Through this appeal, the assessee/appellant has objected the combined impugned Order of the learned CIR(A), Gujranwala, dated 8-1-2013 for the Tax Years 2006, 2007, 2008 and 2010. Since issues involved in all the years are similar, therefore, we decide the issue via combined order. For Tax Years 2006 and 2007, appeal has been agitated on the following ground:--
(i) That the Learned CIT (Appeals) is not justified to reject the plea of appellant regarding not to carry forward business losses for 2004 and 2005 amounting to Rs, 7,004,224 and Rs,16,580,402 under section 57 of the Income Tax Ordinance, 2001 while computing net tax liability for Tax Year - 2006 and onward.
(ii) That the learned CIR(A) is not justified to uphold the order of Add: CIR to treat the interest income from SLR and rate difference income under the head income from other sources and not allowing the set off of loss against such income.
Grounds for Tax Years, 2008 and 2010:
(i) That the Learned Commissioner of Inland Revenue (Appeals) has erred in proving and confirming the order passed by Additional Commissioner -IR to impose tax of Rs,434,479 while ignoring and failing in applying the facts correctly?
(ii)That the Learned CIT (Appeals) has erred in not inquiring into the facts of the case in accordance with law particularly the following: (iii)That the Learned CIT(A) is unjustified to reject the plea of appellant regarding not to carry forward business losses for 2004 and 2005 amounting to Rs,7,004,224 and Rs, 16,580,402 under section 57 of the Ordinance, 2001, while computing the net tax liability for Tax year-2008 and onward.
(iv)Taxation Officer's Letter No, 662 dated 1-3-2012 replied by the Appellant letter dated 28-3-2012 and also written arguments submitted at the time of hearing.
(v)That the Learned CIT(A) and 'Additional Commissioner Inland Revenue both were unjustified to treat the income received from 'Rate difference' under the head of income from other sources without taking due consideration into Appellant's business nature and source.
(vi)That the Leaned CIT(A) and Additional Commissioner (IR) both are unjustified to treat the interest received from SLR deposit with the State Bank of Pakistan without considering the Rules and Regulations of SBP authority for an Exchange Company.
(vii) That the Order passed by the CIT (A) is not justified by holding the contention of the ACIR regarding issue not to carry forward business losses for previous years i,e, 2004 and 2005 as well as treating the income received form 'Rate Difference' as other income instead of business Income according to nature of business.
(viii) That the order passed by the Commissioner of (A) as well as Additional Commissioner Inland Revenue RTO-Gujranwala both liable to be cancelled as passed without considering the facts of this case and proper application of judicial mind.
(ix) That the order passed by the both authorities imposing Tax amount from Tax Year 2008 by 434,479 is illegal, infractuous. illegitimate and contradicting to the facts of this appeal.
2. Facts leading to the instant appeal are that the assessee, in this case, is a Private Limited Company engaged in the business of foreign currency. Original assessment Orders for this case for Tax Years, 2006, 2007, 2008 and 2010 were treated as issued under section 120(1) of the Income Tax Ordinance, 2001. However, assessme nt record was examined by the Additional Commissioner Inland Revenue (Audit Division) RTO - Zone I, Gujranwala who allegedly found certain discrepancies which warranted action under section 122(5A) of the Income Tax Ordinance, 2001. Therefore, the taxpayer Company was confronted through a Show Cause Notice issued under section 122(5A) of the Income Tax Ordinance, 2001. In compliance thereto, detailed reply was filed, by the taxpayer which has been elaborated in the body of the assessment order. Additional Commissioner Inland Revenue after considering the same as unsatisfactory, amended the declared Income by disallowing the excessive depreciation claimed on motor vehicles and wrong claimed of depreciation on purchase of soft ware, while treating it as intangible asset and allowed amortization as provided under section 24 of the Ordinance. However the Additional Commissioner Inland Revenue, also disallowed to carry forward of assessed losses for Tax Years 2004 and 2005, which invoking the provisions of section 122(5A) of the Income Tax Ordinance, 2001. Against which the taxpayer filed appeal before CIT (Appeals), who has 'upheld the Order passed by the Additional Commissioner. Hence the taxpayer is in appeal before this forum.
3. The AR of the appellant has contended that the appellant have only two points on which opinion of this learned Forum is solicited. Firstly, whether interest income derived by the taxpayer on maintenance of 25% of paid up capital as statutory liquidity reserve (SLR) with State Bank of Pakistan in the form of un-encumbered approved Government securities as stipulated under clause 4 of FE 9 issued by the State Bank of Pakistan as well as "rate difference income" is income falls under the head income from business? Secondly, whether the taxpayer is entitled for set off as well as carried forward of assessed brought forward losses to succeeding years in view of provisions of sections 56 and 57 of the Income Tax Ordinance, 2001.
4. The AR has argued that the taxpayer is a Currency Exchange Company formed under the rules and regulations known as Circular FE 9 of 2002 issued by the State Bank of Pakistan. It has peculiar characteristics distant from any other public and private limited company for its establishment and conducting of business. All its business activities are regulated by State Bank of Pakistan. He further submitted that as per rules/regulation issue as FE 9 of 2002, the taxpayer Company was mandatorily required to maintain 25% of its paid up capital as statutory liquidity reserve (SLR) with the State Bank in the form of unencumbered approved Government Securities and State Bank would extend current account and SGLA facilities to it, along with interest amount accrued to the taxpayer on such deposit maintained with the State Bank of Pakistan. He further contended that as per FE 9 the taxpayer company cannot do any other business except the business authorized by the State Bank of Pakistan which are enumerated in the memorandum and Article of Association of the company. He also stated that without maintenance of SLR with State Bank of Pakistan, company cannot even conduct business of currency exchange. Since, interest accrued and arise to the taxpayer as well as "Rate Difference Income" is an integral part of its business activities permitted by the State Bank of Pakistan, being a regulatory authority, therefore, such income is its business income and cannot be assessed under the head 'income from other sources' under section 39 of the Ordinance. He also argued that its income from all sources falls under the head 'income from business'. Therefore, any business loss incurred to the taxpayer cannot be denied to him to be set off against its interest income as well as 'rate difference' income. Furthermore, the taxpayer is also entitled under section 57 of the Ordinance to carry forward and set off said loss against income arising and accrued in the succeeding tax years. The DR on the other hand supported the decisions of both the authorities below on the basis given therein.
5. We have considered the arguments of both the rival parties, perused the documents available on record and orders of both the authorities below.
6. The gist of arguments of the AR of the taxpayer revolves around two issues that:--
(i) interest income from SLR and rate difference income is its business income; and
(ii) the assessed losses for the tax years 2004 and 2005 has not been brought forward to be set off against the income of the succeeding years i,e, Tax Year 2006 and onward.
It is found that almost similar question/issue was brought before Hon'ble High Court, Delhi in the case of Sham Progetti S.P.A. v. Addl: CIT reported as (1982) 10 Taxman 86 (Delhi) and the Hon'ble High Court answered the question in the following words:-- "The main question for decision is whether the "interest income" could be treated as "business income". The answer to this question has to depend on how we are to consider the interest income derived by the petition. No doubt, normally, on the placing of funds in banks on short-term or long-term deposits the interest income derived from those sources would be "income from other sources", but there have been cases in which such income has been treated as income from business, notwithstanding the fact that it is interest income. The adjustment allowable under the Income-tax Act in respect of losses and gains are set out in sections 71 and 72 of the Act as far as they are material in this case. If there is a gain under one head and a loss under another head (excluding the case of capital gain), then they could be an adjustment or set off between the loss of one head and the gain or income of another head in the same year, but in the case of carry forward losses, the carry forward is allowed under section 72 and the set off of losses has to be against business income. The carry forward loss in one business can be set off against the income from another business but this does not apply to income from other sources. For instance, if there is a carry forward business loss it cannot be adjusted against income from other sources, such as dividend income or interest income. This legal proposition is not in dispute. The question in the present case is whether the interest income itself can be treated as business income. For this purpose, the various decisions cited before the Addl: Commissioner were very material. In CIT v.
Cocanad Radhaswami Bank Ltd. (1965) 57-ITR 306 (SC), the question was whether the income derived from securities by a bank, which would otherwise be "income from other sources", could be used for the purpose of adjustment against carry forward losses. It was held that as the securities form part of the trading assets of the bank, the income could be set off. In CIT v.
Chugandas & Co. (1965) 55 ITR 17 (SC), the question before the Court was whether the assessee was entitled to the benefit of Section 25(3) of the Indian Income Tax Act, 1922, in respect of interest on securities. It was concluded that the section did not apply to non-business income. However, the securities, in this case, were held to constitute the stock-in-trade of the business and, therefore, the income from securities was treated as equivalent to business income. In United Commercial Bank Ltd., v. CIT (1957) 32 ITR 688 (SC), it was held on a case very similar to the present that the interest on securities derived by the United Commercial Bank Ltd., could be set off against losses. The question had arisen in this way. Interest on securities for the assessment year in question was quite substantial but there was a loss' under the head "Business Income". The net income was Rs,1495826. This net income was interest income minus business loss. In the year previous to this there was a net loss of Rs,3,21,929 which was claimed to be set off against the aforementioned net income. The ITO rejected the claim for set off on the ground that the net income was not income from business but from securities. The assessee appealed' unsuccessfully up to the Tribunal and then on a reference to the High Court it was held that the income from securities and the income from banking business were under two separate heads, and so there could be no set off. On further appeal to the Supreme Court, the assessee succeeded. The plea which was accepted by the Supreme Court was that though the interest income was to be assessed under section 8 of the Act and the business income under section 10 of the Act, still a set off could be given under section 24(2) of the Act. (Those references are to the Act of 1922). The point that was decided by the Supreme Court was that though the interest income was taxed under section 8 of the Act, it would remain profits from the banking business. The mere fact that for the purpose of taxation a different section applied did not mean that the interest ceased to be derived from banking. Hence, the interest income as well as the general banking income of the bank was really derived from one activity, namely, that of banking. This principle has now to be applied to the present case.
If a person runs a bank or other business and utilizes his funds for the purpose of that business, it is also open to the same person to use some of the funds for business and to keep a part of the funds in a form where it yields income. The question to be seen in such a case is whether the interest income is derived also from what may be described as "business activity". If it is so that then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be disassociated from the section under which the tax is imposed on the form of income.
To revert again to the United Commercial Bank's case (1957) 32 ITR 688 (SC), the bank which had funds deposited with it by its customers and its own capital, could utilize the funds either by landing the same to others or by making various investments. Indeed, in the case of banks, it is compulsory to place some of the funds in securities. The question that would then arise would be whether the interest income is not also a part of the banking activity, if it is, then notwithstanding the fact that the charge of income tax is under the head "interest on securities", the income would be from banking and not from mere investment. In the present case, the assessee claimed that it has funds which it derived from business and which are used only in business and for no other purpose. If there are spare funds, then they are deposited in banks and, hence, it is clear that this income is also business income. To repeat what was said earlier, the company has not come from Italy to make bank deposits in India but has come to the carry on business. If at any time, it has spare funds it prefers not to keep the same idle but makes deposits in banks which give some income. This also is, therefore, business income, and for the purpose of set off has not to be treated as separate from business income.
The judgments just referred to give full support to the petitioner, therefore, we are of the view that set of had to be granted and could not be refused merely because interest income is taxed under a separate head.
We would thus allow the petition and grant the prayer of the petitioners. We would hold that the income from interest on bank deposits is also business income for the purpose of set off. In the circumstances of the case, particularly we note that the contractor is engaged in very large contracts. The rejoinder affidavit shows that there is a contract with Tata's Mithapur, Gujarat, for 250 million $, one with Coromandel Fertilizers for 200 million $, one at Nangal Expansion, Haryana, for 30 million $, one for Hindustan Lever for 300 million $, one which is described as a modifications in MRL for 15 million $ and for setting up a refinery in Turkey jointly with some other Indian concern is for 200 million $. These huge contracts would show that very large funds will have to be available with the petitioner from time to time. It would, therefore, necessitate the petitioner having large liquid funds at times and a businessman placed in such a situation would normally try to get some interest on such deposits and the same would be considered as business income. We would, therefore, hold that set off as claimed has to be allowed even against interest on securities. However, in view of the nature of the case, we leave the parties to bear their own costs.
Petition allowed".
7. In another case CIT v. P. Industrial Infrastructure Corporation Ltd., (1989) 175 ITR 361 (AP). The Hon'ble Court has held that when a company is established for the purpose of lending moneys for development of his infrastructure, the income from bank deposits pending such disbursement could be assessed as business income. This view was relied upon in CIT v. Madras Refineries Limited (1997) 228 ITR 354 had occasion to deal with the issue whether a public sector company engaged in the business in refining petroleum products receiving interest income from fixed deposits with banks should be assessable as business income. In Snam Progetti S.P.A. v. Addl: CIT (1981) 132 ITR 70 (Delhi), the Delhi High Court took a broad view and considered interest income as incidental to business. Further, in another case Collis Lines Private Ltd., v. ITO (1982) 135 ITR 390 (Ker.) the Hon'ble H.C. Kerala has held that surplus money lying idle for the time being and kept in bank for safe keeping would be treated as business income. Similarly, interest from security deposit kept with electricity board for obtaining electricity connection was held to be business income, in CIT v.
Seshasayee Paper and Board Limited (1994) 207 ITR 80 (Mad); English Electric Co., of India Ltd., v. CIT (1987) 168 ITR 513 (Mad.) and CIT v. Dunlop India Ltd., (1992) 197 ITR 34 (Cal).
8. The upshot of above discussion is that if a persons runs a foreign exchange business activities and other business and utilities, its funds for the purpose of that business, it is also open to the same person to use some of the funds for business and to keep a part of fund in a form where it yield income. The facts of the present case are that it was mandatory for the taxpayer to maintain 25% of its capital as SLR otherwise, the taxpayer cannot continue its business operation as per rules prescribed by the State Bank of Pakistan, a regulatory authority of foreign exchange companies. In the circumstances and facts of the case, the question that would then arise, whether the interest income from SLR and "rate difference income" is not a part of the foreign exchange activities of the appellant. There is also decisions of the Hon'ble Supreme Court of India as in CIT v. Production (Pvt.)
Ltd., (2010) 322 ITR 270, the rationale of which is that the matter should be examined with reference to the nexu's of such interest to business. It should not have, therefore, been inferred that interest income could be business income only for money lending business. It is also held by the Hon'ble Supreme Court of India that in the choice of heads of income under which an income falls, it should not be forgotten that "other income" is not an independent head of income unlike other heads, being only a residuary head, when an income does not fall under any other head (2010) 327 ITR 142 (P&H). On the basis of analogy derives from the case-law cited supra, one can easily come to the conclusion that income from interest derives by the taxpayer from SLR, as per regulations/rules of State Bank of Pakistan as well as "rate difference income" is business income of the taxpayer for all purposes like other normal business income derives by the foreign exchange company. Such income cannot be deemed as mere investment in approved government securities, meaning thereby that interest income earns by the taxpayer from SLR/government securities and from "rate difference income" is its business income and not income from other sources. Since we have held that the taxpayer derives business income only which falls under the head "income from business" and not under any other head of income as specified under section 11 of the Income Tax Ordinance, 2001, we would therefore, direct that loss set off as claimed by the taxpayer is to be allowed against income from interest on securities/SLR and "rate difference income" for the Tax Years under appeal.
It is also directed that assessed losses for the Tax Years 2004 and 2005 should be carried forward to the succeeding Tax Years i,e, Tax Year 2006 and onward and brought forward losses should be allowed to be set off against the assessed income of the taxpayer for the said tax years as stipulated under sections 56 and 57 of the Income Tax Ordinance, 2001.
9. Appeal is decided in the manner as indicated supra.