COMMISSIONER OF INCOME-TAX/WEALTH TAX COMPANIES ZONE, FAISALABAD VS Messrs TAJ FLOUR MILLS (PVT.) LTD.
2005 P T D 1142
[Lahore High Court]
Before Nasim Sikandar and Muhammad Muzammal Khan, JJ.
COMMISSIONER OF INCOME-TAX/WEALTH TAX COMPANIES ZONE, FAISALABAD
versus
Messrs TAJ FLOUR MILLS (PVT.) LTD.
Income Tax Appeal No.173 of 1997, decided on /01/.
24th June, 2004. Income Tax Ordinance (XXXI of 1979)---
----Ss. 62 & 136---Reference to High Court---Assessment---Claim of interest paid against loan taken from private parties---Assessee which was a private limited company, obtained two kinds of loans one from a Bank and other from two private persons and paid interest on all said loans---Assessee, for relevant assessment year declared loss and Assessing Officer in the process of framing assessment admitted amount of interest paid by assessee to the Bank on loan obtained by assessee, but amount of interest paid by assessee to private parties was disallowed and said amount of interest was added towards total income of assessee by Assessing Officer---Assessee failed before Commissioner Income Tax who being Appellate Authority maintained disallowance for similar reasons which earlier weighed with the Assessing Officer---Tribunal, however, disapproved disallowance holding that in interest paid on capital borrowed for expanding business was allowable expense---Assessing Officer in the present case did not doubt the incurring of loan liability of assessee for the purpose of business at the relevant time---Mere fact that at a later stage business/manufacturing unit was leased out by assessee to a third party, would not derogate from the claim of interest which was earlier duly recognized and allowed as deduction by Revenue Officer during the period the unit remained operative under the assessee---Second question raised by Revenue Department, did not arise out of order of Tribunal appealed against as distinction pointed out in said question was neither mooted upon before Tribunal nor it was ruled upon by the Tribunal---High Court refused to answer said second question.
Calico Dyeing and Printing Works v. Commissioner of Income Tax, BombayCity II 34 ITR 265 Bombayref.
Muhammad Ilyas Khan for Appellant.
Nemo for Respondent.
Date of hearing:24th June, 2004.
ORDER
NASIM SIKANDAR, J.--This further appeal under section 136(1) of the late Income Tax Ordinance, 1979 assails an order recorded by a learned Member in Chambers of the Income Tax Appellate Tribunal, Lahore Bench, dated 12-8-1997. Through that order the learned Member disapproved disallowing of interest claimed by the assessee as an expense allegedly paid to private creditors.
2.The assessee/respondent is a private limited company and at the relevant time derived income by running a flour mills. For the assessment year 1992-93 as against declared loss of Rs.51,748 the Assessing Officer framed an assessment on 27-6-1993 at net income of Rs.175,924. In the process a sum of Rs.92,940 was disallowed out of the total claim of interest made at Rs.170,033. The part rejection was made in the following manner:--
Interest, Rs.1,77,033
The claim is not fully vouched and verifiable. The bifurcation of the claim is as under:--
| (i) | Interest relating to N.B.P. | Rs.84,093 |
| (ii) | Interest paid to Mst. Shahida Perveen | Rs.46,470 |
| (iii) | Interest paid to Mst. Gulay Nargis. | Rs.46,470 |
| | Total | Rs.1,77,033 |
The claim of interest paid to N.B.P. is admitted and allowed as the same has been paid against the loan taken from NBP, University of Agricultural Branch, Faisalabad against the assets of the company. However, the interest paid to Mst. Shahida Parveen and Mst. Gulay Nargis is not admitted expense as the loans have been brought forwarded this year which were obtained by the lessor in the preceding years for the purpose of his own business. As the flour mills has been leased out to a second party, therefore, the claim of any interest against the loan obtained by the lessor cannot be allowed in principle. The same is, therefore, rejected and added towards total income of the assessee-company. Rs. 92,940.
3.The assessee failed before the CIT (Appeals-II), Faisalabad. Through his order, dated 31-7-1994 the learned First Appellate Authority maintained the disallowance for the similar reasons which earlier weighed with the Assessing Officer.
4.On further appeal the learned Member of the Tribunal, however, disapproved disallowance keeping in view the ratio settled in re: Calico Dyeing and Printing Works v. Commissioner of Income Tax, Bombay City II (34 ITR265 Bombay). In that case the Hon ble Judges of the Bombay High Court held that interest paid on capital borrowed for expanding a business is allowable expense although the assets brought into existence with the help of borrowed capital may not be equally used for the purposes of the business in the relevant accounting year. Also a reference was made by the learned Member to C.B.R. Circular No.10/67, dated 1-8-1967. In that circular the Revenue, inter alia, expressed the view that the interest paid on capital wasan admissible expense and therefore should be allowed to the assessee irrespective of the fact whether dividend was received or not in that year.
5.According to the Revenue the aforesaid order of the Tribunal gives rise to the following questions of law for consideration of this Court:--
(i)Whether under the facts and circumstances of the case the learned Tribunal was justified in allowing the claim of interest when the loan was obtained for a business which was no longer in operation?
(ii)Whether the expense under the head Interest is allowable as a deduction against the lease income, without making a distinction as to whether the loan was used for purchase of fixed assets or as working capital?
6.After hearing the learned counsel for the Revenue, we are of the view that question No.1 as framed needs to be answered in the affirmative. The second part of the question as framed is in nature of an argument and does not pose a legal controversy. Even factually it is not correct. The Assessing Officer disallowed the expense not on the ground that the company had stopped doing any business or that the flour mills run by it had discontinued functioning. His objection only being that since the flour mills had been leased out to a third party, the claim of interest against the liability obtained by the lessor could not be allowed. That finding of the Assessing Officer was necessarily against the real sense of the aforesaid circular referred to by the learnedMember in his order. He was also justified in observing that it was not the first year of the leasing of the flour mills and that similar claim of interest had been allowed by the Revenue in the past. The finding recorded by the Hon ble Judge of the Bombay High Court a part of which was reproduced by the learned Member in his order also supports the case of the assessee on the principle that it was immaterial if the user of the capital actually yielded profit or not. The assessee in that case borrowed money to purchase plant and machinery and claimed deduction on account of interest paid though the plant and machinery were not actually used in the year of accounting. In the present case the Assessing Officer did not doubt the incurring of loan liability for the purpose of business at the relevant time. Mere fact that at a latter stage the business/manufacturing unit was leased out to a third parly does not derogate from the claim of interest which was earlier duly recognized and allowed as deduction by the Revenue Officer during the period the unit remained operative under the assessee company.
7.As far the second question is concerned we are of the view that it does not arise out of the order of the Tribunal inasmuch as the distinction pointed out in the question was neither mooted upon before the Tribunal nor it was ruled upon by the learned Member. Therefore, we will refuse to answer the second question.
8.The appeal is disposed of in the light of our affirmative answer to question No.1.
H.B.T./C-42/LOrder accordingly.