1. The appellant through this appeal has assailed the order of the learned IAC dated 08-04-2000 passed u/s 66A of the Income Tax Ordinance 1979 on the grounds that the learned IAC has erred:-

(i) in observing that the interest income has not accrued on the instruments issued by the payer Company and has not attracted the provision of Section 50(7D) of the Ordinance,

(ii) in directing that assessment be made afresh under the normal provisions of the Ordinance in respect of interest income of Rs.1,560,368/-

(iii) in adjudicating that the order passed under section 62 of the Income Tax Ordinance, 1979 is erroneous and prejudicial to the interest of Revenue.

2. Brief facts leading to this appeal are that return showing a loss of Rs.29,923/- was filed alongwith computation of income, tax liability and other documents. The assessing officer sent a notice in accordance with law u/s 61, in response to that notice representative of the assessee attended and furnished the necessary details asked by the assessing officer. The assessee declared income from the following sources:-

i) Dividend from N.I.T and other limited companies

ii) Interest /mark-up income.

iii) Property income.

The assessee also furnished before the assessing officer proof of Zakat, Wealth Tax. The assessee claimed following incomes u/s 80-B of the income Tax Ordinance, as a separate block of income for which statement u/s 143B has also been filed.

Divident from:-

1. NIT Rs. 38,300
2. Sana Industries Ltd., Rs. 20,00,000
Total dividend income Rs. 2,048,300
Mark-up from Taqees (Pvt) Ltd. Rs. 1,560,368
Total income declared u/s 143B Rs. 3,608,668
Tax payable on above @ 10% Rs. 360,867
Less tax paid Rs. 360,867
Balance payable Rs. NIL

The assessing officer has computed the income as follows:-

TAXABLE INCOME

1. Property income Rs.58,560
Less: 1/5th for repairs Rs. 11,712
Property taxes paid Rs. 5,138
Wealth tax Rs. 13,583
Rs. 30,433 Rs. 28,127

Less: Zakat deducted Rs. 58,050
Total loss Rs.(29,923)

The learned IAC issued a show cause notice u/s 66A which was replied by the assessee in detail but the assessing officer after considering the reply found that the reply is unconvincing for the following reasons:-

"(i) The history of the assessee's case reveals that the assessee has been advancing loans to the companies under consideration and proper accounts in the ledgers of the company have been maintained during the previous years. The interest earned by the assessee was assessed u/s 80-B of the Income Tax Ord., 1979 upto assessment year 1996-97. It was only w.e.f. assessment year 1997-98 that the assessee declared such interest income not from account maintained with the company but from the demand promotes on account of loans given to the companies. It was with the sole reason that due to the introduction of amendment in Finance Act, 1996 that the interest earned from loan advanced to the companies through account maintained with the Company were taken out of the ambit of Section 80-B and the tax rate was revised through Finance Act, 1997 on such interest income.

(ii) The declared interest income from Demand Promote is actually an after through of the assessee to avoid proper tax on interest earned under normal law and to avail the benefit of lesser rate of tax u/s 80-B while actually the assessee had advanced loan to the company as before i.e. before the introduction of amendment in Section 80-B and First Schedule to the Income Tax Ordinance, 1979.

(iii) The assessee has still maintained account with the company but only against loan received on different dates has been mentioned as Demand Note issued. The perusal of the account maintained with M/s. Taqees (Pvt.) Ltd. Tranpires that an amount of Rs.96,90,000/- was advanced by the assessee to the Company on 29-05-1996 through one voucher No. uv-201-040 as under:-

Date Voucher No. Amount
29-5-1996 UV-201-040 Rs. 5000
-do- -do- Rs. 263,000
-do- -do- Rs. 6000
-do- -do- Rs. 105,000
-do- -do- Rs. 25,000
-do- -do- Rs. 105,000
-do- -do- Rs. 5,000
-do- -do- Rs. 5,000
-do- -do- Rs. 266,000
-do- -do- Rs. 5,000
-do- -do- Rs. 900,000
Total Rs. 9,690,000

Actually the assessee advanced loan to the company at Rs. 96,90,000/- on 29-5-1996 but the amounts were split into small pieces according to the payments received by the assessee on different dates. Otherwise there can be no reasons for issuance of so many promotes on the same date and that also for so smaller amounts like Rs. 5,000/- and Rs. 6,000/- and that too on very odd dates. This is only and arrangement made by the assessee in collusion with the company since the assessee is shareholder family member of the directors of the Company.

iv) The perusal of account maintained with the company further transpires that the amount of interest was not paid on maturity of promotes since on maturity the principal amount was returned to the assessee by the company but no payment of interest was made. The amount of interest as on 30-06-1996 was charged at Rs.128,040/- and credited to the account of the assessee but no payment was actually made. Similarly, again an amount of Rs.1,187,255/- was credited to the account of the assessee as interest on 30-6-1997 but the payment was made on 30-9-1997 at Rs.2,123,059/- and income tax was deducted at Rs.48,295/- which is not even 10%.

The perusal of Demand Promote clearly transpires that the principal Amount alongwith the interest amount was to be paid on the mentioned date and the stamp on Demand Promotes is also with the narration as under:

Cancelled
Payment made on
Date
Name of Company
Authorized Signatures

It is quite strange that the principal amount of Promote is returned to the assessee without the mark up while at the time of payment of principal amount, the amount of interest should have also been paid to the assessee because at the time of maturity of the Promote, the principal and the mark up should have been settled as it was finally settlement, it the mark up is not paid, it clearly leads to the inference that it is actually the account maintained by the assessee with the company to earn profit on loan advanced.

The amount of interest also remained with the Company for a lot of period. It is further strange to note that even mark up on small amount of Rs. 5,000/- has been charged while a big amount of interest remained with the Company without any interest.

In view of the above mentioned facts it is quite clear that this is only an arrangement made by the assessee in collusion with the company which is a Private Limited Company and the assessee is family member of the directors/share holders of the Company to avoid higher rate of tax under normal law and to avail the benefit of lesser rate of tax u/s 80 (7D) as in after thought."

3. Keeping in view the above mentioned reasons the learned IAC has held that the interest received by the assessee is from account maintained with the company assessable under normal law and therefore the assessing officer has wrongly assessed u/s 80-B of the Ordinance and he has therefore modified the assessment order by taxing the interest income amounting to Rs. 5,01,129/-

4. Mr. Irfan Sadat Khan, Advocate learned representative of the appellant has contended that the order u/s 66A is bad in law as the learned IAC has initiated the proceedings on the basis of a totally incorrect assumption. He submitted that the IAC issued the show case with the view that the company, which has paid the interest/mark-up to the appellant has deducted the tax at source u/s 50(2A) of the Ordinance and since the word 'company' is no more in the statute book hence the order passed by the DCIT is erroneous in so far as prejudicial to the interest of revenue. Whereas the amounts were advanced through a legally and properly executed instruments of debt which fall under the category of Section 50(7D) of the Ordinance and hence the very initiation of proceedings under section 66A of the Ordinance are liable to be vacated. Learned A.R. has further submitted that the learned IAC inspite of the fact that complete detail with regard to the instruments of debt issued by Taqees (Private) Limited was given to him has totally failed to appreciate this aspect and has proceeded on the basis of an erroneous assumption, which is totally lacking in the present case. He also produced before us the copy of the letter dated 5th May, 1999 which was filed in response to the show cause notice issued by the IAC. The learned counsel further submitted that amounts sere in fact advanced through instruments of debt/demand promissory note and the tax to be deducted at source on the interest/mark up accrued on such instruments clearly falls under the category of Section 50(7D) of the Ordinance. According to the learned A.R., learned IAC thus totally failed to appreciate this aspect especially in view of the fact that not a single word about the genuineness or the legal sanctity of these instruments have been advanced either by the DCIT or the learned IAC, which clearly proves beyond any shadow of doubt that these instruments of debt/demand promissory notes were accepted as such by the department. Hence when these instruments were accepted by the department treating the interest accrued on these instruments to be income from other sources is simply illegal and uncalled for. Mr. Irfan further submitted that the word "company" was omitted from section 50(2A) of the Ordinance only vide Finance Act, 1995 whereas these amounts were advanced much before the promulgation of the said Act i.e. on 29th May, 1995 and hence how could the appellant be aware of the fact that what amendment is being proposed in the forth coming Finance Act/Ordinance. Hence according to him, the observation of the learned IAC that the amounts were advanced with a pre-conceived notion and there was a collusive arrangement between the company and the appellant is simply uncalled for. Learned counsel contended that the learned IAC was totally incorrect to state that upto assessment year 1996-97 the interest earned by the appellant was assessed u/s 80B of the Ordinance, whereas in fact no amount prior to the year under consideration was given to Taqees (Private) Limited it was only in the year under consideration that the amounts were advanced to the said company under a financial arrangement through instruments of debt/demand promissory notes, the genuineness of which has not been questioned by the department. He has submitted that the prior to the year under consideration some different amounts were advance to some other companies which was being assessed as a separate block of income as per Part-I (CC) (c) of the First Schedule to the Ordinance which is still being made with those companies by the appellant. Learned counsel has invited out attention to Section 80B(2)(c) of the Ordinance which states as under:-

"interest or profit on which tax is deductible under sub-Section (7D) of the Section 50"

He has submitted that Section 80B starts with the words "Notwithstanding anything contained in this Ordinance" i.e. it is non-obstinate clause and any income falling under this category will not be governed under any other Section of the Ordinance. According to him, as the tax deducted u/s 50(7D) of the Ordinance clearly falls under this category hence the learned IAC was not correct in observing that the mark-up/interest accrued through these instruments of debts/demand promissory notes fall under the category of income from other sources. Mr. Irfan has argued that the learned IAC has wrongly termed the said arrangement by the appellant to be an affair of avoidance of tax. Elaborating his view point he submitted that first of all the above arrangement is a simple advancement of monies through instruments of debts/demand promissory notes falling under section 50(7D) of the Ordinance and secondly if there was a motive to avoid the tax, the avoidance of the tax is a legally permissible device. According to learned A.R., same position exists in succeeding year also and no adverse inference has been drawn by the department, Learned counsel has also placed reliance on certain reported decisions which are as under:-

"(1969) 20 Tax 51 (Trib). In this case, it has been held by this Tribunal that the Prejudicial to the interest of revenue and erroneous are two independent conditions and, to reopen the case u/s 66A two conditions are to be simultaneously fulfilled. (1984) 49 Tax 34 (H.C.AJ&K). In this case it has been held that the provisions of Section 66A are supervisory in nature and it was incumbent upon the IAC to determine that an order sought to be interfered was erroneous and prejudicial to the interest of the revenue. Through this decision it has been explained that the erroneous means deviated from the law and it was a condition precedent to declare the order erroneous by reference to definite violation or deviation from law. In a case reported as 1997 PTD 2014 (Trib.), it has been held that merely on a change of opinion of the Higher Authority assessment framed could not be reopened. Learned counsel for the appellant in support of his contention has placed before us for consideration the following reported decisions also:-

(1) 1965 Taxation 87 (Trib);
(2) (1988) 75 Tax 50 (Trib.);
(3) (1993) 67 Tax 51 (S.C.Pak).

In these decisions it has been held that the legal avoidance of tax is permissible and the avoidance of tax is not evasion and it carries no ignominy with it. The avoidance of tax in legal manner is not evasion or malafide, and that tax avoidance occurs when a person in any legitimate manner as provided by law adopts a course by which the tax liability is reduced or eliminated. In doing so the assessee seeks his remedy and mechanism within the provisions of law. In view of the above arguments, learned A.R. has prayed that the order framed by the learned IAC is in fact erroneous and is liable to be vacated.

5. On the other hand, Mr. Qamaruddin, learned representative of the Department is supporting the impugned order of the learned IAC. According to him, learned IAC has given sufficient justification for the treatment meted out by him.

6. We have heard learned representatives of both the parties and have also perused the impugned order of the learned IAC passed u/s 66A, the assessment order, the relevant case law and the refereed cases. We have found that the assessee in this case has furnished a statement u/s 143B of the Income Tax Ordinance 1979, wherein the disputed interest income amounting to Rs. 15,60,368/= with that of tax deducted has already been declared by the assessee and the learned counsel for the appellant has fully convinced us that the assessee has not done anything outside impact of the provisions of law. We have found that the very initiation of the proceedings by the learned IAC appears to be incorrect as he has proceeded on the basis of the erroneous assumption that the tax on the amounts advanced by the appellant falls under the category of Section 50(2A) of the Ordinance and when the word "company" has been omitted vide Finance Act, 1995 the said mark-up on the amounts advanced falls under the head income from other sources whereas the said amounts were advanced through instruments of debt/demand promissory notes the deduction of tax of which falls under the category of Section 50(7D) of the Ordinance, which has rightly been declared so by the appellant. When the department has not challenged/questioned the genuineness of the instruments of debts/demand promissory note issued to the appellant but the charging of tax of these instruments clearly falls under Section 50(7D) of the Ordinance and the tax deducted at source on these instruments also clearly falls under Section 80D of the Ordinance. We also do not agree with the observation of the learned IAC that the above said arrangement is collusive as, firstly the amounts were advanced much before the omission of the word "company" in Section 50(2A) of the Ordinance vide Finance Act, 1995 and hence it could not be said that it is an after thought on the part of the appellant, that when an amendment was made in the law the amounts advanced were given a new nomenclature, and secondly prior to the issuance of instruments of debts/promissory notes no amounts were advanced to Taqees (Private) Limited. We also do not agree with the view of the learned IAC that the said arrangement was for the avoidance of tax, had it been so, avoidance of tax is a permissible device by which an assessee intelligently so arrange his/her affairs in a manner to lessen the brunt of tax in a legal manner. Reliance in this regard is placed on the decision of this Tribunal reported as (1993) 67 Tax 51 (S.C. Pak.) wherein, it has been held by the Hon'ble Supreme Court of Pakistan that:

"Evasion with reference to taxation laws means to illegally manipulate things in such a manner that the tax payable under law cannot be assessed. By an act of Evasion of tax or duty is always in breach of the applicable and binding law. In taxation law evasion will mean adoption of such deceitful mechanism and manipulation not permitted by law which may result is reduction or elimination of legal tax liability. In the field of taxation. Tax avoidance and tax evasion are two different terminologies conveying completely different meaning. Tax avoidance occurs when a person in legitimate manner as provided by law adopts a course by which the tax liability is reduced or eliminated. In doing so the assessee seeks his remedy and mechanism within the provisions of law. In aruna v. State of Mairas 55 ITR 642 relying on Latilla v. IR 11 ITR Suppl. 78 (HL) and Howard v. IR 25 TC 121. it was observed that 'avoidance of tax is not tax evasion and it carries no ignominy with it. For it is sound law and. Certainly not bad morality for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum'. Avoidance of tax by adopting legal methods will not amount to evasion of tax. But the moment avoidance is sought by illegal contrivance, deceitful methods and adopting a course not permissible in law it turns into evasion".

We have perused the above findings of the learned IT(A) and we are of the considered view that even if the arrangement of instruments was collusive but was permitted under the law there is no bar under the law for such arrangements. As the avoidance of tax is a permissible device by which an assessee intelligently so arrange his affairs in a manner to lesser the brunt of tax in a legal manner and learned IAC was not justified to invoke jurisdiction u/s 66A as the assessment made on the basis of such instruments was not erroneous.

Moreover, the record of the department reveals that no adverse inference in respect of the above matter has been drawn by the department in succeeding years rather the department has even made the assessments under Section 62 of the Ordinance for the years 1998-99 and 1999-2000, as it has been contended before us by the learned counsel for the appellant. In view of the facts and circumstances narrated above the order passed by the learned IAC u/s 66A of the Ordinance, is hereby vacated and that of order passed by the DCTT is restored.

7. The above appeal is allowed in the manner indicated above.


SD/-
INAM ELLAHI SHEIKH
CHAIRMAN

SD/-
JAWAID MASOOD TAHIR BHATTI
JUDICIAL MEMBER.