KOHI NOOR INDUSTRIES, LAHORE VS COMMISSIONER OF SALES TAX, LAHORE
2001 P T D 476
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
Messrs KOHI NOOR INDUSTRIES, LAHORE
versus
COMMISSIONER OF SALES TAX, LAHORE
C.T.R. No. 26 of 1978, heard on 26/09/2000.
Income-tax Act (II of 1922)---
----S.10(2)(iii), second proviso [as introduced by Finance Act (? of 1967)]-- Sales Tax Act (III of 1951), S.17(1)---Allowable expenses---Disallowing proportionate interest relating to borrowed capital---Introduction of second proviso to S.10(2)(iii) of Income-tax Act, 1922 --- Retrospectivity --- Assessing Officer made disallowance of interest claimed as expense under S.10 of Income-tax Act, 1922 which order was maintained by the Income-tax Appellate Tribunal---Validity---Mere fact that the borrowing in respect of which the interest was claimed as an expense was made before the introduction of the second proviso to S.10(2)(iii) of the Act did not make application of the proviso retrospective---Burden to prove that the borrowing was not made to replenish the shortfall in working capital was certainly on the assessee---Assessee having failed to bring on record any evidence in that regard on disallowance as provided for in the second proviso to S.10(2)(iii) of Income-tax Act, 1922, during the period under review, was rightly made by the Authorities.
Commissioner of Income-tax, Lahore v. Sheikh Muhammad Ismail & Co. Lyallpur 1986 SCMR 968 and Ever Shine v. Commissioner of Income-tax 1995 PTD 614 ref.
Imtiaz Javed Hashmi for Petitioner.
Muhammad Ilyas Khan for Respondent
Date of hearing: 26th September, 2000.
JUDGMENT
NASIM SIKANDAR, J.---At the instance of the assessee, a Private Ltd. Co. engaged in manufacturing of Textile Sugar and Chemicals etc. the Lahore Bench of the Income Tax Appellate Tribunal has framed following questions of law for our opinion which are stated to have arisen out of their order, dated 11-6-1974.
QUESTIONS
(i) Whether in the facts and circumstances of the case the Tribunal was justified in disallowing the proportionate interest relating to borrowed capital?
(ii) Whether the 2nd proviso to section 10(2) (iii) of the Income-tax Act as introduced by the Finance Act, 1967 with effect from 1st of July, 1967 is applicable to the interest payable on borrowings made by the applicant before 1st of July, 1967?
2. While framing assessments for the two years involved, viz. 1967-68 and 1968-69', the Assessing Officer made a disallowance of interest claimed as an expense under section 10 of the Late Income-tax Act of 1922. It was found as a fact that the interest claimed as expense had been paid oil monies borrowed to replenish the funds diverted to Tax Free Units. Reference in this regard was made to second proviso to section 10(2) of the late Act of 1922 which at the relevant time read as under:---
"Provided further that no allowance shall be made under this clause in any case for so much of the interest as relates to the capital borrowed to replenish the .ash or any other asset or assets transferred to a newly set up industrial undertaking or to an expansion of 'an existing industrial undertaking whose income, profits and gains have been exempted under section 15-BB notwithstanding the fact that such newly set up industrial undertaking or such expansion of an existing industrial undertaking is a branch of a subsidiary. "
3. In the first round the matter was remanded by Income-tax Tribunal for certain factual inquiries. However, since the Assessing Officer repeated the disallowance the assessee again approached the Tribunal. It was contended that the investments in Tax Free Unit namely United Chemicals Limited from 1961 onward were made from the sources available with the assessee and that this position had all along been accepted by the Revenue till the immediate preceding year and as a result thereof interest on borrowed capital was allowed. Before the Tribunal it was further contended that all investments were made in the Tax Free Unit by 31-12-1963 and that neither any fresh borrowing was incurred nor during the period under assessment any fund was diverted to the Tax Free Unit. Rather, it was claimed that the statutory Tax Free period of four years having already gone, no disallowance of interest could be made. Therefore, it was argued that these units having become Taxable, the disallowance of the interest was totally unjustified.
4. However, the learned Tribunal disagreed. In their opinion, the appellant transferred the capital to the tune of Rs.3,25,27,396 to Tax Free Unit and, therefore, had to resort to borrowing money to that extent in order to run its own business. Further that since the second proviso to section 10(2)(iii) came on the statute book for the first time in the year 1967, the allowing of interest in earlier years was immaterial. According to them allowing interest in the previous years could not stand in the way of Assessing Officer to disallow it in the two years after introduction of said proviso. The Tribunal also rejected the contention that the proviso placed a bar on allowing of the interest only in respect of the capital that was borrowed to replenish the short fall from the enforcement of the proviso onwards. Accordingly the contention that the Assessing Officer had given retrospective effect to the proviso was rejected.
5. Mr. Imtiaz Javed Hashmi learned counsel for the petitioner has repeated the arguments earlier put forth before the Tribunal. Also relies heavily upon a reported judgment of the Supreme Court of Pakistan in re: Commissioner of Income-tax, Lahore v. Sheikh Muhammad Ismail & Co., Lyallpur cited as 1986 SCMR 968 to contend that the disallowance of the kind could not have been made. Also states that the learned Income-tax Tribunal recorded certain findings of facts with regard to the actual borrowing and the funds diverted to Tax Free Unit which were not based upon the record.
6. Mr. Muhammad Ilyas Khan learned counsel for the Revenue supports the disallowance as well as the reasons given by the Tribunal while maintaining the same.
7. Taking the contention with regard to the alleged retrospectivity of the aforesaid proviso first we find that the submissions made in this regard are necessarily misconceived. Mere fact that the borrowing in respect of which the interest paid was claimed as an expense was made before the introduction of the said proviso does not make its application retrospective. The Assessee claimed an expense in the two years under review which, according to the proviso, could not be allowed in as much as diversion of funds to Tax Free Units had necessitated the borrowings. The findings of fact so recorded by the Assessing Officer and then by the learned Tribunal cannot be ruled upon while considering a reference application. However, the burden to prove that the borrowing was not made to replenish the short fall in working capital was certainly on the Assessee. However, no evidence of the kind appears to have ever been brought on record. Therefore, in absence of any solid reason to the contrary, neither the Assessing Officer nor the Tribunal could record a different findings.
8. The reported judgment relied upon at the bar is clearly distinguishable. The Assessing Officer in that case disallowed the expense earlier paid by the assessee as interest on borrowed capital. The Assessing Officer was of the view that the petitioner Company having advanced interest free loan to one of its Directors was not in the need of borrowing for its business and, therefore, the interest could not be allowed. That view was disapproved by their Lordships of the Supreme Court of Pakistan. The facts in the present case are, however, different inasmuch as admittedly the borrowing had been made and the assessee failed to establish that it was not to replenish the funds diverted to Tax Free Units. It is also not disputed that the said diversion and borrowing has been consecutive in point of time. All the requirements for application of the proviso in the facts and circumstances of the case being available to the case of the assessee was certainly hit by the mischief by the proviso. Also it was rightly found by the Tribunal that allowing of interest before the introduction of the proviso in 1967 was not material nor did it estop the department from invoking the proviso against the claim of interest made in the assessment years in question. The language of the proviso does not support the contention of the Assessee that it was only prospective and was meant to hit the replenishment of funds diverted to Tax Free Unit after its introduction. The learned Tribunal for valid reasons and arguments found that the proviso as reproduced above was applicable to all claims of interest made after its introduction and that the time and juncture of incurring of borrowing was not relevant. Also the reliance of the learned counsel for the assessee at 1995 PTD 614 re: Even Shine v. Commissioner of Income-tax is impertinent. In that case a Division Bench of Karachi High Court concluded that explanation added to section 4(1) of the repealed Income-tax Act, 1922 through Finance Act of 1976 was a substantive provision and, therefore, could not be enforced retrospectively. From various judgments interpreting addition of an explanation to an existing provision in a statute, the learned Division Bench concluded that the explanation in' question created a new liability for Assessee Companies and that nothing further could be spelt out therefrom to indicate that the legislature intended to give it retrospective operation. On the other hand, as observed earlier, the proviso under discussion did not create any new liability. It proceeded to say that ascertain expense will not be allowed if some conditions stated therein were answered. According to the findings of fact recorded by the Revenue and by the Tribunal, these requirements were available in the case of the assessee. Therefore, the disallowance as provided for in the proviso was rightly made during the two years under review.
9. That being so, both questions are answered in the affirmative.
10. The Registrar of this Court shall send a copy of this judgment under his signature and the seal of the Court to the concerned Bench of the Income -tax Appellate Tribunal.
Q.M.H./M.A.K./K-51/L
Reference affirmed.