Messrs AES PAK GEN (PVT.) COMPANY, LAHORE VS INCOME TAX APPELLATE TRIBUNAL, LAHORE
2006 P T D 1
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
Messrs AES PAK GEN (PVT.) COMPANY, LAHORE
Versus
INCOME TAX APPELLATE TRIBUNAL, LAHORE and another
P.T.Rs. Nos. 134 and 135 of 2002, decided on /01/.
th
September, 2005. (a) Income Tax Ordinance (XXXI of 1979)---
----S. 136---Reference to High Court---Counsel for the assessee, at the time of arguments before the High Court, submitted reframed questions with a prayer for their consideration---Validity---Question reframed had only enlarged the scope of arguments, High Court permitted the counsel to argue his case on these lines without formally admitting these questions and observed that High Court would consider and answer only the questions which were earlier laid before the Tribunal for reference to the High Court.
(b) Interpretation of statutes---
----Provision of law could not be amended, rescinded or changed by any policy guidelines agreed to between the Government and certain private individuals or corporate entities---Any policy frame work or principle laid down by the Government in any manner could not take precedence over the express provisions of law.
(c) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part I, Cl. (176) & S.30--- Protection of Economic Reforms Act (XII of 1992), S.5(2)---Private Sector Power Projects---Exemption---Scope---Claim of exemption by assessee company on the interest income earned by it on its cash deposits in foreign banks outside Pakistan---Validity---Claimed exemption was available only to resident companies in respect of interest earned on accounts maintained within the country---Interest, in the present case, admittedly was earned on deposits kept in foreign banks outside Pakistan---Provisions of S.5(2), Protection of Economic Reforms Act, 1992 were not invocable for the purpose of exemption---Under S.30,Income Tax Ordinance, 1979, it was only the accrual of interest income which was relevant and neither the nature of funds on which such income was earned nor the end use of the interest income were relevant---Earning of interest on "investment" and earning interest on deposits were two different concepts.
(d) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part I, Cl. (176)---Private Sector Power Projects---Exemption---Scope---Every activity undertaken by the "project" will not result in income which could properly be described as "profits and gains" from power generation business---Liberal meanings assigned to these words cannot be taken into consideration in order to interpret . Cl. (176) of Second Sched., Part I of the Income Tax Ordinance, 1979---Principle that charging provisions are to be interpreted strictly and that in case of a doubt where two interpretations are equally possible, the one favourable to the tax payer should be adopted, is not relevant to the exemption clauses---Exemption provisions are to be construed strictly and that it is always for the assessee/tax payer to establish that his case clearly falls within the exemption clause.
(e) Income Tax Ordinance (XXXI of 1979)---
----Second Sched, Part I, Cl. (176)---Protection of Economic Reforms Act (XII of 1992), S.5(2)---Private Sector Power Projects---Exemption---Scope---Exempt profits under Cl. (176), Part I, Second Schedule, Income Tax Ordinance, 1979 read with S.5(2), Protection of Economic Reforms Act, 1992, do not include profits on bank accounts maintained wholly and solely for the purpose and in connection' with the power generation plant.
(f) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part I, Cl. (176)---Private Sector Power Project---Exemption---Bank deposits---No borrowing cost can be set -off against income from bank deposits which were necessarily kept for the purpose of meeting lenders covenants under agreement with lenders.
(g) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part I, Cl. (176)---Private. Sector Power Project---Exemption---Exemption from tax is only available to income from sale of electricity and not from power generation project covering all the segments of power generation project income.
1999 PTD (Trib.) 708; Gresham Life Assce Society v. Styles (3 TC 185, 188 (HL); Pandicherry Rly Co. Ltd. v. C.I.T. 5 ITC 363, 370; Badridas Daga v. C.I.T. 34 ITR 10, 15; Calcutta Co. Ltd. v. C.I.T. 37 ITR 1, 9; C.I.T. v. Shirinbai Kooka 46 ITR 10, 15; C.I.T. v. Shoorji Vallabadas 46 ITR 144, 148 (SC); Poona Electric Supply Co. Ltd. v. C.I.T. 57 ITR 52 (SC); C.I.T. v. Kalooram Govndram 57 ITR 630 (SC); C.I.T. v. Birla Gwalior Ltd. 89 ITR 266 (SC); Madeva Sinai v. Union of India 98 ITR 209, 222 (SC); Kashiparekh & Co. Ltd. v. C.I.T. 39 ITR 706; Cochin State Power & Light Corpn. Ltd. v. C.I.T. 93 ITR 582, 594; Amalgamated Electricity Co. Ltd. v. C.I.T. 97 ITR 334, 349; C.I.T. v. Allareddy Sudarsanamma 83 ITR 759; C.I.T. v. Khairpur Textile Mills Ltd. 1989 SCMR 61; National Cooperative Sugar Mills Ltd. v. C.I.T. (1998) 96 Taxman 352 (Punj & Har); Irum Ghee Mills Ltd. v. I.T.O. and others 2000 SCMR 1871; Bajjaj Tempo Ltd. v. C.I.T. (1992) 62 Taxman 480; 1999 PTD (Trib.) 708; Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan, Lahore and others 2004 PTD 2255; Messrs Packages Ltd. v. Commissioner of Income-tax 1993 SCMR 1224; California Copper Syndicate Ltd. v. Haris, Superintendent of Taxes 5 TC 159; Mazagaon Dock Ltd. v. C.I.T. (1958) 34 ITR 368; Traco Cable Co. Ltd. v. C.I.T. (1969) 72 ITR 503; C.I.T., N.-W.F.P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178; C.I.T. Dacca v. Liquidator Khulna Bagerhat Railway Lines Limited (1962) 5 Tax 267; Senairam Doongarmal v. C.I.T. (1961) 42 ITR 392; C.I.T. v. Lahore Electric Supply Company (1966) 60 ITR 1; Narayan Swadeshi Weaving Mills v. C.E.P.T. (1954) 26 ITR 765; Commissioner of Income-tax v. Amalgamation Ltd. 2000 PTD 427; 2003 PTD (Trib.) 1643 and Army Welfare Sugar Mills Limited and others v. Federation of Pakistan 1992 SCMR 1652 ref.
Dr. Ikramul Haq for Petitioner.
Shahid Jamil Khan for Respondents.
Date of hearing: 4th May, 2005.
JUDGMENT
NASIM SIKANDAR, J.---These reference applications under section 136(2) of the late Income Tax Ordinance, 1979 seek consideration and answer of following common questions of law which are alleged to have arisen out of a consolidated order of the Income Tax Appellate Tribunal dated 29-972001 recorded in I.T.A. 11 to 13/2000:
(i) Whether on the facts and the circumstances of the case, the learned Income Tax Tribunal was right in holding that exempt profits under clause (176) of the Second Schedule to the Ordinance, 1979 read with section 5(2) of the Protection of Economic Reforms Act, 1992 do not include profits on bank accounts maintained wholly and solely for the purpose and in connection with the power generation plant?
(ii) Whether on the facts and the circumstances of the case, the learned Income Tax Tribunal was right in holding that no B borrowing cost can be set off against income from bank deposits which were necessarily kept for the purpose of meeting lenders covenants under agreement with lenders?
(iii) Whether on the facts and the circumstances of the case, the
learned Income Tax Tribunal was justified in holding that exemption from tax is only available to income from sale of electricity and not from power generation project covering all the segments of power generation project income?
2. Earlier these questions along with the following question proposed at a later stage were laid before the Tribunal under section 136(1) of the late Income Tax Ordinance, 1979 for their reference to this Court.
"Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was justified in denying exemption from income-tax to interest income earned on bank deposits in the period prior to the commencement of commercial production. Does such income is not part of "Project" set up for power generation purposes and qualify for exemption under clause (176) of the Part I of the Second Schedule to the Income Tax Ordinance, 1979?"
That request was declined by a Division Bench of the Tribunal on 21-.2-2002.
3. At the time of arguments learned 'counsel for the petitioner submitted following re-framed questions with a prayer for their consideration.
(i) Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was justified in denying exemption from income-tax to interest income earned on bank deposits in the period prior to the commencement of commercial production. Does such income is not part of "Project" set up for power generation purposes and qualify for exemption under clause (176) of the Second Schedule to the Income Tax Ordinance, 1979?
(ii) Whether on the facts and the circumstances of the case, the learned Income Tax Tribunal was right in holding that no borrowing cost can be set off against income from bank deposits which were necessarily kept for the purpose of meeting lenders covenants under agreement with lenders?
4. Since these questions only enlarged the scope of arguments, learned counsel was permitted to argue his case on these lines without formally admitting these questions. Resultantly we will consider and answer only the three questions which were earlier laid before the Tribunal for reference to this Court as reproduced in para. 1 above.
5. The petitioner is a Private Limited Company incorporated to generate and sell electricity to Water and Power Development Authority (Wapda) under a 30 years contract. In the year 1996-97 a return was filed to declare Nil income as the business of power generation had not yet started. The Assessing Officer on examination of accounts found that during the year under consideration the assessee-company earned interest income at Rs.1,688,000 on its cash deposits in foreign banks outside Pakistan. On being served with a notice expressing the intention of the Assessing Officer to tax interest income under section 30 (income from other sources) of the late Income Tax Ordinance, 1979, the assessee- company claimed the amount to be exempt from levy of tax under subsection (2) of section 5 of the Protection of Economic Reforms Act, 1992. In the alternate it was stated that the said interest income was to be set off against the interest expenditure incurred at Rs.638,398,000. It was accordingly pointed out that keeping in view the interest expenditure no income remained taxable as a loss of Rs.636,810,000 emerged after set off.
6. The Assessing Officer however, disagreed. He was of the view that the provisions of Protection of Economic Reforms Act, 1992 were not applicable in the case of the assessee as the interest had accrued on the accounts maintained in foreign banks outside Pakistan. According to him an amount of interest received from foreign currency accounts outside Pakistan was taxable in the hands of the recipient which was a Resident Pakistani Company. The claim of expenditure or set off of interest expenditure by the assessee company was also rejected on the basis of the ratio settled in a reported judgment of the Income Tax Appellate Tribunal cited as 1999 PTD (Trio.) 708. It was remarked that no expense was allowable against interest income as the assessee had not incurred any expense to earn that income which was actually the surplus of cash deposits in foreign banks outside Pakistan. Accordingly the interest income at Rs.1,688,000 was subjected to tax by way of an assessment order dated 18-5-1999.
7. In the year 1997-98 the declared interest income at Rs.13,416,000 was again brought to tax after rejecting the objections raised by the assessee on similar grounds as noted above.
8. Learned First Appellate Authority C.I.T. (Appeals) Multan agreed with the Assessing Officer that only profits and gains derived from generation of electricity-were exempted in view of clause (176) of the Second Schedule to the late Income Tax Ordinance, 1979; that the interest income not being a part of profits and gains from generation of electricity was liable to tax. He was also of the view that interest earned from foreign deposits were assessable under section 30 (income from other sources) of the late Ordinance. Also he disagreed with the assessee that "implementation agreement" dated September 24, 1994 between the Government of Pakistan and the assessee-Company under the "Policy Framework and Package of incentives for Private Sector Power Generation Projects in Pakistan---March, 1994" in any manner supported the claim of the assessee that such companies were altogether exempted from corporate income tax.
9. On further appeal learned members of the Tribunal on the basis of the judgment earlier relied upon by the Assessing Officer in the assessment order viz. 1999 PTD (Trib.) 708 maintained both the assessment as well as the first appellate order.
10. We have heard the learned counsel for the parties. Although the controversy now sought to be raised in the form of reframed questions is somewhat different from the one actually assailed before the Tribunal yet we have allowed the petitioner to argue the matter on additional grounds as pointed out in the reframed questions.
11. As noted earlier in para. 5 the assessee disputed chargeability of income tax on interest income under section 30 (income from other sources) of the late Ordinance mainly for three reasons:---
Firstly, that whole of the income of the assessee-Company from whatever sources in the first instance was not liable to levy of tax in view of the exemption available to the company under clause (176) of the second schedule to the late Ordinance.
Secondly, that interest income earned by the assessee-Company was otherwise not liable to tax under section 30 (income from other sources) of the late Ordinance in view of subsection (2) of section 5 of Protection of Economic Reforms Act, 1992. And,
Thirdly, as an alternate it was pleaded that the interest income was to be setoff against interest expenditure incurred by the company in the two years involved.
12. Before the First Appellate Authority, as noted in para. 8 above a reference was also made to the "Policy Framework and Package of incentives for Private Sector Power Generation Projects in Pakistan---March 1994". Before the Tribunal however, the emphasis was made on the fact that to operate the power generation plant it was essential for the company to have bank accounts for payment of salaries etc. On the basis of the contents of the agreement between the assessee-Company and its lenders it was pointed out that the assessee as a. borrower was required to maintain certain minimum balances in bank accounts outside Pakistan for repairs and maintenance reserve, debt service reserve account and debt repayment account and similar other purposes. It was alleged that the bank accounts outside Pakistan having been maintained under contractual obligations it was a part and parcel of power generation business and accordingly any receipt arisen therefrom was as good a part of power generation which was to generate, after the project has become in operation.
13. Before us learned counsel for the petitioner has further argued that the interest income could be chargeable only under section 22 (income from business or profession) and no other head. According to him the words "profits and gains" as used in the exemption clause need to be interpreted to cover all possible commercial activity of the project. Also he has made emphasis on the use of word "from" in the said exemption clause (176) to claim that the intention of the legislature was very clear in exempting all kinds of receipts which were in nature of "profits and gains" derived by an assessee "from" an electric power generation project. He states that the Revenue authorities as well as the learned Tribunal misread the word "from" as "out of" which was totally unjust. It is also stated that keeping in view the definition of the work "income" as made in section 2(24) of the late Income Tax Ordinance, 1979 the view adopted by the Revenue and the Tribunal was incorrect as they restricted the exemption to only one head of income i.e. under section 22 of the late Income Tax Ordinance. It is claimed that since in fiscal statutes there is no room for an intendment and nothing can be read, added or supplemented to a taxing statute, the Tribunal by way of the aforesaid Full Bench judgment unjustly restricted the meaning of such profits and gains. The word "profits" according to him should be understood "in its natural and proper sense and in a sense which no commercial man would misunderstand" as was held in Gresham Life Assce Society v. Styles (3 TC 185,188 (HL)). It is claimed that this principle was approved by the Privy Council in Pandicherry Rly Co. Ltd. v. C.I.T. (5 ITC 363, 370) and by the Supreme Court in India in Badridas Daga v. C.I.T. (34 ITR 10, 15), Calcutta Co. Ltd. v. C.I.T. (37 ITR 1, 9) and C.I.T. v. Shirinbai Kooka (46 ITR 10, 15). Reference is also made to other judgments of foreign jurisdiction to assert that "profits" to be assessed are only those which are considered so in commercial sense as found in (C.I.T. v. Shoorji Vallabadas 46 ITR 144, 148 (SC); Poona Electric Supply Co. Ltd. v. C.I.T. 57 ITR 521 (SC); C.I.T. v. Kalooram Govndram 57 ITR 630 (SC); C.I.T. v. Birla Gwalior Ltd. 89 ITR 266 (SC); Madeva Sinai v. Union of India 98 ITR 209, 222 (SC); Kashiparekh & Co. Ltd. v. C.I.T. 39 ITR 706; Cochin State Power & Light Corpn. Ltd. v. C.I.T. 93 ITR 582, 594; Amalgamated Electricity Co. Ltd. v. C.I.T. 97 ITR 334, 349; C.I.T. v. Allareddy Sudarsanamma 83 ITR 759).
14. Learned counsel also refers the following passage from the judgment of the Hon'ble Supreme Court of Pakistan in re: Messrs Packages Limited v. C.I.T. 1993 SCMR 1224, wherein the view earlier expressed by the Hon'ble Court in re: C.I.T. v. Khairpur Textile Mills Ltd. (1989 5CMR 61) was reiterated.
"Learned counsel contended that although the High Court did take note of some Indian Cases relevant directly or indirectly in the matter, did not notice a judgment of this Court in Commissioner of Income-tax v. Khairpur Textile Mills Ltd. 1989 60 Tax 55 (SC Pak) = (1989 SCMR 61). It was ruled therein that the amount of interest paid by the purchaser of an industrial concern to the vendor on the unpaid price was an integral part of the profit earning process. It was related to the carrying or conduct of business and satisfies the test laid down for bringing the case within the fold of section 10(2)(iii); as being interest on the analogy of it being interest on capital borrowed for the business of the company; and also, under section 10(2)(xvi), as expenditure incurred wholly and exclusively for the purpose of business".
15. It is thus pleaded that interest income is necessarily incidental to the income of an industrial concern and the terms "profits and gains" should be understood in its ordinary commercial sense and not as those necessarily under section 22 (income from business or profession) of the late Income Tax Ordinance, 1979. It is repeated that interest income was not, chargeable under section 30 (income from other sources). A reliance in that regard is placed upon a judgment from Indian jurisdiction namely National Cooperative Sugar Mills Ltd. v. C.I.T. (1998) 96 Taxman 352 (Punj & Har), Lastly reference is made to the ratio settled in Irum Ghee Mills Ltd. v. I.T.O. and others 2000 SCMR 1871 and Bajjaj Tempo Ltd. v. C.I.T. (1992) 62 Taxman 480. Learned counsel agreeing that generally exemption clauses are to be construed strictly, states that even such an approach does not suggest that the expression "profits and gains" only relates to those which are subject-matter of the head of income under section 22 of the late Ordinance.
16. Learned counsel for the Revenue on the other hand supports the impugned order of the Tribunal particularly with reference to their Full Bench judgment which was made basis for their decision, namely 1999 PTD (Trib.) 708.
17. At the out set it needs to be stated that we are not persuaded to agree with the learned counsel for the appellant that the ratio settled in re: Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan, Lahore and others (2004 PTD 2255) is distinguishable from the facts in hand. Also his reliance upon the case of Messrs Packages Ltd. v. Commissioner of Income-tax 1993 SCMR 1224 is hardly of any relevance. The Hon'ble Supreme Court while deciding the case re: Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan, Lahore and others (supra) distinguished their judgment recorded in Messrs Packages Ltd. v. Commissioner of Income-tax, (supra). The assessee in that case, like the one before us claimed exemption under clause (176) of the Second Schedule to the Ordinance being an electric power generation project. The interest income earned from the share capital deposited in the banks was claimed exempt with reference to the aforesaid clause. Their Lordships agreed with the Revenue that interest income on share capital fell within the scope of section 30 of the late Ordinance (income from other sources). In para. 11 of the, report their Lordships while disagreeing that their judgment in Messrs Packages Ltd. v. Commissioner of Income-tax, (supra) was relevant to the facts in hand finally observed that share capital deposits in the banks provided, a separate income to the company after post-production stage of the power generation activity. Therefore, on interest income no exemption could possibly be claimed by the appellant under clause (176) of the Second Schedule to the late Ordinance. Learned counsel for the appellant is partly correct in pointing out that in the case re: Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan, Lahore and others (supra) the question of application of Protection of Economic Reforms Act, 1992 or the policy announced by the Government was not before the Hon'ble Judges. However, in our view which we have formed on the basis of the findings recorded by the Hon'ble apex Court, even a reference or reliance of the appellant before them on Protection of Economic Reforms Act, 1992 or the policy guide-lines formulated by. the Federal Government would not have done any good. The reason simply being, that a provision of law could not be amended, rescinded or changed by any policy guidelines agreed to between the Federal Government and certain private individuals or corporate entities.
18. We are also not persuaded to agree that any policy framework or principle laid down by the Federal or any other Government in any manner take precedence over the express provisions of a statute. In fact the so-called policy principles could not be invoked even to interpret the express provisions of law. Particularly, when these provisions had already been interpreted by the Hon'ble Supreme Court of Pakistan against the claim of one of such power generation companies in re: Genertech Pakistan Limited (supra).
19. As far section 2(5) of Protection of Economic Reforms Act, 1992 is concerned, we are in agreement with the view expressed by the Revenue that the claimed exemption was available only to resident companies in respect of interest earned on accounts maintained within the country. Since in the present case admittedly the interest was earned on deposits kept in foreign banks outside Pakistan the provisions of the Act were not invokable for the purpose of claiming exemption. Here we would like to remark that at different stages of the proceedings the assessee attempted to improve his case by taking different stances as to the nature of the amounts deposited in foreign banks on which the interest income was earned. At the early stage of proceedings he claimed the deposits to have been made in order to meet certain expenses like salaries etc. Subsequently before the Tribunal such deposits were claimed to have been as a result of an agreement between the lender banks or other financial institutions and the Company. The attempt on the part of the petitioner to distinguish the Supreme Court judgment in re: Genertech of Pakistan Limited (supra) is also a part of that chain to say that since in the' present case generation of electric power had not yet started it could claim the interest income as exempt inasmuch as after the start of production of electricity the exemption could only be claimed with reference to the income of electric generation independently.
20. As far application of section 30 (income from other sources) of the late Ordinance is concerned, it is only the accrual of interest income which is relevant and neither the nature of funds on which such income is earned nor the end use of the interest income which is relevant. Learned members of the Tribunal in (1999) 79 Tax 1 (Trib.) on consideration of different judgments of the superior Courts, particularly while distinguishing the two judgments relied upon by the assessee before them in re: California Copper Syndicate Ltd. v. Haris, Superintendent of Taxes 5 TC 159 and re: Mazagaon Dock Ltd. v. C.I.T. (1958) 34 ITR 368 made a right distinction that earning of interest on "investment" and earning interest on "deposits" were two different H things. The ratio settled in re: Traco Cable Co. Ltd. v. C.I.T. (1969) 72 ITR 503 is also not relevant because it was a case where the assessee carried on business of banking. The view adopted by the Tribunal was certainly supported by a judgment of the Peshawar High Court, as noted by them in re: C.I.T., N.-W.F.P. v. N.-W.F.P. Forest Development Corporation (1990 PTD 178). In that case it was held that interest earned by the Corporation from deposits of funds in a bank was not attributable to its operations of sale of timber. The other case noted by the learned Tribunal was a Supreme Court judgment in re: C.I.T. Dacca v. Liquidator Khulna Bagerhat Railway Lines Limited (1962) 5 Tax 267. In that case Hon'ble apex Court while confirming the findings of the Dacca High Court rejected the contention that interest received on deposit of part of business capital was income from business. In that judgment learned members of the Tribunal also disagreed that the interest paid on borrowed capital deposited in the bank was to be allowed against the interest income. The learned members held and we will agree that expenditure incurred on account of interest on such borrowed capital being otherwise admissible as expenditure under section 23(1)(vii) of the Ordinance, there was no question of its set-off against interest income. Learned members of the Tribunal were also correct in holding that interest income, except in cases where money was utilized as stock-in -trade, could not be in any situation treated as income from business. To support their view they relied upon three judgments of the Hon'ble Supreme Court of India in re: Senairam Doongarmal v. C.I.T. (1961) 42 ITR 392, re: C.I.T. v. Lahore Electric Supply Company (1966) 60 ITR 1 and re: Narayan Swadeshi Weaving Mills v. C.&P.T. (1954) 26 ITR 765. In the first case the Hon'ble Court observed that the term business "denotes as activity with the object of earning profit". In the second case the term business was held to "contemplates an activity capable to producing a profit which can be taxed". And, in the third judgment the Hon'ble Court held that business "connotes some real, substantial and systematic or organized source of activity or conduct with a set purpose".
21. Learned counsel for the petitioner while extending the scope of his arguments has also tried to assail the impugned order while relying upon the meaning of the word "project" and difference between "set up" and "commencement". It is maintained that earning interest is part of the overall project of power generation and, therefore, is includable in its "profits and gains" and that mere non-commencement of power generation by itself does not derogate from the primary business and activity of the company. The claim of the learned counsel for the petitioner that the funds generating interest income were intrinsically and inextricably linked with the project and, therefore, could not be taxed as income from other sources is sought to be supported by the reported judgments i.e. re: Commissioner of Income-tax v. Amalgamation Ltd. 2000 PTD 427 and 2003 PTD (Trio.) 1643. However we will not agree that every activity undertaken by the "project" will result in income which could properly be described as "profits and gains" from power generation business. The liberal meanings assigned to these words cannot be taken into consideration in order to interpret the clause (176) of the Second Schedule to the late Ordinance. The principle that charging provisions are to be interpreted strictly and that in case of a doubt where two interpretations are equally possible, the one favourable to the taxpayer should be adopted is not relevant to the interpretation of exemption clauses at least as far the view of superior Courts in Pakistan is concerned. The law is well-settled that exemption provisions are to be construed strictly and that it is always for the assessee/taxpayer to establish that his case clearly falls within the exemption clause. In re: Army Welfare Sugar Mills Limited and others v. Federation of Pakistan (1992 SCMR 1652) the Hon'ble Supreme Court of Pakistan settled the principle -of interpretation of exemption clauses in fiscal statutes in the following words:---
"There are two basic principles of construing a provision of statute involving exemption from payment of tax, namely, the first rule is that the burden of proof is on the person who claims exemption. The Second Rule is that a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favour of taxing officer."
22. Lastly, learned counsel for the petitioner heavily relies upon a judgment of Punjab and Haryana High Court in re: National Cooperative Sugar Mills Ltd. v. Commissioner of Income-tax, (1998) 96 Taxman 352. That case however is clearly distinguishable as far the facts in hand are concerned. In that case the assessee, a cooperative society pursuant to an agreement with foreign supplier of machinery made fixed deposits as margin money paid to the bank for opening a letter of credit. The interest income earned thereon was claimed as part of business income which was rejected by the Assessing Officer and the Hon'ble High Court maintained these findings. The alternate plea for the assessee for adjustment and set-off of interest income against various expenditure and the balance to be capitalized as part of actual cost of assets acquired by the assessee was however, partly accepted by the Hon'ble Court. The basic reason for acceptance of the alternate plea being the direct nexus between the interest income and the acquisition of the asset. No such nexus exists in the facts of the case in hand. The relevant part of the findings of the Court as contained in para. 24 of the report reads as under:---
"In the case of the assessee before us, it has already been seen that money was deposited so as to open a letter of credit under the terms of the agreement with the supplier of the machine. It was, therefore, not a case where surplus share capital money lying idle and unused had been deposited in the bank. Here the money was deposited out of necessity for the purpose of acquiring an asset. The plea of the Department that unutilized and surplus money had been deposited by the assessee, does not appear to be correct. The assessee's plea that money had been deposited so as to open a letter of credit has not been 'controverted. Therefore, the activity of depositing money out of the share capital was an activity incidental to the acquisition of the asset. It was not a case where surplus share capital money was deposited with the bank because it was lying unutilized and idle. The assessee deposited the money with the bank with a definite purpose to execute an agreement for the purpose of acquiring machine. There is, however, no evidence on record to show that the fixed deposit has been made by the assessee out of the borrowings. It was the share capital which was deposited. The question therefore, arises as to whether the deposit of the share capital money for the time being, require the money for its business. The assessee purchased fixed deposits in the course of an activity directly relatable to the acquisition of an asset. There is thus a direct nexus between the purchase of the machinery and the deposit of money in the bank. This nexus shall bring out a presumption in assessee's favour that money was deposited not without a purpose but with the object of acquiring machine from the supplier. Such interest income being directly relatable to the terms of the contract for acquiring a business asset should go to reduce the cost of the asset. As has been seen the Supreme Court in U.P. State Industrial Development Corpn.'s case (supra) took notice of the activity of underwriting shares and the earning of the underwriting commission and brokerage from such activity. 'It was held that as the underwriting commission had been earned by the assessee in the course of taking over certain shares, such commission shall go to reduce the cost of the shares acquired by the assessee and could not be taken into the profit and loss account. Since the assessee had subscribed certain shares out of the underwritten shares, the commission relating to those shares went towards the cost and no income was earned by the underwriter. Following the ratio laid down by the Supreme Court in U.P. State Industrial Development Corpn's case (supra), it has to be concluded, in the present case, that the interest income earned by the assessee was directly relatable to the activity of acquiring an asset from a supplier in whose favour a letter of credit was opened after paying money in fixed deposits. Since the two activities, namely, deposits made in the bank and the acquisition of machinery have a direct nexus, the interest income has to be associated with the cost of the asset so acquired. It was not a case of deposit of surplus money, entirely unconnected with any other activity of' the assessee. The deposit of share capital money with the bank had a definite purpose and object. In this light, the interest earned by the assessee shall go to reduce the cost of the asset acquired out of the transaction."
23. For the aforesaid reasons and discussion we will return an affirmative answer to the three questions detailed in opening part of this order:
24.This order will also govern PTR 135 of 2002.
M.B.A./A-586/LReference answered in the affirmative.