COMMISSIONER (LEGAL DIVISION) VS N.D.F.C., 2006 PTD-KARACHI-HIGH-COURT-SINDH 2439 (2006)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 136 & 23(1)(vii)---Reference to High Court---Applicant/department being aggrieved by order passed by Income Tax Appellate Tribunal filed a Reference under S.136(1) of Income Tax Ordinance, 1979 before the Tribunal asking it to refer question of law for opinion of High Court---Office of Tribunal inadvertently treated said application as income tax appeal, did not fix it for hearing for a long period---Tribunal refused to refer question framed by applicant/department on the assumption that there must have occurred many changes in the law as well as in the facts and circumstances of the case during period of pendency of reference application which was pending for more than seven years---Impugned order of the Tribunal was tantamount to punishing applicant for an erroneous act of the Tribunal as it had been admitted that mistake in the treating of the reference as an income tax appeal was on the part of the office of the Tribunal and not on the part of applicant---Parties could not be punished for an erroneous act of the Court---Tribunal under provisions of S.136(1) of Income Tax Ordinance, 1979 could either refer the proposed question for the opinion of the High Court or could reject same either on the ground that no question of law had arisen or on the ground that application was time barred---No other order could be passed by the Tribunal under S.136(1) of Income Tax Ordinance, 1979---Order passed by the Tribunal, in circumstances was against the provisions of S.136 of Income Tax Ordinance, 1979---On merits, however, there was no substance in the question proposed by applicant either on fact or on law and High Court refused to answer the same---Reference application being devoid of merits, was dismissed.

Packages Limited v. The Commissioner of Income Tax 1993 SCMR 1224; The Commissioner of Income Tax West Zone Karachi and another v. Khairpur Textile Mills Ltd. and others 1989 SCMR 61; Calico Dyeing and Printing Works v. Commissioner of Income Tax, Bombay City, II 34 ITR 265; India Cement Ltd. v. Commissioner of Income Tax, Madras 60 IRT 52; Commissioner of Income Tax v. Gelcaps (Pvt.) Limited in ITR No.58 of 1992 and ITR No.226 of 1991 ref.

Aqeel Ahmed Abbasi for Applicant.

ORDER

MUHAMMAD ATHAR SAEED, J.---This reference application under section 136(2) of the Income Tax Ordinance has been preferred by the Commissioner of the Income Tax against the order of Income Tax Appellate Tribunal in ITA No.229/1987-88, dated 8-4-1996. Certain additions had been made by the Income Tax Officer which were deleted by the CIT(Appeals) and the order of CIT(Appeals) was maintained by the Income Tax Appellate Tribunal. The following questions said to be arising from the order of the Tribunal are proposed to be referred for the opinion of this Court:--

(1) Whatever on the facts and circumstances of the case the learned ITAT was justified in discarding, the evidence on record and the factum of investment in tax free securities and capital goods made out of a pool of financial Resources. Holding it as a presumption/surmises, since such finding suffers from misreading of the evidence and that presumption was a legal presumption?

(2) Whatever on the facts and circumstances of the case the learned ITAT was justified in directing to allow tax depreciation of old assets on the original cost, when the assessee had charged accounting depreciation in the Tax holiday period and had WDV after deduction of such allowance?

2. Brief facts of the case are that the respondent-Bank is the Government owned corporation carrying on business of investment banking in Pakistan. The income of the respondent was exempted up to the assessment year 85-86 and this exemption was withdrawn with effect from assessment year 86-87 and therefore the respondent had filed its first return of income for the assessment year 86-87. The Income Tax Officer while finalizing the assessment added back the amount of Rs.64,17000 and Rs.52,89,300 from the total interest claimed under section 23(1)(vii) allegedly for the ,reasons that the respondent had invested the borrowed capital in investment in KDCs and BNFBs, the income of which was exempted from income tax and also that money was advanced toward construction of office in building named Finance and Trade Centre which was capital asset and therefore according to the Income Tax Officer interest paid on money borrowed for the purpose of capital investment was not allowable as an expense. The respondent had claimed depreciation on the written down value (WDV) of the assets, which was the same as the original cost as the respondents had never claimed nor were allowed depreciation in the previous years on these assets. However that the depreciation was allowable on the old assets at WDV because the different between actual cost and book value of the assets had already been off-set against income for earlier years made an addition of Rs.824527 by allowing depreciation on alleged WDV as computed above.

3. Being aggrieved by the order of the Income Tax Officer the respondent filed appeal before the CIT(Appeals) who after examining the facts of the case deleted the addition of Rs.64,47,000 and Rs.5289300 made out of interest on borrowed capital by holding that no part of the borrowed capital was utilized for the purchase of KDCs and BNFCs by the respondent and the same were purchased from the respondent's own surplus capital and there was no evidence on record to suggest otherwise. He also held that there was no evidence on record to suggest that any part of the borrowed capital was utilized for the investment in construction of office in Finance and Trade Centre and the disallowance has been made on presumptions and surmises and devoid of any factual basis. The CIT(Appeals) also deleted the addition of Rs.824527 made out of claim of tax depreciation by holding that the law clearly states that for arriving at the WDV of assets what is to be deducted from the original cost is not a hypothetical figure of depreciation but depreciation actually allowed and since it was an undisputed fact that prior to the assessment year in question no depreciation was ever allowed, therefore, the treatment accorded by the IT'O could not be sustained.

4. Being aggrieved by the above order the Commissioner of Income Tax filed an appeal before the Income Tax Appellate Tribunal who upheld the order of CIT(Appeals) on the above points. They also relied on the following judgments in coming to conclusion that interest on borrowed capital is allowable expenses notwithstanding the fact that the capital has been used for the acquisition of a capital asset for the purpose of an ongoing business:--

(1) Packages Limited v. The Commissioner of Income Tax 1993 SCMR 1224 at 1226, 1227 letter "A" 1231 letter "G".

(2) The Commissioner of Income Tax West Zone Karachi and another v. Khairpur Textile Mills Ltd. and others 1989 SCMR 61 at 67 and 63 letter "C".

(3) Calico Dyeing and Printing Works v. Commissioner of Income Tax, Bombay City, II 34 ITR 265.

(4) India Cement Ltd. v. Commissioner of Income Tax, Madras 60 ITR 52.

5. Being aggrieved by the above order the department filed a reference application under section 136(1) on 27-4-1996 before the Income Tax Appellate Tribunal asking them to refer the above stated question of law for the opinion of this Court. Unfortunately the office of the Tribunal inadvertently treated the same as the Income Tax Appeal and did not fix it for hearing for a long period and when it was finally fixed the present applicant filed an application, dated 9th September, 2002 requesting for sine die adjournment in the case and in the title of the application had mentioned income tax appeal number instead of reference application number. The Tribunal therefore refused to refer the questions framed by the applicant/department on the assumption that there must have occurred many changes in the law as well as in the fact and circumstances of the case during the period of pendency of the reference application which was pending for more than seven years. We fail to understand the logic behind the order of Tribunal, which is beyond our comprehension. The impugned order of this Tribunal tantamounts to punishing the applicant for an erroneous act of the Tribunal as it has been admitted that the mistake in the treating the reference as an Income Tax Appeal was on the part of the office of the Tribunal and not on the part of the applicant but the mention of the number of Income Tax Appeal. In the application for adjournment by the applicant was considered to be their mistake. What the Tribunal has failed to appreciate is that the applicant had no other option but to mention the number of case, which must have been mentioned in the notice of fixation of the case. It is a well settled law that litigants cannot be punished for an erroneous act of the Court.

6. On a perusal of section 136(1) the Tribunal may either refer the proposed question/questions for the opinion of the Court or may reject the same either on the ground that no question of law arises or on the ground that the application is time barred. There is no other order that Tribunal can pass under section 136. We are therefore, of the firm opinion that the order passed by the Tribunal is against the provision of section 136.

7. However in order to dispose of the matter and dispense justice 'we asked the learned counsel for the applicant to argue the case on merits.

8. The learned counsel for applicant at the very outset conceded that the first part of the question No.1 relating to the proportionate disallowance of interest on income of tax free investment made by the respondent for the purchase of KDCs and BNFBs and the question No.2 are questions of fact and therefore do not fall under the provisions of section 136(2). He however argued hat the second part of question No.(i) relating to the disallowance of interest of accounts of investment for the purchase of capital asset i.e. office in Finance and Trade Centre is a mixed question of law and fact and should be answered by this Court. He drew our attention to the provisions of section 23(1)(vii), which reads as under:

"any interest paid in respect of capital borrowed for the purpose of business or profession."

9. He argued that only interest paid in respect of capital borrowed for the purpose of business and profession is allowable and investment of capital nature cannot be termed as expended for the purposes of business or profession. He however was unable to controvert the factual finding of the CIT (Appeals) and the Tribunal that the office in Finance and Trade Centre Building was constructed during the continuity, of business from the surplus funds of respondents and there is no evidence on record to suggest that the borrowed funds have been utilized for the purpose of the meeting the cost of the office in the FTC. He was also unable to distinguish the cases on which reliance has been placed by the Tribunal in support of their decision on the Tribunal in support of their decision on the legal issue that interest paid on capital the legal issue that interest paid on capital which has been utilized for the acquisition of capital arises for the purposes of an ongoing business is an allowable expense.

10. The learned counsel for the applicant relied on unreported judgment of this Court in the case of Commissioner of Income Tax v. Gelcaps (Pvt.) Limited in ITR No.58 of 1992 and ITR No.226 of 1991, dated 1-4-2003. He took us to para. 38 of the judgment, which reads as under:

"We fully agree with the reasoning contained in the above two judgments of Patna High Court and hold that the interest income earned by the assessees in the two cases before us on short term deposit out of the capital borrowed for the establishment of industry is not income from business but is income from other sources and cannot be allowed to be adjusted against the interest paid on the borrowed capital for the simple reason that the interest paid on the borrowed capital is to be capitalized and there is no provision in law where-by income earned under the head other sources can be permitted to be adjusted against the expense which are to be capitalized."

11. There can be no cavil to be above judgment of this Court but is apparent is perusal of the above extract, it is on a different aspect and is completely irrelevant and different to controversy in hand.

12. We have also perused the judgments of Hon'ble Supreme Court relied on by the Tribunal and find that the case of respondent is fully covered by those cases and therefore the decision of the Tribunal to delete the addition made on account of disallowance of interest is in accordance with settled law.

13. We are therefore of the considered opinion that there is no substance in questions proposed by the applicant either on fact op on law therefore we refuse to answer the same.

This reference application being devoid of merits was dismissed by us vide our short order, dated 1-3-2006.

H.B.T./C-22/KApplication dismissed.