PTD 1989, Page 1221 (Trib

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[(1986) 53 Tax 122 (S.C. Pak)]

1986 SCMR 968 = 1885 SCC 637COMMISSIONER OF INCOME TAX LAHORE ZONE LAHORE

Versus

SH. MUHAMMAD ISMAIL AND CO., LIMITED, LYALLPUR Present: Aslam Riaz Hussain, Mohammad Afzal Zullah and Dr. Nasim Hassan Shah, JJ.

Civil Appeals Nos. 148, 149 and 150 of 1972,

decided on 5-9-1985

[On appeal from the judgment dated 5-10-1971 of the Lahore High Court, Lahore in Civil Reference Nos. 77, 78 & 79 of 1971]

A.Income Tax Act, 1922 (XI of 1922) Section 10(2)(iii) Business expenditure Borrowed capital Assessee company made advances to its Managing Director free of interests Interests paid to banks on overdrafts I.T.O. disallowed the interests paid by the company to the banks and made additions Tribunal deleted the additions High Court upheld the Tribunals order Whether High Courts order exceptionable Held yes.

Briefly stated the facts relevant to these appeals are that the respondent is a private joint stock company limited by share liability incorporated under the provisions of the Companies Act, 1913 (hereinafter referred to as the assessee) and is engaged in the business of ginning cotton. The dispute relates to the assessment years 1966-67, 1967-68, 1968-69. During these assessment years the assessee had paid substantial interest to various banks from which overdrafts had been secured. At the same time the 1986]

C.I.T. v. SH. MUHAMMAD ISMAIL & CO.

123Managing Director of the assessee company, Mian Aziz A. Sheikh, had borrowed substantial amounts free of interest from the company. The Income Tax Officer held that as the loans taken by the company were diverted to the Managing Director who utilized the money on his personal account, the entire interest paid by the company could not be treated as interest on capital borrowed for purposes of the business of the company. The Income Tax Officer consequently disallowed the sums of Rs.43,559/-, Rs.99,935/- and Rs.84,691/- in the three years respectively. This action was confirmed by the Appellate Assistant Commissioner. But on further appeal filed before the Income Tax Appellate Tribunal, the Tribunal deleted the additions in toto. [Page 124]A

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 book and the bank accounts were before the Income Tax Officer who completed the assessment under sub-section (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. [Page 126]B.

We note that the question being raised before us was not the question that was referred to the High Court by the Commissioner of Income Tax because therein the finding of fact recorded by the Tribunal had not been challenged. Since the High Court cannot disturb or go behind any finding of fact given by the Tribunal even on the ground that there is no evidence to support it, unless it has been first expressly challenged by and question raised in the reference application under Section 66 to the Tribunal; the High Court was bound by the finding of fact recorded by the Tribunal as being without any evidence, against records or perverse and for that reason the finding recorded by the Tribunal attained finality in terms of sub-section (6) of section 33 of the Income Tax Act, 1922. [Page 127] C.

B.Income Tax Act, 1922 (XI of 1922) Section 66(A) Reference to High Court Jurisdiction Nature of Whether jurisdiction of the High Court is advisory in nature Held yes.

We may also add that the function of High Court is cases referred to it under Sec. 66 is advisory only and is confined to considering and 124

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[Vol. 53answering the actual question referred to it; see Raja Bahadur Sir Rejendra Naryan Bhanj Deo v. Commissioner of Income Tax (A.I.R. 1940 P.C. 158). The High Court was, therefore, justified in dismissing the references on the ground that the matter was concluded by a finding of fact and not going beyond it and taking up any other question. [Page 127] D. Cases referred to : -

Raja Bahadur Sir Narayan Ghanj Deo v. C.I.T. (A.I.R. 1940 P.C. 158)

Muhammad Ilyas Khan, Advocate Supreme Court and Iftikhar Ahmed, Advocate-on-Record, for the appellant.

Mohammad Amin Butt, Advocate Supreme Court and S. Wajid Hussain, Advocate-on-Record for the Respondent.

Date of hearing : 2-7-1985

JUDGMENT

[The judgment of the court was delivered by Nasim Hasan Shah. J.] This judgment will dispose of Civil Appeals nos.148, 149 and 150 of 1972, as a common question of law arises in all these matters.

Briefly stated the facts relevant to these appeals are that the respondent is a private joint stock company limited by share liability incorporated under the provisions of Companies Act, 1913 (hereinafter referred to as the assessee) and is engaged in the business of ginning cotton. The dispute relates to the assessment years 1966-67, 1967-68, 1968-69. During these assessment years the assessee had paid substantial interest to various banks form which overdrafts had been secured. At the same time the Managing Director of the assessee company, Mian Aziz a. Sheikh, had borrowed substantial amounts free of interest from the company. The Income Tax Officer held that as the loans taken by the company were diverted to the Managing Director who utilized the money on his personal account, the entire interest paid by the company could not be treated as interest on capital borrowed for purposes of the business of the company. The Income Tax Officer consequently disallowed the sums of Rs.43,559/-, Rs.99,935/- and Rs.84,691/- in the three years respectively. This action was confirmed by the Appellate Assistant Commissioner. But no further appeal filed before the Income Tax Appellate Tribunal, the Tribunal deleted the additions in toto. In doing so it observed: --

We are, however, of the opinion that the funds available were greater than the borrowings of the Managing Director and there is apparently no bar on a business concern to advance its own funds or utilize them in the particular manner. It is at the same time patent that out of non-interest bearing finances certain advances were made to the Managing Director and as and when further capital was needed to run the appellants business the same was recouped by obtaining loans from various banks. This may be an arranged affair but there can be no possible restriction on a business concern to arrange its affairs in a particular manner as to suit revenue. There is no evidence on record to show that the 1986]

C.I.T. v. SH. MUHAMMAD ISMAIL & CO.

125advances made to Mian Aziz A. Sheikh were out of the borrowings that were obtained from the various banks. In absence of such evidence the normal presumption is that the available funds were utilized according to the circumstances of the appellant and when the business required further funds, the same were obtained through borrowings. In absence of any evidence, therefore, that the borrowed capital was utilized elsewhere the actions of the officers below in curtailing the interest payable thereon cannot be upheld. We would direct that the interest payments disallowed should be deleted from the taxable income of the appellant.

The Commissioner of Income Tax filed three separate Reference Applications under sub-section (1) of Section 66 of the Income Tax Act, 1922 raising the following question of law to challenge he decision of the Tribunal: --

Whether on the facts and circumstances of the case the Tribunal was right in deleting the addition of Rs.43,559/- (for assessment year 1966-67); Rs.99,935/- (for assessment year 1967-68) and Rs.84,691/- (for assessment year 1968-69) on account of bank interest under section 10(2)(iii) of the Income Tax Act?

The High Court while considering the question referred to it and taking note of the Tribunals judgment dated 5-7-1971 observed that the Tribunal had recorded a clear finding that there was no evidence on record to show that the advances made to Mian Aziz A. Sheikh were made out of the borrowing that were obtained from various banks and went on to observe that in absence of such evidence the normal presumption is that the available funds were utilized according to the circumstances of the appellant and when the business required further funds, the same were obtained through borrowings. The learned Judges held that this was eminently a question of fact and there could be no doubt that it was for the petitioner to have obtained evidence to support the order of assessment. Referring to the argument that the evidence was in possession of the assessee and it was for him to have produced it, the learned Judges observed:

We are afraid we cannot see eye to eye with the learned counsel for the petitioner on this point, because it was the Income Tax Officer who was making the assessment and he could not make it arbitrarily. He had to base it on evidence before him and if he did not agree with the deduction sought by the company, it was for him to have summoned the necessary record and placed the material on the record to justify the making of the impugned order.

In the result, the High Court held that the Tribunal had rightly deleted the additions made by the Income Tax Officer and dismissed the reference in limine.

The Department, therefore, sought leave to appeal from this Court and it was contended that Section 10(2) of Income Tax Act contemplates that the need for borrowed capital should have arisen because the funds available out of the Companys own finances were insufficient. It could never be intention of the law to provide facilities for Directors of a 124

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[Vol. 53Company to serve their personal ends by utilizing the funds of the Company without paying interests and to burden the Company with interest instead. Leave was granted to consider the question of law.

The provision of law which is relevant for our present purpose is (iii) of subsection (2) of Sec.10 of Income Tax Act 1922 which read as under: -

(2)Subject to the provision of this Act such profits or gains shall be computed after making the following allowances, namely;

(iii)in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid.

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 the 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 sub-section (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 provides;

12(7) Where an assessee has made any loan or advance to any person on which no interest has been charged or the rate at which interest has been charged is less than the rate (hereinafter referred to as the 'said rate') arrived at by adding two per cent to the bank rate notified by the State Bank of Pakistan as applicable on the date on which the loan or advance was made, the amount not charged or the amount equal to the interest computed at the said rate as reduced by the interest actually charged shall be deemed to be the income of the assessee and shall be included in his total income: -

Provided that nothing contained in this sub-section shall apply to-

(a) any loan or advance made by an assessee to an employee in accordance with the terms and conditions of his employment and for such purpose or purposes; or

(b) such assessee or persons or class or classes of assessees or persons, as may be specified in this behalf by the Central Board of Revenue by notification in the official Gazette.

1986]

C.I.T. v. SH. MUHAMMAD ISMAIL & CO.

127

We note that the question being raised before us was not the question that was referred to the High Court by the Commissioner of Income Tax because therein the finding of fact recorded by the Tribunal had not been challenged. Since the High Court cannot disturb or go behind any finding of fact given by the Tribunal even on the ground that there is no evidence to support it, unless it has been first expressly challenged by and question raised in the reference application under Section 66 to the Tribunal; the High Court was bound by the finding of fact recorded by the Tribunal as being without any evidence, against records or perverse and for that reason the finding recorded by the Tribunal attained finality in terms of sub-section (6) of section 33 of the Income Tax Act, 1922.

We may also add that the function of the High Court in cases referred to it under Section 66 is advisory only and is confined to considering and answering the actual question referred to it; see Raja Bahadur Sir Rajendra Naryan Bhanj Deo v. Commissioner of Income Tax (A.I.R. 1940 P.C. 158). The High Court was, therefore, justified in dismissing the reference on the ground that the matter was concluded by a finding of fact and not going beyond it and taking up any other question.

The judgment of the High Court is unexceptionable and these appeals accordingly must fail. They shall, therefore, stand dismissed. The parties, however, will be left to bear their own costs.

Appeals dismissed- - - - - - - - - - - - - - - - - -