Income Tax Ordinance (XXXI of 1979)---

----Ss.22, 30 & 136(2)---Income from business or profession---Interest income---Business income or income from other sources---Reference-- Assessee had not carried on any business during the relevant year and had earned interest income on loan advanced---Carry forward of losses-- Adjustment of interest income against losses of business---Assessing Officer refused to adjust the amount declared by way of loss on the ground that loss represented the loss from business and could not be adjusted against the income which was not earned from the business---First Appellate Authority confirmed the assessment order---Appellate Tribunal directed the Assessing Officer to treat the interest income as income from business on the basis of previous year assessment---Reference---Department contended that there was not an iota of evidence regarding the closing down of business by assessee and starting a new business of money lending so as to infer- that loan advanced was business of the assessee liable to be assessed under S.22 of the Income Tax Ordinance, 1979---Validity---Impugned order of Appellate Tribunal was not only based on misreading and overlooking the evidence and material on the record but was also contrary to the provisions of the Income Tax Ordinance, 1979 inasmuch as in the absence of a finding that assessee was doing the business of money-lending, the interest income could not be treated as business income so as to be charged to tax under S.22 of Income Tax Ordinance, 1979---Such interest income was to be charged to tax under S.30 of the Income Tax Ordinance, 1979 which specifically included interest income under the heading "income from other sources"---Appellate Tribunal having taken into consideration extraneous material and non-existent facts its order could not be sustained in circumstances---Order of Appellate Tribunal was set aside and order of Commissioner of Income-tax (Appeals) was restored by High Court.

Commissioner of Income-tax v. Motilal Hirabhai Spinning and Weaving Co. Ltd. (1978) 113 ITR 173 distinguished.

M. G. Hassan for Applicant.

Date of hearing: 8th October, 1998.

JUDGMENT

SAIYED SAEED ASHHAD, J.---This income-tax case has arisen from an application under section 136(2) of the Income Tax Ordinance, filed by the applicant/Department framing therein six questions and claiming them to be questions of law for seeking the opinion of this Court. The questions of law are as under:--

(a) Whether the finding of fact recorded by the Appellate Tribunal is supported by any evidence?

(b) Whether the finding of the Appellate Tribunal was not vitiated by its omission to consider the order of the CIT (Appeals) for the assessment year 1987-88?

(c) Whether on the facts and in the circumstances of the case, the interest income is not taxable as "income from other sources" under the provisions of section 30(2) (b) of the Income Tax Ordinance, 1979?

(d) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that in the instant case, the interest income should be treated as income from business or profession?

(e) Whether on the facts and in the circumstances of the case, a previous assessment based on the incorrect application of law, is binding in the future assessment years?

(f) Whether on the facts and in the circumstances of the case, the assessment year 1988-89 was not independent and self-contained year for the purpose of assessment to income-tax?

The facts leading to the filing of the income-tax case are that the respondent/assessee filed his return of income for the assessment year 1988-89 declaring a loss of Rs.8,416 and the return was revised on 12-11-1988, declaring an income for the year at Rs.20,993 and an overall loss of Rs.3,29,883 which included brought forward loss of Rs.3,50,876 of the earlier years. During the assessment year the company had not carried on any business and earned interest income of Rs.50,704 on loan advanced to the associate concern M/s. Irfan Enterprises (Pvt.) Limited. The Income-tax Officer while framing the assessment added a sum of Rs.24,476 claimed by the respondent/assessee by way of depreciation on car, and a sum of Rs.2,000 out of telephone expenses of Rs.2,586. Both' the amounts were disallowed on the ground that the respondent/assessee had not done tiny business in the relevant assessment year. The Income-tax 0fl:cer also refused to adjust the amount declared by way of loss on the ground that the same represented the loss from business and could not be adjusted against the income which was not earned from the business. The respondent/assessee feeling aggrieved with the assessment framed by the Income-tax Officer filed an appeal before the Commissioner of Income-tax (Appeuisi, who vide order dated 28-7-1989 dismissed the appeal and upheld the assessment framed by the Income-tax Officer. Feeling aggrieved and dissatisfied with the order of the Commissioner of Income-tax (Appeals), the respondent/assessee filed a second appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal by its order dated 17-9-1990 set aside the order of the Commissioner of Income-tax (Appeals) and remanded the matter to the Income-tax Officer with direction that he should frame the assessment and decide the issues regarding brought forward loss, dcprecia6on and telephone expenses etc. in the light of the discussion in the impugned order. With regard to the issue whether the income disclosed by the respondent/assessee was to be assessed as income from business under section 22 of the Income Tax Ordinance (hereinafter referred to as the Ordinance) or from other sources, the Appellate Tribunal held that both the Officers fell in error in treating the income of the respondent/assessee as income from other sources. The Appellate Tribunal relying on the case of Commissioner of Income-tax v. Motilal Hirabhai Spinning and Weaving Co. Ltd. reported in (1978) 1130 ITR 173 as well as on the assessment for the earlier assessment year 1987-88 wherein the Income-tax Officer had treated. the income of the respondent/assessee from business, which finding after being confirmed by the Commissioner of Income-tax (Appeals) was not challenged by the applicant/Department in a second appeal, directed the Income-tax Officer to treat the interest income as income from business in the aforesaid assessment year 1988-89. The Department feeling dissatisfied with the order of the Appellate Tribunal submitted a Reference Application being R.A. No.255/HQ of 1990-91 framing a question of law therein and praying the Appellate Tribunal to refer the same to this Court for seeking its opinion. The Tribunal by its order dated 1,10-1991 refused to refer the question to this Court and dismissed the aforesaid Reference Application. Finding no other alternative the, applicant/Department approached this Court directly under section 136(2) of the Income-tax Officer, seeking opinion of this Court on the aforesaid six questions, claimed to be questions of law.

We have heard the arguments of Mr. M.G. Hassan, learned counsel for the applicant/Department. None appeared on behalf of the respondent/assessee though he is duly represented by an advocate.

Mr. M.G. Hassan, the learned counsel for the applicant/Department vehemently attacked the order of the Appellate Tribunal and submitted that the same was based on misreading, misconstruing and overlooking the evidence and material on record and further that in arriving at the findings contained in the said order there was a' lack of application of mind and appreciation of intricate questions involved in the case, He drew our attention to the portion of the Appellate Tribunal's order whereby it had directed the Income-tax Officer to treat the income of the respondent/assessee in the said assessment year as income from business and submitted that the said finding was absolutely contrary and in conflict with the material on record which the Appellate Tribunal completely ignored and/or overlooked in arriving at its aforesaid finding. He further submitted that the said finding was said to have been arrived at on the basis of past history which observation was absolutely contrary to the facts and circumstances inasmuch as the assessment framed by the Income-tax Officer under section 22 of the Ordinance in the assessment year 1987-88 was set aside by the Commissioner of Income-tax (A) vide his order dated 25-2-1988 and the Income-tax Officer was directed to assess the income-tax under section 30 of the Ordinance. Mr. M.G. Hassan further submitted that the Appellate Tribunal had wrongly placed reliance on the case of Indian origin referred to hereinabove, on two grounds; firstly, that unlike the facts of the case relied upon, there was no evidence or material on record to establish and conclude that the assessee had completely closed down the business which it was originally carrying on; and secondly, that the Indian Income Tax Act does not provide or contain a separate provision for assessment of interest income under the head of income from other sources, whereas in the Ordinance interest income has been specifically included under the head "interest from other sources" in section 30 thereof. Another ground on which Mr. M.G. Hassan attacked the order of the Appellate Tribunal was that there was not an iota of evidence even to suggest that the respondent/assessee had completely closed down its business and had started the business of money-lending so as to infer that advancing loans was the business of the respondent/assessee for earning income by charging interest thereon, which was a necessary ingredient to be established before the interest income earned by the respondent/assessee could be treated as income from business, liable to be assessed under section 22 of the Ordinance.

We have considered the arguments advanced by Mr. M.G. Hassan and have also examined the order of the two Officers below as well as the impugned order of Appellate Tribunal. We are unable not to disagree with the contention that the Appellate Tribunal in passing the impugned order has not only misconstrued the evidence and material on record, but has also based the same on extraneous material. The Appellate Tribunal also made observations which are not consistent and are contrary .to the facts and circumstances of the case. The Appellate Tribunal issued directions to the Income-tax Officer for assessing the interest income earned by the respondent/assessee in the relevant year as business income under section 22 of the Ordinance on the basis of past history of the respondent/assessee relating to the assessment year 1987-88, whereas the fact is that the assessment framed by the Income-tax Officer in the assessment year 1987-88 under section 22 of the Ordinance was set aside by the Commissioner of income-tax (Appeals) with direction to the Income-tax Officer to frame assessment under section 30 without allowing business expenses against the same and also without setting off the business loss, brought forward from earlier years, against the declared interest income. The Appellate Tribunal had also wrongly placed reliance on the case of Commissioner of Income-tax v. Motilal, ibid; without holding an. enquiry as to whether the respondent/ assessee had completely and finally closed down its business which it was earlier carrying on and which was very important and decisive factor taken into consideration by the Gujarat High Court for coming to the conclusion that the interest income earned by the assessee was to be treated as income from business. It was also pointed out by Mr. M.G. Hassan that in the Indian income Tax Act, 1961 the provisions relating to "Income from other sources" contained in section 56 thereof does not include or provide for inclusion of interest income as income from other sources, whereas section 30 of the Ordinance relating to "Income from other sources' specifically includes interest income within its scope. For a clear understanding and appreciation of the aforesaid issue, it would be appropriate to reproduce section 30 of the Ordinance and section 56 of the Indian Income Tax Act. Section 30 of the Ordinance is as under:---

"30. Income from other sources.---(1).....................................

(2) In particular, and without prejudice to the - generality of the provisions of subsection(1), the following income shall, save as otherwise provided in this Ordinance, be chargeable under the head "Income from other sources", namely:--

(a) dividend;

(b) interest, royalties and fees for technical services;

(c) ground rent;

(d) income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery, plant or furniture; and

(e) any income to which subsection (12) of section 12 or section 13 applies. "

Section 56 of the Indian Income Tax Act is as under;---

"56.---(1).......................................................................

(2) In particular, and without prejudice to the generality of the provisions of subsection (I), the following income shall be chargeable to income-tax under the head "Income from other sources", namely"-

(i) dividends;

(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business of profession";

(iii) when; an assessee lets on hire machinery, plant or furniture belonging to him and also building, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or professions."

We are satisfied beyond any doubt that the impugned order of the Tribunal cannot be said to be a valid and proper order and cannot be sustained.

The six questions framed on behalf of the applicant/Department, in the application under section 136(2) have not been properly framed. The issues and the points raised in the aforesaid six questions can easily be covered by two questions. Accordingly, we frame the following two questions which in our opinion would cover all the aspects spread over the aforesaid six questions. The questions framed by us are as under:-

(i) Whether under the facts and circumstances of the case, the Appellate Tribunal was justified in directing the Income-tax Officer to frame as assessment under the head "Income from business" under section 22 of the I.T.C. in respect of the interest income earned during the assessment year 1988-89?

(ii) Whether under the facts and circumstances of the case the Appellate Tribunal was justified to set aside the finding of the Income-tax officer regarding refusal to adjust the brought forward loss against the declared interest income and disallowing the depreciation of a car and telephone expenses on the ground that no business was conducted by the respondent/ assessee?

Upon the above discussion, we have come to the conclusion that the impugned order of the Appellate Tribunal is not only based on misreading and overlooking the evidence and material on the record but is also contrary to the provisions of the Ordinance inasmuch as in the absence of a finding that the respondent/assessee was doing the business of money-lending, the interest income could not be treated as business income so as to be charged to tax under section 22 of the Ordinance. The interest income was to be charged to tax under section 30 of the Ordinance which specifically includes interest income under the heading "Income from other sources". In arriving at the conclusion the Appellate Tribunal had taken into consideration extraneous material and non-existent facts. The impugned order cannot be sustained in view of the defects pointed out by us during the course of the aforesaid discussion.

Accordingly, this income-tax case is allowed and both the questions of law which arise from the order of the Appellate Tribunal framed by us are answered in the negative. The impugned order of the Appellate Tribunal is set aside and the order of the Commissioner of Income-tax (Appeals) is restored.

C.M.A.97/K(Tax) Questions answered.