Fakhruddin H. Shaikh, J.-1. The Commissioner of Income-tax (West), Karachi has made this direct reference under section 66 (1) of the Income-tax Act, 1922 (hereinafter to as the Act) raising following questions for opinion of this Court "(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?"
2. The facts of the case are that the respondent firm carries on business of investors and financiers.
In the assessm ent year 1970-71 the respondent claimed certain interest payments under section 10
(2) (iii) of the Act. The Income-tax Officer observed that there were substantial payments and advances made to the partners of the firm and their wives etc. And these were also out of the borrowed capital. Therefore, the payment of interest proportionate to the advances to the partners etc. Were treated as nondeductible expense of the business carried on. The Income-tax Officer then worked out the proportionate interest which came to Rs. 1,50,922 and disallowed the same for the above assessm ent year. The assessee-company i.e. The respondent had also received dividend income of Rs. 3,05,001 from a company enjoying tax holiday under section 15-BB of the Act. This amount was also disallowed by the Income-tax Officer on the ground that section 15-BB of the Act did not provide for exemption of such dividends.
3. Aggrieved by this order of the Income-tax Officer, the assessee company filed appeal before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal mainly on the ground that similar appeals filed by the same assessee in respect of the previous assessment years had been allowed.
During the previous three assessm ent years also the same assessee had claimed exemption in respect of interest and dividends under similar circumstances. Those appeals were decided in favour of the assessee by the Tribunal with the following observations :- "After considering the factual position we are of the opinion that the Appellant had more than sufficient funds available out of its own capitals collected from the partners, the family or elsewhere out of which advances could be made to the partners for house building purposes.
There is no evidence on the record to show that the borrowing was made specifically to make advances to the partners. There is no denying the fact that substantial capital was otherwise available with the appellant and it could advance out of this available capital to any one, whatsoever amount was needed. The capital acquired by the appellant was interest free and it was the appellant's concern to see in what manner the same could be given back to the partner, etc. 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 purposes of the business. In this view the matter we find no force in the contention of the Departmental Representative and hold that there was little justification for working out interest proportionate to the advances made to the partners." It was further held by the Tribunal that the facts and circumstances of the case in respect of assessment year 1970-71 were the same as in the three preceding years. Consequently the deletion of interest was allowed.
4. In respect of the dividend income the Tribunal observed that in view of the previous decisions of the Tribunal, dividend income received by an assessee from a company which enjoyed tax holiday was exempted from income-tax under section 15-BB. Hence the present reference.
5. So far as question No. 2 is concerned, it can be disposed of easily. The dividend income was admittedly received by the assessee on shares of company enjoying benefit of section 15-BB of the Act. The dividends were received during the assessment year 1970-71. The question whether such incomes were taxable or not, was considered by a Division Bench of this Court in the case of Commissioner of Income-tax, Karachi v. Yaseen Ali Akbar H. Ibrahim 1982 PTD 250. It was held in the above case that subsection (4-AA) inserted in section 15-BB of the Act by Finance Ordinance, 1972 declaring dividend incomes from companies enjoying tax holiday to be nondeductible allowances, could not have retrospective effect from a date prior to 20th December, 1971. It was further held that the dividend incomes which were received by assessee prior to 20th December, 1971 from the companies enjoying tax holiday were not hit by the mischief of subsection (4-AA) as inserted by Finance Ordinance, 1972 in section 15-BB of the Act. The above decision of the Division Bench in the case of Commissioner of Income-tax, Karachi v. Yaseen Ali Akbar H. Ibrahim has been followed by this Court in several other decisions holding that the dividend incomes received by an assessee prior to 20th December 1971 from companies which enjoyed tax holiday under section 15-BB of the Act. Were exempted from income-tax. The same principle shall apply to the present case also so far as question No. 2 is concerned, which is answered in the affirmative.
6. So far as the disallowance of interest is concerned, it is admitted that the assessee/respondent is a firm carrying on business of investors and financiers, lt had paid interest on the amount which it had borrowed and said to have been relent to partners and their wives. The contention of the learned counsel for the department is that the respondent was entitled to the deduction of interest on those sums only which were utilised in the business, while interest paid on borrowed sums which were not utilised in the business, could not be treated as deductible expenses under section 10 (2)
(in) of the Act and that the Income-tax Officer was justified in disallowing the proportionate interest.
7. From the assessm ent order passed by the Income-tax Officer it transpires that the assessee/respondent had paid interest to the Banker at much higher rate for the overdraft facilities than the rate charged by it from its partners and relatives to whom the money had been advanced. According to the Income-tax Officer, no satisfactory explanation was rendered for the discriminatory treatment. The difference between the two rates was, therefore, worked out as Rs.
1,50,922 and was added back.
8. It was contended by Mr. Ali Athar learned counsel for the assessee/respondent that the fact that the part of the borrowed amount was relent to partners and the relatives was no ground for disallowing the interest on such amount. In support of this contention he has relied on the case of Commissioner of Income-tax v. Gopikrishna Muralidhar (1963) 47 1TR 469. The facts of this case were that the assessee, a Hindu undivided family, which carried on business on an extension scale with a capital of about Rs. 20 Lakhs, made large borrowing during the relevant year for the purposes of the business and paid interest amounting to Rs. 93,611. In the course of the year monies amounting to Rs 1,77,984 were withdrawn from time to time for household expenses. The question was whether a part of the interest paid on borrowed capital could be disallowed.
It was held by the Andhra Pradesh High Court "That, as the amounts were borrowed for the purposes of the business of the family and as no particular sum purposing to be borrowed on behalf of the business was spent for household expenses and the family was entitled to withdraw from the capital supplied by it thereby depleting the capital, the fact that part of the amounts borrowed was later on used for personal expenses did not deprive the assessee of the benefit of deduction of the entire interest paid on borrowed capital under section 10 (2) (///) of the Indian Income- tax Act, 1922, and a part of the interest could not, therefore, be disallowed."
9, The Learned Tribunal has observed in the impugned judgment that there was no evidence on record to show that the firm had borrowed the amount specifically for the purpose of making advances to the partners. This is a finding of fact at which the Tribunal had arrived after going through the record of the assessee. It has not been challenged that this finding of fact is inconsistent with the record of the case. The Tribunal was, therefore, justified in setting aside the order of Income-tax Officer and in deleting the disallowance of the interest.
10. It was further held by the Tribunal that the assessee was entitled! To utilise its entire capital in any manner it choses. Lt could also make interest-free advances to its partners and the fact that the borrowed amount was relent at lower rate of interest, was no reason for disallowing the proportionate amount of interest to the extent of the difference. In the case of Amna Bui Hajee I ns a v. Commissioner of Income-tax, Madras (1964) 51ITR (Sh. N. 19) it was held that the fact that the assessee had sufficient funds at her disposal which he could have utilised for investment as capital without making any borrowings on interest, was irrelevant for the purpose of claiming exemption of such interest under section 10 (2) {iii) of the Act. The facts of the above case were that on April 1, 1955, the assessee had an overdraft of Us. 96,625 in a firm which acted as her bankers. On March 31, 1957 she received a sum of Rs. 1,01,000 and paid it to his firm. She also borrowed Rs. 90,000 from this firm and invested it as capital in another firm, and after setting off this sum of Rs. 90,000 and other withdrawals made by her the debit balance remained at Rs 53,182 on March 31, 1957. In the accounting year ended March 31, 1958 she had to pay Rs. 2,965 as interest on this sum of Rs. 53 182 and claimed it as an allowance from her profits from the firm in which she had invested. It was disallowed by the Tribunal on the ground that the Rs. 90,000 could not be treated as borrowed capital as it could have come out of Rs. 1.01,000 she had received on March 31, 1957 and that 'for lack of identity the assessee's contention must fail. The High Court held ; "that as the assessee's directions to the bank showed that this particular sum of Rs. 90,000 was debited against her for the purpose of being invested as capital in the firm, the interest claimed was allowable : the fact that the assessee had, according to the accounts, some funds at her disposal which she could have utilised for investment as capital was irrelevant." It would follow from the above decision that the assessee was entitled to utilise the amount in any way it chose and that the fact that the assessee had charged lower rate of interest on the amount relent by it than the interest paid by it to the agency from which it was borrowed, would not be a ground for disallowing the interest claimed by the assessee.
11. In the case of Commissioner of Income-tax v. Gammon Pak. Ltd., Karachi 1966 Taxation 304 also it was held that the interest paid by the parent company on overdraft and loans taken by it for the purpose of investment in the sub-sidiary company were admissible expense under section 10(2)
(/7/)of the Income-tax Act. The ratio of the above decision is that if it is proved that the borrowed amount has been utilised by the assessee for the purpose of its business, then interest paid on such amounts shall be exempted from income-tax under section 10 (2) (iii) of the Act irrespective of the manner in which the borrowed amount is utilised. Thus, the fact that the assessee had relent the amount to the partners etc. At lower rate of interest than the -'rate of interest at which the amount was borrowed, shall be irrelevant for *the purpose of determining the question of exemption under the said section.
For the above reasons we are inclined to uphold the views which found favour with the Tribunal and answer question No, 1 also in the affirmative.