The instant appeal filed by tax-payer is directed against an order dated 12.1.2011 passed by learned CIR (Appeals-II) Islamabad for the tax year, 2006.
2. Brief facts are that the tax-payer being a private limited company is running a business to render wireless telecommunication services. On scrutiny, It transpired that the original assessment was erroneous as well as prejudicial to the interest of revenue whereon a show-cause notice under Section 122(9) read with Section I22(5A) of the Income Tax Ordinance, 2001 was issued to the tax- payer providing that the company had claimed deduction of Rs. 35,253,000 under the head late payment charges during the period 1.1.2005 to 31.12.2005 whereas the Income Tax Ordinance, 2001 does not provide for allowability of such deductions. In reply submitted by the tax-payer, it was contended that the jurisdiction to invoke the provisions of sub-section (5A) of Section 122 of the Income Tax Ordinance, 2001 can be exercised by the Commissioner only and such powers cannot be delegated and that the Additional Commissioner cannot amend the original amendment order under Section 122(5A) of the Ordinance. Further, it was maintained that the late payment charges were made for the purposes of business and are allowable expense. However, the Additional Commissioner Inland Revenue by his order dated 10.11.2010 found that the contractual obligations were being discharged under the Contract Act, 1872 and the violation of the contract, entered into between the tax-payer and Nokia, is the violation of the Contract Act and late payment charges were paid for that contravention of the contract and thus the expense on account of late payment charges is manifestly in contravention of Section 21(g) of the Income Tax Ordinance, 2001 being fine paid for the violation of the law of land i.e. The Contract Act, 1872; resultantly the expense of Rs.
35,253,000 on account of late payment charges was disallowed and added back.
3. Aggrieved of this treatment, the tax-payer went in appeal but to no avail. Now the tax-payer is in further appeal before this Tribunal on the following grounds:-
(1) The learned Commissioner Inland Revenue (Appeals-II), Islamabad has erred in upholding the action of Additional Commissioner Inland Revenue, Audit-I, Large tax-payer Unit, Islamabad of making further amendment to Company's assessment for tax year 2006 after Company filed appeal against the first amended order.
(2) The learned Commissioner Inland Revenue (Appeals-IT), Islamabad has erred in upholding the action of Additional Commissioner Inland Revenue, Audit-I; Large tax-paver Unit, Islamabad of disallowing late payment charges of Rs.35.253,000.
4. During arguments, learned A.R. Did not press the ground as to jurisdiction of the Additional Commissioner for passing the amended assessment order but has vehemently contested the findings of the forums below regarding disallowing of late payments charges. In this regard, learned A.R. Maintained that the late payment charges were incurred on delayed payments to Nokia Siemens in accordance with the contractual obligations between the company and Nokia.
Further, Section 20 of the Income Tax Ordinance, 2001 stipulates that a person may be allowed a deduction for any expenditure incurred wholly and exclusively foe the purpose of business unless specifically disallowed by the Ordinance. He also averred that the provisions of Section 21 of the Ordinance envisaged disallowance of fine or penalties in violation, of any law, rule or regulations.
Learned A.R. Argued that the late payment charges are not in respect of violation of any law, rule or regulation and such-like expenditure is a common feature of contacts. Learned A.R in support of his contention referred to 2000 PTD 3741 S.C. In the case of Sui Southern Gas Company Ltd. v. CIT, Companies-V, Karachi. Learned A.R. Also provided a photo-copy of contract between the appellant, Telenor, Nokia Siemens network executed on 31.3.2009 and referred to clause 14.11 of the said contract providing for interest on delayed payment in the event of any delay in due- payments.
5. As against this, learned D.R. Contended that the contractual obligations were being discharged under the Contract Act, 1872 and the violation of the contract entered into between the tax-payer and Nokia, is the violation of the Contract Act and late payment charges were paid for the said contravention. He added that the claimed expense on account of late payment charges is in contravention of the Income Tax Ordinance, 2001 being fine paid for the violation of the law of land i.e. The Contract, Act, 1872, therefore, the expense of Rs. 35,253,000 on account of late payment charges has been disallowed and added back in the declared income of the company. As regards the case-law referred to by learned A.R., learned D.R. Maintained that the same is distinguishable as the said judgment relates to provisions of repealed Income Tax Ordinance, 1979.
6. At the outset, it is worthwhile to reproduce hereunder the relevant clause of the contract between the Telenor, appellant and Nokia Siemens Network executed on 31.3.2009:- " 14.11 interest for delayed payments. In the event of any delay in due payments under this Contract due to Purchaser's fault, the Purchaser shall pay interest on the amount delayed at the rate of LIBOR one year plus 3.5 per cent per annum for each day elapsed from the due date to the date of actual payment, calculated on the basis of a 360 days year and the debtor shall pay such interest without undue delay."
7. It seems that the aforesaid clause providing interest on the delayed payment is one of the terms and conditions of the contract between two parties and it may safely be said that the same clause is neither a provision of any statute/law rule or regulation. Next, the relevant provision of Income Tax Ordinance, 2001 dealing with the subject is Section 21 clause (g), which disallows a deduction for any fine or penalty paid or payable by the person for the violation of any law, rule or regulation.
8. Firstly, the aforesaid clause (g) of Section 21 of the Ordinance, 2001 clearly provides that the fine or penalty paid or payable by the person is for violation of any law, rule or regulation. However, in any case, it appears that clause 14.11 of the contract between the appellant and Nokia Siemens network reproduced above, is neither law, rule or regulation. There is hardly any need to add that the three expressions law, rule or regulations imply codified provisions, may it be a primary legislation by the legislature or a subordinate one by other authorities to whom legislature delegated its power to make rules or regulations. Secondly, it seems that Contract Act has not been correctly construed by the forums below for the same regulates the relationship between a promiser and a promisee, envisaging certain conditions for execution of the contract. The contractual rights and liabilities are justiciable when the relationship comes into being in accordance with the provisions of the Contract Act. Surely, it is not a statute/law providing specific penalties including fine in case of non-compliance of the contractual obligations. In this regard, the important aspect of the said statute/law which cannot be lost sight of is, that the party in default has to perform his part of the contract which may be got enforced in terms of actual performance or if the same is not possible, by compensation, appropriate in a each case. Thus the violation of the terms of a contract, as executed in line with the provisions of the Contract Act is not violation of any law, rule or regulation.
9. The case-law referred to by learned A.R. Is quite supportive of his contention. The facts of the said case are that the petitioner being a public limited company was engaged, in the business of purification transmission, distribution and sale of natural gas and was required to pay the Federal Government development surcharge in relation to gas sold by it under Section 3(1) of the Natural Gads(sic) Development Surcharge Ordinance, 1967. Section 3(3) of the said Ordinance provided that interest at the rate of 12 per cent, per annum would be payable in addition to the amount due under Section 3(T) of the said Ordinance if the said amount was not paid within the time specified for its payment. Further, the petitioner purchase raw natural gas from gas supply companies and transmitted this gas after purifying and processing the same. The petitioner was required to pay interest at various rates if the gas price bills were not paid within the stipulated period. The petitioner claimed as deductible business expenses, Rs. 34.036 million paid by it as interest at the rate of 12 per cent per annum on the late payment of gas development surcharge to the Federal Government and Rs. 39.916 million paid by its as financial charges/interest at an average rate of 14 per cent per annum on the late payment of gas price bills to five gas supply companies for the Income Tax assessm ent year 1997-1998. The Supreme Court in the given circumstances held as under:- "Above two sums were paid by the petitioner to the Federal Government and to the gas companies in connection with its routine business expenses and if such expenditure had not been made, it might have resulted in suspension of the gas supply and cancellation of the agreement between the petitioner and gas companies. Considering that said sums were paid in the interest of business and to avoid further losses, it may not be out of place to observe here that the petitioner is stated to have saved a large amount by making delayed payment of the development surcharge on the gas supply and gas price and the huge amount so saved was used for carrying out the business.
Section 3(3) of said Ordinance stipulated that interest at the rate of 12% would be payable on any amount due if the amount was not paid within the time specified for such payment. The above provision of law does not say that penalty shall be imposed but states that interest shall be payable on any amount due if the amount is not paid within the specified time for such payment. It may be pertinent to observe that penalty is to be levied or a fine is to be imposed on account of any criminal infraction/violation of the provision of law but in the instant case interest/compensation for delayed payment has been provided in the statute as well as in the agreement, therefore, it may be non-compliance with contractual obligation on the part of die petitioner to make additional payment as interest or compensation for late payment, but it could not be said to be violation or infraction of criminal law, therefore, such payment cannot be termed as a penalty or penal interest having regard to the fact that payments were made for the purpose of carrying on business to enable the petitioner to carry on and earn profit in business, and if the payment had not been made, the petitioner could have suffered losses."
10. In view of the above, the late payment charges paid by the appellant did not fall within mischief of the clause (g) of Section 21 of the Income Tax Ordinance and thus could not be disallowed. The appeal thus merits acceptance to the extent of the question of late payment charges which in result is accepted.