I.T.AS. NOS.2863/KB OF 1986-87, 1301/KB, 1302/KB OF 1997-98 VS I.T.AS. NOS.2863/KB OF 1986-87, 1301/KB, 1302/KB OF 1997-98
1999 P T D (Trib.) 708.
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman, S.M. Sibtain, Accountant Member and Muhammad Mehboob Alam, Accountant Member
I.T.As. Nos.2863/KB of 1986-87, 1301/KB, 1302/KB of 1997-98 and 114/KB of 1991-92, decided on 19/10/1998.
(a) Income-tax---
----Business---Purport and import---Word "business" in taxing statute is used in the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit.
(b) Income-tax---
---"Person intending to carry on business "---Connotation and characteristics- Test ---To infer from a course of transactions that the person intended to carry on business, Assessing Authorities to ordinarily see that the characteristics of volume, continuity and regularity indicating an intention on part of such person to continue the activity .of carrying on the transaction exist.
(c) Income-tax---
----"Interest on investment"--- "Interest on deposit"---Distinction---To earn "interest on investment" is distinct from earning "interest on deposit".
(d) Income-tax---
----Intention---Judgment---Intention has to be judged on the touchstone of legal provision and not the legal provision on the mercurial human wishes and desires.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.22---Income from business and profession---Business---Physical and/or mental human activity---Involvement of---Phrases "carried on", "specific services performed" and "exercise of a profession" in cls. (a), (b) & (c) of S.22 of Income Tax Ordinance, 1979 respectively indicate that some kind of continuous physical and/or mental human activity is involved in generation of income from business.
(f) Income Tax Ordinance (XXXI of 1979)---
----S.30---Income from other sources---Interest income---Business income or income from other sources---Distinction and connotation---Income earned by way of interest without engaging in an activity falling under the meaning of business or, where money is not utilised as stock in trade, is income from other sources under S.30 of the Income Tax Ordinance, 1979---Neither the assessee's personal status nor the nature of business, profession or occupation, one is engaged in, would change the nature of such income-- Neither the source of the funds generating such interest income nor the purpose of which such funds are obtained by the depositor would have any bearing on the nature of such income.
Case law ref.
(g) Income Tax Ordinance (XXXI of 1979)---
----S.15---Head of income--Change of---Neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains 'being derived or to be derived wherefrom, are exempt under the Income Tax Ordinance, 1979, or otherwise, nor the fact that such company or an assessee having any other personal status under S.2(32), Income Tax Ordinance, 1979 has deposited the funds out of equity or out of borrowed capital, nor the fact that, in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession, would change the classification of such income under S.15 of the Income Tax Ordinance, 1979.
Case law ref.
(h) Income Tax Ordinance (XXXI of 1979)---
----Ss.31(1)(b) & 23(1)(vii)---Deduction---Interest expenditure-- Admisibility---Principles---Amounts borrowed for the purposes of business and not wholly and exclusively for the purpose of earning income from other sources i.e. interest---Expenditure incurred on account of interest on such borrowed capital is admissible as expenditure under S.23(1)(vii) of the Income Tax Ordinance, 1979 and not as expenditure laid out or expended wholly and exclusively for the purposes of earning interest income as admissible under S.31(1)(b) of the Income Tax Ordinance, 1979.
Case law ref.
(i) Income Tax Ordinance (XXXI of 1979)---
----Ss.30 & 31(l)(b)---Deduction---Borrowed capital---Expenditure incurred on account of interest---Admissibility---Expenditure incurred on account of interest on borrowed capital was not to be deducted under S.31(1)(b) of the Income Tax Ordinance, 1979 from interest earned on deposit of funds m Bank assessable as income from other sources under S.30 of the Income Tax Ordinance, 1979.
Case law ref.
(j) Income Tax Ordinance (XXXI of 1979)---
----Ss.30, 31(1)(b) & Second Sched., Part I, Cl. (119)---Income from other sources---Industrial undertaking---Interest income---Sale of scrap-- Exemption---Borrowed capital---Sale of scrap was set off against capital expenditure incurred on construction, similarly interest earned was set off against interest paid/accrued on loan; both the ' amounts were treated as income from other sources and expenditure incurred on construction and borrowed capital had been capitalized by the Assessing Officer---First Appellate Authority confirmed the same regarding sale of scrap on the ground that exemption was not available as the commercial production was yet to commence---Interest income was held to be income from other sources on the ground that neither the income derived from the industrial undertaking nor the industrial undertaking had yet been set up---Validity---Findings of the First Appellate Authority were confirmed by the Appellate Tribunal and dismissed the appeal of the assessee.---[1988 PTD (Trib.) 369 overruled].
1988 PTD (Trib.) 369 overruled.
1996 PTD 11 and 1998 PTD (Trib.) 3319 ref.
(k) Income Tax Ordinance (XXXI of 1979)---
----Ss.30, 31(1)(b) & Second Sched., Part I, Cl. (118-D)---Income from other sources---Exemption---Interest income ---Assessee's income was exempt under cl. (118-D) of Second Sched., Part I of the Income Tax Ordinance, 1979---Loss was declared after adjusting the amount earned on account of interest---Assessing Officer treated the interest as income from other sources under S.30 of the Income Tax Ordinance, 1979 and no expenditure was allowed under S.31(1)(b) of the Ordinance on account of interest paid on the ground that it was allowable under S.23 of the Ordinance against business income under S.22 of the Income Tax Ordinance, 1979---First Appellate Authority set aside the assessment order on the ground that to treat interest as income from other sources, interest received must be from assessee's own fund not from borrowed money---Validity---Decision of the First Appellate Authority was vacated by the Appellate Tribunal and allowed the appeal by restoring the assessment order.---[1988 PTD (Trib.) 369 overruled].
1988 PTD (Trib.) 369 overruled.
1996 PTD 11 and 1998 PTD (Trib.) 3319 ref.
(k) Income Tax Ordinance (XXXI of 1979)--
----Ss.30---Income from other sources ---Assessee a limited company declared nil income on the ground of non-production---Earned interest income-- Expenses were capitalized after deducting interest income---Assessing Officer treated interest income as income from other sources---First Appellate Authority found that order was not sustainable---Validity---Appellate Tribunal vacated the order of the First Appellate Authority and restored the assessment order.---[1988 PTD (Trib.) 369 overruled].
1988 PTD (Trib.) 369 overruled.
1996 PTD 11 acrd 1998 PTD (Trib.) 3319 ref.
Muhammad Moin Khan for Appellant (in I.T.A. No.2863/KB of 1986-87):
Muhammad Majid, D. R. for Respondent (in I.T.A. No.2863/KB of 1986-87).
Muhammad Majid, D. R. for Appellant (in I.T.As. Nos.1301/KB and 1302/KB of 1997-98).
Kh. Mazheruddin Siddiqui for Respondent (in I.T.As. Nos. 1301/KB and 1302/KB of 1997-98).
Muhammad Majid, D. R. for Appellant (in 1.T.A. No.114/KB of 1991-92):
Tayyabji Adeeb, C. A. for Respondent (in I.T.A. No.114/KB 1991-92).
Date of hearing: 26th February, 1998.
ORDER
S. M. SIBTAIN (ACCOUNTANT MEMBER).---This Full Bench is seized with the issue common in these four appeals i.e., the question whether the interest earned on Bank Deposits of unutilised business capital--paid-up or borrowed--is income from other sources, chargeable under section 30 of the Income Tax Ordinance and if such interest income is, chargeable, whether interest paid, on the borrowed amount deposited in Bank, yielding such income from sources is to be allowed as expenditure under section 31(1)(b) against such interest income.
2. We have heard Mr. Muhammad Majid, the learned representative of the Department, Mr. Muhammad Moin Khan, the learned counsel of appellant M/s. Baluchistan Foundry Ltd., Karachi, Mr. Mazharuddin Siddique, the learned counsel of the respondent M/s. Rupafil Ltd., Karachi and Mr. Tayyabji Adeeb, the learned Authorised Representative of the respondent M/s. Din Textile Mills Ltd., Karachi.
3. Having identified supra the main issues to be adjudicated upon in the instant appeals and after a brief review of the facts and circumstances, the issues supra have generated from, we shall now proceed to examine the facts and circumstances in each of the instant appeals.
4. Facts in the case of M/s. Baluchistan Foundry Ltd., are that it is in the process of setting up an industrial undertaking, the income where from has been exempted from tax under the Ordinance, because the provisions of clause (119) of the Second schedule to the Income Tax Ordinance are applicable thereto. Return is filed alongwith statements of account for the income year ending 30-6-1983, declaring nil income. Proceeds amounting to Rs.176,834 on account of sale of scrap etc. producing during construction have been set off against capital expenses. Similarly, interest amounting to Rs.263,864 earned, from five associated concerns, has also been set off against interest paid/accrued on loans sanctioned for the industrial undertaking because the borrowed funds yet to be utilised have been advanced to sister concerns. The learned DCIT has treated both the amounts supra as chargeable income from other sources under section 30 of the Income Tax Ordinance and the entire expenditure incurred on construction as well as on account of borrowed funds has been capitalised. The learned CIT (A) has upheld the impugned actions. Sale of scrap is held as income from other sources because commercial production, the income whereof is exempt under clause (119) supra, is yet to commence; hence exemption is not yet available. Similarly, interest earned has been held to be income from other sources because it is neither the income derived from the industrial undertaking nor the industrial undertaking has yet been set up; hence the instant appeal at the instance of the assessee.
5. The facts in the case of M/s. Rupafil Ltd., briefly, are that it is a public limited company, operating an industrial undertaking that has commenced commercial production since July, 1994. The income derived from its industrial undertaking has been exempted from tax under the Income Tax Ordinance, because provisions of clause (118-D) of the Second Schedule supra are applicable to such income. Returns are filed alongwith statements of accounts for the income years ending 30-5-1995 and 30-6-1996, declaring net losses amounting to Rs.207,748,000 and Rs.174,731 for the assessment years 1995-96 and 1996-97 respectively, after adjusting the amounts of Rs.1,678,000 and Rs.179,000 earned on account of interest on deposits in bank. The learned assessing officer has treated each of the amounts supra, in two respective assessment years, as income from other sources under section 30 and no expenditure is allowed under section (1)(b) on account of interest paid to banks on borrowed funds because it is allowed under section 23 as expenditure against business income under section 22.
6. Appeals have been preferred before the CIT(A) against the orders of the DCIT supra. While deciding the appeal for assessment year 1995-96 the learned CIT(A) has held:
"As regards the treatment awarded to interest received and its assessment as income from other sources it is noted that this issue has been the subject of several decisions of superior Appellate Authorities and some of which are conflicting in their findings. The Assessing Officer has relied upon an order of the learned Tribunal reported as 1996 PTD (Trib.) whereby for reasons discussed therein interest income in that case has been held to be taxable as income from other sources. The learned A.R. has placed reliance on an order of the learned Tribunal reported as 1988 PTD (Trib.) 369 whereby it was directed that interest income, in that case was not chargeable to tax as income from other sources.
Perusals of learned Tribunal's order No. 1996 PTD (Trib.) 11 shows that interest received was on account of appellant's own surplus funds. No such effort has been made by the Assessing Officer in the impugned assessment order. Under the circumstances it would be prudent to set aside the order on this issue with the directions to prove conclusively that conditions as pointed out in learned Tribunal's order No. 1996 PTD (Trib.) 11 exist before treating income from interest as income from other sources."
Hence, the instant appeals at the instance of the Department.
7. Facts, in the third case of M/s. Din Textile Mills Ltd., are that the respondent has filed its first return for the income year ending on 30-9-1989, corresponding to assessment year 1990-91. It has been incorporated on 13-6-1988 with a paid-up capital of Rs.40,000. Capital works in progress, at Tehsil Chunian, District Kasur, has been declared at Rs.22,646,177, financed through borrowings mainly from Directors. Overhead expenses are shown at Rs.289,812 and bank charges at Rs.3,072. It has earned interest on S.T.D. and PLS A/c. at Rs.506,667. No income has been declared in the return of income because no production has commenced yet. All expenses have been capitalised after deducting the amount of interest earned. The learned DCIT has treated the interest income supra, after deducting bank charges, as appellant's income from, other sources. The assessment order has been challenged before the CIT(A) who has held, relying upon the decision reported as 1988 PTD (Trib.) 369, that the impugned assessment is unsustainable; hence the appeal at the instance of the Department.
8. Thus, we find that facts and circumstances, in case of each of the three persons supra, liable to charge of income-tax under section 9 and super tax and surcharge under section 10 of the Income Tax Ordinance, 1979, differ from one and another in varying degree. However, interest earned on surplus of equity plus borrowed capital deposited in bank or advanced as loan to others is a common factor.
9. The Full Bench has been constituted in view of the contradictory decisions of the two Division Benches, on the two issues supra reported as 1988 PTD (Trib.) 369 and 1996 PTD (Trib.) 11.
10. Facts in the case reported as 1988 PTD (Trib.) 369 were that the appellant, a company incorporated on 10th July, 1980, filed its returns for assessment years 1982-83 to 1985-86 declaring nil income. The ITO while Processing the returns found that the appellant was floated with paid-up capital of Rs.35,000 divided into 7,000 ordinary shares of Rs.5 each for the purposes of setting up an industry for manufacturing of liquid sugar. For this purpose it had also borrowed loans which it not only spent on the project in each year but also kept the balance in banks on fixed deposits and earned interest amounting to Rs.11,79,631, Rs.17,48,413, Rs.3,338,847 and Rs.28,250 in assessment years 1983-84, 1984-85, 1985-86 and 1986-87 respectively. It, however, deducted this amount of interest from the amount of interest which it paid in each assessment year and then capitalised the balance as it could not go in operation in the assessment years concerned. The ITO, however, could not reconcile himself with this novel procedure. He therefore, called upon the appellant to explain and hold that the amount of interest derived from fixed deposits shall be treated as income from other sources and taxed accordingly. The Tribunal held:--
"Now, if we examine the facts of these appeals from the point of commercial expediency, it appears that the appellant had to pay interest on the borrowed loan. He, therefore, had two choices: either he could have kept the money in its safe and capitalised the interest paid, or should have earned some interest on the unutilised money and then capitalize the difference obtained after deduction of the interest earned from interest paid. In either case he could have capitalized the interest paid. In the later case, however, he could have minimised its liability whereas in the former case it would not have done so. As a businessman of ordinary intelligence and common prudence it adopted the second method and it is indeed the method of commercial expediency. At the time when it was minimising its interest liability it might not have known that its adventure would ultimately fail to see the day of commencement of production as it ultimately happened. Let us point out that as per statement of Mr. F A ., the appellant has not gone in production till today and this fact further shows the commercial foresight of the appellant and its financial advisers as they minimised their losses by depositing the balance money on interest. We are, therefore, of the considered view that the appellant rightly invested the balance money in fixed deposits and earned interest thereon so that its losses could be minimised. This is, in our judgment, best example of commercial expediency. We are, therefore, of the view that the interest income of the appellant earned under the facts and circumstances of these appeals was an income from business, and as such, it was rightly set off against the interest payable before the balance was capitalised for the simple reason that it was an expenditure admissible under section 23(1)(vii) of the Income Tax Ordinance. Let us point out that under the facts and circumstances of these appeals the loan was obtained for business of earning interest as well as for business of earning income from manufacturing liquid sugar. Hence the interest expenditure in proportion to interest income has been deducted and the balance has been capitalised.
Thus, in view of discussion made above, we allow these appeals and hold that interest income was not chargeable to tax as income from other sources. We also direct the ITO to allow deduction of interest earned from interest payable. "
11. The learned Bench has given the finding supra placing reliance firstly upon the ratio of decision cited at Bar in Eastern Investment Ltd. v. CIT (1951) 20 ITR 1 (S.C. India).
12. Briefly, facts of this case are that the assessee, an investment company, was originally formed for acquiring, holding and otherwise dealing with shares and Government securities which belonged to C. The share capital of the company was 250 lacs and the majority of its shares, including 50,000 ordinary shares of the face value of Rs.50,00,000, was held by C and the rest was held by the nominees of C. C died and S was appointed administrator of his estate. S held the 50,000 ordinary shares in that capacity. Money was needed by the executors of C and accordingly S entered into an agreement with the assessee under which the assessee agreed to reduce its share capital by Rs.50 lacs by taking over from S the 50,000 shares at Rs.100 a share and S on his part agreed to forego cash payment and to receive instead debentures of the face value of Rs.50 lacs carrying interest at 5 per cent. per annum "redeemable at the option of the registered holder at any time". The sanction of the High Court was obtained in due course and the agreement was carried out by the parties. The transaction was not challenged on the ground of fraud. The Income-tax Authorities, the Appellate Tribunal and the Calcutta High Court took the view that in computing the income of the assessee the interest paid on these debentures could not be deducted under section 12(2) of the Indian Income Tax Act, 1922, on the ground (a) that it was not expenditure incurred for the purpose of earning the income, profits and gains of the assessee and (b) that even if it was so, it was at any rate not expenditure incurred solely for that purpose.
13. The Supreme Court of India, under the facts and circumstances supra, found no relevance to the core issue, in the arguments that (1) the conversion did not, in any way, disturb the holding of the investments of the company; (2) or interfere with the earning of its income; (3) or it had the effect of diminishing its taxable income; (4) or that there was complete identity of person between the person whose shares were sold and the person who took the debentures and that the transaction resulted in considerable benefit to him; (5) or whether the transaction could be brought within the functions of an investment company; (6) or that the capital of the company could have been reduced in other ways; (7) or that the company had, at the time, sufficient liquid resources to effect the reduction of capital desired and so it was not necessary to resort this process. The Court held that as long as the transaction is not challenged as a fraud, and since there is not even an allegation of fraud, the test for present purposes is neither whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant's legistimate commercial undertaking in order, indirectly, to facilitate the carrying on of its business. Finally it is held:
"On a full review of the facts it is clear that this transaction was voluntarily entered into in order, indirectly, to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency. It therefore, falls within the purview of section 12(2) of the Income-tax Act, 1922, before its amendment in 1939."
14. We, therefore, find that the issue in this case is the nature of expenditure incurred and its incidence to business under the law. The ground of commercial expediency has not been considered in the context of the nature of income accrued to the assessee. Facts of decision in 36 ITR 329, 39 ITR 696, 46 ITR 511, 49 ITR 127 and (1978) 115 ITR 519 (SC Ind.) cited at Bar before the learned Bench are similar.
15. The next case cited at the Bar and relied upon by the learned Bench in the case ibid is reported as Motilal Hirabhai Spinning & Weaving Mills Ltd. v. CIT in (1978) 113 ITR 173 (Gujarat High Court).
16. We have availed the benefit of perusal of the decision of the Gujarat High Court NJ and we find that, according to the assessing officer, the assessee in that case, (1) was running a textile mill as far back as assessment year 1941-42 and thereafter, it discontinued its said business and derived income from property and interest on deposits; (2) the assessee always deposited the excess funds available with it with various parties and declared, up to assessment year 1969-70, interest income under the head "Income from other sources"; (3) in the assessment year in question interest income was derived from loans advanced to five parties and scrutiny of the accounts of those parties revealed that there was no frequency of advances made to those parties and that the transactions were mainly in the nature of deposits; (4) no borrowal was effected by the assessee in the assessment year under consideration nor in any of the earlier years to earn interest by lending money to the various parties and only surplus funds which were available with the company were advanced to earn interest; (5) the pattern of advances had also varied from year to year and in some years, monies were invested in banks while in other monies were placed either infixed deposit or in Sharafi account with certain companies.
17. The Income-tax Officer and the Appellate Assistant Commissioner negatived the claim of the assessee. The Tribunal, however, upheld the assessee's claim on the grounds that clauses 25 and 26 of the articles of association of the company authorised the company "to invest and deal with the moneys of the company in such manner as may from time to time be thought necessary" and "to lend, deposit or advance money, securities and property to such persons, firms or companies limited or otherwise and on such terms as may seem expedient and in particular to customers and sellers and others having dealings with the company. " The proceedings of the meetings of the board of directors showed that the directors were regulating the advances to be made to various parties and that they decided not only upon the amounts to be advanced but also the rate of interest to be charged depending upon the exigencies of the situation. The Tribunal also found that there was a systematic activity of advancing monies to Carious parties.
18. At the instance of the revenue, the Tribunal referred the following question of law arising out of its order for the opinion of this Court:
"Whether, oft the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income derived by the assessee company from deposits arid loans is 'income from business' and not 'income from other sources'?"
19. The Gujarat High Court finally held that the last part of clause 25 of the articles of association of the company referred to advances being made in particular to customers and sellers and others having dealings with the company. The last part could not be read as controlling the first part. The objects of the company, having regard to the language in which they were couched, authorised the company to make advances not only to customers and sellers but also to any "persons, firms or companies" as the assessee company thought proper. The proceedings of the board of directors revealed that the directors were regulating the advances. They treated it as a part of the activity which the company had to undertake. The Tribunal rightly applied the relevant tests, namely, volume, frequency, continuity and regularity of the transactions in reaching the conclusion that the activities of the assessee in giving advances constituted business. The interest earned by the assessee on the advances made by it was assessable as income from business.
20. We further find that the ratio of the decision of Gujarat High Court supra is that in taxing statutes the word "business" is used in the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. In order to infer from a course of transactions that the person intended thereby to carry on business, ordinarily the characteristics of volume, frequency, continuity and regularly indicating an intention to continue the activity of carrying on the transactions must exist. But no single test is decisive of the intention to carry on business. IB In the light of all the circumstances an inference that a person desires to carry on business may be raised.
21. With due respect to the view of the learned members of the Bench who decided the case reported as 1988 PTD (Trib.) 369 we are unable to pursuade ourselves to subscribe to their view that the ratio of decision ibid supported their view that income derived by their appellant from deposits kept in bank was profits and gains of business. We find, on the contrary, that the Gujarat High Court, in tile case ibid, has held that profits and gains from business are earned normally through devotion of time, attention and labour of a person, indicating an intention to continue the activity which, in the case before the Court, is manifest from the deliberated decisions of the Board meetings to make advances to various parties at the rates warranted by circumstances and expressly provided in the Articles of the Memorandum.
22. The learned Bench, thereafter, has considered the ratio of decisions relied upon by the learned D.R. and has observed that in CIT v. United Wire Ropes Ltd. (1980) 121 ITR 762 (Bom. H.C.), Bengal and Assam Investors v. CIT (1976) 33 Tax 8 (S.C. Ind.) and CIT v. Liquidators Khulna Bagerhat PLD 1962 SC 128 it is held that, where surplus funds either out of share capital or borrowed capital are deposited in Banks, the interest accrued thereon, and, where investment of such funds in shares is made simply to earn dividends, the interest and/or dividend, so derived, are income from other sources. The learned Bench has further observed that the ratio of decision in Trace Cable Co. Ltd. v. CIT (1969) 72 ITR 503 is that if a person carries on any business other than a business of banking or dealing in money, deposits surplus funds in a bank and receives interest thereon, it cannot be contended that it is income from business nor can it be contended that, where pending commencement of business any expenses are incurred by a company connected with the running of its affairs, such expenditure is incurred for earning interest on deposits of surplus funds in Bank. The learned Bench has further noted that in United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688, relied upon by the learned D.R., the Supreme Court of India has held that interest on securities held by the Bank is part of its banking business income.
23. However, the learned Bench, in our view, seems to have been influenced by the ratio of decisions in California Copper Syndicate Ltd. v. Haris, Surveyor of Taxes: 5 TC 159, Mazagaon Dock Ltd. v. CIT (1958) 34 ITR 3688 (S.C. Ind.) and Bandengwers Ltd. v. Clarke (1935) 31 ITR (Eagles case) 17 which are not relevant, either in context or in content. It has escaped the attention of the learned Bench that to earn interest on "investment" is distinct from earning interest on "deposit". Thus, the learned Bench has arrived at the fallacious conclusion that earning of interest by the appellant, who had obtained loan for setting up a liquid sugar manufacturing factory, and who would have been manufacturing liquid sugar when it might have started the production, is also to be deemed an income from business on the principle of commercial expediency.
24. Subsequently, in the decision reported as 1996 PTD (Trib.) 11 where the appellant; a Public Limited Company, engaged in the manufacture and export of sale of gwar gum, has been assessed on total income of Rs.6,173,366 including a sum of Rs.2,222,287 classified in the appellant's statements of account as "other income" according to International Accounting Standard (IAS). Other income supra is on account of interest earned on placement of temporary surplus borrowed business funds, during the year, in deposit account. The learned DCIT has assessed it as income from other source and has held that interest accrued on borrowed capital is not admissible expenditure against interest earned on deposit account but admissible as business expenditure. In an appeal preferred before the CIT(A), appellant's contention that the amount of interest supra constitutes part of business income has not found favour of the learned CIT(A). The alternate contention that if interest income has to be separately computed, interest paid should be allowed to be set off against such income has also been dismissed.
25. When the appeal preferred against the order of the learned CIT(A) supra is heard by the Tribunal, the learned counsel of the appellant has placed reliance upon the decisions in case reported as 1988 PTD (Trib.) 369 = 1988 PTD (Trib.) 369, C.I.T. v. A.P. Industrial Infrastructure Corporation Ltd.; (1989) 175 ITR 361, wherein interest income, in proclaimed similar circumstances, has been held to be assessee's business income. However, the Tribunal has found that 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 has not yet been set up and the income relates to pre -operation period. Moreover the sum on which interest earned and incurred is a bank loan. In the case reported as (1989) 175 ITR 361 the assessee corporation has received and disbursed Government funds in the course of its business activities and has kept the money in bank in the interval between receipt and disbursement of funds. That way money is virtually assessee's stock-in-trade. The interest income is therefore, considered as business income.
26. The learned Bench, therefore, has held:
"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. 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."
27. Having considered supra, at length, the genesis of the issue being considered by us, we now revert to the submissions made before us by the learned representatives of the two sides. We find that the learned representatives of the parties supra agree that both section 9 as well as section 10 provide that tax specified therein shall be charged levied and paid for each assessment year, in respect of the total income of the income year, of every person at the rate or rates specified in the First Schedule. (Emphasis provided by us). Further, there is no dispute on the facts that tax under the Ordinance is charged, levied and paid, of course subject to the provisions of the Ordinance, for each assessment year, in respect of the total income of the income year, of every person.
23. Now, the term "person", as used supra, according to subsection (32) of section 2 of the Ordinance, includes an individual; a firm, an association of persons, a Hindu undivided family, a company, a local authority and every other artificial juridical person and the term "total income" according to subsection (44) of section 2 of the Ordinance means the total amount of income referred to in section 11 computed in the manner laid down in the Ordinance, and includes any income which, under any provision of the Ordinance, is to be included in the total income of an assessee.
29. Further we see that section 15 of the Income Tax Ordinance, 1979 requires that all income shall, for the purposes of the charge of tax and the computation of total income, be classified under the following heads, namely: ---
"(a) Salary.
(b) Interest on Securities.
(c) I Income from House Property.
(d) Income from Business or Profession,
(e) Capital gains; and
(f) Income from other Sources.
30. The learned D.R. on the basis of the foregoing provisions of law submits that the consideration before the assessing officer, while classifying the incomes as required under section 15 supra, except for any specific provision of law to the contrary or on the basis of specific facts and circumstances of the specific case of a person, is neither that the assessee is an individual, a firm, an association of persons, a Hindu Undivided family, a company, a local authority o: any other artificial juridical person, nor whether the assessee is a resident or a non-resident nor whether the assessee is a salaried employee, a landlord, a house property owner or a person engaged in business or profession nor whether the assessee is a person of ordinary intelligence and common prudence or possessing commercial foresight and expediency. The sole criterion to classify the income under section 15 ibid, in ordinary course, is the source and/or the nature of activity and conduct where from and/or whereby the particular income is being generated. As long as the source can be factually found, circumstances seldom have any bearing on the characteristic of the income.
31. Thus, interest earned by an assessee who deals in money as stock-in trade is "income from business" as held in CIT v. A.P. Industrial Infrastructure Corpn. Ltd. (1989) 176 ITR 361. However, it cannot be anything but "income from other sources" for an assessee who has earned it on money held as capital, irrespective of the fact that it is borrowed or contributed by Proprietor/Director/Partner/Sponsor or Shareholder, as held in several decisions of Indian jurisdiction reported in (1968) 69 ITR 824 (M.P.) (Madhya Pardesh State Industries Corpn. Ltd. v. CIT), (1969) 72 ITR 503 (Ker H.C.) (Traco Cable Company Ltd. v. CIT), (1982) 135 ITR 390 (Collis Line Pvt. Ltd. v. ITO) (1988) 170 ITR 545 (Bokaro Steel Ltd. v. CIT), and 1995 PTD 1189 (CIT v. Bihar Alloy Steels Ltd.) (H.C. Patna). This view is also supported by the decision of Peshawar High Court reported as CIT, N.-W.F. P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178 wherein it is held that interest received by the Corporation from deposit of funds in Bank is not attributable to its operations of sale of timber. Also in an earlier decision the Supreme Court of Pakistan in CIT, Dacca v. Liquidator, Khulna-Bagerhat Railway Company Ltd. 1962 PTD 415 confirmed the finding of Dacca High Court in PLD 1961 Dacca 108, where the memorandum and articles of association also provided that the company could lend, invest or otherwise employ moneys belonging to or entrust to the company upon securities or shares as may be thought proper and from time to time vary the same as the company thought fit and whole of the share income was not immediately required for expenditure on the construction of the Railway line, some amounts were in fact invested and kept deposited in the bank and the company received income by way of interest on such deposits, the interest received on money kept in Bank, being part of its business capital, is held to be its income derived from "other sources" and certainly not its income from business.
32. The learned counsel, appearing on behalf of the assessee (appellants/respondent) on the other hand, have solely relied upon the decision of the Tribunal reported in 1988 PTD (Trib.) 369 which we have already considered at length supra, we have already recorded the reason why we are unable to subscribe to the findings of the learned Bench. Meanwhile another decision of a Division Bench of the Tribunal, on the same issue, has been reported in 1998 PTD (Trib.) 3319 wherein, besides the decision of the Division Bench of the Tribunal ibid, other decisions of the Indian jurisdiction, cited at the Bar, have been considered. Since we are persuaded to subscribe to the findings of the Bench we are reproducing the findings with approval hereunder:
"This brings us to the issue if the treatment of interest income and refusal of the Revenue to allow expenses, as claimed with reference to the provisions of section 31(1)(b), was legally correct. At the outset it needs to be mentioned that the claim of the assessee to allow interest on borrowed capital as an expense in the circumstances is not based upon any statutory provision. It is based upon the above reported judgments from Indian jurisdiction and most of all on the ratio settled by this Tribunal in 1988 PTD (Trib.) 369. The fact of the matter is that except for this case no other judgment is express in supporting the claim of the assessee. All other cases cited at the Bar are not only from foreign jurisdiction but are also clearly distinguishable. In the first case Security Printers v. CIT 1986 PTD (Trib.) 490 pre-incorporation travelling expenses were allowed against income earned and disclosed for that period. In the second case as well re: Kewalchand Nemchand Mehta v. CIT, Bombay (1968) 67 ITR 804 the assessee was finally allowed to set off interest earned from borrowed money against the interest income which accrued on such money and was included in his total income. In the third case, CIT, Gujarat v. Motilal Hirabhai Spinning & Weaving Co. Ltd. (1978) 113 ITR 173, the assessee company was closed after having remained in business for many years. Also advances to parties were found to be one of the permissible business activities as mentioned in the Memorandum of Association. The next case Rai Bahadur Visheshwara Singh (deceased) and others v. CIT, Bihar (1961) 41 ITR 685 is also not relevant inasmuch as the Court on the facts before it and considering the magnitude and frequency of the transactions, the ratio of sales purchases and total holding of the assessee found him to be engaged in business of dealing in shares as against treatment of the Revenue as an investor simpliciter. The two cases of the Supreme Court of Pakistan CIT v. Pakistan Industrial Engineering Agencies 1992 PTD 954 and Packages Ltd. v. CIT 1993 PTD 758 are also distinguishable as the facts as well as the issues before their Lordships were not identical to those in the present case. The cases relied upon by the learned Legal Advisor on the other hand certainly give support to the position taken up by the Revenue. A specific reference in this regard can be made to the cases CIT, N.-W.F.P. w. N.-W.F.P. Forest Development Corporation 1990 PTD 178, CIT v. Hindustan Electro Graphites Ltd. 1991 PTD 252; CIT v. Bihar Alloy Steels Ltd., (1994) 206 ITR 351; Addl. CIT, Madras v. Madras Fertilizers Ltd. (1990) 122 ITR 139; CIT v. Maglam Cement Ltd. (1996) 217 ITR 369; Madhya Pradesh State Industries Corporation Ltd. v. CIT, M.P. (1968) 69 ITR 824 and Bokaro Steel Ltd. v. CIT (1988) 170 ITR 545, where in comparable situations interest income was held assessable as "Income from other sources".
We will agree that facts in the abovestated judgment were identical to those unfolded before us in this case. However, the ratio settled in that case cannot be followed for the simple reason that it is diametrically opposed to the ratio and principle settled by the Dacca High Court as well as the Supreme Court of Pakistan in re: Lequidator Khulna Begarhat (supra). After going through the judgment of the High Court as well as that of the Supreme Court three principles emerge boldly. First, that if an income properly falls under the head it cannot be assessed by the ITO under another. Secondly that where a businessman keeps his money intended to be used as a capital of his particular business or part of such money or his other money in the banks and derives income by way of interest it would not be his income from business but from "other sources". Thirdly, that there was a difference between the objects and the power of activities of a company in carrying out that object into effect.
It will be noted that both the aforesaid judgments were duly relied upon before the learned Division Bench. However none of them was either discussed or the facts were distinguished in order to hold them inapplicable. As the three principles settled above indicate, the ratio was surely applicable in the facts before the learned Division Bench. Therefore, its conclusion which was otherwise based upon the alleged commercial expediency, a term borrowed from the aforesaid judgment from Indian jurisdiction, resulted in a decision which can only be described as a decision per in curium. We are conscious of our view held in 1997 PTD (Trib.) 879 that ratio settled by the Tribunal is binding upon a Bench of equal strength. However, it will be noted that Article 189 of the Constitution enjoins that any decision of the Supreme Court shall, to the extent that it decides a question of law or is based upon or enunciates a principle of law, be binding on all other Courts in Pakistan. The aforesaid three principles being clearly applicable to the facts in hand the ratio settled in the aforesaid judgment of the Tribunal cannot be followed. In 1995 CLC 1453 re: Abdul Razzak v. The Collector of` customs the Karachi High Court observed: "A per incuram decision, even of the highest Court does not bind any other Court and it matters little that such Court itself be at the lowest rung of the hierarchy of Courts."
33. Regarding the weight given to the consideration of "commercial expediency", given in the decision reported in 1988 PTD (Trib.) 369 supra also, we agree with the view held by the Division Bench in the case re: 1998 PTD (Trib.) 3319 that the term commercial expediency is too general a phrase to effect the classification of income as made by law or to change their nature or nomenclature. The learned Bench has rightly observed that an act of commercial expediency of one businessman may be taken as blunder by another of equal prudence and, therefore, an intention has to be judged on the touchstone of legal provisions and not the legal provisions on the mercurial human wishes and desires.
34. This brings us to a consideration of the provisions of section 22 of the Income Tax Ordinance, 1979 which provides:
"22. Income from business or profession. ---The following incomes shall be chargeable under the head "Income from business or profession", namely---
(a)profits and gains of any business or profession carried on, or deemed to be carried on, by the assessee at any time during the income year;
(b)income derived by any trade, professional and similar association from specific services performed for its members; and
(c)value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
Explanation. ---Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business carried on by the assessee".
35. The phrases "carried on" as used in clause (a), "specific services performed" as used in clause (b) and "exercise of a profession" as used in clause (c) indicate that some kind of continuous physical and/or mental human activity is involved in generation of income from business. This view is supported by several decisions of Indian jurisdiction. The Supreme Court of India in Senairam Doongarmal v. CIT (1961) 42 ITR 392-396 has observed that the term business "denotes as activity with the object of earning profit". Further, in CIT v. Lahore Electric Supply Company Ltd.: (1966) 60 ITR 1 at page 5., it is held that the term business "contemplates an activity capable of producing a profit which can be taxed" and in the decision reported as Narayan Swadeshi Weaving Mills v. C.E.P.T. (1954) 26 ITR 765 at page 773, business "connotes some real, substantial and systematic or organised source of activity or conduct with a set purpose".
36. Thus, in our considered opinion, income earned by way of interest -without engaging in an activity falling under the meaning of business or, say where money is not utilised as stock-in-trade, is income from other sources under section 30 of the Income Tax Ordinance. Neither the assessee s personal status nor the nature of business, profession or occupation, one is engaged in, would change the nature of such income. Similarly, neither the source of the funds generating such interest income nor the purpose for which such funds are obtained by the depositor would have any bearing on the nature of such income.
37. In short, neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains being derived or to be derived wherefrom, are exempt under the Income Tax Ordinance or otherwise, nor the fact that such company or an assessee having any other personal status under subsection (32) of section 2 has deposited the funds out of equity or out of borrowed capital, nor the fact that, in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession would change the classification of such income under section 15 of the Ordinance.
38. Regarding the alternate plea for allowing interest paid on the borrowed capital, the deposit in bank whereof has yielded the interest income under section 30 supra we find that in the cases of both Baluchistan Foundry Ltd. as well as Rupafil Ltd. such amounts are "borrowed for the purposes of the business" and not wholly and exclusively for the purpose of earning income from other sources i.e., interest in the instant cases. The expenditure incurred on account of interest on such borrowed capital, therefore, is admissible as expenditure revenue or capital as the circumstances warrant under section 23(1)(vii) and, not as expenditure laid out or expended wholly and exclusively for the purposes of earning interest income as admissible under section 31(1)(b) of the Ordinance. Accordingly, we confirm the view that the expenditure incurred on account of interest on borrowed capital is not to be deducted under section 31(1)(b) from interest earned on deposit of such funds in Bank assessable as income from other sources under section 30 of the Ordinance.
39. We, accordingly, overrule the decision, on this issue, of the Division Bench reported as 1988 PTD (Trib.) 369 and approve the view taken by the two Division Benches of this Tribunal in the judgments reported as 1996 PTD 11 and 1998 PTD (Trib.) 3319. We confirm the finding of the learned CIT(A) in the case of Baluchistan Foundry Ltd. and dismiss the appeal at the instance of the assessee; vacate the decision of the learned CIT(A) in Rupafil Ltd. as well as the decision in Din Textile Mills Ltd., and allow the appeals at the instance of the Department by restoring the assessment orders.
C. M. A./7/(Trib.)
Order accordingly.