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I.T.A. No. 2128/LB of 1955-86, decided on 4th July, 1987.

--Ss. 23, 20, 31 & 16(2)(a)--Interest on loan When allowable--Investments, kinds of--Assessee an individual deriving income for salary, property and meeting fee only obtained a loan on which the interest was paid--Assessee had not earned any business Income-- Interest on borrowed capital, held, was not allowable under S. 23 to the assessee.

Under section 23 (1) (vii) of Income-tax Ordinance, 1979 interest paid on borrowed capital for the purpose of business or profession is an admissible allowance. However, before such an allowance can be made it has first to be established that the capital borrowed was for the purpose of business or profession. In the present case there was nothing on record to show that the assessee's business was of purchase and sale of shares and that the borrowed money was invested for the purposes of purchase and sale of shares. On the contrary there was evidence on record that part of the money was transferred by the assessee to his son, which could not be said to be business purpose of the assessee. It may be stated here that no allowance is admissible against the income derived from salary. Under section 16 (2) (a) the word 'salary' has been defined which includes any fees, commission etc. in lieu of or in addition to salary or wages. Therefore, the meeting fee, if at all, could be treated as income, would be included in the term 'salary' and therefore, was to be assessed under section 16 of the Income-tax Ordinance. In such circumstances the income of the assessee would be from salary and from property. Since' no allowance is admissible against the salary income, the interest on borrowed capital claimed by the assessee could not be allowed against such an income. Similarly against the property income only specified allowances are allowable which certainly do not include the interest on borrowed capital in the present circumstances. In the alternative even if the meetings fee is to be considered as income from other sources even then the assessee is not entitled to any allowance as admissible deductions are detailed under section 31 of the Income-tax Ordinance.

The expenditure should be expended wholly and exclusively for the purpose of earnings 'such income'. 'Such income' is referable to sub-section (1) of section 31, which begins with the words 'in computing any income under the head income from other sources'. It is therefore, necessary that there must be some income from other sources before applying clause (b) and the expenditure should have been to earn 'such income'. It is while computing the income from other sources that certain allowances had been made admissible. Now the expenses which are allowable under clause (b) is of the kind which hail been laid out or expended exclusively for the purpose of earning 'such income' meaning thereby that the capital borrowed by the assessee should have been for the purpose of earning income from other sources. The computation of income is only possible if section 30 is applicable which provides that income from every kind, which is included in the total income of the assessee and should be chargeable under this head. In the present case it has not been established that the assessee is a dealer in shares and loan obtained by the assessee was spent for the purpose of purchase and sale of shares and that the assessee had invested this amount in a business. There can be two kinds of investments in purchase of shares. For the purpose of earning dividend and the second is that the assessee purchased shares with an intention to re-sale the shares on profit. In the first case, if the dividend is earned that would be income from other sources and in the second case the income would be from business of purchase and sale of shares. Admittedly the assessee did not earn any dividend income nor any income has been earned from purchase and sale of shares. It is therefore, clear that the assessee had not earned any business income and therefore the interest on borrowed capital cannot be allowed under section 23. Since no dividend income had been earned, therefore, the income from other sources is also not available to the assessee.

Nazir Ahmad Saleemi, AC/DR for Appellant.

Zia H. Rizvi for Respondent.

Date of hearing: 14th June, 1987.

This is a departmental appeal against an individual deriving income from salary, property and meeting fee and relates to the assessment year 1982-83. The department is aggrieved against the deletion of addition on account of interest on burrowed capital, which had been disallowed by the ITO.

2. Brief facts of the case are that the assessee had obtained a loan of rupees one billion on which the interest was paid at Rs.56,781/-. A portion of this loan was transferred by the assessee to his son for the purchase of shares in M/s. Allah Wasaya Textile Milts Ltd. and Hilal Floor and General Mills Limited. The assessee deducted interest on that portion of the loan, which had been transferred to his son and balance of the interest was claimed as an admissible allowance. The ITO disallowed the interest on the ground that the interest could not be set off against the income declared by the assessee. On appeal the learned AAC held that the interest amount was allowable and directed the ITO to allow the same.

3. The learned D.R. vehemently contended that there is no provision under which such an allowance could be made by the assessee. It was submitted that the assessee had three sources of income namely salary, property and meeting fee. The learned D.R submitted that meeting fee is in fact prerequisite and has to be treated as salary income. No allowance is admissible against the income chargeable under the head salary. Against the income from house property specific deductions are allowable a/s 20 of the Ordinance. It was further pleaded that interest on borrowed capital is not admissible a/s 20 nor there is any provision for making any such allowance against the income from salary. It was pleaded that even if the meeting fee is not included in the income from salary even then no allowance could be made as an admissible allowance and is clot allowable a/s 31 of the I.T. Ordinance.

4. The learned counsel for the assessee however (contended that the assessee's interest claimed by him on borrowed capital was an admissible expense on the ground that the assessee had borrowed capital for the purchase of shares. Therefore the interest on borrowed capital is allowable a/s 23 (1) (vii).

5. I have considered the arguments of the parties. Under section 23 (1) (vii) interest paid on borrowed capital for the purpose of business-or profession is an admissible allowance. However, before such an allowance can be made it has first to be established that the capital borrowed was for the purpose of business or profession. There is nothing on record to show that the assessee's business was of purchase and sale of shares and that the borrowed money was invested for the purposes of purchase and sale of shares. On the contrary there is evidence on record that part of the money was transferred by the assessee to his son which could not be said to be business purpose of the assessee. It may be stated here that no allowance is admissible against the income derived from salary. U/s 16 (2) (a) the word 'salary' has been defined which includes any fees, commission etc, in lieu or in addition to salary or wages. Therefore the meeting fee, if at all could be treated as income, would be included in tire term 'salary' and therefore was to be assessee a/s 16 of the I.-T. Ordinance. In such circumstances the income of the assessee would be from salary and from property. Since no allowance is admissible against the salary income, the interest on borrowed capital claimed the assessee could not be allowed against such an income. Similarly against the property income only specified allowances are allowable certainly do not include the interest on borrowed capital in the present circumstances. In the alternative even if the meeting fee is to be considered as income from other sources even then the assessee is not entitled to any allowance as admissible deductions are detailed under section 31 of the I.-T. Ordinance. The learned counsel for the assessee relied on clause 'b' of subsection (1) of section 31, according to which any expenditure laid out or expended wholly and exclusively for the purpose of earning such income is an admissible expense. The capital was not borrowed to earn income from meeting fee. It was contended that the assessee had obtained a loan with an intention to purchase shares and therefore it was for the purpose of" earning the income and is covered by this clause. This contention is 'misconceived and devoid of any force. The expenditure should be expended wholly and exclusively for the purpose of earning 'such income'. Such 'income' is referable to subsection (1) of section 31 which begins with the words 'in computing any income under the head income from other sources'. It, is therefore necessary that there must be same income from other sources before applying clause 'b' and the expenditure should have been to earn 'such income'. It is while computing the income from other sources that certain allowances had been made admissible. Now the expenses which are allowable under clause 'b' is of the kind which had been laid out or expended exclusively for the purpose of earning 'such income' meaning thereby that the capital borrowed by the assessee should have been for the purpose of earning income from other sources. The computation of income is only possible if section '30 is applicable which provides that income from every kind which is included in the total income of the assessee and should be chargable under this head. As stated above it has not been established that the assessee is a dealer in shares and loan obtained by the assessee was spent for the purpose of purchase and sale of shares and 'that the assessee had invested this amount as a business. There can be two kinds of investments in purchase of shares. For the purpose of earning dividend and the second is that the assessee purchase shares with an intention to re-sell' the shares on profit. In the first case if the dividend is earned that would be income from other sources, and in the second case the income would be from business of purchase and sale of shares. Admittedly the assessee did not earn any dividend income nor any income, has been earned from purchase and sale of' shares.

6. It is therefore clear that the assessee had not earned any business income and therefore the interest on borrowed capital cannot be allowed u/s 23. Since no dividend income had been earned, therefore the income from the other sources also not available to the assessee. In these circumstances. I have the order of the learned AAC and restore that of the I.T.O. The appeal is accepted.

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