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Income-tax References Nos. 54, 55 and 56 of 1976, decided on 25th November, 1986.
---S. 10 (2) (iii)--Interest paid on borrowed money to shareholders- Exemption-- Balance-sheet of assessee-Company in relevant year showing a cash balance of Rs.9.13,266 standing to its credit on the opening day and yet an interest bearing loan was obtained by assessee from two of his shareholders and a sum of Rs.27,000 credited to their accounts as interest paid to them--Such interest on borrowed capital was allowed under S.10(2)(iii) by Department from 1959 to 1968 without objection but such claim was disallowed by Department for the first time in 1969--Whether amount shown as interest on capital borrowing could be disallowed in circumstances.
Per Saeeduzzaman Siddiqui, J. agreeing with K.A. Ghani, J. [Ibadat Yar Khan, J. (contra)]
Interest on borrowed capital was allowed under section 10(2)(iii) of the Act by the Income-tax Authorities from 1959 yip to the assessment year 1968-69 in favour of assessee without objection. Claim for such deduction was disallowed by Income-tax Authorities for the first time in the assessment year 1968-69 and the grounds for disallowing deduction were firstly, that the assessee had a surplus amount which it had kept in F.D.R. where interest was paid only 4 % whereas the assessee was paying interest on borrowed capital at 9% to the creditors, and secondly that in spite of having a surplus the assessee had failed to return the amount of loan. None of the above reasons given by the Income-tax Officer in disallowing the deduction under section 10(2)(iii) of the Act were found sufficient by the Income-tax Tribunal which allowed these deductions in favour of applicant for the year 1968-69 and the order of Income-tax Tribunal was upheld by the High Court. The grounds on which the Income-tax Officer once again disallowed the claim of the applicant for deduction of interest paid on the borrowed capital from the income were as under:- Interest Rs.27,000'. Facts regarding disallowance of interest on money borrowed by the assessee-Company have been discussed at length in the assessment order for 1968-69. During the year under consideration also the assessee has paid interest to Mr. R.D. Mahtani and C.H. Mahtan @ Rs.13,000 each. The assessee had surplus cash which remained deposited in the Bank in the fixed deposit yet the money borrowed was never returned to the creditors although the F.D. rupees fetched only 4 % interest whereas the assessee has paid 9% interest on the money borrowed. Same explanation as in the last year, has been repeated by the counsel of the assessee, keeping the past history in view interest paid at Rs.27,000 will be disallowed like last year.. .27,000"
I have carefully examined the above reasons given by the Income-tax Officer for disallowing the claim of applicant for deduction of interest paid on borrowed capital from income for assessment years 1969-70, 1970-71 and 1971-72 and I am unable to find anything new in the above order which could justify the disallowance of this claim of applicant. It will be seen that once again the reasons which prevailed with the Income-tax Officer for not allowing the above claim of the applicant were that the assessee had surplus cash which remained deposited in the bank in fixed deposit yet the money borrowed was never returned to the creditors although the F.D.R. fetched only 4 % interest whereas the assessee had paid 9% interest on the money borrowed. The above reasons given by the Income-tax Officer for disallowing the claim of the assessee for the assessment years under review are substantially the same which were given in respect of the assessment year 1968-69 and which were not found sufficient by the Income-tax Appellate Tribunal as well as by the High Court to uphold the order of Income-tax Officer. The above reasons given by the Income-tax Officer for disallowing the claim of deduction of applicant under section 10(2)(iii) of the Act at best amounted to a finding that the act of borrowing by the assessee for the assessment years 1969-70, 1970-71 and 1971-72 in view of the available surplus capital was an imprudent act. This observation certainly could not amount to a finding that the capital borrowed by the applicant was not for business purposes. The fact that the assessee had surplus cash which was kept invested in F.D.R. which fetched only 4 % interest while assessee paid 9% interest on the borrowed capital, and that the assessee could have returned the borrowed capital from the surplus capital which he failed to do were neither relevant nor sufficient under section 10(2)(iii) of the Act for disallowing the claim of applicant. It was necessary for the Income-tax Authorities to have reached a positive conclusion for disallowing the claim of applicant for the assessment years under review under section 10(2)(iii) of the Act, that the loan obtained by the assessee was not for the purposes of business of applicant. It is only on such a positive findings in the case by the Income-tax authorities that the applicant could be held disentitled to these deductions under section 10(2)(iii) of the Act as the factum of borrowing and payment of interest thereon was not in dispute.
Order of the Tribunal showed that the claim of the assessee was not disallowed on the ground that the loan was not utilized for the business purposes but on the ground that it was no more advisable for the company to keep a loan on which the company was paying interest at the rate of 9% while on its own surplus kept in the F.D.R. the company was receiving only 4 % interest. These considerations were not relevant for disallowing a claim for deduction under section 10(2)(iii) of the Act.
Per K.A. Ghani and Saeeduzzaman Siddiqui, JJ, agreeing; [Ibadat Yar Khan, J. (contra)]--
Without any material on record and against the past history of the loans borrowed by the assessee-Company for its business on which interest was paid at the same rate to the same creditors in spite of available cash surplus invested in Fixed Deposit Account, the Tribunal could not have acted suo motu without any material and justification in disallowing claim under section 10(2)(iii) by inference drawn on mere surmises that the loans did not remain loans for purposes of business for the years under consideration. The findings of the Tribunal were against the statutory provisions contained in section 10(2)(iii) of the Act which provide for allowance of interest in respect of 'capital borrowed for the purposes of business'. The Tribunal as well as Income-tax Officer nowhere held that the amount borrowed from the two shareholders was not capital borrowed for purposes of business. The observation of the Tribunal that how it can be thought that Rs.3 lacs was needed for the purposes of business if the business be carried on even after depositing Rs.8,65,000 in 1971-72 and Rs.4,15,000 in the year 1969-70 and that in such circumstances the loan did not remain loan for purposes of business, are not only against the past history of the case, but are also based upon mere surmises. It is not for the revenue authorities to decide for the assessees or guide them as to how the investments be made by them.
M/s. Pakistan Industrial and Engineering Agencies Limited Karachi I.T.R. No. 288 of 1974 Amna Bai Hajee Essa v. Commissioner of Income-tax Madras (1964) 51 I.T.R. 835; Commissioner of Income-tax v. Fateh Ali Co. 1984 P T D 341 and Commissioner of Income-tax (West) Karachi v. Adamji Sons, Karachi 1984 P T D 390 ref.
Per Ibadat Yar Khan, J. [(Saeeduzzaman Siddiqui and K.A. Ghani, JJ. not agreeing)]--
Section 10(2)(iii) of the Act does not specify any condition as to the entitlement of deduction of interest from the 'Profit and Loss Account'. No doubt the assessee is free to resort to borrowing if the exigencies of his business require. He is also free to invest his own capital as well as the borrowed capital to any use profitable or unprofitable. Further, if he takes up a business adventure, which may prove to be hazardous depriving him of everything there is nobody to question his discretion. One may go to the extreme limit of saying that even if funds have been committed and are stuck up in not very attractive adventures and the assessee generally feels the necessity to replenish the pool and raise capital for investment, the Income-tax Officer has no authority to question the discretion of the assessee, because these considerations are the sole considerations of the assessee and the law has allowed him to fully and completely enjoy the right of manoeuvrability of his funds. Yet there is one consideration to oversee the unrestricted exercise of right by the assessee and that is this that the assessee should not abuse or misuse the concession allowed to him by this section. It must be appreciated that this section allows what has been described as 'exemption' in the Act. In other words this otherwise taxable income is granted an exemption from the general rule of taxability of the income. To this extent it is the duty of the Taxing Authority to see whether the exemption claimed by an assessee falls under the rule or 'exceptions' to the general rule. Only in latter cases the benefit of section 10(2)(iii) would be extended and not in others.
At the time when the 'profits and gains of the business profession or vocation' of the assessee are being calculated and determined for purposes of determining the tax liability, they are to be computed after making some allowances. These allowances are incidental to the business through which the profits and gains have originated. For instance, the rents of the premises where the business is carried on is allowed as an allowance and has to be deducted from taxable income. Similarly, the costs and expenses incurred on repairs of the premises occupied by the assessees for the business is an expense, which is permissible as deduction from the income and allowance would be given for sums spent on repairs.
Under section 10(2)(iii) of the Act not all the interest paid but only such interest as has been paid on such capital as was acquired for purposes of business. In other words it means that an adventurous assessee who wants to generate a pool or create a capital to be employed in the business or for purpose of advancing the interest of business, should not feel hesitant or frustrated for lack of funds, but is free to resort to borrowing and if he borrows for the business and pays interest, the amount paid as interest should be treated as an allowance permitted to be deducted from the income, or profits or gains and would not be subjected to tax liability. Now the question arises that an assessee, who already sits on a fat capital and has, according to his own balance-sheet, substantial cash in hand, readily available to be employed in any adventure or investment which the exigencies of the business may claim or require can he or would he think of locking up this huge capital in his safe and resort to borrowing of interest bearing loans for his business. The balance-sheet for the assessment year 1969-70 shows a cash balance of Rs.9,13,266 standing to his credit on the opening day of the year and yet an interest bearing loan is obtained by the assessee from two of the shareholders and a sum of Rs.27,000 is credited to their account as interest paid to them.
To put it mildly it is to be termed as imprudent act on the part of any businessman to allow his own funds to remain unproductive and treasured in a safe and go about begging for funds to feed the business requirements. To put it crudely it may be called a clever devise to 'play fraud on the statute'.
Looking to the balance-sheet showing fixed deposits available to the assessee to the tune of Rs.8,50,000 the burden immediately shifts to the assessee to satisfy the Taxation Authority that this huge amount of fixed deposits which though readily available to him still left the necessity of borrowing Rs.3 lacs from the Directors of the assessee. The plain answer to this question is that the assessee having failed to satisfy the Taxation Authority that in this situation the borrowing was for business purposes, the Taxation Authority on appreciation of facts of the case was competent to hold that this was not a loan for business purposes, and consequently interest paid on this amount was not to be deducted.
If the loan amount has been put in F.D.Rs. and the surplus funds have been utilised for purposes of business then clearly the assessee is not entitled to the deductions under section 10(2)(iii) because he has used his own funds and not the borrowed funds for the purposes of business. On this view of the matter also the assessee's claim must fail on account of lack of identity of the funds for which exemption is claimed.
Commissioner of Income-tax Karachi v. Fateh Ally & Co., Karachi (1984) 50 Tax 189; C.I.T. v. Adamjee Sons (1984) 50 Tax 196; Messrs Eastern Silk Stores v. The Commissioner of Income-tax P L D 1957 (W.P.) Kar. 130; Govan Brothers v. Commissioner of Income-tax, U.P. (1963) 48 I.T.R. 930; Birla Gwalior Private Ltd. v. Commissioner of Income-tax M.P. (1962) 44 I T R 847; Kishinchand Chellaram v. Commissioner of Income-tax Bombay City III (1978) 114 I T R 654; Amna Bai Haji Issa v. Commissioner of Income-tax (1964) 51 I T R 835; I.-T.R. No. 288 of 1974; Commissioner of Income-tax v. Fateh Ali Co. 1984 P T D 341; Commissioner of Income-tax v. Messrs Adamjee Sons 1984 P T D 390 distinguished.
--- Each case has to be decided on its own merits--Law is best explained in a given situation and unless facts of case are identical, enunciation of law in one set of facts can hardly be a compelling reason to be adopted in another case.
--- Practice and procedure--Erroneous view of law and judgment in the past would not be a justification to repeat same--To follow erroneous view would amount adjudication without applying mind to case before Court.
--- Previous decision or a precedent, unless it is law declared by superior Court of competent jurisdiction, may, have a pursuasive value, but is not binding--Decision of a Court cannot be blindly followed until it is proved that same interprets law in identical situation and points now requiring adjudication were raised, examined-a-id disposed of.
---S. 66(2)--Reference--Whether High Court can question judgment of Department that any finding or conclusion was not proper.--[ Qusere].
---S. 10(2) (iii)--Loan for purpose of business--Payment of interest on- Exemption-- Burden of proof--Duty of assessee--Whether or not burden had been discharged to the satisfaction of authorities is a pure question of fact.
---S. 10(2)(iii)--Assessee when become entitled to claim deduction of interest paid on borrowed capital--Conditions--Eventuality which might disentitle assessee to claim deduction stated.
In order to entitle an assessee to claim deduction of interest paid on the borrowed capital under section 10(2)(iii) of the Act from the profits and gains he has only to show, that he had borrowed the capital during the assessment years; that the borrowed capital was for purposes of business, profession and vocation of the assessee and that the assessee had paid the amount of interest on the borrowed capital which he is claiming as a deduction under section 10(2)(iii) of the Act. If the assessee succeeds in establishing these facts the Income-tax Authorities will allow the deduction claimed by the assessee under section 10(2)(iii) of the Act. Any further enquiry by the Income-tax Authorities in this regard to find out whether the act of borrowing by the assessee was prudent or not or there existed any necessity for the assessee to indulge in such borrowing or not or that the interest paid on the borrowed capital was reasonable or not, is neither permissible nor come within the scope of the above section.
Conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of the interest on borrowed capital under section 10(2)(iii) are; firstly that money must have been borrowed by the assessee; secondly, it must have been borrowed for business purposes and thirdly the assessee must have paid interest on the said amount and claimed as a deduction. It is not the requirement of the law that the assessee must further show that the borrowing of the capital was necessary for business purposes so that if at the time of borrowing the assessee had sufficient amount of its own, the claim for deduction could not be allowed under section 10(2)(iii) of the Act.
Deduction which is permissible under section 10(2)(iii) is 'in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid'. The subsection makes no distinction between capital borrowed in order to acquire revenue asset and capital borrowed to acquire a capital asset. All that the section requires is that the assessee must borrow the capital, the purpose of the borrowing must be for the business which is carried on by the assessee in the year of account. The capital must be borrowed for the purpose of no other business except the business, which is being assessed. When looked at the other sub-clauses of section 10(2), it is clear that the underlying idea of these sub-clauses is that the particular deduction claimed must be in relation to the business which is referred to in subsection (1) of section 10, that is, the business in respect of which tax is payable by an assessee.
The requirement of section 10(2)(iii) of the Income-tax Act is only to the extent, firstly, that the money must have been borrowed by the assessee; secondly, it must have been borrowed for purposes of business or vocation of the assessee and thirdly, the assessee should have paid this amount before claiming deduction under the aforesaid section. The above section does not provide that for the purposes of business the borrowing of capital should have been necessary so that if at the time of the borrowing the assessee had sufficient money of his own to invest in the business then the deduction cannot be allowed.
An assessee is free to carry on a business with his own capital or from money borrowed from any bank or other financial institution and it is only in case where the assessee chooses to run his business with borrowed capital that he would be entitled to deduction in respect of amount paid for and on account of interest. Thus, the only eventuality which might disentitle an assessee to claim deduction of the whole or any part of interest is where the amount is not shown to have been used as capital in the business carried on by the assessee.
Commissioner of Income-tax, Bombay City v. Bombay Samachar Limited (1969) 74 I T R 723; Calaco Dyeing and Printing Works v. Commissioner of Income-tax (1958) 34 I T R 265 and Rajkashan Oil Mills v. Commissioner of Income-tax (1965) 56 I T R 186 and Commissioner of Income-tax Lahore Zone v. Shaikh Muhammad Ismail & Co. 1986 SCMR 968 ref.
---Ss. 10(2)(iii) & 66(2)--Reference--Claim of deduction of interest on borrowed capital--Whether the capital was borrowed or not by assessee during assessment year for purpose of business is a pure question of fact--Finding of fact in such cases recorded by Income-tax Officer and Appellate Tribunal is binding on High Court in reference--Whether such findings recorded by Income-tax Authorities amounted to holding that the borrowed capital of assessee was not for business purpose, can certainly be examined in reference within the scope of question framed and referred to High Court.
---S. 10(2)(iii)--Loan for purposes of business--Payment of interest- Deduction--Mere fact that a company had surplus capital which it invested in some security which is less profitable than the interest paid by it on the borrowed capital is not a sufficient circumstance to hold that borrowed capital was not needed for business purposes.
---S. 10 (2) (iii)--Loan for purposes of business--Payment of interest- Deduction--In the absence of finding by the Department to the effect that borrowed capital by the assessee was not utilized for business purposes, claim of assessee for deduction of interest paid on borrowed capital could not be disallowed under S. 10(2)(iii).
Iqbal Naeem Pasha for Petitioner.
Ghulam Hyder for Respondent.
Dates of hearing: 11th, 14th, 18th and 20th November, 1985.
-- This is a reference under section 66(1) of Income-tax Act filed by the assessee pertaining to the assessment years 1969-70, 1970-71 and 1971-72. The assessee is a private Limited Company and deals in import of ball bearings. They have been assessed from year to year since long time. But we are here concerned with the accounting years ending 30-9-1968, 30-9-1969 and 30-9-1970. In all these three years their claim for exemption of interest paid by them on the amounts borrowed for the purpose of the business have not been allowed by the Income-tax Officers, who have passed assessment orders in respect of these three years. This grievance was taken in appeal to the Income-tax Appellant Tribunal. The Income-tax Appellate Tribunal has passed a single order disposing of the three appeals against orders passed on 10-5-1973 relating to Assessment years 1969-70, 1970-71 and 1971-72.
Against this common order for the aforesaid three years, the appellants have filed three different references being Income-tax Reference Nos. 54 of 1976, 55 of 1976 and 56 of 1976 and these references would be disposed of by this common judgment, because the same point of law is involved in all the three references.
By this common order the three appeals of the assessee have been dismissed and orders of Income-tax Officers have been upheld. The view taken by the Tribunal is that in the circumstances of the case the amount of loan on which the interest has been paid to the two shareholders from whom the loan was borrowed could not be treated as business loans. The assessee-Company had sufficient funds readily available to be employed if needed. As such there was neither any necessity nor indeed justification to obtain this loan of Rs.3,00,000 and lodge claim for interest paid on this amount.
The assessee-Company moved the Appellate Tribunal for making a reference to the High Court under section 66(1) of the Income-Tax Act for the opinion of the High Court on the following question of law:---
"Whether the learned Income-tax Appellate Tribunal misdirected itself in law in disallowing interest payment of Rs . 27 , 000 "
By their order dated 10-2-1976 the Appellate Tribunal rejected this application. The Tribunal in this order observed "our finding that the loans were not obtained for the purposes of the business continues to hold good. There is not the least dispute that this is the finding on facts. The question posed by the applicant, therefore, in our opinion, is a question of fact and in consequence, we refuse to refer the same".
The assessee has, therefore, filed this reference directly in the High Court under section 66(2) with the prayer:
"It is, respectfully submitted that the learned Tribunal having overlooked the fact that interest received by the applicant had been assessed under section 10 as income from business, it had misdirected itself in Law in arriving at the finding that the capital borrowed was not used for the purposes of the business. The question as framed in para. (10) of this application is a question of law involving interpretation of section 10 (2) (iii) of the Income-tax Act.
It is, therefore, humbly prayed that this Hon'ble Court be pleased to decide the said question of law."
Mr. Iqbal Naeem Pasha, the learned counsel for the applicant relying on the plain language of section 10(2) (iii) argues that all the requirements of this provision of law are satisfied and the applicants are entitled to the beneficial exemption provided by the section. Mr. Shaikh Haider learned counsel for the Department, however, supports the order of the Income-tax Officer and the Income-tax Appellate Tribunal. In his reading of the section, the assessees have merely resorted to the device of showing the amount as a loan to escape from the tax liability. The learned counsel contends that only such interest would be exempted from the tax liability, which an assessee has paid on the capital borrowed for the purpose of the business. Any interest on a capital, which cannot be co-related with the needs and for requirements of the business cannot and should not be excluded from the tax liability. Subsection (2), clause (iii) of section 10 of the Income-tax Act is in the following language:
(2) Such profits or gains shall be computed after making the following allowances; namely:
(i) ..............................................................
(ii) ...............................................................
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid:
Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in the taxable territories who may be assessed under section 43 or, in the case of a firm, for any interest paid to a partner of the firm."
A careful reading of the section would show that at the time when the "profits and gains of the business profession or vocation" of the assessee are being calculated and determined for purposes of determining the tax liability, they are to be computed after making some allowances. These allowances are incidental to the business through which the profits and gains have originated. For instance, the rents of the premises where the business is carried on is allowed as an allowance and has to be deducted from taxable income. Similarly, the costs and expenses incurred on repairs of the premises occupied by the assessees for the business is an expense, which is permissible as deduction from the income and allowance would be given for sums spent on repairs.
Then follows the part of the section under review. Under this part of the section not all the interest paid but only such interest as has been paid on such capital as was acquired for purposes of business. In other words it means that an adventurous assessee who wants to generate a pool or create a capital to be employed in the business or for purpose of advancing the interest of business, should not feel hesitant or frustrated for lack of funds, but is free to resort to borrowing and if he borrows for the business and pays interest, the amount paid as interest should be treated as an allowance permitted to be deducted from the income, or profits or gains and would not be subjected to tax liability. Now the question arises that an assessee, who already sits on a fat capital and has, according to his own balance-sheet, substantial cash in hand, readily available to be employed in any adventure or investment which the exigencies of the business may claim or require can he or would he think of locking up this huge capital in his safe and resort to borrowing of interest bearing loans for his business. Such is the situation in this case. The balance-sheet for the assessment year 1969-70 shows a cash balance of Rs.9,13,266 standing to his credit on the opening day of the year and yet an interest bearing loan is obtained by the appellant from two of the shareholders and a sum of Rs.27,000 is credited to their account as interest paid to them.
To put it mildly it is to be termed as imprudent act on the part of any businessman to allow his own funds to remain unproductive and treasured in a safe and go about begging for funds to feed the business requirements. To put it crudely it may be called a clever devise to "play fraud on the Statute".
The fact that this cash of Rs.9,13,266 shown in the balance-sheet was put in Bank under F.D.R. is of no consequence because the F.D.R. are yielding an interest of 4 % and the interest paid to the shareholder on the borrowed amount is as much as 9%.
There would be some point if this capital shown as surplus in the balance-sheet ending the period of each business year was invested or was locked in some other way and was not readily available when needed. But when questioned about its involvement, the learned counsel for the applicant frankly and categorically conceded that this capital was not stuck up any where and was never beyond reach. It could be pulled out and utilised any time the applicants wanted it. There was no long term or even short term commitment for this capital as in case cited by the learned counsel for appellant in support of his contention.
In this situation it cannot be said that the Income-tax Officer and the Appellate Tribunal were wrong in their approach by holding; that the amount shown as interest on capital borrowed for purposes of business was not borrowed for the pretended purpose but for feeding the shareholders through back door on the one hand and escaping the tax liability on the other.
C.I.T. v. Fateh Ally & Co. (1984) 50 Tax 189.
In the case Commissioner of Income-tax, Karachi v. Fateh Ally & Co. Karachi reported in (1984) 50 Tax 189, the deductions were allowed by the Assistant-Appellate Tribunal and the Appellate Tribunal on the findings that the amount of loans obtained by the assessee- Company were secured by the Company from the Bank "as and when found necessary for carrying on of its own business and that its advances to its directors were made in the usual course of business". Moreover, this was a case in which the loans were obtained when the Company's own funds were already converted into stock in trade or shares to the Directors and the exigencies of the business required repletion of capital to be employed for purposes of the business of the company. The facts of this case are, therefore, clearly distinguishable from the case on hand where Company's own funds far exceeding the amount of loan borrowed have already remained available to the Company for purposes of its business.
C.I.T. v. Adamjee Sons (1984) 50 Tax 196.
The other reference i.e. Income-tax Reference No. 709 of 1972 reported as Commissioner of Income-tax Karachi v. Adamjee Sons was disposed of by the High Court and has been relied upon. In this case the Income-tax Officer had disallowed the deductions on the ground that the firm had made substantial payments and advances to the wives and children of the partners of the firm and such utilisation of the borrowed capital could not be called utilisation of the capital for purposes of business of the firm. The Appellate Tribunal set aside the order of the Income-tax Officer and allowed these deductions in full. It was held by the Tribunal; the funds of the firm were built with contributions from the partners and the their family members, and portion of these funds was lent to them on loan for building their own house. Then the important part of the order:
"If after this arrangement the appellant fell short of the capital in any manner it was fully at liberty to borrow money on interest. It was none of the department's concern to direct the appellant not to make advances to the partners who had debit balances in their accounts. After all the entire capital was of the assessee and it could utilise the fund at its disposal in any manner it chose. This being the position no exception could be taken to the tax free advances being made even to the partners whose accounts showed debit balances. If thereafter, the business needed any capital the appellant could resort to borrowings and on such borrowings the interest payable would be clearly for the purpose of the business."
On these facts the High Court agreed with the order of the Appellate Tribunal for deductions of the amount of interest.
Here again the findings are that the capital, which was their own money was consumed by the partners for construction of their houses and fresh capital was needed to be employed for the purposes of the business which could only be obtained by the assessee by resorting to borrowing.
Messrs Eastern Silk Stores v. The Commissioner Income-tax PLD 1957 (W.P.) Kar. 130.
Another case relied upon by the counsel for the applicant is reported in P L D 1957 (W.P.) Kar. 130. The assessee firm which was a partnership of two sons of one Jevat Ram obtained a loan from the father of the partners and paid interest at the rate of 9% for earlier years and raised it to 12% in later years. The Income-tax Officer as well as the Tribunal did not allow exemption on the enhanced rate. When the matter was placed before a Division Bench of this Court for opinion on this and other points involved, the Court remanded the case to the Department with the directions that Income-tax Appellate Tribunal to refer the following question alongwith a statement of facts, for answer under section 66(2) of the Income-tax Act to this Court:
"Whether, when interest has been paid in respect of capital borrowed for the purposes of the assessee's business, the Income-tax Authorities are justified in reducing the rate of interest on the ground that an excessive amount has been paid for non-commercial reasons "
This case provides no guidance for the problem in this case whether the assessee having adequate funds in reserve, can still resort to borrowing and claim exemption for the interest paid on such loans. Though, this case does not render any help for solution of the main problem, still there are weighty observations, which are relevant for this case. At page 135 the following lines are important to note:--
"This subsection contemplates that any expenditure not in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively for such business, profession or vocation shall be given allowance by the Income-tax authorities.
The onus of establishing that a particular expense was wholly or exclusively or the purpose of such business is clearly or the assessee."
If the order of the Tribunal in the present case particularly the following passage is read in the light of the above-quoted observation of the Court, the case of the assessee must fail:
"We however, felt that if the business can be carried on ever after depositing Rs. 8,65,000 in 1971-72 and Rs.4,15,000 in the years 1969-70 and 1970-71 how can it be thought that Rs.3,00,000 was needed by business for the purposes of business. In such circumstances we are constrained to hold that the loan did not remain loan for purposes of business for the years under review and hence uphold the disallowance of the interest paid to the shareholders. "
Again in the order, dated 16-2-1976 which was passed on the application of the assessee/appellant praying for making a reference of the case to the High Court under section 66(1) of the Income-tax Act, the Appellate Tribunal while rejecting this request observed as follows:--
"Our finding that the loans were not obtained for the purposes of the business continues to hold good. There is not the least dispute that this is the finding on facts. The question posed by the Applicant, therefore, in our opinion, is a question of fact and, in consequence, we refuse to refer the same."
Govan Brothers v. Commissioner of Income-tax, U.P. (1963) 48 I.T.Rs. 930.
This case is from Indian jurisdiction and has close resemblance with the facts of the present case as few extracts from the judgment would show. This case came to the High Court of Allahabad on a reference under section 61(1) of the Income-tax Act in the following circumstances: --
The assessee firm were managing agents of two Sugar Mills for a period of 20 years. While this term of 20 years had still 4 years to complete, the assessee firm purchased shares of the value of Rs.19,04,126 of the Sugar Manufacturing Companies from H.H. Nawab of Rampur. To finance this purchase of shares the assessee borrowed interest bearing loans from different sources and paid a sum of Rs.64,239 as interest to the lenders including the Nawab. After about eight months the assessee sold these shares to a new Company. Incidentally the Directors of this Company were close relatives of the partners of the assessee firm. The assessee claimed reduction of Rs.64,239. The Income-tax Authorities disallowed this deduction and held that "the capital was not in truth borrowed for the business" The Appellate Tribunal upheld this decision of the Income-tax Officer, At the request of the assessee reference was made to the High Court under section 61(1) of the Act to answer the following question:--
"Whether on the facts and circumstances of the case, the sum of Rs.64,239 paid as interest to H.H. the Nawab of Rampur and others is a permissible deduction in computing the business income of the assessee "
The High Court of Allahabad answered the reference in the negative and held:--
"Coming now to its allowability under section 10(2)(iii) one has to remember that the managing agency was still to run for a period of four years on the date of borrowing and purchase. Only eight months later the shares were transferred to Dalmia Cement Company as according to the assessee it had no funds to pay the amount borrowed. Clearly, the assessee must have taken its financial position even on the date of the borrowing and the purchase. It could not have suddenly dawned on the assessee only after the expiry of eight months that it could not hold on to the shares and must part with them. It follows that the borrowing and the purchase and the subsequent transfer of the shares to Dalmia Cement Company were all parts of a pre-determined scheme. There is the further fact that the assessee and the Dalmia Cement Company were closely linked as the shareholders of the latter company were relations and close friends of the managing director of the assessee. The pretext for the borrowing and the purchase and sale was that the arrangement would help the assessee to retain the managing agency for a further period as under the agreement of sale, the vendee would exercise its vote according to the desire and in the interest of the assessee. This pretext stands completely exposed when we find that by further agreement between the parties incorporated on December 24, 1951, the benefit of the receipt of 25% commission and office allowance was in no way to stand reduced even if the vendee parted with all but a negligible portion of its shareholding. "
It was also observed in the next para. as under:--
"The device is further exposed by the further agreement, dated January 2, 1952, by which the benefit of the agreement was transferred to Messrs Dalmia Jain Trust. Presumably this was done with a view to completely evade payment of tax on 25% of the managing agency commission and office allowance, the amount of which it appears was quite considerable. It is significant that the assessee himself probably felt that the arrangement for parting with 25% of the managing agency commission and the office allowance was in the nature of a partnership arrangement for depleting the profits of the business of the managing agency and not a bona fide arrangement for acquiring assets necessary for its business. It, therefore, incorporated a paragraph in the agreement of sale that the agreement. did not amount to a partnership between the parties. It is true that an assessee is entitled to arrange its affairs in such a way as to_ reduce its tax liability by all legal ways but the arrangement must be genuine and not a sham. Here it appears that the object of borrowing was illusory and colourable and not genuine or bona fide. It follows that the sum o Rs.64,239 was not allowable as deduction under section 10(2)(iii:) also. The deduction was not claimed under any other provision. The question referred to us should, therefore, be answered in the negative."
Birla Gwalior Private Ltd. v. Commissioner of Income-tax M.P. (1962) 44 1 T R 847. .
The learned counsel for the applicant relies on a case reported in Birla Gwalior Private Ltd. v. Commissioner of Income-tax M.P. (1962) 44 I T R 847. In this case the reference made to the High Court of Madhia Pradesh under section 66(1) of the Income-tax Act was answered in the negative on the question formulated as under:--
"Whether having regard to the provisions of section 10(2)(iii) of the Act, the Income-tax Authorities had power to scale down the rate of interest on the ground of unreasonableness "
It was observed in the case that the assessee's claim for deduction under section 10(2)(iii) was to be determined by keeping in view the following points:--
(1) first, the money, that is the capital, must have been borrowed by the assessee; '
(2) secondly, it should have been borrowed for the purposes of the business, profession or vocation of the assessee; and
(3) thirdly, the assessee should have paid the interest amount claimed by him as an allowance under that clause. The interest paid has not been made subject to the test of reasonableness as is bonus or commission under section 10(2)(x).
The learned counsel for the applicant relies on the above observations and contends that once these three elements are found to be existing in favour of the assessee there should be no reason to disallow the deduction. If the discussion had ended here, perhaps the decision would lend support to the contention of the learned counsel. But these observations are followed by very relevant condition which is to be borne in mind and which in the present case is the basis of decision of the department in the reference now before us. The observations are to the following effect:--
"Therefore, when the Income-tax authorities have found that the borrowing transactions were not illusory or colourable and that the capital was borrowed by the assessee for the purpose of business and the amount of interest was paid, then they have no jurisdiction under clause (iii) to determine a reasonable amount of interest as deduction."
In the present case this is exactly what the learned counsel for the department is arguing. He is contesting that the loan was borrowed to feed the business. According to the department, the object was to feed the directors. This case, therefore, cannot be read in favour of the appellant. Rather it supports the view point of the Department.
Kishinchand Chellaram v. Commissioner of Income-tax Bombay City-III (1978) 114 I T R 654.
The next case cited by the learned counsel for the applicant is Kishinchand Chellaram v. Commissioner of Income-tax (1978) 114 I T R 654. In this case also the point involved was totally different from the point involved in the present case. It was held in this case:--
"That so far as the Bombay High Court is concerned, it is quite clear that, under section 10(2)(iii), interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for purposes of business and that if it is used for a purpose other than that of business, then interest to the extent to which the capital was so used, will not be allowed as a permissible deduction under section 10(2)(iii)."
I may also add that the question involved in the above case was whether the amount borrowed and spent on discharging the tax liability of the partners could be treated as the amount spent in the business of the firm The reference was answered in the negative. This case is not relevant for the determination of the point involved in the present case.
Amna Bai Haji Issa v. Commissioner of Income-tax (1964) 51 ITR 835.
In this case the assessee had her accounts in a firm which also used to act as her banker. The balance remained fluctuating according to deposit and withdrawals. On 1st April, 1956 the assessee had an overdraft of Rs.96,625. On 31-3-1957, she deposited a sum of Rs.1,01,000 in her account and also withdrew as a loan a sum of Rs.90,000 specifically for investing as capital in another firm. She operated this account during the year and made several withdrawals from time to time. On the closing day of the accounting year i.e. 31-3-1957, a debit balance of Rs.53,182 was struck in her account as loan and she was charged interest in the sum of Rs.2,965 on this amount which she claimed as deduction from her income in the assessment year 1957-58. "This claim was disallowed by the Tribunal on the ground that Rs.90,000 could not be treated as borrowed capital as it could have come out of Rs.1,01,000 she received on March 31, 1957 and that for lack of identity assessee's claim must fail".
At the assessees request the department made a reference to the High Court under section 61(1) of the Income-tax Act. The High Court answered the reference in favour of the assessees and allowed the deductions. Commenting on the decision of the Tribunal the Judges made following observations:-----
"The Appellate Tribunal apparently relied upon the circumstances that the assessee, according to the above account, had certain sums belonging to her which she could very well have utilised towards furnishing the capital to Thayub, Madurai, and that therefore, she need not have made any borrowing. It seems to us that this view is hardly sound. To take a general example, it may be that an assessee has in his banking account a large sum of surplus money available. But that does not prevent the assessee from making a borrowing elsewhere for the purpose of financing a business or a partnership. It is not unusual for persons to make borrowings if they could do so at a lower rate of interest for the purpose of making new investments and not to disturb their existing investments which may be earning a higher rate of interest. The fact, therefore, that the assessee had ample resources which she could draw upon for the purpose of making this investment and that she need not have borrowed is hardly relevant to the question."
This case has been unhesitatingly followed by a Division Bench of this Court in Income-tax Reference No. 288 of 1974. Incidentally the reference was in relation to the assessment year 1968-69 of the same assessee with whom we are dealing with in this reference.
It now remains to consider the two judgments of this Court written by a Division Bench in two Income-tax Reference Nos. 288 of 1974 and 294 of 1974. Income-tax Reference No. 288 of 1974, as a reference filed by the Commissioner of Income-tax against the assessee. Incidentally the parties were the same as in the reference before us In this reference deductions of interest on borrowings of the assessees were allowed by the Tribunal and the Department filed the reference for the opinion of the Court on the following question of law:-----
"Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the amount of interest payable to the two minor shareholders "
A Division Bench answered the question in the affirmative and disposed of the reference relying on three cases mentioned in the judgment. They are as follows:--
Commissioner of Income-tax v. Fateh Ali & Co. 1984 P T D 341; Commissioner of Income-tax v. Messrs Adamjee Sons 1984 P T D 390 and Amna Bai Hajee Issa v. Commissioner of Income-tax (1964) 51 ITR Mad. 835.
Fateh Ali's case has been discussed by me in the earlier part of the judgment. Messrs Adamjee's case has also been distinguished by me in the earlier part of the judgment. I will deal with the Madras's case a little later. On reading these cases the learned Judges of the Division Bench came to the following conclusion:--
"It may be observed that section 10(2)(iii) does not specify any condition as to the entitlement of deductions of interest from the profit and loss account and, therefore, the learned Income-tax Tribunal was justified in granting the deductions for interest paid to the minor shareholders as the factum of borrowing as the amount of borrowing was not disputed by the Department."
It is this finding of the learned Judges which is the focal point of the case and has been relied upon by the learned counsel for the appellant in this case. The learned counsel for the appellant insists that on the basis of these observations no room is left for any other opinion and the reference should be answered accordingly. It is to be borne in mind that no two cases are similar. Each case has to be decided on its own merits. Without meaning to under-estimate the value of the precedent it cannot be denied that law is best explained in a given situation and unless the facts of two cases are identical the enunciation of law in one set of facts can hardly be a compelling reason to be adopted in another case. The facts of the case before that Division Bench are not given and it cannot be said whether the point now being argued before us also fell for determination in that case and the approach was brought about after examining this point. So far as the legal proposition is concerned, there can be no cavil that "section 10(2)(iii) does not specify any condition as to the entitlement of deduction of interest from the' Profit and Loss Account." No doubt the assessee is free to resort to borrowing if the exigencies of his business require. He is also free to invest his own capital as well as the borrowed capital to any use profitable or unprofitable. Further, if he takes up a business adventure, which may prove to be hazardous depriving him of everything there is no body to question his discretion. One may go to the extreme limit of saying that even if funds have been committed and are stuck up in not very attractive adventures and the assessee generally feels the necessity to replenish the pool and raise capital for investment the Income-taxi Officer has no authority to question the discretion of the assessee,' because these considerations are the sole consideration of the assessee and the law has allowed him to fully and completely enjoy the right of manoeuvrability of his funds. Yet there is one consideration to oversee the unrestricted exercise of right by the assessee and that is this that the assessee should not abuse or misuse the concession allowed to him by this section. It must be appreciated that this section allows what has been described as "exemption" in the Act. In other words this otherwise taxable income is granted an exemption from the general rule of taxability of the income. To this extent it is the duty of the Taxing Authority to see whether the exemption claimed by an assessee falls under the rule or 'exceptions' to the general rule. Only in latter cases the benefit of section 10(2)(iii) would be extended and not in others.
In the present case on the morning of 1st of October, 1970 when the business year of the assessee started, we have to see what were the assets and liabilities of this assessee and whether on that point of time it was or it could be a business necessity to resort to borrowing. Whether the motive of borrowing was to generate funds to feed the business or generate amount of interest to feed the shareholders I may repeat that I am not conceding to the Taxation Authority the right to judge the wisdom of the assessee in evaluating the business necessity to borrow the funds but merely the phenomenal necessity of borrowing from the Directors on the opening day of their business year or even thereafter during the course of the year. The balance-sheet on the opening day of the year shows that the position of cash and bank balance of the assessee was as follows:--
| "In hand: | Rs. 2,708.38 |
| On Current Account: | Rs. 64,422.43 |
| On Fixed Deposit Account. | Rs. 8,50,000" |
Looking to this balance-sheet showing fixed deposits available to the assessee to the tune of Rs.8,50,000 the burden immediately shifts to the assessee to satisfy the Taxation Authority that this huge amount of fixed deposits which though readily available to him still left the necessity of borrowing Rs.3 lacs from the Directors of the assessee. The plain answer to this question is that the assessee having failed to satisfy the Taxation Authority that in this situation the borrowing was for business purposes, the Taxation Authority on appreciation of facts of the case was competent to hold that this was not a loan for business purposes, and consequently interest paid on this amount was not to be deducted. Question arises whether we in this reference can question the judgment of the Taxation Authority that this finding or conclusion was not proper In my humble view this was a pure question of fact whether or not the burden had been discharged to the satisfaction of the Taxation Authority.
The learned counsel for the appellant contended that the loan was obtained in 1959 and has been shown in the books since then. That it was not a fresh loan. In my opinion this would not change the position because we have to judge the commitment each year and the position of the tax is to be seen yearly. The admitted position is that neither the loan was for a specified period which could continue till the end of that period. Nor indeed the Fixed Deposits shown in the balance-sheet was fixed commitment where this amount was stuck up. Therefore, this argument does not hold any weight.
The next argument was that because the Income-tax Authorities have been allowing this exemption during the last several years, the Income-tax Authority should have followed that precedent. This argument is also not impressive because each officer has to perform his duties according to the situation before him. If an erroneous view of law has been taken or there is an erroneous judgment, this can be no justification to repeat the same mistake. We have to see the merits of the case for the year under assessment. To follow the decisions of the previous years would, to say the least, amount to adjudication without applying his mind to the case before him.
I may repeat once again that a previous decision or a precedent, unless it is the law declared by a superior Court of competent jurisdiction, may have a pursuasive value, is not binding. Even a decision of a Court cannot be blindly followed until it is proved that it interprets the law in identical situation and the points now requiring adjudication were raised, examined and disposed of.
In the present case all that is shown is that parties were same and the amount borrowed in 1959 by the present assessee was utilised for business purposes. As such the interest paid was allowed as permissible deduction for the taxable income. There is no finding and no discussion on the important point involved in the present reference that a huge amount of cash lying idle or say put in bank against F.D.R. all the time within reach of the assessee, should be completely blanketted from the vision, and the vacuum thus created should lie allowed to be filled by the borrowed amount.
In the years under review the Tribunal has examined this aspect of the case and has formed an opinion that on facts before him, it could not be a borrowing for purposes of business or a loan which was business necessity which could qualify for exemption within the meaning of section 10(2)(iii) of the Income-tax Act. The judgment in Reference No. 288 of 1974 is, therefore, not germane to the decision of the case on hand. The other judgment of the same Division Bench in Reference No. 294 of 1974 is even less helpful because it has simply answered the reference by following judgment in Reference No. 288 of 1974.
So far as the Madras case is concerned, it is to be noted with utmost respect that the opinion expressed and relied by the learned counsel for the' applicant here would be difficult to adopt as proposition of law, particularly the following lines in the judgment:--
"The Appellate Tribunal apparently relied upon the circumstance that the assessee, according to the above account, had certain sums belonging to her which she could very well have utilised towards furnishing the capital to Thayub, Madurai, and that, therefore, she need not have made any borrowing."
This judgment has received adverse comments from the Editor of the Journal in which it is printed. Not only this, the lines following the above passage are indicative of the situations visualised by their Lordships to justify deductions in that case. But these situations materially differ from the situation of the present case and surely this case cannot be a dependable basis for decision of the present case. Their Lordships have visualised the situation when in spite of reserve funds, borrowings could be made. I quote; "To take a general example, it may be that an assessee has in his banking account a large sum of surplus money available. But that does not prevent the assessee from making a borrowing elsewhere for the purpose of financing a business or a partnership. It is not unusual for persons to make borrowings if they could do so at a lower rate of interest or the purpose of making new investments and not to disturb their exist in investments which may be earning a higher rate of interest." With utmost respect or the learned Judges it may be said that once it is conceded that the bank deposit is earning a higher interest this by itself is such a factor, which would change the whole complexion and completely change the approach. In the first place this by itself may be a business proposition and a mode of investment chosen by the assessee. Moreover, there is a sound rationale behind the urge for borrowing additional funds because the reserves or savings are already invested in productive investments.
In the present case the situation is totally different. The huge amounts of cash are kept aside and interest bearing loans are obtained at 9% interest. The wisdom of putting them in F.D.Rs. earning 4% interest has not been explained by the assessee to the Taxation Authority and they have taken a view that borrowing was not a business necessity and for lack of identity utilisations could not be said to be employment of the funds in the business.
This should not be confused to be interference with assessee's right to invest his funds in any manner he chooses. Even with his right to create fresh capital or supplement the existing capital for further investment in his business by borrowing.
All the case law cited at the bar relates to aforesaid situations. In the case on hand choice of utilisation of funds is not involved, nor the option to resort to borrowing. Here the very object and motive for borrowing is held to be, to use the language of their Lordships of Allahabad High Court in a similar situation a "borrowing illusory and colourable and not genuine or bona fide".
There is another angle from which the claim of the assessee can be examined. The exemption claimed is in respect of a cash amount to the extent of Rs. 3 lacs for each year. Question arises which sum in cash was employed for the F.D.R. and which was put in circulation for business purposes. All that we know is that amount of loan borrowed as early as 1959 remained in circulation for a period of time and then was invested in F.D. Rs. Can it be asserted with certainty that the loan amount remained in circulation for business purposes and the surplus which has remained fluctuating between Rs. 4 lacs and 8 lacs during the years under review was utilised for investment in F.D.Rs.
If the loan amount has been put in F.D Rs and the surplus funds have been utilised for purposes of business then clearly the assessee is not entitled to the deductions under section 10(2)(iii) because he has used his own funds and not the borrowed funds for the purposes of business. On this view of the matter also the assessee's claim must fail on account of lack of identity of the funds for which exemption is claimed.
In my humble opinion the answer to the reference should be in the negative.
-I have had the honour of reading the judgment of my learned brother Mr. Justice Ibadat Yar Khan answering the question reproduced above in the negative. The learned Judge inter alia, referred to the case of Commissioner of Income-tax (Central Zone) Karachi v. Messrs Pakistan Industrial and Engineering Agencies Limited Karachi I.T.R. No. 288 of 1974 for the assessment year 1968-69 in which the same question as raised in the present case came up for consideration and was answered by the learned Division Bench who heard that case, in the affirmative.
My learned brother Ibadat Yar Khan, J. in his judgment in the present case, with reference to the judgment given in the earlier case I.T.R. No. 288 of 1974 rightly observed that the facts of the case before that Division Bench are not given. The learned Judge further observed that it could not be said whether the point argued before this Bench also fell for determination in the case and the approach was brought about after examining this point. The learned Judge after extensive examination of case-law took a view different from that given in the judgment by the learned Division Bench of this Court in the earlier case I.T.R. No. 288 of 1974.
2. The facts of the earlier case I.T.R. No. 288 of 1974 briefly stated as could be gathered from the record of the said case as well as the present cases may briefly be stated as follows: -
(i) The assessee is a private company registered under the Companies Act, 1913. Right from assessment year 1959-60 (each accounting year ending on 30th day of September) on the capital amount Rs. 3 lacs borrowed from its two minor shareholders for purposes of business interest paid at 9% per annum has continuously been allowed as business expenditure within the meaning of section 10(2)(iii) of the Income-tax Act, 1922 and interest received by the assessee on fixed deposits at 4% per annum was treated as business income..
However, for the said assessment year 19688,69, ending 30-9-1967 the Income-tax Officer disallowed payment of interest by order passed on 6-12-1971 the relevant finding is reproduced below:-
"Interest Rs.27,000Long time ago, the company borrowed Rs.3,00,000 from two minor shareholders to meet business exigencies, The money was never returned to them, it has remained with the company and interest is being paid on it @ 9% per annum. During the year under assessment the assessee had huge surplus cash, which remained deposited in the bank in fixed deposits, yet the money borrowed was never returned to the creditors, although the F.D. Rs. Fetched only 4 % under assessee paid 9% to the creditors. Asked to explain the reasons of this payment of interest on the unneeded money borrowed, the learned counsel, in his reply, dated 22-11-1971 only relied on the past history of the case. The argument is of no avail, as wrong allowance in the past is no justification for an inadmissible claim. The interest has been paid for considerations other than business. No prudent businessman would borrow capital at an interest rate of 9% only to invest in Bank Fixed Deposits yielding only 4 %. Disallowed .27,000."
Relevant it would be to point out here that the Income-tax officer for the assessment year 1908-69 had disallowed payment of interest on the borrowed capital inter alia for the reason that the assessee had Rs.12 lacs surplus cash which it kept invested in the bank in fixed deposit fetching interest at 4% p.a. only instead of utilising it in returning the capital borrowed (Rs. 3 lacs) on which interest was paid at 9% p.a. According to the Income-tax Officer no prudent businessman would do that.
(ii) The assessee aggrieved by the order passed by the Income-tax Officer as above disallowing interest paid to the creditors for the reasons reproduced above filed an appeal (I.T.4 No. 7018 of 1971-72) before the Income-tax Appellate Tribunal which by its order passed on 30th April, 1973 allowed the same and thus vacated the order of the Income-tax Officer inter alia on the ground that the disallowance of interest was contrary to the past history of the assessee, that the Income-tax officer is no Judge of the reasonableness of the interest and that he was little justified to hold inferentially that the debt was not for the business purposes. It was further held:---
"Merely because the rate of interest paid by the assessee in the opinion of the Income-tax Officer was higher was not conclusive to hold that it was not for the business purposes. In the circumstances we are persuaded to hold that the debt in the question was purely for business purposes and the department had themselves allowed the same in the last ten years. Consequently the appeal is accepted and the order o the Income-tax Officer is vacated."
(The underlines have been made by me).
(iii) Application under section 66(1) of the Act was then made by the Commissioner of Income-tax (Central Zone, Karachi) in the High Court and was registered as Income-tax Case No. 288 of 1974. In the said case the following question of law arising out of the order of the learned Tribunal came up for consideration:-
"Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the amount of interest payable to the two amount shareholders."
The said case was heard by a learned Division Bench of this Court consisting of Mr. Justice Ajmal Mian (as he then was) and Mr. Justice Tanzilur Rehman. After referring to the cases of Amna Bai Hajee Essa v. Commissioner of Income-tax, Madras (1964) 51 f T R 835, Commissioner of Income-tax v. Fateh Ali Co. 1984 P T D 341 and Commissioner of Income-tax (West) Karach v. Adamji Sons, Karachi 1984 P T D 390 in the opinion of the Court delivered by Ajmal Mian, J. it was held:---
"It may be observed that section 10(2)(111) does not specify any condition as to the entitlement of deduction of interest from the profit and loss account, and, therefore, the learned Income-tax Tribunal was justified in granting the deduction for interest paid to the minor shareholders as the factum of borrowing of the amount was not disputed by the department. In this view of the matter our answer to the above question is in the affirmative, but there will be no order as to costs."
3. (i) For the subsequent assessment years 1969-70, 1970-71, 1971-72 the assessee claimed the payments made as interest to the same creditors, at the same rate 9% p.a. on the same capital borrowed for the purposes of business which amount had remained outstanding.
The Income-tax Officer however, rejected the claims for the same reasons recorded in the order passed for the assessment year 1968-69. Reasons recorded for disallowing the claim in the order passed for assessment year 1969-70 (which were relied in orders while making assessments for 1970-71 and 1971-72) are reproduced below:
Facts regarding disallowance of interest on money borrowed by the assessee-Company have been discussed at length in the assessment order for 1968-69. During the year under consideration also the assessee has paid interest to Mr. R.D. Mahtani and C.H. Mahtani @ Rs.13,000 each. The assessee had surplus cash which remained deposited in the Bank in the fixed deposit yet the money borrowed was never returned to the creditors although the F.D. rupees fetched only 4 % interest whereas the assessee has paid 9% interest on the money borrowed. Some explanation as in the last year, has been repeated by the counsel of the assessee, keeping the past history in view interest paid at Rs.27,000 will be disallowed like last year 27,000."
(ii) Appeals were preferred by the assessee against the above orders but the learned Appellate Tribunal dismissed the same by order passed on 12-12-1976 with the following observations:----
"The Income-tax Officer could not believe that this could be a business loan also on the ground that no prudent businessman would keep a loan and pay interest at 9% when he was receiving back from the bank for fixed deposit interest only at the rate of 4 %. It was not the rate of interest which was the subject told in spite but the very loan itself or the advisibility of having the loan when it could be repaid as the creditors were shareholders. It was difficult to imagine why the loans were not being repaid. In the assessment year 1968-69 a similar disallowance had been made but the Tribunal in Income-tax Appeal No. 7018 of 1971-72 had deleted the disallowance on the ground that the income-tax officer was no Judge of the reasonableness of the interest nor was he justified in holding that the debit was not for business purposes merely because rate of interest paid by the assessee in the opinion of the Income-tax Officer was higher. We have given our thoughtful consideration to the Tribunal's order and found that the disallowance was defected on the ground that the Income-tax Officer was no person to judge the reasonableness of the rate of interest and without basis to regard the loan as a loan not for business purposes. We, however felt that if the business can be carried on even after depositing Rs.8,65,000 in 1971-72 and Rs.4,15,000 in the years 1969-70 was needed by business for the purposes of business. In such circumstances we are constrained to hold that the loan did not remain loan for purposes of business for the years under review and hence uphold the disallowance of the interest paid to the shareholders."
5. A perusal of the 'Statement of Facts' submitted by the Commissioner of Income-tax in Income-tax Case No. 288 of 1974 and the judgment of learned Division Bench in that case in my humble opinion that the facts involved in the present cases as well as the earlier case (Income-tax Case No. 288 of 1974) are identical. The reasonableness of the interest -paid and the fact that the amount was borrowed for the purposes of business stood settled not only by the learned Income-tax Appellate Tribunal by its order given in Income-tax Appeal No.7018 of 1971-72 but also by the learned Division Bench of this Court by judgment delivered on 5-11-1984. The Income-tax Officer as well as the Tribunal after the question had been answered in Income-tax Case No. 288 of 1974 could not have taken a different view particularly when the facts continued to remain the same/identical. If the departmental authorities were not satisfied the only course open to them was either to have preferred an appeal before the Honourable Supreme Court against judgment given in Income-tax Case 288 of 1974 or by referring the question to this Court by filing appropriate application in accordance with the law.
6. To me it appears that without any material on record and against the past history of the loans borrowed by the assessee-Company for its business on which interest was paid at the same rate to the same creditors in spite of available cash surplus invested in Fixed Deposit account, the tribunal could not have acted suo motu without any material and justification in disallowing claim under section 10(2)(iii) by inference drawn on mere surmises that the loans did not remain loans for purposes of business for the years under consideration. The findings of the Tribunal are against the statutory provisions contained in section 10(2) (iii) of the Act which provide for allowance of interest in respect of "capital borrowed for the purposes of business". The Tribunal as well as Income-tax Officer nowhere held that the amount borrowed from the two shareholders was not capital borrowed for purposes of business. The observation of the Tribunal that how it can be thought that R 3 s. lacs was needed for the purposes of business if the business be carried on even after depositing Rs.8,65,000 in 1971-72 and Rs.4,15,000 in the years 1969-70 and that in such circumstances the loan did not remain loan for purposes of business, in my opinion are not only against the past history of the case, but are also based upon mere surmises. It is not for the revenue authorities to decide for the assessees or guide them as to how the investments be made by them.
7. In the light of the above discussion keeping in view the judgment of my learned brother Mr. Justice Ibadat Yar Khan in the present case and that given by the learned Division Bench in Income-tax Case No. 288 of 1974, I am of the opinion that this case may be placed before a larger Bench to decide the question which has been raised.
IBADAT YAR KHAN, J.--This case may be placed before the Honourable Chief Justice for constituting a larger Bench, for hearing.
SAEEDUZZAMAN SIDDIQUI, J.-- The above-noted three Income-tax references have been placed before me as a result of difference of opinion between the two learned Judges of a Division Bench of this Court (K.A. Ghani and Ibadat Yar Khan, JJ) on a question referred to this Court under section 66(2) of the Income-tax Act. In these references which were filed directly by the applicant under section 66(2) of the Income-tax Act, 1922 and related to assessment years 1969-70, 1970-71 and 1971-72 the following question was referred for opinion of this Court:----
"Whether the learned Income-tax Appellate Tribunal misdirected itself in law in disallowing interest payment of Rs.27,000 "
For the assessment years under review the Income-tax Authorities disallowed the claim of applicant for deduction of interest paid by it to two minor shareholders of the company on the borrowed capital from the profits and gain of company under section 10(2)(iii) of Income-tax Act on the ground that during these years the assessee had surplus funds which remained deposited in bank in fixed deposits fetching only 41% interest yet the money borrowed was never returned to the creditors and the assessee paid 9% interest thereon. One of the learned Judges of the Division Bench (Ibadat Yar Khan, J) took the view that since the assessee had already fat capital in his balance-sheet which was readily available for being employed in any business during the assessment years under review it was hardly prudent on the part of the assessee to have allowed his own funds to remain unproductive and go about begging for funds to feed the business requirement and as such the Income-tax Authorities rightly disallowed the claim of applicant in respect of interest paid on the borrowed capital and accordingly answered the above references in the negative. The other learned member of the Division Bench (K.A. Ghani, J.) was however, of the opinion that from the statement of the facts submitted by the department in a previous Income-tax Reference No. 288 of 1974 in respect of the same assessee and the judgment of this Court in that case, the reasonableness of the interest paid and the fact that the amount was borrowed for the purposes of business, stood settled and as there was no material on record against the past history of the case the claim of the assessee applicant for deductions under section 10(2) (iii) in respect of the interest paid on the borrowed capital could not be disallowed.
I have heard Mr. Iqbal Naseem Pasha for the applicant and Mr. Shaikh Haider for the department at length. On a careful reading of section 10(2)(iii) of Act XI of 1922 and after considering the case-law cited at the Bar I am of the view that in order to entitle an assessee to claim deduction of interest paid on the borrowed capital under section 10(2)(iii) of the Act from the profits and gains he has only to show, that he had borrowed the capital during the assessment years; that, the borrowed capital was for purposes of business, profession and vocation of the assessee and that the assessee had paid the amount of interest on the borrowed capital which he is claiming as a deduction under section 10(2)(iii) of the Act. If the assessee succeeds in establishing these facts the Income-tax Authorities will allow the deduction claimed by the assessee under section 10(2)(iii) of the Act. Any further enquiry by the Income-tax Authorities in this regard to find out whether the act of borrowing by the assessee was prudent or not or there existed any necessity for the assessee to indulge in such borrowing or not or that the interest paid on the borrowed capital was reasonable or not, in my humble opinion is neither permissible nor comes within the scope of the above section. In the case before me it is an admitted position that there was no fresh borrowing by the assessee for the years under review. It is quite clear from the facts on record that the assessee had borrowed the disputed capital during the assessment year 1959-60. It is also an admitted position that until the assessment year 19.68-69 the interest paid by the assessee on the above-borrowed capital was allowed by the Department consistently under section 10(2)(iii) of the Act. However, for the first time in the assessment year 1968-69 (ending 30th September, 1967) the Income-tax Officer disallowed the interest claimed by the assessee by his order dated 6-12-1971. A reading of the order dated 6-12-1971 will show that the claim of the applicant for deduction of interest on borrowed capital under section 10(2)(iii) of the Act was disallowed by the Income-tax Officer on the ground that the capital was borrowed by assessee long ago and in spite of the fact that the company now had surplus capital which is kept deposited in F.D.R. fetching an interest only 41 % the assessee had failed to return the borrowed capital and continue to pay interest at 9% per annum. The above order of the Income-tax Officer was, however, set aside by the Income-tax Appellate Tribunal on appeal, as the learned Tribunal took the view that merely because the interest paid by the assessee was in the opinion of the income-tax Officer higher was noel conclusive to hold that the capital was not borrowed for the business purposes. The department then brought the matter in a reference before this Court which was decided by a Division Bench of this Court and it was held that as section 10(2)(iii) did not specify any condition as to the entitlement of deduction of interest, therefore, the learned Income-tax Tribunal was justified in allowing the deduction under the relevant section as the factum of borrowing of the amount was not disputed by the Department. From the above resume of the fact it is quite clear that interest on borrowed capital was allowed under section 10(2)(iii) of the Act by the Income-tax Authorities from 1959 upto the assessment year 1968-69 in favour of applicant without objection. That claim for such deduction was disallowed by Income-tax Authorities for the first time in the assessment year 1968-69 and the grounds for disallowing deduction were firstly, that the assessee had a surplus amount which it had kept in F.D.R where interest was paid only 4 % whereas the assessee was paying interest on borrowed capital at 9% to the creditors, and secondly that in spite of having a surplus the assessee had failed to return the amount of loan. None of the above reasons given by the income-tax Officer in disallowing the deduction under section 10(2)(iii) of the Act were found sufficient by the Income-tax Tribunal which allowed these deductions in favour of applicant for the year 1968-69 and the order of Income-tax Tribunal was upheld in Income-tax Case No. 288 of 1974 by this Court. The grounds on which the Income-tax Officer once again disallowed the claim of the applicant for deduction of interest paid on the borrowed capital from the income for the assessment years 1969-70, 1970-71 and 1971-72 are reproduced in the order of my learned brother K.A. Ghani, J. and for the sake of convenience I reproduce the same here. It is as follows:
Facts regarding disallowance of interest on money borrowed by the asses see-Company have been discussed at length in the assessment order for 1968-69. During the year under consideration also the assessee has paid interest to Mr. R.D. Mahtani and C.H. Mahtani @ Rs.13,000 each. The assessee had surplus cash which remained deposited in the Bank in the fixed deposit yet the money borrowed was never returned to the creditors although the F.D. rupees fetched only 4 % interest whereas the assessee has paid 9% interest on the money borrowed. Some explanation as in the last year, has been repeated by the counsel of the assessee, keeping the past history in view interest paid at Rs.27,000 will be disallowed like last year . . . 27 , 000. "
I have carefully examined the above reasons given by the' Income-tax Officer for disallowing the claim of applicant for deduction) of interest paid on borrowed capital from income for assessment years; 1969-70, 1970-71 and 1971-72 and I am unable to find anything new in, the above order which could justify the disallowance of this claim of applicant. It will be seen that once again the reasons which prevailed with the Income-tax Officer for not allowing the above claim of the applicant were that the assessee had surplus cash which remained deposited in the bank in fixed deposit yet the money borrowed was never returned to the creditors although the F.D.R. fetched only 4 % interest whereas the assessee had paid 9% interest on the money borrowed. The above reasons given by the Income-tax Officer for, disallowing the claim of the assessee for the assessment years under, review are substantially the same which were given in respect of the assessment year 1968-69 and which were not found sufficient by the Income-tax Appellate Tribunal as well as by this Court in Income-tax, Case No.288 of 1974 to uphold the order of Income-tax Officer. The above reasons given by the Income-tax Officer for disallowing the claim of deduction of applicant under section 10(2)(iii) of the Act at best, amounted to a finding that the act of borrowing by the assessee for' the assessment years 1969-70, 1970-71 and 1971-72 in view of the available surplus capital was an imprudent Act as is also found by one of the learned Judges of Division Bench (Ibadat Yar Khan, J). This observation certainly could not amount to a finding that the capital borrowed by the applicant was not for business purposes. The fact that the assessee has surplus cash which was kept invested in F.D.R. which fetched only 4 % interest while assessee paid 9% interest on the borrowed capital, and that the assessee could have returned the borrowed capital for the surplus capital which he failed to do, in my humble opinion were neither, relevant nor sufficient under section 10(2) (iii) of the Act for disallowing; the claim of applicant. As earlier pointed out it was necessary for the Income-tax Authorities to have reached a positive conclusion for, disallowing the claim of applicant for the assessment years under review under section 10(2)(iii) of the Act, that the loan obtained by the assessee was not for the purposes of business of the applicant. It is only on such a positive finding in the case by the Income-tax Authorities that the applicant could be held disentitled to these deductions under section 10(2)(iii) of the Act as the factum of borrowing and payment of interest thereon was not in dispute. It is contended by the learned counsel for the Department that whether the capital was borrowed or not by the applicant during the assessment years for the purpose of business is a pure question of fact and a finding of fact in this regard recorded by the Income-tax Officer and the Appellate Tribunal is binding on this Court in these references. There can be no cavil with the, above proposition advocated by the learned counsel as in these references as framed the findings of facts are not challenged. However, whether' the findings recorded by the Income-tax Authorities amounted to holding' that the borrowed capital of the assessee was not for business purpose, can certainly be examined in these references within the scope of question framed and referred to this Court. I have already reproduced above; the order of the Income-tax Officer disallowing the claim of the assessee under section 10(2)(iii) of the Act for the assessment years under review and I am in no doubt after reading the same that the reasons given therein could not amount to a finding that the borrowed capital was not business purposes. I will not examine the order of Income-tax Appellate Tribunal in this regard to find out if the Tribunal recorded any positive finding in this behalf. The reasoning given by the Income-tax Appellate Tribunal in disallowing the appeals of the assessee for the assessment years under review is as follows:---
"The loan was taken by this private limited Company from two of its shareholders some time in 1959-60. Each of the shareholders loaned out Rs.1,50,000. The appellant has been paying this interested year after year although there was no need to have the loan in these three years. Income-tax Officer found that the assessee had fixed deposits exceeding the loans in each of the years concerned. In 1969-70 and 1970-71 fixed deposit amounted to Rs.4,15,000 and in 1971-72 there was a surplus of each of Rs.8,65,000. The Income-tax Officer could not believe that this could be a business loan also on the ground that no prudent businessman would keep a loan and pay interest at 9% when he was receiving back from the bank for fixed deposit interest only at the rate of 4 %. It was not the rate of interest which was the subject of dispute but the very loan itself or the advisability of having the loan when it could be repaid as the creditors were shareholders. It was difficult to imagine why the loans were not being repaid."
A careful reading of the above reasoning by the Income-tax Tribunal will show that it was of the opinion that the assessee have been paying interest on the borrowed capital year after year in spite of the fact that there was no need to have the loan in these years; that the assessee had surplus deposit exceeding the amount of loan on which they were getting return of 4 % whereas they were paying interest on the borrowed capital at the rate of 9% and that it was not the rate of interest which is subject of dispute but the very loan itself or the advisibility of having the loan. The above reasons given by the Appellate Tribunal deals more with the advisability and desirability of the loan taken by the assessee than holding that the loan was not taken for purposes of the business of applicant. I am satisfied after reading the order of the Tribunal that the claim of the assessee was not disallowed on the ground that the loan was not utilized for .the business purposes but on the ground that it was no more advisable for the company to keep a loan on which the company was paying interest at the rate of h 9% while on its own surplus kept in the F.D.R. the company was receiving only 4 % interest. These considerations as pointed out earlier were not relevant for disallowing a claim for deduction under section 10(2)(iii) of the Act. It may be mentioned here that mere fact that a company had surplus capital which it invested in some security which is less profitable than the interest paid by it on the borrowed capital is a not a sufficient circumstance to hold that borrowed capital was not needed for business purposes. There is no finding either by the Income-tax Officer or by the Income-tax Appellate Tribunal that the money which was initially borrowed by the company in the year 1959 for business purposes was not applied for business purposes for the assessment years under review. In the case of Commissioner of Income-tax Bombay City v. Bombay Samachar Limited (1969) 74 I T R 723 it is held that the conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of the interest on borrowed capital under section 10(2)(iii) are; firstly that money must have been borrowed by the assessee; secondly, it must have been borrowed for business purposes and thirdly the assessee must have paid interest on the said amount and claimed as a deduction. It is further held that it is not the requirement of the law that the assessee must further show that the borrowing of the capital was necessary for business purposes so that if at the time of borrowing the assessee had sufficient amount of its own, the claim for deduction could not be allowed under section 10(2)(iii) of the Act. The assessee in the above-cited case had advanced loan to another company on which it was not charging any interest whereas it was paying interest to its own creditor on the borrowed money. The claim for deduction of the interest paid by the assessee to its creditor was disallowed for some years by the Income-tax Tribunal on the ground that since the assessee had advanced its own fund to other person on which it was claiming no interest it was not entitled to the claim of the deduction of the interest on the money borrowed by it from its creditors. The order of Income-tax Officer was confirmed by the Appellate Assistant Commissioner in appeal who took the view that to the extent of the capital which the company had advanced to the other company the borrowed capital must be taken to have been diverted and interest paid on that amount borrowed by the assessee could not, therefore, be allowed under section 10(2)(iii). On a further appeal before the Tribunal, the Tribunal allowed the interest claimed by the assessee on the entire amount and on a reference before the High Court of Bombay the order of Income-tax Tribunal was upheld. The following observations of the High Court of Bombay in the above case may be reproduced here with advantage:----
"As we have already pointed out, it is undisputed that the amounts borrowed from outsider on which interest has been paid have been used for the purpose of the business of the assessee. It appears to have been the view of the income-tax Officer that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce it indebtedness and thus save a part of the interest which it had to pay on its own borrowings. The assessee, therefore, was not justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it. To the extent, therefore, to which it would have been in a position to collect interest on the outstandings due to it from others, it could not be permitted to claim interest paid by it to outsiders. In our opinion the view taken by the Income-tax Officer is clearly unsustainable. As has been pointed out by the Madhya Pradesh High Court in Ram Kishan Oil Mills v. Commissioner of Income-tax the only conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of the interest under section 10(2)(iii) are firstly, that money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed. Similarly, the Madras High Court in Amna Bai Hajee Issa v. Commissioner of Income-tax has held that in deciding whether a claim for interest on borrowing can be allowed the fact that the assessee had ample resources at its disposal and need not have borrowed, is not relevant matter for consideration. The matter to be decided is whether the amount of interest was paid in fact in respect of the capital borrowed for business."
Similarly in the case of Calaco Dyeing and Printing Works v. Commissioner of Income-tax (1958) 34 I T R 265 claim of the assessee was disallowed by the Department on the ground that the plant and machinery were not used for business purposes in the accounting year under consideration. While laying down the requirements which are to be established by an assessee to entitle him to claim deduction of interest under section 10(2)(iii) of the Act the learned Judges in the above case observed as follows at page 270 of the report:
Before we look at the authorities, it would perhaps be best to turn to the section itself, and the deduction which is permissible under section 10(2)(iii) is "in respect of capital borrowed fort the purposes of the business, profession or vocation, the amount of the interest paid". Now it will be noticed that the subsection makes no distinction between capital borrowed in order to acquire revenue asset and capital borrowed to acquire a capital asset. All that the section requires is that the assessee must borrow the capital the purpose of the borrowing must be for the business, which is carried on by the assessee the year of account. The capital must be borne for the purpose of no other business except the business, which is being assessed. Now, when we look at the other sub-clauses of section 10(2), it is clear that the underlying idea in these sub-clauses is that the particular deduction claimed must be in relation to the business which is referred to in subsection (1) of section 10, that is, the business in respect of which tax is payable by an assessee.
In the same case while repelling the contention of the Department in this behalf the learned Judge further observed at page 272 of the report as follows:
"Therefore, in order to determine whether capital has been used for the purpose of the business, it is not open to the Taxing Department to reject the claim of the assessee in respect of interest paid on that capital merely because the use of the capital is unremunerated. That really, in short, is the contention of Department. The Department says that the assessee has borrowed capital, it has used capital in putting up plant and machinery, plant and machinery is not working, and, therefore, no profit is received from the plant and machinery."
In yet another case reported as Rajkashan Oil Mills v. Commissioner of Income-tax U.P. (1965) 56 I T R 186 the learned Judges of the High Court of Madhya Pradesh held that the requirement of section 10(2)(iii) of the Income-tax Act is only to the extent, firstly, that the money must have been borrowed by the assessee; secondly, it must have been borrowed for purposes of business or vocation of the assessee and thirdly, the assessee should have paid this amount before claiming deduction under the aforesaid section. It is further observed in this case that the above section does not provide that for the purposes of business the borrowing of capital should have been necessary so that if at the time of the borrowing the assessee had sufficient money of his own to invest in the business then the deduction cannot be allowed. In a recently decided case by our Supreme Court reported as Commissioner of Income-tax Lahore Zone v. Shaikh Muhammad Ismail & Co. 1986 S C M R 968 the claim of the assessee for deduction of interest paid to the bank on the overdraft was disallowed by the Income-tax Authorities on the ground that the loans taken by the company were directed to the Managing Director who utilized the money on his personal account and it was held that such interest could not be claimed as interest on capital borrowed for purposes of business of the company. The order of Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner but on a further appeal the Tribunal deleted the addition and allowed total interest claimed by the company by way of deduction. The matter was then brought to the High Court by the Department and it was held by the High Court that the Tribunal rightly deleted the addition made by the Income-tax Officer. Thereafter, the matter was finally brought before the Supreme Court but the appeal was dismissed and it was held as follows:----
"It seems that according to the above provision an assessee is free to carry on a business with his own capital or from money borrowed from any bank or other financial institution and it is only in case where the assessee chooses to run his business with borrowed capital that he would be entitled to deduction in respect of amount paid for and on account of interest. Thus, the only eventuality which might disentitle an assessee to claim deduction of the whole or any part of interest is where the amount is not shown to have been used as capital in the business carried on by the assessee. In this case, the entire account including the cash books and the bank accounts were before the Income-tax Officer who completed the assessment under subsection (3) of section 23 but he failed to show that any part of the borrowed money was not used in business and was diverted to the personal use of Mian Aziz A. Sheikh. Indeed, a finding of fact has been recorded by the Tribunal that the whole of the capital which was borrowed was used for the purposes of the company. It appears that no provision exists in the Income-tax Act, 1922 to prevent a company from advancing money to a Director or shareholder which could operate as a bar to the making of advances by companies to their Directors. In order to overcome this lacuna a provision has been made in the new Income-tax Ordinance, 1979, namely, clause (7) of section 12 which provide".
In view of above discussion I am quite clear in my mind that in the above cases in the absence of a finding by the Income-tax Authorities to the effect that the borrowed capital by the assessee was not utilized for the business purposes, the claim of the assessee for deduction of the interest paid on the borrowed capital could not be disallowed under section 10(2)(iii) of the Act. I accordingly agree with the conclusion of my leaned brother K.A. Ghpni, J. and answer the question referred to the Court in the above references in the affirmative. There will be no order as to costs.
M.B.A./5169/R Reference answered in the affirmative.
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