Income Tax Ordinance (XXXI of 1979)---

----Ss. 14(1), 22(c), 151, 136(2) & Second Sched., Cl. (72)---Profit earned on Khas Deposit Certificates under National Saving Schemes-- Assessee claimed exemption on such profit in terms of Cl.(72) of Second Shed. of the Income Tax Ordinance, 1979, but Assessing Officer treated the same as "business" in terms of S.22(c) of the Ordinance ---Appellate Authority restored statutory exemption claimed by the assessee-- Appellate Tribunal approved the findings of Appellate Authority -- Validity---Khas Deposit Certificates were in assessee's name---Securities of Khas Deposits were owned by company and appeared as its assets in balance-sheet---Exemption claimed by company, but declined by Assessing Officer had been restored by Appellate Authority---Tribunal had rightly declined to refer question as decision of Appellate Authority had been approved---Question raised could not be said to have arisen out of the order of Tribunal---Recipient of interest/profit was none other than assessee, who had invested amount in their account---High Court decided reference in affirmative in favour of the assessee.

Nasarullah Awan for Applicant.

Hyder Raza Naqvi for Respondent

ORDER

The application was disposed of by short order, dated 6-2-2003, these are the reasons.

The applicant has filed an application in terms of section 136(2) of the Income Tax Ordinance, by raising the following question of law:--

"Whether on facts and in the circumstances, of the case, the learned ITAT was justified in holding that the benefit of exemption of profit on KDCs., accrued in the hands of the assessee when provision of section 151 of the clearly envisages that where any income is exempted from tax, the exemption shall in the absence of a specific .provision to the contrary contained in this Ordinance, be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income."

The assessment pertains to the, year 1988-1989, the respondent, Shipping Agent submitted the Return claiming the exemption on profit earned from KDCs Certificate in terms of clause (72) of Second Schedule of the Income Tax Ordinance, 1979, which exempts the yield of National Savings or Deposit Certificate, including Defence Saving Certificates, issued under the National Saving Schemes.

The Assessing Officer disallowed the exemption claimed by treating the same as business in terms of section 22 (c) of the Ordinance, 1979. The respondent/assessee filed an appeal before Commissioner of. Income Tax (Appeals). The learned Commissioner Income Tax (Appeals) after recording the contention and restored the statutory exemption claimed by the assessee by observing that:--

'The appellant earned the income of Rs.753,750 from KDC and Rs.206,446 from bank interest by utilizing the pool of resources including the funds payable to various creditors and such action is incidental to the conduct of business generating positive income. The provisions of section 22(c) seek to attribute income from such a facility which does not generate or reflect positive income. For example a free passage by a shipping or airlines, free meals by restaurants or gifts from customers which are benefits and not being positive income are covered by section 22(c). The use of funds payable to creditors are beyond the scope of section 22(c). The securities of Khan Deposits are. patently owned by the company and appear as the asset of the company in the balance-sheet. The principal who may appear as creditors have no right, interest or lien whatsoever in the ownership of such securities or any income generating therefrom.

The exemption available to the income from Khas Deposit is statutory in terms of section 14(1) clause (72) of the Second Schedule to the Income Tax Ordinance, 1973-which provides as follows:--

'Notwithstanding anything claimed in this Ordinance the income, Qr clauses of income or persons or classes of persons specified in the Second Schedule shall be exempted from tax under this Ordinance.'

The appeal preferred by the Department before learned Income Tax Appellate Tribunal also failed, learned ITAT approved the finding recorded by learned Commissioner of Income Tax (Appeals) The Department filed an application under section 136(1) of the Income Tax Ordinance for reference of aforesaid question to this Court which was also declined. Hence the present application under section 136(2) of the Ordinance, 1979.

We have heard Mr. Nasarullah Awan, learned counsel for the applicant and Mr. Hyder Raza Naqvi, learned counsel for the respondent.

The main thrust of the contention of Mr. Nasarullah Awan was that the exemption could have been claimed provided, the respondent was the recipient of the profit, meaning thereby that the KDCs should have been in the name of respondent.

Mr. Hyder Raza Naqvi, representing the respondent contended that the admitted facts are that the KDCs are in the name of respondent. The only objection was that the provision of section 22(c) seeks to charge any benefit or perquisite arising from the business. The use of funds payable to creditors are beyond the scope of section 22 (c). It is obvious that these would not apply to cases where the holding of money is in the normal course of conduct of business.

The admitted facts that the Khas Deposit Certificates are in the name of respondent as reflected in the order of Commissioner of Income Tax (Appeals), that the securities of Khas Deposits are patently owned by the company and appeared as the assets of the company in balance sheet. They have claimed the exemption which was declined and restored by the Commissioner of Income Tax (Appeals). The Tribunal has rightly declined to refer the above question as the decision of the learned Commissioner of Income Tax was approved. The department could have impugned the order, dated 9-11-1991, passed by the learned Appellate Tribunal in appeal. The question raised cannot be said to have arisen out of the order of the learned Appellate Tribunal

As consequence thereof, the learned Tribunal has rightly declined to refer the matter. The recipient of the interest/profit in the present case is none other than the respondent who had invested the amount in their own name, therefore, the reference is decided in affirmative in favour of the assessee. The Tribunal be informed accordingly.

S.A.K./C-68/KReference answered.