I.T.As. Nos. 1545/KB to 1548/KB of 1996-97, decided on 30th January, 2003. VS I.T.As. Nos. 1545/KB to 1548/KB of 1996-97, decided on 30th January, 2003., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1449 (2003)

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

----S. 23(1)(vii)---Deductions---Interest on borrowed capital (financial charges)---Disallowance proportionately---Investment in tax free securities-Assessing Officer found that investment was made in Khas Deposit Certificates out of borrowed capital and disallowed the proportionate charge of interest attributable to such borrowed funds invested in exempt income while the assessee claimed that such investment was made from his own funds ---Validity---Assessee was entitled to deduction of interest paid in respect of capital borrowed for the purposes of business or profession ---Assessee may borrow funds for employment in his business even if he had invested all his own resources in any other shape---What was required to be seen was whether at the time of making investments, the assessee had made any borrowings which could be related to these investments on that particular time/day-- If at the time of making investment, the assessee had sufficient resources of his own to make investment, then any subsequent or prior borrowings could not be treated as borrowings for such investments---Such could be established from examination of the books of accounts pertaining to relevant date and period of time when investments were made---Question being that of fact, Appellate Tribunal set aside the issue for de novo consideration with the direction that assessee should be provided proper opportunity to substantiate his claim.

(b) Income-tax---

----Profit and Loss Account---Additions---Deletion of---Addition made out of various heads in different years on general observation that examination of evidence revealed that expenses were not fully verifiable were deleted as no instance had been pointed out.

Naveed Haider, A.C.A. for Appellant.

Jawed Iqbal Rana, D.R. for Respondent.

Date of hearing: 30th November, 2002.

ORDER

INAM ELLAHI SHIEKH (CHAIRMAN). ---By this consolidated order, we proceed to decide four appeals of a non-resident company deriving income from distribution of petroleum products. These appeals arise out of the order, dated 31-10-1996 recorded by learned CIT(A), Zone-V, Karachi. The common ground in all these appeals is the disallowance of financial charges made by the Assessing Officer as the assessee made investments in certain tax-free securities.

2. The relevant facts in brief are that the Assessing Officer restricted the assessee's claim of financial charges in the assessment year 1992-93 as the assessee had shown certain tax-free income on investments made in the Khas Deposit Certificates (K.D.Cs.) etc. In the first round, such addition was set aside by the First Appellate Authority vide an order, dated 22-4-1995 in the following manner:--

"The Assessing Officer observed that the appellant made investment in tax free securities which he considered to have been purchased out of borrowed capital. Accordingly he prorated the charge of interest and disallowed the interest.

"The Assessing Officer observed that the appellant made investment in tax free securities which he considered to have been purchased out of borrowed capital. Accordingly prorated the charge of interest and disallowed the interest attributable to tax free securities. The learned A.R. argued that the investment in such securities is made out of own funds of the appellant and the profits for the year besides the large amount of the Head Office investments is duly verifiable from the balance sheet and no part of borrowed capital was utilized for such investment. Reliance is placed on the case-law reported as (1986) 53 Tax 122 (SC Pak.)"

In the re-assessment proceedings, the Assessing Officer again made the addition in the following manner:---

"DISALLOWANCE OF INTEREST ALLOCABLE TO EXEMPT INCOME

The matter was set aside on the ground that the investment was made out of profit earned during the year.

The contention of the assessee had been examined and perusal of the record reveals that the assessee profits have partly been absorbed in fixed assets additions and remittances to head office the remaining portion of profit is far from the amount placed in investments. Therefore, proportionate financial charges of borrowed funds invested in exempt income are once again disallowed to the same extent.

The learned CIT(A) vide the impugned order, dated 31-10-1996, confirmed this treatment with the observation that the assessee had failed to produce the cash book and other records to establish the exact date of investment and. to substantiate the claim. In the assessment year 1993-94, again this issue was set aside by the First Appellate Authority and again the, addition was repeated for the same reasons given in the preceding years. Similarly in the assessment year 1994-95, the expenditure was curtailed on similar lines whereas in the assessment year 1995-96, the appeal before us is in the first round on the same issue.

2. We have heard both the parties on this issue and we find that the matter has not been dealt with properly. In the first round, the learned CIT(A) had set aside this issue in view of the treatment given in the assessment year 1991-92 which had also been set aside. A reference was also made to a decision of the Honourable Supreme Court of Pakistan. Both these points have not been considered by the departmental officials in the second round. The learned A.R. of the assessee has also filed copies of the Assessment orders for the assessment years 1990-91 and 1991-92 made under section 62 of the 1979 Ordinance. In the assessment year 1990-91, the Assessing Officer has found that the assessee had earned other Income from NBP, BCCI, POGM and from other companies and no adverse inference was drawn. In the assessment year 1991-92, the assessee was found to have made investments in KDs and WAPDA Bond and the assessee had claimed that such investments had been made from own funds. The assessee was in that year invited to explain as to why the expenditure may not be curtained proportionately and the only defence taken by the assessee was that no borrowed funds had been invested in such investments. It was also noticed by the Assessing Officer in that year that the investment had increased from Rs.50 million to Rs.71 million. Thus, the expenditure was curtailed but there is no detailed working available in respect thereof. This addition in the assessment year 1991-92 was set aside by the learned CIT(A), Zone-II, Karachi vide an order, dated 15-5-1994 with specific directions and it appears that no re-assessment has been made. It also appears that the Department filed no further appeal against such setting aside.

3. In addition to the above observations, we would like to comment that it is not question of interest allocable to investment in securities whether taxable or tax-free. Under the provisions of clause (vii), the assessee is entitled to deduction of interest paid in respect of capital borrowed for the purposes of the business or profession. It is settled proposition that an assessee may borrow funds for employment in its business even if it has invested all his own resources in any other shape Hence, what is required to be seen is whether at the time of making these investments, the assessee had made any borrowings which can be related to these investments on that particular time/day. If at the time of making the investment, the assessee had sufficient resources of its own to make the investment, then any subsequent or prior borrowings could not be treated as borrowings for such investments: This can be established from examination of the books of accounts pertaining to the relevant date and period of time when the investments were made. Since it is mainly a question of fact, we are inclined to set aside the orders of the departmental officials on this issue and remand the matter back to the Assessing Officer for de novo consideration in view of the observations already given above. The assessee should be provided proper opportunity to substantiate its claim that the interest was expended for earning the profits or for its business purpose only.

4. The assessee has also agitated the disallowances of certain Profit & Loss expenses as confirmed by the First Appellate Authority. In the assessment year 1992-93, an addition of Rs.98,850 is said to have been made out of other expenses. However, we do not find any mention of any disallowances out of other expenses in the assessment order for that year. An addition of Rs.796,200 in travelling and vehicle running expenses has been agitated which was 10% of the claim. As per the impugned assessment order, the assessee was asked to provide the evidence for these expenses. The Assessing Officer has made a general observation that the examination of evidence revealed that these were not fully verifiable and no instance has been pointed out. This addition is, therefore, deleted. In the assessment year 1993-94, an addition of Rs.1,154,300 was made out of travelling and vehicle running expenses with similar observations and this addition is again deleted for the same reasons as recorded above. Similarly, an addition of Rs.92,566 was made out of public relationing expenses without pointing out any specific defects. This addition is also deleted.

5. In the assessment year 1994-95, the disallowance was made in these two heads as before subject to reduction in the addition on account of public relation expenses. Again, the Assessing Officer has made general observations in the re-assessment proceedings after the setting aside of the Profit & Loss Account add-backs in the first round. Hence, .the addition on account of travelling and vehicle running expenses and public relation expenses are deleted in this year as well.

6. In the assessment year 1995-96, an addition of Rs.1,881,300 was made in travelling and vehicle running expenses as per history of the case. Considering our earlier order, this addition is deleted. Similarly, an addition of Rs.698,000 was made in other expenses at 20% of the claim without pointing any specified defects. This addition is also deleted for reasons already assigned.

7. The last grievance of the assessee is with regard to non -allowance of compensation on advance payment of tax. The learned CIT(A) has summarily rejected the assessee's claim citing some change in law in the assessment year. No detailed discussion has been made of such change in the law. This issue is remanded back to the First Appellate Authority for passing a speaking order after considering alt the arguments of both the parties and the facts of the case. If needed, a fresh opportunity may be provided to the assessee before adjudicating this issue.

8. As a result of the above discussion, the anneals filed by the assessee are allowed to the extent that the issue of proration of financial charges in respect of investments yielding tax-free income is set aside in all the years under consideration and remanded back to the Assessing Officer with the directions given above. The relief is allowed in the profit and loss account expenses to the extent indicated above, whereas the issue of compensation for advance payment of tax is remanded back to the First Appellate Authority. A copy of this order may be communicated to the First Appellate Authority.

C.M.A./655/Tax(Trib.) Order accordingly.