Law: Income Tax Ordinance, 1979

Section: 170

Tagline : No provision of law provided that mere existence of financial obligation in the form of loans would have dis-entitled the company from claiming exemption granted under Clause 170 of Second Schedule to Part I of the Income Tax Ordinance, 1979. Income Tax Ordinance (XXXI of 1979) [since repealed]-------Second Sched. Pt. 1, Clause 170 [since repealed]---National Funds Bonds---Interest income---Exemption from tax---Company had invested in National Funds Bonds---Interest income on such bonds was exempt under the Income Tax Ordinance, 1979---Company had also borrowed loans from international borrowers and foreign states---Income tax Officer drew an inference that borrowed monies/loans were diverted to purchase the National Funds Bonds to derive tax free income, therefore, he disallowed the interest accrued on the loans in proportion to the interest income derived from the Bonds---High Court found that tax authorities were not justified in confirming disallowance of proportionate interest on the basis that loans obtained by the company were utilized in the purchase of fixed assets and the investment in the National Funds Bonds was made from the capital and unappropriated profits available with the company---Validity---Tax department failed to point any restriction under the law that would have disentitled the company from claiming exemption on the interest income in case there were loans standing against it---Perusal of statement of accounts filed by the company showed that long term loans were obtained by the company prior to the purchase of the Bonds which were to be discharged with interest over a long period of time, hence, independent of the financial obligation against the long term loans, the company made investment in the National Funds Bonds with its own funds generated from its business---Interest income derived thereon was admittedly exempt under the law and had no co-relation whatsoever with the loans---Irrespective of any co-relation between the two, no provision of law provided that mere existence of financial obligation in the form of loans would have disentitled the company from claiming exemption granted under Clause 170 of Second…