2025 PLP 853 (PTD)

MUHAMMAD SAJID MEHMOOD SETHI, J.

Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 ("the Ordinance of 2001"), following question of law, urged to have arisen out of impugned order dated 18.01.2016, passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ("Appellate Tribunal"), has been pressed and argued for our opinion:- "Whether under the facts and in the circumstances of the case, the learned Tribunal was justified in holding that unabsorbed depreciation of previous years can be adjusted against income from other source ignoring the dictum laid down by the High Court reported as 2000 PTD 363 (H.C. Karachi)?

2. Brief facts of the case are that respondent-taxpayer, being a distribution company, filed income tax return for the tax year 2009 declaring net loss at Rs.22,625,478,526/- which was taken to be an assessment order in terms of Section 120(1) of the Ordinance of 2001. Subsequently, a Show-Cause Notice under section 122(9) of the Ordinance of 2001 was issued to respondent-taxpayer, which culminated in passing of order-in-original dated 19.03.2014. Feeling aggrieved, respondent-taxpayer filed appeal before CIR (Appeals), which was dismissed vide order dated 29.05.2014. Being dissatisfied, respondent-taxpayer preferred appeal before learned Appellate Tribunal, which was allowed vide order dated 18.01.2016. Hence, this Reference Application.

3. Learned Legal Advisor for applicant-department submits that profit on bank deposits is "other income", hence Section 57(1) is attracted, and it should be assessed to tax without any set off of carried forward unabsorbed business losses.

4. Conversely, learned counsel for respondent defends the impugned order and submits that unabsorbed depreciation, shown in the income tax return, was to be added to the deductions admissible in the tax year 2009. He further submits that the loss for the tax year 2009 was to be set off against any head of income in terms of section 56 of the Ordinance of 2001.

5. Arguments heard. Available record perused.

6. Perusal of record shows that respondent-taxpayer declared a net profit as Rs.518,960,129/- and a business loss at Rs.23,143,963,041/-. However, the Assessing Officer identified the profit from bank deposits at Rs.368,960,129/-, accrued on deposits of electricity bills through the banks, and classified it as 'income from other sources', charging it to tax. In cases where the dispute concerns whether the income should be classified as 'business income' or 'income from other sources', a thorough examination of the facts is necessary. This includes assessing the objectives of the assessee-company, its functions, and its memorandum of association or foundational documents. Once the primary business activities and functions are verified, they must be evaluated in relation to the declared objectives. Additionally, the assessee's actual operations, tax returns, and treatment of income should be analyzed to determine the appropriate classification of the income. Reliance can be placed on Commissioner of Income Tax, Companies Zone, Islamabad v. Messrs Fauji Foundation Limited (2023 SCMR 1694).

8. The respondent-taxpayer (FESCO) is not authorized to carry on any business other than the distribution of electricity, therefore, all income earned by it is considered 'business income' and cannot be classified as 'Income from other sources', especially since the income tax return does not show it as such. The Assessing Officer has not appreciated the fact that the bank deposits were also business income, being entirely dependent on and incidental to its operations. Accumulated unadjusted depreciation allowance carried forward from year to year should be treated as an admissible expense for the current your in terms of subsection (4) of Section 57 of the Ordinance of 2001 and adjusted against income assessable under any other head under Section 56(1) of the Ordinance of 2001. The depreciation admissible for a tax year should include the depreciation calculated for that year plus the amount of unabsorbed depreciation from the preceding year, and the income loss from business for the tax year can only be determined after deducting admissible depreciation. In the judgment reported as Commissioner of Income Tax v. Messrs Khairul Hayat Amin & Co. Ltd. (2000 PTD 363), cited in the proposed question, it was not established that the assessee was engaged in the business of money-lending. Therefore, the interest income was not treated as 'business income' and consequently charged to sex. The facts of the said case are distinguishable and are not applicable to the present case.

9. In view of the above, the proposed question is decided against the applicant-department and in favour of respondent-taxpayer. This Reference Application is dismissed.

20. Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133(8) of the Ordinance of 2001. MQ/C-2/L Reference dismissed.