PUNJAB MINERAL DEVELOPMENT CORPORATION LTD. VS COMMISSIONER OF INCOME TAX, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 2522 (2015)

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

----Ss. 30, 26, 22(a), 11 & Fifth Schedule, Part II---Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits----Terms "profit" and "gain" used under Rr. 1 & 2 of Part II of the Fifth Schedule to the Income Tax Ordinance, 1979---Scope---Interest on Bank deposits, as "income from other sources"---Taxpayer was engaged in the business of exploration and extraction of mineral deposits, and the question before the High Court was whether income earned by taxpayer as interest from financial institutions was to be assessed under Part-II of the Fifth Schedule of the Income Tax Ordinance, 1979 as in terms of S. 26(c) of the Income Tax Ordinance, 1979 or was the same to be assessed under S. 30 of the Income Tax Ordinance, 1979, as income from other sources---Held, that perusal of the provisions revealed that income earned as "interest from financial institutions" was not "profit" and "gain" from business of exploration and extraction of mineral deposit and Rr. 1 & 2 of Part-II of the Fifth Schedule of the Income Tax Ordinance, 1979 when placed in juxtaposition with Ss. 11, 22(a) & 30 of the Income Tax Ordinance, 1979 left no room for doubt that income earned as interest being income from other sources was to be assessed under S. 30 of the Income Tax Ordinance, 1979 and not under Part-II of the Fifth Schedule of the Income Tax Ordinance, 1979---Under R. 1 of Part II of the Fifth Schedule of the Income Tax Ordinance, 1979; only the profit and gain from extraction or exploration of mineral deposits was to be computed under the said provision and merely because taxpayer being a statutory body, was authorized under its statute to make investments and Bank deposits, would not change the character of interest as "income from other sources" to income against business of exploration and extraction of mineral deposits---Reference was answered, accordingly.

Messrs Habib Insurance Co. Ltd. v. Commissioner of Income-Tax (Central), Karachi PLD 1985 SC 109 and Muhammad Mukhtar and others v. Muhammad Sharif and others 2007 SCMR 1867 ref.

Uch Power (Pvt.) Ltd. and others v. Income Tax Appellate Tribunal and others 2010 PTD 1809 = 2010 SCMR 1236 and Genetech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan Lahore and others 2004 SCMR 1319 rel.

Messrs Habib Insurance Co. Ltd. v. Commissioner of Income-Tax (Central), Karachi PLD 1985 SC 109 distinguished.

(b) Income Tax Ordinance (XLIX of 2001)---

----S. 133---Reference to High Court---Only those questions of law could be raised for the opinion of the High Court under S. 133 of the Income Tax Ordinance, 2001 which were arising out of order of Appellate Tribunal.

Messrs S.M.Y. Industries Limited v. Deputy Commissioner Income Tax and others 2014 SCMR 907 rel.

Mian Ashiq Hussain for Applicant.

Muhammad Nawaz Waseer and Dr. Ishtiaq Ahmad, Additional Commissioner for Respondents.

Date of hearing: 10th March, 2015.

JUDGMENT

ABID AZIZ SHEIKH J.---This judgment will decide instant reference application as well as P.T.Rs. Nos.68, 69, 70, 71, 72, 73, 74, 75 and 76 of 2004 as common questions of law and facts are involved therein and the reference applications are also against the same consolidated order between the same parties. These applications by way of reference are filed under section 133 of the Income Tax Ordinance, 2001 ("Ordinance") against the order dated 27-2-2003 passed by the erstwhile Income Tax Appellate Tribunal, Lahore Bench, Lahore ("Tribunal") regarding assessment years, 1990-91 to 1999-2000.

2. The following common questions of law are urged at the time of arguments by learned counsel for the applicant:--

(i) "Whether on the facts and circumstances, Income Tax Appellate Tribunal was justified to direct that interest income of the applicant was to be assessed under section 30?

(ii) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified to direct that interest income be assessed under Section 30 whereas section 26(c) of the Income Tax Ordinance, 1979 lays down that income of the applicant is to be assessed in accordance with Part-II of 5th Schedule?

3. Brief facts are that the applicant is a statutory corporation under the management and control of the Government of Punjab and is engaged in exploration and extraction of mineral deposits in the Province of Punjab. For the relevant assessment years, the assessing officer assessed the interest income earned by the applicant/assessee from financial institutions under section 30 of the Income Tax Ordinance, 1979 ("repealed Ordinance"). In appeal before the Commissioner Appeals, the applicant/assessee's stance was that income earned as interest from financial institutions during the course of and incidental to business of developing, operating mines and selling of mineral products is not income from other sources but actually it is income from business. Therefore, the same was to be assessed in accordance with Part-II of 5th Schedule read with section 26(c) instead of section 30 of the repealed Ordinance. The Commissioner Appeals on 11-2-1998 set aside the assessment and remanded the case to the assessing officer. In post remand proceedings, the assessing officer vide order dated 30-6-1999 again assessed the interest income under section 30 of the repealed Ordinance. In appeal, the Commissioner Appeal again set aside the assessment order on 28-10-1999. The assessing officer again assessed the interest income under section 30 of the repealed Ordinance on 29-2-2000. The applicant/assessee's appeal before the Commissioner Income Tax, in 3rd round was again allowed on 26-9-2000. However, in departmental appeal before the learned Tribunal, the Commissioner Appeals order was vacated and order of assessing officer was restored in all assessment years vide impugned order dated 27-2-2003, hence these applications by way of reference.

4. The learned counsel for the applicant argued that applicant being engaged in business of exploration and extraction of mineral deposits, under section 26(c) of the repealed Ordinance, applicant's income including interest income was to be assessed in accordance with Part-II of 5th Schedule and not under section 30 of the repealed Ordinance. He further submits that the interest income earned by the applicant-assessee was not income from other sources but it was incidental to its business income of exploration and extraction of mineral deposits. To support his contentions, he referred to sections 18(e), 21(f) and 22(1&2) of the Punjab Mineral Development Corporation Act, 1975 ("Act of 1975"). Reliance is placed on Messrs Habib Insurance Co. Ltd. v. Commissioner of Income-Tax (Central), Karachi (PLD 1985 SC 109). He further argued that applicant-assessee is also entitled for set off of losses against the interest income. He though admitted that the question regarding set off of losses was neither agitated nor adjudicated by the learned Tribunal and same is also not raised in these references, however, submits that same being a question of law can be raised at any stage.

5. Conversely the learned counsel for the respondent argued that profit and gain from business of exploration and extraction of mineral deposits covered under the "business income" under section 22 read with section 26(c) and Part II of 5th Schedule of the repealed Ordinance whereas interest income being from other sources is specifically covered under section 30 of the repealed Ordinance. To support his contentions, reliance is placed on Muhammad Mukhtar and others v. Muhammad Sharif and others (2007 SCMR 1867) and Uch Power (Pvt.) Ltd. and others v. Income Tax Appellate Tribunal and others 2010 PTD 1809 = (2010 SCMR 1236). In response to arguments on claim of set off, it is submitted that said question is not arising out of the learned Tribunal's Order, hence cannot be raised through verbal arguments.

6. We have heard the arguments of learned counsel for the parties and perused the record with their able assistance.

7. The pivotal question require determination in these cases is whether income earned as interest from financial institutions is to be assessed under Part-II of 5th Schedule as per section 26(c) of the repealed Ordinance or the same is to be assessed under section 30 of the repealed Ordinance. For better understanding and to resolve the above controversy, it would be advantageous to reproduce relevant clauses of section 26(c), Rules 1 and 2 of Part-II of 5th Schedule, Sections 15, 22(a) and 30 of the repealed Ordinance as under:--

"Section 26. Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits, [etc.] Notwithstanding anything contained in this Ordinance--

(c) the profits and gains of any business which consists of, or includes, the exploration and extraction of such mineral deposits of a wasting nature (not being petroleum and natural gas) as may be specified in this behalf by the Federal Government carried on by an assessee in Pakistan shall be computed in accordance with the rules contained in Part-II of the Fifth Schedule.

Rules 1 and 2 of Part-II of 5th Schedule.

(1) Exploration and extraction of mineral deposits to be treated as a separate undertaking.---Where any person carries on, or is deemed to carry on, any business which consists of or includes the exploration or extraction of mineral deposits of wasting nature (other than petroleum) in Pakistan such business or part thereof, as the case may be, shall, for the purpose of this Ordinance, be deemed to be a separate undertaking (hereinafter referred to as such undertaking.) and the profits and gains of such undertaking shall be computed separately from his income, profits or gains from other business, if any carried on by him.

(2) Computation of profits.---(1) Subject to provisions of this Part, the profits and gains of such undertaking shall be computed in the manner applicable to income, profits and gains chargeable under the head: "Income from business or profession".

Sections 15, 22(a) and 30.

15 Heads of Income.---All income shall, for the purposes of the charge of tax and the computation of total income, be classified under the following heads namely;-

(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.

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;

30. Income from other sources.---(1) Income of every kind which may be included in the total income of an assessee under this Ordinance shall be chargeable under the head "Income from other sources" if it is not included in his total income under any other head.

(2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following income shall, save as otherwise provided in this Ordinance, be chargeable under the head "Income from other sources" namely;

(a) dividend;

(b) interest, royalties and fees for technical services;

(c) ground rent;

(d) income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the same machinery, plant or furniture; and

(e) any income to which subsection (12) or section 13 applies.

(underlining by us to emphasize)

8. Plain reading of section 26(c) read with above reproduced Rules 1 and 2 of Part-II of 5th schedule of the repealed Ordinance shows that where any person carries on business of exploration or extraction of mineral deposits of wasting nature in Pakistan, such business shall be treated as separate undertaking and profit and gain of such undertaking shall be computed separately from his income, profit or gain from other business. The Rules 1 and 2 ibid postulates that it is only the profit and gain from exploration and extraction of mineral deposit which is to be computed under Part-II of the 5th Schedule. Further bare perusal of sections 15, 22(a) and 30 of the repealed Ordinance manifests that five heads of income are specified under sections 15(a) to (e) and income from other sources is covered under section 15(f). The words "profit and gain" used under Rule 1 of Part-II of 5th Schedule essentially relates to "business income" which is covered under section 15(d) and specified under section 22(a) of the repealed Ordinance. It is only under this head of income that "profit and gain" of business was to be computed for the purpose of income tax, whereas section 30 of the Ordinance is a residuary provision, which covers the income from all sources not covered by other 5 heads of income under sections 15(a) to (e).

9. In our opinion, the income earned as interest from financial institutions is not profit and gain from business of exploration and extraction of mineral deposit. Section 26(c) and Rules 1 and 2 on Part-II of 5th Schedule when placed in juxtaposition with sections 15, 22(a) and 30 of the repealed Ordinance, leaves no room for doubt in our mind that income earned as interest being income from other sources was to be assessed under section 30 read with section 15(f) of the repealed Ordinance and not under Part-II of the 5th Schedule of the repealed Ordinance.

10. The similar question, whether the income earned on interest from financial institutions being income from other sources, is covered under section 30 of the repealed Ordinance or not, came up before the august Supreme Court in Uch Power (Pvt.) Ltd. and others v. Income Tax Appellate Tribunal and others (2010 SCMR 1236), where it was held that interest income is covered under section 30 of the repealed Ordinance in following terms:--

"16. Reverting to the other set of twenty two petitions placed in categories (b) to (e); keeping in view the submission of the learned counsel in this regard, we have carefully perused the case record and the relevant provisions of the Ordinance, which goes to show that by virtue of section 15 of the Ordinance, for computation of total income, law makers have bifurcated all incomes into six heads, which are covered by sections 16 (salary). 17 (interest on securities), 19 (house property), 22 (income from business or profession), 27 (capital gains) and 30 (from other sources) of the Ordinance. From the plain PTR No.67 of 2004. 8 reading of these sections, it is evident that it is only the language of section 22, which carries the words "profits and gains" and for the purpose of allowable deductions, income generated under this head is regulated by section 23, while admissible deductions have been categorized in section 24. Relating to the controversy in hand, the other relevant section is section 30, which is the residuary section and covers income from all other sources, which are not covered by sections 16, 17, 19, 22 and 27. Thus a combined reading of these provisions of the Ordinance makes it abundantly clear that use of words "profits and gains" under clause 176 is only with reference to the income generated by the companies, which is covered by section 22 of the Ordinance. Admittedly, interest earned by the petitioner companies on their bank investments/savings accounts was an income covered by section 30 of the Ordinance and thus not covered by exemptions under clause 176 ibid. Similarly, the use of word "project" in clause 176 (ibid) has brought no significant change in this clear legal position."

Same view was also expressed by the august Supreme Court in Genetech Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan Lahore and others (2004 SCMR 1319). The relevant observation of the august Supreme Court is reproduced as under:--

"9. Now question for consideration is as to whether interest earned by the appellants from the share capital deposited in the Banks does fall within the scope of "income from other sources" under section 30 of the Ordinance. To answer the proposition, it is to be borne in mind that Item "profits and gains derived by an assessee from Electric Power Generation Project, set up in Pakistan on or after 1st of July, 1998 shall be exempted from total income tax." Essentially, profits and gains from the Electric Power Generation Project is distinct and different from the interest being obtained by the Company on the deposit of share capital in the Banks, during the financial years for which the return of income under the relevant provision of Ordinance is filed and the exemption is claimed from the payment of income tax under Item 176 of Second Schedule of the Ordinance. It is informed that Electric Generating Plants of appellants-companies had started functioning in 1994-95 but they instead of claiming exemption on the profits/gains from Power Generation, claimed it from the deposit of the share capital lying in the Banks. It is to be seen that no sooner as a Company goes in production it cannot claim exemption of income tax on the interest of share capital deposited in Banks because on commencement of the production, profits and gains are to be earned out of the income of Electric Generation independently".

11. The next argument of learned counsel for the applicant that in terms of clauses 18, 21 and 22 of Act of 1975, the interest income is part of its business income and not income from other source is also misconceived. The applicant-assessee being a statutory corporation, indeed requires authority under the law to invest its surplus amounts, which authorization has been specified under the aforesaid provisions but this authorization does not mean that business of the corporation is to invest money in financial institution to earn interest. Under Rule 1, Part-II of the 5th Schedule, profit and gain only from business of exploration or extraction of mineral deposits are to be computed under Part-II of the 5th Schedule and as already explained above, merely because the applicant-assessee was authorized under the Act of 1975 to make investment and bank deposits will not change the character of interest income from income from other sources to income against business of exploration and extraction of mineral deposits. The case of Messrs Habib Insurance supra relied upon by the applicant which otherwise relates to assessment under Income Tax Act, 1922 is not applicable to the facts and circumstances of this case. The applicant/ assessee's case is squarely covered under the subsequent judgments of the august Supreme Court in Uch Power and Genetech cases ibid passed under the applicable repealed Ordinance.

12. So far as argument of learned counsel for the applicant regarding claim of set off against interest income is concerned, we have noted that this question was neither agitated nor adjudicated by the learned Tribunal, therefore, not arising out of the impugned order. Further this question has also not been framed in any of these references under discussion and therefore cannot be allowed to be raised through verbal arguments. The august Supreme Court in Messrs S.M.Y. Industries Limited v. Deputy Commissioner Income Tax and others (2014 SCMR 907) held that only those questions of law can be raised for opinion of this Court which are arising out of the order of learned Tribunal.

13. In view of above discussion, the questions raised by the applicant are answered in affirmative against the applicant assessee.

14. Accordingly these reference applications are dismissed.

15. Office shall send a copy of this judgment under the seal of the Court to the learned Appellate Tribunal Inland Revenue as per Section 133(5) of Ordinance.

KMZ/P-27/LOrder accordingly.