1988 PLP (Trib (PTD)

The brief facts giving rise to all these appeals are that the appellant, a company, incorporated on 10th July, 1980 filed its returns for all the relevant assessment years declaring nil income. The I.T.O. while going through the returns found that the appellant was floated with authorised capital of Rs.5,00,00,000 and paid up capital of l Rs.35,000 divided into 7,000 ordinary shares of Rs.5 each for the purposes of setting up an industry for manufacturing of liquid sugar. For this purpose it had also borrowed loans which it not only spent on the project in each year but also kept the balance in banks on fixed deposits and earned interest amounting to Rs.11,79,631, Rs.17,48,413, Rs.33,38,847 and Rs.28,250 in assessment years 1983-84, 1984-85, 1985-86 and 1986-87 respectively. It-, however, deducted this amount of interest from the amount of interest, which it paid in each assessment year and then capitalised the balance as it could not go in operation in all the assessment years concerned. The I.T.O. however, could not reconcile himself with this novel procedure. He, therefore, called upon the appellant to explain as to why the amount of interest derived from fixed deposits be not treated as income from other sources and taxed accordingly. By its letter dated 11th November, 1985, the authorised representative of the appellant offered its explanation as under:- "Our clients borrowed loans for the industry owned by them on which interest is payable. The loans borrowed are not invested in the project immediately but as and when required. Whenever the funds are not required, they are invested in fixed deposit as a matter of business procedure to reduce the interest charge. Therefore, the interest received in this case is not a separate source but reduces interest charges." The I.T.O., however, rejected this explanation and taxed the interest income in assessment year 1983-84 with the following reasons:- "(1) Only loss can be set off against income. There is no provision under the law where capital expenditure is reduced by income under any head for the purpose of assessing the total income. (2) The assessee has shown nil income on the ground that manufacturing has not been commenced and the assessee's income was exempt under clause 119 of the Second Schedule to the Ordinance. In other words, the business has not yet been carried on by the assessee. In such a case there is no income or loss under the head of business and as such income from other sources i.e. interest cannot be reduced by any loss or expenditure incurred before the commencement of the business." It further appears that by its reply dated 28th November, 1985 the appellant took different stand before the I.T.O. than the stand taken by him in earlier assessment years when it stated that the appellant was entitled to set off the interest earned against the amount of interest paid under section 31(b) of the Income Tax Ordinance. The I.T.O. rejected this explanation as well and charged interest income in all the assessment years involved accordingly. Having been aggrieved arid dissatisfied the appellant went up in appeal but the learned CA.T.(A) and the learned A.A.C. upheld the finding of the I.T.O. The appellant, however, still feels aggrieved and has come up in second appeal. Mr. Farooq Ali, the learned counsel for the appellant, firstly repeated before us his arguments taken before the I.T.O. vide his letter, dated 5th August, 1983 when he contended that the interest income on fixed deposit was actually a business income obtained as a matter of business procedure to reduce the interest charged. In this connection the learned counsel relied upon a case from Madras High Court reported as (1979) 40-Tax 190 Moosa Sons Ltd. v. C.I.T. and a case from Gujerat High Court reported as (1978) 113 1 T R 173, C.I.T. v. Motilal Hirabhai Spinning and Weaving Company Ltd. Mr. Farooq Ali has further relied upon the following cases: Eastern Investment Ltd. v. C.I.T. (1951) 20 I T R 1 (SC); Ormerods (India Private Ltd.) v. C.I.T. (1959) 36 I T R 329 (Bom. HC); Chail Bibari Lal v. C.I. T. (1960) 39 I T R 6 (All. HC) and Apparao v. C.I.T. (1962) 46 I T R 511 (Mad. HC); Mohammad Ghous v. C.I.T. (1963) 49 I T R li7 (Mad. HC); C.I.T. v. Gopal Patnak (1978) 115 I T R 86 (Orissa HC); C.I.T. v. Rajindar Parasad Moody (1978) 115 I T R 519 (SC). Mr. Mohammad Farid, the learned D.R. on the other hand, has supported both the officers below. According to him since the appellant was not engaged in the business of borrowing or earning the income by way of interest on fixed deposits it was nothing but an income from other sources and could not be deemed to be business income by any stretch of imagination. Meeting the alternative arguments of Mr. Farooq Ali, the learned D.R. vehemently argued that the interest payable by the appellant was not an expenditure incurred in earning income from other sources as such no adjustment could be made against it. In order to fortify his submission that the interest income was taxable as income from other sources, the learned D.R. cited at Bar the following Rulings:- Eastern Investment Co. v. C.I.T. (1951) 20 I T R 1 (SC); United Commercial Bank Ltd. v. C.I.T. (1957) 32 I T R 688; C.I.T. v. Liquidator Khuna Bagerhat (1961) P T D 136, (Dad. HC); C.I.T. v. Liquidator Khuna Bagerhat P L D 1962 SC 128 (SC Pakistan); C.I.T. v. Jagmohan Das Kapadia (1966) I T R 663 (Bom. HC); Madhya Paradesh State Industrial Corporation Ltd. v. C.I.T. (1968) 69 I T R 824 (Mp. HC); Traco Cable Co. Ltd. v. C.I.T. (1969) 72 ITR 503 (Ker. SC); C.I.T. v. Mimraj Manmal Ruia (1972) 84 I T R 673 (Bom. HC); Shrimati Padmavati Jaykrishnan v. C.I.T. (1975) 101 I T R 153 (Guj. HC); Bengal and Assam Investors v. C.I.T. (1976) 33 Tax 8 (SC India) and C.I.T. v. United Wire Ropes (1980) 12 I T R 762 (Bom. HC). We have heard both the learned counsel for the appellant as well as the learned D.R. at length and have also perused not only the assessment as well as impugned orders but also the case-law cited at Bar. It appears that the first question to be answered by us is whether the interest earned on fixed deposits could tie treated as income from business. Mr. Farooq Ali, F.C.A., has answered this question in affirmative. In order to fortify his submissions he has strongly relied upon the case of Moti Lal Hirabhai Spinning and Weaving Co. (supra). In this case the assessee, a Public Ltd. Co., was originally running a textile mill, which was subsequently closed down. The assessee, however, earned income on advance and deposits and treated it as income from business. The I.T.O. however, called it as income from other sources and taxed it accordingly but ultimately a Division Bench of Gujerat High Court held it to be income from business Mr. Farooq further cited at Bar the case of Moosa Sons (supra). In this case the assessee borrowed loan for business purposes but used it in purchasing shares. The interest paid on this loan was deducted from income earned from business. Subsequently the auditors discovered it and recommended to the I.T.O. that the entire amount of interest should not be deducted from business income. The I.T.O, after receiving this report re-opened the assessment. Under these circumstances the question arose as to whether the auditor's report could be deemed to be an information and a Division Bench of Madras High Court answered the question in the affirmative. This authority, therefore, appears to be irrelevant. The next case relied upon by Mr. Farooq Ali is the case of Rajindar Prashad Moodi (supra). In this case the assessee borrowed money for the purposes of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with that money matter ultimately reached the anvil of Indian Supreme Court and it was finally held that the interest paid on money borrowed for investment in shares which did not yield any dividend was admissible as a deduction under section 51(111) of the Income Tax Act, 1961, in computing its income from dividend under the head income from other sources. In this case the Indian Supreme Court has considered Patnaik's case (supra), case of Mohammad Ghous (supra), case of Apparao (supra), case of Cheil Bihari (supra) and the case of Ormorods (supra). He also invited our attention to a case from Indian Supreme Court contained in (1951) 20 I T R 1 Eastern Investment v. C.I.T. in which their Lordships explained the concept of commercial expediency. Mr. Mohammad Farid, the learned D.R., on the other hand, has very strongly relied upon the case of United Wire Ropes Ltd., (supra). In this case the assessee borrowed a loan from I.C.I.C.I. for importing certain materials from abroad for setting up some industry but because of some restrictions on foreign exchange remittance, were forced to deposit the amount in bank on interest. However, they obtained loan from abroad for the purposes of importing the material and had to pay interest thereon. During the relevant assessment year they deducted the amount of interest earned from the amount of interest to be paid. A Division Bench of Bombay High Court, however, did not approve this practice. Mr. Mohammad Farid further cited at Bar the case of United Commercial Bank Ltd., (supra) in which the question was as to whether the income from interest on securities held by a banker could be treated as income from business. The Indian Supreme Court finally held that the assessee's business was receiving deposits from clients and withdrawal by them and the securities were the part of its banking business. The next case relied upon by the learned D.R. is the case of Traco Cable Ltd. (supra). In this case the assessee invested the share capital in banks pending commencement of business. However; it increased some expenditure on business also and claimed deduction thereof from the interest earned. Thus, the question arose as to whether it was entitled to claim this deduction. A Division Bench of Kerala High Court on facts held that the income earned by the assessee was the income from other sources and as such it was not entitled to deduct business expenses from it. Another case cited at Bar by Mr. Mohammad Farid is that of Bengal and Assam Investors (supra). In this case it was held that if a company merely acquired and held shares with the intention of receiving dividends it did not carry on business. The next case relied upon by the learned D.R. is from our own Supreme Court recorded in the case of the Liquidator (supra). In this case the assessee was incorporated in the year 1916 and entered into an agreement with the Secretary of State for the construction and running of Railways in erstwhile East Pakistan. It kept in deposits its surplus money in bank as the Articles of the Company allowed it to invest money. The question as to whether the interest earned by it on such deposits was an income from normal business in the circumstances of the case and their Lordships of our own Supreme Court answered the question in the negative. Mr. Mohammad Farid, the learned D.R, has also cited at Bar several other cases mentioned above but all of them have been considered in one case or the other and we need not consider them separately. After this discussion let us now revert to the question which we framed earlier i.e., whether the interest earned on fixed deposits could be treated as income from business under the facts and circumstances of these appeals. Now when we recapitulate the case-law cited at Bar feel very much tempted to answer it in the affirmative like Mr. Farooq Ali, the learned F. C. A., and our reasons are as follows. It is well-settled principle that while dealing with the questions regarding charging of income-tax on investment, the purposes for which an assessee hay invested it becomes not only very relevant but also very material. We have really to look into the intention of an assessee in such cases. In 5 TC 159, California Gippes Syndicate v. Harries, the British Court looked into the purpose and intent of the assessee it order to determine its tax liability. It was held in that case that where the owner of an ordinary investment chooses to realise and obtain a greater price for it than the price on which he, originally acquired it, the enhanced price was not profit assessable to income-tax. It was also held in that case that the enhanced values obtained from realisation or conversion of securities, might, nevertheless, be exposed to the income-tax if it might be established that it was gained out of which is called carrying on, or carrying out of a business. The Indian Supreme Court in the case reported as (1958) 34 I T R 368, Mazagaos Dock Ltd. v. C. I. T. has also held that the expression 'business' as used in the Income-tax laws was required to be construed in the broad rather than restricted sense. The House of Lords in a case reported as (1935) 3 I T R (Eagles case) 17, Bandengwers Ltd. v. Clarke, again laid emphasis on the form in which a transaction gave rise to income and the name which was given to it was found to be irrelevant in determining the eligibility of taxes. Thus, their Lordships of Kerala High Court also adopted the same reasoning in the case of Motilal Hirabhai Spinning and Weaving Co. (supra), which has been relied upon by Mr. Farooq Ali, the learned counsel for the appellant. In this case the income of a Public Ltd. Co. earlier running a textile mills derived its income from interest on certain advances or deposits and it was held that under the facts and circumstances of the case the income was from business. In our, judgment the principle laid down in this case under its own facts and circumstances appears to be fully applicable in the case of the appellant. It is true that the loan was obtained by the appellant for establishing a factory for manufacturing of liquid sugar. Thus, manifestly its business would have been manufacturing of liquid sugar when it might have started the production. However, earning of the interest is also to be deemed an income from business on the principle of commercial expediency, which has been highlighted not only in the case of Motilal Hiralal Spinning Weaving Ltd., but also in the leading case coming from Indian Supreme Court reported as (1951) 20 I T R 1, Eastern Investment Co. v. C.I.T. which has been relied upon by both the learned counsel for the appellant and the learned departmental epresentative. Now, if we examine the facts of these appeals from the point of commercial expediency, it appears that the appellant had to pay interest on the borrowed loan. He, therefore, had two choices: either lie could have kept the money in its safe and capitalised 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. At the time when it was minimising its interest liability it might not have known that its adventure would ultimately fail to see the day of commencement of production as it ultimately happened. Let us point out that as per statement of Mr. Farooq Ali, the appellant has not gone in production till today and this fact further shows the commercial foresight of the appellant and its financial advisers as they minimised their losses by depositing the balance money on interest. We are, therefore, of the considered view that the appellant rightly invested the balance money in fixed deposits and earned interest thereon so that its losses could be minimised. This is, in our judgment, best example of commercial expediency. We are, therefore, of the view that the interest income of the appellant earned under the facts and circumstances of these appeals was an income from business, and, as such, it was rightly set off against the interest payable before the balance was capitalised for the simple reason that it was an expenditure admissible under section 23(1)(vii) of the Income Tax Ordinance. Let us point out that under the facts and circumstances of these appeals the loan was obtained for business of earning interest as well as for business of earning income from manufacturing liquid sugar. Hence the interest expenditure in proportion to interest income has been deducted and the balance has been capitalised. Let us also mention here that in the Articles of Association the appellant was entitled to earn income on investment also. Now before concluding let us point out that the case of United Wire topes (supra) comes close to the facts and circumstances of these appeals. However, it is distinguishable for the reason that in that case two separate loans were obtained in two separate transactions and it was because of this fact that their Lordship: of the Bombay High Court did not take them to be so integrated as to be recorded as a single composite transaction. However, in this case the loan was one and same and the interest earned was from that money on which the interest was to be paid. Similarly, all other cases relied upon by Mr. Mohammad Farid, the learned D.R., also revolve round their own facts and are inapplicable in these appeals. In none of them the assessee attempted to minimise his interest liability in the way as was done by the appellant in commercial expediency. Thus, in view of discussion made above, we show these appeals and hold that interest income was not chargeable to tax as income from other sources. We also direct the I.T.O. to allow deduction of interest earned from interest payable. All the appeals stand disposed of accordingly. M.B.A./482/T Appeals allowed.