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I.T.As. Nos. 1297 to 1300/KB of 1982-83; I;T.A. No. 1335/KB of 1982-83, decided on 26th June, 1986 and M.A. No. 30/KB of 1986-1987, decided on 14th March, 1987.
---S. 23---Appeal--Commissioner of Income-tax (Appeals) allowing expenses "keeping in view the past record of the appellant" and ordered deletion of add-backs--Appeal, held, was disposed of by Commissioner, in a very cursory manner which Gave impression that he did not apply his mind fully to all the relevant facts.
---S. 23--Assessee a pharmaceutical company claimed advertising expenses which included expenses incurred on samples, give-sways and market research--Such expenses resulting in tremendous rise in sales of assessee--Assessee offered and was in a position to give exhaustive list of all recipients of samples and give-sways and such expenses were not unverifiable--Deletion of add-backs in respect of such expenses, held, was justified in circumstances.
---S. 23--Assessee, a pharmaceutical company incurring expenditure in making doctor to doctor, pharmacist to pharmacist contact to find out trend in prescription of medicines--Such expenditure being an expenditure on acquiring technical knowhow about market conditions so as to regulate the immediate supply of particular medicines in particular area, or to increase or reduce promptly visits of their representatives in particular areas or zones according to the result of such survey, held, were not expenses of the capital nature and thus were allowable.
C.I.T. v. S.L. & Maneklal Industries Limited (1978) 37 Tax 358 and Time Aids (India) Private Limited v. C.I.T. 1980 PTD 441
---S.23--Drugs (Licensing, Registering and Advertising) Rules, 1976, R.33--Expenditure on advertisement as provided by R.33 being 5% of turn over amount spent in excess of 5%, held, was rightly disallowed.
C.I.T. v. Alpha Insurance Company P L D 1981 S C 293 distinguished.
1981 P T D (Trib.) 71 ref.
---S.23(xviii)--Expenditure incurred in contravention of any law- Expenditure incurred wholly and exclusively for the purpose of business of assessee how to be determined--Powers of Income-tax officer detailed with illustrations.
An expenditure incurred wholly and exclusively for the purposes of a business of an assessee is a permissible deduction under section 23 (xxviii) of the Income-tax Ordinance. It may, however, be claimed under following circumstances:-
(1) Where, the business is lawful and expenditure is also lawful;
(2) Where business is unlawful and expenditure is also unlawful;
(3) Where business is lawful but expenditure is unlawful;
(4) Where business is lawful but expenditure is unlawful and the assessee is ignorant of it; and
(5) Where business is lawful but expenditure is unlawful and the assessee is aware of illegality of such expenditure.
The question as to whether expenditure has been incurred wholly and exclusively for the purposes of business falls exclusively within the jurisdiction of the income-tax officer. HP is not supposed to sit idle and wait for verdict of guilty returned by a criminal Court, which is, indeed, governed by technical rules of evidence. It is within the exclusive power of the Income-tax Officer to decide as to whether any expenditure is in contravention of any law and thus cannot be treated as an expenditure incurred wholly or exclusively for the purposes of business. By this, it does not mean that the Income-tax Officer is vested with the power of conducting a criminal trial to find out whether an assessee has committed an offence for which a particular fine is prescribed. The expenditure claimed by an assessee can be looked into from the two different angles. In the first case, an assessee might have been tried for violation of some law and some penalty might have been imposed on him by way of fine. If such an assessee claims the amount of fine paid by him as an expenditure, the Income-tax Officer would rather accept the finding of the Court or other competent authority empowered to inflict such fine and disallow it was an expenditure arising out of contravention of some law. But there might be other type of cases in which some amount is claimed as, an expenditure but the assessee has neither been convicted nor fine imposed, yet the expenditure, without any further proof, appears to be in contravention of some law. The Income-tax Officer should not wait for a verdict of guilty from any Court or competent authority. Thus, when any question arises whether an assessee has incurred an expenditure wholly or exclusively for the purposes of his business, it is for the Income-tax Officer and Income-tax Officer alone to answer it in context of and with reference to all the evidence available on record and the attending circumstances including the order of any Court or other authority if any. When Income-tax officer is called upon to decide as to whether an expenditure is incurred wholly and exclusively for business purposes, he is required by law not to allow that expenditure which is incurred in contravention of some law, though it might have been strictly incurred wholly and exclusively for the purposes of the business. Income-tax Officer has power to disallow such expenditure and it was not necessary that it should have been quantified by a Court or competent authority.
Any expenditure incurred in contravention of law cannot be deemed to be wholly and exclusively for the purposes of the business.
It is not understandable as to how an expenditure in violation of law would be deemed to have been incurred wholly and exclusively for the purposes of business and would be allowed, but if the assessee is convicted and fined then only fine would not be allowed as it would be deemed to have been incurred in contravention of some law, hence not incurred wholly and exclusively for business purposes.
There might be cases where penalties provided for contravention of any law might neither be imprisonment nor fine. For instance, if an assessee exceeds the prescribed limit of expenditure, it commits an offence and only its licence might be suspended or cancelled and there is 'no likelihood Of any imposition of fine yet the contravention of law could very 'easily be found out by reading the relevant Act and the Rules framed: thereunder and the account books of the assessee.
Though the orders and decisions of a Court or other competent authority command great respect of an Income-tax Officer yet the law has given him power to decide an issue on the evidence available before him, including the decisions and orders of such Courts or competent authorities. One has to keep into consideration that the Income-tax Officer is not governed by the technical rules of evidence though he has to follow the principles of natural justice.
The Income-tax Officer found that the assessee had incurred certain amount of expenditure in violation of the relevant rules. He disallowed that much amount, which was in excess of the permissible limit as prescribed by rule 33 of the Drug (Licensing, Registration and Advertising) Rules, 1976. If the competent authority, for any reason, does not take any action under the Rules, it does not mean that such expenditure must be allowed by the Income-tax Officer. The Income-tax Officer has simply to see as to whether the assessee had deliberately or knowingly contravened any provision of law and if he finds that the applicant has spent some money in contravention of any law, he is very much justified to disallow the excessive expenditure.
If an expenditure is in contravention of some law, it would not be deemed to be as an expenditure incurred wholly and exclusively for the purposes of business. Whether it is quantified or not by way of fine by a Court or other authority is a question wholly irrelevant for the purposes. One has not to equate penalty with actual advertisement expenditure but has to look into contravention of law involved while incurring a particular expenditure.
Expenditure in excess of the prescribed limit is itself in actual violation of the law.
C.I.T. v. Alpha Insurance Co. P L D 1981 293 ref.
--S.23 (1) (x)--Bad debt--Held, it was for the Income-tax Officer to determine as to whether any debt had become irrecoverable.
Section 23(1) (X) of Ordinance XXXI of 1979 which is regarding bad debts, lays down that the deduction on account of bad debts written off by an assessee-would be determined by the Income-tax Officer to be irrecoverable. Thus, it is for the Income-tax Officer to determine as to whether any debt has become irrecoverable. Even if an assessee holds a decree of civil Court, which finds that a particular debt is barred by limitation yet the income-tax officer on the basis of evidence before him may hold such debt not to be irrecoverable for the simple reason that the law of limitation merely extinguishes the remedy and not the right.
---S.29 (3)--Market value of capital asset to be determined by Income-tax Officer even if value of such capital asset had already been determined by any other Authority.
Under section 29 (3) of the Income-tax Ordinance, 1979, it is the Income-tax Officer who is to determine the market value of a capital asset, even if the value of such capital asset has already been determined by any other authority. The Income-tax Officer would not be bound by it but on the basis of evidence available to him, he has been given the power to determine it. Supposedly a Court has, held, that a particular property carries a particular market value, but the Income-tax Officer obtains a sale-deed regarding an adjacent property, having exactly the same features but sold on higher price at the same point of time, he may determine the market value which may be different from, the market value arrived at by Court of law.
Amin-e-Ajam, D.R. for Appellant (in I.T.A. No. 1297/KB to 1.T.A. No. 1300/KB of 1982-83).
Mr. Alam for Respondent (in I.T.A. No. 1297/KB to I.T.A. No. 1 0/ K B of 1982-83)
Mr. Alam for Appellant (in Case No.1335/KB of 1982-83).
Amin-e-Ajam, D.R. for Respondent (in Case No. 1335/KB of 1982-83).
Amin-e-Ajam, D.R for Respondent (in Case No. 1335/KB of 1982-83).
Date of hearing: 24th June, 1986.
. --These appeals are arising out of the consolidated order of learned Commissioner of Income-tax (.Appeals) recorded by him on 1st January, 1983, relating to assessment years 1974-75. 1975-76, 1976-77 and 1978-79. The first four appeals have been filed by the Department to impugn the order of learned Commissioner of Income-Tax (Appeals) whereby he allowed advertising expenses to the assessee, hereinafter referred to as "the respondent" in assessment years 1974-75, 1975-76, 1976-77 and 1978-79, to the tune of Rs.1,44,542, Rs.3,35_649, Rs.8,27,306 and Rs.6,11,629 in each year respectively, which were earlier disallowed by the Income-tax Officer. In the departmental appeal for assessment year 1978-79, the direction of the learned Commissioner of Income-tax (Appeals) regarding levy of surcharge has further been agitated. The respondent has challenged firstly the confirmation of disallowance by learned Commissioner of Income-tax (Appeals) of Rs.50,000 out of its claim for repairs and maintenance and, secondly, he has disputed the calculation of the amount of Workers' Welfare Fund. Since common questions of facts and law are involved in all the appeals, we, therefore, propose to dispose them of by this single order.
2. It appears that in assessment year 1974-75 the respondent claimed Rs.3,44,362 as advertising expenses out of which Rs.3,04,135 were claimed as sample expenses and Rs.40.227 were allegedly spent on market research. The Income-tax Officer, however, disallowed Rs.1,44,542 out of the total claim, viz. Rs.1,04,315 out of the claim of sample expenses and Rs.40,227 out of the claim for market research expenses.
3. In assessment year 1975-76 the appellant claimed advertising expenses to the tune of Rs.8,18,511, viz. Rs.5,66,792 on samples. Rs.2,32,140 on give-aways and Rs. 19,579 on market research and the I.T.O. disallowed Rs.2,00,000, Rs.1,16,070 and Rs.19,579 out of the respective claims totalling Rs.3.35,640.''
4. In assessment year 1976-77 the advertising expenses claimed amounted to Rs.1,292,669 out of which Rs.9,81,777 were claimed as sample expenses, Rs.2,29,172 as give-aways and Rs. 81,720 as market research. The Income-tax Officer out of these claims disallowed Rs.8,27,306, Rs.6,00,000, Rs.1,45,586 and Rs.81,720, being disallowances out of the claims for samples, give-aways and market research respectively.
5. In assessment year 1978-79 the respondent claimed Rs.3,360,134 as sales promotion expenses but the Income-tax Officer disallowed Rs.6,11,629 on the ground that under Rule 33 of Drug Rules 1978, .the respondent was entitled to spend 5% of the turnover on sales promotion expenses. According to him total advertisement expenses claimed in assessment year 1978-79 amounted to Rs.3,316,134 and 5% of the total gales came to Rs.2,704,505. Thus, if the later amount is deducted from the former, we arrive at the figure of Rs.6,11,629. Regarding surcharge, the Income-tax Officer treated the amount of tax payable as unretained income and levied surcharge accordingly. As far as the respondent's; Maims regarding repairs and maintenance and contribution to Workers Welfare Fund is concerned the Income-tax Officer disallowed Rs.50,nr;o and Rs.1,02,638 respectively.
6. On appeal, the learned Commissioner of Income-tax (.Appeals) allowed all the advertising expenses in all the assessment years "keeping in view the past record of the appellant" and ordered deletion of the add-backs in all the years. Regarding surcharge, the learned Commissioner of Income-tax (Appeals), relying upon a decision of this Tribunal reported as (1979) 40-Tax-47 (Trib.) directed the Income-tax Officer not to levy surcharge on amount of taxes payable. As far as the appeal filed by the respondent is concerned, the learned Commissioner of Income-tax (Appeals) found disallowance of Rs.50,000 in order and confirmed it. Similarly, he found no fault with the working of the workers' Welfare Fund and confirmed his order accordingly. Thus, both the Department as well as respondent have come up in appeal.
7. Mr. Amin-e-Ajam, the learned Departmental Representative, attacking the impugned order vehemently argued that the learned Commissioner of Income-tax (Appeals) did not apply his mind to all the relevant facts obtaining in the relevant assessment years. According to him, he fell in grave error when he took resort to the past record of the appellant and ordered the deletion of the add-backs made by the Income-tax Officer. Mr. Alam, on the other hand, appearing for the respondent vehemently argued that the advertising expenses were incurred wholly and exclusively for business purposes which culminated in giving tremendous push to the sales in all relevant assessment years. Regarding his appeal, Mr. Alam, argued that all the details regarding expenses incurred on repairs were given to the Income-tax Officer and contended the authorised representative, the Income-tax Officer was not justified in disallowing Rs.50,000 without any cogent and convincing reasons. As regards, the working of the Workers, Welfare Fund, he conceded that in view of the decision of the Tribunal reported as (1983) P T D (Trib.) 17 he was not pressing it
8. We have heard both the learned Departmental Representative as well as Mr. Alam, and have also perused the assessment as well as impugned orders. We have no hesitation in observing that the learned Commissioner of Income-tax (Appeals) disposed of the appeal regarding add-backs from advertising expenses in a very cursory manner which has justifiably given the impression to Mr. Amin-e-Ajam that the learned Commissioner of Income-tax (Appeals) did not apply his mind fully to all the relevant facts. As mentioned above, the appellant claimed advertising expenses which included expenses incurred on samples, ' give-sways and market research. We have already given the details thereof. From perusal of the assessment order it appears that for assessment year 1974-75, the Income Tax Officer disallowed a part of the claim firstly for the reason the increase in the expenses was rather disproprotionate and, secondly, because, no receipts were obtained from the Doctors to whom the samples were allegedly given. For assessment years 1975-76 and 1976-77 he disallowed the expenses because money spent on samples had increased from 2.3% of .he turnover to 2.8% of the total turnover. Moreover, according to him, the expenses claimed were excessive as compared to other parallel cases. About the market research he disallowed the claim in all, the relevant assessment years on the ground that it was of capital nature because the expenditure thereon resulted in enduring benefit. Regarding' assessment veer 1978-79, he disallowed Rs.6,11,629 because this amount was in excess of 5% of the total turnover.
9. Starting with the expenses incurred on samples and give-sways we find on record that by its letter dated 19th May, 1977 the respondent informed the Assessing Officer that by virtue of enhanced expenditure on advertising the sales of the respondent had increased by Rs.66,00,000. Similarly, .by its letter dated 13th October, 1977 and 11th December, 1977 it was explained to the Assessing Officer that to obtain a receipt from a busy Doctor was improper and wholly uncalled for. It was further impressed upon him that exhaustive lists of all such Doctors who were given samples or give-sways were possible but would require at least a week because they would be voluminous. There is nothing on record to show that the Income-tax Officer insisted on such receipts to be furnished to him in any case. Thus, it is clear that the expenses on advertising have not only resulted in tremendous rise in sales but the assessee was in a position to give exhaustive list of all recipients of samples and give-sways and was willing to furnish it to Income-tax Officer within a week if he wanted it. As such, the expenditure on samples and give-sways could not be said to be unverifiable. Thus, the learned Commissioner of Income-tax (Appeals) was justified in ordering deletion of the add-backs made in assessment year 1974-75.
10. As far as the assessment years 1975-76 and 1976-77 are concerned, undoubtedly, the expenditure on advertising has gone up. But, at the same time, the sales have also increased appreciably. Moreover, the Income-tax Officer has not cited any parallel case in which such expenses might have been claimed at lower scale. We, therefore, think that the deletion of add-backs in these assessment years is also justified in law and the order of learned Commissioner of Income-tax (Appeals) is confirmed for these years as well.
11. Now coming to the expenses incurred on market research claimed in assessment years 1974-75, 1975-76 and 1976-77, we think that the, Assessing Officer erred in holding it to be expenditure of capital nature. This expenditure has been incurred, as pointed out by Mr. Alam, in making Doctor to Doctor and Pharmacist to Pharmacist contact to find out the trend in prescription of the medicines. To us it appears that it is an expenditure on acquiring technical knowhow about the market conditions so as to regulate the immediate supply of particular medicines in particular area, or to increase of reduce promptly the visits of their representatives in particular areas or zones according to the results oil such survey. We think that this expenditure is allowable in view C.I.T. v. S.L. & Maneklal Industries Limited. (1978) 37 Tax 358, and Time Aids (India) Private Limited v. C.I.T. 1980 P T D 441. We therefore, uphold the order of learned Commissioner of Income-tax (Appeals) regarding deletion of amount spent on market research and added-back by the Assessing Officer.
12. Now turning to the deletion ordered by learned Commissioner of Income-tax (Appeals) in assessment year 1978-79, we are afraid, his order is not sustainable. In fact, he has not considered the issue involved in this year. The Income-tax Officer, as pointed out earlier, disallowed the amount which was in excess of 5% of the turn-over in view of rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976, rules 33 reads:
--No person shall spend more than five per cent of his turn-over on advertisement, sampling and other promotional activities in respect of drugs."
Rule 12 reads as under:
-(1) If a licensee does not comply with any of the conditions of a licence or violates any of the provisions of the Ordinance or the Rules, the Central Licensing Board may, by an order in writing stating the reasons thereof, cancel a licence or suspend it for such period as it thinks fit, either wholly or in respect of some of the drugs to which it relates."
From perusal of this rule, it appears that the Central Licensing Board was vested with the power of cancelling or suspending a licence if it found a licensee violating the provisions of the Ordinance or the Rules. Mr. Alam, however, contended that in view of C.I.T. v. Alpha Insurance Company P L D 1981 S C 293, since the respondent spent the money wholly and exclusively for business purposes therefor, it was rightly allowed by learned Commissioner of Income-tax (Appeals). With due respect to him, in our judgment Alpha Insurance Co's. case (supra) revolves round its own peculiar facts. The Insurance Act and the Rules framed thereunder lay down the procedure for maintenance of the account books of the Insurance Companies as well as the assessment of their profits. It is true that Rule 40-C of the Insurance Rules provided a prohibition against exceeding the management expenses but it was not either absolute or irremediable or punitive. Their Lordships of Supreme Court took it to be a regulatory, supervisory and corrective power exercisable by the Controller of Insurance and in view of this conclusion, held, that the power of the Assessing Authority under Rule 6 of the First Schedule to the repealed Income-tax Act, did not, like Rule 2 of the same Schedule, or on the strength of section 40-C of the Insurance Act and Rule 40 of the Insurance Rules, extended to disallowance of excess management expenses and then concluded that the expenses of management incurred in excess of the limit prescribed under Section 40-C of the Insurance Act and Rule 40 of the Insurance Rules were not in the nature of penalty, fine or forfeiture for the purpose of their admissibility for deduction as business expenses under Section 10 of the repealed Income-tax Act. But, on the contrary, Rule 12 of the Drug Rules provides for the cancellation or suspension of the licence if the licensee violates any of the provisions of the Ordinance or the Rules. Not only that it also provides for an opportunity of hearing before licence is cancelled or suspended and on top of it also grants a right of appeal to the licensee. Thus, the case of Alpha Insurance Co. does not come to the rescue of the respondent. On the other hand, 1981 PTD (Trib.) 71 very much supports the Assessing Officer. This is a case of a Scheduled Bank, which had to pay penal interest to State Bank of Pakistan under section 36 (1) of the state Bank of Pakistan Act, 1956 because of infraction of law. In that case, the point involved was as to whether the penal interest paid by the Scheduled Bank in view of infraction of law was an admissible expenditure. The then President and the present Chairman of the Tribunal speaking for the Bench answered the question against the Scheduled Bank. Respectfully following it we, therefore, vacate the order of learned Commissioner of Income-tax (Appeals) and restore that of the Assessing Officer with the result that in assessment year 1978-79 Rs.6,11,629 would stand disallowed as ordered by the Income-tax Officer.
13. Now turning to the last plea of the Department regarding levy of surcharge, we find that the respondent declared its income in assessment year 1978-79 at Rs.44,24,413 which was, however, assessed at Rs.51,11,220. The Income-tax Officer determined the amount of tax thereon at Rs.25,55,610 and treating it as unretained income levied surcharge amounting to Rs.1,35,281. The respondent felt aggrieved and went up in appeal and the learned Commissioner of Income-tax (Appeals) following the decision of this Tribunal reported as (1979) 40-Tax-47 (Trib.) directed the Income-tax Officer not to levy surcharge on amount of taxes payable. Mr. Amin-e-Ajam, the learned Departmental Representative submitted before us that aforesaid decision of the Tribunal was subject-matter of several Reference Applications in High Court and the Department had filed the appeal in order to safeguard the revenue interest. Mr. Alam, however, relied upon our aforesaid decision. We are unable to find any fault with the order of learned Commissioner of Income-tax (Appeals) as he has done nothing but to follow our direction. His order, therefore, is unexceptionably sound and is hereby confirmed. Thus, all the departmental appeals stand disposed of. In other words, the deletion of advertising expenses by learned Commissioner of Income-tax (Appeals) in assessment years 1974-75, 1975-76 and 1976-77 is hereby confirmed but for assessment year 1978-79 his order is vacated and that of the Assessing Officer is restored. Similarly, his direction regarding levy of surcharge is also confirmed.
14. Now turning to the respondent's appeal, we find that all the necessary details were provided by the respondent to the Income-tax Officer which have also been supplied to us in appeal. As such, he was not justified in making disallowance of Rs.50,000. The learned Commissioner of Income-tax (Appeals) has not gone into all the necessary details. We, therefore, vacate his order and order deletion of Rs.50,000 added-back by the assessing officer. As regards the calculation of Workers' Welfare Fund, Mr. Alam himself has not pressed his this ground in view of our decision mentioned above. Thus, the respondent's appeal also stands disposed of to the extent and in the manner as indicated above.
This Miscellaneous Application has been moved by the applicant, an assessee who was respondent before us in departmental appeals, with the prayer that in our order recorded in I.T.As Nos. 1297 to 1300/KB of 1982-83 recorded on 26-6-1986 we committed an error apparent on face of record which should be rectified under section 156 of the Income-tax Ordinance. In the application the impugned portion of the order of this Tribunal has also been reproduced. Mr. Faizul Alam, the learned Authorised Representative of the applicant argued before us that we have erred inasmuch as we relied upon a decision of this Tribunal reported as 1981 PTD (Trib.) 71 which was never cited at the Bar and with which we never confronted him. It is further submitted that aforesaid decision was not applicable in the case of the applicant at all. Elaborating his arguments further, the learned authorised Representative contended in that case the amount of penalty imposed on a Commercial Bank was claimed to be an expenditure but it was disallowed by the Income-tax Officer and ultimately the disallowance was upheld by the Tribunal. The learned authorised Representative further contended that the authority of our own Supreme Court contained in C.I.T. v. Alpha Insurance Company in P L D 1981 S C 293, was fully applicable under the facts and circumstances of his case and we further erred in not properly appreciating it Mr. Faizul Alam, FCA, summarising his submissions contended that before an Income-tax Officer makes a disallowance he should find-
(1) that there was an infraction of law;
(2) that such infraction of law was punishable with fine;
(3) that such fine was quantified by an authority empowered to impose such fine and
(4) that such fine was paid and then claimed as an expenditure.
2. Mr. Mohammad Farid, the learned Departmental Representative, on the other hand, vehemently argued that the rectification under Section 156 of the Ordinance was permissible if there was an error apparent from the record which required no elaborate arguments and which floated on the surface of the record. According to learned Departmental Representative, the Tribunal after considering all the pros and cons of the dispute allowed the appeal and restored the order of the Income-tax Officer. He, therefore, concluded that such a considered order could not be taken to be consisting of an error apparent on face of record especially when it was allegedly arising out of the appreciation of the case law.
3. We have heard both the learned Authorised and Departmental Representatives at length and have also gone through our decision as well as the rectification application. An expenditure incurred wholly and exclusively for the purposes of a business of an assessee is a permissible deduction under section 23 (xviii) of the Income-tax Ordinance, hereinafter referred to as the "Ordinance". It may, however, be claimed under following circumstances:
(1) where the business is lawful and expenditure is also lawful;
(2) where business is unlawful and expenditure is also unlawful;
(3) where business is lawful but expenditure is unlawful;
(4) where business is lawful but expenditure is unlawful and the assessee is ignorant of it; and
(5) where business is lawful but expenditure is unlawful and the assessee is aware of illegality of such expenditure.
4. Now, as far as the first two categories are concerned, there appears no controversy in existence. Even our own Supreme Court has dealt with these two categories in case reported as C.I.T. v. Alpha Insurance Co. P L D 1981 S C 293. Similarly, as far as category No. (4) is concerned, it deals with rather a mitigating circumstance and is not relevant for our purposes. However, as far as categories (3) and (5) are concerned, we think that the case of the applicant falls under the latter. Mr. Faiz-ul-Alam, FCA, on the other hand contends that whatever be the category the authority which has been given power to impose fine should firstly impose it and if it is claimed as an expenditure subsequently, the Income-tax Officer could disallow it as an expenditure incurred in contravention of law. With due respect to the learned authorise Representative, we do not subscribe to his point of view. We think that the question as to whether an expenditure has been incurred wholly and exclusively for the purposes of business falls exclusively within the jurisdiction of the Income-tax Officer. He is not supposed to sit idle and wait for verdict of guilty returned by a criminal Court, which is, indeed governed by technical rules of evidence. We are of the view that it is within the exclusive power of the Income-tax officer to decide as to whether any expenditure is in contravention of any law and thus cannot be treated as an expenditure incurred wholly or exclusively for the purposes of business. Now by this it does not mean that the Income-tax officer is vested with the power of conducting a criminal trial to find out whether an assessee has committed an offence for which a particular fine is prescribed. In our judgment, the expenditure claimed by an assessee can be looked into from the two different angles. In the first case an assessee might have been tried for violation of some law and some penalty might have been imposed or him by way of fine. If such an assessee claims the amount of find paid by him as an expenditure, the Income-tax Officer would rather accept the finding of the Court or other competent authority empowered to inflict such fine and disallow it as an expenditure arising out of contravention of some law. But there might be other type of cases in which some amount is claimed as an expenditure but the assessee has neither been convicted nor fine imposed, yet the expenditure, without any further proof, appears to be in contravention of some law. Here we do not think that the Income-tax officer should not wait for a verdict of guilty from any Court or competent authority. Thus, when any question arises whether an assessee has incurred an expenditure wholly or exclusively for the purposes of his business, it is for the income-tax Officer and Income-tax Officer alone to answer it in context of and with reference to all the evidence available on record and the attending circumstances including the order ' of any Court or other authority if any.
5. Let us now proceed a step further; when Income-tax Officer is called upon to decide as to whether an expenditure is incurred wholly and exclusively for business purposes, he is required by law not to allow that expenditure which is incurred in contravention of some law, though it might have been strictly incurred wholly and exclusively for the purposes of the business. Mr. Alam concedes that Income-tax Officer has power to disallow such expenditure but he insists that it should have been quantified by a Court or competent authority. With due respect to him we are unable to see any logic in it. In order to she the fallacy of his arguments, we would like to illustrate our point view. Suppose a businessman needs a licence for his business, which could be issued to him if conditions A, B, C and D exist. Suppose his case only conditions A, B and C exist, yet he succeeds in obtaining the licence by greasing the palms of same officers. Now, when claims some expenditure the Income-tax officer makes enquiry and directs him to give the details of the expenditure. The assessee points of that he spent that money on bribing some officers for obtaining to licence. The Income-tax Officer directs him to reveal the names of such officers but he expresses his regrets. When the Income-tax Officer wants him to prove that he actually, spent that money on paying illegal gratification to the officers, he says that under the law the licence could not have been issued if conditions A, B, C and D would not have been in existence but since it has been issued only on existence of conditions A, B and C only, it proves that some officers favoured him. The assessee further contends that circumstantial evidence is proving the payment of illegal gratification. He argues that he spent that money wholly and exclusively for purposes of his business and it should be allowed. Now under these circumstances what the Income-tax Officer should do particularly in view of the fact that on assessee's own showing illegal gratification has been given wholly and exclusively for purposes of his business. Should he allow it as it appears to be proved by circumstancial evidence Our answer is in an emphatic no. We are firmly of the view that giving of bribe is as much an offence as accepting it under the Prevention of the Corruption Act read with section 165A of the Pakistan Penal Code. We would disallow it saying that since it was incurred in contravention of law, it cannot be deemed to be wholly and exclusively for the purposes of the business. But Mr. Alam argues that it should be allowed. According to him, it would be disallowed only when the assessee is convicted with fine for giving illegal gratification and then claims the amount of fine as an expenditure. If his submission is accepted, the expenditure of illegal gratification would in any case be allowed and if the assessee is convicted and fined for giving illegal gratification, only the amount of fine would be disallowed, if claimed as an expenditure. It does not appeal to our reason that an expenditure in violation of law would be deemed to have been incurred wholly and exclusively for the purposes of business and would be allowed, but if the assessee is convicted and fined then only fine would not be allowed as it would be deemed to have been incurred in contravention of some law, hence not incurred wholly and exclusively for business purposes. Moreover, there might be cases where the penalties provided for contravention of any law might neither be imprisonment nor fine. The case of the applicant itself provides an example of such type of contravention of law. Here, if an assessee exceeds the prescribed limit of expenditure, it commits an offence and only its licence might be suspended or cancelled. Here, there is no likelihood of any imposition of fine yet the contravention of law could very easily be found out by reading relevant Act and the Rules framed thereunder and the account books of the assessee.
6. We are also very much fortified in our view by other provisions of the Ordinance. For example, section 23 (1) (x), which is regarding bad debts, lays down that the deduction on account of bad debts written off by an assessee would be determined by the Income-tax Officer to be irrecoverable.' Thus, it is for the Income-tax Officer to determine as to whether any debt has become irrecoverable. Even if an assessee holds a decrees of civil Court which finds that a particular debt is barred by limitation yet the Income-tax Officer on the basis of evidence before him may hold such debt not to be irrecoverable for the simple reason that the Law of Limitation merely extinguishes the remedy and not the right. Supposingly the Income-tax Officer comes across the evidence that the assessee is still having business dealings with his debtors. In such case, in spite of the decree of the Court, he may not allow the deduction. Similarly, under section 29 (3) of the Ordinance, it is the Income-tax Officer who is to determine the market value of a capital asset, even if the value of such capital asset has already been determined by any other authority. The Income-tax Officer would not be bound by it but on the basis of evidence available to him he has been given the power to determine it. Supposingly a Court has held that a particular property carries a particular market value. But the Income-tax Officer obtains a sale-deed regarding an adjacent property, having exactly the same features but sold on higher price at the same point of time. He may determine the market value, which may be different from the market value arrived at by a court of law. What we beg to state by all this discussion is that though the orders and decisions of a Court or other competent authority command great respect of an Income-tax Officer yet the law has given him power to decide an issue on the evidence available before him, including the decisions and orders of such courts or competent authorities. We have to keep into consideration that the Income-tax Officer is not governed by the technical rules of evidence though he has to follow the principles of natural justice.
7. Now, if we consider arguments of Mr. Alam, the learned F.C.A., in context of and with reference to the facts of the case of the applicant, it appears that in its case the penalty provided is neither of fine nor of imprisonment. It rather consists of cancellation or suspension of the licence. In its case, therefore, the amount of fine can never be claimed as an expenditure. As such, his submission does not carry any force. Under the facts of the case of the assessee the Income-tax Officer found that the applicant had incurred certain amount of expenditure in violation of the relevant Rules. He disallowed that much amount, which was in excess of the permissible limit as prescribed by rule 33 of the Drug (Licencing, Registration and Advertising) Rules, 1976. If the competent authority, for any reason, does not take any action under rule 12 of the aforesaid Rules, it does not mean that such expenditure must be allowed by the Income-tax Officer. In our judgment, the income-tax Officer has simply to see as to whether the applicant had deliberately or knowingly contravened any provision of law and if he finds that the applicant has spent some money in contravention of any law, he is very much justified to disallow the excessive expenditure.
8. Now, turning to the arguments of the learned F.C.A. regarding our decision reported as 1981 P T D (Trib.) 71 let us point out that firstly it should have been brought to our notice by the learned FCA himself, which he did not. Secondly, it was not inapplicable as pointed out by Mr. Alam. In that case, a Commercial Bank had been advancing loans in excess of the prescribed limit. This was obviously done by that bank wholly and exclusively for the purposes of its business and with a view to earn more and more profits. However, it was in contravention of the regulations laid down by the State Bank of Pakistan. The loans given in excess of the prescribed limit were detected by the State Bank and a penalty was imposed on the Commercial Bank. The bank surely paid the penalty but claimed it as an expenditure. The question arose as to whether the expenditure claimed was wholly and exclusively for the purposes of the business of the bank Obviously, the loans were advanced for the purposes of the business of the bank but since they were advanced in violation of the law, therefore, the Tribunal held that the amount of the fine imposed by the State Bank was result of contravention of law. Therefore, it was not permissible deduction. It is true that in that case the fine was imposed by the State Bank of Pakistan and the same was claimed as an expenditure. But the common point between the case of the applicant and the aforesaid case is that both spent the money wholly and exclusively for the purposes of their business and contravened the law. The case mentioned above applied in the case of the applicant because of this reason. The fact that in that case the expenditure claimed was the amount of the penal interest does not make it distinguishable in view of the discussion made above. In our judgment if an expenditure is in contravention of some law, it would not be deemed to be as an expenditure incurred' wholly and exclusively for the purposes of business. Whether it is quantified or not by way of fine by a Court or other authority is a question wholly irrelevant for our purposes. We have not equated penalty with actual advertisement expenses but we have looked into contravention of law involved while incurring a particular expenditure. The commercial bank did not claim that amount of loans as an expenditure but the applicant has claimed the expenditure incurred on advertisement etc., as a deduction. In the case of the commercial bank, the penalty was the effect whereas the payment of the advances-loans was the cause. But in the case of the applicant expenditure in excess of the prescribed limit is itself in actual violation of the law and herein lies the similarity in both the cases.
9. As far as Alpha Insurance Co.'s case (supra) is concerned, we have already discussed it at length in our main order and need not dilate on it again. Once again, we reiterate that as far as Alpha Insurance Co's case (supra) is concerned it revolves round its own facts and does not come to the rescue of Mr. Alam.
10. As far as the submission of Mr. Mohammad Farid, the learned Departmental Representative is concerned, we think that such type of mistakes are not mistakes apparent from the record and we should have summarily rejected the application. However, Mr. Alam has not only addressed us at length but also invoked our judicial sense.
Moreover, we also felt that the observations made by us regarding the case, mentioned above, could be misconstrued, we have, therefore, dealt with the entire submissions at length.
11. To conclude, we find no force in this Miscellaneous Application and it is rejected accordingly. However, this order shall make part of the original order recorded in ITAs. Nos. 1297 to 1300/KB of 1982-83 recorded on 26-6-1986.
M.B.A./377/T Order accordingly.
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