I.T.A. No.810/KB of 1998-99, decided on 29th June, 1999. VS I.T.A. No.810/KB of 1998-99, decided on 29th June, 1999., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1076 (1999)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 30, 31(1)(b) & 62‑‑‑Income from other sources ‑‑‑Deductions‑‑ Interest income on short term deposit kept under lien for Letter of Credit‑‑‑Interest income earned from the amount kept in STND as Letter of Credit margin in performance of business activity and importing machinery for the industrial unit was declared as business income on the ground that amount kept in STND was Letter of Credit margin for import of machinery which was business/commercial assets and any return on such deposit would retain the character of business income‑‑ Assessing Officer treated such interest as income from other sources under S.30 of the Income Tax Ordinance, 1979 and claim of expenses was disallowed on the ground that all the expenses incurred were of capital nature related to establishment of the industrial unit‑‑‑First Appellate Authority treated such interest as business income and allowed the interest paid on the capital borrowed as expenses on the principle of commercial expediency and directed that income from interest assessed under S.30 of the Income Tax Ordinance, 1979 to be deleted ‑‑‑Validity‑ Interest income received by the assessee qualified to be set off against the interest paid on the amount borrowed from the directors as business income and business expenditures‑‑‑Even if the income earned was treated as income from other sources still the assessee would be entitled to allowance of interest paid under S.31(1)(b) of the Income Tax Ordinance, 1979‑‑‑Order of the First Appellate Authority was upheld by the Appellate Tribunal and appeal of the department was dismissed.

1998 PTD 369; CIT v. Eastern Bank Limited PLD 1982 Kar. 680 and I.T.A. No. 7 of 1987 rel.

1999 PTD (Trib.) 708 distinguished.

Muhammad Umer Farooq, D.R. ‑for Appellant. Jawed Zakaria and Jan‑e‑Alam, I.T.P. for Respondent.

Date of hearing: 29th June, 1999.

ORDER

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).‑ This appeal has been instituted at the instance of the department against the order of the learned CIT(A), dated 19‑5‑1998 on the following grounds:‑‑‑

(i) That the interest income of the assessee was rightly taxed under section 30 of the Income Tax Ordinance, 1979.

(ii) That the pre‑incorporation, incorporation and capital nature expenditures were rightly disallowed by the Deputy Commissioner of Income Tax, since not covered under section 31 of the Income Tax Ordinance, 1979.

2. Brief facts of the case are that the assessee is a unlisted public company incorporated on 21‑3‑1996 and during the year under consideration it was in the stage of installation and has not started any business. During this year it was engaged in setting up of an industrial unit. The respondent received interest income of Rs.11,84,504 on short term deposit Rs.38.2 million kept under lien for L/C of, US$. 1.270 Million established by HBL during this year. The DCIT while framing the assessment order under section 62 treated the interest received as income from other sources, under section 30 and the claim of the expenses made by the respondent was disallowed on the ground that all the expenses incurred were of capital nature related to establishment of the industrial unit. The assessee being aggrieved by the assessment order filed an appeal and the learned CIT(A) relying on case reported as 1998 PTD 369 treated the interest as business income and allowed the interest paid on the capital borrowed as expenses on the principle of commercial expediency and directed that the income from interest assessed under section 30 at Rs.11,84,504 to be deleted.

3. Mr. Muhammad Umer Farooq, learned representative of the department has submitted that the interest income of the assessee was rightly taxed under section 30 of the Income Tax Ordinance, 1979 and the DCIT has rightly disallowed the pre‑incorporation, in corporation and capital expenditure as these were not covered under section 31 of the Income Tax Ordinance. In support of his contention he has placed reliance on Full Bench decision by this Tribunal reported as 1999 PTD (Trib.) 708. He has specifically pointed out the following findings given by the Full Bench:‑‑‑

"Thus, in our considered opinion, income earned by way of interest without engaging in an activity falling under the meaning of business of, say where money is not utilized 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 income sources 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.

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 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 30(1)(b) from interest earned on deposit of such funds in bank assessable as income from other sources under section 30 of the. Ordinance."

4. On the other hand Mr. Jan‑e‑Alam, ITP and Mr. Jawed Zakaria, Advocate representing the respondent has contended, that the decision relied upon by the learned D.R. revolves around the facts of the cases which were before the learned Tribunal. According to the learned representatives of the assessee/respondent those facts may be elaborated is under:‑‑‑

(i) B.F., Limited earned exempt income under clause (119) of the Second Schedule. Unutilized portion of the loan sanctioned for industrial undertaking was advanced to sister concerns for earning interest income.

(ii) Messrs R. Limited which was enjoying exempt income under clause (1180) of the Second Schedule declared losses after adjusting the income earned on account of interest on deposit in bank.

(iii) Messrs D.T.M the capital work in progress was financed mainly through borrowing from directors. It earned interest income on STD, and PLS account. All expenses incurred were capitalized after deducting the amount of interest earned.

The learned Representative of the respondent have argued that in all the three cases which were before the Tribunal while deciding the reported case supra where the earlier decision of the Tribunal were reversed, the excess funds available from own funds or borrowed funds were specifically given to sister concerns or invested in bank accounts for the purposes of earning interest income. While distinguishing the facts of the case of respondent from the facts of the cases in the reported judgment, the learned representatives of the assessee have produced evidence showing that an amount of Rs.38.2 million was borrowed from directors vide cheque, dated 28‑3‑1996 and directly kept in SNTD, dated 2‑4‑1996 under lien for L/C establishe6 by bank. Certificate of the bank, dated 3‑4‑1996 has also been placed before us confirming establishment of L/C of US$. 1.270 million.

6. The learned representatives has contended that in view of these facts the interest income earned is to be adjusted against the interest paid to the directors on the loan of Rs.38.2 million whether the interest earned is treated as business income under section 22 or income from other sources under section 30 of the Ordinance. The learned representative while supporting their claim that the interest earned is income from business have contended that the amount was kept in SNTD as L/C margin in performance of business activity and importing machinery for the industrial unit. A$ the amount kept in SNTD was L/C margin for import of machinery this was a business/commercial assets and any return on this deposit would retain the character of business income. In support of their contention they have placed reliance on the decision of Hon'ble High Court of Sindh in the case of CIT v. Eastern Bank Limited reported as PLD 1982 Kar. 680: In this case the income earned by a Banking Company from securities and shares held as trading asset was held as business income. The relevant portion of that judgment as reproduced hereunder:‑‑‑

"The finding of the Tribunal is that the securities and shares were held by the respondent as its trading assets and therefore, in our view income from them would form part of income of assessee we are fortified in our decision from Indian jurisdiction, namely Western State Trading Company Ltd. v. Commissioner of Income Tax Central Culcatta (1971) 80 ITR 21 wherein it was held by the Supreme Court of India that if shares are held by an assessee as part of its trading assets, dividends of those shares would form part of the income from business of the assessee and the assessee will, therefore, be entitled under section 24(2) of the Act to claim set off of losses from its business carried forward from earlier years against the dividends of current year."

7. The learned representative of the assessee has further argued that if their above contention is not accepted, the alternative arguments in support of their contention is, that in all the three cases came up before the Tribunal in the case relied upon by the learned D.R., there was no direct connecuun between the interest paid on the amount borrowed and the interest earned. In these three cases the surplus out of amount borrowed for industrial purpose which was not immediately needed for business, was put in interest bearing deposit, or advance. The learned A.R. has explained that in the case of the respondent the amount borrowed has been directly paced in SNTD and there is a direct nexus between the amount borrowed and the STD, giving interest income. He has submitted that in view, of these facts the interest received even if assessed under section 30 is to be adjusted against interest paid under the provisions of section 31(1)(b) wherein it has been said that "any expenditure (not being in nature of capital or personal expenses of the assessee) laid out or expended wholly or exclusively for the purpose of earning such income. The learned A.R. has also placed reliance on an unreported case of Sindh High Court I.T.A. No. of 1987, dated 4‑6‑1992. In this case relating to period falling under the repealed Act of 1922, the assessee had issued debentures and the amount raised through debenture was invested in two companies. The interest paid on the debentures was considered inadmissible as an expense under section 10(2)(iii) and under section 12(2) of the repealed Act, 1922 because no income was received from the investment. The Hon'ble High Court after examining the facts of the case held that as money was invested in shares, therefore, the interest on capital borrowed cannot be allowed as an expenses under section 10(2)(iii). However, as there was direct connection between the amount borrowed and the investment in shares the Hon'ble High Court held that this interest is an admissible expenditure under the provisions of section 12(2) of the repealed Act, 1922 which is similar to provisions of section 31(1)(b) of the Income Tax Ordinance, 1979. The comparison of the two provisions of the Income Tax Ordinance, 1979 and the repealed Act, 1922 show that they are totally similar.

8. We have heard both the learned representatives appearing on behalf of the appellant/department and the respondent/assessee and have also perused the impugned order and the assessment order. We have also considered the judgment relied upon by both the parties. We are of the opinion that the contention raised by the learned representatives of the assessee, have enough force and they have successfully distinguished the facts of the case before us from the case as relied by the learned D.R. We, therefore, before concluding this order clarify that this decision is being given in view of the particular facts of this case without disturbing in any way, the finding given by the Full Bench. We are in respectful agreement with the Principles laid down for the judgment reported as (1999) 79 Tax Page-1 (Trib.) on the facts of the cases which were before the Full Bench, which has been specifically distinguished in this case. We, therefore, feel no hesitation in holding that the two judgments of the Hon'ble High Court of Sindh as discussed above fully apply to the facts of the present case. The interest income received 'by the respondent qualifies to be set of against the interest paid on the amount borrowed from the directors as business income and business expenditures. Even if the income earned is treated as income from other sources still; in view of the principle laid down in the judgment cited supra, the assessee would be entitled to allowance of interest paid under provisions oil clause 31(1)(b) of the Income Tax Ordinance, 1979. We, therefore, find no warrant for interference in the impugned order of the learned CIT(A) which is upheld and the appeal by the department is dismissed.

C.M.A./620/Tax (Trib.) Appeal dismissed.