1989 PLP (Trib (PTD)

"The assessee 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 capitalized the interest paid. In the later case, however, he could have minimised 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."

5. Now turning to the other submission of the learned counsel for the appellant let me start my discussion with the facts of the unreported decision of a Division Bench of this Tribunal mentioned above. In this case the appellant a Private Ltd. Co., derived its income during the relevant assessmant years from the manufacturing of vegetable oil and it was granted tax holiday by the Central Board of Revenue in respect of its income, profits and gains from the vegetable oil manufacture undertaking. It appears from its perusal that during the relevant assessmant years the appellant had substantial surplus cash, which was not immediately required for its business and the same was consequently deposited in banks for a fixed period of 4 years in order to avail of the maximum rate of interest. However, as luck could have it, it was compelled to provide some funds for running of its business. It, therefore, resorted to borrowing from its directors and others as well as Habib Bank Limited. Thus, during the relevant assessment years it received Rs.4,94,170, Rs.3,55,978 and Rs.2,70,091 as against this paid interest of Rs.2,04,341, Rs.2,47,990 and Rs.2,08,

000. This having a surplus of Rs.2,89,778, Rs. 1,07,988 and Rs. 62,072 in all the three years respectively. The I.T.O. took these receipts as income from other sources and taxed them accordingly after rejecting the contention of the appellant that they were not exempt under declaration of tax holiday. The controversy was ultimately placed before a Division Bench of this Tribunal and it was firstly contended that the interest income from fixed deposits was in no manner distinct from business income as it was earned during the course of the business of the appellant and secondly that the surplus cash being business asset, the receipts were nothing but business income of the appellant. The then learned President of this Tribunal after considering the decision reported as (1951) 20 I.T.R. 451, (1957) 32 I.T.R. 41, (1958) 34 I.T.R 155, (1961) 41 I.T.R. 645, (1961) 41 I.T.R. 524, (1966) 62 I.T.R. 532, (1968) 69 I.T.R 247 and (1971) P T D (Trib.) 63 came to the conclusion that all the receipts being the product of commercial assets were nothing but business income. In this connection his following observation is fruitfully reproduced:

"After considering the respective arguments of both opinion that the admitted position is that the surplus cash which was put in fixed deposit was a commercial asset of the industrial undertaking granted tax holiday. It was also conceded by the Departmental Representative and was also established by a chain of judicial decisions, that when the commercial assets are in any manner exploited or used, including the distinct user then the one for which they are designed, the resultant income, profit and gains are nothing but business profits. We must, therefore, hold that the interest income earned by the appellant in all these years cannot but be its business income." The then learned President then dealing with the provisions of section 15-BB held that since the interest receipts of the appellant stood merged in the business income of the appellant, same could not be segregated arid enjoyed tax holiday. In this context the following observation of the then learned President is quite pertinent. He observed:- "In our view, therefore, the income from interest receipts being an integral part of the business of the present industrial undertaking, there remains no justification for the I.T.O. to treat it separately or distinctly from the business income of the appellant." Now-with this background let me turn to Clause (119) of the Second Schedule of the Income Tax Ordinance and, it reads as under:- "(119) Profits and gains derived by an assessee from an industrial undertaking set up between the first day of March, 1978, and the thirtieth day of June, 1988, both days inclusive, for a period of five years beginning with the month in which the undertaking is set up or, the commercial production is commenced, whichever is the later. The exemption under this clause shall apply to an industrial undertaking which is-- (a) set up in the Province of Baluchistan; (b) owned and managed by a company formed and registered under the Companies Act, 1913 (VII of 1913) having its registered Pakistan. (c) engaged in the setting up of a hotel or m the manufacture of goods or materials or the subjection of goods or materials to such process; and (d) an undertaking the income, profits and gains of which are not liable to be computed in accordance with the rules contained in the Fifth Schedule." However, tax holiday was given under section 15-BB of the repealed Income tax Act and its subsection (1) read as under:- 15-BB. Tax holiday industries--(1) subject to the provisions of Tax holiday for new industries--(I) Act, the income, profits and gains of an industrial undertaking set up in Pakistan (between) the first day of April, 1959 (and the thirtieth day of June, 1965 (both days inclusive) shall be exempt from the tax payable under this Act for a period of (four) years beginning with the month in which the undertaking is set up commercial production is commenced whichever is the later: Provided that in the case of an industrial undertaking set up in such (areas) as may be specified in this behalf by the Central Government by notification in the official Gazette this subsection shall have effect as if for the words 'four years', the words 'six' (and eight) years were substituted." From perusal of subsection (2) of Section 15-BB it appears that the exemption was available to those industrial under-takings which fulfilled the conditions mentioned in its Clauses (a),(b),(c),(d) and (dd). In brief it can be said that an industrial undertaking enjoyed the tax holiday: (i) If it was owned and managed by a company formed and registered under the Companies Act of 1913 and having its registered office in Pakistan and its subscribed and paid-up capital was not less than Rs.50,000. (ii) If it used wholly or mainly that raw material which was produced in Pakistan. (iii) If its income, profits and gains were not to be computed under First and Second Schedules of the Act. (iv) If its certain percentage of exempted income, profits and gains were set apart for the purposes of expansion, development etc. From perusal of its subsection (3) it appears that the profits and gains of industrial undertakings to which, Section 15-BB applied were to be computed in accordance with the provisions of Section 10.

6. Now if we compare the provisions of Clause (119) 'of the Second Schedule of the Income Tax Ordinance with various provisions of section 15-BB of the repealed Act, we notice not only a difference in the approach adopted by the Legislature on both the occasions but the language used also appears to be quite different. Thus, if I read clause (119) it appears to me that profits and gains derived by an assessee from an industrial undertaking engaged in the manufacturing of goods or materials or the subjecting of goods or material to such process, are exempt from income tax whereas under section 15-BB of the repealed Income Tax Act the income, profits and gains of an industrial undertaking were exempt from tax if it fell within the four corners of any of the clauses of its subsection (2). Moreover, the profits and gains of an industrial undertaking were to be computed in accordance with the provisions of Section 10 of the repealed Income-tax Act for the purposes of Tax Holiday under section 15 BB. The only condition provided by clause (119) for exemption is that such profits and gains should have been derived by an assessee from an industrial undertaking, which was engaged in the manufacturing of goods or materials etc. Thus, it is clear that under section 15-BB; the computation of business income left open the merger of the interest receipts into business income but under clause (119) such profits and gains have been singled out for exemption, which are derived from an industrial undertaking engaged in the manufacturing of goods. Thus, in my humble opinion, the Legislature has very much restricted the scope of profits and gains which might be claimed exempt under clause (119) of the Second Schedule of the Income Tax Ordinance as against the income, profits and gains which enjoyed tax holiday under section 15-BB of the repealed Income Tax Act. I am, therefore, of the view that the unreported decision which has been relied upon by the learned AR of the appellant, if I may say so, correctly stated the law as far as the scope of tax holiday under section 15-BB was concerned; but it can't be pressed into service for extending the provisions of clause (119) of the Second Schedule of the Income Tax Ordinance to the interest income for the simple reason that such receipts are not derived by an assessee from the profits anti gains of an industrial undertaking yielded by its manufacturing process etc.

7. In view of discussion made above the appeal is found to be devoid of any merit and it stands rejected accordingly. M.BA./621/T Appeal dismissed.