COMMISSIONER OF INCOME-TAX Versus PICIC

ORDER

1. By this common judgment, we intend to dispose of the above 4 references which have been filed under Section 66 (2) of the Income Tax Act, 1922 (hereinafter referred to as the Act) for soliciting our opinion on 5 questions mentioned in the 'Statement of the case'. However, Mr. Nasrullah Awan learned counsel for the applicant has pressed questions No.l and 4 which read as follows:-

(1) "Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that the interest paid on borrowed capital should not be allocated between gross receipts from the dividend income, which was exempt, and the other income, which was not exempt?

(4) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that no part of the total administrative and other expenses and interest should be allocated against dividend income which was exempt from tax'"

2. The brief facts leading to the filing of the above references are that the respondent in the assessment years 1968-69 to 1971-72 disclosed certain amounts as the dividend received exempted from taxes. It appears that the Income Tax Officer, by the assessment order, attributed Rs.1,76,031, Rs.1,97,501, Rs.2,51,476 and Rs.3,24,183 as the amounts of the administrative expenses deductable from the above 7 (?) of one of the orders namely, that there was no material to indicate that the capital borrowed was not utilized in investment and that the capital and reserves exceed the investment and, secondly, that the loans obtained by the respondent-Corporation, both for foreign exchange and local currency, were in turn distributed to the industry and the respondent-Company got certain percentage of the shares from the borrower companies from which it received the above tax free dividend. Against the above assessment orders the respondent Company went, in appeal before the learned Income Tax Appellate Tribunal, I.T.A. No.1940/KB of 1972-73 (Assessment year 1968-69,) I.T.A. No.19411KB of 1972-73 (Assessment year 1969-70,) I.T.A. No. 1942/KB of 1972-73 (Assessment year 1970-71), I.T.A. No.1943/KB of 1972-73 (Assessment year 1971-72). The learned Income Tax Appellate Tribunal by its order dated 4-9-1974 held -that the aforesaid portion of the administrative expenses could not have been attributed and deducted from the above tax free dividend the break-up of which was as follows-.-

2. 1968-69

3. Rs.35,00,928

4. 1969-70

5. Rs.44,87,943

6. 1970-71

7. Rs.55,98,480

8. 1971-72

9. Rs.44,84,528

3. The applicant Department filed an application under Section 66 (1) of the Act before the Income Tax Appellate Tribunal for getting the matter referred to this Court for opinion on the legal question but the same was declined by an order dated 31-3-1977 The applicant thereafter filed the above quoted reference.

4. In support of the above reference, Mr. Nasrullah Awan learned counsel for the applicant has vehemently urged that the learned Income Tax Tribunal was not justified in disallowing the above deductions or a portion thereof as admittedly the respondent-assessee was engaged in advancing the loans for setting up industries and they got the shares of the various companies from the borrower companies compulsorily and therefore in fact even borrowed capital is utilized in purchasing the above shares, from which the above tax free dividend was received. It may be observed that the Income Tax Officer in his assessment order has not challenged the correctness of the respondent-assessee's averment to the effect that the investment made by them did not exceed their capital and reserves whereas the learned Income Tax Appellate Tribunal has recorded a finding of fact to that effect. In this view of the matter, it is not urged that any portion of the borrowed capital was utilized in purchasing the shares from which tax free dividends in question were received. It may further be observed that the learned Income Tax Tribunal has relied upon the two cases of Indian Jurisdiction, namely C.I.T. v. South India Bank (1963) Taxation (India) 3, 463) and the ease of C.I.T. Bombay City II v. Industrial Investment Trust Company Ltd. (1968-67) I.T.R. 436).' In the latter decision in fact the above judgment of the Indian Supreme Court was followed and which support the conclusion arrived at by the learned Income Tax Tribunal namely that the dividend exempted, from the payment of taxes cannot be burdened with any portion f the administrative and other expenses. To reinforce the above submission Mr. Ali Athar has referred to the case of Commissioner of Income Tax, (West), Karachi v. Adamjee Sons, Karachi reported in 1984 PTD 390 (H.C. Karachi) and the case of Commissioner of Income Tax, Karachi v. N. Futehally and Co., Karachi reported in 1934 PTD 341 (H. C. Karachi). In the former case the assessee-Company was a firm of financiers and investors, borrowed certain amount from the financial institutions at the high rate of interest but advanced certain amount of loan to its partners at lower rate interest. The following two questions were referred to this High Court:-

10. "(1) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in deleting the' disallowance of payment of interest proportionate to the advance made to the partners on the ground that it was a deductible expense of the business carried on by the assessee firm?

(2) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in holding that dividends received by the assessee on shares of companies enjoying the benefit of section 15-BB of the Income Tax Act are exempt from tax and not liable to be included in the total income of the shareholders?."

11. The High Court answered the above two questions in the affirmative. Similar point was involved in the second case where loan was advanced to the directors of the company and upon reference by the Department, the High Court took the same view as was taken in the above first case. The above two cases in fact lend support to the conclusion arrived at by the learned Income Tax Appellate Tribunal in the instant case. We are inclined to concur with the above conclusion. We, therefore, answer the above questions in the affirmative. However, there will be no order as to costs.

12. M. B. A./ C-48/ K Questions answered in affirmative.