VS, 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2385 (2007)

(a) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., Cl. (176)---Exemption---Power generation plant---Interest income---Interest income was a business income as the same had been earned as a result of operation of the project .and no separate additional effort had been made for the purpose of earning income from sources like interest as well as sale of scrap---Validity---Strict interpretation of Cl. (176) of the Second Sched. of the Income Tax Ordinance, 1979 did not leave any doubt to say that the interest income could be an income of a power generation project of a company' incorporated for the purposes of operating the power generation project; it was entirely a separate and independent source for which charge had been created in S.30 of the Income Tax Ordinance, 1979 and consequently the same was not exempt at all---Even if under some special circumstances such an income could be termed as income from business, it shall still not be an income of the power generation project in terms of Cl. (176) of the Second Sched. of the Income Tax Ordinance, 1979 and there was no doubt with regard to charge of interest income and the assessee did not have any case on the issue---Appeal was dismissed in circumstances.

I.T.A. No.136/KB of 1998-99 not in field.

(2006) 81 Tax 319 and 2003 PTD (Trib.) 2213 rel.

(b) Income Tax Ordinance (XXXI of 1979)---

----Second Sched. Cl. (176)---Exemption---Power generation plant---Income from scrap---If the scrap was not an ancillary item and was only by way of cuttings, broken office furniture or of machine parts used etc. it could not be considered as part of the income of the project from the power generation---Income from scrap was not covered in Cl. (176) of the Second Schedule of the Income Tax Ordinance, 1979 in circumstances.

(c) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., Cl. (176)---Exemption---Power generation plant---Supplemental charge on delayed payment---Additional payment of delay of the original payment was not an income of the power generation ,project from sale of electricity.

M.M. Faisal Banday, A.C.A. for Appellant (in I.T.As. Nos.1382/IB to 1384/IB of 2005).

Muhammad Ali Shah, D.R. for Respondent (in I.T.As. Nos.1382/IB to 1384/IB of 2005).

Muhammad Ali Shah, D.R. for Appellant (in I.T.As. Nos.1379/IB to 1381/IB of 2005).

M.M. Faisal Banday, A.C.A. for Respondent (in I.T.As. Nos.1379/IB to 1381/IB of 2005).

ORDER

These appeals by assessee as well as the Department are basically on the basis of common grounds.

2. The issue in respect of assessee's appeal is that the exemption provided under clause (176) of the repealed Income Tax Ordinance, 1979 is for, the Electric Power Generation Project set up in Pakistan on or after the first day of July, 1976.

3. The A.R. in support of claim of exemption said that the exemption is in respect of the power generation plant hence any or every type of income earned by the said assessee is exempt. Particularly the income from interest is as a result of maintenance of account which is a part and parcel of the transactions conducted by assessee's business. The assessee, he remarked, had no intention of earning either interest income or making his good item as bad in terms of scrap and sale thereof nor he had intention of diverting its main source. The income has been earned as a result of the operation of the project and no separate additional effort has been done for the purpose, of earning income from sources like interest as well as sale of scrap etc. When confronted he remarked that the judgments of the ITAT' as well as the Honourable High Court are distinguishable. Interest earned in the said case was before installation -and operation of the said industry. In the present case the assessee has not only installed his plaint but is also earning income from power generation project. The additional sources in terms of interest income as well as sale of scrap etc. by all means is part and parcel of the business activity and a sort of by product.

4. The arguments when confronted to learned D.R. he said that he has nothing to add beyond the C.I.T.(A) order.

5. So far as the income from interest is concerned one cannot be in agreement with the learned A.R: that interest income from bank in the circumstances of this case can be considered as income from business. Assessee has formed a power generation project by a company formed for the purpose of operating the power generation project. Strict interpretation of the clause (176) does not leave any iota of doubt to say that the interest income can be an income of a power generation project of a company incorporated for the purposes of cooperating and managing the power generation project. It is entirely a separate and independent source for which charge has been created in section 30 and consequently the same is not exempt at all. In this regard the judgments in terms of I.T.A. No.136/KB of 1998-99 dated 22-10-1999 is no more in field. The Honourable High Court in (2006) 81 Tax 319 High Court Karachi has categorically held that income earned by a power generation plant from interest is not an exempt income.

6. The argument that it was for pre-operational period has further been duly taken care of in 2003 PTD (Trib.) 2213 wherein the Honourable Tribunal has further dilated this issue. It has been held therein that the income from interest being income from other sources in terms of section 30 in any case cannot beheld to be as an income from business. The question of its exemption, therefore, does not arise on the face of it. The ratio of the judgment is very clear. However, we would, like to add here that even if under some special circumstances such an income can be termed as income from business, it shall still not be an income of the power generation project in terms of clause (176) of the Second Schedule of the Income Tax Ordinance (Repealed), 1979.

7. We have in a recent judgment further dilated the issue 'for which judgment can be referred as I.T.As. Nos.2248 to 2252/LB of 2004 wherein this issue has been dilated in more detail. However, since we have no doubts in our mind with regard to charge of interest income, we hold that the assessee does not have any case on this issue and dismiss his claim.

8. So far as the income from scrap is concerned, there is again a strong doubt of its status as a by-product of a company which is generating power. By-product of a power generation plant can only be electricity. Scrap means a small fragment of cuttings which in this case could at best be of machine tools, office furniture etc. Sale of the same obviously is neither part of the objects of the assessee-Company nor have any ancillary or auxiliary status to the power generation. We are conscious of our decision wherein we have held that the scrap to be as a by-product and ancillary to some industrial undertakings but the same is for the reason of the factual status in the said industries. In case while manufacturing a machine or machine part etc. a part of the product is declared as technically unusable, the same can be called as its by-product and sold as a scrap. In such like situation the exemption may become the right of the assessee but if the scrap is not an ancillary item and is only by way of cuttings, broken office furniture or of machine parts used etc. it cannot be considered as part of the income of the project from the power generation.

9. The outcome of above discussion is, therefore, obvious. None of the sources of this assessee other than already declared as exempt is covered in clause (176) of the Second Schedule. The appeals, therefore, are accordingly decided.

10. This covers taxability of the supplemental charges received from WAPDA on delayed payment also. The status of the same being additional payment of delay of the original payment is not an income of the power generation project from sale of electricity.

11. Coming to the departmental appeals it will be naive to say that no expense has been incurred for earning the interest income specially in the presence of the Omni bus provision in section. 31. Said provision clearly allows expenses incurred for the purpose of earning some income. The criteria is determination of nexus which, however, can only be done at the stage of the Assessing Officer with the assistance of the assessee. In this case we have already given our opinion in many cases hence no further discussion of dilation will be required.

12. The appeals of the Department as well as that of the assessee are dismissed and are accordingly decided.

C.M.Q.A./86/Tax(Trib.)Appeals dismissed.