2003 PLP (Trib (PTD)

That the learned CIT(A) has erred in confirming the action of the learned Assessing Officer for charging additional tax amounting to Rs.303,382 under section 87 of the Income Tax Ordinance, 1979. That the learned CIT(A) has erred. in confirming the action of the learned Assessing Officer for charging additional tax amounting to Rs.1,152 under section 88 ,of the Income Tax Ordinance.

2. However, last objection, which is set forth at serial No.4 of the memo. of appeal is not pressed by the learned A.R.

3. Both the parties were represented by their respective representatives and were heard.

4. Brief relevant facts of the case are that assessee is a public limited company quoted on stock exchange deriving income, from generation and sale of electric power. The business income of assessee is exempted under clause (176) of Second Schedule to the Income Tax Ordinance, 1979 (hereinafter called the Ordinance). Return was filed declaring Nil income. However, income of Rs.24,574,719 from power generation was declared and was claimed as exempted under clause 176 of the Ordinance, which was allowed accordingly. Besides the income from power generation, the assessee earned other income being interest as under: Interest on advance Rs. 6,187,992 Return on deposit Rs. 176,962 Total Rs. 6,364,954

5. Vide notice under section 62 the Assessing Officer informed the assessee that it was income from .Power Generation which was exempt under clause 176 to the Second Schedule so that the additional income from the above sources was liable to tax. The appellant/assessee contested this treatment on the ground that it was the surplus generated from the business operation which was advanced to the. sister concerns and deposited as security (FDR) to (HBL) in lien of guarantee by HBL to Sui Southern Gas Limited on behalf of the company upon which interest earned by the assessee formed part of the business income of the assessee. It was further pleaded that as clause 176 exemption was not restricted to Power Generation activities only but the total profit of such power projects has been allowed as exemption. Thus plea was not accepted by the Assessing Officer and was rejected by him with following observation:-- "The explanation has been examined and it is noted that facts of the case have not been fully appreciated by the learned A.R... There is no dispute that income from power generation is exempted but other income, earned from whatever source and through whatever funds, is liable to tax. Clause 176 provides for exemption to income from power generation. Furthermore, income from power generation is a business income assessable under section 22 of the Income Tax Ordinance, 1979 whereas interest income and profit on deposits represent income from other sources, therefore, the assessee cannot lend shelter of clause

176. The plea is rejected and the income is assessed to tax.

6. The appellant preferred appeal before the learned CIT(A) who confirmed order of Assessing Officer with the following observation:-- Under clause 176 of Part 1 of the Second Schedule only the profits and gains of the power generation project is exempt. The A.R. claims that interest earned on advances and deposits in part of the profits and gains of the power project. However, exemption of record shows that the earning of interest income is not in the process of power generation project related business activity. It is deliberate and conscious decision of the company to invest funds in the shape of advance and deposits to earn interest income. These conscious activity and arrangement by not paying the rent and service charges bills, and by putting funds so available in making `advance' and deposits to earn profit is activity different from project related income. Therefore, the DCIT has correctly charged interest income to tax. Besides reliance is also placed on (1999) 79 Tax 1 (Trib.) Additional tax under section 87 has been charged lawfully and correctly. However, additional tax under section 88 is not applicable in view appellant's claim of exemption in the return of income."

7. In the present appeal before this treatment of the officers below has been contested by the appellant and the same grounds have been taken as were taken before the officer below, the matter has been considered by us. As regards the interest on advanced made to sister concerns the learned counsel of the appellant has not been able to prove A as to how the making of said advances were related to the business of Power generation. As such the interest earned on such advances amounting to Rs.61,48,992 is held to have properly been brought to tax by the Assessing Officer and rightly confirmed by the learned CIT(A). In respect of the other amount of Rs..1,76,962 being interest on deposit made with UBL towards of guarantee provided by them to Sui Southern Gas Limited, it has been pleaded that the furnishing of guarantee through HBL was essential. to ensure the supply of gas by Sui Southern Gas Limited and it was thus incidental to the Power Generation Project and it also qualified for exemption. The learned A.R. relied for this purpose on the unreported order of Tribunal in ITA No.136/KB of 1998-99 (assessment year 1996-97), dated 23-10-1998, wherein interest accruing in bank account maintained for the purposes of disbursement of salary and other expenses being essential for running the project was held to be part of profit and gains derives from electric power generation project and thus exempted under clause 176 of the Income Tax Ordinance, 1979. In the present case also the maintaining of FDR account being essential for providing bank guarantee to the gas company, the interest earned in the FDR has been pleaded to be exempt. We are persuaded to agree with the .contention of the learned counsel for the appellant and following !lie case relied upon by the learned counsel, exemption is allowed to the interest earned in the FDR account, opened with the bank for the facility of providing guarantee to the gas company. This interest is held to be part of the income of Power Generation Project and addition made by Assessing Officer below on this count is therefore, deleted. In consequence while interest income from advance made to other sister concern amounting to Rs.61,87,992 is held to be taxable, the interest on deposit amounting to Rs.176,962 is held to be exempt of such tax. The appeal on this ground is allowed to this extent.

8. The next ground taken by appellant relates to the levy, of additional tax under section 87 for alleged non-payment of advance tax on taxable income. It was pleaded by Assessing Officer that income from power Generation be exempt including interest income on advances and deposits, the question of any levy for default of payment advance installment was not maintainable, however, this plea was rejected on the following observation:

"As regards the charging of tax under section 87, the fact is that tax demand of Rs.2,208,638 was created on total taxable earning of Rs.6,692,843 for assessment year 1990-2000. Since the same source of income existed during the year, therefore, assessee was liable-to pay tax under section 53 and due to its failure, additional tax is chargeable under section 87."

9. As we have already held that interest income on advance made t to sister concern to taxable under the Ordinance and such tax demand was also raised in the preceding assessment year, the levy of additional tax under section 87 of non-payment of the advance held to be proper to this extent.

10. No other ground is pressed. The appeal is partly allowed in the manner discussed above. C.M.A./691/Tax (Trib.) Appeal partly allowed.