MR. JUSTICE MUHAMMAD ATHER SAEED.-(1). This reference application has been filed under section 136(2) of the Income Tax Ordinance, 1979, against the order of the Income Tax Appellate Tribunal, dated 10-12-1991 in R.A. No. 358/HQ of 1990-91 by which the Tribunal had refused to refer the following proposed question said to be arising out of the order of Income Tax Tribunal, dated 25-11-1990, passed in ITA No. 94/HAQ of 1988- 99 for the opinion of this Court:-- "Whether on the facts and in the circumstances of the case the learned Tax Appellate Tribunal was justified in confirming the disallowance of the claim of encashment of performance bond by the Government of Punjab."
2. Brief facts of the case are that the applicant is a private limited company carrying on the business of constructions for itself and on contract for other parties. For assessm ent year 1985- 86 the applicant have been awarded the contract by the Government of Punjab in respect of Hockey Stadium. For the execution of this contract the applicant was required to submit a performance bond (Bank Guarantee) amounting to Rs. 20,65,000, this guarantee was encashed by the Government of Punjab due to the alleged breach of contract during assessment year in question. The applicant had filed suit against the Government of Punjab. The Income Tax Officer disallowed this claim because according to him the amount was recoverable and thus was not an expense allowable during the year.
3. Being aggrieved by the above order the applicant filed an appeal before the C.I.T.(Appeals) who also upheld the I.T.O.'s contention that the amount of performance bond was not mature for write- of and rejected the appeal filed by the applicant on this point.
4. Being aggrieved by the above order the applicant filed the appeal before the Tribunal who rejected the same for the following reasons:- "As suit was filed in the High Court against the encashment which was dismissed. Since it was in the nature of penalty and the appeal already stand dismissed, we confirm the addition."
5. The learned Tribunal also refused to refer the question on this point for the opinion of this Court by the impugned order. Hence this reference application.
6. We have heard Mr. Rehan Hassan Naqvi and Ms. Lubna Pervez, learned counsel for the applicant and Mr. Nasrullah Awan, learned counsel for the respondent.
7. At the very outset of the arguments Mr. Nasrullah Awan, the learned counsel for respondent informed the Court that this point has already been- decided by the Hon'ble Supreme Court of Pakistan in the judgment in the case of Commissioner of Income Tax v. Premier Bank Limited, Karachi reported in [1999 SCM R 1213], wherein according to the learned counsel the Hon'ble Supreme Court has held that the payment on account of fine, penalty or penal interest cannot be allowed as expense laid out wholly or exclusively for the purposes of business of the assessee.
8. The learned counsel for the applicant Mr. Rehan Hassan Naqvi and Ms. Lubna Pervaiz did not agree with the contention of learned counsel for the respondent that their case was identical to the case of Premier Bank quoted supra and argued that the judgment of Hon'ble Supreme Court relied on by the learned counsel for the respondent was distinguishable and their case will not be covered by it. According to the learned counsel the Hon'ble Supreme Court had held that the fine, penalty or penal interest payable on account of infringement of law cannot be allowed as expense wholly and exclusively laid out for the business, whereas in their case the applicant had been awarded a contract for construction at the Hockey Stadium and furnishing the performance bond was necessary for executing this contract and therefore the performance bond was furnished exclusively for the purposes of business. They further submitted that since allegedly they could not fulfil the contract within the time stipulated in the contract, the Government of Punjab encashed the performance bond. They filed a suit against such forfeiture and encashment of the performance bond which was dismissed by the Hon'ble Lahore High Court. They stated that in their case forfeiture was made for the breach of contract and not for infringement of any law and therefore their case was clearly distinguishable from the case of Premier Bank quoted supra. In support of their contention that their Lordships of Hon'ble Supreme Court of Pakistan while deciding the case have specifically held that the fine, penalty or penal interest payable for the infringement of any law cannot be allowed as a business expenditure, the learned counsel relied on the following extract of judgment of the Hon'ble Supreme Court:- "Revenue expenses incurred by the assessee wholly and exclusively for the purpose of his business can legitimately be claimed by him as allowable deduction under section 10(2)(xvi), but expenditure incurred as penalty or fine paid on account of infraction of law cannot be permitted as expenditure laid out wholly or exclusively for the purpose of the business of the assessee."
9. The learned counsel further stated that although on this point they could lay their hands on only one Pakistani judgment but Indian Courts have decided identical cases on the same point in favour of the applicant.
10. In support of their contention the learned counsel relied on the following judgments:-
(1) Karachi Steam Navigation Co. Ltd. v. Commissioner of Income Tax reported in (1967) 15 Taxation 73 (H.C. Karachi).
(2) (1963) 8 Tax 343 (H.C. Madras) Hind Mercantile Corporation Ltd. v. Commissioner of Income Tax, Mardas.
(3) (1973) 91 ITR 427 (Madras H.C.) Commissioner of Income Tax (Central), Madras v. Inden Biselers.
(4) (1994) 206 LTR 112 (Gujrat H.C.) Commissioner of Income Tax v. Mihir Textiles Ltd.
11. Mr. Nasarullah Awan learned counsel for the respondent one again relied on the judgment of the Hon'ble Supreme Court in the case of Premier Bank quoted supra and rested his case.
12. We have examined the case in the light of the arguments of the learned counsel and have carefully perused the records of the case including the orders passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the judgments relied on by the learned counsel especially the judgment of the Hon'ble Supreme Court of Pakistan in the case of Premier Bank, quoted supra.
13. From the bare reading of judgment of the Hon'ble Supreme Court it is seen that as rightly pointed out by the learned counsel for the applicant the Hon'ble Supreme Court has held that fine, penalty or penal interest payable for infringement of any law cannot be allowed as business expense. We have also seen that whereas the Income Tax Officer and the Tribunal have disallowed the allowance of disputed expense, due to the fact that in their opinion it was still recoverable because the suit filed against the Punjab Government in the Lahore High Court was still pending, the Tribunal despite being aware that the legal proceedings initiated by the applicant had been decided against them, upheld the disallowance of expense without giving any reason for their action. We have also perused the judgments relied upon by the learned counsel for the applicant:-
(1) In Karachi Steam Navigation Co. Ltd. v. Commissioner of Income Tax reported in (1967) 15 Taxation 73 (H. C. Karachi) Karachi High Court has held as under: ~ "Damages-Steamship company-Damages paid in settlement of litigation for breach of contract-Whether wholly and exclusively for purpose business and admissible expenditure-Held yes." (2) In the case of Hind Mercantile Corporation Ltd. v. Commissioner of Income Tax, Madras reported in (1963) 8 Tax 343 (H.C. Madras) has held as under:-- "Held, that, as there was no total prohibition of export by any law the policy of the Government in giving licence for exports varied from half year a half-year, dealers were, of necessity and as a matter of practice compelled to enter into engagement in advance, and the contracts in question were not, therefore, unlawful or against public policy; the loss was one incurred in the usual course of business and was incidental to the conduct of the business for earning profits, and was allowable in computing the profits of the assessee's business under section 10 of the Act." (3) In the case of Commissioner of Income Tax (Central), Madras v. Inden Biselers reported in (1973) 91 ITR 427 (Madras H.C.) has held as under:-- "On the facts and findings of the Tribunal, we are also of the view that the damages paid by the assessee is a revenue loss incurred in the course of carrying on of the business and, therefore, to be deducted under section 10(1) of the Act." (4) In the case of Commissioner of Income Tax v. Mihir Textiles Ltd., reported in (1994) 206 ITR 112 (Gujrat H.C.) has held as under:- "To our mind this question does not require any lengthy debate inasmuch as the same is covered by a number of decisions on the point. On this point, we have a decision of this Court in the case of C.I.T.(A) v. Tarun Commercial Mills Co., Ltd. (1977) 107 ITR 172. This decision clearly lays down the principle that the sum to be paid in default of fulfilling the export obligation, no doubt described as a penalty, in the ultimate analysis, it is the substance of the transaction between the parties which had to be considered for the purpose of determining as to what is the nature and import of the scheme. Therefore, the amount which was required to be paid to the Textile Commissioner for flon- fulfilment of the assessee's export obligation was a business expenditure incurred wholly and exclusively for the purpose of the assessee's business. The same principle has been reiterated by another decision of this Court in the case of C.I.T.(A) v. Bharat Vijay Mills Ltd. (198l) 128 ITR 633. Thus, there cannot be any controversy on this aspect of the matter. Under the circumstances, this question is required to be answered in the affirmative, viz., the payment made by the assessee, in the facts and circumstances of the case, is allowable as a business deduction under section 37(1) of the Income Tax Act, 1961 14. From a perusal of these judgments and the judgment of the Hon'ble Supreme Court of Pakistan quoted supra relied on by the learned counsel for respondent it is clear that case of the applicant falls within the ambit of judgments relied on by the learned counsel for the applicants as in all these cases including the applicants' case the damages or compensation has been paid for breach of contract which had been executed by the applicants and the taxpayers who are parties to the judgments relied on by the learned counsel for applicants wholly and exclusively for the purpose of their businesses and in all these judgments the learned Courts have held that the damages/compensation paid for breach of contract are expenses incurred exclusively for the purposes of business and are allowable under the provisions of section 23(2)
(xviii) and its pari materia sections in other Acts/Ordinances. The judgment of Hon'ble Apex Court, however, deals with penalty, fine or penal interests paid on account of infringement of law. It is nobody's case that infringement of law can be equated with breach of contract. One is an infraction against the public at large, an authority and a society whereas other is a infraction against a private person.
15. We are therefore, inclined to agree with the contention of- the learned counsel for applicant that their case is not covered by judgment of Apex Court in Premier Bank's case quoted supra. We also find ourselves in full agreement with the judgment of this Court in Karachi Steam Navigation case quoted supra and the judgments of the Indian Courts.
16. Respectfully following these judgments we hold that expenditure claimed on the encashment of applicant's performance bond by the Punjab Government has been expended wholly and exclusively for the purposes< of business and is therefore, allowable under section 23(2)(xviii) of the Income Tax Ordinance, 1979. We therefore, answer the question proposed in negative in favour of the applicant.
17. A copy of this order under the signature of the Registrar and seal of this Court be remitted to the Income Tax Appellate Tribunal for passing of orders in conformity with this order.