IN THE SUPREME COURT OF PAKISTAN 
(APPELLATE JURISDICTION) 
 
 
PRESENT: 
MR. JUSTICE MIAN SAQIB NISAR, HCJ 
MR. JUSTICE UMAR ATA BANDIAL 
MR. JUSTICE FAISAL ARAB 
 
CIVIL APPEAL NO. 1338 OF 2007 
(On 
appeal 
against 
the 
judgment 
dated 
14.03.2006 passed by the High Court of Sindh, 
Karachi in ITR No. 03/1994) 
 
Commissioner of Income Tax, Companies Zone, Islamabad 
… Appellant 
VERSUS 
 
M/s Pak Saudi Fertilizer Ltd 
 …Respondent 
 
 
For the Appellant:  
Dr. Farhat Zafar, ASC 
 
 
 
 
Raja Abdul Ghafoor, AOR 
 
 
For the Respondent: 
Mr. Iqbal Salman Pasha, ASC 
 
Date of Hearing:  
20.02.2017 
 
JUDGMENT 
 
 
 
 
FAISAL ARAB, J.- In the assessment years 1987-88, 
1988-89 and 1989-90, the respondent invested a sum of 
Rs.14,99,99,762/- in the purchase of National Funds Bonds. The 
interest income on such Bonds was exempt from tax under the 
provisions of Clause 170 to the Second Schedule to Part I of the 
erstwhile Income Tax Ordinance, 1979. In these assessment years, 
the respondent on such investment derived interest income to the 
tune of rupees 19.6 million. Considering the fact that the 
respondent on the one hand was claiming exemption on interest 
income and on the other hand interest expense was being incurred 
on loans borrowed from Asian Development Bank and Government 
of Saudi Arabia, the Income Tax Officer drew an inference that 
borrowed monies were diverted to purchase the National Funds 
Bonds to derive tax free income. The Income Tax Officer thus 
disallowed the interest accrued on the loans in proportion to the 
interest income derived from the Bonds to the extent of rupees 
12.13 million.  
Civil Appeal No. 1338/2007 
2
 
2. 
 
The decision of the Income Tax Officer was challenged 
by the respondent upto the stage of Income Tax Tribunal but 
without success. The respondent then filed Reference in the High 
Court of Sindh, which framed the question “whether on the facts 
and in the circumstances of the case the learned Income Tax 
Appellate Tribunal was justified in confirming the disallowance of 
proportionate interest”. This question was answered in the negative 
against the department and in favour of the respondent. After 
taking into consideration the plea of the respondent that the loans 
that were obtained by the respondent from Saudi Arabian 
Government as well as from the Asian Development Bank 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 respondent, the learned 
High Court held that the Tribunal’s findings were based merely on 
assumptions and conjectures as it failed to examine whether the 
Bonds were in-fact purchased from the borrowed monies or not. 
Aggrieved by such decision, the appellant filed the present appeal 
with the leave of this Court.   
 
3. 
 
Learned counsel for the appellant argued that as a 
huge loan amount was outstanding against the respondent, the 
investment made in the National Funds Bonds for deriving tax free 
income was not justified for the reason that on the one hand the 
interest expense was being claimed on the borrowed monies and 
on the other hand tax free income was being derived by investing 
the very same amount in the Bonds, thereby taking undue 
advantage.  
 
4. 
 
In rebuttal, learned counsel for the respondent 
submitted that from the statement of accounts of the respondent 
relating to the tax years in question it was evident that long term 
loans were obtained, which were utilized in the purchase of capital 
assets for setting up fertilizer plant and the investment that was 
made in National Funds Bonds was out of respondents' own 
capital and unappropriated profits, which had no nexus with the 
loan amount and this aspect was not considered at any stage upto 
Civil Appeal No. 1338/2007 
3
the Income Tax Tribunal and was only taken into account by the 
High Court.  
 
5. 
 
It is an admitted position that the interest income on 
the investment made in the National Funds Bonds was exempt 
from tax under Clause 170 to the Second Schedule to the Part I of 
the Income Tax Ordinance. The appellant’s counsel failed to point 
out that there was any restriction under the law that would have 
disentitled the respondent from claiming exemption on the interest 
income in case there were loans standing against it. A perusal of 
the copies of the statement of accounts filed by the respondent, it 
is quite evident that long term loans were obtained by the 
respondent 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 respondent made investment in the National Funds Bonds with 
its own funds generated from its business. The 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 was shown to us to 
establish that mere existence of financial obligation in the form of 
loans would have disentitled the respondent from claiming 
exemption granted under Clause 170 to Second Schedule to Part I 
of the defunct Income Tax Ordinance, 1979.  
 
6. 
 
We, therefore, find no justification to reverse the 
findings arrived at by learned High Court of Sindh.  This appeal is, 
therefore, dismissed.   
 
 
CHIEF JUSTICE 
JUDGE 
JUDGE 
Islamabad, the 
20thof February, 2017 
Approved For Reporting 
Khurram