COMMISSIONER OF INCOME TAX, COMPANIES ZONE-I, LAHORE VS Messrs GRAYS LEASING COMPANY LIMITED, 2005 PTD-LAHORE-HIGH-COURT-LAHORE 2093 (2005)

Income Tax Ordinance (XXXI of 1979)-

----Ss. 22, 30, 31(1)(b), 34, 66-A & 136---Expenditure against interest income---Reference to High Court---Assessing Officer, took interest income of assessee under S.22 of Income Tax Ordinance, 1979 and allowed preliminary expenditure against ; interest income---Inspecting Additional Commissioner, however, found the order of Assessing Officer as erroneous and prejudicial to the interest of Revenue and initiated proceedings under S.66-A of Income Tax Ordinance, 1979 and denied expenditure against interest income under S. 31(1)(b) of Income Tax Ordinance, 1979---Income Tax Appellate Tribunal accepting appeal against order of Inspecting Additional Commissioner, set aside the same---Validity---Provisions of S.66-A of Income Tax Ordinance, 1979 could only be attracted when decision of Assessing Officer was prejudicial to the interest of Revenue---Provisions of S.34 of Income Tax Ordinance, 1979 had clearly shown that loss in one year could be claimed as set off against the profit in the next year --Assessee, if had shown loss and proved that he had suffered losses, the income computed though could not be prejudicial to the interest of Revenue in that year, but it would lie for set off against the next year and those losses shown would entitle assessee to adjustment which could cause prejudice to the interest of Revenue---Income Tax Commissioner, in circumstance was right in invoking provisions of S.66-A of Income Tax Ordinance, 1979---Impugned order of Income' Tax Appellate Tribunal, was not well founded---Interest income shown by assessee could not be 'qualified to be business income---Questions raised from the judgment of Income Tax Appellate Tribunal, were answered in negative and accepting appeal, order passed by Appellate Tribunal was set aside and order of Inspecting Additional Commissioner, was upheld.

Commissioner of Income Tax v. Khulna Railway Company PLD 1962 SC 128 and Genertech Pakistan Ltd. v. Income Tax Appellate Tribunal of Pakistan 2004 SCMR 1319 ref.

Muhammad Ilyas Khan for Appellant.

Zahid Pervaiz for Respondent.

ORDER

The respondent was incorporated on 31-8-1995 as public company with primary object to undertake leasing business. No leasing business was done during the year 1996-97, however, non-leasing operations were carried. The interest of Rs.23,12,494 was received, which was set off against preliminary expenses to arrive at figure of Rs.9, 52, 634.

2. The Assessing Officer took interest income of respondent, under section 22 of the Income Tax Ordinance, 1979 and allowed preliminary expenditure against the interest income. The Inspecting Additional Commissioner held the order of the Assessing Officer as erroneous and prejudicial to the interest of revenue and as such initiated proceedings under section 66-A of the Income Tax Ordinance, 1979. Show-cause notice bearing No.1814, dated 16-6-1997 was issued, reply thereof was submitted by the assessee, which was found unsatisfactory and resultantly assessment was finalized by Inspecting Additional Commissioner under section 66-A of the Income Tax Ordinance, 1979. The Inspecting Additional Commissioner did not allow the expenditure against the interest income under section 31(1)(b) of the Income Tax Ordinance, 1979.

3. The Income Tax Appellate Tribunal on 15-5-1998 accepted the appeal (I.T.A. No.4814/LB of 1997, `against the decision of the Inspecting Additional Commissioner, held as under:--

"We, therefore, do not agree with learned ITAT that there was any reason or any prejudice to the interest of Revenue is this case. Even if we accept this argument that the interest income was not assessable under section 22 and that the expenditures as envisaged under section 31(2)(b) cannot be extended to include all the expenses of business, we are not convinced that the same has caused any prejudice to the interest of Revenue, as then section 34 becomes applicable. As a result of which the ultimate income shall remain the same as has been computed by the ITO.

4. The following questions of law have been stated to have arisen from the impugned judgment of the Tribunal:

"(i) Whether on the fact and under the circumstances of the case, learned Income Tax Appellate Tribunal was justified to cancel the assessment under section 66-A by observing that preliminary business expenses can be allowed/set off against the interest income assessable under section 30 of the Income Tax Ordinance, 1979, and

(ii) Whether on the fact and under the circumstances of the case learned Income Tax Appellate Tribunal was justified to hold that the interest, income earned by the assessee qualified to be business income."

5. Learned counsel for appellant (Revenue) contended that the assessee has argued that the respondent has utilized its funds in a profitable activity such as depositing it in bank and earning interest and such income, not being the object of company, cannot be termed as business income and was thus rightly held by Inspecting Additional Commissioner to be covered under section 22 of Ordinance, 1979. The respondent is a Leasing Company and has been incorporated to transact the leasing business, which is altogether different from banking business. The interest income is treated as business income only with regard to the banks. The learned counsel has further contended that the order of Inspecting Additional Commissioner holding the interest income subject to tax by invoking the provisions of section 66-A of Ordinance, 1979, is in no manner a change of opinion.

6. The learned counsel for respondent, on the other hand has supported the impugned order and submitted that the company during the period from the incorporation of the company, till the issuance of certificate of commencement of business could not carry commercial transaction. The company was allowed to start leasing business in February, 1997 and the money which was not required immediately at the relevant time was kept in bank, was commercial expediency adopted by its directors. The money in hand in the absence of its utilization in business has resulted in more losses. It was vehemently argued that the impugned income of respondent is covered under section 30 and not under section 22. It was argued further that the provisions of section 66-A are not attracted to the case of the appellant and that the impugned assessment was not prejudicial to the interest of Revenue.

7. Heard learned counsel for the parties and examined the record.

8. As far as question No.1 is concerned the assessee was entitled to be allowed the set off, of losses of one source against another income as the same was admitted at the relevant time under section 34 of the c Income Tax Ordinance, 1979. The Appellate Tribunal has held that since the set off to the assessee was allowed, therefore, the ultimate income remained the same, which has been computed by income Tax Officer and thus there was no prejudice to the interest of Revenue. The provisions of section 66-A can only be attracted when the decision of Assessing Officer is prejudicial to the interest of Revenue. It is clear from the perusal of section 34 that loss in one year can be claimed as set off from the profit in the next year. The assessee if shows loss and proves that he c has suffered the losses, the income computed though may not be prejudicial to the interest of Revenue in that year, yet it lies for set off for the next year and these losses shown entitle the assessee to an adjustment which can cause prejudice to the interest of revenue, at the end of the day. We are, therefore, inclined to hold that Income Tax Commissioner was right in invoking the provisions of section 66-A. The impugned order of Income Tax Appellate Tribunal is not well-founded.

9. As regards question No.2 the interest income earned by the assessee qualifies to be business income. This matter was resolved firstly by the Hon'ble Supreme Court in Commissioner of Income Tax v. Khulna Railway Company (PLD 1962 SC 128). The above view has again been affirmed by the august Supreme Court in Genertech Pakistan Ltd. v. Income Tax Appellate Tribunal of Pakistan (2004 SCMR 1319). The Hon'ble Supreme Court of Pakistan in the later case affirmed the earlier view (2004 SCMR 1319) supra in the following manner:

"But in the instant case, position is altogether different because the share capital deposits in the Banks by the appellants are providing a separate income to them after post-production stage of the power Generating activity, therefore, on the income of interest no exemption can be claimed by the appellants under Item 176 of Second Schedule of the Ordinance as it is a different income from the profits gains being earned from post-production activity of power generation."

In view of the afore-mentioned dictum of law declaration by the Hon'ble Supreme Court of Pakistan, we hold that the interest income shown by the assessee cannot be qualified to be business income. The second question is answered in negative.

10. For the foregoing reasons, we are of the view that questions raised from the judgment of the Income Tax Appellate Tribunal are answered in negative and the appeal is accepted, order passed by the Appellate Tribunal is set aside and the order of the Inspecting Additional Commissioner is upheld.

H.B.T./C-78/LAppeal accepted.