ITA'S NOS.2673/KB OF 1986-87, 1827/HQ OF 1987-88, 291/HQ, 1701/HQ AND 1702/HQ OF 1988-89 VS ITA'S NOS.2673/KB OF 1986-87, 1827/HQ OF 1987-88, 291/HQ, 1701/HQ AND 1702/HQ OF 1988-89, 1994 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1103 (1993)

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 22(c)---Managed Cement Establishments (Payments to Corporation) Ordinance (II of 1979), Preamble ---S.R.O.No.612(1)/87, dated 21-7-1987-- Subsidy ---Assessee a public limited company manufacturing cement, owned by Government received subsidy from State Cement Corporation out of Development Fund for reimbursement of losses---Subsidy being a receipt from definite source to recoup trading losses could not be treated as casual income and was taxable in the hands of assessee.

CIT v. Sandoz Pakistan Limited 1987 PTD 482; CIT v. Smith Kline and French of Pakistan 1991 PTD 999 and 1985 PTD (Trib.) 379 distinguished.

Ratna Sugar Mills Co. Ltd. v. CTT, UP & V.P. (1958) 33 ITR 644; PIAC v. CIT, Karachi PLD 1975 Kar. 924 and PIDC v. Pakistan 1992 PM 576 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 23(1)(vii) & (xviii)---Interest---Investment---Interest on amount invested on capital assets is an admissible expenditure only after commercial production has been started by such assets---Assessment order showed that assessee itself had indicated the nature of investment as "capital work in progress"---Where the assessment order failed to show details of assets on which investment was made by the assessee, the assessment order was set aside by the Tribunal and Assessing Officer was directed to examine the issue viz. "if capital work in progress"-- If capital work in progress" showed by the assessee was the part of assets already in production the interest on investment should be allowed to the assessee and if the work in progress constituted a separate production unit which had not started commercial production then interest had to be capitalized.

Khairpur Textile Mills Limited v. CIT, Karachi 1989 PTD 500; (1982) 137 TTR 400 and ITAs. Nos.3891, 3892/KB of 1986-87, 4137, 4138/KB, 1851/KB and., 1851/KB of 1987-88, 647/KB of 1988-89, 1095 and 1096/KB of 1990-91, dated 27-9-1992 ref.

Akbar G. Merchant, CA. for Appellant.

Muhammad Nawaz, D.R. for Respondent.

Date of hearing: 10th February 1993.

ORDER

MUHAMMAD MUSHTAQ (ACCOUNTANT MEMBER): -- These appeals - have been filed on behest of M/s. Thatta Cement Company Limited, hereinafter referred to as the assessee against following appellate orders of C.I.T.(A), Zone-II, Karachi:

(a)C.I.T.(A)/Z-II/410, 736/86, dated 14-11-1986.

(b) C.I.T.(A)/Z-11/285/86, dated 13-5-1987.

(c) C.I.T.(A)/Z-III/420, 421, 422 of 1986-87 and 1987-1988, 1988-1989, dated 28-5-1991.

(d) C.I.T.(A)/Z-II/628, dated 10-8-1988.

The departmental appeal is directed against order of C.I.T. (A) Zone -II vide A.O. No. CIT(A-II)/447/1989, dated 14-9-1989. The assessee's appeal are in respect of additions made by the I.T.O. on account of subsidy received by the assessee from M/s. S... ... C... ... C... ...., disallowance of interest on loan obtained by the assessee for investment in various assets of the company. The assessee has also agitated the addition made by the ITO in Profit and Loss account expenses. The departmental appeal on the other hand, is against relief allowed by the CIT(A) in respect of addition made by the I.T.O. under the head telephone expenses for the assessment year 1988-89. The issues involved in all these appeals are common and inter-related, hence these disposed of by a combined single order as under:--

2. The assessee in this case is a public limited company all of whose shares are held by the Government. Various issues involved in these appeals are discussed and decided as under:

SUBSIDY RECEIVED FROM STATE CEMENT CORPORATION:

3. For various years the assessee received following amounts from State Cement Corporation as under:

This point has been raised by the assessee in appeal against order under section 132/156 for assessment year 1984-85. For the assessment year 1985-86 and 1988-89 this point has been raised in appeal against order under section 62 and for assessment year 1986-87 and 1987-88 in appeal against order under section 62/132. For all these years the assessee contended that above amount was received by the assessee as a subsidy. The assessee claimed that the above amounts were not liable to tax. However, for all these years the income tax authorities assessee these amounts to income tax by including these amounts into the total income. The learned CIT(A) confirmed the treatment given by the I.T.O. As per assessment orders the narration given against this amount is "reimbursement of extra cost of production. The A.R. of the assessee explains that various units of manufacturing cement who were controlled by the S ... ... C... ... C... ... have to pay every year an amount specified by the Government in respect of each metric ton produced by these units to S ... ... C... ... C... ... This amount is credited by the S ... ... C... ... C... ... to a Fund known as C ... ... D... ... F... ... which is to be administered in such a manner as directed by the Government. This C... ... D... .... F... ... is also used by the S ... .... C... ... C... ... to meet losses of the Cement Factories whenever any such need arises. According to the A.R. of the assessee, the assessee received subsidy from State Cement Corporation out of above Development Fund during the above years. It was also explained by the A.R. of the assessee that an agreement was arrived at between officers of the State Cement Corporation and the C.B.R. that this Fund will be taxed in the hands of the State Cement Corp.

4. The A.R. of the assessee has contended that amount of subsidy received is 'able to tax for the following reasons:

(i) The appellant M/s. Thatta Cement Co. Ltd. is a public limited company, 100% owned and managed by Government through a Corporation M/s. State Cement Corporation.

(ii) That the above Cement Development Fund was created as a result of statutory provisions incorporated in Ordinance No.11 of 1979 dated 15-1-1979.

(iii) As per section 3 of above Ordinance every Unit shall pay in above Account of the State Cement Corporation, in respect of each Metric ton of cement produced and sold by it after 24th day of March, 1976, such amount as the Federal Government may, by notification in the official Gazette, fix and different amount may be fixed for different periods.

(iv) That as per section 5 of above Ordinance this fund is to be used b) r SCCP, in such development schemes, or other purposes including payment of a subsidy to a unit, that may be in the interest of the cement industry owned by the State,

(v) That through the above Cement Development Fund (CDF) belonging to Government and maintained in SCCP accounts, yearly payments as approved by Federal Government, Ministry of Production, are made to loss making cement units to reimburse OR reduce loss OR show marginal profit, in mode of subsidy per ton.

(vi) That contribution by units to CDF is an admissible business expenditure for income tax .purposes, in hands of contributing units, as per section 4 of above Ordinance.

(vii) That said contribution by units to parent corporation SCCP is to be treated as income in hands of SCCP for tax purposes as per special agreement arrived at in 1988 between officers of Income Tax Department and State Cement Corporation. ,

(viii) As per Government policy decision in 1983 reimbursement of part losses are made to appellant by Federal Government through mechanism of Cement Development Fund of SCCP. Since then, on basis of debit notes issued by appellant, from time to time. This fact of reimbursement of losses by Federal Government through SCCP is certified by SCCP.

(ix) That the receipt from Government through parent corporation M/s. SCCP by the appellant, is a CAPITAL RECEIPT and therefore, is not chargeable to tax and is not taxable under the provisions of Income Tax Ordinance, 1979.

(x) That the reimbursement of losses by SCCP/Government to appellant company, is not in any way, supplementary trading receipt, as the company is wholly owned by Federal Government.

(xi) That reimbursement of losses to appellant-company by SCCP are directly through Cement Development Fund's account maintained in SCCP's Account, and it is not paid through Profit and Loss account, of SCCP nor it is claimed as an admissible expenditure for tax purpose by SCCP in its tax assessment, and therefore consequentially it is also not a taxable receipt in hands of appellant."

5. The A.R. of the assessee vehemently contended that amount of subsidy received by the assessee-company are capital receipts: Alternatively it has been argued by the A.R. of the assessee that these amounts represent casual receipts and in either case whether it is treated as capital receipt or casual receipt it is not liable to tax. In support of his arguments the A.R. of the assessee has also quoted following case-law:

(i) 1987 PTD 482 Commissioner of Income Tax, Central Zone v. M/s. Sandoz Pakistan Limited.

(ii) 1989 PTD 500 CIT, West Zone v. M/s. Khairpur Textile Mills Ltd. and Pakistan Progressive Cement Industries Ltd. v. CIT, Karachi.

(iii) 1991 PTD 999 CIT v. Smith Kline and French of Pakistan Ltd. . (iv) 1985 PTD (Trib.) 379.

6. The D.R. on the other hand, supported the order of the authorities below.

7. Before the question of taxability of the amounts received by the assessee as above from State Cement Corporation is considered it is pertinent to point out that as mentioned above the Cement producing units owned by Government have to pay certain amounts to State Cement Corporation as provided in Ordinance No.ll of 1979. The relevant sections of said Ordinance are reproduced as under:

3. Payment Units to Corporation: -Every Unit shall pay to the Corporation in respect of each metric ton of cement produced and sold by it after the twenty-fourth day of March, 1976, such amount as the Federal Government may, by notification in the official Gazette, fix; and different amounts may be fixed for different periods.

4. Allowance to be made for amounts paid by a Unit for purpose of income-tax.---Notwithstanding anything contained in the Income Tax Act, 1922 (IX of 1922), the amount paid by a Unit to the Corporation in pursuance of section 3 shall be an expenditure for which allowance is to be made in computing profits or gains of that units under subsection (2) of section 10 of that Act. .

5. Cement Development Fund.---The proceeds of the amounts paid by the units shall be credited to a fund to be known as the Cement Development Fund which shall be administered in such manner, and used by the Corporation in such development schemes as may be prescribed."

Subsequently, this Ordinance was amended vide Ordinance No. XXII of 1982, dated 18-9-1982. Section 2 of this Ordinance is reproduced as under:

"2. Amendment of section Ordinance 11 of 1979:--In the Managed Cement establishments (Payment to Corporation) Ordinance, 1979 (II of 1979), in section 5, after the word "schemes, the words and commas" or other purposes, including payment of a subsidy to a unit, that may be in the interest of the cement industry owned by the State shall be inserted."

Later on rules were made to implement the above decision of the Government of Pakistan by Notification No. SRO 612(1)/87, dated 21-7-1987 Relevant rules are reproduced as under:

"3. Cement Development Fund.---(1) The Federal Government shall at the beginning of each financial year fix the provisional amount payable by each unit to the Corporation in respect of each metric ton of cement produced and sold by it on the basis of its budgeted profit. The amount so fixed shall be finally determined by the Federal Government during the year.

(2)(i) The proceeds of the amount paid by the units shall be credited to the cement Development Fund Account in the Books of accounts of the Corporation, and

(ii) Shall constitute advances for issuance of shares by Corporation to the Federal Government.

(3) The Corporation shall, intimate to the Ministry the details of the periodical receipts of the fund and the actual quantity of cement sold by each unit.

(4) The amount of fund collected by the Corporation from its units shall be utilized with the prior approval of the Federal Government, as under:--

(i) Government equity/loan for the new cement projects/schemes under taken by the Corporation.

(ii) Government equity/loan for balancing modernization and rehabilitation of the on-going/cement units.

(iii) Subsidy to a cement unit to compensate it for the differentials in transportation expenses of cement from one area to another or for the unforeseen or unavoidable heavy cost or losses.

(5) The amount of the fund shall be kept in a current account or short or long term deposit accounts until the amount is actually used by the Corporation.

(6) At the close of the Financial year the Federal Government shall finally determine the amount to be paid to the Corporation by each unit with reference to its audited accounts. The difference in the provisional and final amount will be settled and accounted for accordingly.

(7) That final amount as fixed by the Federal Government for each unit under sub-rule (6) shall be notified in the official Gazette at the end of the financial year.

(8) Figures of the receipt and payment and the balance lying in the account of the fund shall be reconciled by a representative of the Ministry quarterly.

(9) The Cement Development Fund Account shall be reflected in the final account of the Corporation and shall be audited by the statutory auditors.

(10) The Corporation shall issue its shares to the Federal Government in such instalments and at such times as may be agreed upon between the Ministry and the Corporation out of the advances for shares referred to in clause (ii) of sub-rules (2)."

7. From the above documents it is quite evident that after 1976 every cement manufacturing unit managed by the State Cement Corporation has to pay to the State Cement Corporation some amounts with reference to the cement manufactured by it. These amounts were credited by the State Cement Corporation to Cement Development Fund and utilized by the State Cement Corporation in issuance of shares to the Government or for balancing and modernization of the cement units and subsidy to compensate it for the differentials in transportation expenses of cement or for the unforeseen or unavoidable heavy cost or losses incurred by the cement producing units. This last objective was introduced by the Ordinance NOXXII of 1982 and is also indicated in rules dated 21-7-1987. The A.R. of the assessee contends that actually this amount was given to the assessee by the SCCP for reimbursement of losses. The A.R. of the assessee contends that certificate from the State Cement Corporation of Pakistan, dated .23-2-1992 supports this contention. This certificate is reproduced as under:

"This is to certify that Government subsidy given to Thatta Cement Company Limited a Unit of State Cement Corporation of Pakistan (Pvt.) Ltd. from assessment year 1984-85 to 1988-89 represents reimbursement towards losses suffered as per accounts by the Unit in each year."

At this stage it will be relevant to examine the case-law relied on by the A.R. of the assessee.

8. The first case quoted by the A.R. of the assessee in this connection is 1987 PTD 482 (CIT v. Sandoz Pakistan Limited). In this case the facts are that the assessee company i.e. M/s. Sandoz Pakistan Limited was owned to the extent of 75% by a foreign company i.e. M/s. Sandoz Ltd. based in Switzerland. Voluntary payments were made by the foreign Co. to the assessee company considering the circumstances of domestic company but there was no legal obligation on the foreign company for making such payments. The honorable High Court held that voluntary payments received from the foreign company was not liable to tax. From the facts of this case it is quite obvious that facts of this case are not applicable in the case under consideration.

9. The second case relied on by the A.R. of the assessee is (1991) PTD 999 (CIT v. Smith Mine and French of Pakistan). The facts of this case are that in 1963 the assessee company was owned by M/s. Smith Kline USA. Up to assessment year 1963-64 the assessee had accumulated loss at Rs.78,776. The assessee was mostly dealing in foreign goods which were intended. In 1967 it was decided by the assessee company to start manufacturing activities with foreign participant. The capital of the company was, therefore, raised to Rs.16,00,000 out of which shares to the extent of Rs.11,75,000 were issued to the foreign participants. It was further decided that accumulated losses will be absorbed by the foreign shareholders. Consequently an amount of Rs.1,38,867 which represented accumulated losses upto 29-2-1964 were reimbursed by the foreign participant. This amount was credited in the respondent's account as Miscellaneous income. But later on the assessee realized this mistake and contended before the I.T.O. that amount received from the foreign participant was not income at all and if it was income, it was casual in nature and exempt from income tax under section 4(3)(vii) of the Income Tax Act, 1922. It was held by the Supreme Court of Pakistan that the above receipts was not an income. However, facts of this case are entirely different than the present case. The last case relied on by the A.R. of the assessee is reported as 1985 FM (Trib.) 379. In this case assessee was x Government Corporation providing transport and cargo facilities to farflung areas on behalf of the Federal Government. The grants received as advances from Government for that purpose was held by I.TA.T. as capital receipt not chargeable to tax. But it is not known whether in this case any reference is pending or not.

10. After carefully considering the facts it is quite evident that cases cited by the A.R. of the assessee are not relevant. However, relevant cases in this connection are as under.

1l. In the case cited as (1958) 33 ITR 644. Ratna Sugar Mills Co. Ltd. v. CIT, UP & V.P. The facts are similar to the present case. In the case of Ratna Sugar Mills, the receipt of subsidy on payments by the Government of India out of Excise Duty on Sugar with the object to compensate the company for losses arising out of additional wages to the workers by the order of U.P Government, was held to be trading receipts.

12. Another case, which is relevant in this connection is the case cited as PLD 1975 Kar. 924 PIAC v. CTT, Karachi. The facts of this case are that Pakistan International Airlines Corporation was created by Pakistan International Airlines Corporation Ordinance which was subsequently, replaced by Pakistan International Airlines Corporation Act under section 26 of the said Act. Central Government undertook to make good any loss sustained by the Corporation during the three years next after 30th September, 1963. In the accounting period relevant to charge year 1966-67 the Central Government paid a sum of Rs.1,05,13,609 in terms of said section 26 of the Act. The assessee claimed this payment as replenishment of its capital which according to the assessee stood reduced to the extent of an amount, received by the assessee from the Central Government. This plea .of the assessee was rejected by the I.T.O. and took the receipts of the said amount as revenue amount and brought it to tax. The assessee filed direct appeal before the Tribunal against the decision of the I.T.O. and the Tribunal upheld the order of the I.T.O. According to the A.R. of the assessee the PIAC had to subsidise the tickets on some of the routes and in order to save the capital the Central Government paid the above amount. The D.R. on the other hand, contended that amount in question paid by the Central Government to PIAC in order to offset the trading losses of the assessee and these receipts were in the nature of the revenue receipts. The order of the Tribunal was upheld by the Supreme Court of Pakistan. Facts in this case are exactly same as in the case of PIAC.

13. At this stage it is relevant to look into the scheme of subsidy under which the assessee received the payment of above amount (i) Vide section 3 of the Ordinance No.ll of 1979, dated 15-1-1979 every Unit is required to pay to the State Cement Corporation in respect of each metric ton of the cement produced and sold by it after 24-3-1976, such amount as the Federal Government may by notification in the official Gazette, fix and different amounts may be fixed for the different years (ii) Vide section 4 of the said Ordinance the above amount was to be allowed-to the Units as a Profit and Loss account expenditure under the Income-tax Act, 1922. (iii) The amounts of the fund collected by the State Cement Corporation are to be credited to the Cement Development Fund Account. (iv) The above Development Fund was to be utilised on the objectives as per Rule 4 of the Rules promulgated by S.R.O. No.612(1)/87, dated 21-7-1987. (v) Vide Rule 4(iii) one of the objective is to pay subsidy to a Cement Unit to compensate it for the differentials in transportation expenses of the cement from one area to other area for the unforeseen or unavoidable heavy cost or losses.

(vi) The A.R. of the assessee has also provided a Certificate from the State Cement Corporation for the assessment years 1984-85 to 1988-89, dated 23-2-1992, which is reproduced in foregoing paragraphs.

14. The A.R. of the assessee has contended that an agreement was made between the officers of Income Tax and State Cement Corporation that proceeds of Development Fund will be taxed in the hands of the State Cement Corporation. It has been argued by the A.R. of the assessee that amount received by the assessee company has already suffered tax in the hands of State Cement Corporation hence it cannot be taxed twice. This contention of the A.R. of the assessee is not tenable. A copy of the Agreement between the Chief Income Tax, C.B.R., Commissioner of Income Tax Companies, Lahore on the one hand and Mr. Iqbal Hussain, Deputy Secretary, Ministry of Production and Mr. Muhammad Hanif, G.M. Finance, SCCP on the other hand, indicates that contention of the A.R. of the assessee is not correct. Relevant part of para. 3 is reproduced as under:

"After detailed discussion it was decided that:

(a) The Corporation should be considered taxable on the issue under reference i.e. Cement Development Fund, with effect from assessment year 1987-88 and onwards and the assessments for the years 1976-77 to 1986-87 shall be cancelled under section 138 of the Ordinance.

From the above agreement it was quite evident that for the assessment year 1976-77 to 1986-87 State Cement Corporation did not pay any tax on Development Fund. It was liable to payment of tax after assessment year 1986 87. Thus, up to assessment year 1986-87 it is quite clear that at first certain amounts are taken from the Units by the SCCP and credited to Cement Development Fund and by Ordinance these are made allowable Profit and Loss account expenses in the hands of units and then when subsidies .are paid by the SCCP to the Units out of above Fund then it is contended that these are not taxable which arguments are not tenable.

15. The contention of the A.R. of the assessee that Cement Development Fund cannot be taxed twice because it has already suffered tax in the hands of SCCP is not correct. Even if the said Development Fund has been taxed in the hands of State Cement Corporation there is no bar in law in taxing the amount in the hands of individual units and we are fortified in arriving at this conclusion by the judgment of the Honorable Supreme Court in the case as (1992) PTD 576 PIDC v. Pakistan Civil Appeal No. 123-K of 1983 (Supreme Court of Pakistan) wherein it has been held that principle of the Act is to charge all income with tax but in the hands of same person only once unless there is any restriction imposed. Thus, the income cannot be taxed twice in the hands of same person unless there is specific provision to that effect. In this case for the assessment year 1976-77 to 1986-87 no tax has been paid by the State Cement Corporation on Cement Development Fund. But even if the State Cement Corporation paid any tax after assessment year 1986-87, there is no bar in taxing the amount of subsidy in the hands of assessee.

16. The alternate plea of the A.R. of the assessee is that this income is casual income but in view of the provisions of Ordinance No.11 of 1979, dated 15-1-1979 and rules made therein vide SRO 612(1)/87 it is quite evident that these receipts are from definite source to recoupe trading losses hence these cannot be treated as casual income. Lastly, the ratio of cases of PIAC and Ratna Sugar Mills discussed above is fully applicable in this case. Because of these reasons the appeals of the assessee on this point are rejected for all the yes.

DISALLOWANCE OF FINANCIAL EXPENSES APPEAL AGAINST ORDER UNDER SECTION 62/132 (ASSTT. YEAR 1986-87, 1987-88 & 1988-89).

17. As per ground of appeal this objection has been taken by the assessee in appeal against order under section 62/132 of the Ordinance. In this ground of appeal it has been indicated that following amounts were disallowed by the I.T.O.:

A perusal of the record indicates that originally some amounts were disallowed by the I.T.O. under this head. Aggrieved against this treatment the assessee filed appeal before the learned CIT(A). The learned C.I.T.(A) upheld the disallowance, of financial expenses but. observed that interest calculated w not correct. The I.T.O. had calculated proportionate interest @ 14%. According to CIT(A) it should have been calculated at the rate of 11%. Accordingly ITO modified the amounts disallowed in his order under section 62/132. A perusal of the original order indicates reasons for disallowance for assessment year 1986-87 are as under:

"Out of financial expenses interest on long term loan has been shown at Rs.5,80,25,000. As per Note 19 work in progress amounting to Rs.5,02,76,000 has been shown which is on account of investment on assets not used during the year and shown in the capital work in progress. The proportionate amount of interest of this cost of assets is to be capitalized being item of capital nature and interest at 14% on this amount of Rs.5,02,76,000 is disallowed."

For other two years the reasons for disallowance are similar. The above disallowance were upheld by the learned CIT(A). The A.R. of the assessee contends that interest paid by the assessee company was revenue expenditure. The A.R. of the assessee has also cited a number of cases in support of his contention as under:---

(i) (1989) PTD 500 Khairpur Textile Mills Limited v. CIT, Karachi (Supreme Court of Pakistan Civil Appeals Nos. 77-K to 80-K).

(ii) (1982) 137 ITR 400.

(iii) ITAs Nos. 3891, 3892/KB of 1986-87, 4137, 4138/KB of 1987-88, 1851/KB of 1987-88, 1851/KB of 1987-88, 647/KB of 1988-89, 1095 and 1096/KB of 1990-91, dated 27-9-1992.

In the first case cited by the A.R. of the assessee the Khairpur Textile Mills was owned by Khairpur State. The assessee was incorporated as a Joint Stock Company under the Companies Act, 1913, in the State of Khairpur with the object to purchase the said Mills from the State of Khairpur which was done by a sale-deed dated 3-3-1955 for a total consideration of Rs.1,53,87,293 which was stipulated to be paid in instalments with 3% interest on the unpaid balance. The Income Tax authorities treated the interest as capital expenditure but it was held by the Supreme Court that it was an admissible expenditure.

18. M/s. Pakistan Progressive Cement Industries Limited was started as an association of persons. However, it was incorporated on 18th April, 1964 as a limited company and purchased two cement factories situated at Karachi and Dandot owned by M/s. Dalmia Cement Limited which was a subsidiary of M/s. Dalmia Limited. It was stipulated in the agreement that till the sale-deed was finally executed the purchase price was to be paid in instalments by way of export of cement to India. It was also stipulated that 6% interest will be charged on unpaid purchase price. It was held by the Supreme Court that the payment of interest was a revenue expenditure.

19. In the second case cited as (1982) 137 ITR 400 Commissioner of Income Tax, Gujarat III v. Granulated Fertilizers Feeds (Private) Limited, the assessee was a private limited company and paid interest to the extent of Rs.1,06,717 on the amount borrowed by it. The I.T.O. found out that a sum of Rs.5,00,000 out of the above amount borrowed by the assessee was utilized for acretion of capital and he disallowed Rs.50,000 attributable to the above amount of Rs.5,00,000. It was held by the Gujarat High Court that it was a revenue expenditure.

20. The next case relied by the A.R. of the assessee is the case cited as ITAs Nos. 3891/KB, 3892/KB of 1986-87, 4137, 4138/KB of 1987-88,1851/KB of 1987-88, 647/KB of 1988-89, ITAs Nos.1095 and 1096/KB of 1989-90, dated 27-9-1992 by the TTAT. In this case the facts were that the assessee made investment in certain assets and claimed interest thereon. The I.T.O. disallowed the amount on the ground that investment in which the interest was being claimed was made in capital assets. The interest was allowed by ITAT. However, in the instant case the facts are slightly different. As already pointed out that the I.T.O. disallowed proportionate interest on the ground that the assessee made investment in assets shown by the assessee in details as work in progress. As per accounts submitted by the assessee these were not included by the assessee in the assets. The I.T.O. was of the view that till these assets are brought in business the investment is a capital expenditure and interest thereon cannot be allowed as revenue expenses. The D.R. supported the order of the I.T.O.

21. From the assessment order it is indicated that assessee has itself indicated the nature of investment as "capital work in progress". According to ITO the said "capital work in progress" has not been made part of assets as per account statement of the assessee. On the contrary, the A.R. of the assessee contends interest on amount invested on capital assets is a revenue expenditure. We have carefully considered the issues involved. The interest on investment in capital assets is an admissible expenditure only after commercialproduction has been started by such assets. The assessment orders do not indicate details of assets on which investment was made by the assessee. The assessment orders for the assessment years are set aside, the I.T.O. is directed to examine this issue again if "capital work in progress" shown by the assessee is part of assets already in production the interest on investment should be allowed to the assessee. However if 'work in Progress" constitutes a separate production unit which has not started commercial production then interest has to be capitalized.

22. This bring us to Profit and Loss account expenses. These are discussed as under:--

Vehicle running expenses: (Administration)

Vehicle running expenses (Selling & Distribution);

23. Before merits of P&L account expenses are considered it is pertinent to point out that the A.R. of the assessee has relied on a decision made by us in ITA No.1178/KB of 1980-81 (Asstt. Year 1980-81), dated 4-4-1988 wherein it was held that in Semi-Government Organizations such expenses like Miscellaneous expenses, motor-car expenses, repair and maintenance expenses could not be unvouched. We fully agree with the observations made by our learned brethren as above but in this case facts are different.

24. Disallowance under the head vehicle running expenses was made by the ITO on the ground that major part of these expenses are un-detailed and unverifiable. The disallowance made by the ITO was upheld by the learned CIT(A). The A.R. of the assessee contended that disallowance was made on the basis of stock purchases and no specific instance was given by the ITO for disallowing these expenses. The A.R. of the assessee further contended that the assessee company was owned by the Government and there was no possibility of unvouched and unverifiable expenses. The D.R on the other hand, supported the order of the ITO.

25. We have carefully considered the facts of the case. The ITO has made disallowance on the basis of general observations made by the ITO. The disallowance made by the ITO is deleted for all the years.

Travelling expenses (Administration)

Travelling expenses (Selling and Distribution)

26. These expenses were disallowed by the 1T0 as according to the ITO complete details of verifiable nature was not submitted by the assessee hence the above disallowance. The A.R. of the assessee contended that again this observation was not correct because it was a Government organization and every expenses has to be accounted for. The A.R. of the assessee further explained that the travelling was undertaken by the employees from Karachi to Head Office of SCCP and necessary vouchers are available. The D.R. supported the order of the ITO. However, considering the various facts the disallowance made by the ITO is deleted for all the years.

Postage Telegram and Telephone (Admn)_

Postage. Telegram and Telephone (Selling and Distribution)

27. These expenses were disallowed by the ITO on account of personal nature of expenses. When the matter reached CIT(A) he set aside the assessment order on this point and directed that the disallowance should be restricted to 15% of the residential telephone. The A.R. of the assessee contended that disallowance under this head was not justified because it was a Government organization. The D.R. on the other hand, supported the order of the ITO. For the assessment year 1988-89 only, the department is also in appeal against the directions issued by the learned CIT(A).

28. We have considered the facts of the case. The learned A.R. of the assessee has pointed out that as far as residential telephones are concerned, the officers .are not provided separate and independent telephone but the calls are made through PBX. In other words it is not possible to separate expenses of residential telephones of officer and other telephones, considering this fact it is directed that no disallowance should be made out of postage and telegram expenses. However, 10% disallowance should be made out of telephone expenses.

Repair & Maintenence:

29. These expenses were disallowed by the ITO on the ground that these expenses are not verifiable. The A.R. of the assessee contended that these observations are of general nature and all the expenses arc verifiable. The D.R. supported the order of the I.T.O. but the I.T.O. has not provided any specific instance of unverifiable expenses hence the disallowance made by the 1T0 is deleted.

Miscellaneous expenses (Admn.)

Miscellaneous expenses (Selling and Distribution).

30. These expenses were disallowed by the ITO as according to him these were not fully verifiable. The A.R. of the assessee again contended that these observations are of general nature. Actually these expenses are verifiable. However, before us, the A.R. of the assessee could not produce any evidence to rebut the contention of the I.T.O. but the disallowance made by the I.T.O. is excessive and ii is restricted to 15% of the claim.

31. No other ground was pressed by the assessee.

32. As a result of the above discussion the appeals of the assessee succeed as above whereas the departmental appeal fails and is hereby rejected.

M.B.A./37/T.T.Order accordingly.