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2006 SLD 205 Equiv. Citation: 2006 PTD 2439 = 95 TAX 48 = 2007 PTR 54 =

ITC No. 197 of 2004, decided on 1st March, 2006

KARACHI HIGH COURT

Before Anwar Zaheer Jamali and Muhammad Ather Saeed, JJ

Aqeel Ahmed Abbasi for Applicant

COMMISSIONER (LEGAL DIVISION)

vs
N.D.F.C

Law: Income Tax Ordinance (XXXI OF 1979)

Sections: 23(1)(vii), 136, 136(1)

ORDER

MUHAMMAD ATHAR SAEED, J.---This reference application under section 136(2) of the
Income Tax Ordinance has been preferred by the Commissioner of the Income Tax against
the order of Income Tax Appellate Tribunal in ITA No.229/1987-88, dated 8-4-1996.
Certain additions had been made by the Income Tax Officer which were deleted by the
CIT(Appeals) and the order of CIT(Appeals) was maintained by the Income Tax Appellate
Tribunal. The following questions said to be arising from the order of the Tribunal are
proposed to be referred for the opinion of this Court:--

(1) Whatever on the facts and circumstances of the case the learned ITAT was justified in
discarding, the evidence on record and the factum of investment in tax free securities and
capital goods made out of a pool of financial Resources. Holding it as a
presumption/surmises, since such finding suffers from misreading of the evidence and that
presumption was a legal presumption?

(2) Whatever on the facts and circumstances of the case the learned ITAT was justified in
directing to allow tax depreciation of old assets on the original cost, when the assessee
had charged accounting depreciation in the Tax holiday period and had WDV after
deduction of such allowance?

2. Brief facts of the case are that the respondent-Bank is the Government owned
corporation carrying on business of investment banking in Pakistan. The income of the
respondent was exempted up to the assessment year 85-86 and this exemption was
withdrawn with effect from assessment year 86-87 and therefore the respondent had filed
its first return of income for the assessment year 86-87. The Income Tax Officer while
finalizing the assessment added back the amount of Rs.64,17000 and Rs.52,89,300 from
the total interest claimed under section 23(1)(vii) allegedly for the ,reasons that the
respondent had invested the borrowed capital in investment in KDCs and BNFBs, the
income of which was exempted from income tax and also that money was advanced
toward construction of office in building named Finance and Trade Centre which was capital
asset and therefore according to the Income Tax Officer interest paid on money borrowed
for the purpose of capital investment was not allowable as an expense. The respondent
had claimed depreciation on the written down value (WDV) of the assets, which was the
same as the original cost as the respondents had never claimed nor were allowed
depreciation in the previous years on these assets. However that the depreciation was
allowable on the old assets at WDV because the different between actual cost and book
value of the assets had already been off-set against income for earlier years made an
addition of Rs.824527 by allowing depreciation on alleged WDV as computed above.

3. Being aggrieved by the order of the Income Tax Officer the respondent filed appeal
before the CIT(Appeals) who after examining the facts of the case deleted the addition of
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Rs.64,47,000 and Rs.5289300 made out of interest on borrowed capital by holding that no
part of the borrowed capital was utilized for the purchase of KDCs and BNFCs by the
respondent and the same were purchased from the respondent's own surplus capital and
there was no evidence on record to suggest otherwise. He also held that there was no
evidence on record to suggest that any part of the borrowed capital was utilized for the
investment in construction of office in Finance and Trade Centre and the disallowance has
been made on presumptions and surmises and devoid of any factual basis. The
CIT(Appeals) also deleted the addition of Rs.824527 made out of claim of tax depreciation
by holding that the law clearly states that for arriving at the WDV of assets what is to be
deducted from the original cost is not a hypothetical figure of depreciation but depreciation
actually allowed and since it was an undisputed fact that prior to the assessment year in
question no depreciation was ever allowed, therefore, the treatment accorded by the IT'O
could not be sustained.

4. Being aggrieved by the above order the Commissioner of Income Tax filed an appeal
before the Income Tax Appellate Tribunal who upheld the order of CIT(Appeals) on the
above points. They also relied on the following judgments in coming to conclusion that
interest on borrowed capital is allowable expenses notwithstanding the fact that the capital
has been used for the acquisition of a capital asset for the purpose of an ongoing
business:--

(1) Packages Limited v. The Commissioner of Income Tax 1993 SCMR 1224 at 1226, 1227
letter "A" 1231 letter "G".

(2) The Commissioner of Income Tax West Zone Karachi and another v. Khairpur Textile
Mills Ltd. and others 1989 SCMR 61 at 67 and 63 letter "C".

(3) Calico Dyeing and Printing Works v. Commissioner of Income Tax, Bombay City, II 34
ITR 265.

(4) India Cement Ltd. v. Commissioner of Income Tax, Madras 60 ITR 52.

5. Being aggrieved by the above order the department filed a reference application under
section 136(1) on 27-4-1996 before the Income Tax Appellate Tribunal asking them to
refer the above stated question of law for the opinion of this Court. Unfortunately the office
of the Tribunal inadvertently treated the same as the Income Tax Appeal and did not fix it
for hearing for a long period and when it was finally fixed the present applicant filed an
application, dated 9th September, 2002 requesting for sine die adjournment in the case
and in the title of the application had mentioned income tax appeal number instead of
reference application number. The Tribunal therefore refused to refer the questions framed
by the applicant/department on the assumption that there must have occurred many
changes in the law as well as in the fact and circumstances of the case during the period of
pendency of the reference application which was pending for more than seven years. We
fail to understand the logic behind the order of Tribunal, which is beyond our
comprehension. The impugned order of this Tribunal tantamounts to punishing the
applicant for an erroneous act of the Tribunal as it has been admitted that the mistake in
the treating the reference as an Income Tax Appeal was on the part of the office of the
Tribunal and not on the part of the applicant but the mention of the number of Income Tax
Appeal. In the application for adjournment by the applicant was considered to be their
mistake. What the Tribunal has failed to appreciate is that the applicant had no other
option but to mention the number of case, which must have been mentioned in the notice
of fixation of the case. It is a well settled law that litigants cannot be punished for an
erroneous act of the Court.

6. On a perusal of section 136(1) the Tribunal may either refer the proposed
question/questions for the opinion of the Court or may reject the same either on the
ground that no question of law arises or on the ground that the application is time barred.
There is no other order that Tribunal can pass under section 136. We are therefore, of the
firm opinion that the order passed by the Tribunal is against the provision of section 136.

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7. However in order to dispose of the matter and dispense justice 'we asked the learned
counsel for the applicant to argue the case on merits.

8. The learned counsel for applicant at the very outset conceded that the first part of the
question No.1 relating to the proportionate disallowance of interest on income of tax free
investment made by the respondent for the purchase of KDCs and BNFBs and the question
No.2 are questions of fact and therefore do not fall under the provisions of section 136(2).
He however argued hat the second part of question No.(i) relating to the disallowance of
interest of accounts of investment for the purchase of capital asset i.e. office in Finance
and Trade Centre is a mixed question of law and fact and should be answered by this
Court. He drew our attention to the provisions of section 23(1)(vii), which reads as under:

"any interest paid in respect of capital borrowed for the purpose of business or profession."

9. He argued that only interest paid in respect of capital borrowed for the purpose of
business and profession is allowable and investment of capital nature cannot be termed as
expended for the purposes of business or profession. He however was unable to controvert
the factual finding of the CIT (Appeals) and the Tribunal that the office in Finance and
Trade Centre Building was constructed during the continuity, of business from the surplus
funds of respondents and there is no evidence on record to suggest that the borrowed
funds have been utilized for the purpose of the meeting the cost of the office in the FTC.
He was also unable to distinguish the cases on which reliance has been placed by the
Tribunal in support of their decision on the Tribunal in support of their decision on the legal
issue that interest paid on capital the legal issue that interest paid on capital which has
been utilized for the acquisition of capital arises for the purposes of an ongoing business is
an allowable expense.

10. The learned counsel for the applicant relied on unreported judgment of this Court in
the case of Commissioner of Income Tax v. Gelcaps (Pvt.) Limited in ITR No.58 of 1992
and ITR No.226 of 1991, dated 1-4-2003. He took us to para. 38 of the judgment, which
reads as under:

"We fully agree with the reasoning contained in the above two judgments of Patna High
Court and hold that the interest income earned by the assessees 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
where-by income earned under the head other sources can be permitted to be adjusted
against the expense which are to be capitalized."

11. There can be no cavil to be above judgment of this Court but is apparent is perusal of
the above extract, it is on a different aspect and is completely irrelevant and different to
controversy in hand.

12. We have also perused the judgments of Hon'ble Supreme Court relied on by the
Tribunal and find that the case of respondent is fully covered by those cases and therefore
the decision of the Tribunal to delete the addition made on account of disallowance of
interest is in accordance with settled law.

13. We are therefore of the considered opinion that there is no substance in questions
proposed by the applicant either on fact op on law therefore we refuse to answer the
same.

This reference application being devoid of merits was dismissed by us vide our short order,
dated 1-3-2006.

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Application dismissed.

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