COMMISSIONER OF INCOME-TAX, FAISALABAD VS UNIGOHAR TRADERS (PVT.) LTD., 2002 PTD-LAHORE-HIGH-COURT-LAHORE 2542 (2002)

(a) Income Tax Act (XI of 1922)---

----S.10(2)(iii)---Allowance, claim of---Entitlement---Necessary conditions ---Scope---Assessee was entitled to claim allowance under S.10(2)(iii) of Income-tax Act, 1922, provided he could satisfy that he had borrowed capital; that such borrowed capital was for the purpose of business, profession or vocation and that interest had been paid on such borrowed capital---Borrowing of capital should be genuine and not a sham or illusory.

CIT v. Pakistan Industrial Engineering Agencies Ltd. (1992 PTD 954) ref.

(b) Income Tax Act (XI of 1922)---

----S.10(2)(iii)---Borrowing of capital---Availability of surplus funds with assessee---Effect---Borrowing of capital was discretion of the assessee-- Mere availability of surplus funds with the assessee did not in any manner debar him from taking loans.

CIT v. Pakistan Industrial Engineering Agencies Ltd. (1992 PTD 954) ref.

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

----S.136(1)---Allowable allowance---Duty of Assessing Officer ---Scope- Assessing Officer disallowed an expense as an admissible deduction but the same was allowed by the Income-tax Appellate Tribunal ---Validity-- if an allowance is allowable, the Assessing Officer must allow the same in its entirety---To disallow part of the claim, is contradictory in terms- Claim can be partly disallowed only after recording sufficient reasons and bringing material on record that part of the interest/expense was incurred for the purpose other than business---Assessing Officer did not record any such finding at the time of disallowing the expense-- Reference was disposed of accordingly.

CIT v. Pakistan Industrial Engineering Agencies Ltd. 1992 PTD 954 fol.

Muhammad Ilyas Khan for Appellant.

Date of hearing: 8th April, 2002.

JUDGMENT

NASEEM SIKANDAR, J.---In this further appeal under section 136(1) (since amended) of the Income Tax Ordinance, 1979 following questions of law are stated to have arisen out of an order of the Income-tax Appellate Tribunal dated 6-10-1997:--

"(i) Whether under the facts and circumstances of the case, the learned Income-tax Appellate Tribunal can direct to allow an expense as an admissible deduction when it has no connection with the business of the assessee?

(ii) Whether under the facts and circumstances of the case, the learned Income-tax Appellate Tribunal was justified in deleting the add back under the head interest on loan in the face of the fact that the exigency of such a heavy borrowing was not explained by the assessee?"

2. The respondent is an assessee of the Income-tax Department. While framing assessment for the year 1991-92 the Assessing Officer disallowed the claim interest on the ground that borrowing of capital was not at all necessary inasmuch as the Company was possessed with sufficient funds. In the view of the Assessing Officer loan from Directors were obtained only to give them interest and, therefore, to avoid incidence of taxation at norvel rates.

3. The learned CIT (Appeals) as well as the Tribunal concluded that the Assessing Officer was not justified in making the disallowance inasmuch as he was to see only if borrowed capital was actually employed in the business of the assessee. Further that as long the capital borrowed was not used for the purpose other than business the claimed interest could not have been disallowed.

4. After hearing the learned counsel for the Revenue we are not persuaded to entertain the aforesaid questions. The issue as to when an assessee is entitled to claim interest was examined by the Hon'ble Supreme Court of Pakistan in re: CIT v. Pakistan Industrial Engineering Agencies Ltd. (1992 PTD 954). According to their Lordships an assessee would be entitled to claim an allowance under section 10(2) (iii) of the Income-tax Act, 1922 provided he satisfied that (i) he had borrowed capital, (ii) such borrowed capital was for the purpose of business, profession vocation and (iii) that interest had been paid on such borrowed capital. According to their Lordships borrowing of capital should be genuine and not merely a sham of illusory.

5. In the case in hand the Assessing Officer refused to make allowance for considerations which were extraneous to such claim. The learned Members of the Tribunal were right in observing that the Assessing Officers was to judge .the interest claimed on the aforesaid criteria and nothing else. Whether borrowing of capital was necessary had to be left to the direction of the assessee. In the aforesaid judgment their Lordships were of the view that mere availability of surplus funds with the assessee did not in any manner debar him from incurring loans.

6. It will further be seen that if an allowance is allowable the Assessing Officer must allow the same in its entirety. To disallow part of the claim, it goes without saying, is necessarily contradictory in terms. A claim can be partly disallowed only after recording sufficient reasons and bringing material on record that part of the interest/expense was incurred for the purpose of other than business. No such findings were recorded in this case.

7. The view adopted by the Tribunal being in line with the ratio settled by the Supreme Court of Pakistan in the aforesaid judgment, the proposition appears settled to that extent. Therefore, as said above, we will refuse to entertain the question.

8. Dismissed.

Q. M. H./M. A. K./C-163/L

Reference dismissed.