Messrs PAK SAUDI FERTILIZER LTD., KARACHI VS COMMISSIONER OF INCOME TAX, KARACHI, 2006 PTD-KARACHI-HIGH-COURT-SINDH 1343 (2006)

Income Tax Ordinance (XXXI of 1979)-

----S. 31(3)---Investment in purchase of National Funds Bonds out of borrowed capital---Claim under head "interest"---Disallowance of such claim for reason that income from such Bonds was exempt from tax, thus, expenditure on earning such income was not admissible---Validity---Assessing Officer had not examined the cash flow position on the day when National Funds Bonds were purchased in order to ascertain the liquidity position of assessee on such date---Incumbent upon Tribunal, before proportionately disallowing claim under head "interest", to examine factual position, if any investment was actually made for purchase of National Funds Bonds with borrowed capital---Plea of assessee could not be brushed aside without any material in possession of Assessing Officer leading to the contrary conclusion---Assessing Officer was not justified in making proportionate disallowance out of the claim for `interest'.

Iqbal Salman Pasha for Applicant.

Nasarullah Awan for Respondent.

Date of hearing: 14th March, 2006.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---The learned Income Tax Appellate Tribunal has referred a common question of law in the Reference Nos. 214 to 216/KB of 1991-92 pertaining to the years 1987-88, 1988-89, 1989-90, as follows:--

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in confirming the disallowance of proportionate interest."

Heard Mr. Iqbal Salman Pasha, learned counsel for the applicant and Mr. Nasarullah Awan, learned counsel for the Respondent.

Briefly stated the common facts in all the three assessment years giving rise to the proposed question are that while making the assessments, the Assessing Officer disallowed the claim under the head Interest' paid on borrowed capital in proportion to the investment made in purchase of the National Funds Bonds for the reason that income there from was exempt from tax and consequently expenditure on earning such income is not admissible by virtue of provisions contained in subsection (2) of section 31 of the Income Tax Ordinance, 1979.

The assessee preferred appeals before the CIT(Appeals) and ITAT, without any success and hence this Reference application.

Learned counsel for the applicant has submitted that a specific plea was taken before the Assessing Officer that the applicant borrowed loan from Saudi Arabian Government under the guarantee of Government of Pakistan and invested the entire borrowed money in purchase of the fixed assets. The National Funds Bonds were purchased out of the Funds available with the applicant in the shape of share capital and unappropriated profit amounting to Rs.74,19,47,445.00. It was further pleaded specifically that the entire borrowed amount was already invested in purchase of assets (plant and machinery) before purchasing the National Funds Bonds. He has further contended that all the books of accounts were produced before the Assessing Officer reference to which has been made by the Assessing Officer in the assessment year 1988-89.? it is observed by the Assessing Officer that the account books were produced which were examined, details and explanations wherever necessary were obtained and placed on file after its scrutiny. In any of the three assessment years the Assessing Officer could not find any material in the account books or otherwise to rebut the contentions raised on behalf of the applicant. In spite of that the proportionate disallowance was made on mere presumptions and assumptions, conjectures and surmises not warranted in law.

Learned counsel for the applicant has further submitted that the Tribunal also failed to advert to the factual aspect and therefore fell in serious error in arriving at the conclusion that the profits in respect of investments in the National Funds Bonds are not liable to tax and consequently, any interest paid on such investments also remains inadmissible. Learned counsel for the applicant has maintained that without giving any finding that any borrowed capital was invested in purchase of the National Funds Bonds it has been held that the interest paid on such investment is not admissible. He has submitted that the finding given by the Tribunal is erroneous and therefore the question, referred, may be decided in negative.

Mr. Nasarullah Awan, learned counsel for the Department, has supported the finding given by the Tribunal. However, when he was confronted with the question whether before arriving at the conclusion that the applicant had made investment from borrowed capital for purchasing the National Funds Bonds the Assessing Officer had examined the cash flow position on the day when the National Funds Bonds were purchased in order to ascertain the liquidity position of the applicant on the said date. Mr. Nasarullah Awan has frankly stated that there is nothing on record, to show that any such exercise was done.

We have carefully considered the contentions of the learned counsel for the parties and the material available on record in the Reference made by the Tribunal. We are of the opinion that the finding of the Tribunal is based on mere assumptions and conjectures not warranted in law. Before giving a finding that the claim under the head `Interest' was to be proportionately disallowed it was incumbent on the Tribunal to c- amine the factual position if any investment was actually made for purchase of National Funds Bond with the borrowed capital. The plea of an assessee cannot be brushed aside without any material in possession of the Assessing Officer leading to the contrary conclusion.

For the foregoing reasons it is held that the Tribunal fell in error in holding that the Assessing Officer was justified in making the proportionate disallowance out of the claim of the interest. The finding of the Tribunal confirming the treatment is not sustainable in law.

For the foregoing reasons the question referred to us is answered in negative.

A copy of this judgment shall be sent to the Income Tax Appellate Tribunal under the seal of the court and signature of the Registrar of this Court for passing the appropriate order disposing the appeals conformably to the finding contained in this judgment.

The Reference application stands disposed of, accordingly.

S.A.K./P.12/K???????????????????????????????????????????????????????????????????????? Answer in negative.