I. T. AS. NOS. 92/LB, 93/LB, 147/LB AND 148/LB OF 1990-91, DECIDED ON 28TH NOVEMBER, 1990. VS I. T. AS. NOS. 92/LB, 93/LB, 147/LB AND 148/LB OF 1990-91, DECIDED ON 28TH NOVEMBER, 1990.V
1991 P T D (Trib.) 531
[Income-tax Appellate Tribunal, Pakistan]
Before Abrar Hussain Naqvi, Judicial Member and Mirza Muhammad Wasim,
Accountant Member
I. T. As. Nos. 92/LB, 93/LB, 147/LB and 148/LB of 1990-91, decided on 28/11/1990.
(a) Income-tax---
----Trading additions---Assessing Officer had not found any defect in assessee's accounts and the assessee's debit side had been found in order and the sales were to verifiable parties ---Assessee, held, had not only a good case on legal plane but even on factual ground and Assessing Officer was not justified in making any trading addition whatsoever.
(b) Income-tax---
----Rejection of, accounts---Low sale rate as compared to other parallel cases, held, was not a ground for rejection of accounts and moreso when reason for lower sale rate had been successfully explained by the assessee.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1)(vii) & 12(7)---Deductions---Interest paid on capital borrowed-- Conditions to be fulfilled for allowance of interest so paid.
Following are the requirements of section 23(1)(vii) of the Income Tax Ordinance, 1979 for deduction of interest paid on borrowed capital:--
(1) There should be capital borrowed.
(2) The borrowed capital should be for the purpose of business or profession.
(3) Interest has been paid in respect of the capital borrowed.
If these three conditions are fulfilled the assessee is entitled to the allowance to the extent of interest paid by him.
It has to be noted that in clause (vii) of section 23(1) no such condition had been attached as to how the borrowed capital is to be used. What is required in the above clause is that at the time of the borrowing the borrowed capital should be for the purpose of business. After the borrowing how the assessee uses or utilises the capital this is none of the business of the assessing authority. If the intention of the Legislature was to put a check- on- the assessee as to how the assessee had utilised the borrowed capital after the borrowing, the Legislature would have put more conditions before making the amount of interest as allowable deduction, such as a proviso could be added that "provided the capital borrowed is actually used or utilised by an assessee for business purpose." No such condition has been placed in the aforesaid clause. Once the assessee borrows the capital it is he who has to decide as to how the capital is actually to be used for business preferences. No one thus could dictate the assessee as to how the capital has to be utilized and what are the assessee's business preferences. It is true that such a facility can be misused by an assessee and perhaps it was for this reason that section 12(7) was incorporated in the Ordinance and that if the assessee misuses his facility and re-lends the money borrowed to some other person either free of interest or on a lower interest, the interest not charged or the difference between 2% above the Bank rate and the actual interest charged, could be deemed to be the income of the assessee advancing such loans. Thus, if any person had misused the facility of loan the interest claimed by him under section 23(1)(vii) could not be disallowed on that account but under section 12(7) the income in the shape of the interest not charged by an assessee could be added to the assessee's income. As stated above the proviso has been added to section 12(7) of the Income Tax Ordinance by the Finance Act, 1985 according to which this section 12(7) is no longer applicableafter the assessment year beginning on or after 1st July, 1985. Thus, the Legislature in its wisdom did not feel it necessary to continue to burden the assessee with the income on the basis of interest not charged by an assessee on the advances made by him. After the removal of this burden the assessing authorities cannot charge the interest in the shape of making the disallowance under section 23(1)(vii) of the Ordinance.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 23(1)(vii)---Deductions---Interest on capital borrowed---Assessing Officer was unable to establish that the advances made by assessee to its associated undertakings had been diverted from the capital borrowed---Assessing Officer whatever had stated in his order was a mere suspicion of possibility that part of the borrowed capital might have been used for making advances to its associated undertakings whereas record showed the contrary ---Assessee had shown (though the burden was not on him to prove it) that it had sufficient funds available with it to make advances in the shape of paid-up capital and profit and reserved funds as the interest-fee advances received from the Provincial Government---Record also did not show that assessee had borrowed the capital specifically for the purpose of advancing the same capital to its associated undertakings ---Held, capital borrowed by the assessee was for the purpose of business and there was nothing on the record to support the allegation that the assessee had diverted the borrowed capital for making advances to its associated undertakings.
(e) Income-tax--
----Addback---Assessee had not taken separate and specific ground with regard to each item of the profit and loss disallowances ---Income-tax Appellate Tribunal declined to entertain the ground being vague and not specific.
(f) Income Tax Ordinance (XXXI of 1979)--
----S. 134---Appeal---Where assessee in memorandum of appeal had not taken separate and specific grounds with regard to each item of the profit and loss disallowances, Income-tax Appellate Tribunal declined to entertain them, same being vague and not specific.
Zia H. Rizvi for Appellant (I.TA. Nos. 92/LB and 93/LB of 1990-91).
Mian Masood Ahmad, D.R. for Appellant (I.TA. Nos. 147/LB and 148/LB of 1990-91).
Mian Masood Ahmad, D.R. for Respondent (I.TA. Nos. 92/LB and 93/LB of 1990-91):
Zia H. Rizvi for Respondent (I.TA. Nos. 147/LB and 148/LB of 1990-91).
Date of hearing: 8th October, 1990.
ORDER
ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).---These are four cross appeals two by the assessee and two by the department relating to the assessment years 1987-88 and 1988-89. The assessee is a Public Limited Company quoted on Stock Exchange and deriving income from manufacturing and sale of sugar. The assessee is aggrieved against the disallowance of interest charged on borrowed capital while the department is aggrieved against the deletion of trading additions in both the assessment years under consideration.
2. Departmental appeals: The learned assessing officer made trading additions only on account of low average sale rate of sugar as compared to the other parallel case. The average sale rate of the assessee was at Rs.8,326 per Metric Ton while in the parallel cases quoted by the assessing officer bearing NTN 07-08-1717656 and NTN 07-08-1714055 where the declared average sale rate was between Rs.8,626 to Rs.8,632 per Metric Ton respectively. Consequently, the assessing officer discarded the assessee's declared version and adopted the sale rate at Rs.8,600 per Metric Ton in the assessment year 1987-88 and in the assessment year 1988-89 the assessing officer held that the assessee was showing sale rate of sugar lower by 15 paisa per K.G. Consequently the addition was made calculating the shortfall to that extent. On appeal the learned C.I.T.(A) deleted the additions in both the assessment years which has caused grievance to the department, hence, these two appeals.
3. The learned C.I.T.(A) has passed a detailed order before whom both legal and factual objections were taken against the trading additions. On legal plane the contention of the assessee before the learned C.I.T.(A) was (as well as before us) that no defects were pointed out by the I.T.O. in the trading accounts of the assessee. The assessee's cost of purchases, recovery of sugar and the expenses on the cost of sales were found to be in order. The assessee's sales were 100% to verifiable parties. The assessing officer issued notice under section 148 of the Income Tax Ordinance in response to which the assessee's sales were certified by the purchasers. Before the learned C.I.T.(A) as well as before us the assessee has cited the following cases:-
(1) Star Vacum Bottle Manufacturing Company v. C.I.T.1986 P T D 84.
(2) Muhammadi Textile Mills v. C.I.T.1984 P T D 239.
(3) 1987 P T D (Trib.) 402.
In these reported cases it has been held that without finding any defect in the accounts of the assessee the assessing officer is not entitled to reject the accounts and make the trading additions merely on the basis of parallel cases or on the basis of lower profit.
4. The learned D.R. has not been able to displace the finding of the learned C.I.T.(A). We are really surprised as to how the department feels aggrieved against the order of the learned C.I.T.(A) when the assessing officer had not found any defect in the assessee's accounts and the assessee's debit side had been found in order and the sales were 100% to verifiable parties. Not only the assessee has a good case on legal plane but even on factual ground no exception can be taken to the order of the learned C.I.T.(A). When confronted, the assessee had adequately explained the lower sale rate though it was not necessary as this could not be a ground for rejection of accounts. The assessee's explanation was firstly that because of the paucity of funds the assessee had been selling the sugar in the earlier part of the year when the sale rate is low. In order to support his contention the assessee had given the details of production and sale of sugar which has been reproduced by the learned C.I.T.(A) at page 4 of his order. According to these details the assessee had sold 68.67% of its sugar upto February and almost the entire production was sold by 30th June, 1986 while in other parallel cases this was not the position. In the first parallel case quoted above the sale was upto the extent of 5.65% while in the second case it was 45% upto February, 1986. It is well known that sugar prices increase after February/March when the production of the Sugar Mills stopped and it is highest in the later months of July to September. In the assessment year 1988-89 the assessing officer had taken another pica against the assessee. According to him the assessee's Ex-Mill sale rate was Rs.8.78 per K.G. while the purchase rate of Beverages Companies at Lahore was Rs.9.10 per Kg. As a matter of fact it is on the basis of these figures that the assessing officer concluded that the average sale rate of the assessee was lower by 0-15 paisa per K.G. Before the learned C.I.T.(A) the assessee had given details that the assessee had incurred average expense of Re.0.24 per K.G. on account of transportation, octroi, Zila Council export tax and on loading at Mill and unloading at Lahore. On the basis of these workings the F.O.B. Lahore price of sugar works out to Rs.9.02 K.g. against the purchase price of Beverage Companies at Rs.9.10 per K.g. which leaves a margin of 0.8 paisa per K.g. which was regarded as a commission of the Commission Agents by the learned C.I.T.(A). The learned C.I.T.(A) has further observed that the receipt of actual expenses on account of truck charges, freight, octroi, Zila Council export tax, etc. were shown to him.
5. After considering the arguments and the above explanation of the assessee we are inclined to agree with the learned C.I.T.(A) that the assessing I officer had no justification in making any trading addition whatsoever. Firstly, when no defect was found in the assessee's account no addition could be made merely on account of low average sale rate of sugar as compared to the other parallel cases. Secondly, even on factual plane the assessee has successfully explained the lower rate, if any. We, therefore, see no merit in the departmental appeals which are dismissed.
6. Assessee's appeals: The assessee has attacked the order of the learned C.I.T.(A) on two accounts namely curtailment of financial charges and additions out of the profit and loss account.
7. Financial charges: The assessee had claimed financial charges as under:--
| 1987-88 | Rs.1,03,08,587 |
| 1988-89 | Rs.1,57,30,543 |
The learned assessing officer curtailed these expenses to the tune of Rs.80,75,000 in the assessment year 1987-88 and Rs.94,58,618 in the assessment year 1988-89. The assessing officer's case was that the assessee had advanced an amount of Rs.6,08,60,027 to its associated undertakings in the assessment year 1987-88 and outstanding amount against associated undertakings of Rs.5,83,90,021 in the assessment year 1988-89.
According to the assessing officer funds to this extent remained unutilized by the assessee-company for purpose of business. Before the learned C.I.T.(A) it was pleaded by the assessee firstly that no advance was made by the assessee in the current year and whatever advances had been made that had been made between the period of 1971-72 to 1981-82. Secondly, it was contended that the advances made to the associated undertakings were in accordance with the normal course of business of the assessee and this was in accordance with the objects stated in the Memorandum of the assessee-company against clause 54 of the same. The third contention before the learned C.I.T.(A) was that there was no legal bar against the advancement of any loan, etc. to the associated companies and no disallowance could be made merely on the ground inasmuch as what section 23(1)(vii) requires is that the capital should have been borrowed for the purposes of business or profession and the interest had been paid thereon. If both the conditions are fulfilled, no disallowance could be made and the entire amount was an allowable deduction. The fourth contention of the learned counsel for the assessee was that if any interest accrued to the assessee or deemed to have been accrued from the associated undertakings that could only be charged as income under section 12(7) of the Income Tax Ordinance. Since, by the proviso added by the Finance Act, 1985 such an interest could not be charged under section 12(7) after the first July, 1985 this amendment in law could not be defeated by making a disallowance out of the financial charges, argument was also advanced before the learned C.I.T.(A) that the assessing officer should not have curtailed the financial charges by calculating the same on the basis of outstanding balance appearing in the balance sheet but should have restricted it to the genuine amount advanced by the assessee to its associated undertakings.
8. The learned C.I.T.(A) rejected all these contentions except the last one. The last alternative argument was accepted by the learned C.I.T.(A) and he has set aside the assessment on this issue and directed the assessing officer to re ad judicate in the light of observations made by him.
9. The learned counsel for the assessee has reiterated the same arguments as were advanced before the learned C.I.T.(A). He submitted that no borrowing had been done in the assessment years under consideration and all loans and the interest claimed is on the brought-forward loans. Secondly, it was contended that there was no finding based on material by the assessing officer that any part of the capital borrowed by the assessee was not utilized for business purposes. The contention of the learned counsel for the assessee was that since the assessee had fulfilled both the conditions laid down by section 23(1)(vii) of the Income Tax Ordinance, therefore, no disallowance is admissible under the law. Admittedly, the assessee had borrowed the capital for business purposes and admittedly the assessee had paid the interest thereon. Since, both these facts are not disputed the assessing officer was not entitled to make any disallowance whatsoever out of the interest paid by the assessee on the capital borrowed. Secondly, it was contended that even on factual plane the contention of the assessee is correct. He submitted that firstly no loan had been advanced in the assessment years under consideration and secondly the assessee had enough funds available with him to make advances to its associated undertakings. The sources of these funds were:-
(1) Paid-up capital.
(2) Profits and revenue reserved.
(3) Advances made by the Food Department till 1982.
The assessee has given the details of the paid-up capital, profits and revenue reserved. From the chart given by the assessee we find that right from 1971 onwards in none of the years the advances to the associated undertakings had exceeded the total amount of paid-up capital and profits and revenue reserved available with the assessee. It was further submitted by the learned counsel for the assessee that to make advances to its associated undertakings is the normal course of business of the assessee-company. In support of his contention he has, Cited clause 54 of Memorandum of the assessee-company which reads as under:--
"To lend or deposit moneys belonging to or entrusted to or at the disposal of the company, to such persons or companies and in particular to customers and others having dealings with company with or without security, upon such terms as may be thought proper and to invest or otherwise employ such moneys in such manner as may be thought proper and from time to time to vary such transactions in such manner as the company may think fit."
10. The last contention of the learned counsel for the assessee was that by making such a disallowance the learned assessing officer had virtually applied section 12(7) which is no longer applicable. Had section 12(7) been applicable the result would have been the same as had been done by the assessing officer by making the disallowances. Since section 12(7) is no longer applicable, unless such a provision is available in Income Tax Ordinance, 1979 no such disallowance could be made.
11. We have considered the contentions of the learned counsel for the assessee and have heard the learned D.R. We have also perused the orders of the officers below. Before proceeding further it would be necessary to reproduce the relevant provision of law. The allowable deductions have been given in section 23. Subsection (1) of Section 23 read with clause (vii) is reproduced below:
"23. Deductions.---(1) In computing the income under the head `income from business or profession', the following allowances and deductions shall be made, namely:--
(vii) any interest paid in respect of capital borrowed for the purposes of the business or profession."
12. From the' bare reading of the above clause it is evident that the requirements of the above clause are as under:--
(1) There should be capital borrowed.
(2) The borrowed capital should be for the purpose of business or profession.
(3) Interest has been paid in respect of the capital borrowed.
If these three conditions are fulfilled the assessee is entitled to the allowance to the extent of interest paid by him. It may be stated here that none of these conditions had been disputed by the assessing officer. Admittedly, the assessee had borrowed capital, the capital had also been borrowed for business purposes and the interest had been paid. Since all these conditions were fulfilled and there is no other condition attached to this clause there could be hardly any justification for making a disallowance on the ground that the assessee had made certain advances to associated undertakings. It has to be noted that in the aforesaid clause no such condition had been attached as to how the borrowed capital is to be used. What is required in the above clause is that at the time of the borrowing the borrowed capital should be for the purpose of business. After the borrowing how the assessee uses or utilises the capital this is none of the business of the assessing authority. If the intention of the Legislature was to put a check on the assessee as to how the assessee had utilised the borrowed capital after the borrowing, the Legislature would have put more conditions before making the amount of interest as allowable deduction, such as a proviso could be added that "provided the capital borrowed in actually used or utilised by an assessee for business purpose". No such condition has been placed in the aforesaid clause. Once the assessee borrows the capital it is he who has to decide as to how the capital is actually to be used for business preferences. No one thus could dictate the assessee as to how the capital has to be utilized and what are the assessee's business preferences. It is true that such a facility can be misused by an assessee and perhaps it was for this reason that section 12(7) was incorporated in the ordinance and that if the assessee misuses his facility and re-lends the money borrowed to some other person either free of interest or on a lower interest, the interest not charged or the difference between 2% above the Bank rate and the actual interest charged, could be deemed to be the income of the assessee advancing such loans. Thus, if any person had misused the facility of loan the interest claimed by him under section 23(1)(vii) could not be disallowed on that account but under- section 12(7) the income in the shape of the interest not charged by an assessee could be added to the assessee's income. As stated above the proviso has been added to section 12(7) of the Income Tax Ordinance by the Finance Act, 1985 according to which this section 12(7) is no longer applicable after the assessment year beginning on or after 1st July, 1985. Thus, the Legislature in its wisdom did not feel it necessary to continue to burden the assessee with the income on the basis of interest not charged by an assessee on the advances made by him. After the removal of this burden the assessing authorities cannot charge the interest in the shape of making the disallowance under section 23(1)(vii) of the Ordinance.
13. The Supreme Court clinched this issue in a recent decision in C.I.T. v. Sh. Muhammad Ismail & Company reported as 1986 S C M R 968. In that case the assessee-company had made advances to its Managing Director free of interest. The assessee had also borrowed capital and the interests had been paid which had been claimed as an allowable deduction. The assessing officer disallowed the part of the interest on the ground that the loan had been diverted by the company to the Managing Director who utilised the money for his own personal account and as a consequence the assessing officer held that the entire interest claimed by the assessee could not be treated as interest on capital borrowed for the purposes of business. The Supreme Court held firstly that the assessing officer failed to show that any part of the borrowed money was not used for business purposes and was diverted by the assessee-company to the personal use of the Managing Director. At page 126 of the report the Supreme Court observed as under:,.
"It appears that no provision exists in the Income-tax Act, 1922 to prevent a company from advancing money to a Director or shareholder which could operate as a bar to the making of advances by companies to their Directors. In order to overcome this lacuna a provision has been made in the new income Tax Ordinance, 1979, namely, clause (7) of section 12 which provides ...............
14. The ratio decidendi of the Supreme Court judgment was:--
(1) That it is to be established by the assessing officer that borrowed capital in fact had been diverted by the company to make advances to some other persons.
(2) That there was no provision in the old Act (the provision of section 23(1)(vii) is pari materia to the provisions contained in section 4(2)(iii) of the repealed Income-tax Act) to prevent a company from advancing money to a Director or a shareholder. (In this case it is to associated companies and undertakings).
(3) That there was a lacuna in the aforesaid provisions of the Income-tax Act which was removed by incorporating section 12(7) in the Ordinance.
From the above it is clear that in this case the assessing officer is not able to establish that the advances made by the assessee-company to its associated undertakings had been diverted from the capital borrowed by it. What the assessing officer had stated is mere suspicion of possibility that part of the borrowed capital might have been used for making advances to its associated undertakings. Not only that this fact had not been established but there is sufficient material available on record to prove the contrary. The assessee has shown (though the burden was not on him to prove it) that it had sufficient funds available with it to make advances in the shape of paid-up capital and profit and reserved funds as well as the interest free advances received from the Punjab Government for the purchase of sugar till 1982. It has also been shown by the assessee that the advances had been made to its associated undertakings between the period from 1971 to 1981. The Supreme Court judgment in Sh. Ismail's case quoted above is fully applicable on the facts of the present case. In that case the advances have been made to its Managing Director and in the present case the advances have been made to associated undertakings. The above judgment of the Supreme Court has been followed in a subsequent decision by majority judgment in Pakistan Industrial Engg. Agencies Limited v. C.I.T. reported as 1987 P T D 149. In that case the assessee's claim of interest on borrowed capital had been disallowed under section 10(2)(iii) of the repealed Income-tax Act on the ground that the assessee had surplus amount which had been deposited in the Fixed Deposits where interest received by the assessee was 4-1/2% whereas the assessee himself had to pay the interest on borrowed capital @ 9%. The second ground for disallowance was that the assessee having surplus funds available with it the assessee did not require the loan and when the surplus funds were available the assessee did not return the loan. The disallowance was maintained upto the Tribunal's level but the High Court held that the disallowance had been made merely on surmises and it is not for the Revenue Authorities to decide or guide as to how the investments were to be utilised by an assessee. In that case while interpreting section 10(2)(iii) of the repealed Income-tax Act the High Court held that in order to title as assessee to claim deduction of interest paid on the borrowed capital what is required to show is:--
"That he had borrowed the capital during the assessment years; that the borrowed capital was for purposes of business, profession and vocation of the assessee and that the assessee had paid the amount of interest on the borrowed capital which he is claiming as a deduction under section 10(2)(iii) of the Act. If the assessee succeeds in establishing these facts the Income-tax Authorities will allow the deduction claimed by the assessee under section 10(2)(iii) of the Act. Any further enquiry by the Income-tax Authorities in this regard to find out whether the act of borrowing by the assessee was prudent or not or there existed any necessity for the assessee to indulge in such borrowing or not or that the interest paid on the borrowed capital was reasonable or not, is neither permissible nor comes within the scope of the above section."[1987 P T D 149].
Arriving at this conclusion the High Court has followed the judgment of Supreme Court in Sh. Ismail's case already quoted above.
15. Even otherwise there is nothing on record to show that the assessee had borrowed the capital specifically for the purpose of advancing the same capital to its associated undertakings. As stated above, the assessee had even otherwise sufficient capital available to make advances. For the foregoing reasons we have no hesitation in holding that the capital borrowed by the assessee was for the purpose of business and there is nothing on record to support the allegation that the assessee had diverted the borrowed capital for making advances to its associated undertakings. As a matter of fact in spite of fact that section 12(7) is no longer applicable after the 1st July, 1985 the disallowance made by the assessing officer on the ground that the assessee had made advances to its associated companies amounts to applying section 12(7) in substance which is not permissible under the law. We, therefore, direct that the entire interest paid by the assessee on borrowed capital be allowed.
16. The assessee has not taken separate and specific ground in regard to each item of the profit and loss disallowances. The ground being vague and not specific, we refuse to entertain this ground. On this issue the assessee fails.
17. For the foregoing reasons, the assessee's appeals are partly accepted but those of the department are dismissed.
H.B.A./1179/T. Order accordingly.