Interest income

Income tax Officer drew an inference that borrowed monies/loans were diverted to purchase the National Funds Bonds to derive tax free income, therefore, he disallowed the interest accrued on the loans in proportion to the interest income derived from the Bonds

High Court found that tax authorities were not justified in confirming disallowance of proportionate interest on the basis that loans obtained by the company were utilized in the purchase of fixed assets and the investment in the National Funds Bonds was made from the capital and unappropriated profits available with the company

Validity

Tax department failed to point any restriction under the law that would have disentitled the company from claiming exemption on the interest income in case there were loans standing against it

Perusal of statement of accounts filed by the company showed that long term loans were obtained by the company prior to the purchase of the Bonds which were to be discharged with interest over a long period of time, hence, independent of the financial obligation against the long term loans, the company made investment in the National Funds Bonds with its own funds generated from its business

Interest income derived thereon was admittedly exempt under the law and had no co-relation whatsoever with the loans

Irrespective of any co-relation between the two, no provision of law provided that mere existence of financial obligation in the form of loans would have disentitled the company from claiming exemption granted under Clause 170 of Second Schedule to Part I of the Income Tax Ordinance, 1979

Appeal filed by tax department was dismissed accordingly.

Income tax Officer drew an inference that borrowed monies/loans were diverted to purchase the National Funds Bonds to derive tax free income, therefore, he disallowed the interest accrued on the loans in proportion to the interest income derived from the Bonds

High Court found that tax authorities were not justified in confirming disallowance of proportionate interest on the basis that loans obtained by the company were utilized in the purchase of fixed assets and the investment in the National Funds Bonds was made from the capital and unappropriated profits available with the company

Validity

Tax department failed to point any restriction under the law that would have disentitled the company from claiming exemption on the interest income in case there were loans standing against it

Perusal of statement of accounts filed by the company showed that long term loans were obtained by the company prior to the purchase of the Bonds which were to be discharged with interest over a long period of time, hence, independent of the financial obligation against the long term loans, the company made investment in the National Funds Bonds with its own funds generated from its business

Interest income derived thereon was admittedly exempt under the law and had no co-relation whatsoever with the loans

Irrespective of any co-relation between the two, no provision of law provided that mere existence of financial obligation in the form of loans would have disentitled the company from claiming exemption granted under Clause 170 of Second Schedule to Part I of the Income Tax Ordinance, 1979

Appeal filed by tax department was dismissed accordingly.

Question before the High Court was whether "interest income earned by taxpayer on security deposit which was held with a Bank for purpose of obtaining Bank guarantees was part of the business income and exempt from tax and accordingly not taxable under S.30 of Income Tax Ordinance, 1979"

Held, that S.30(2)(b) of the Income Tax Ordinance, 1979 dealt with "income from the sources" and was only applicable where investment of money by a company had not been made as part of its business activity but where such money had been invested by a company in its business, as in the present case, profit generated on such investment, for all intents and purposes, would be considered to be profit earned from business and not from any other source

Reference was answered, accordingly.

Taxpayer contended that Taxation Officer was not justified in subjecting to tax gross amount of bank deposits without setting-off the interest paid on borrowed capital invested in the bank on which profit was earned and also in not allowing part of expenses which were incurred on earning the profit

Validity

Issue was referred back by the First Appellate Authority to verify from the record that whether proportionate expenses incurred on interest earning on bank deposits had been claimed and allowed against business income or not; and further directed that after ascertaining the factual position, the proportionate interest expenses might be allowed against interest/ profit on debt on bank deposits to the extent of utilization of borrowed amount in earning interest income; and Assessing Officer ensured that no double deductions were allowed

Taxpayer contended that he had earned income by depositing surplus business funds in the bank which indicated that if at all interest expenses was to be allowed, it was supposed to be allowed on borrowed capital whereas admittedly the taxpayer had the surplus business funds on which he had earned interest income and setting of any interest expenditure against such interest income earned would not be justified

Interest expenditure against such interest income earned was not allowable

Order of First Appellate Authority was vacated by the Appellate Tribunal on the said issue.