Encashment of bank guarantee" for breach of contract by the assessee

Citation Name : 2017 PTD 2054 SUPREME-COURT
Side Appellant : COMMISSIONER OF INCOME TAX, KARACHI
Side Opponent : HASSAN ASSOCIATES (PVT.) LTD.
S. 23(1)(xviii)---Permissible deductions falling within the purview of S. 23(1)(xviii) of the Income Tax Ordinance, 1979 [since repealed]---"Encashment of bank guarantee" for breach of contract by the assessee---Damages or compensation paid in the course of carrying on business---Scope---Assessee-company was awarded a construction contract by Provincial Government subject to furnishing of a performance bond (bank guarantee)---Provincial Government encashed the bank guarantee for alleged breach of contract by the assessee---Assessee claimed the said amount as expenditure in the income tax return filed for the relevant assessment year and also filed a civil suit against such encashment---Income Tax Officer disallowed the said amount as expenditure and added it to the respondent's income on the ground that it (the amount) was recoverable from the Provincial Government---Legality---Any expenditure incurred as a penalty or fine paid on account of an infraction, breach or violation of law would not be allowed to be an expenditure laid out wholly or exclusively for the purpose of the business of the assessee---Whereas any amount paid as damages or compensation was an expenditure laid out wholly or exclusively for the purpose of the business of the assessee---Said amount was a revenue loss incurred in the course of carrying on of the business and therefore an admissible deduction under S. 23(1)(xviii) of the Income Tax Ordinance, 1979---In the present case, the contract was executed between the assessee and the Provincial Government, in connection with the business of assessee, who failed to perform its part of agreement, as such the Provincial Government encashed the performance bond---Encashment of bank guarantee could at best be considered to be damages or compensation paid to the Provincial Government for unsatisfactory performance of a contract by the assessee which was a revenue loss incurred by the latter in the course of carrying on its business---Transaction between the parties was purely a business transaction and there was no infraction or violation of any law whatsoever---Forfeiture of an amount under a contract could not be equated with a fine or penalty incurred due to infraction or violation of any law---Further, the civil suit filed by the assessee against the Provincial Government having been dismissed, amount in question was no more adjustable---High Court had rightly set aside the judgments of the fora below and allowed the amount in question as permissible deductions falling within the purview of S. 23(1)(xviii) of the Income Tax Ordinance, 1979---[Commissioner of Income Tax v. Premier Bank of Pakistan [1999 PTD 3005 = 1999 SCMR 2013], held not applicable].

Citation Name : 2017 PTD 2054 SUPREME-COURT
Side Appellant : COMMISSIONER OF INCOME TAX, KARACHI
Side Opponent : HASSAN ASSOCIATES (PVT.) LTD.
S. 23(1)(xviii)---State Bank of Pakistan Foreign Exchange Manual, Chap. 13, Para. 44---Permissible deductions falling within the purview of S. 23(1)(xviii) of the Income Tax Ordinance, 1979---Scope---Fine/penalty imposed for violation of a law---State Bank imposed a penalty on the respondent-company (assessee) in terms of Para. 44 of Chap. 13 of the (State Bank of Pakistan) Foreign Exchange Manual---Respondent (assessee) claimed the said amount as an expenditure in its income tax returns, however, the Assessing Officer refused to allow the same on the ground that such amount was a penalty incurred on account of infraction of law and was thus an impermissible deduction---Respondent (assessee) contended that the State Bank charged an 'interest' and not a fine or penalty under any law---Validity---Any expenditure incurred as a penalty or fine paid on account of an infraction, breach or violation of law would not be allowed to be an expenditure laid out wholly or exclusively for the purpose of the business of the assessee---Perusal of Para. 44 of Chap. 13 of the (State Bank of Pakistan) Foreign Exchange Manual showed that amount payable under the same was not a mere interest or additional amount demanded by the State Bank, rather the word used therein was" fine" which was akin to a penalty---Foreign Exchange Manual contained the basic regulations issued by the Federal Government and the State Bank under the provisions of the Foreign Exchange Regulations Act, 1947, therefore, it had the force of law and any violation thereof would entail the penal consequences provided therein---Since the respondent failed to comply with the provisions of the Manual, a fine was charged at the prescribed rate; it was essentially a fine for infraction of the law, and not damages or compensation for breach of a contract---Assessing Officer had rightly treated the amount paid as a penalty and an impermissible deduction in terms of S.23(1)(xviii) of the Income Tax Ordinance, 1979---[Commissioner of Income Tax v. Premier Bank of Pakistan [1999 PTD 3005], held applicable.

Citation Name : 2017 PTD 381 SUPREME-COURT
Side Appellant : COLLECTOR OF CUSTOMS, CUSTOM HOUSE, KARACHI
Side Opponent : Syed REHAN AHMED
S. 194-C(2) & (4)---Customs Appellate Tribunal ("Tribunal")---Chairman or other Member of the Tribunal, authorized by the Chairman, sitting singly and deciding a case---Scope---Chairman or Member of Tribunal could decide a case sitting singly provided that such Member or Chairman was already a member of a Bench constituted by the Chairman under S. 194-C(2) of the Customs Act, 1969 and the case must have been allotted to such Bench---Such Member (or Chairman) could only decide such cases sitting singly where, the value of the goods confiscated without option having been given to the owner of the goods to pay a fine in lieu of confiscation under S. 181 did not exceed five million rupees; OR, in any disputed case, the difference in duty or tax or the duty or tax involved or the amount of fine or penalty involved did not exceed five million rupees---Decision by the Chairman to allow himself or any other member of a Bench to sit singly to dispose cases falling within the ambit of S. 194-C(4) should not be as a matter of course or right, rather should be done upon proper application of mind by the Chairman who shall himself make such decision, and not delegate it to any other officer to undertake as an administrative action---Chairman was obliged to examine the circumstances warranting the decision of letting him or another member of a Bench to dispose of a matter sitting singly before taking such step. [Director, Intelligence and Investigation (Customs and Excise), Faisalabad and another v. Bagh Ali (2010 PTD 1024) held to be good law].