This Tax Reference along with connected PTR No.246 of 2004 are arising out of common order dated 16-4-2003 passed by erstwhile Income Tax Appellate Tribunal ("Appellate Tribunal").
2. On assessee's application for reference, Appellate Tribunal has referred following question of law for our opinion:- "Whether under the given facts and circumstances, "penal interest" for non-payment of loan amount outstanding constitutes "admissible expenditure" under section 23(1) (xviii) of the repealed Income Tax Ordinance, 1979?"
The questions, which were dropped by the Appellate Tribunal, are moved for our opinion by assessee in PTR No.246 of 2004. However, learned counsel for the assessee has pressed questions Nos.(ii) and (iii) only, which are reproduced hereunder:- "(ii) Whether the learned Tribunal was legally justified in up holding assumption of jurisdiction under section 66-A of the repealed Income Tax Ordinance, 1979 by the respondent Commissioner?
(iii) Whether the disallowance of penal interest/ additional mark up by the learned Tribunal in the applicants case, is not violative of law enunciated by the Hon'ble Supreme Court of Pakistan in the decision cited as (2001) 83 Tax 113 (S.C. Pak)?
3. Facts necessary for disposal of these cases, are that order under Section 62 for assessment year 1978 was cancelled by Commissioner, Special Zone, Lahore, exercising powers of the IAC under Section 66A of (repealed) Income Tax Ordinance, 1979. After cancelling the order, case was remanded to Assessing Officer for the reason that he had wrongly allowed expense of penal interest/additional mark-up charged by NDFC for non-payment of loan amount outstanding against the assessee. In his opinion, the penal interest/ additional mark-up was consequence of infarction of law, which was not admissible deduction under Section 23(1), being not relating wholly and exclusively for the purpose of business. For this opinion, he had placed reliance on a judgment by august Supreme Court of Pakistan in Commissioner of Income Tax v. Premier Bank Limited, Karachi 1999 SCM R 1213. This order was unsuccessfully assailed before the Appellate Tribunal. The Appellate Tribunal upheld the action under Section 66A by Commissioner, Special Zone as well as reasons given for the order to disallow penal interest/ additional mark-up.
4. Learned counsel for the applicant has relied on another judgment by august Supreme Court of Pakistan reported as Sui Southern Gas Company Ltd. v. Commissioner of Income Tax, Companies- V, Karachi PLD 2001 SC 201, to submit penal interest charged as consequence of criminal infarction/violation of the provision of law is to be disallowed. He. Explains that additional mark-up charged in this case was not result of any criminal infarction of a principle of law. Adds that the additional mark-up was charged as a result of re-scheduling of loan which was reversed in subsequent years by NDFC and was duly offered for taxation in the relevant returns. Learned counsel for the department has supported the order by Appellate Tribunal and submits that case was remanded by Commissioner, Special Zone, after cancelling order under Section 62, to the Assessing Officer for verification whether penal charges were result of infarction of any provision.
5. Heard, record perused.
6. The submission made by learned counsel for the respondent is examined first. Relevant part from the order of Commissioner, Special Zone, under Section 66A is reproduced hereunder:- "5. For reasons discussed above, it is held that the allowance of penal interest by the assessing officer in violation of law has rendered the assessment erroneous in so far as it is prejudicial to the interests of revenue. The same is hereby cancelled with the, direction to the assessing authority to examine the issue of penal interest afresh with reference to its quantum as well as judgment of the Supreme Court of Pakistan quoted supra. Correspondence between the NDFC and the assessee should also be thoroughly examined while working out the exact amount of penal interest to be added to the income of the assessee. Needless to say that the assessee must be given adequate opportunity to plead its case before making assessment under sections 62/66A of the Income Tax Ordinance, 1979." (emphasis supplied)
7. The underlined part of the reproduced order shows that Commissioner was not confident about its opinion that penal interest/ additional mark-up was a result of infarction of law.
8. Though Appellate Tribunal has discussed the fact of reimbursement of the charged penal interest/additional mark-up, yet its effect on merits of case were not dilated upon.
9. Perusal of record supports the submission by learned counsel for the assessee that charging of additional mark-up was a result of financial arrangement based on agreement between assessee and NDFC.
In our opinion, the Appellate Tribunal as well as Commissioner, Special Zone, had relied upon the judgments by superior courts without ascertaining the fact about infarction of law.
10. It is settled principle of law that for invoking provision of Section 66A, the authority has to show that the order was erroneous as well as prejudicial to the interest of revenue. In our opinion, Commissioner, Special Zone, was not certain about erroneousness of the decision, as is reflecting from reproduced part of his order. The admitted fact of reversal of the mark-up in question, which was duly offered for taxation in subsequent years, also shows that no prejudice was caused to the revenue. Provisions of Section 66 are not invokable, if one of the ingredient is missing but in the instant case both ingredients were not available to the Commissioner, Special Zone.
For what has been discussed above, our answer to question proposed in the instant case, is in Affirmative and questions proposed in PTR No.246 of 2004 are in Negative. The questions are answered against the department. This Tax Reference along with P.T.R. No.246 of 2004 are decided in favour of the applicant assessee.
11. Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per Section 133(5) of the Income Tax Ordinance, 2001.