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

----S. 30, Second Sched., Part I, cl. (176)---Income from other source----Supply of electricity---Interest income on delayed payment of electricity bills---Taxability---Interest income is not to be considered as part and parcel of the business income and its assessment under S.30 of the Income Tax Ordinance, 1979 was quite justified---Such amount of interest was distinct and separate insofar as the exemption was con cerned and could not be considered income from power generation--Exemption refused by the Department was confirmed by the Tribunal.

1998 PTD (Trib.) 3319 ref.

(b) Interpretation of statutes---

---- Fiscal statute---Exemption provision ---Assessee has to prove himself to be within the four corners of the exemption provisions---Unlike charging provision when an exemption clause is interpreted the doubt is resolved in favour of the Department.

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

----Ss. 31 & 23(1)(vii)---Deduction---Interest earned on delayed payment of electricity bills---Interest paid on borrowed capital---Deduction of interest earned---Validity---Earning of interest and payment of interest in the present- case was corresponding financial arrangement---Borrowed capital if remains unpaid on account of delay by the customer, did not disentitle the assessee from the proportionate interest paid by him to the Bank on account of such delay ---Assessee was entitled to the interest paid by him to the Bank in circumstances.

1999 PTD (Trib.) 708 distinguished.

Kh. Muhammad Iqbal for Appellant.

Muhammad Asif, D.R. for Respondent.

Date of hearing: 3rd February, 2001.

ORDER

MAZHAR FAROOQ SHERAZI (ACCOUNTANT MEMBER).- -The appellant is a limited company which is engaged in deriving income from power generation and supply of electricity. It has come up in appeal against a consolidates order passed by the learned CIT(A) Zone-I. Faisalabad on 3-5-1999 in respect of assessment years 1995-96 to 1997-98. The main issues agitated by the learned AR of the assessee company are that the CIT(A) has erred under the law in setting aside the order of DCIT. In fact the CIT(A) should have deleted all the additions as made under section 62 in view of the submissions made before him. Furthermore, the DCIT had wrongly taxed the mark-up under section 30 charged on delayed payment of electric bills by the electric consumer. It was pleaded that the CIT(A) has further erred under law in setting aside the order on this point. Without prejudice to the above it was further prayed that the DCIT had erred under law in not allowing expense in shape of interest paid against mark-up charged on delayed payment of electricity bills by the consumer of electricity.

2. Perusal of the impugned order for the three years under appeals shows that the asses see-company enjoys exemption from tax vide clause 176 of the Second Schedule to the Income Tax Ordinance. This claim of exemption was accepted by the DCIT for all t-he three years under appeal. Nevertheless income from other sources was also received by the assessee as under:--

It was observed by the DCIT that during the period relevant to all the assessment years under appeal the appellant-company had extended advances to the associated undertaking and received mark-up on them in pursuance of terms and conditions executed between both the business enterprises. It was further added that income of the appellant from generation of electricity was exempt from tax. However, the appellant was required to show cause as to why the above referred income for the three years may not be assessed under section 30 of the Income Tax Ordinance.

3. In its' explanation the assessee-company submitted that the consumer of electricity, is Messrs Nishat Mills Limited which was supposed to pay electric bills within one month from the receipt of electricity bills as per agreement, dated 20th July, 1994. In the present context Messrs Nishat Mills Limited was not regular in its payment and as per clause of agreement was supposed to pay mark-up @50 paisas per thousand per day on the bill which was not paid within 30 days.' There was a difference of opinion between the DCIT and the assessee-company regarding the nature of mark-up, received by the company from Messrs Nishat Mins Limited. The DCIT was of the view that the assessee had extended huge amounts as advances to the associated undertakings and received mark-up upon the same as per terms and conditions mutually agreed between the two business enterprises. The DCIT was of the view that although as provided in clause 176 of the Second Schedule to the Income Tax Ordinance income from generation of electricity was exempt but the `assessee was confronted as to why the mark-up income should not be assessed under section 30 of the Income Tax Ordinance. The above perception of the DCIT was vehemently contested by the assessee -company who inter alia, submitted that the interest as charged by the appellant was the result of delayed payment of electricity bills by Messrs Nishat Mill Limited and the interest (Mark-up) is very much part of electric receipts as interest was directly related to the interest account only. It was pointed out that the provisions of section 30 in such a circumstances were wrongly applied as the assessee-company never advanced any amount to Messrs Nishat Mills Limited. In fact the learned A.R. of the assessee submitted detail working of the electric bills to establish from month to month position without interest; in fact it was penalty or surcharge as per WAPDA Rules for -not making payment in time. It was argued that there was hardly any element of interest and section 30 was not applicable in the case. In support of his contention the learned A.R. of the assessee cited the case of Messrs D.G. Electric Company wherein the CIT(A) Zone-I, Lahore vide his order, dated 3-5-1999 had deleted the addition of mark-up charged on late payments. It was prayed that without prejudice to tree legal and factual position submitted even under law the amount of interest as earned was squarely allowable against interest payment as per latest reported case of Income Tax Appellate Tribunal 1998 PTD (Trib.) 3319.

4. The arguments of the assessee's A.R. were rejected by the DCI,T on the premise that assessee's claim that it is also exempt being mark-up received on delayed payment of electricity charges is incorrect. Interest/mark-up income is distinguishable from the income of power generation. The interest received on delayed payment 2s according to the' agreement between the assessee and Messrs Nishat Mill- Limited, dated 80-8-1994 and under the law mark-up income is taxable. This mark-up received cannot be part of the electric bills, hence section 30 was rightly applied. It was further pointed out that Messrs Nishat Mills Ltd. had already claimed interest paid to Messrs Nishat Tek Ltd. under the head financial expenses. The DCIT also, in support of his contention, cited a case of the Tribunal reported as 1999 PTD (Trib.) 708 in which a Full" Bench had held that interest income shown by the tax holding companies as other income or earned on F.D.Rs. etc. are to be treated as an income from other sources under section 30 of the Ordinance and it is taxable. The case-law cited by the assessee-company in the case of Messrs D.G. Electric was not accepted by the DCIT on the ground that the case had been superseded by the decision of the ITAT. Furthermore, in a cited decision of ITAT 1999 PTD (Trib.) 708 it was held that no cost of fund is- adjustable against the interest income. It was further observed by the DCIT that both the concerns Messrs Nishat Mills Ltd. and Messrs Nishat Tek Ltd. are owned by the same group and they had tried to shift the taxable income of Messrs Nishat Mills Ltd. in non-taxable income of Messrs Nishat Tek Ltd. under the disguise of interest paid on delayed payments of electric bills. The CIT(A) has observed inter alia, that the Assessing Officer has assessed the appellant's income from mark-up under section 30 of the Income Tax Ordinance without establishing that the appellant extended huge amounts as an advance to the associated undertaking and received mark-up upon the same. Furthermore, the CIT(A) was of the considered view that the DCIT should properly ascertain whether the appellant's income assessed under section 30 was the interest income/mark-up on money advanced by the appellant as loan, assessable under the said section or it is the amount of interest which was charged by the appellant from Messrs Nishat Mills Ltd. in respect of the delayed payment of outstanding bills pertaining to the electricity sold out to the said concern and incidental to the main sales of the assessee.-

We have heard both sides. So far as the issue regarding charge of interest is concerned in our humble opinion same cannot be equated to the business income. Not only that this amount has been received as interest on delayed payment but also that the same has been declared as interest income. It is true that it does have a very close connection to the payment of bill but this in any case is not the payment against utilization of the electricity. The amount of electricity is fixed and determined and the additional amount paid is mark-up/interest on non-payment of the electricity bill in the shape of additional payment, penalty for default. The legislature has kept it in a separate nomenclature in term of section 30 with all intents and full understanding. This figure is an `interest' and is also supported by the agreement between the two parties itself in which on delayed payment the defaulter is to pay an additional amount. In fact, the learned First Appellate Authority has discussed this aspect and has been repeated by us supra but while concluding he has not given a direction. The outcome of his discussion is not clear. The interest is definitely not to be considered as a part and parcel of the business income and its assessment in our humble opinion in section 30, therefore, is quite, justified. The other issue that the assessee was entitled to expenses, however, was a clear and unambiguous one. Reference to the Judgment reported as 1999 PTD (Trib.) 708 was hardly relevant. The Hon'ble ITAT has disallowed the interest paid on borrowed capital against interest income received on deposit of money borrowed from the Bank. This is entirely a different situation. The assessee in the referred Judgment had borrowed capital from the Bank for development of the industry and later that amount was deposited in Bank until it was utilized for the actual purposes. During this period, the assessee earned interest on that borrowed capital and claimed the interest expenses paid by him on the same capital to the Bank. The opinion of the Tribunal was that the assessee loan from bank was not for the purposes of its re-deposit. The purpose of borrowing capital was establishing of an industrial undertaking and not earning of interest on the same capital, therefore, in the opinion of the learned Tribunal had no nexus so far as the Income Tax Ordinance is concerned. The relevant para. from the referred Judgment is re-produced:---

"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 B...F...Ltd. as well as R...Ltd. Such amounts are `Borrowed for the purposes of the business' and not wholly and exclusively for the purposes of earning interest income as admissible under section 13(l)(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 13(1)(b) from interest earned on deposit of such funds in Bank assessable as income from other sources under section 30 of the Ordinance."

The CIT has taken support from above Judgment which, in fact, is a misreading of the same. The non-allowance of interest in above circumstances in no way is applicable on this case. This assessee truly has not obtained loan for the purposes of earning interest thereon but, however, his income from this source is under a compulsive circumstances. It is not that he has re-deposited that only and that the delay in the payment of the original amount is as per his own desires and option. This income, therefore, is analogous to the billing income and his earning is not as per wishes of the assessee impugned before us.

We have already agreed with the Department to the extent that this income is not a business income and that it is covered under section 30 of the Income Tax Ordinance. We further hold that the amount of interest is distinct and separate insofar as the exemption is concerned. It is in keeping view the settled principle of law that it is the assessee who has to prove himself to be within the fours of the exemption provision. As unlike charging provision when an exemption clause is interpreted the doubt is resolved in favour of the Department. The interest income cannot be considered income from power generation and the exemption refused by the Department, is hereby confirmed.

This finding, however, cannot be applied on the alternative argument of the assessee. The earning of interest and payment of interest in the present case is corresponding financial arrangement. The assessee borrowed capital if remains unpaid on account of delay by the customer does not disentitle him from the proportionate interest paid by him to the Bank on account of such delay. We, therefore, hold that the assessee is entitled to the interest paid by him to the Bank. However, the income of the assessee from the main business being exempt, the ratio of the amount of interest, shall be determined by the Assessing Officer.

The result of above discussion is obvious. The assessee has not been considered as covered under the provisions of clause 197 to the extent of interest income received by him besides he has been allowed expenses of interest in the manner mentioned, above. The determination of his income shall, however, be by the Assessing Officer.

Order accordingly.

C.M.A./M.A.K./184/Tax (Trib.) Order accordingly.