(a) Income‑tax‑‑‑-

--Portfolio management ‑‑‑Fund/cash management‑‑‑Connotation and meanings‑‑‑Portfolio management was nothing else than the methods evolved or to be evolved for realizing income from portfolio which included income from interest or income from other known methods of investments‑‑‑Phrase "fund/cash management" carried the same meaning as carried by the phrase "portfolio management".

Black's Law Dictionary, 6th Edn. ref.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑-

‑‑‑Ss. 30 & 23(1)(vii)‑‑‑Income from other sources‑‑‑Interest income‑‑ "Unallocated" capital expenditure‑‑‑ Set off‑‑‑Set off of the interest income against unallocated capital expenditure on the ground that investment of, the surplus money or withdrawing/realizing investment from one financial institution and re‑investing the same in more profitable investment was part of the income from business of the company which has been authorized by the resolution of the Board of Directors passed under Memorandum of Association of the company and the respondent was entitled to set‑off the same against the unallocated capital expenditure and the balance, if any, to capitalize in order to reduce the capital cost of the project‑" Interest income" received by assessee on the investment of its surplus money was treated as income from "other sources" falling under S.30 of the Income Tax Ordinance. 1979 and taxed accordingly by the Assessing Officer‑‑‑First Appellate, Authority directed the Assessing Officer to set‑off interest income against the "unallocated" capital expenditure, inclusive of financial charges and to capitalize the balance interest income, remaining unabsorbed in order to reduce the capital cost of the project ‑‑‑Validity Main business of the assessee was to earn income from manufacture an. ‑sale of cement and though Articles of Association allowed the company to invest surplus money but it could not be included in the normal business of the assessee‑‑‑Order of the First Appellate Authority, held, was not maintainable‑‑‑Appeal of the Department was accepted‑‑‑Order of the First Appellate Authority was set aside and that of the Assessing Officer was restored by the Appellate Tribunal‑‑‑[(1988) 58 Tax 15 (Trib.) overruled.

(1988) 58 Tax 15 (Trib.) overruled.

I.T.A. No.920/LB of 1986‑87; (1921) 3 KBD 258; (1995) 211. ITR 55; (1988) 171 ITR 663; (1981) 132 ITR 70 and 1996 PTD (Trib.) 11 ref.

PLD 1962 SC (Pak.) 128 and 1999 PTD (Trib.) 708 rel.

Dr. Ikram Ghani, D.R. for Appellant.

Iqbal Naeem Pasha for Respondent.

Date of hearing: 31st May, 2001.

ORDER

FAZLUR REHMAN KHAN (JUDICIAL MEMBER).---‑‑‑These three departmental appeals are directed against the order, dated 30‑10‑1997 of the learned Commissioner of Income‑tax/Wealth Tax (Appeals‑VI), Karachi Camp at Peshawar whereby appeals of the assessee‑respondent for the assessment years from 1994‑95 to 1996‑9" were accepted.

2. The order has been challenged on the following grounds:‑‑

(i)That the cases relied upon by the CIT(A) are not parallel and congruent cases.

(ii)Company is not, exempt from levy of income‑tax, therefore, interest income has rightly been taxed.

(iii)The Company has not obtained any loan and no interest is payable by it, therefore, CIT(A)'s allusion to "Audited Statement of Account" is incorrect and there is no business expenses under section 23(1)(vii).

(iv)That the record of the assessee was never requisitioned and the remarks of the CIT(A), Peshawar that assessment record was examined is baseless rather naratory.

(v)That income accrued or derived from interest falls under the purview of section 30 and in the said section there is no room for setting off of such income against capital expenses.

(vi)This office pleads that interest income is clearly income from other source and was thus rightly taxed under section 30 of the Income Tax Ordinance, 1979.

3. The brief facts, giving rise, to these appeals, are that the respondent is a private limited company which, during the assessment years under appeals, started construction of Cement Plant at Pezu, District Lakki Marwat. The authorized capital of the Company was 3‑billions rupees and paid‑up capital was at Rs. 1,406,000,000. The Company did not obtain any loan and in pursuant of a resolution, dated 25th August, 1994 of the Boards of Directors, the Chief Executive of the Company invested the "surplus money" of the Company in various financial institutions, including Habib Cooperative, NDFC, PICIC, CITI Bank A.G. Zurich, Muslim Commercial Bank, Habib Modaraba Management Ltd. Bank of America (Portfolio Management). The Chief Executive of the Company, in accordance with the mandate, given to him by the company, varied the "investments" constantly withdrawing realizing investments from one financial institution and reinvesting the realized amounts in more profitable channels of investment. The respondent declared income from this source at Rs.1,54,11,176 for 1994‑95, Rs.17,45,82,184 for 1995‑96 and Rs.4,77,53,907 and in the "Audited Statement of Accounts" set‑off the aggregate of the sums, so realized by it, from the financial institutions against the "unallocated capital expenditure" which also included `financial charges' and capitalized the balance, claiming to have reduced the project cost.

4. The learned Deputy Commissioner of Income‑tax issued notices under sections 61/62 of the Income Tax Ordinance, 1979 to the respondent to show cause as to why the "interest income" received by it, on the investment of its surplus money shall not be treated as income from "other sources" falling under section 30 of the Ordinance and taxed accordingly. The respondent submitted replies, dated 21‑11‑1996 and 22‑2‑1997, taking the plea that the `interest' received on deposit of the surplus money was actually business income falling under section 22 of the Ordinance and not income from "other sources" falling under section 30 of the Ordinance. In support, the respondent placed reliance on a case decided by this Tribunal, vide 1988 PTD (Trib.) 369 and another case decided by this Tribunal, vide I.T.As. Nos. 585,, 586 and 809 of 1987‑88 of N.‑W.F.P. Forest Corporation. However, these explanations were rejected, distinguishing the foregoing authorities and held that the interest received by the respondent was income from "other sources", falling under section 30 of the Ordinance. Feeling aggrieved, the respondent went in appeals. In the appeals before the learned CIT(A), the learned A.R. for the respondent besides placing reliance on he authorities cited earlier in the explanations also placed reliance the following authorities:

(i) I.T.A. No.920/LB of 1986‑87 etc., dated; 16‑3-1991. (ii) (1921) 3 KBD 258; (iii) (1995) 211 ITR 55 (Orissa); (iv) (1988) 171 ITR 663 (AP) and (v) (1981) 132 ITR 70 (Delhi).

5. In the light of the foregoing authorities, the learned CIT(A) directed the Deputy, Commissioner of Income‑tax to set‑off interest income against the "unallocated" capital expenditure, inclusive of financial charges and to capitalize the balance interest income, remaining unabsorbed in order to reduce the capital cost of the project. The Department is aggrieved by the order of the learned CIT(A) and has filed the present appeals.

6. We have heard the ‑learned representatives of the parties and have also perused the record.

7. The main question which falls here for determination is as to whether the income received from investment of the surplus money of the Company by constantly withdrawing/realizing investments from one financial institution and re‑investing the realized amounts in more profitable investments, amounts to income from business or the income received thereof is interest income falling .under section 30 of the Ordinance and the respondent is not entitled to any adjustment. The learned D.R. submitted that the investment or withdrawing/realizing investment from one financial institution and re‑investing the realized amounts in more‑ profitable investments is a simple case of interest income, chargeable to tax. In support of his submission, the learned D.R. placed reliance on:

(i) PLD 1962 SC (Pak.) 128, and

(ii) 1999 PTD (Trib.) 708.

8. On the other hand, the learned A.R. for the respondent contended that the investment of the surplus money or withdrawing/realizing investment from one financial ,institution and re investing the same in more profitable investment is part of the income from business of the Company which has been authorized by the Resolution, dated 25th August, 1994 of the Boards of Directors‑passed under clause (6) of Memorandum of Association of the Company and the respondent is entitled to set‑off the same against the unallocated capital expenditure and the balance, if any, to capitalize in order to reduce the capital cost of the project. In order to examine the respective contentions of the parties, it would be appropriate here to reproduce below clause 6 of the Memorandum of Association of the 'company and the schedule of income realized from investment/re‑investment:

"Clause 6. To invest or otherwise deal with the money of the Company in such manner as may from time to time be determined. "

9. It may be mentioned here that previously, there was a difference of opinion amongst. different Benches of the Tribunal with regard to the interest income. One view vide 1988 PTD (Trib.) 369 was that the income earned from deposit of surplus money in fixed account was business income and if the assessee enjoys exemption, it is not chargeable to tax and the other view vide 1996 PTD 11 (Trib.) was that such income is interest income and separately chargeable to tax. Accordingly, a Full Bench was constituted wherein it was held:‑‑

"36. Thus, in our considered opinion, income earned by way of interest without engaging in an activity falling under the meaning of business or, say where money is not utilized as stock‑in‑trade, is income from other sources under section 30 of the I.T. 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 the source 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.

37.In short, neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains being derived or to be derived wherefrom, are exempt under the I.T. Ordinance or otherwise, nor the fact that such company or an assessee having any other personal status under subsection (32) of section 2 has deposited the funds out of equity or out of borrowed capital, not the fact that, in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession would change the classification of such income under section 15 of the Ordinance."

10. It may be stated here that during the course of arguments, the learned A.R. for the respondent candidly agreed that the income at Serial Nos. 7, 18, 12, 13 and 18 of the Schedule, as reproduced above, is interest income. However, for the rest, he contended that these incomes were mainly from portfolios/management and fund management/cash management which was apart of the business of the respondent, as such, not separately taxable. However, in support of his arguments, 'he produced no authority. From our search, we have not been able to lay Hands on the definitions of portfolio/management or fund/cash management from the available books in the Library of this Tribunal. However, in the Black's Law Dictionary, 6th Edition, the word "portfolio" and the phrase "portfolio income" have defined as under:‑‑

"Portfolio. In investments, the collective term for all the securities (which may consist of various types) held by one person or institution.

Portfolio income. Income from interest, dividends, rental, royalties, capital ‑gains, or other investment sources. Portfolio income is not considered passive income, therefore; net passive losses cannot be used to off‑set net portfolio income. See also passive investment income; passive loss."

11. From the foregoing definitions, we are of the view that portfolio management is nothing else than the methods evolved or to be evolved for realizing income from portfolio which includes income from interest or income from other known method of investments. We believe that the phrase "fund/cash management" carries the same meaning as is carried out by the phrase/portfolio management".

12. In the case reported in PLD 1962 SC 128 it was observed by their Lordships of the Hon'ble Supreme Court of Pakistan that:

"We have considered the various Articles by which this Company was governed. We have no hesitation in agreeing with the view of the High Court that the normal business of the Company was the construction and the running of the Railway and not investment of its moneys on interest. Other powers were also given to the Company by the Articles of Association, but it is not contended that all those powers pertained to the earning of normal business‑income. If the Company, instead of retaining its surplus moneys in idle condition, invested them under the powers given to, them by their Articles of Association, it would not follow that the income so derived would be part of the Company's normal business‑income. Each case must be decided on its own facts and, in the instant case, the circumstances brought out in the evidence do not indicate that the receiving of interest on invested moneys was really included in the business income of the Company. We are, therefore, of the opinion that the view taken by the High Court is not open to any legal exception."

13. In the case‑in‑hand also the main business of the respondent is to earn income from manufacture and sale of cement and though clause (6) of the Articles of Association allows the Company, to invest surplus money but in view of the, foregoing observations of, their Lordships, it cannot be included in the normal business of the respondent.

14. The above judgment of the Hon'ble Supreme Court of Pakistan has been followed by the learned Full Bench of this Tribunal in the case reported in 1999 PTD (Trib.) 708, the relevant portions of which, have already been re‑produced, which clearly support the submissions made by the learned D.R. and has also overruled the authority reported in 1988 PTD (Trib.) 369. Accordingly, the impugned order of the learned CIT(A) is not maintainable.

15. As a result, this appeal is accepted, the impugned order of the learned CIT(A) is set aside and that of the Assessing Officer on the issue is restored.

C.M.A./506/Tax(Trib.)Appeal accepted.