I.TA. NO. 683/HQ OF 1990-91, DECIDED ON 2ND MAY, 1995. VS I.TA. NO. 683/HQ OF 1990-91, DECIDED ON 2ND MAY, 1995.
1996 P T D (Trib.) 11
[Income-tax Appellate Tribunal Pakistan]
Before Hamidullah Malik, Accountant Member and Tahseen Ahmed Bhatti, Judicial Member
I.TA. No. 683/HQ of 1990-91, decided on 02/05/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 156, 30 & 22---Rectification of mistake---Income from Bank interest-- Income from business---Income from other sources---Income from Bank interest was assessed as a part of assessee's business income while actually it was assessable as income from other sources---Income Tax Officer, on realising the consequences of assessing the income under wrong head rightly rectified the mistake under S.156, Income Tax Ordinance, 1979---Held, to tax the income on account of Bank interest as income from other source does not require much of legal ratiocination---Lengthy reasoning, in fact, was required when it was claimed to be taxable as income from business or profession.
CIT v. A.P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 distinguished.
(b) Income-tax---
----Income from other sources---Income from Bank interest ---Assessee being a manufacturer, as such its earning of interest could not be considered as part of its business income---Short term deposits with the Bank would not convert the funds available with the assessee into stock in trade.
The assessee is a manufacturer and as such earning of interest cannot be considered as part of its business income as there is no nexus between the company's business of manufacturing and the deposits in the banks, which led to the earning of interest income. Short-term deposits with the Bank does not convert the funds available with the company into stock-in-trade.
(c) Income Tax Ordinance (ICI of 1979)---
----S.23 (1)(vii)---Deductions---Interest on---Money borrowed from Bank by assessee for raw material was allowable as a deduction under S.23(1)(vii) of the Income Tax Ordinance, 1979.
(d) Income Tax Ordinance (XXXI of 1979)--
----Ss.30 (2)(b) & 23(1)(vii)---Income from other sources---Income from Bank interest---Deduction---Interest earned on assessee's own money, which was available in the shape of surplus funds was taxable under S.30(2)(b), Income Tax Ordinance, 1979 as income from other sources---Interest expenses by assessee on the money it borrowed from the bank for raw material were not admissible under S.30(1)(b) of the Income Tax Ordinance, 1979---Assessee's claim of set off of such interest expenses against interest earned by assessee itself thus was not taxable in law.
The assessee-Company borrowed money from the banks for the purpose of purchasing raw material. The interest incurred on such amount was allowable as a deduction under section 23(1)(ii) of the Income Tax Ordinance and the I.T.O. had allowed it so. The interest earned on assessee's own money, which was available in the shape of surplus funds, was clearly taxable under the provisions of section 30(2)(b) of the Income Tax Ordinance, 1979 as "income from other sources". Interest expenses in the circumstances of the case were not admissible under the provisions of section 30(1)(b) of the Income Tax Ordinance. Hence assessee's claim of set off of interest expenses against interest income was not tenable in law.
The Assessing Officer was fully justified in taxing the interest income under the head "Income from Other Sources" and in allowing the interest expenses under the provisions of section 23(1)(vii) of the Income Tax Ordinance, 1979.
Madhya Pradesh State Industries Corpn. Ltd. v. C.I.T., M.P. (1968) 69 ITR 824; Traco Cable Company Ltd. v. Commissioner of Income Tax, Ernakulam (1969) 72 ITR 503; Collis Line Pvt. Ltd. v. I.T.O. (1982) 135 ITR 390 and Vokaro Steel Ltd. v. C.I.T. (1988) 170 ITR 545 ref.
Ebrahim Dahoodwala, CA. for Appellant.
Basharatullah, D.R. for Respondent.
Date of hearing: 5th April, 1995.
ORDER
The appeal is directed against the order, dated 15-12-1990 by the C.I.T.(A)-III, Karachi. The issue involved is whether interest from bank is taxable under section 30 or 22 of the Income Tax Ordinance, 1979.
2. Relevant facts of the case are that the appellant is a public limited company, which derives income from manufacture and sale of gwar gum. The original assessment was completed on a total income of Rs.61,73,366. It included interest income of Rs.22, 22,227. Export rebate was allowed on the total income instead of the income attributable to export sales. The audit pointed out that interest income should have been excluded from the total income to determine the admissible export rebate. According to the audit, export rebate of Rs.11,35,401 was admissible as against Rs.16,30,000 allowed. The Income Tax Officer therefore, rectified the mistake after fulfilling the requirements of section 156 of the Income Tax Ordinance, 1979.
3. The learned C.I.T.(A) confirmed the order under section 156 by discarding all the objections by the learned A.R. hence the instant appeal.
The appellant contested the impugned order on the following grounds:
(1) The learned C.I.T. erred in not adjudicating the issue raised by the appellant that the learned I.T.O. had erroneously invoked the provisions of section 156, there being no apparent mistake. In fact, the learned I.T.O: s action tantamounted to a change of opinion, which is not permitted in law.
(2) That without prejudice to the above, the learned C.IA.(A) erred in confirming the order of the learned I.T.O under section 156 under which the learned I.T.O. had erred in excluding a sum of Rs.22,22,227 of interest received from the total income alleging it to be income from `other sources' when in fact it constituted part of business income.
(3) That without prejudice to the grounds 2 and 3 above, the learned C.I.T. (A) erred in discarding the appellant's contention that if interest income has to be separately computed, interest paid should be given set off against such income. Accordingly, the learned I.T.O. erred in not deducting Rs.13,19,358 paid as interest from interest received amounting to Rs.2,22,227 and thus erred in deducting Rs.22,22,227 instead of only Rs.9,02,869 from total income to compute export rebate.
5. The learned A.R. submitted the following arguments in support of the above grounds of appeal:
"(a) That the interest income of Rs.22,22,227 cannot be segregated from business income, as it is an integral part of and incidental to the business activities and operations. Merely because such income was classified for the limited purposes of accounting presentation as `other income' does not change its interest character. The interest income arose in the regular course of doing business, just as interest expense was so incurred. The interest income and expense are not set off in the accounts; these items are shown separately, to comply with the requirements of the International Accounting Standard (IAS) formulated by the IAS Committee, of which the Institute of Chartered Accountants of Pakistan is a member. All listed companies are required to follow the IAS. The interest income has not arisen from capital investments but as a result of management decision to place temporary surplus business funds during the course of the year, on deposit account, at a time when overdraft facilities were not required. If the interest expense is recognised, then such interest income should also be recognised as part of business operation, especially when the I.T.O. has himself assessed it as business income. The audited accounts of PGC also reveal no capital investments at year-end.
(b) Furthermore, on the one hand the expense is treated as business related and allowed as deduction from income and export rebate being allowed on net income. However interest income related to the same business and derived from business funds is now being considered not as business-related thereby reducing the export rebate. Consequently the assessee is hit twice on this account; viz. export rebate is reduced both on account of interest expense income which is against the principles of justice. When interest expense has been allowed, interest income should also be considered as business related.
(c) In addition to our above submissions, reliance is also placed on the Income Tax Appellate Tribunal's decision reported as 1988 PTD (Trib.) 369 decided on February 21, 1988. In this case a company was floated for purpose of setting up an industry. The assessee had also borrowed moneys, which was not only spent on the project but also kept in banks on temporary fixed deposits and earned interest. The amount of interest was taxed as `Income from other sources' and taxed by the I.T.O., instead of adjustment against losses of business. The Tribunal held that such income was related to business and was to be adjusted against business income, as it was not `income from other sources'.
(d) If at all for any reason, the above contents are not acceptable then at least in calculating the export rebate the interest expenses should be netted off against the interest income."
6. Finally, in support of his contention he placed reliance on the decision in a case reported as C.I.T. v. A.P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 wherein interest income in similar circumstances was held to be assessee's business income. The learned D.R. submitted that in the scheme of the Income Tax Ordinance the income of an assessee is assessable under six distinct heads and expenses under each head of income are to be allowed strictly in accordance with the relevant provisions of the law. That the interest earned by the assessee-company was assessable specifically under the provisions of section 30(2)(b) of the Income Tax Ordinance, 1979 and that only that expenditure was allowable against such interest income as is authorised by the provisions of section 31 of the Ordinance. He, therefore, vehemently supported the orders of the authorities below.
7. We have considered the arguments of both the sides. As regards appellant's objection regarding invoking of the provisions of section 156 of the income Tax Ordinance, we find no inhibition under the law for I.T.O.'s action. In original assessment the income from bank interest was assessed as a part of assessee's business income while actually it was assessable under section 30 ibid. On realising the consequences of wrong application of law, the I.T.O. was justified in rectifying this mistake through an order under section 156. To tax the income on account of bank interest under section 30 of the Income Tax Ordinance, 1979 does not require much of legal ratiocination. In fact, lengthy reasoning is required when it is claimed to be taxable under section 22 of the Income Tax Ordinance as is the claim of the learned A.R. We, therefore, uphold the action of the I.T.O. under section 156 of the Ordinance.
8. Regarding the plea of the A.R. that the assessee's income from bank interest constituted a part of its business income, we have consulted the case law on this subject and we find that there exist more cases against the appellant than in its favour. The circumstances of the first case relied upon by the A.R. are not in pari materia with the instant case. In that case the industry had not yet been set up and the income related to pre-operation period. Moreover the sum on which interest was earned and incurred was a bank loan. It was the same loan on which interest was incurred as well as earned. Moreover the business had not started its operation and the industry was in the process of being set up. Hence the Tribunal had rightly allowed the interest expenses as a deduction against the revenue receipts (i.e. interest income) of the pre -operation period. This action was in accordance with the decision of a case reported as Security Printers v. C.I.T. 78 ITR 766. In the case reported as (1989) 175 ITR 361 and relied upon by the A.R., the circumstances were also different from those of the present case. In that case the assessee corporation received and disbursed Government funds in the course of its business activities and kept the money in a bank in the interval between receipt and disbursement of funds. That way money was virtually assessee's stock-in-trade. The interest income was, therefore, considered as business income. In the appellant's case the money on which interest was incurred was in the shape of bank loans and the money on which interest was earned represented assessee's own surplus funds. This fact has been admitted by the assessee in the abovementioned arguments. Thus the two kinds of moneys involved were of totally different nature. The assessee is a manufacturer and as such earning of interest cannot be considered as part of its business income as there is no nexus between the company's business of manufacturing gwar gum and the deposits in the banks, which led to the earning of interest income. Short term, deposits with the Bank does not convert the funds available with the company into stock-in-trade. If learned A.R.'s reasoning is accepted, it would mean that interest income would never be taxable under section 30 of the Ordinance in the case of persons deriving income from business i.e. under section 22 of the Ordinance. Obviously, this can never be the intention of the Legislature. The appellant company borrowed money from the banks for the purpose of purchasing raw material. The interest incurred on such amount is allowable as a deduction under section 23(1)(vii) of the Income Tax Ordinance and the I.T.O. has allowed it so. The interest earned on assessee's money, which was available in the shape of surplus funds, is clearly taxable under the provisions of section 30(2)(b) of the Income Tax Ordinance, 1979 as "income from other sources". Interest expenses in the circumstances of the case are not admissible under the provisions of section 30(1)(b) of the Income Tax Ordinance. Hence assessee's claim of set off of interest expenses against interest income is not tenable in law. In holding this opinion, we are fortified by the decisions of the higher appellate authorities in the following cases, which are more germane to the circumstances of the present case:
(1) (1968) 69 ITR 824) Madhya Pradesh State Industries Corporation Ltd. v. C.I.T., M.P.
"... The shares of the assessee-company, the Madhya Pradesh Industries Corporation Ltd. which was incorporated in 1961 as a Government Private Limited Company for taking over and running certain concerns of the Government of Madhya Pradesh, were held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board and the Director of Industries, Madhya Pradesh Government. For the assessment year 1962-63 the assessee did not carry on any business nor was there any production. The share money received by the company, not being immediately required, were deposited in call deposits in certain banks. During the year, the assessee received interest on the deposit. The Income Tax Officer assessed this interest as "income from other sources". This was confirmed on appeal by the Appellate Assistant Commissioner and the Tribunal. On a reference to the High Court: Held, that deposit of share capital in a bank cannot be said to be an act of money-lending and, hence, the interest income was properly assessable as income from other sources', under section 56 of the Income Tax Act, 1961 and not as `business income' under section 28 of the Act."
(2) (1969) 72 ITR 503 (Traco Cable Company Ltd. v. Commissioner of Income Tax, Ernakulam):
"...The assessee, a public limited company, was incorporated on February 5, 1960. The objects of the company were inter alia, manufacture of wires, cables etc. The company was expected to go into operation before the end of 1963. The company deposited in banks the share capital collected. In the year ended March 31, 1962 the company earned a sum of Rs.68,013 as interest on the deposits. During the same period the company incurred an expenditure of Rs.34,139 by way of salary stationery and other expenses. Held that the deposit of the share capital by the company was not a business carried on by the company. The expenditure was not incurred for the purposes of making or earning the interest received by the company on the deposit of the share capital office and establishment expenses unconnected with the earning of the company were not permissible deductions under section 57 of the Act (i.e. income from other sources)..."
(3) (1982) 135 ITR 390 (Collis Line Pvt. Ltd. v. I.T.O.):
"...Where money was invested in a bank by the assessee, a shipping company, because the money was lying idle and it was safer and wiser to put it in a bank, the interest earned on the deposit would be incidental to the main purpose of the deposit, which was safe keeping and not earning of profits. Therefore, the interest earned cannot be said to be received in the course of business so as to make it part of the profits and gains of the assessee's business. It should be assessed as income from "other sources" and the assessee would not be entitled to set off the unabsorbed development rebate against that income under section 33 of the Income Tax Act,1961..."
(4) (1988) 170 ITR 545 (Vokaro Steel Ltd. v. C.I.T.):
.... The assessee steel factory, a Central Government undertaking wholly owned by the Government, received interest on short term deposits with banks of amounts received from the Government before its plant was fully constructed. Held that surplus money not required for business had been kept in short term deposits in banks. The bank deposits were not incidental to the business of the assessee nor they were incidental to the constructions of the factory of the assessee. The interest on short term deposits constituted income of the assessee and it was assessable as income from other sources..."
9. Taking an overall view of the facts and circumstances of the case and the case-law on the subject, we are of the firm view that the Assessing Officer was fully justified in taxing the interest income under the head "Income from other sources" and in allowing the interest expenses under the provisions of section 23(1)(vii) of the Income Tax Ordinance, 1979. We, therefore, uphold the orders of the authorities below.
10. The appeal is accordingly dismissed.
M.BA. /129/T
Appeal dismissed.