COMMISSIONER OF INCOME TAX, KARACHI VS GELCAPS (PVT.) LTD., KARACHI
2009 P T D 331
[Karachi High Court]
Before S. Ahmed Sarwana and Muhammad Mujeebullah Siddiqui, JJ
COMMISSIONER OF INCOME TAX, KARACHI
Versus
Messrs GELCAPS (PVT.) LTD., KARACHI
I.T.R. No.58 of 1992 and I.T.C. No. 226 of 1991, decided on 10/04/2003.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 15---Business income---Commercial expediency---"Interest on investment"---To earn interest on "investment" is distinct from earning interest in "deposit"---Earning of interest by assessee, who had obtained loan for setting up an industry, and would have been manufacturing the product when it might have started the production was not to be deemed an "income from business" on the principle of commercial expediency.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.15---Classification of income under S.15, Income Tax Ordinance, 1979---Criterion---Sole criterion to classify the income under S.15, in ordinary course, is the source and/or the nature of activity and conduct wherefrom and/or whereby the particular income is being generated---As long as the sources can be factually found, circumstances seldom have any bearing on the characteristic of the income.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss.30 & 15---Classification of income---"Income from business"---"Income from other sources"---Interest earned by an assessee who deals in money as stock-in-trade is "income from business", but such income cannot be anything but "income from other sources" for an assessee who has earned it on money held as capital, irrespective of the fact that it is borrowed or contributed by proprietor/director/partner/sponsor or shareholder---Interest income is assessable as "income from other sources" in circumstances.
CIT v. A.P. Industrial Infrastructure Corpn. Ltd. (1989) 176 ITR 361; Madhya Pradesh State Industries Corpn. Ltd. v. C.I.T., (1986) 69 ITR 824 (M.P.); Traco Cable Company Ltd. v. C.I.T. (1969) 72 ITR 503 (Kar. H.C.); Collis Line (Pvt.) Ltd. v. C.I.T. (1982) 135 ITR 390; CIT v. Bihar Alloy Steels Ltd. 1995 PTD 1189 (14.C. Patna); C.I.T., N.-W.F.P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178; CIT, Dacca v. Liquidator, Khulna-Bagerhat, Railway Company Ltd. 1962 PTD 415; PLD 1961 Dacca 108; C.I.T. v. Hindustan Electro Graphites Ltd. 1991 PTD 252; CIT v. Bihar Alloy Steels Ltd., 1994 206 ITR 351; Addl. CIT, Madras v. Madras Fertilizers Ltd. 1990 122 ITR 139; CIT v. Maglam Cement Ltd. 1996 217 ITR 369; Madhya Pradesh State Industries Corporation Ltd. v. CIT M.P. 1968-69 ITR 824 and Bokaro Steel Ltd. v. CIT 1988 170 ITR 545 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.15---Classification of income---If an income properly falls under a particular head, it cannot be assessed by the Assessing Officer under another head---Where an assessee keeps his money intended to be used as capital of his particular business or part of such money or his other money in the banks and derives income by way of interest it would not be his "income from business" but "other sources"; there was a difference between the objects and the power of activities of assessee in carrying out the object into effect.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.15---Classification of income---Term "commercial expediency"---Scope---Term "Commercial expediency" is too general a phrase to affect the classification of income as made by law or to change their nature or nomenclature---Issues are not to be decided on the basis of commercial expediency on the part of one assessee, which may not be prudent from the point of view of another assessee but has to be judged on the touchstone of legal provisions.
(f) Income Tax Ordinance (XXXI of 1979)---
----S.22---Income from business or profession---Phrases "carried on" as used in S.22(a), "Specific services performed" as used in S.22(b) and "exercise of a profession" as used in S.22(c) of the Income Tax Ordinance, 1979 indicate that some kind of continuous physical and/or mental human activity is involved in generation of income from business--'"Business"---Connotation.
(g) Income Tax Ordinance (XXXI of 1979)---
----Ss.30, 22, 15 & 2(32)---Classification of income---"Income from other sources"---"Income from business"---Income earned by way of interest without engaging in an activity falling under the meaning of business or, where money is not utilized as stock-in-trade, is income from other sources under S.30 of the Income Tax Ordinance, 1979---Neither the assessee's personal status nor the nature of business, profession or occupation, in which he is engaged, would change the nature of such income; similarly, neither the source of the funds generating such interest income nor the purpose for which such funds are obtained by the depositor would have any bearing on the nature of such income---Neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains being derived or to be derived wherefrom, are exempt under the Income Tax Ordinance or otherwise, nor the fact that such company or an assessee having any other personal status under subsection (32) of S.2 of the Income Tax Ordinance, 1979 has deposited the funds out of equity or out of borrowed capital, nor the fact that, in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession, would change the classification of such income under S.15 of the Ordinance.
1988 PTD (Trib.) 369 = 1988 58 Tax 15 not a correct law.
Bokaro Steel Ltd. v. Commissioner of Income Tax (1988) 170 ITR 545 not a correct law.
(h) Income Tax Ordinance (XXXI of 1979)---
----Ss.30, 22 & 15---Classification of income---"Income from other sources"---"Income from business"---Interest income earned by the assessee 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 whereby income earned underthe head "other sources" can be permitted to be adjusted against the expenses which are to be capitalized.
(1988) 58 Tax 15 not a correct law.
Eastern Investment Ltd. v. CIT (1951) 20 ITR 1 (S.C. India); 36 ITR 329; 39 ITR 696; 46 ITR 511; 49 ITR 127; (1978) 115 ITR 519; Motilal Hirabhai Spinning and Waving Mills Ltd. v. CIT (1978) 113 ITR 173 (Gujarat HC); 1988 PTD (Trib.) 369; CIT v. United Wire Ropes Ltd. (1980) 121 ITR 762 (Born. H.C.); Bengal and Assam Investors v. CIT (1976) 33 Tax 8 (S.C. Ind.); CIT v. Liquidators Khulna Bagerhat PLD 1962 SC 128; Trace Cable Co. Ltd. v. CIT (1969) 72 ITR 503; United Commercial Bank Ltd. v. CIT (1975) 32 ITR 688; California Copper Syndicate Ltd. v. Haris, Surveyor of Taxes. 5 TC 159; Mazagaon Dock Ltd. v. CIT (1958) 34 ITR 368 (S.C. Ind.); Bandengwers Ltd. v. Clarke (1935) 31 ITR (Eagles Case) 17; CIT v. A.P. Industrial Infrastructure Corpn. Ltd. (1989) 176 ITR 361; Madhya Pardesh State Industries Corpn. Ltd. v. CIT, (1986) 69 ITR 824 (M.P.); Traco Cable Company Ltd. v. CIT (1969) 72 ITR 503 (Kar. H.C.); Collis Line Pvt. Ltd. v. ITO (1982) 135 ITR 390; Bokaro Steel Ltd. v. C.I.T. 1988 170 ITR 545; CIT v. Bihar Alloy Steels Ltd. 1995 PTD 1189 (H.C. Patna); CIT, N.-W.F.P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178; CIT, Dacca v. Liquidator, Khulna-Bagerhat Railway Company Ltd. 1962 PTD 415; PLD 1961 Dacca 108; CIT, v. Hindustan Electra Graphites Ltd. 1991 PTD 252; CIT v. Bihar Alloy Steels Ltd., 1994 206 ITR 351; Addl. CIT, Madras v. Madras Fertilizers Ltd. 1990 122 ITR 139; CIT v. Maglam Cement Ltd. 1996 217 ITR 369; Madhya Pradesh State Industries Corporation Ltd. v. CIT M.P. 1968-69 ITR 824; Bokaro Steel Ltd. v. CIT 1988 170 ITR 545; Senairam Doongarmal v. CIT (1961) 42 1TR 392; CIT v. Ludhiana Electric Supply Company Ltd. (1966) 60 ITR 1; Narayan Swadeshi Weaving Mills. v. C. E. P. T (1954) 26 ITR 765; 1988 PTD (Trib.) 369; 1988 170 ITR 545; Commissioner of Income Tax v. Bihar Alloy Steels Ltd. 1995 71 Tax 62; Traco Cable Company Ltd. v. CIT 1969 72 ITR 503 and Collis Line Pvt. Ltd. v. ITO 1982 135 ITR 390 ref.
Nasrullah Awan for Appellants.
Hisamuddin for Respondent.
Dates of hearings: 11th November, 2002 and 11th March, 2003.
JUDGMENT
MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---The question of law in both the above cases is common, therefore, both the cases are being disposed of by this single consolidated judgment.
2. In I.T.R. 58 of 1992, the learned Income Tax Appellate Tribunal (hereinafter referred to as ITAT) has referred the following question of law for our opinion:--
"Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in directing the adjustment of Profit earned on PLS time Deposit against interest payable on borrowed capital, and capitalize the balance."
3. The facts giving rise to the above question are that during the assessment year 1988-89 the respondent/assessee was setting up a factory. No production or business was carried on. The assessee filed, return of total income declaring nil income. The organization and development expenditure amounting to Rs.80,46,674 was capitalized after deducting the profit earned on PLS time Deposit. The Assessing Officer did not accept the treatment and held that the interest incurred on loan for establishing industrial undertaking is to be capitalized and there is no provision for reducing the capital expense by adjusting it against the income from other sources. He further held that the amount of interests earned by assessee is taxable under section 30 of the Income Tax Ordinance, 1979 and consequently the profit/interest amounting to Rs.5,54,701 was subjected to tax as income from other sources. The First Appeal preferred by the assessee was dismissed. The assessee preferred second appeal before the ITAT. The tribunal while placing reliance on its earlier decision reported as 1988 PTD (Trib.) 369, accep ted the appeal and directed the Assessing Officer to allow capitalization of the amount representing the difference of the interest paid and the interest received. The Department feeling aggrieved submitted reference application and the learned ITAT, after citing the following passage from the earlier decision of ITAT, reported as 1988 PTD (Trib.) 369, referred the question reproduced earlier:--
"Now, if we examine the facts of these appeals from the point of commercial expediency, it appears that the appellant had to pay interest on the borrowed loan. He therefore, had two choices; either he could have kept the money in its safe and capitalized the interest paid, or should have earned some interest on the unutilized money and then capitalized the difference obtained after deduction of the interest earned from interest paid, in either case he could have minimized its liability whereas in the former case it would not have done so. As a businessman of ordinary intelligence and common prudence it adopted the second method and it is indeed the method of commercial expediency. At the time when it was minimizing its interest liability it might not have known that its adventure would ultimately fail to see the day of commencement of production as it ultimately happened.
Let us point out that as per statement of Mr. Faruq Ali, the appellant has not gone in production till today and this fact further shows the commercial foresight of the appellant and its financial advisers as they minimized their losses by depositing the balance money on interest. We are, therefore, of the considered view that the appellant rightly invested the balance money in fixed deposits and earned interest thereon so that its losses could be minimized. This is, in our judgment, best example of commercial expediency. We are, therefore, of the view that the interest income of the appellant earned under the facts and circumstances of these appeals was an income from business, and, as such, it was rightly set off against the interest payable before the balance was capitalized for the simple reason that it was an expenditure admissible under section 23(1)(vii) of the Income Tax Ordinance. Let us point out that under the facts and circumstances of these appeals the loan was obtained for business of earning interest as well as for business of earning income from manufacturing liquid sugar. Hence the interest expenditure in proportion to interest income has been deducted and the balance has been capitalized."
4. The relevant facts giving rise to I.T.C. No. 226 of 1991 are that the respondent filed return of income for the assessment year 1987-88 declaring nil income. The assessee being a company was in the process of establishing a factory and the expenses were capitalized. The Assessing Officer, on examination of accounts found that an amount of Rs.2,07,935 were paid to Messrs Union Bank of Middle East while an amount of Rs.1,91,269 was received from Union Bank of Middle East as interest on fixed deposit. Difference of these two amounts were transferred to Paper Plant machinery account. The assessee was called upon to show as to why the interest received should not be subjected to tax as income from other sources. The assessee contended that it did not earn profit on fixed deposit but had reduced the cost of machinery by way of adjusting Rs.1,91,269 against Rs.2,07,935 by reducing interest charged on loans for investment in machinery and the difference of Rs.16,666 was capitalized. The Assessing Officer, did not accept the contention and subject to the interest earned on F.D.R. at Rs.1,91,269 as income from other sources. The assessee preferred First Appeal contending that the method was adopted by way of business expediency and the Assessing Officer has no jurisdiction to interfere with the manner in which business is conducted by an assessee. The learned A.A.C. did not accept the contention and the appeal was dismissed. The assessee preferred Second Appeal before the ITAT and the learned ITAT allowed the appeal by placing reliance on its earlier decision reported as 1988 PTD (Trib.) 369.
5. The Department being aggrieved submitted reference application proposing following question of law:--
"Whether on the facts and circumstances of the case the learned Tribunal was justified in upholding the action of the appellant in capitalising the difference of the interest paid and interest received amounting to Rs.16,666 and not charging the tax on the amount of interest earned on FDR of Rs.1,91,269 under the head income from other sources."
6. The reference application was rejected and .consequently, the department submitted application under section 136(2) of the Income Tax Ordinance, 1979 before this Court and the reference application was admitted to regular hearing to consider the question of law proposed by the Department.
7. We have heard Mr. Nasrullah Awan, learned counsel for the applicants in both the reference applications and Mr. Hisamuddin learned counsel for the respondent in ITR 58/92. Nobody has appeared on behalf of respondent in ITC 226/91. 'Mr. Nasrullah Awan, has vehemently assailed the finding of ITAT in the judgment reported as 1988 PTD (Trib.) 369. his contention is that, in the above cited judgment, learned Tribunal has seriously erred in holding that in pre-production period the assessee earned income from business and further fell in error that the assessee rightly set off the income so earned against the interest payable before the balance was capitalized for the similar reason that it was an expenditure admissible under section 23(1)(vii) of the Income Tax Ordinance. He has submitted that the finding contained in the Tribunal's order reported as 1988 PTD (Trib.) 369, is contradictory in terms as the learned Tribunal has approved the capitalization of interest which means that it was a pre-production period and the assessee has not commenced its business, while on the other hand, it has held that the interest earned on deposits was a business income. He has further contended that even if it is accepted for the sake of argument that the interest earned on deposits is income from business then the entire business income is not to be allowed as expenditure and that too in the form of capitalization of the interest paid at the borrowed capital at a stage when the business has not taken off. He has submitted that the learned ITAT, has not considered the judgment cited by it in real perspective and consequently, has fallen in error.
8. On the other hand, Mr. Hismauddin, learned counsel for the respondent in ITR 58/92, has fully supported the view of the ITAT held in the judgment reported as 1988 PTD (Trib.) 369.
9. We have carefully considered the contentions raised by the learned advocates for the parties and the relevant law on the question under consideration.
10. The learned Tribunal while deciding the issue under consideration in both the cases mainly placed reliance on an earlier Division Bench judgment of the Tribunal reported as 1988 PTD (Trib.) 369. It is, therefore, necessary to recapitulate the relevant facts in the above cited judgment of the Tribunal. In the said case, the assessee, a company, incorporated in July, 1980, had filed return for the assessment years, 1982-83 to 1985-86 declaring nil income. The Assessing Officer, while processing the return found that the assessee company was floated with paid up capital of Rs.35,000 divided in to 7000 shares of Rs.5 each for the purposes of setting-up industry for manufacturing of liquid sugar. For this purpose it had also borrowed loan. A part of the borrowed loan was spent on the under construction project and the balance was kept in banks on fixed deposits. Interest income was earned, which was deducted from the amount of interest paid on the borrowed capital and the balance interest paid on the borrowed capital was capitalized. Admittedly the assessee had not gone in operation in the relevant assessment years. The Assessing Officer did not accept the treatment and held that the amount of interest derived from fixed deposits was income from other sources and taxed accordingly. In the above situation, a Division Bench of the learned Tribunal held as follows:--
"Now, if we examine the facts of these appeals from the point of commercial expediency, it appears that the appellant had to pay interests on the borrowed loan. He, therefore, had two choices; either he could have kept the money in its safe and capitalised the interest paid, or should have earned some interest on the unutilized money and then capitalize the difference obtained after deduction of the interest earned from interest paid. In either case he could have capitalized the interest paid. In the later case, however, he could have minimized its liability whereas in the former case it would not have done so. As a businessman of ordinary intelligence and common prudence it adopted the second method and it is indeed the method of commercial expediency. At the time when it was minimizing its interest liability it might not have known that its adventure would ultimately fail to see the day of commencement of production as it ultimately happed. Let us point out that as per statement of Mr. F.A. the appellant has not gone in production till today and this fact further shows the commercial foresight 'of the appellant and its financial advisers as they minimized their losses by depositing the balance money on interest. We are, therefore, of the considered view that the appellant rightly invested the balance of money in fixed deposits and earned interest thereon so that its losses could be minimized. This is, in our judgment, best example of commercial expediency. We are, therefore, of the view that the interest income of the appellant earned under the facts and circumstances of these appeals was an income from business, and as such, it was rightly set off against the interest payable before the balance was capitalized for the simple reason that it was an expenditure admissible under section 23(1)(vii) of the Income Tax Ordinance. Let us point out that under the facts and circumstances of these appeals the loan was obtained for business of earning interest as well as for business of earning income from manufacturing liquid sugar. Hence the interest expenditure in proportion to interest income has been deducted and-the balance has been capitalised.
Thus, in view of discussion made above, we allow these appeals and hold that interest income was not chargeable to tax as income from other sources. We also direct the ITO to allow deduction of interest earned from interest payable."
11. The learned Division Bench of the Tribunal gave the above finding by placing reliance on the judgment of Supreme Court of India in the case of Eastern Investment Ltd. v. CIT (1951) 20 ITR 1 (SC India).
12. The facts in the case of Eastern Investment Ltd. were that an investment company was formed for acquiring, holding and otherwise dealing with shares and Government securities which belonged to C. The share capital of the company was 250 lacs and the majority of its shares, including 50,000 ordinary shares of the face value of Rs.5,000,00, was held by C and the rest was held by the nominees of C.0 died and S was appointed administrator of his estate. S held the 50,000 ordinary shares in that capacity. Money was needed by the executors of C and accordingly S entered into an agreement with the assessee under which the assessee agreed to reduce its share capital by Rs.50 Lacs by taking over from S the 50,000 shares at Rs.100 a share and S on his part agreed to forego cash payment and to receive instead debentures of the face value of Rs.50 lacs carrying interest at 5 per cent. per annum "redeemable at the option of the registered holder at any times". The sanction of the High Court was obtained in due course and the agreement was carried out by the parties. The transaction was not challenged on the ground of fraud. The Income-tax Authorities, the Appellate Tribunal and the Calcutta High Court took the view that in computing the income of the assessee the interest paid on these debentures could not be deducted under section 12(2) of the Indian Income Tax Act, 1922, on the ground (a) that it was not expenditure incurred for the purpose of earning the income, profits and gains of the assessee and (b) that even if it was so, it was at any rate not expenditure incurred solely for that purpose.
13. The Supreme Court of India, under the facts and circumstances supra, found no relevance to the core issue, in the arguments that (1), the conversion did not, in any way, disturb the holding of the investments of the company; (2) or interfere with the earning of its income; (3) or it had the effect of diminishing its taxable income; (4) or that there was complete identity of person between the person whose shares were sold and the person who took the debentures and whole the transaction resulted in considerable benefit to him; (5) or whether the transaction could be brought within the functions of an investment company; (6) or that the capital of the company could have been reduced in other' ways; (7) or that the company had, at the time, sufficient liquid resources to effect the reduction of capital desired and so it was not necessary to resort this process. The Court held that as long as the transaction is not challenged as a fraud, and since there is no even an allegation of fraud, the test for present purposes is neither whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant's legitimate commercial undertaking in order, indirectly, to facilitate the carrying on of its business. Finally it was held:--
"On a full review of the facts it is clear that this transaction was voluntarily entered into, in order, indirectly, to facilitate the carrying on the business of the company and was made on the ground of commercial expediency. It therefore, falls within the purview of section 12(2) of the Income Tax Act, 1922, before its amendment in 1939."
14. A perusal of the above facts and the findings of the Supreme Court of India shows, that the issue under consideration was pertaining to nature of expenditure incurred incidental to business under the law. The ground of commercial expediency was not considered in the context of the nature of income accrued to the assessee. The learned Tribunal further placed reliance on the judgments reported in 36 ITR 329, 29 ITR, 696, 46 ITR 511, 49 ITR 127 and (1978) 115 ITR 519. In all these cases the facts were similar to the Eastern Investment Ltd.
15. The other case on which the learned Division Bench of the Tribunal placed reliance was, Motilal Hirabhai Spinning and Weaving Mills Ltd. v. CIT (1978) 113 ITR 173 (Gujarat High Court).
16. The relevant facts in the case of Motilal Hirabhai Spinning and Weaving Mills Ltd., (Supra) were that the assessee was running a textile mill. Subsequently, it discontinued business and derived income from property and interest on deposits. The assessee used to deposit the excess funds available with it with various parties and declare up to assessment year, 1969-70, interest income under the head "Income from other sources". Subsequently, in the assessment year in dispute, the interest income was derived from loans advanced to five parties and scrutiny of the accounts of those parties revealed that there was no frequency of advances made to those parties and the transactions were mainly in the nature of deposits. No borrowal was affected by the assessee in the assessment year under consideration nor in any of the earlier years to earn interest by lending money to the various parties and only surplus funds which were available to the company were advanced to earn interest. The pattern of advances had also varied from year to year, and in some years, monies were invested in banks while in others monies were placed either in fixed deposit or in Sharafi account with certain companies. The assessee claimed that the income was under the head 'business'. The Income Tax Officer and the appellate Assistant Commissioner, did not accept the claim of the assessee. The Tribunal, however, upheld the assessee's claim on the grounds that the articles of association of the company authorized the company to invest' and deal with the moneys of the company in such manner as may from time to time be thought necessary and to land, deposit or advance money, securities and property to such persons, firms or companies limited or otherwise and on such terms as may seem expedient and in particular to customers and sellers and other having dealings with the company. The proceedings of the meetings of the board of directors showed that the directors were regulating the advances to be made to various parties and that they decided not only upon the amounts to be advanced but also the rate of interest to be charged depending upon the exigencies of the situation. The Tribunal also found that there was a systematic activity of advancing monies to various parties.
17. At the instance of the revenue, the Tribunal referred the following question of law arising out of its order for the opinion of the Gujarat High Court:--
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income derived by the assessee company from deposits and loans is `income from business' and not `income from other sources'.
The Gujarat High Court finally held that, the last part of clause (25) of the articles of association of the company referred to advances being made in particular to customers and sellers and others having dealing with the company. The last part could not be read as controlling the first part. The objects of the company, having regard to the language in which they were couched, authorized the company to make advances not only to customers and sellers but also to any "persons, firms or companies" as the assessee company thought proper. The proceedings of the board of directors revealed that the directors were regulating the advances. They treated it as a part of the activity which the company had to undertake. The Tribunal rightly applied the relevant tests, namely, volume, frequency, continuity and regularity of the transactions in reaching the conclusion that the activities of the assessee giving advances constituted business. The interest earned by the assessee on the advances made by it was assessable as income from business.
We further find that the ratio of the decision of Gujarat High Court supra is that in taxing statutes the word "business" is used in the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. In order to infer from a course of transactions that the person intended thereby to carry on business, ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no single test is decisive of the intention to carry on business. In the light of all the circumstances an inference that a person desires to carry on business 1ilay be raised.
18. From the facts of the case narrated above and the judgment of the Gujarat High Court, we find that the learned members of the bench who decided the judgment reported as 1988 PTD (Trib.) 369, failed to consider that the facts in cited case were entirely different and distinguishable. The ratio of the judgment by the Gujarat High Court was not. attracted. On the contrary, the Gujarat High Court held that profits and gains from business are earned normally through devotion of time, attention and labour of person undertaking an intention to continue the activity which, in the case before the Gujarat High Court was manifested from the deliberated decisions of the board meetings to make advances to various parties at the rate warranted by the situation and expressly provided in the articles of the memorandum. No such activity was shown in the case reported as 1988 PTD (Trib.) 369 and in the two cases under consideration before us.
19. The learned Bench, thereafter, considered the ratio of decisions relied upon by the learned D.R. and observed that in CIT v. United Wire Ropes Ltd. (1980) 121 ITR 762 (Born. H.C.)., Bengal and Assam Investors v. CIT (1976) 33 Tax 8 (S.C. Ind.) and CIT v. Liquidators Khulna Bagerhat PLD 1962 SC 128 it is held that, where surplus funds either out of share capital or borrowed capital are deposited in banks, the interest accrued thereon, and, where investment of such funds in shares is made simply to earn dividends, the interest and/or dividend, so derived, are income from other sources. The learned Bench further observed that the ratio of decision in Trace Cable Co. Ltd. v. CIT (1969) 72 ITR 503, is that if a person carries on any business other than a business of banking or dealing in money, deposits surplus funds in a bank and receives interest thereon, it cannot be contended that it is Income from business nor can it be contended that, where pending commencement of business any expenses are incurred by a company connected with the running of its affairs, such expenditure is incurred for earning interest on deposits of surplus funds in bank. The learned Bench further noted that in United Commercial Bank ltd. v. CIT (1975) 32 ITR 688, relied upon by the learned D.R., the Supreme Court of India has held that interest on securities held by the bank is part of its banking business income.
20. However, the learned Bench, in our view, seems to have been influenced by the ratio of decisions in California Copper Syndicate Ltd. v. Haris, Surveyor of Taxes .5 TC 159, Mazagaon Dock Ltd., V. CIT (1958) 34 ITR 368 (S.C. Ind.) and Bandengwers Ltd. v. Clarke (1935) 31 ITR (Eagles case) 17 yvhich are not relevant, either in context or in content. It has escaped the attention of the learned Bench that to earn interest on "investment" is distinct from earning interest on "deposit". Thus, the learned Bench has arrived at the fallacious conclusion that earning of interest by the appellant, who had obtained loan for setting up a liquid sugar manufacturing factory, and who would have been manufacturing liquid sugar when it might have started the production, is also to be deemed an income from business on the principle of commercial expediency.
21. Under the scheme of law contained in the Income Tax Ordinance, 1979, the sections 9 and 10 provide that tax specified therein shall be charged, levied and paid for each assessment year, in respect of total income of the income year, of every person at the rate or rates specified in the First Schedule.
22. Under section 15 of the Income Tax Ordinance, 1979, all income shall, for the purposes of the charge of tax and computation of total income, be classified under the following heads:--
"(a) Salary;
(b) Interest On Securities;
(c) Income from House Property;
(d) Income from Business or Profession;
(e) Capital gains; and
(f) Income from other sources."
23. A perusal of section 15 of the Income Tax Ordinance, 1979, shows that, the sole criterion to classify the income under section 15, in ordinary course, is the source and/or the nature of activity and conduct wherefrom and/or whereby the particular income is being generated. As long as the sources can be factually found, circumstances seldom have any bearing on the characteristic of the income.
24. Thus, interest earned by an assessee who deals in money as stock-in-trade is "income from business" as held in CIT v. A.P. Industrial Infrastructure Corpn. Ltd. (1989) 176 ITR 361. However, it cannot be anything but "income from other sources" for an assessee who has earned it on money held as capital, irrespective of the fact that it is borrowed or contributed by Proprietor/Director/Partner/Sponsor or Shareholder, as held in several decisions of Indian jurisdiction reported in (1986) 69 ITR 824 (M.P.) (Madhya Pardesh State Industries Corpn. Ltd. v. CIT, (1969) 72 ITR 503 (Kar. H.C.) (Traco Cable Company Ltd. v. CIT), (1982) 135 ITR 390 (Collis Line Pvt. Ltd. v. ITO, (1988) 170 ITR 545 (Bokro Steel Ltd. v. CIT), and 1995 PTD 1189 (CIT v. Bihar Alloy Steels Ltd.) H.C. Patna). This view is also supported by the decision of Peshawar High Court reported as CIT, N.-W.F.P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178, wherein-it is held that interest received by the Corporation from deposit of funds in Bank is not attributable to its operations of sale of timber. Also in an earlier decision the Supreme Court of Pakistan in CIT, Dacca v. Liquidator, Khulna-Bagerhat Railway Company Ltd. 1962 PTD 415, confirmed the finding of Dacca High Court in PLD 1961 Dacca 108, where the memorandum and articles of association also provided that the company could lend, invest or otherwise employ moneys belonging to or entrust to the company upon securities of shares as may be thought proper and from time to time vary the same as the company thought fit and whole of the share income was not immediately required for expenditure on the construction of the Railway line. Some amounts were in fact invested and kept deposited in the bank and the company received income by way of interest on such deposits. The interest received on money kept in Bank, being part of its business capital was held to be its income derived from "other sources" and certainly not its income from business.
25. At this juncture, we would like to mention that, the claim of the assessee to allow interest on borrowed capital as an expense is not based on statutory provisions. It is based upon the ratio of the Tribunal's judgment reported as 1988 PTD (Trib.) 369. A perusal of the case-law from the Pakistan and Indian jurisdiction shows that, except for the Tribunal's judgment under consideration no other judgment has been produced in supporting the claim of the assessee.
26. On the other hand, it has been held in the following cases in similar situations that the interest income was assessable as "income from other sources":--
(1) CIT, N.-W.F.P. v. N.-W.F.P. Forest Development Corporation 1990 PTD 178.
(2) CIT, v Hindustan Electro Graphites Ltd. 1991 PTD 252.
(3) CIT v. Bihar Alloy Steels Ltd. (1994) 206 ITR 351.
(4) Addl. CIT; Madras v. Madras Fertilizers Ltd. 1990 122 ITR 139.
(5) CIT v. Maglam Cement Ltd. 1996 217 ITR 369.
(6) Madhya Pradesh State Industries Corporation Ltd. v. CIT M.P. 1968-69 ITR 824; and
(7) Bokaro Steel Ltd. v. CIT (1988) 170 ITR 545.
27. The principles laid down by the Dacca High Court in the case of Liquidator, Khulna-Bagerhat, PLD 1961 Dacca 108 and confirmed by the Hon'ble Supreme Court, in 1962 PTD 415 are that, if an income properly falls under a particular head, it can not be assessed by the ITO under another head. Where businessman keeps his money intended to be used as a capital of his particular business or part of such money or his other money in the banks and derives income by way of interest it would not be his income from business but from "other sources". It is further held that, there was a difference between the objects and the power of activities of a company in carrying out that object into effect. After a perusal of the judgment from Pakistan and Indian jurisdiction it becomes abundantly clear that the members of the Bench of the Tribunal borrowed the term `commercial expediency' from the judgments in the Indian jurisdiction but applied the same incorrectly to the facts and circumstances of the cited case, and against the principles laid down by the Hon'ble Supreme Court of Pakistan. The term "Commercial expediency" is too general a phrase to affect the classification of income as made by law or to change their nature or nomenclature. The issues are not to be decided on the basis of commercial expediency on the party of one assessee, which may not be prudent from the point of, view of another assessee but has to be judged on the touchstone of legal provisions.
28. This brings us to the consideration of the provisions of section 22 of the Income Tax Ordinance, 1979 which reads as follows:--
"(22) Income from business or profession."
The following incomes shall be chargeable under the head "Income from business or profession" namely---
(a) profits and gains of any business or profession carried on, or deemed to be carried on, by the assessee at any time during the income 'year;
(b) income derived by any trade, professional and similar association from specific services performed for its members; and
(c) value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
Explanation. Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business carried on by the assessee."
29. The phrases "carried on" as used in clause (a), "specific services performed" as used in clause (b) and "exercise of a profession" as used in clause (c) indicate that some kind of continuous physical and/or mental human activity is involved in generation of income from business. This view is supported by several decisions of Indian jurisdiction. The Supreme Court of India in Senairam Doongarmal v. CTT (1961) 42 ITR 392, has observed that the term business "denotes an activity with the object of earning profit". Further, in CIT v. Ludhiana Electric Supply Company Ltd. (1966) 60 ITR 1 it is held that the term business "contemplates an activity capable of producing a profit which can be taxed" and in the decision reported as Narayan Swadeshi Weaving Mills v. C.E.P.T. (1954) 26 ITR 765 it is held that "business" connotes some real, substantial and systematic or organized source of activity or conduct with a purpose.
30. Thus, in our considered opinion, income earned by way of interest .without engaging in an activity falling under the meaning of business or, where money is not utilized as stock-in-trade, is income from other sources under section 30 of the Income Tax Ordinance. Neither the assessee's personal status nor the nature of business, profession or occupation, in which he is engaged, would change the nature of such income. Similarly, neither the source of the funds generating such interest income nor the purpose for which such funds are obtained by the depositor would have any bearing on the nature of such income.
31. In short, neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains being derived or to be derived wherefrom, are exempt under the Income Tax Ordinance or otherwise, nor the fact that such company or an assessee having any other personal status under subsection (32) of section 2 has deposited the funds out of equity or out of borrowed capital, nor the fact that, in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession, would change the classification of such income under S.15 of the Ordinance.
32. For the foregoing reasons, we are of the considered opinion that, the view held by the Income Tax Appellate Tribunal, in its decision reported as 1988 PTD (Trib.) 369, does not contain the correct proposition of law. While coming to the above conclusion, we have referred to various judgments from Pakistan and Indian jurisdiction. We would, like to refer two judgments from Indian jurisdiction, first in the case of Bokaro Steel Ltd. v. Commissioner of Income Tax, (1988) 1670 ITR 545 and Second, Commissioner of Income Tax v. Bihar Alloy Steels Ltd. (1995) 71 Tax 62. Both these judgments were delivered by the Patna High Court. In Bokaro Steel Ltd.', the question for consideration was as follows:--
"Whether on the facts and in the circumstances of the case, the interest received from the bank on short term deposits is liable to be assessed as, the income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee?"
33. The relevant facts in the case were that the assessee was an undertaking wholly owned by the Government of India. It received sums from Government. Those sums used to be deposited in banks on short-term deposits and earned interest thereon. The question was whether, interest so earned is income or not. In support of revenue reliance was placed on the case of Madhya Pradesh State Industries Corporation Ltd. v. CIT (1968) 69 ITR 824 (M.P.). In this case the assessee was a Government private limited company. During the assessment year, 1962-63, the company did not actually carry on any business; there was also no production. That was a period of capital expenditure and installation of machinery and plant. The share money which the company received from the Government being not immediately required by it, was deposited in call-deposits in certain banks. On these deposits, the company received interest income. The company showed this amount of interest as "cash and bank balances" in its accounts. In the profit and loss account, the amount was shown as "interest on deposits". In the return of income from the assessment year in question, the assessee showed a total loss of Rs.15,110. Before the Income Tax Officer the assessee contended that being a newly established undertaking, it did not have income liable to tax, and that further the interest receipts should be assessed as income from business as it was authorized to do money-lending business also under clause 13 of the memorandum of association. The Income Tax Officer held that though the company was authorized to do money-lending business, the interest received by it on deposits from the banks was not income received from money-lending business. He treated the interest income as income from other sources. He allowed deduction of a part of the expenses incurred in earning this interest income. The Madhya Pradesh High Court held that the moneys deposited by the company with the bank were plainly not in the ordinary course of its business of making investment under sub-clause 20 of clause III of the memorandum of association, article 72(1) of the articles of association. It was merely a transaction relating to share capital and not an act in the course of its business.
34. The above view of the Madhya Pradesh High Court was followed by Kerala High Court in Traco Cable Company Ltd. v. CIT (1969) 72 ITR 503, Kerala High Court held as follows:--
"But the short question for decision in this case is whether, as a matter of fact, the company carried on such a business during the accounting year concerned. All that it did was to deposit in banks the share capital received by the company instead of keeping it in its own safe. This was done because the company had not commenced business and the amounts were not immediately required for any business. The receipt of income by interest was only incidental or consequential to the deposit. It can hardly be contended that if an individual, who carries on any business other than a business of banking or dealing in money, deposits his surplus funds in a bank and receives interest thereon, the interest thus received would be income from business. The position cannot at all be different if the assessee happens to be an incorporated company instead of an individual. On the facts of this case, the finding of the Tribunal that the deposit of the share capital by the company in banks was not a business carried on by the company is perfectly right. Learned counsel for the Revenue brought to our notice a decision of the Madhya Pradesh High Court in Madhya Pradesh State Industries Corporation Ltd. v. CIT 1968 69 ITR 824. This decision fully supports the view we have expressed above."
35. Similar view was taken by the Kerala High Court in the case of Collis Line Pvt. Ltd. v. ITO 1982 135 ITR 390.
36. After examining the ratio in the judgments referred to above, the Patna High Court held that, the income from bank deposit was liable to tax and it would not reduce the cost of construction of the assessee. The view of the Tribunal that it to be assessed as income from other sources was upheld.
37. In the case of Bihar Alloy Steel Ltd., following questions were referred to the Patna High Court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting Rs.3,13,014 for the assessment year 1972-73 as income from other sources on account of interest as determined by 5th Income Tax Officer and confirmed by the appellate Assistant Commissioner in appeal?
(2) Whether. on the facts and in the circumstances of the case, the interest earned, taxable as income from the other sources, is subject to a deduction towards the construction of the factory?
In this case, the Patna High Court followed its earlier decision in the case of Bokaro Steel Ltd. it was observed that there is no provision in the Indian Income Tax Act, providing that the income from other sources will cease to be taxable, if it is applied in the acquisition of capital earned. It was further held that merely because the interest income have been appropriated or adjusted towards construction of plant or building it does not cease to be income liable to tax under the Act. It was also held that the application of income per se does not affect its taxability except for specific provisions in this regard. Relying on the law laid down by Indian Supreme Court in the case of Challapalli Sugars Ltd. v. Commissioner of Income Tax 1975-98-167 , it was held that the interest paid on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the `actual cost' of the assets of the assessee, and as such it is capital expenditure. Merely, because interest paid by the assessee being capital in nature it cannot be allowed deduction in computing the income of the assessee. Both the question referred were decided against the assessee.
38. We fully agree with the reasoning contained in the above two judgments of the Patna High Court and hold that the interest income earned by the assessee 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 whereby income earned under the head "other sources" can be permitted to be adjusted against the expenses which are to be capitalized.
39. Consequent to above findings, the questions referred to us in both the cases are decided in favour of the revenue and against the assessees. The questions referred to us are answered in negative. The reference applications stand disposed of accordingly.
40. A copy of this judgment under signature of the Registrar and seal of this Court be sent to the Registrar Income Tax Appellate Tribunal, Karachi, who shall pass such orders as are necessary to dispose of the case conformably to this judgment.
M.B.A./C-22/KReference answered.