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


1986 SCMR 968 = 1885 SCC 637
COMMISSIONER 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

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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.

123

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 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

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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

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124

TAXATION

[Vol. 53

answering 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

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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

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1986]

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

125

advances 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

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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

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124

TAXATION

[Vol. 53

Company 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

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(b)

1986]

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.

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
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