NASIM SIKANDAR, J.---By this judgment we intend to dispose of Tax Reference No.7 of 2001 as well as P.T.R. Nos.128 and 129 of 2001.
2. The petitioner Messrs Crescent Investment Bank Limited is an investment company. While framing assessm ents in its respect for the years 1995-96 and 1996-97 the Assessing Officer allowed claimed exemption to "capital gains" under clause (116) of Part I of the Second Schedule of late Income Tax Ordinance, 1979 declared in these two years respectively at Rs.17,15,18,920 and Rs.12,55,11,906 which statedly arose on sale of shares. Subsequently the concerned IAC proceeded under section 66-A of the late Ordinance and revised the assessment orders so framed. In his order dated 21-5-2001, he observed that the Assessing Officer while framing assessments under section 62 of the late Ordinance ignored the fact that income from business and capital gains were two distinct and separate sets of income. Therefore, any expense attributable to an activity which generated income from business or capital gain was required to be allocated accordingly on proportionate basis in case separate accounts were not maintained for each head of income; that under the provisions of section 23(1)(xviii) of the late Ordinance all expenses wholly and exclusively incurred for the purpose of earning income were required to be allowed and allocated while determining income of the assessee. Therefore, according to the revising authority, the failure on the part of the Assessing Officer to allocate proportionate expense to capital gains resulted into under assessm ent of the business income. Earlier the learned revision authority not only distinguished the case-law relied upon at the bar for the assessee but also rejected the contention that the assessee carrying on a composite business, whole of its income was assessable as business income or that it could not be bifurcated into sub-trades nor the expenses could be apportioned against different heads. In the view of the revising authority no authoritative pronouncement by the superior Court was cited at the bar to support the contention that no expense could be allocated to exempt capital gains. He was also of the view that capital gains assessable under section 27 (capital gains) which represented appreciation in value of capital assets and income from business under section 22 (income from business or profession) of the late Ordinance, 1979 were two separate and distinct sets of income. The reported judgments in re: Commissioner of Income-tax v. PICIC 1988 PTD 626 and re: Rajasthan State Warehousing Corporation v. Commissioner of Income-tax (2002) 82 Tax 565 (SC Ind.) were accordingly discussed and distinguished. The plea of the assessee that capital gains in case of an investment banking company was assessable under section 22 was also rejected on the ground that acceptance of such a plea will make provisions of section 37 (capital losses) as redundant. Also that in case capital gains of an investment company were treated as part of composite income assessable under section 22 then such company will not be entitled to claim exemption under clause (116) of Part I of the Second Schedule which A granted exemption to income chargeable under the head "Capital Gains" only and not to any other income including the one assessable under section 22 of the late Ordinance. He made specific mention of the fact that the assessee failed to provide transaction-were analysis with regard to the availability of funds on each date of transaction of sale and purchase of shares to show the position of incomings and outgoings as far the income chargeable under the head "Capital Gains" was concerned. Accordingly finding that income from capital gains did not make part of composite income assessable under section 22 and in view of non-maintenance or non-furnishing of separate accounts of these transactions he allocated expense to "Capital Gains" on proportionate basis and modified the assessments earlier framed under section 62 of the late Ordinance.
3. On appeal a Division Bench of the learned Tribunal agreed with the revising authority that in absence of the accounts of the transactions there was no alternate but to allocate expense to capital gains on proportionate basis.
4.The assessee, thereafter made an application under section 136(1) of the late Ordinance seeking a reference of following questions of law which statedly arose from the said order of the Tribunal dated 27-6-2001:--- "(i) Whether the learned Appellate Tribunal misdirected itself in law by confirming order under section 66-A passed by the learned Inspecting Additional Commissioner of Income-tax Range-II, Companies Zone-1, Lahore.
(ii) Whether on the facts and circumstances of the case, the learned Tribunal was justified to uphold the action of Inspecting Additional Commissioner of Income-tax under section 66-A, when the issue of composite business had been the subject-matter of appeal before the Commissioner of Income-tax (Appeals) decided on 18 November, 1999 as well as before the Honourable Tribunal decided on 27th November, 2000.
(i.e) Whether in view of facts that the business of the applicant was one and indivisible, non- maintenance of separate accounts indicating transactions based working in respect of expenses relatable to "capital gains" warranted allocation of expenses to capital gains on proportions basis.
(iv) Since the applicant did not claim to have incurred any expenditure "wholly and exclusively"; for the purpose of earning "capital gains" whether the administration and other expenses including interest could be thrust upon it simply because income from capital gains was exempt.
(v) Whether in view of the fact that income of an investment company carrying on a "composite business" is to be assessed under section 22 of the Income Tax Ordinance, 1979, the learned Income Tax Appellate Tribunal misdirected itself in law by allocating "business expenses" to capital gains."
5. Learned members of the Tribunal, however on 29-8-2001 referred only questions No.1 for our consideration and opinion which is reproduced for facility of reference:--- "Whether the learned Appellate Tribunal misdirected itself in law by confirming order under section 66-A passed by the learned Inspecting Additional Commissioner of Income-tax Range-II, Companies Zone-I, Lahore."
6. The petitioner through the above two applications P. T.Rs. 128 and 129 of 2001 has sought admission of all questions for consideration and reply under section 136(2) of the late Ordinance.
7. Heard the learned counsel for the parties. As,far the. Last four questions are concerned, we are not inclined to entertain than for our consideration and reply. The questions Nos.2 to 5 as framed are more in A nature of arguments rather than posing a legal controversy to be resolved by us. Also these questions assume findings of certain facts by the revising authority as well as the Tribunal which is not correct. The question referred to by the Tribunal clinches the issue involved and, therefore, both applications under section 136(2) of the late Ordinance are rejected.
8. For the petitioner emphasis has again been made on the plea of "composite business" of the assessee to support the submission that exempted capital gains income and taxable income of the assessee being from one indivisible source apportionment of expenditure is not sustainable at law. It is also alleged that allocation of expense to exempt business has indirectly resulted in partial denial of the exemption allowed by law under the aforesaid provisions of the late Ordinance. In support of the submissions reliance is again placed upon the said two judgments. However, we are not persuaded to agree for the following reasons:--- Firstly section 15 of the late Ordinance provided for charge of tax and computation of total income under six different heads. Two of them being income from business or profession and capital gains. Their fusion is possible or dependent on the condition of indivisibility. Learned counsel for the Revenue is correct in pointing out that the assessee is attempting to overplay the "composite business" factor.
It is rightly stated that such a plea in case of the assessee is necessarily mutually destructive inasmuch as in case the petitioner wishes his capital gains to be assessed under section 22 of the late Ordinance then it cannot avail the benefit of exemption in respect of capital gains which were assessable only under section 27 (capital gains) read with section 28 (computation of capital gains).
Secondly, no provision of the late Income Tax Ordinance has been pointed out to support the submission that capital gains which are assessable under section 27 of the late Ordinance can possibly be clubbed or merged into business income by an assessee to be assessable under section 22 of the late Ordinance. The heads of income given in section 15 of the late Ordinance, it is by now well-settled are mutually exclusive. Mere fact that an individual or a corporate entity engages itself in more than one kind of business will not result in merging of income from different sources. Thirdly, the revising authority rightly pointed out that the ratio settled. in re: Commissioner of Income-tax v. PICIC (Supra) was not attracted to the facts in hand because the questions of law which came up for consideration before their Lordships of Karachi High Court were different from the one which is before us. In the other case re: Rajasthan State Warehousing Corporation v. Commissioner of Income-tax (supra) again their Lordships of the Supreme Court of India were considering allocation of expense in case of exempt and taxable income when earned from an indivisible business. The concept of "composite business" in case of a bank or an investment company cannot be extended to capital gains as a matter of course. It is simply for the reason that a bank or investment company cannot take shelter behind their on failure to maintain accounts with respect to their different spheres of activities. To say that an investment company could not maintain separate accounts with regard to sale and purchase of shares, their retention and then disposal in the market and alleging them to be a part of day to day business is not acceptable either as a matter of fact or in law. With the availability of professional expertise in financial and accounting matters the assessee as an investment company cannot take benefit of its on default of having failed to maintain record of transactions in shares.
Fourthly, the plea of a "composite business" is in fact an attempt to over simplify the issue. The sale and purchase of shares in a stock market is completely recorded and it is not believable that an investment company/bank failed to maintain faithful record of these transactions even if these are in thousands: All payments and receipts without any iota of doubt are made through cheques and other banking instruments. In the case in hand despite repeated notices the assessee-Company failed to produce the record and as said above still wanted to take benefit of its default of having maintained no independent account of these transactions. The revising authority, therefore, rightly refused to give premium for the default of the assessee.
Fifthly, the revising authority appears justified in finding that the original assessment order under section 62 as framed by the Assessing Officer was prejudicial to the interest of Revenue inasmuch as even accrual of the claimed capital gains was not proved through production of record and books of accounts. Non-allocation of expense to such income, therefore, certainly increased the volume of the claimed exempt income.
Sixthly, learned counsel for the Revenue is correct in pointing out that in case the assessee had returned only capital gains it could not refuse allocation of expense. In such situation provisions of subsection (3) of section 32 (method of accounting) of the late Ordinance would have become applicable. The declaration of higher income from exempted source is as objectionable attempt as to inflate losses.
Seventhly, it is also correct that during the proceedings before the revising authority the petitioner failed to establish that the investment in shares which resulted in capital gains was made from the equity of the members. The revising authority rightly rejected a telegraphic statement submitted before it to show the position of availability of certain funds out of share-holders equity on a particular date.
The plea taken in this regard though quite frivolous on the face of it was again sought to be supported from the factum of default on the part of the petitioner to maintain accounts.
Lastly, it is also not acceptable that no expense whatsoever was incurred to earn such a huge amount of capital gains. It is common knowledge that stock exchange brokers charge commission of different rates in case of shares of different values. Also revenue stamps are required to be affixed on transfer deeds of shares. These expenses must have been substantial when transactions were made in thousands of shares and were repeated frequently.
9. Therefore, our answer to the question referred to by the Tribunal is in the negative. As observed in para. 7 above applications P.T.Rs. 128 and 129 of 2001 by the assessee shall stand rejected.
10. Disposed of. .
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