TNB LIBETY POWER LTD. VS COMMISSIONER OF INCOME TAX
2010 P T D 802
[Islamabad High Court]
Before Muhammad Munir Peracha and Syed Qalb-i-Hassan, JJ
TNB LIBETY POWER LTD.
Versus
COMMISSIONER OF INCOME TAX
Tax Reference Nos.26, 27, 51 of 2005, T.R. No.58, 59, 60, 61 of 2007, T.R. No.1, 2, of 2006, T.R. No.1, 2, 3 of 2008, T.R. No.161, 162, 163 and 164 of 2008, T.R. No.63 of 2008, T.R. No.17, 19, 21 and 22 of 2009, decided on 19/05/2009.
(a) Income Tax Ordinance (XXXI of 1979)---
----Second Sched. Part-I, Entry 176---Interest income derived by assessee-company from electric power generation projects---Deduction of such interest from income of assessee---Scope---Interest business of such assessee whether in pre or post production period was liable to tax and not exempt.
Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan Lahore and others 2004 SCMR 1319 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1)(vii) & 31(1)(b)---Interest paid by assessee-company in respect of capital borrowed for business purpose---Deduction of such paid interest from income of assessee---Scope---Such interest paid by assessee could not be said to be wholly and exclusively for purpose of earning interest income, thus, same could be deducted while computing its income under head `business or profession' in view of S.23(1)(vii) of Income Tax Ordinance, 1979---Such interest paid by assessee pre-production period might prove to be a loss in business, which could be set-off against interest income of assessee.
Commissioner of Income Tax v. Pioneer Cement 2005 PTD 2086 and AES Pak Gen (Pvt.) Ltd. v. Commissioner Income Tax, decided 16-6-2006 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.34---Set-off of loss---Scope---Business loss under any head of income, if exempt from income tax, could be allowed as set-off against income of assessee---Principles.
Waseem Sajjad, Mustafa Ramday, Rashid Hafeez, Suleman Faisal vice Sardar Shahbaz Khan Khosa and Hafiz Muhammad Idrees for Petitioners.
Syed Nayab Ali Gadezi with Mumtaz Ahmed, Member (Legal), Sardar Shahbaz Khan Khosa and Shaher Bano Walajahi, Additional Commissioner for the respondents.
Dates of hearings: 6th, 8th and 15th May, 2009.
JUDGMENT
MUHAMMAD MUNIR PERACHA, J.---This judgment shall dispose of T.R. Nos. 26, 27, 51 of 2005, T.R. Nos. 58, 59, 60, 61, of 2007, T.R. Nos. 1, 2 of 2006, T.R. No. 1, 2, 3 of 2008, T.R. Nos. 161, 162, 163 and 164 of 2008, T.R. No. 63 of 2008, T.R. Nos. 17, 19, 21 and 22 of 2009.
2. The Government of Pakistan announced power policy in the year 1994. In order to provide incentive to invest on the power projects, the Federal Government promised in the power policy that the corporate income tax shall be exempt if the investment is made on the power projects.
3. In the Second Schedule Part-I, an entry 176 was inserted through S.R.O.1046(I)/88, dated 22-11-1988, which reads as under:
"Profits and gains derived by an assessee from an electric owner generation project set-up in Pakistan on or after the 1st day of July, 1988.
The exemption under this clause shall apply to such project which is--
(a) owned and managed by a company formed for operating the said project and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan.
(b) not formed by the splitting up, or the re-construction or re-constitution, of a business already existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and
(c) owned by a company fifty per cent, of whose shares are not held by the Federal Government or a Provincial Government or a local authority or which is not controlled by the Federal Government or a Provincial Government or a local authority."
Provided that the condition laid down in sub-clause (a) shall not apply to the Hub Power Company Limited."
The assessees in all these tax references have set up electric power generation projects in Pakistan on or after the 1st day of July, 1998.
4. Income of the assessee subject-matter of these Tax References can be divided into two periods, in certain assessment years or tax years, the assessees have not started production that period hereinafter shall be referred as pre-production period. The period after the commencement, of the projects shall be referred to as post-production period. In the pre-production period, the amount of share capital and the capital borrowed for the set-up of the project was deposited in the banks. The assessees earned interest on the said deposits. Similarly, interest accrued on the deposits during the post-production period. The assessees claimed the exemption of income tax on the said interest income on the basis of entry 176 in Part-I of Second Schedule already reproduced above. However, the claim was rejected by the Assessing Officers, Commissioner Income Tax (Appeals) and Income Tax Appellate Tribunal. The finding was recorded that the interest income can be classified income from other sources and is chargeable under section 30 of the Income Tax Ordinance, 1979. In alternative, the assessees claimed that they are entitled to deduct from their interest income., interest paid by them in respect of capital borrowed. However, it was held that law does not permit the deduction of interest paid by the assessees in respect of capital borrowed from the interest income of the assessee.
5. The business losses of the assessees were allowed as set-off against the interest income of the assessees. This gave a cause of grievance to the Commissioner Income Tax. The Commissioner of Income Tax, therefore, filed Tax References No.63 of 2008 and 17, 19, 21 and 22 of 2009. The rest of the references mentioned in this judgment have been filed by the assessees. In Tax References Nos. 60 and 61 of 2007 filed by the Messrs TNB Liberty Power Limited, an additional question is involved. Messrs TNB Liberty Power Limited has been charged with Worker Welfare Fund on the interest income. It is claimed on behalf of the Messrs TNB Liberty Power Limited that they are not liable to pay worker welfare fund. The following questions of law arise:--
(i) Whether the interest income of the Messrs Uch Power (Pvt.) Limited and Messrs TNB Liberty Power Limited is exempt from Income Tax in view entry 176 of Part-1 of the Second Schedule and the said income is included in the profit and gains derived by the assessees from an electric power generation projects?
(ii) Whether the interest paid in respect of capital borrowed by the assessees can be deducted while computing interest income under clause (b) of section 31(1)?
(iii) Whether the business loss can be set-off against the interest income of the assessees in terms of section 34 of the Income Tax Ordinance, 1979, although the business income of the assessee is exempt from Income Tax?
(iv) Whether the petitioner in Tax References Nos.60 and 61 of 2007 is liable to pay worker welfare fund on the interest income?
6. We have heard learned counsel for the petitioners, learned counsel for the 'respondent and Mr. Mumtaz Ahmad, Member (Legal) and have gone through the record with their able assistance.
7. Section 34 of the Income Tax Ordinance, 1979 reads as under:
"Set-off of losses: Where an assessee sustains a loss (not being a loss of which section 36 or section 37 applies) in any assessment year under any head of income specified in section 15, he shall, subject to clause (v) of subsection (1) of section 23 be entitled to have the amount of the loss set off against his income (other than income to which subsection (7) or (9) of section 12 applies), if any, under any other head assessable for that assessment year."
8. Learned counsel appearing for the Commissioner Income Tax submits that the loss under any head of income, which is exempt from income tax, cannot be allowed as set-off against income of the assessees under any other head. We are unable to agree with this submission made on behalf of the Department. Had this been the intention, the legislature could have used afterwards any head of income, the word "not exempt". No judgment has been cited in support of the proposition. We therefore, answer question No. iii in positive.
9. Learned counsel appearing for the assessees submit that the interest income of the assessees is also exempt under entry 176 of Part-I of the Second Schedule. Their attention was drawn to the judgment of the Hon'ble Supreme Court of Pakistan in case reported as "Genertech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan Lahore and others (2004 SCMR 1319). They are, however, of the opinion that the said judgment is distinguishable inasmuch as in the reported case, the interest income was post-production stage. They also submitted that precedent case can be distinguished on the ground that in paragraph 8 of the judgment, it was observed:--
"A perusal of the questions put up by the appellants before the Court for examination, arising out of the order of the Tribunal, and findings of the learned High Court abundantly makes it clear that the arguments i.e. the share capital is invested in projects for their completion including purchase and installation of plants to generate electricity is not available to appellants as it was not raised before the learned High Court as well as before the Appellate Tribunal."
10. They submit that the projection available under Protection of Economic Reforms Act, 1992 was not pleaded before the Hon'ble Supreme Court and that the interest income of the assessees is exempt under the provisions of Protection of Economic Reforms Act, 1992. They also submit that the said judgment is not applicable to the present tax references because the definition of the word project given in the agreement between the Government of Pakistan and the assessees was not taken into consideration by the Hon'ble Supreme Court, which is very wide. We are unable to agree with the learned counsel that the judgment in the cited case is distinguishable. The Hon'ble Supreme Court examined entry 176 of Part-I of Second Schedule of Income Tax Ordinance, 1979 in the precedent case and recorded a finding that interest income derived is not exempt under the said entry. The judgment of the Supreme Court is binding on all the Courts and other organs of the State under Article 189 of the Constitution. The distinction drawn by the learned counsel for the assessees that the law declared by the Supreme Court was with respect to post-production period has not impressed us. The fact that in the precedent case, the period involved was post-production period does not mean that the exemption is available in the pre-production period. The interest income of the assessees whether in the pre-production or post-production period is liable to tax and not exempt. We, therefore, answer question No. (i) in negative.
11. Learned counsel for the assessees relying on section 31(1) clause (b), submit that the interest paid by the assessees on the sum borrowed is an expenditure and has to be deducted in computing the income under the head "income from other sources". In this respect, learned counsel relied on the judgment of the Lahore High Court in case reported as "Commissioner of Income Tax v. Pioneer Cement (2005 PTD 2086)". With respect to the learned Judges, who decided the cited case, we are unable to agree with the learned Division Bench of the Lahore High Court. In section 31(1) clause (b), one of the conditions is that the expenditure must have been incurred wholly and exclusively for the purpose of such income. In the present case, the capital was borrowed for the purpose of the business or profession, it therefore, cannot be said that the expenditure in the shape of interest paid in respect of capital borrowed was wholly and exclusively for the purpose of earning interest income. In this respect, a paragraph from the judgment of the Hon'ble Supreme Court in case "AES Pak Gen (Pvt.) Ltd., v. Commissioner Income Tax", decided on 16-6-2006 can be cited:--
"From a bare perusal of the paragraph reproduced from the judgment of Tuticorin Alkali Chemical and Fertilizers Ltd. v. Commissioner of Income Tax (PLD 1998 PTD 900) it may be observed that the Supreme Court of India after considering relevant provisions of the Indian Income Tax Act, 1961 pronounced that anything which can properly be described as income is taxable under the Act unless expressly exempted and further that payment of interest on the capital generated/ borrowed by the petitioner for starting a business venture would not be adjustable or it could be set off against the income accruing to it by investing/utilizing the generated/borrowed capital or part thereof and earning interest thereon. There is no provision in the Ordinance exempting such income from being charged to tax."
12. We answer question No.ii in the negative. However, the interest paid by the assessees on the capital borrowed can be deducted while computing the income under the head business or profession in view of clause (vii) of subsection 1 of section 23. In the pre-production period, it may prove to be a loss in business income of the assessees and we have already held that the business loss can be set off against the interest income of the assessees.
13. We find no reason for holding that the assessees are exempt from payment of worker welfare fund. The question No. iv is therefore, answered in negative.
14. All the references are answered in the above terms. The parties are left to bear their own costs.
S.A.K./T-6/IslOrder accordingly.