:4 was adopted.
(ii)Whether in the facts and circumstances of the case the respondent No. 1 has subjected the appellant to discrimination by estimating the sales/receipts on the basis of sui-gas consumption at the rate of 1:8 against the declared ration 1:5 while in other cases the respondent No. 1 has adopted the sales at the ratio of 1:4. Thus there has been violation of Article 4 of the Constitution.
(iii)Whether in the facts and circumstances of the case the respondent No. 1 could modify the order of the respondent No. 2 for estimating the receipts in dyeing and printing sections when the respondent No. 2 had only followed the order of respondent No. 1."
10.We have heard the learned counsel for the parties. It is clear from the questions framed in the two years as reproduced above that the assessee is assailing the estimation of sales in clandering, dyeing in both years while in the earlier year viz 1988-89 the restoration of addition under section 25(c) of the late Ordinance by the learned Tribunal is challenged.
11.In case of treating addition in dyeing, finishing and clandering sections in the two years involved we are of the view that the assessee has not been treated fairly both at the assessment as well as at the Tribunal level. It is correct that under the repealed provisions of reference under section 136 of the late Ordinance this Court generally refused to interfere where it was only a matter of estimation of sales or turnover of a business. In the case in hand, however, it appears that the estimation of sales in the ration 1:10 by the Assessing Officer and then its reduction to 1:8 by the Tribunal was not based upon any material available on record. In the first place the addition of any machinery in the year 1988-89 is expressly denied by the appellant/assessee. Learned counsel for the appellant on the basis of the audited account of the company has demonstrated that in the year ending on 30th June, 1988 only a vehicle was added to the assets of the company while in the year ending on 30th June, 1989 addition to machinery was made at Rs. 7,05,162,50. The Assessing Officer on the basis of a letter issued by a lender bank of the assessee observed that some new machinery was added to the existing list during the period ending on 30th June, 1988. The exact nature of the machinery and its expansion to the production capacity of the factory or so-called sophistication was never brought home. It is an admitted fact that in the succeeding assessment years 1996-97 to 1998-99 the sales of the appellant/assessee were estimated at four times of the suigas consumption. The declared sales in two years involved being at five times of the sui-gas consumption during this period, their twofold enhancement as observed earlier, was not supported by any material on record. Learned CIT (Appeals) was therefore correct in allowing the impugned relief. The order of the Tribunal being without any basis, the relief allowed by the learned CIT (Appeals) shall accordingly be restored.
12. In case of the addition under section 25(c) of the late Ordinance however we are not persuaded to agree that the Assessing Officer acted in an illegal manner and that the learned Tribunal unjustly maintained its findings. The ratio settled by the Hon'ble Division Bench of the Delhi High Court in re: Mrs. Ethyl Saxena (Decd) (by L.R) vs. Commissioner of Income-Tax, New Delhi (1984) 146 ITR 518) does not in any manner support the case of the assessee. Learned counsel has particularly referred to an observation of the learned Division Bench at page 522 of the report in which it was observed that in the case before their Lordships the assessee's indebtedness to the bank was not a trading liability in respect of which any deduction could have been allowed in any year. The facts in that case were totally different inasmuch as it was never an issue before the Hon'ble Division Bench if the interest paid on a bank loan taken for the purpose of business was a trading liability. The assessee in that case dealt in hides and skins. Some of the stocks pledges with the bank to enjoy overdraft facility was damaged. The bank employees entered the godown of the assessee and removed hides and skins earlier hypothecated with the bank. The assessee initiated criminal proceedings against the bank mainly on the ground that a hypothecation letter had not yet been confirmed. Therefore, bank was liable both in civil as well as on criminal sides. The bank entered into a compromise under which the assessee gave up his claim for compensation and in return the bank agree to write off the amount due from the assessee. The Hon'ble High Court finally found that the payment received by the assessee (by way of adjustment) being in respect of stockin-trade was a trading receipt and therefore assessable to tax irrespective of the fact whether. the assessee had claimed or omitted to claim loss or damage to the stock-intrade as and when it occurred. Accordingly the addition made in the total income of the assessee and maintained by the learned Members of the Tribunal was upheld.
13. In the case is hand it is not denied that the assessee claimed the bank interest as an expense in the three years proceeding to assessment year 1988-89. it is also not disputed that the claimed interest was allowed to the assessee. However, in the assessment year under review it was found that actually no interest was paid on borrowing earlier made for the purpose of business. It has all along been the case of the assessee that interest due on bank borrowing was not a trading liability and therefore, the provisions of Section 25(c) of the late Ordinance were not attracted at all.
However, neither before the revenue authorities, the Tribunal, nor before us the appellant has been able to dispute the practice of the department in that regard as observed by the Tribunal. Also in our view the provisions of sub-clause (c) need to be read alongwith the opening part of section 25 which speaks not only of a trading liability but also of allowances and deductions made under section 23 (Deductions) in respect of any loss, bad debt as well as an expense incurred by the assessee. The reference to trading liability in sub-clause (c) of section 25 needs to be read not in isolation but in conjunction with allowances and deductions allowed in respect of loss, bad debt, expense and trading liability. It is also so far the reason that under section 23 the various allowances and deductions allowable under the head business and profession, the word and phrase "trading liability" does not figure out any where. The interpretation of the assessee of the word "trading liability" is narrow and is designed to confine itself only to an advance made for the purpose of purchases. That hardly appears to be the intention of the law. Although not all of them but majority of the deductions allowable under section 23 can conveniently be read as trading liabilities unless it specifically finds mention in section 24 (Deductions not admissible). The word "trade" in its most common significance is not confined to mere sale and purchase. In its wide meaning it signifies the whole of business a person is engaged in. That business can be of any nature starting from simple sale and purchase and covering manufacturing, providing services and any other venture which can properly be described to be in the nature of trade. A trading liability in that sense would be any liability incurred with respect and in regard to the business of an assessee. The amount of interest having admittedly been claimed as an expense and the same having admittedly not been paid in the preceding three years the provisions of Section 25(c) were clearly attracted. The appellant having claimed an expense without actually having incurred the same in the period allowed by law in that regard cannot be allowed to turn around and claim on the basis of farfetched interpretation of the word "trade" to refuse to account for the same. The interpretation of the assessee even otherwise will result in an anomalous situation inasmuch as the assessm ents framed in the previous three years will not be correct reflections of the income of the assessee. Having claimed and on being allowed interest as an expense, the total taxable income of the assessee was reduced to a considerable extent. The assessments so framed therefore would become un-real. Our answer to the question No. (v) in the assessment year 1988-89 is in the negative while in the years 1988-89 and 1989-90 we will hold that there were no legal basis for the Tribunal to maintain estimation of receipts of the appellant and resultantly the relief allowed by the CIT (Appeals) shall be restored.