Tax-Digest-Pakistan.pdf
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Tax Laws Pakistan...
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(v) COMPARATIVE TABLE OF SECTIONS
VOL-I
Contents List List of cases Digested in VOLUME-I
.....
Comparative Table of, Income-tax Act, VII of 1918, Income-tax Act, XI of 1922 & Income Tax Ordinance, 1979 Under Section 1.
Title
.....
(xxxiii) (cix)
Case No.
Page No.
1-460
1-272
1
35
Retrospective Legislation
35
58
Remedial and curative Legislation has retrospective effect
59
72
Principle of contemporary exposition
60
73
Action is deemed illegal, the whole superstructure built upon it is also illegal
62
74
Income cannot be taxed twice
63
74
One thing implies the exclusion of another
64
75
Application of rule generalibus specialia derogant
66
76
Interpretation of statutes / General Principles
67
77
Principles governing interpretation of financial liabilities
98
86
Principle of Equity
99
87
Powers of courts/administrative jurisdiction
102
88
Income / deeming provisions How to be construed
140
105
Distinction between direct and indirect taxes
146
108
Distinction between "tax" and "fee"
147
109
Distinction between actual liability in praesenti and a liability de futuro which for the time being, is only contingent
148
109
Short title, extent and commencement General Principles of Taxation / Rules of Interpretation - Legislative Powers
(vi) Income Tax Digest.
VOL-I
Under Section
Title
Case No.
Page No.
Theory of reading down as a rule of interpretation
149
110
Rule of evidence
150
111
Courts can strike down discriminatory and confiscatory provisions of fiscal laws
156
113
Scope of various words and expressions
157
113
Interpretation regarding words and expressions
227
145
Past and closed provision
231
147
Special law vs. income tax
232
148
Machinery provisions
234
150
Limitation period cannot be extended retrospectively
239
153
Rules of construction - Fiscal statutes
240
154
Rule of interpretation Two equal possible interpretations Exemption clauses
264
164
Rule of limitation
269
166
Redundancy should not be readily assigned by courts
279
170
Interpretation favourable to assessee is to be adopted
281
170
Rules when language is ambiguous
283
171
Non obstante provision overrides conflicting provision
304
180
Doctrine of binding precedent (Stare Decisis)
305
180
Doctrine of merger
314
184
Legal maxims
316
185
Doctrine of res judicata/estoppel
326
190
Natural justice/duties of court
334
194
Doctrine of mutuality
345
198
Non-application of federal tax laws to tribal areas
346
199
Rules relating to interpretation of amending provisions explained
347
200
(vii) COMPARATIVE TABLE OF SECTIONS
Under Section
2(1).
Title
VOL-I
Case No.
Page No.
Principles governing interpretation of financial liabilities
349
201
Interpretation leading to destructive ends should be avoided by courts
350
202
Terms and phrases used in one statute
351
204
Marginal notes to the section of an act cannot be referred to for the purpose of construing the act
352
205
Principle of literal interpretation
353
206
Doctrine of favourable interpretation
355
206
Department can go beyond a transaction
356
207
Application of tax rates through a finance act explained
357
207
Act is to be read as a whole
358
208
Statute should be read as a whole
359
208
Section vs. Rule
360
209
Principle of approbate and reprobate
361
210
High court is competent to entertain writ where interpretation of law is involved
362
211
General rules in respect of writ petition
363
211
Writ held maintainable
390
227
Writ held not maintainable
408
241
Miscellaneous
443
263
461-549
273-324
Scope of term `agriculture'
461
281
Land used for agricultural purposes
467
284
Agricultural process
472
287
Rent / revenue, connotation of
479
290
Land must be situated in Pakistan
480
290
Land must be assessed to land revenue
481
291
Dividends to shareholders out of `agricultural income'
483
291
Sale of trees of spontaneous growth - Not agricultural income
484
293
Definitions.-Agricultural Income.
(viii) Income Tax Digest.
VOL-I
Under Section
2(6).
2(7).
2(8).
Title
Case No.
Page No.
Interest on arrears of rent
491
298
Annuity
495
302
Commission
496
303
Salary / Remuneration
497
303
Rent
503
307
Income from mortgage
506
308
Lease rent
512
312
Salami (lumsump payment)
515
314
Maintenance allowance
517
314
`Forestry' and `agriculture' not synonymous
524
316
Tea manufacturers
541
321
Coffee manufacturers
542
322
Sugar Manufacturers
543
322
Reference to the high court
544
322
Definitions.-Assessee
550-553
325-328
Scope of definition
550
326
Assessee vis-a-vis Trust
553
328
Definitions.-Assessment
554
329-330
Words "assessment" and "re-assessment" explained
554
330
Definitions.-Assessment year
555-556
331-334
555
332
557-566
335-345
Adventure in the nature of trade
557
337
Definition of the word "business"
564
342
Purchase and sale of heavy shares with borrowed capital to sister concern at market rate
566
344
Definitions.-Capital Asset.
567
346-347
`Capital asset' - Scope of
567
347
568-595
348-363
568
351
Word `year' - How to be construed 2(11).
2(12). 2(14).
Definitions.-Business
Definitions.-Charitable purpose. General conditions for exemption
(ix) COMPARATIVE TABLE OF SECTIONS
Under Section
2(16).
2(20).
Title
Case No.
Page No.
Charitable vs. non-charitable trust
569
352
Mixed trusts
575
354
Relief of poor - Preference to relatives
578
356
Residuary head - Object of general public utility - Connotation of
583
357
Public- connotation of
587
359
Element of private gain
589
360
Illustrations
590
361
596-600
364-367
Word "form", meaning of
596
365
Expressions "by" and "under" explained
597
365
Body "corporate under the law" explained
598
366
Chamber of commerce
600
367
601-606
368-374
601
369
607-618
375-382
General - Connotations of word "income"
607
377
Criteria to determine taxable & tax free income
615
379
Definitions.-Income Tax Officer.
619
383-384
Definition of `income tax officer'
619
384
620-632
385-396
620
387
Can income year be of more than 12 months? 622
387
Word `year' explained
623
388
Expression "such period"
625
389
Expression "previous year"
626
390
Miscellaneous
632
396
Definitions.-Inspecting Additional Commissioner.
633
397-398
Powers of inspecting additional commissioner633
398
Definitions.-Company.
Definitions.-Dividend. Scope of term "dividend"
2(24).
2(25). 2(26).
Definitions.-Income.
Definitions.-Income Year. Change of year
2(27).
VOL-I
(x) Income Tax Digest.
VOL-I
Under Section 2(29). 2(32).
Title
Case No.
Page No.
Definitions.-Interest.
634
399-400
Expression "interest" - Scope of
634
400
635-716
401-442
Definition of "person"
635
409
Status of "local authority"
638
410
Status of "individual"
640
410
Status of "AOP"
644
412
Word "association" does not have technical meaning
652
416
Hindus - Connotation of
653
416
Hindu undivided family Connotation of
654
416
Hindu undivided family vs. Hindu coparcenary
656
417
Family - Connotation of
659
418
Junior member
660
419
Female members
661
419
Partition of HUF
664
421
Property of HUF
665
421
Ancestral properties'
668
422
Self acquired properties
671
423
Property of HUF
672
424
Business of HUF
676
427
Throwing of self-acquired property into family hotchpot
680
429
Impartible estate
681
429
Remuneration to karta-partner from firm
682
429
Benefits of contracts
684
430
HUF & Firm
685
430
Association of persons - Basic principles
686
430
HUF and AOP
689
431
Firm & AOP
690
432
Association of companies
691
432
Definitions.-Person.
(xi) COMPARATIVE TABLE OF SECTIONS
Under Section
2(34). 2(40).
2(43). 2(44). 3.
4.
Title
VOL-I
Case No.
Page No.
Co-owners [Position under the 1922 Act]
692
432
Co-heirs
698
434
Co-trustees
702
435
Co-executors
703
436
Mutual concern - General tests
704
436
Test as to distribution of surplus
705
436
Clubs
706
437
Companies
708
438
Co-operative society
711
439
Mutual insurance company
713
440
Definitions.-Principal officer.
717
443-444
Illustrations
717
444
718-745
445-462
Significance of residential status
718
448
`Year' as in `income year'
728
451
Individual
730
454
Test for "not-ordinarily resident"
732
455
Firm - General
733
456
Company
737
458
Control and management - Meaning of
740
459
Definitions.-Tax.
746
463-465
"Penalty" or "interest" on tax due
746
464
Definitions.-Total income.
747
466-469
Meaning of "total income"
747
467
748-750
470-474
Power of CBR
749
471
Income tax officer, whether a court
750
474
751-758
475-486
Authority
751
476
Comparison with Indian law
755
480
Jurisdiction
757
484
Removal
758
485
Definitions.-Resident.
Income tax authorities
Appointment of income tax authorities etc.
(xii) Income Tax Digest.
VOL-I
Under Section 5.
7.
Title
Case No.
Page No.
758-795
487-514
Jurisdiction
759
491
Transfer of jurisdiction
763
494
Tribunal was not legally justified in annulling the assessment on the point of jurisdiction
774
506
Jurisdiction in general
776
508
Jurisdiction of assessing officer
781
511
Objection as to income tax officer's jurisdiction
790
513
Opportunity of hearing
793
513
Scope and application of provision
794
514
796-802
515-519
796
516
803-813
520-527
Legality of CBR's orders, instructions & directions
803
522
Powers of CBR to give direction to ITO
812
526
Binding force of circulars
813
526
814-996
528-647
Charge of income tax, super tax and surcharge
814
545
Scope of article 165 vis-a-vis changeability in the case of provincial Governments
822
548
Liability to tax when arises
829
559
Concept of income
833
561
Scope of protection under the economic reforms protection act of 1992
846
569
Charge on benami transactions
849
572
Tests to determine whether a receipt is a revenue or capital receipt
850
574
Profit and loss appropriation account
869
584
Jurisdiction of income tax authorities
Guidance to Deputy Commissioners Guidance to assessing officers
8.
9, 10.
All Officers to follow the orders of the Central Board of Revenue
Charge of income, super tax and surcharge
(xiii) COMPARATIVE TABLE OF SECTIONS
Under Section
Title
VOL-I
Case No.
Page No.
Overriding title vs. Application of income
870
585
Devaluation gain
871
586
"Mercantile" and "cash system"
873
588
Applicability of 1922 Act to different Provinces/States
874
590
Applicability of act to rulers of erstwhile Indian states
877
591
Charging section - General
878
591
Charge is in respect of income of previous years
881
592
Exemption from tax
883
593
Double taxation
885
593
Finance acts - Relevance of
888
594
Tax avoidance / tax planning
891
595
English cases
893
596
Guiding principles
894
596
Burden of proof
901
599
Other factors
902
599
Allocation of payment between interest and principal sum due
904
599
Illustrations
911
607
Commission
915
608
Pension / annuity
916
609
Rent
918
610
Salami
921
611
Illustration
925
612
Subsidy / incentives
927
614
Gifts / voluntary payments
928
614
Share in business profits
930
615
Technical know-how
931
616
Patent / trade mark / copyright
932
617
Mining rights
933
617
Bonus shares
934
618
(xiv) Income Tax Digest.
VOL-I
Under Section
Title
Case No.
Page No.
Bonus debentures
935
619
Sale proceeds of trees
936
619
Sale proceeds of assets of money-lender
938
620
Receipts by partners from firm
940
621
Others
941
621
Application of income
946
623
Illustrations
947
624
Maintenance allowance
949
624
Royalties
954
627
Payments by executor to beneficiaries under testator's will / trust
955
628
Accrual of income - Connotation of
958
629
Time of accrual of income - Basic principles
960
630
Receipt/deemed receipt - Connotation of
962
631
Time of accrual of income - Illustrations
963
631
Interests
966
633
Commission
971
635
Underwriting commission
972
636
Profits of mortgage sale
973
637
Concept of real income
974
637
Disputed claims
975
638
Income forgone
976
638
Place of receipt / accrual of income - General 978
639
Accruing or arising in Pakistan - Meaning of 981
640
Illustrations : In case of buying and selling of goods 982
640
Illustrations : Relevance of place from where directions are issued for transactions/where contract is concluded
988
643
Illustrations : In case of agents
991
645
Illustrations : Where payment is made by posting of cheque
993
646
Illustrations : Commission
994
647
Illustrations : Interest
995
647
(xv) COMPARATIVE TABLE OF SECTIONS
Under Section 11.
12(1).
12(2).
12(3).
12(7). 12(9).
12(9A).
VOL-I
Title
Case No.
Page No.
997-1022
648-675
Scope of "total income"
997
651
"Accrue" and "arise", meaning of
998
651
Chargeability vis-a-vis deeming provisions
1001
656
Relevant date for accrual of income
1012
666
Receipt and accrual of income
1013
668
Scope of total income
Amount is `received' when income accruing outside is `set off' against liability in Pakistan1016
670
Transmission of funds is always bilateral
1017
671
Book entries
1018
671
Retrospective operation
1019
671
Unexplained income
1020
672
Liability
1021
673
1023-1024
676-678
Salary when deemed to accrue or arise in Pakistan
Receiving salaries from state exchequer is taxable no matter where paid
1023
677
Position under 1922 act
1024
678
1025-1050
679-697
Business connection - Connotation of
1025
682
Illustrations of business connection
1040
690
Source / property
1048
696
Business operations
1049
697
1051-1052
698-700
Interest
1051
699
Loan when deemed as income
1053
701-702
Scope of deemed income
1053
702
Dividend Paid abroad
1054
703-704
Dividend paid by a Pakistani company outside Pakistan
1054
704
1055-1066
705-715
1055
707
Business connection
Interest when deemed to accrue or arise in Pakistan
Undistributed profit when taxable Additional income tax on undistributed profits - Application of provision
(xvi) Income Tax Digest.
VOL-I
Under Section
12(11).
12(12).
12(18).
13(1)(a).
13(1)(aa).
Title
Case No.
Page No.
"Free reserve", meaning of
1058
708
Gratuity is an ascertained liability
1062
712
Definition "free reserve" and super tax
1063
714
General
1064
714
Smallness of profits - Tests for determination1066
715
Dividend Income - Basis of chargeability
1067-1072
716-722
Word "pay", meaning of
1067
717
Change in law
1068
717
Year of taxability of dividend income
1069
718
Difference between the fair market value of stocks and shares
1073
723-725
Deduction of liability towards the foreign loans
1073
724
Difference between the fair market value of stocks and shares
1074, 1075
726-728
Share deposit money is not "loan"
1074
727
Section 12(18) vis-a-vis section 66A
1075
728
1076-1092
729-746
Unlawful additions under section 13 are not sustainable
1076
731
Itat has a duty to correctly record the facts and give objective findings
1077
732
Cash credit
1078
732
Unexplained investments, etc., deemed to be income - Cash credit
"Income from undisclosed sources", meaning of1087
742
Nature of receipt
1088
744
Firm / partners
1089
745
Procedures followed
1090
745
Illustrations
1092
746
1093-1095
747-752
1093
748
Unexplained investments, etc., deemed to be income - Proof of income from other source Proof of income from other source
(xvii) COMPARATIVE TABLE OF SECTIONS
Under Section 13(1)(b).
Title
Case No.
Page No.
1096-1097
753-754
1096
754
1098-1099
755-757
1098
756
1100-1102
758-760
Valuation of land
1100
759
Valuation of assets - Property
1102
760
1103-1104
761-762
Explained source of expenditure
1103
762
Unexplained investments, etc., deemed to be income
1105
763-764
Status of law
1105
764
1106-1113
765-770
Exempt income, meaning of
1106
767
"Assessable" and "taxable" contain different meanings and applications
1108
767
Exempt incomes vis-a-vis charge of workers welfare fund
1110
768
1115-1117
771-774
Principles governing classification of income1114
772
Unexplained investments, etc., deemed to be income Excess stock declared with banks is deemed income
13(1)(c).
Unexplained investments, etc., deemed to be income General
13(1)(d).
13(1)(e).
13(2).
14.
15. 16.
VOL-I
Unexplained investments, etc., deemed to be income
Unexplained investments, etc., deemed to be income
Exemptions
Heads of income Salary
1118-1150
775-801
Compensation for loss of service is capital receipt 1118
779
Master servant relationship
780
1119
Compensation under golden handshake scheme1120
781
Salary v. professional income
1121
781
Salary vs. business income
1123
783
Contributions to pension funds
1124
784
Accrual of salary
1126
787
Illustrations of salary
1128
788
Perquisites - Allowances
1139
792
(xviii) Income Tax Digest.
VOL-I
Under Section
17.
19.
20.
Title
Case No.
Page No.
Car perquisites
1141
794
Shares allotment to employees
1143
795
Position under the 1979 Ordinance
1144
796
Position under 1922 act
1146
798
Managing director/director
1148
799
Position prior to 1979
1150
801
1151-1157
802-809
Place of accrual of income Interest on securities
1151
803
Purview of chargeability
1154
806
Interest on securities is taxable on receipt basis
1155
807
Impartible estate
1156
808
Deductions
1157
808
1158-1188
810-835
Ownership & chargeability
1158
813
Applicability of explanation with retrospective effect
1167
819
Distinction between "property tax" and "income tax"
1168
820
Owner
1169
820
Profits and gains of business or profession vs. income from house property - Letting of properties Annual value - General
1175 1178
828 831
Lessee Trustees
1181 1182
832 833
Official assignee
1184
833
Co-operative society
1185
834
In case of money-lender
1186
834
Zamindari
1187
834
Property used for business
1188
835
1189-1197
836-840
1189
837
Interest on securities
Income from house property
Deductions Wealth tax liability is an allowable expense
(xix) COMPARATIVE TABLE OF SECTIONS
Under Section
21.
22.
VOL-I
Title
Case No.
Page No.
Deductions - Repairs
1190
837
Annual charge
1191
838
Interest on borrowed capital
1194
839
Taxes
1195
840
Certain terms defined - Impartible estate
1197
840
1198-1202
841-845
Words "definite" and "ascertainable", explained
1198
842
Co-owners - Shares to be definite
1199
843
Tax as AOP
1201
844
Illustration
1202
845
1203-1343
846-957
Liability in the case of co-owners.
Income from business or profession
Revenue receipts vs. capital gains Section 22 & section 27 of the ordinance
1203
860
Profit motive, meaning & relevance of
1205
863
Isolated transaction when can constitute adventure in the nature of trade
1209
865
Business income - General principles
1217
872
Profits and gains, connotation of
1218
873
Business when deemed to be carried on
1225
876
Business income vs. income from other sources - Section 22 & section 30 of the Ordinance
1226
877
Income determined in the case of the trust
1230
880
Business income on purchase of share
1231
881
Business income in the nature of casual or non-recurring
1232
882
"Abandoned" and "discarded", meaning of
1234
884
Loss / forfeiture of deposit
1235
885
Disposal or remuneration of income is not admissible in law
1240
890
Income or capital receipts
1242
892
Business income - Tests to determine nature of transaction
1243
893
Veil of corporation can be lifted
1250
897
(xx) Income Tax Digest.
VOL-I
Under Section
Title
Case No.
Page No.
Profits derived from sale of shares and bonus shares
1252
898
Dealing in land when constitute business
1254
900
Compulsory acquisition of property
1257
903
In case of money-lender
1258
903
Other illustrations
1260
904
Dealers in shares
1261
905
Gold and silver transactions
1262
908
Other illustrations
1264
909
Concept of business - Connotation of
1266
910
Profession / occupation / vocation
1269
911
Illustrations
1272
913
Carrying on business / closure of business
1278
916
Same business - Connotation of
1280
916
Rental income - Hiring of business assets
1281
917
Rental income - Other illustrations
1282
917
Royalties
1284
919
Compensation
1287
920
Sale proceeds of business / business assets / stock-in-trade
1289
921
Exploitation of mining rights
1290
922
Share dealing
1292
923
Money-lending business
1293
923
Other illustrations
1297
926
Business loss / deduction - Allowability of loss and expenditure
1300
927
Conditions precedent
1302
928
Other concepts
1307
930
Distinction between `fixed capital' and `circulating capital' - Devaluation loss
1312
932
Payment of portion of profits
1315
940
Revenue or of capital loss - Test of
1316
941
Losses on sale of shares
1317
941
(xxi) COMPARATIVE TABLE OF SECTIONS
Under Section
23.
VOL-I
Title
Case No.
Page No.
Loss on sale of securities / benefits
1319
942
Loss on sale of assets / land, etc.
1320
943
Loss arising to money-lenders
1322
944
Deductions in case of partners
1328
946
Others
1329
947
Year in which deductible - General
1333
951
Others
1334
951
Trade / professional association `Specification services' - Connotation of
1336
952
Speculation business - Scope of provision
1337
953
Valuation of land
1339
954
Other illustrations
1341
956
Mutual benefit societies
1342
956
1344-1369
958-978
1344
961
Business expenditure - Scope of deductibility1353
967
Gratuity cannot be construed as a free reserve1355
969
Tests for capital or revenue expenditure
1356
970
Computation of profits - Basic principles
1359
974
Construction of documents
1360
974
Repairs to other premises
1361
974
Rent
1362
975
Depreciation - General
1363
975
Deductions. General principle
23(1)(iii).
Bonus or commission - Application of provision1364
976
Cases under 1922 act
1365
977
Rule 14 of schedule iv
1366
977
Animals - Application of provisions
1367
977
1370-1371
979-981
1370
980
1372-1388
982-1000
Depreciation in general
1372
984
Cost how to be determined
1380
992
Current repairs Expenditure on repairs
23(1)(v).
Depreciation allowance
(xxii) Income Tax Digest.
VOL-I
Under Section
23(1)(vii).
Title
Case No.
Page No.
Depreciation on buildings explained
1381
993
World depreciation pool Full depreciation in case of pre-dissolved and post reconstituted Depreciation is admissible on assets received as gift Depreciation on hotel building Depreciation of unregistered firm can be carried forward and set off against profits of registered firm Difference between original cost price and written down value
1382
993
1383
994
1384 1385
994 996
1387
999
1388
1000
1389-1421
1001-1025
1389
1004
Interest paid on borrowed capital General
23(1)(viii).
23(1)(x).
Interest on money borrowed when deductible1392
1006
Distinction between capital and revenue expenditure
1397
1009
Capital borrowed - Connotation of
1402
1014
Illustrations where interest is not deductible 1408
1020
Illustrations
1420
1024
1422-1427
1026-1033
Provision of bonus
1422
1027
Managing director is entitled for bonus being an employee
1423
1028
Reasonableness of bonus
1425
1031
Expenditure held to be inadmissible
1427
1033
1428-1488
1034-1068
Bad debts - Meaning and scope of
1428
1040
Bad debts - Connotation of
1434
1042
Incidental to business - General test
1437
1043
Embezzlement by employee
1438
1044
Managing agent
1439
1044
Money lender
1440
1044
Test for determining irrecoverability of debt or when the debt has become bad - Basic concepts
1447
1048
Bonus or commission paid to employees
Bad debts
(xxiii) COMPARATIVE TABLE OF SECTIONS
Under Section
23(1)(xiii).
Title
VOL-I
Case No.
Page No.
Onus to prove
1451
1049
Time to allow bad debts / powers of income tax authorities
1452
1049
Effect of period of limitation
1457
1053
Relevance of fact that debtor has become insolvent
1463
1056
Relevance of writing off of debt
1465
1057
Illustrations
1470
1059
Debt should become bad in relevant account year 1476
1062
Reference to high court
1480
1065
1489-1675
1069-1209
Disallowability - General
1489
1088
Wholly and exclusively - Meaning of
1499
1098
Wholly and exclusively for the purpose of business - Illustrations of allowability / non-allowability
1501
1098
Premium paid on annual basis
1520
1115
Devaluation of currency
1521
1115
"Penal interest and the penalty", meaning of 1525
1121
Liquidated damages are allowable expenditure1529
1125
Expenses incurred to raise capital or obtain loan or recover debts, etc.
1531
1125
Expenditures on running school for children of employees
1534
1128
Loss of stock-in-trade / spares, etc.
1535
1129
Loss or embezzlement of cash / robbery or theft
1539
1131
Rates / taxes
1543
1134
Reasonableness of remuneration
1545
1136
Capital or revenue expenditure
1553
1140
Tests for determining nature of expenditure 1557
1143
Interest and dividends earned by the assessee is an allowable deduction
1567
1151
Test of fixed or circulating capital
1568
1152
Business expenditure.
(xxiv) Income Tax Digest.
VOL-I
Under Section
Title
Case No.
Page No.
Relevance of character of receipt in recipient's hands
1569
1152
Travelling expenses for training abroad
1570
1153
Expenditure must be incurred in the character as a trader
1571
1154
Expenditure must be for carrying of business1572
1154
Quantum of expenditure
1574
1155
Relevance of benefit to third party
1576
1155
Relevance of production of income from expenditure
1577
1156
Business expenditure - Sharing of profits
1580
1157
Land / building, acquisition of
1583
1160
Benefit of contracts
1584
1160
Goodwill
1585
1162
Selling agency
1586
1162
Copyright
1587
1163
Electricity transmission lines / railway platforms, etc.
1588
1163
Expenditure to save business reputation
1589
1164
Brick manufacturers
1590
1164
Bidi manufacturer
1596
1167
Mining - Mining rights & mining expenses
1597
1168
Repairs / renovation
1602
1172
Illustrations : repairs to permises / furniture
1604
1173
Illustrations : repairs to machinery
1605
1173
Rent
1607
1175
Royalty
1609
1177
Forfeiture of security deposits
1611
1178
Contribution to provident fund
1612
1179
Other illustrations
1614
1180
Compensation to managing agents / selling agents
1615
1180
Managing agency commission
1617
1181
(xxv) COMPARATIVE TABLE OF SECTIONS
Under Section
Title
VOL-I
Case No.
Page No.
Others
1618
1181
Litigation expenses
1619
1181
Expenses incurred to protect business / business assets
1622
1185
Expenditure to protect profit / source of income1629
1187
Expenses peculiar to firms
1631
1187
Expenses peculiar to HUFs
1633
1188
Penalty / damages paid for breach of contract1635
1189
Estate duty
1636
1189
Excise duty / import duty
1637
1189
Others
1638
1190
Amount paid to ward off competition
1642
1191
Gifts and presents
1644
1192
Advertisement & sales promotion expenses / expenses for inaugural functions 1646
1196
Trade mark, charges for registration of
1647
1196
In case of profession
1648
1197
Expenses incurred by holding company for subsidiary company
1650
1195
Banking company
1651
1196
Insurance companies
1653
1197
In case of partner of a firm / firms Expenses by partner / firm
1659
1201
Payments to retiring partner
1660
1201
Expenditure incurred by HUF - Salary to coparcener
1662
1202
Others
1665
1203
`To effect or keep in force' - Connotation of
1670
1205
Contract of insurance, meaning of
1672
1206
Provident fund
1673
1206
Income of co-operative Societies - Co-operative bank
1675
1208
(xxvi) Income Tax Digest.
VOL-I
Under Section 23(2)). 24(a).
24(b).
24(c).
24(d).
24(h).
24(i).
Title
Case No.
Page No.
Deductions.
1676
1210-1211
General
1676
1210
Deductions not admissible.-Any cess, rate or tax levied on the profits or gains
1677
1212-1214
Profits or gains of business or profession - Connotation of
1677
1212
1678-1680
1215-1221
General
1678
1215
Commission paid to non-resident without deduction of tax at source
1679
1216
Deductions not admissible.-Services rendered, brokerage or commission or rent of house property
1681
1222-1223
In cases of directors
1681
1222
Deductions not admissible.-Interest, brokerage, commission, salary or other remuneration
1682
1224-1225
Interest
1682
1224
1683-1686
1226-1230
General
1683
1226
Deduction of tax at source
1684
1227
Pension fund was maintained in foreign country for foreign employees and was payable in foreign Country after retirement 1686
1228
Deductions not admissible.Payments to non-residents
Deductions not admissible.-Provident fund or other fund established for the benefit of employees of the assessee
Deductions not admissible.Expenditure incurred by an assessee on perquisites, allowances
1687-1692
1231-1235
Excess perquisites
1687
1231
Using the word `or' as disjunctive
1688
1231
Reimbursement on account of medical bills is a perquisite
1689
1232
Provident fund is not perquisite
1690
1233
(xxvii) COMPARATIVE TABLE OF SECTIONS
Under Section 24(j).
Title
VOL-I
Case No.
Page No.
1693-1695
1236-1240
1693
1236
1696-1702
1241-1247
Trading liability
1696
1241
Loss
1702
1245
Special provisions regarding business of insurance and production of oil and natural gas and mineral deposits
1703-1726
1248-1272
Assessment of insurance business
1703
1250
Powers of assessing officers under Fourth Schedule
1705
1252
Benefit of produced rate of tax to insurance companies
1721
1265
Position under 1922 act
1726
1268
1727-1735
1273-1281
1727
1275
Cost of bonus shares - Method of calculation 1728
1276
`Immovable property' is not a capital asset
1733
1280
Face value should be cost of bonus share
1734
1280
Immovable property vis-a-vis ownership and possession
1735
1281
Computation of capital gains
1736
1282-1283
Face value of bonus share constitutes its actual cost
1736
1283
1737-1747
1284-1291
General
1737
1286
Gratuity - Position prior to 1.7.1979
1742
1288
Zamindari
1733
1289
Income from house property vs. Income from other sources
1744
1290
Illustration
1745
1290
Deductions not admissible.Expenditure incurred on account of payment of a fine or penalty Penalty, fine and forfeiture are not admissible expense
25.
26.
27.
Amounts subsequently recovered in respect of deductions, etc.
Capital gains Bonus share - View's of Lahore High Court reversed
28.
30.
Income from other sources
(xxviii) Income Tax Digest.
VOL-I
Under Section 31.
Title
Case No.
Page No.
1748-1757
1292-1299
1748
1294
Any other expenditure, etc., paid out or expended wholly and exclusively for purpose of earning such Income - Basic principles 1750
1296
Interest
1751
1297
In case of company in liquidation
1755
1298
Others
1756
1299
1758-1845
1300-1375
Deductions Scope of the section
32.
34.
35.
Method of accounting
Rejection / acceptance of method of accounting1758
1309
Method of accounting and chargeability
1785
1337
System of accounting
1795
1346
Application of sub-section (3) and proviso
1802
1350
Power of assessing officer
1822
1361
General
1830
1366
Choice of method of accounting
1837
1372
Change of method of accounting
1841
1374
Others
1845
1375
1846-1851
1376-1381
General principles
1846
1377
Business loss could not be adjusted against free reserve
1850
1380
Losses in case of resident and ordinary resident
1851
1381
1852-1878
1382-1404
Words "in any other business", "such business", meaning of
1852
1385
Same business - General tests
1853
1386
In any other business - General tests
1862
1393
Intra business adjustment
1863
1395
Operation of provision
1864
1396
When loss arises
1868
1399
Losses of illegal business
1872
1401
Set-off of losses
Carry forward of business losses
(xxix) COMPARATIVE TABLE OF SECTIONS
Under Section
VOL-I
Title
Case No.
Page No.
1873 1874 1876
1401 1402 1403
1879-1881
1405-1408
1879
1406
1881-1888
1409-1418
Unabsorbed depreciation
1882
1411
Depreciation allowance can be carried forward without any time limit
1883
1412
Dissolution of registered firm
1885
1414
Unregistered firm converted into registered 1886
1414
Share of loss
1887
1416
Allowance for investment in Defence Savings and NIT Certificates, etc.
1889-1892
1419-1422
Deduction or rebate, meaning of
1889
1420
Allowance for purchase of books
1893
1423-1424
Exemption claimed on account of educational expenses of children of HUF
1893
1424
1894-1895
1425-1427
General
1894
1426
Expression "any sum paid"
1895
1427
1896-1902
1428-1434
1896
1429
1900 1903-1905
1432 1435-1437
Amended law and scope of Credit for tax deducted at source
1903 1904
1436 1436
Deduction of tax at source.-Interest / profit on deposit / account
1906
1438-1439
Pakistani banks having branches in the tribal areas
1906
1439
Income against which carried forward loss can be set off Losses of unregistered firm Illustrations 36.
Speculation losses Speculation losses are to kept distinct
38.
41.
42.
47.
48.
50(1).
50(2A).
Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.
Allowance for donations for charitable purposes
Exemption from tax of newly established industrial undertakings Capital employed Provisions of section for the purpose of determination of total income Deduction of tax at source
(xxx) Income Tax Digest.
VOL-I
Under Section 50(2B).
Title
Case No.
Page No.
1907-1908
1440-1443
1907
1441
1909-1914
1444-1449
1909
1445
1915-1918
1450-1454
Banks have no right to claim or charge any commission or service charge from wapda
1915
1451
Expression "supplies" includes sales in section 50(4)
1916
1452
"Goods" do not include immovable property 1917
1453
Sale of land, building and other fixed assets 1918
1454
Deduction of tax at source.Certain banking instruments Special deposit receipts
50(3).
Deduction of tax at source.-`Certain payment to non-residents' "Assessee in default"
50(4).
50(5).
50(5A).
50(7A).
50(7BB).
Deduction of tax at source.-Payments on supply of goods / services / contracts
Deduction of tax at source.-Imports
1919-1925
1455-1463
Tests for question of law
1919
1456
Tax on imports
1922
1458
Calculation of duties & octroi
1924
1460
Words, "same manner" and "at the same time", meaning of
1925
1461
Deduction of tax at source.-Export proceeds
1926
1464-1466
Export of cotton yarn
1926
1465
1927-1933
1467-1479
Scope of section 50(7A)
1927
1460
Section 50(7A) is held to be valid law
1930
1470
Words, `sale', `property', explained
1932
1474
Auction of the right to collect export tax is not a sale
1933
1478
Deduction of tax at source.Cost of commercial buildings
1934
1480-1481
General
1934
1481
Deduction of tax at source.-Sale of certain properties, octrio right, toll fee etc.
(xxxi) COMPARATIVE TABLE OF SECTIONS
Under Section 52.
53.
54. 55.
56.
Title
VOL-I
Case No.
Page No.
1935-1939
1482-1486
Assessee in default cannot be a person who was not competent to deduct tax
1935
1483
Proceeding under section 52 held not maintainable
1936
1484
Advance payment of tax
1940-1955
1487-1500
Advance tax - General
1940
1489
Scope of "retained income"
1947
1494
Constitutional and legal issues relating to advance tax
1948
1494
Recovery notice after case has been set aside is illegal
1950
1496
Assessee in default
1951
1496
CBR's circular held violative of the provisions of section 53
1954
1498
Levy of additional tax
1955
1500
Payment of tax with return of income
1956
1501-1502
Full payment of tax with return
1956
1502
1957-1969
1503-1511
Return filed voluntarily, after service of notice, position prior to Income Tax Ordinance, 1979
1957
1505
Constitutional validity
1959
1507
Person liable to furnish return
1961
1507
Validity of return
1962
1508
Extension of time
1963
1508
Return under 1922 act
1964
1509
Defective return
1966
1510
Signing of return
1967
1510
1970-1975
1512-1520
Words `during the previous year' and `any' - Meaning of
1970
1513
Notice can be given for any year
1971
1514
Liability of persons failing to deduct or pay tax
Return of total income
Notice for furnishing return of total income
(xxxii) Income Tax Digest.
VOL-I
Under Section
57.
58.
Title
Case No.
Page No.
ITO can curtail the period for filing of return1973
1516
Profit and loss account
1974
1517
1976-1977
1521-1523
Remanding of case held illegal
1976
1522
Revised return filed before issuance of notice
1977
1523
1978-1979
1524-1526
1978
1525
1980-2006
1527-1552
Revised returns of total income
Wealth statement Statement of assets and liabilities
59.
59B.
59D. 60.
Self-assessment
Self-assessment scheme - Section 59 read with section 65 of the ordinance - General
1980
1530
Conditions for reopening of SAS cases
1982
1531
Registered firms not maintaining accounts - SAS was not applicable
1988
1534
Principle of res judicata does not apply to SAS cases
1989
1534
Scope of additions under SAS
1990
1534
Selection for total audit
1992
1535
Cases selected for detailed scrutiny
1996
1539
Enhancement of income vis-a-vis Self assessment scheme
1997
1540
Claim for immunity
1999
1542
Comparison of income where loss assessed
2000
1543
Assessee can file a revised return for availing the benefit of Self assessment scheme
2001
1544
Section 59 vis-a-vis writ petition
2002
1546
Assessment under the simplified procedure for assessment
2007
1553-1554
Assessee challenged the legality of notice through writ jurisdiction
2007
1554
Tax on undisclosed income
2008
1555-1556
Declaration of undisclosed income
2008
1556
Provisional assessment
2009
1557-1558
General
2009
1558
(xxxiii) COMPARATIVE TABLE OF SECTIONS
VOL-I
LIST OF CASES DIGESTED IN VOLUME-I Case No.
A A&B Food Industries Ltd. v. Commissioner of Income Tax/CST Karachi [1992] 65 TAX 281 (S.C.Pak)
70, 206
A.A. Thevar Bros. v. Commissioner of Income Tax 7 ITC 156 (Rangoon)
684, 977
A.C. Macnab, Retired Financial Commissioner, Punjab, In re. [1961] 4 TAX 143 (H.C.Lah.) = 1961 PTD 713
728
A.G. v. Aramago [1925] 9 TC 445 (HL)
319
A.H. Forbes v. Commissioner of Income Tax 6 ITC 208 (Pat.)
1669
A.H.Wadia v. Commissioner of Income Tax [1949] 17 ITR 63 (PC)
1052
A.Harvey v. Commissioner of Income Tax [1935] 3 ITR 311 (Mad.)
1066
A.Hussain S. Mirza and Company, Dacca v. Commissioner of Income Tax, Dacca [1966] 13 TAX 1 (H.C.Dacca)
1702
A.J. Hartshorn v. Commissioner of Income Tax, West Karachi [1984] 49 TAX 198 (H.C.Kar.)
47, 177, 1125, 1141
A.Jainulabdeen Sahib v. Commissioner of Income Tax [1944] 12 ITR 285 (Mad.)
2567
A.L.A.R. Bros. v. Commissioner of Income Tax 3 ITC 209 (Mad.)
1394
A.M. Qureshi v. Commissioner of Income Tax [1987] 56 TAX 72 (H.C.Kar.)
1103
A.R. Hattiangadi, In re [1940] 8 ITR 85 (Bom.)
944, 1132
A.S.P.L.V.R. Ramaswami Chettiar v. Commissioner of Income Tax [1933] 1 ITR 389 (Mad.)
1166, 1295
A.Salam, A.Sattar, Dacca v. Commissioner of Income Tax, East Pakistan Dacca [1968] 17 TAX 179 (H.C.Dacca)
1070
Abbas S. Sharoff and another v. Income Tax Officer and Others [1998] 78 TAX 119 (H.C.Kar.) = 1998 PTD 2884
449
Abbot Laboratories Ltd. v. Commissioner of Income Tax, Central Zone, Karachi [1989] 60 TAX 75 (H.C.Kar.)
1522
Abdul Aziz and another v. Income Tax Officer And Another [1967] 15 TAX 235 (H.C.Kar.)
771
Abdul Hameed Awan v. Tax Recovery Officer-04 Coys Zone, Income Tax Building at Rawalpindi and 3 others [1997] 76 TAX 238 (H.C.Lah.) = 1998 PCTLR 440 = 1998 PTD 874 (H.C.Lah.)
374
Abdul Hamid, son of Mohammad Ismail, Azad Boot House, Mirpur, and others v. Deputy Collector, Excise & Taxation / Income Tax Officer, Commissioner of Income & others [1988] 57 TAX 14 (H.C.A.J.&K.)
373
(xxxiv) VOL-I
Income Tax Digest. Case No.
Abdul Hussain Moosaji v. Commissioner of Income Tax 10 ITC 255 (Sind)
1325
Abdul Majeed Awan v. Inspecting Additional Commissioner of Income Tax [1999] 80 TAX 115 (H.C.Lah.) = 1999 PTD 2910 = 2000 PCTLR 1046
124
Abdul Majeed Awan v. Inspecting Additional Commissioner of Income Tax [1999] 80 TAX 115 (H.C.Lah.) = 1999 PTD 2910 = 2000 PCTLR 1046
117
Abdul Rahman v. Commissioner of Income Tax [1944] 12 ITR 302 (Lahore)
1200
Abdul Rashid (c/o Union Traders GoIe Cloth, LyalIpur) v. Special Judge (Central), Lahore and another [1976] 34 TAX 199 (H.C.Lah.)
134, 168, 756, 766
Abdul Razzak v. Collectors of Customs 1995 CLC 1435 (H.C.Kar.)
309
Abdul Rehman & Another v. Income Tax Officer Mirpur & another [1993] 68 TAX 132 (S.C.AJ&K)
412
Abdul Sattar Noon Muhammad and others v. The Government of Balochistan [1999] 79 TAX 93 (H.C.Quetta) = 1998 PTD 3468 = PTCL 1999 CL. 252
1941
Abdul Sattar Noor Muhammad & Co. v. Government of Pakistan, etc. [1999] 80 TAX 49 (H.C.Qta)
1922
Abdul Sattar v. Commissioner of Income Tax, Karachi [l960] 2-TAX (Suppl.-114) (H.C.West Pakistan, Karachi Bench) = 1959 PTD 119 = 1958 PLD 220
773
Abdur Rehman v. Income Tax Officer [1981] 43 TAX 158 (H.C.Lah.) Abhey Ram Chunni Lal, In re [1933] 1 ITR 126 (All.)
1034 786
Adamjee & Sons v. Commissioner of Income Tax [1983] 47 Tax 211 (H.C.Kar.)
1227
Adamjee Insurance Co, Ltd. and Others v. Income Tax Officer and Others [1995] 71 TAX 164 (H.C.Kar.)
409, 1714
Aftab Medical Stores Dera Ghazi Khan v. Commissioner of Income Tax, Lahore [1976] 34 TAX 10 (H.C.Lah.)
52, 276
Afzal Construction Co. (Pvt.) Ltd. v. Chairman, Central Board of Revenue and others [1990] 62 TAX 91 (H.C.Lah.) = 1990 PTD 9/833
331
Agha Ice Factory, Sheikhupura v. Regional Commissioner Of Income Tax, Central Region, Lahore and 4 Others [1996] 74 TAX 215 (H.C.Lah.)
425
Ahmad Din Alla Ditta v. Commissioner of Income Tax [1934] 2 ITR 369 (Lahore)
968
Ahmadpur Katwa Railway Co. Ltd. In re [1935] 3 ITR 277 (Cal.) Ahmed Maritime Breakers Ltd. v. Central Board of Revenue etc. [1992] 65 TAX 268 (H.C.Kar.)
1409 333
(xxxv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Ahmed Steel (Pvt.) Ltd. v. Government of Balochistan, etc. [1998] 78 TAX 334 (H.C.Qta.) = PCTLR (Qta) 1361
1924
Al-Ahram Builders (Pvt.) Ltd. v. Income Tax Appellate Tribunal 1992 SCC 950 = [1992] 66 TAX 147 (S.C.Pak.) = 1992 PTD 167
798
Al-Hamza Ship Breaking Co. and Others v. Government of Pakistan through Secretary, Finance and Economic Affairs, Islamabad and Others [1996] 73 TAX 203 (H.C.Quetta)
1925
Al-Hilal Agencies Ltd. v. Income Tax Officer, Karachi and another [1980] 41 TAX 40 (H.C.Kar.)
1945
AL.VR. ST. Veerappa Chettiar v. Commissioner of Income Tax [1941] 9 ITR 56 (Mad.)
504, 975
AL.VR. V.P. Pethaperumal Chettiar v. Commissioner of Income Tax [1943] 11 ITR 532 (Mad.)
491, 493
Algemene Bank, Nederland N.V., Karachi v. Commissioner of Income, Central Zone `C', Karachi [1992] 65 TAX 306 (H.C.Kar.)
1152
Ali Davar Khan and 19 others v. Government of Pakistan and 54 others 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
751, 755
Ali Roberts (Bahawalpur) Limited v. Commissioner of Income Tax [1966] 13 TAX 188 (H.C.Lah.)
873
All India Spinners' Association v. Commissioner of Income Tax [1944] 12 ITR 482 (PC)
569, 584, 593
Allied Bank of Pakistan Ltd., Azad Kashmir Branches, Mirpur through Inam Elahi Azhar, EVP and Provincial Chief, PHQ (Punjab) v. Income Tax Appellate Tribunal, AJK Council, Muzaffarabad and others [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 (H.C.AJ&K) = 2000 PTD 2872
76
Allied Cans v. Income Tax Officer, Circle-8, Multan and others [1995] 71 TAX 216 (H.C.Lah.)
430
Alyani Cotton Ginning and Pressing Factory, Rahimyar Khan v. Assistant Commissioner of Income Tax and another [1974] 29 TAX 238 (H.C.Lah.)
277, 278
Ameer Bux Badhuddin, Sarraf, Hyderabad v. Commissioner of Income Tax, Karachi (West), Karachi [1984] 50 TAX 61 (H.C.Kar.)
1997
Amin Bricks Company. Faisalabad v. Commissioner of Income Tax (Pension) and Another [1996] 74 TAX 227 (H.C.Lah.) = 1997 PTD 76
151, 1762
Amin Textile Mills (Pvt.) Ltd. v. Commissioner of Income Tax and 2 others, PTCL 2000 CL. 316 (S.C.Pak)
408
Amir Nawaz Khan, etc. v. Government of Pakistan, through Secretary Finance, Islamabad, etc. [2001] 83 TAX 397 (H.C.Lah.)
414, 1927
Amrit Waman v. Commissioner of Income Tax [1937] 5 ITR 721 (Nag.)
1840
Amrita Bazar Patrika, In re [1937] 5 ITR 648 (Cal.)
1629
(xxxvi) VOL-I
Income Tax Digest. Case No.
Amritsar Produce Exchange Ltd., In re [1937] 5 ITR 307 (Lahore) Amulyadhan Addy, In re [1936] 4 ITR 164 (Cal.)
860, 939, 1249 1753
Anant Ram Khem Chand v. Commissioner of Income Tax [1937] 5 ITR 511 (Lahore)
932
Andhra Insurance Co. Ltd. v. Commissioner of Income Tax [1937] 5 ITR 697 (Mad.)
1726
Anglo-Persian Oil Co. (India) Lid. v. Commissioner of Income Tax [1933] 1 ITR 129 (Cal.)
1569, 1577, 1615
Anisa Rehman v. PInspecting Additional Commissioner [1994 SCMR 2232]
316
Arafat Woollen Mills Ltd. v. Income Tax Officer, Companies Circles E1, Karachi [1986] 54 TAX 1 (H.C.Kar.) = 1986 PTD 316
238, 436
Arnarchand Madhavjl & Co. v. Commissioner of Income Tax [1935] 3 ITI1 462 (Bom.)
1468
Arshad Mahmood v. Government of Pakistan through Secretary, Ministry of Interior and Narcotics Control, Islamabad and another 1998 PTD 370 (H.C.Lah.)
847
Asbestos Cement Ltd. v. Commissioner of Income Tax [1988] 58 TAX 80 (H.C.Kar.)
1494
Asiatic Agencies Limited, Karachi v. Commissioner of Income Tax [1967] 15 TAX 89 (H.C.Kar.)
1114
Asim Textile Mills Limited v. Central Board of Revenue & others [1999] 80 TAX 217 (H.C.Lah.)
1926
Aspro Ltd. v. Commissioner of Taxes [1936] 4 ITR 264 (PC)
1552
Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax East Pakistan, Dacca 1962 SCC 113 = [1962] 6 TAX 49 (S.C.Pak.)
1397
Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax, East Pakistan [19601 2-TAX (III-228) (H.C.Dacca) = 1960 PTD 379 = 1960 PLD 389
1554
Associated Cement Companies Ltd. v. Commissioner of Income Tax, Lahore Range, Lahore and others 1978 SCC 453 = [1978] 38 TAX 132 (S.C.Pak.)
184, 550
Ata Hussain Khan Limited v. Commissioner of Income Tax, Dacca [1968] 18 TAX 2 (H.C.Dacca)
1781
Ata Hussain Khan Ltd., Dacca v. Commissioner of Income Tax, East Pakistan, Dacca [1965] 11 TAX 335 (H.C.Dacca)
1548
Ata Hussain Limited v. Commissioner of Income Tax, East Pakistan Dacca 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.)
1501, 1545, 1546
Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 Tax Cas. 155 (HL)
1565
(xxxvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Attock Oil Co. Ltd. Rawalpindi, v. Commissioner of Income Tax, Rawalpindi Zone 1981 SCC 557 = [1982] 45 TAX 1 (S.C.Pak.)
1534
Augustine C. Paul & Co., Karachi v. Commissioner of Income Tax, South Zone, West Pakistan, Karachi [1967] 16 TAX 73 (H.C.Kar.)
1793
Augustine C. Paul And Company, Karachi v. Commissioner of Income Tax, South Zone, (West Pakistan), Karachi [1967] 15 TAX 94 (H.C.Kar.)
1782
Australasia Bank Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1962] 6 TAX 7 (H.C.Lah.) = 1962 PTD 575 = 1962 PLD 779
1535
Auto Stores, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca [1963 7 TAX 1 (H.C.Dacca) = 1964 PTD 317 = 1964 PLD 433
1087
Azad Friends Company Limited v. Commissioner of Income Tax [1970] 21 TAX 75 (H.C.Kar.)
1244
Aziz Book Depot, Lahore v. Inspecting Additional Commissioner of Income Tax, Lahore and another [1995] 71 TAX 209 (H.C.Lah.)
1956
Azmat Farooq v. Regional Commissioner of Income Tax Central Region Lahore and another [1993] 68 TAX 74 (H.C.Lah.)
432
Aasia v. Income Tax Appellate Tribunal etc. 1978 SCC 446 = [1980] 41 TAX 1 (S.C.Pak)
150
B B.B. Jubb v. Commissioner of Income Tax [1938] 6 ITR 210 (Rangoon)
1208
B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax [1937] 5 ITR 279 (Lahore)
966, 1449, 1461, 1484, 1837, 1870
B.D.Avari v. Commissioner of Income Tax [1989] 60 TAX 79 (H.C.Kar.)
1171
B.J. Heera v. Commissioner of Income Tax [1937] 5 ITR 591 (Lahore)
1674
B.K. Paul & Co. v. Commissioner of Income Tax 7 ITC 20 (Cal.)
1664
B.K. Paul & Co., In re [1938] 6 ITR 395 (Cal.)
1873
B.N. Elias, In re [1935] 3 ITR 408 (Cal.)
695
B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [1946] AC 224 (PC)
1562
B.P. Biscuit Factory Ltd., Karachi v. Wealth Tax Officer, II-Circle, Karachi & another [1982] 45 TAX 17 (H.C.Kar.) = 1981 PTD 217
438
B.R. Naik v. Commissioner of Income Tax [1945] 13 ITR 124 (Bom.)
741
Babra Srarif v. Commissioner of Income Tax [1993] 68 TAX 124 (H.C.Lah.)
1161
Babulal Kanji v. Commissioner of Income Tax [1946] 14 ITR 662 (Bom.)
1670, 1671, 1672
Babulal Raj Garhia, In re [1936] 4 ITR 148 (Cal.)
1179
(xxxviii) VOL-I
Income Tax Digest. Case No.
Baby-own v. Income Tax Officer [1997 PTD 47]
451
Bachu Bai F.E. Dinshaw, Karachi v. Commissioner of Income Tax [1967] 15 TAX 37 (H.C.Kar.) = 1967 PTD 170 = PLD 1067 Kar. 372
1172
Badri Shah Sohan Lal v. Commissioner of Income Tax [1936] 4 ITR 303 (Lahore)
1323
Badri Shah Sohan Lal v. Commissioner of Income Tax 10 ITC 1 (Lahore)
1431
BaIaji Rao v. Commissioner of Income Tax [1935] 3 ITR 461 (Mad.)
1128
Balkishan Nathani v. Commissioner of Income Tax [1923] 1 ITC 248 (Nagpur)]
58
Ballygunge Bank Ltd. v. Commissioner of Income Tax [1946] 14 ITR 409 (Cal.)
1177, 1181
Bank Bihari LaI v. Commissioner of Income Tax 10 ITC 461 (Lahore)
1127
Bank of Bahawalpur Ltd. v. Commissioner of Income Tax [1983] 47 TAX 173 (H.C.Kar.)
1454
Bank of Chettinad Ltd. v. Commissioner of Income Tax [1940] 8 ITR 522 (PC)
1046
Bank of Punjab v. Federation of Pakistan [2000] 81 TAX 390 (H.C.Lah.)
362, 1903
Banka Mal Niranjan Das v. Commissioner of Income Tax, Punjab and N.W.F.P. [1960] 2-TAX (Suppl.-118) (H.C.Lah.) = 1951 PLD 311
1858, 1876
Bansidar Podd v. Commissioner of Income Tax [1934] 2 ITR 20 (Pat.)
1460
Bansidhar Poddar v. Commissioner of Income Tax 7 ITC 117 (Pat.)
1462
Baramula Saw Mills Ltd., Baramula v. Commissioner of Income, Punjab and N.W.F.P. [1960] 2-TAX (Suppl.-104) (H.C.Lah.) = 1960 PTD 1225 = 1954 PLD 157
1039
Barnala Commission Shop, Chak-Jhumra v. Income Tax Officer, BWard, Lyallpur [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311
355, 407, 556
Barry Brothers v. Commissioner of Income Tax [2001] 83 TAX 299 (H..C.Lah.)
1761
Basant Lal Thakat Singh v. Commissioner of Income Tax [1933] 1 ITR 141 (All.)
1192
Basant Rai Takhat Singh v. Commissioner of Income Tax 4 ITC 324 (All.)
1282, 1744
Basharat Ali and another v. Deputy Superintendent, Central Excise and Sales Tax, Mananwala Circle, Sheikhupura [1995] 72 TAX 218 (H.C.Lah.)
378
Bashir & Co., Lyallpur v. Income Tax Officer, B-Ward, Lyallpur & Another 1968 SCC 315 = [1968] 17 TAX 207 (S.C.Pak.)
760
(xxxix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Bashir Ahmad v. The State [PLD 1960 Lahore 687]
312
Bashir Sons (Pvt.) Ltd. v. CBR [1993] 67 TAX 395 (H.C.Lah.)
457
Batala Engineering Ltd. v. Income Tax Officer Lahore 1973 SCC 403 = [1974] 29 TAX 190 (S.C.Pak)
446
Bayer Pharma Ltd., Karachi v. Commissioner of Income Tax `A' Range, Karachi [1993] 68 TAX 184 (H.C.Kar.)
1530
Beach Luxury Hotel Ltd. v. Commissioner of Income Tax (Central), Karachi 1981 SCC 546 = [1981] 44 TAX 40 (S.C.Pak.)
1380, 306
Beak (Inspector of Taxes) v. Robson [1942] 25 Tax Cas. 33 (HL)
856
Beak (Inspector of Taxes) v. Robson [1943] 11 ITR (Suppl.) 23 (HL)
1145
Bebari Lal Chatterji v. Commissioner of Income Tax [1934] 2 ITR 377 (All.)
1967
Beecham Pakistan Ltd. v. Commissioner of Income Tax [1995] 71 TAX 57 (H.C.Kar.)
1346
Begum Nusrat Bhutto v. Income Tax Officer, Circle V, Rawalpindi [1980] 42 TAX 59 (H.C.Lah.)
26, 214, 401, 635
Behari Lal Jhandu Mal, In re [1944] 12 ITR 209 (Lahore) Beli Ram & Bros. v. Commissioner of Income Tax [1935] 3 ITR 103 (Lah.) Benarisdas Jagannath, In re [1947] 15 ITR 185 (Lahore)
1262 319 1590, 1591
Bengal Coal Co. Ltd. v. Sri Janardan Kishore Lal Singh Deo [1938] 6 ITR 632 (PC)
880
Bengal-Burma Steam Navigation Co. Ltd. v. Commissioner of Income Tax, East Pakistan, Dacca [1960] 2-TAX (III-451) (H.C.Dacca) = 1960 PTD 765 = 1960 PLD 584
1007
Benoy Ratan Banerji v. Commissioner of Income Tax [1947] 15 ITR 98 (All.)
487
Beohar Singh Raghubir Singh v. Commissioner of Income Tax [1948] 16 ITR 433 (Nag.)
464, 526, 546
Bhagat Jiwan Das v. Commissioner of Income Tax 4 ITC 40 (Lahore)(FB)
985
Bhagwan Das Nanak Chand v. Commissioner of Income Tax 10 ITC 448 (Labore)
1464
Bhagwati Shankar, In re [1944] 12 ITR 193 (Lahore)
1129
Bhajan Lal Sanwal Das v. Commissioner of Income Tax 5 ITC 118 (All.)
678
Bharat Insurance Co. Ltd. v. Commissioner of Income Tax [1934] 2 ITR 63 (PC)
948, 1220, 1658
Bharat Insurance Co. Ltd. v. Commissioner of Income Tax 5 ITC 288 (Lahore)
1656
(xl) VOL-I
Income Tax Digest. Case No.
Bhikaji Vyankatesh Dravid & Co. v. Commissioner of Income Tax 2 ITC 355 (Nag.)
1310
Bhikamchand Laxmichand v. Commissioner of Income Tax [1935] 3 ITR 120 (Nag.)
967
Bhikamchand Laxmichand v. Commissioner of Income Tax 7 ITC 184 (Nag.)
865
Bhimji K. Naik v. Commissioner of Income Tax [1946] 14 ITR 334 (Bom.)
726, 735
Bhudarmull Chandi Prasad v. Commissioner of Income Tax 8 ITC 249 (Pat.)
1335
Biafo Industries v. Federation of Pakistan, PTCL 2000 CL. 384
147
Binjraj Hukamchand v. Commissioner of Income Tax 5 ITC 303 (Cal.) Bisheshar Prasad Parshotam Das v. Commissioner of Income Tax 7 ITC 74 (All.) Bisheshwar Nath & Co., In re [1942] 10 ITR 103 (All.)
1451 784 787, 788, 795, 989
Bishwanath Singh Sharma v. Commissioner of Income Tax [1941] 9 ITR 474 (Pat.)
1101
Bismillah and Co. v. Secretary, Government of The Punjab, Etc. [1997] 75 TAX 109 (H.C.Lah.) = 1997 PTD 747
1929
Bissendoyal Doyaram, In re [1938] 6 ITR 165 (Cal.)
1446
Board of Intermediate & Secondary Education v. Central Board of Revenue, etc. [1999] 79 TAX 28 (H.C.Lah.)
391
Board of Revenue v. Ramanathan Cheltian [1 ITC 244 (Madras)]
255
Bombay Cloth House, Lahore v. Income Tax Officer, Circle-I, Zone-A, Lahore and others [1993] 67 TAX 398 (H.C.Lah.)
775
Booz Allen & Hamilton International (P.R.) Inc. U.S.A. Commissioner of Income Tax, Lahore [1976] 33 TAX 189 (H.C.Lah)
v.
1006
Brentford Yousuf & Co. Ltd. v. Commissioner of Income Tax, Lahore [1966] 13 TAX 182 (H.C.Lah.)
1547
Brihan Maharashtra Sugar Syndicate Ltd. v. Commissioner of Income Tax [1946] 14 ITR 611 (Bom.)
473, 547, 548
Brilliant Farbics & Silk Factory, Karachi v. Income Tax Officer, West Zone, Karachi & others [1987] 56 TAX 24 (H.C.Kar.)
435
British Insulated & Helsby Cables Ltd. v. Atherton [1925] 10 TC 155, 198 (HL)
1499
British South Africa Co. v. Commissioner of Income Tax [1946] 14 ITR (Suppl.) 17 (PC)
1290
Brumby (H.M. Inspector of Taxes) v. Mimer 51 Tax Cas. 583 (HL)
1134
Bowman v. Secular Society Ltd. [1917] AC 406 (HL)
571
(xli) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Burhan Transport Service Ltd., Wah Cantt. v. Commissioner of Income Tax, Rawalpindi [1980] 41 TAX 182 (H.C.Lah.)
1370
Burma Corpn. Ltd. v. Commissioner of Income Tax 4 ITC 49 (Rangoon)
1613
Burma Railway Co. v. Secretary of State [1 ITC 140 (Burma)]
34, 210
C C.J.G. Saunders v. Commissioner of Income Tax 5 ITC 454 (All.)
958
C.Macdonald & Co. v. Commissioner of Income Tax 7 ITC 466 (Bom.)
1618
C.T.A.C.T. Nachiappa Chettiar v. Secretary of State [1933] 1 ITR 330 (Rangoon)
1057
C.W.T., Southern Region, Karachi v. Abid Hussain [1999] 80 TAX 89 (H.C.Kar.) = [1999 PTD 2895
329
Calcutta Stock Exchange Association Ltd. In re [1935] 3 ITR 105 (Cal.)
1180
Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159
1289
Caltex Oil (Pakistan) Ltd., Karachi v. Commissioner of Income Tax, Central, Karachi [1985] 52 TAX 27 (H.C.Kar.)
1558
Cameron v. Prendergaat (Inspector of Taxes) [1940] 8 ITR (Suppl.) 75 (HL)
1144
Cannon Products Ltd., and others v. Incomu Tax Officer and others [1985] 51 TAX 114 (H.C.Kar.) = 1985 PLD 572
2000, 2001
Car Tunes v. Income Tax Officer etc. [1989] 59 TAX 115 (H.C.Kar.) = 1989 PLD 337
373
Carew And Company Ltd., Darsana v. Commissioner of Income Tax, East Pakistan, Dacca [1968] 17 TAX 133 (H.C.Dacca)
1405
Cbatturarn v. Commissioner of Income Tax [1947] 15 ITR 302 (PC)
1960
CBR & Another v. Sindh Industrial Trading Estate Limited 1984 SCC 604 = [1986] 53 TAX 47 (S.C.Pak.)
822
Cement Agencies Limited v. Income Tax Officer, Central Circle II, Karachi and another [1965] 11 TAX 216 (H.C.Kar.)
1012
Cement Agencies Ltd. v. Income Tax Officer, Central Circle II, Karachi & Another 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak.) = (PLD 1969 S.C. 318)
157, 998
Central Exchange Bank Ltd., Lahore v. Commissioner of Income Tax, Lahore [1960] 2-TAX (Suppl.-121) (H.C.Lah.) = 1960 PTD 987 = 1954 PLD 439
1155
Central India Spg., Wvg. & Mfg. Co. Ltd. v. Commissioner of Income Tax [1943] 11 ITR 266 (Nag.)
1626
Central Insurance Co. & other, v. CBR, Islamabad etc. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.)
69, 106,179, 803, 1704, 1705
(xlii) VOL-I
Income Tax Digest. Case No.
Central Insurance Co. Ltd. v. Commissioner of Income Tax [1999] 79 TAX 1 (S.C.Pak.)
103
Central Insurance Company Ltd. v. Commissioner of Income Tax, Karachi and another [1992] 65 TAX 132 (H.C.Kar.) = 1992 PTD 32
1716
Central Provinces & Berar Provincial Co-operative Bank Ltd. v. Commissioner of Income Tax [1946] 14 ITR 479 (Nag.)
1157
Ch.Karamat Hussain v. Commissioner of Income Tax, Azad Jammu and Kashmir Council, Muzaffarabad and another [2001 PTD 1174 (S.C.AJ&K)
1802, 1822
Chairman, Central Board of Revenue v. Pak-Saudi Fertilizer Ltd. [2001] 83 TAX 119 (S.C.Pak.)
363, 1948
Chamber of Commerce v. Commissioner of Income Tax [1936] 4 ITR 397 (All.)
573, 704
Chanda Motors, Karachi v. Central Board of Revenue [1990] 62 TAX 67 (H.C.Kar.) = 1990 PTD 549
554
Chapal Builders v. Income Tax Officer and another [1990] 61 TAX 57 (H.C.Kar.)
2004
Chatturam v. Commissioner of Income Tax [1946] 14 ITR 695 (Pat.)
1963
Chatturam v. Commissioner of Income Tax [1947] 15 ITR 302 (PC)
1959
Chaturbhuj Vallabhdas v. Commissioner of Income Tax [1946] 14 ITR 144 (Bom.)
577
Chellaiah Pillai v. Commissioner of Income Tax [1948] 16 ITR 350 (Mad.)
513, 525
Chengalvaroya Chettiar v. Commissioner of Income Tax [1937] 5 ITR 70 (Mad.)
1597
Chhitar Mal Ram Dayal, In re. 3 ITC 54 (All.)
1645
Chhuna Mal Salig Ram v. Punjab NWFP [5 ITC 316]
162
Chibbett v. Joseph Robinson & Sons [1924] 9 Tax Cas. 48
864
Chief Secretary, Government of The Punjab Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore [1976] 33 TAX 176 (H.C.Lah.) = PLD 1976 Lah. 258
137, 639
Chimanlal Rameswarlal v. Commissioner of Income Tax [1940] 8 ITR 408 (Cal.)
1467
Chinnaswamy Mudaliar v. Commissioner of Income Tax 8 ITC 126 (Mad.)
874
Chockalingam Chettiar v. Commissioner of Income Tax [1945] 13 ITR 122 (Mad.)
480, 481
Chouthmal Golapchand, In re. [1938] 6 ITR 733 (Cal.)
963
Charushila Dassi, In ne [1946] 14 ITR 362 (Cal.)
901
Charushila Dassi v. Commissioner of Income Tax 9 ITC 321 (Cal.)
666
(xliii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Charushila Dassi, In re [1937] 5 ITR 1 (Cal.) Chunnilal Nathmal v. Commissioner of Income Tax 5 ITC 361 (Nag.) Chunnilal Nathmal v. Commissioner of Income Tax 9 ITC 173 (Nag.)
952 1091 913
Ciba (Pakistan) Limited, Karachi v. Commissioner of Income Tax, Karachi [1985] 52 TAX 23 (H.C.Kar.)
1559
Ciba Laboratories (Pakistan) Ltd. v. Commissioner of Income Tax (East), Karachi [1984] 50 TAX 26 (H.C.Kar.)
1532
CIR v. A.S.A. Concern [1937] 5 ITR 456 (Rangoon)
1313
City Bank N.A., Karachi v. Commissioner of Income Tax, Central Zone-C, Karachi [1994] 70 TAX 159 (H.C.Kar.)
213, 1527
Colonel Malik Sir Umar Hayat Khan v. Commissioner of Income Tax 2 ITC 52 (Lahore)
531
Colony Textile Mills Ltd. Lahore v. Income Tax Appellate Tribunal (Pak) & another [1972] 25 TAX 140 (H.C.Lah.)
442
Colony Thal Textile Mills Limited v. Commissioner Of Income Tax, Lahore [1981] 43 TAX 9 (H.C.Lah.)
1737
Commercial Properties Ltd. v. Commissioner of Income Tax 3 ITC 23 (Cal.)
1177
Commissioer of Income Tax (Central Zone), Karachi v. Zamiruddin Ahmad [1986] 53 TAX 46 (H.C.Kar.)
1093
Commissiomer of Income Tax, Karachi v. A. Razak H. K. Dada [1980] 41 TAX 10 (H.C.Kar.)
560
Commissioner Income Tax v. Anantapur Gold Mines [1 ITC 133 (Madras)
313
Commissioner of Agricultural Income Tax v. BWM Abdur Rehman [1974] 29 TAX 212 (S.C.Pak.)
158
Commissioner of Income Tax (AJ&K Council), Muzaffarabad and 2 others v. Messrs Cade Creets Associates through Managing Partner, Diwan Ali Khan Ghughtai and another [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892
37, 1920
Commissioner of Income Tax (Central Zone) v. Monotype Corporation Ltd. [1986] 53 TAX 74 (H.C.Kar.)
1497
Commissioner of Income Tax (Central Zone), Karachi v. Esso Eastern Standard Inc. [1986] 54 TAX 38 (H.C.Kar.)
1453
Commissioner of Income Tax (Central Zone), Karachi v. Karachi Electric Supply Corporation Limited [1985] 52 TAX 98 (H.C.Kar.) = 1985 PTD 389
614, 1864
Commissioner of Income Tax (Central Zone), Karachi v. Pakistan Progressive Cement Industries Ltd. [1985] 51 TAX 199 (H.C.Kar.)
1399
Commissioner of Income Tax (Central Zone), Karachi v. Pakistan Security Printing Corporation Ltd., Karachi [1985] 51 TAX 137 (H.C.Kar.) = 1985 PTD 413
1062
(xliv) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax (Central Zone), Karachi v. Petroleum Institute of Pakistan Ltd., Karachi [1985] 52 TAX 25 (H.C.Kar.)
1056
Commissioner of Income Tax (Central Zone), Karachi v. Shahsons Fisheries Limited [1985] 52 TAX 107 (H.C.Kar.)
1951
Commissioner of Income Tax (Central Zonr), Karachi v. Beach Luxury Hotel Limited [1988] 57 TAX 150 (H.C.Kar.)
1060
Commissioner of Income Tax (Central) Karachi v. New Jubilee Insurance Co. Ltd. [1982] 46 TAX 125 (H.C.Kar.)
189
Commissioner of Income Tax (Central) v. Beach Luxury Hotel Ltd., [1983] 48 TAX 1 (H.C, Kar.)
1245
Commissioner of Income Tax (Central) Zone, Karachi v. Shahnawaz Ltd. [1985] 52 TAX 110 (H.C.Kar.) = 1985 PTD 498
1977
Commissioner of Income Tax (Central), Karachi v. Habib Insurance Co. Ltd., Karachi [1969] 19 TAX 229 (H.C.Kar.)
1717
Commissioner of Income Tax (Central), Karachi v. Khayam Theatre Karachi [1985] 51 TAX 109 (H.C.Kar.)
1848
Commissioner of Income Tax (Central), Karachi v. New Jubilee Insurance Co. Ltd. [1982] 46 TAX 125 (H.C.Kar.) = 1982 PLD 684
802
Commissioner of Income Tax (Central), Karachi v. Pakistan Insurance Corporation [1980] 41 TAX 183 (H.C.Kar.)
604
Commissioner of Income Tax (East) Karachi v. Forbes Campbell & Co. Ltd [1979] 39 TAX 21 (H.C.Kar.)
1242
Commissioner of Income Tax (East), Karachi v. International Computors & Tabulators, Ltd., Karachi [1982] 45 TAX 204 (H.C.Kar.)
1231, 1316
Commissioner of Income Tax (East), Karachi v. Volkmar Roeddes [1984] 49 TAX 110 (H.C.Kar.)
1531
Commissioner Of Income Tax (Investigation), Karachi v. Pakistan Transport Co. Ltd., Jhang [1973] 28 TAX 66 (H.C.Lah.)
762
Commissioner of Income Tax (Investigation), Karachi v. Vali Bhai Kamruddin (Sind) Limited [1973] 28 TAX 143 (H.C.Kar.)
1000
Commissioner of Income Tax (Investigation), Lahore v. Colony Textile Mill [1977] 35 TAX 121 (H.C.Lah.)
617, 1232
Commissioner of Income Tax (West Zone), Karachi v. Associated Products of Pakistan, Karachi [1984] 50 TAX 69 (H.C.Kar.)
1944
Commissioner of Income Tax (West), Karachi v. Jupiter Trading Corporation, Karachi [1979] 40 TAX 32 (H.C.Kar.) = 1979 PLD 207
1765
Commissioner of Income Tax / Wealth Tax v. Prime Dairies Ice Cream Limited [1999] 80 TAX 282 (H.C.Lah.)
1916
Commissioner of Income Tax AJK and another v. Asian D. Enterprises and other [2000] 82 TAX 518 ((S.C.AJ&K.)
37, 1920
(xlv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax Central Zone (A), Karachi v. Razak Ltd. [1989] 60 TAX 24 (H.C.Kar.)
1943
Commissioner of Income Tax Central Zone `A', Karachi v. S.M. Naseem Allawala [1991] 64 TAX 31 (H.C.Kar.)
1504
Commissioner of Income Tax Central Zone `B', Karachi v. Pfizer Laboratories Ltd., Karachi [1991] 63 TAX 32 (H.C.Kar.)
1683
Commissioner of Income Tax Central Zone B, Karachi v. Farrokh Chemical Industries 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak)
326
Commissioner of Income Tax Central Zone Karachi v. United Liner Agencies, Karachi [1990] 62 TAX 31 (H.C.Kar.)
221
Commissioner of Income Tax Central Zone Lahore v. Gauher Ayub [1995] 71 TAX 271 (H.C.Lah.)
107
Commissioner of Income Tax Companies II, Karachi v. Sultan Ali Jeoffery & Others 1992 SCC 974 = [1993] 67 TAX 51 (S.C.Pak)
186, 187
Commissioner of Income Tax Companies III, Karachi v. Krudd Sons Ltd. 1992 SCC 1000 = [1993] 68 TAX 41 (S.C.Pak.)
1758
Commissioner of Income Tax Companies Zone Lahore v. Mst. Khursheed Begum [1995] 71 TAX 280 (H.C.Kar.)
270
Commissioner of Income Tax Companies Zone Lahore v. Naveed A. Sheikh [1992] 65 TAX 80 (H.C.Lah.)
245
Commissioner of Income Tax East Bengal v. Kumar Narayan Roy Choudhry and others 1959 SCC 68 = [1959] 1-TAX (111-207) (S.C.Pak.)
74, 161
Commissioner of Income Tax East Pakistan & 2 others v. Aswab Ali & others 1969 SCC 350 = [1975] 31 TAX 101 (S.C.Pak)
334
Commissioner of Income Tax Pakistan v. Fazlur Rehman & Sayeedur Rehman 1964 SCC 176 = [1964] 10 TAX 49 (S.C.Pak)
316, 335
Commissioner of Income Tax East Pakistan, Dacca v. Wahiduzzaman 1965 SCC 212 = [1965] 11 TAX 296 (S.C.Pak.)
1989
Commissioner of Income Tax Faisalabad v. Chief Glass House [1992] 65 TAX 205 (H.C.Lah.)
315
Commissioner of Income Tax Karachi (West), Karachi v. Habib Vali Muhammad, Karachi [1984] 49 TAX 23 (H.C.Kar.)
616
Commissioner of Income Tax Karachi v. Ashfaq Ahmad Khan & 10 others [1974] 29 TAX 149 (S.C.Pak.)
111
Commissioner of Income Tax Karachi v. Khatija Begum, partner Shakil Impex Karachi 1965 SCC 228 = [1965] 12 TAX 95 (S.C.Pak)
241
Commissioner of Income Tax Karachi v. Nisar Ahmad [1984] 50 TAX 187 (H.C.Kar.)
46
Commissioner of Income Tax Karachi v. Paracha Textile Mills Karachi [1973] 28 TAX 155 (H.C.Kar.)
217
(xlvi) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax Lahore v. Govt. Jallo Rosin and Turpentine Factory, Lahore [1976] 34 TAX 71 (H.C.Lah.)
136
Commissioner of Income Tax Lahore v. Noorani Calendaring and Finishing Mills, Lyallpur 1991 SCC 801 = [1991] 64 TAX 69 (S.C.Pak.)
620
Commissioner of Income Tax Lahore Zone Lahore v. Malik & Co. Lahore [1974] 29 TAX 165 (H.C.Lah.)
253
Commissioner of Income Tax Lahore Zone, Lahore v. Muhammad Allah Bux [1977] 35 TAX 74 (H.C.Lah.)
165
Commissioner of Income Tax North Zone, Lahore v. Lahore Central Iron and Hardware Machinery, Merchants [1973] 27 TAX 40 (H.C.Lah.)
223
Commissioner of Income Tax North Zone, Lahore v. Mst. Wazirunissa Begum [1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.)
71
Commissioner of Income Tax North Zone, Lahore v. Waris Silk Weaving and Knitting Mills, Gujranwala [1973] 28 TAX 181 (H.C.Lah.)
190
Commissioner of Income Tax Peshawar Zone, Peshawar v. Siemen A.G. 1991 SCC 773
181
Commissioner of Income Tax Punjab, NWFP & Bahawalpur v. Mrs. E.V. Miller 1959 SCC 53 = [1959] 1 TAX (III-1) (S.C.Pak)
160, 173, 181
Commissioner of Income Tax Rawalpindi v. Noor Sugar Mills [1975] 32 TAX 273 (H.C.Lah.)
90, 202
Commissioner of Income Tax Rawalpindi v. Wolf Gang Matzke [1975] 32 TAX 176 (H.C.Pesh.)
138
Commissioner of Income Tax Rawalpindi Zone, Rawalpindi v. New Afza Hotel Rawalpindi [1973] 27 TAX 212 (H.C.Lah.)
342
Commissioner of Income Tax Sukkur Zone, Sukkur, through Deputy Commissioner of Income Tax v. Gatron (Industries) Ltd. [1999] 79 TAX 161 (H.C.Qut.)
271
Commissioner of Income Tax v. A. F. Ferguson And Company [1967] 15 TAX 205 (H.C.Kar.)
870
Commissioner of Income Tax v. A.V.P.MR.M. Lakshmanan Chettiar [1940] 8 ITR 545 (Mad.)
662
Commissioner of Income Tax v. Abdul Rauf [1944] 12 ITR 76 (Pat.)
889
Commissioner of Income Tax v. Abubakar Abdul Rahman [1936] 4 ITR 233 (Bom.) Commissioner of Income Tax v. Achrulal [1938] 6 ITR 255 (Nag.)
898, 1183 1814
Commissioner of Income Tax v. Adamji Sons [1966] 14 TAX 174 (H.C.Kar.)
29
Commissioner of Income Tax v. Adamji Sons [1984] 50 TAX 196 (H.C.Kar.)
1638
(xlvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. Aga Abbas Ali Shirazi [1944] 12 ITR 179 (Mad.)
575, 580
Commissioner of Income Tax v. Ahmedabad Millowners' Association [1939] 7 ITR 369 (Bom.)
691
Commissioner of Income Tax v. Al-Karam Lamps (Pvt.) Ltd. Peshawar and others [2000] 82 TAX 61 (H.C.Pesh.)
1113
Commissioner of Income Tax v. American Life Insurance Company [1967] 15 TAX 268 (H.C.Kar.)
1719
Commissioner of Income Tax v. Anwar Enterprises, Sialkot [1999] 79 TAX 283 (H.C.Lah.)
1786, 1795
Commissioner of Income Tax v. Anwar Textile Mills Ltd. [1992] 65 TAX 277 (H.C.Kar.)
1883
Commissioner of Income Tax v. AR.M.M. Firm [1945] 13 ITR 290 (Mad.)
1219
Commissioner of Income Tax v. Arif Latif [2000] 81 TAX 1 (H.C.Lah.) = 1999 PTD 4120
1344
Commissioner of Income Tax v. Asbestos Cement Industries Ltd. & Others 1992 SCC 904 = [1993] 67 TAX 174 (S.C.Pak.)
1940, 1947
Commissioner of Income Tax v. B.J. Fletcher [1937] 5 ITR 428 (PC)
1147
Commissioner of Income Tax v. Badridas Ramrai Shop [1939] 7 ITR 613 (Nag.)
1834
Commissioner of Income Tax v. Bai Nindhi Bai [1946] 14 ITR 600 (Sind)
930
Commissioner of Income Tax v. Basant Rai Takhat Singh [1933] 1 ITR 197 (PC)
1740, 1750
Commissioner of Income Tax v. Beach Luxury Hotel Ltd., Karachi [1971] 23 TAX 161 (H.C.Kar.)
1386
Commissioner of Income Tax v. Bhojraj Harichand [1946] 14 ITR 277 (Lahore)
1599
Commissioner of Income Tax v. Bombay Burma Trading Corpn. Ltd. [1941] 9 ITR 155 (Rangoon)
1581
Commissioner of Income Tax v. Bombay Burma Trading Corporation Ltd. [1933] 1 ITR 152 (Rangoon)
1131
Commissioner of Income Tax v. Buckingham & Carnatic Co. Ltd. [1935] 3 ITR 384 (PC)
1363
Commissioner of Income Tax v. Bufco Tanneries Limited [1966] 13 TAX 185 (H.C.Dacca)
1378
Commissioner of Income Tax v. C. Macdonald & Co. [1935] 3 ITR 459 (Bom.)
947
Commissioner of Income Tax v. CbuniIaI B. Mehta [1938] 6 ITR 521 (PC)
981
(xlviii) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax v. Central India Spg. & Wvg. Co. Ltd. [1939] 7 ITR 187 (Nag.)
1367, 1368, 1612
Commissioner of Income Tax v. Century Spg., Wvg. & Mfg. Co. Ltd. [1947] 15 ITR 105 (Bom.)
1647
Commissioner of Income Tax v. Chengalvaroya Mudallar [1934] 2 ITR 395 (Mad.)
1597
Commissioner of Income Tax v. Chhotalal Mohanlal [1940] 8 ITR 114 (Sind)
689
Commissioner of Income Tax v. Chowringhee Properties Ltd. [1947] 15 ITR 405 (PC)
1194
Commissioner of Income Tax v. ChuniIaI B. Mehta [1938] 6 ITR 521 (PC)
988, 1115
Commissioner of Income Tax v. CT. RM. N. Narayanan Chettiar [1943] 11 ITR 470 (Mad.)
911
Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 (PC)
1035, 1048, 1050
Commissioner of Income Tax v. Dadabhoy Silk Mills Ltd., Karachi [1985] 51 TAX 222 (H.C.Kar.)
1850
Commissioner of Income Tax v. Darsanram [1945] 13 ITR 419 (Pat.)
682
Commissioner of Income Tax v. Dawood Cotton Mills Limited [1974] 29 TAX 123 (H.C.Kar.)
1901
Commissioner of Income Tax v. Dewan Bahadur Dewan Krishna Kishore [1941] 9 ITR 695 (PC)
1156, 1174, 1197
Commissioner of Income Tax v. Dhanomal Kewalram Aswani [1949] 17 ITR 568 (Sind)
723
Commissioner of Income Tax v. Dharamchand Dalchand [1 ITC 264 (Nagpur)]
57
Commissioner of Income Tax v. Diwan Bahadur S.L. Mathlas [1939] 7 ITR 48 (PC)
542, 941, 1264, 1275
Commissioner of Income Tax v. Eastern Bank Ltd. [1982] 46 TAX 56 (H.C.Kar.)
1865
Commissioner of Income Tax v. Eastern Federal Union Insurance Company 1981 SCC 572 = [1982] 46 TAX 6 (S.C.Pak.)
231
Commissioner of Income Tax v. Ekbal & Co. [1945] 13 ITR 154 (Bom.)
1963
Commissioner of Income Tax v. Farrokh Chemical Industries [1991 SCC 805 = 1992 SCMR 523]
314
Commissioner of Income Tax v. Faysal Islamic Bank of Bahrain, Karachi [2001] 83 TAX 376 (H.C.Kar.)
10
Commissioner of Income Tax v. G.D. Naidu Industrial Educational Trust [1942] 10 ITR 358 (Mad.)
574
(xlix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. Gammon (Pak) Limited, Karachi [1966] 14 TAX 304 (H.C.Kar.)
1401
Commissioner of Income Tax v. Gangabishan Mohanlal [1945] 13 ITR 20 (Mad.)
743
Commissioner of Income Tax v. General Steel Industries [1989] 59 TAX 112 (H.C.Lah.)
1099
Commissioner of Income Tax v. Glaxo Laboratories (Pak.) Ltd. [1991] 65 TAX 164 (H.C.Kar.)
1492
Commissioner of Income Tax v. Gotnedalli Lakshmi Narayan [1935] 3 ITR 367 (Bom.)
662
Commissioner of Income Tax v. Govindrarn Seksaria [1938] 6 ITR 584 (Bom.)
990
Commissioner of Income Tax v. Great Eastern Life Assprance Co. Ltd. [1949] 17 ITR 173 (PC)
1726
Commissioner of Income Tax v. Great Eastern Life Assurance Co. Ltd. [1949] 17 ITR 13 (PC)
1722
Commissioner of Income Tax v. Guest Keen & Nettles Fold (Pak.) Ltd. [1985] 51 TAX 20 (H.C.Kar.)
1894
Commissioner of Income Tax v. Gurupada Dutta [1946] 14 ITR 100 (PC)
1544, 1637, 1677
Commissioner of Income Tax v. Habib Bank (Overseas) Ltd. [1976] 33 TAX 221 (H.C.Kar.)
1253
Commissioner of Income Tax v. Habib Bank Executors And Trustees Co. Ltd., Karachi [1967] 15 TAX 127 (H.C.Kar.)
565
Commissioner of Income Tax v. Habib Insurance Co. Ltd., [1975] 32 TAX 232 (H.C.Kar.)
837
Commissioner of Income Tax v. Hajee Abdul Gany Ayoob [1941] 9 ITR 339 (Rangoon)
1666
Commissioner of Income Tax v. Haji Gulzar & Sons. [1983] 47 TAX 222 (H.C.Kar.)
1880
Commissioner of Income Tax v. Harveys Ltd. [1940] 8 ITR 307 (Mad.)
895, 1414
Commissioner of Income Tax v. Hemraj Kanji [1933] 1 ITR 304 (Sind)
1321, 1644
Commissioner of Income Tax v. Hoosen Kasam Dada Karachi 1960 PTD 574 (H.C.Dacca)
359
Commissioner of Income Tax v. Hukum Chand Jagadhar Mal [1936] 4 ITR 140 (Lahore)
1474, 1484
Commissioner of Income Tax v. Hukum Chand Jagadhar Mal [1936] 4 ITR 380 (Lahore)
1474
Commissioner of Income Tax v. Hungerford Investrnent Trust Ltd. [1936] 4 ITR 270 (PC)
1741
(l) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax v. Hussaini Fund [1964] 9 TAX 278 (H.C.Kar.)
1071, 1072
Commissioner of Income Tax v. Ibrahimji Hakimji [1940] 8 ITR 501 (Sind)
1183
Commissioner of Income Tax v. Imam Bux Allah Dewaya, Leiah [1976] 34 TAX 85 (H.C.Lah.)
1958
Commissioner of Income Tax v. Indian Life Assurance Co. Ltd. [1941] 9 ITR 177 (Sind)
1726
Commissioner of Income Tax v. Indian Life Assurance Co. Ltd. [1946] 14 ITR 347 (Sind)
1725
Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. (No. 1) [1939] 7 ITR 341 (Sind)
710, 715
Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. (No. 2) [1939] 7 ITR 352 (Sind)
710, 715
Commissioner of Income Tax v. Jainaratn Jagannath [1945] 13 ITR 410 (Pat.)
1663
Commissioner of Income Tax v. Jhamandas Devkishendas [1946] 14 ITR 554 (Sind)
481
Commissioner of Income Tax v. Jug Sah Muni Lal Sah [1939] 7 ITR 522 (Pat.)
1836, 1839
Commissioner of Income Tax v. K.A.R.K. Firm [1934] 2 ITR 183 (Rangoon)
1326
Commissioner of Income Tax v. K.C. Manavikraman Rajah [1945] 13 ITR 174 (Mad.)
514
Commissioner of Income Tax v. K.H. Katrak [1937] 5 ITR 527 (Sind)
1136
Commissioner of Income Tax v. Kamruddin Fakhruddin [2001] 83 TAX 353 (H.C.Kar.)
1957
Commissioner of Income Tax v. Karimi Industries [1983] 47 TAX 184 (H.C.Pesh.)
1206
Commissioner of Income Tax v. Karirn Bros. Charity Fund [1943] 11 ITR 603 (Bom.)
582
Commissioner of Income Tax v. Karuppaswami Mooppanar [1934] 2 ITR 284 (Mad.)
1412
Commissioner of Income Tax v. Kathiawar CO-OP Housing Society [1985] 51 TAX 5 (H.C.Kar.)
1178
Commissioner of Income Tax v. Kathiawar Coopperative Housing Society [1985] 51 TAX 5 (H.C.Kar.)
162
Commissioner of Income Tax v. Katragadda Madhusudhana Rao [1944] 12 ITR 1 (Mad.)
475, 549
Commissioner of Income Tax v. Kesar Sugar Works Ltd. 2001 PTD 744
148
(li) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. Khan Bahadur Waliur Rahman [1946] 14 ITR 287 (Cal.)
541
Commissioner of Income Tax v. Khemchand Ramdas [1940] 8 ITR 159 (Sind)
750, 1811
Commissioner of Income Tax v. Khemchand Ramdas [1933] 1 ITR 309 (Sind)
1461, 1469
Commissioner of Income Tax v. King and Partridge 2 ITC 142 (Mad.)
1641
Commissioner of Income Tax v. Kyauktaga Grant Ltd. [1937] 6 ITR 580 (Rangoon)
1329
Commissioner of Income Tax v. L. Armstrong Smith [1946] 14 ITR 606 (Bom.)
1150
Commissioner of Income Tax v. Lachmi Narain Bhadani [1944] 12 ITR 355 (Pat.)
2607
Commissioner of Income Tax v. Lady Navajbai R.J. Tata [1947] 15 ITR 8 (Bom.)
1119, 1128, 1742
Commissioner of Income Tax v. Lal Suresh Singh [1935] 3 ITR 356 (Oudh)
517
Commissioner of Income Tax v. M. Jamal Mohamad Sahib [1941] 9 ITR 375 (Mad.)
579
Commissioner of Income Tax v. M.A.L. Chettiyar Firm [1935] 3 ITR 193 (Rangoon)
969
Commissioner of Income Tax v. Madhwa Siddhantha Onnahini Nidhi Ltd. [1934] 2 ITR 427 (Mad.)
708, 1342
Commissioner of Income Tax v. Madras & Southern Mahratta Railway Co. Ltd. [1940] 8 ITR 280 (Mad.)
996, 1052
Commissioner of Income Tax v. Madras Cricket Club [1934] 2 ITR 209 (Mad.)
1165
Commissioner of Income Tax v. Madras Provincial Co-operative Bank Ltd. [1942] 10 ITR 490 (Mad.)
1157, 1675
Commissioner of Income Tax v. Madura Hindu Permanent Fund Ltd. [1933] 1 ITR 46 (Mad.)
1410
Commissioner of Income Tax v. Mahaliram Ramjidas [1940] 8 ITR 442 (PC)
325
Commissioner of Income Tax v. Maharaja of Darbhanga [1944] 12 ITR 116 (Pat)
1444
Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC)
896, 904, 1330, 1583, 1608, 1796
Commissioner of Income Tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1938] 6 ITR 686 (Pat.)
1318
(lii) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1942] 10 ITR 214 (PC)
1533
Commissioner of Income Tax v. MaharaJadhlraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC)
1807
Commissioner of Income Tax v. Makanji Lalji [1937] 5 ITR 539 (Bom.)
951
Commissioner of Income Tax v. Manager of Katras Encumbered Estate [1934] 2 ITR 100 (Pat.)
954
Commissioner of Income Tax v. Mathuradas Mannalal [1942] 10 ITR 95 (Nag.)
1354
Commissioner of Income Tax v. Mehran Associates Limited [1992] 65 TAX 223 (H.C.Kar.)
1169
Commissioner of Income Tax v. Mercantile Bank of India [1936] 4 ITR 239 (PC)
935
Commissioner of Income Tax v. Messrs Sadiq Traders [1990] 80 TAX 112 (H.C.Kar.)
1990
Commissioner of Income Tax v. Metro Goldwyn Mayer (India) Ltd. [1939] 7 ITR 176 (Bom.)
1036, 1045
Commissioner of Income Tax v. Mills Store Co. [1941] 9 ITR 642 (Sind)
857, 858, 902, 1137, 1299, 1745
Commissioner of Income Tax v. Mobanmal Chordia [1943] 11 ITR 352 (Mad.)
675
Commissioner of Income Tax v. Mohanlal Hargovind [1942] 10 ITR 84 (Nag.)
701
Commissioner of Income Tax v. Motiram Nandram [1940] 8 ITR 132 (PC)
1611, 1239
Commissioner of Income Tax v. Mrs. E. V. H. Miller / Mitchell R. (c/o The Colyana Estate, Okara) [1960] 2-TAX (Suppl.-49) (H.C.Lah.) = 1956 PLD 45 = 29 ITR 296
483
Commissioner of Income Tax v. Muhammad Aqeel And Company [1967] 16 TAX 51 (H.C.Kar.)
1885
Commissioner of Income Tax v. Muhammad Kassim [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280
81, 279, 281, 288
Commissioner of Income Tax v. Mushtaq Muhammad Ali [1987] 55 TAX 157 (H.C.Kar.)
747
Commissioner of Income Tax v. Muslim Commercial Bank Ltd [1975] 32 TAX 239 (H.C.Kar.)
1673
Commissioner of Income Tax v. Mutha Sarvarayudu 2 ITC 208 (Mad.)
887
Commissioner of Income Tax v. Muzaffar-ud-Din and Sons [1966] 13 TAX 214 (H.C.Lah.)
1377
(liii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. N.S.A.R. Concern [1938] 6 ITR 194 (Rangoon)
543
Commissioner of Income Tax v. Nagina Talkies (property) Karachi [1974] 29 TAX 115 (H.C.Kar.)
92
Commissioner of Income Tax v. Narayana Gajapati Raju Bahadur Garu [1934] 2 ITR 288 (Mad.)
657
Commissioner of Income Tax v. Nasir Ali and another [1999] 79 TAX 428 (S.C.Pak.)
284
Commissioner of Income Tax v. National Agriculture Ltd., Karachi [2000] 82 TAX 73 (H.C.Kar.) = [2000] 81 TAX 249 (H.C.Kar.) = 2000 PTD 254
304
Commissioner of Income Tax v. National Bank of Pakistan, Karachi [1976] 34 TAX 158 (H.C.Kar.) = 1976 PTD 237
1476
Commissioner of Income Tax v. New China Glassware Company [1974] 30 TAX 158 (H.C.Kar.)
165, 564
Commissioner of Income Tax v. New India Assurance Co. Ltd. [1938] 6 ITR 603 (Bom.)
995
Commissioner of Income Tax v. New Jubilee Insurance Company [1990] 61 TAX 1 (H.C.Kar.)
1567, 1657
Commissioner of Income Tax v. Nishat Cinema, Lyallpur [1979] 39 TAX 140 (H.C.Lah.)
145
Commissioner of Income Tax v. Official Liquidator of the Agra Spg. & Wvg. Mills Co. Ltd. [1934] 2 ITR 79 (All.)
717, 1961
Commissioner of Income Tax v. Olympia [1988] 57 TAX 46 (H.C.Kar.)
44, 458
Commissioner of Income Tax v. Olympia [1988] 57 TAX 71 (H.C.Kar.)
43
Commissioner of Income Tax v. P.L.S.M. Concern [1934] 2 ITR 417 (Rangoon)
1102, 1339, 1340, 1797
Commissioner of Income Tax v. P.R.A.L. Muthu Karuppan Chettiyar [1935] 3 ITR 208 (PC)
940
Commissioner of Income Tax v. P.V.R.M. Visalakshi Achi [1937] 5 ITR 448 (Rangoon)
1052
Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
327
Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. 1991 SCC 878 = [1992] 66 TAX 176 (S.C.Pak.)
1390
Commissioner of Income Tax v. Pakistan Insurance Corporation & others 1989 SCC 740 = [1997] 75 TAX 113 (S.C.Pak) = 1997 PTD 49
167, 601
Commissioner of Income Tax v. Pakistan Investment Ltd. [1988] 57 TAX 46 (H.C.Kar.) = 1988 PTD 532
1204
(liv) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax v. Pakistan Progressive Cement Industries [1985] 51 TAX 199 (H.C.Kar.)
1356
Commissioner of Income Tax v. Pakistan Tobacco Company Ltd. [1988] 57 TAX 118 (H.C.Kar.) = 1988 PTD 66
230, 225
Commissioner of Income Tax v. Pakistan Tobacco Company Ltd., etc. [1988] 57 TAX 113 (H.C.Kar.)
225
Commissioner of Income Tax v. Pandit Dhaneshwardhar Misra [1940] 8 ITR 416 (Pat.)
466
Commissioner of Income Tax v. Papammal [1942] 10 ITR 349 (Mad.)
724
Commissioner of Income Tax v. Paracha Textile Mills Ltd. [1993] 68 TAX 77 (H.C.Kar.)
1243
Commissioner of Income Tax v. Pfizer Laboratories Ltd. [1991] 63 TAX 52 (H.C.Kar.) = 1991 PTD 39
1691
Commissioner of Income Tax v. Poana Electric Supply Co. Ltd. [1946] 14 ITR 622 (Bom.)
927
Commissioner of Income Tax v. PR.PL. Palmuiappa Chettlar [1945] 13 UK 269 (Mmd.)
742
Commissioner of Income Tax v. Prasad Film Laboratories (P.) Ltd. [1999 PTD 325]
82
Commissioner of Income Tax v. Prime Dairies Ice Cream Limited [1999] 80 TAX 282 (H.C.Lah.)
222
Commissioner of Income Tax v. R. Johnstone [1934] 2 ITR 390 (Rangoon)
1128
Commissioner of Income Tax v. Raid Prayag Krnnarl Debt [1940] 8 ITR 25 (Pat.)
859
Commissioner of Income Tax v. Raja Bahadur Dhakeswar Prasad Narain Singh [1938] 6 ITR 476 (Pat.)
1752
Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC)
491, 918
Commissioner of Income Tax v. Raja Bahadur Kamakshya Narain Singh [1946] 14 ITR 738 (Pat.)
922, 924
Commissioner of Income Tax v. Raja Bahhadur Dhakeshwar Prasad Narain Singh [1938] 6 ITR 476 (Pat.)
1421
Commissioner of Income Tax v. Raja Sri Sri Kalyanl Prasad Deo [1945] 13 ITR 17 (Pat.)
1754
Commissioner of Income Tax v. Reckitt & Colman of Pakistan Ltd. [1985] 52 TAX 18 (H.C.Kar.)
1684
Commissioner of Income Tax v. Roneo Vicker Limited, Karachi [1991] 63 TAX 14 (H.C.Kar.)
1348
Commissioner of Income Tax v. S. Ramsay Unger [1947] 15 ITR 87 (Mad.)
1418
(lv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. S.A.S. Ramaswamy Chettiar [1946] 14 ITR 236 (Mad.)
1433
Commissioner of Income Tax v. S.M. Chitnavls [1932] 2 Camp. Cas. 464
1483
Commissioner of Income Tax v. S.N.A.S.A. Annamalai Chettiar [1944] 12 ITR 226 (Mad.)
960
Commissioner of Income Tax v. Salem District Urban Bank Ltd. [1940] 8 ITR 269 (Mad.)
688, 712
Commissioner of Income Tax v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC)
1806, 1835
Commissioner of Income Tax v. Sarwan Kumar [1945] 13 ITR 361 (All.)
661
Commissioner of Income Tax v. Satish Chandra Bhowmik 1960 PTD 1075 (H.C.Dacca) = 1960 PLD 713
633
Commissioner of Income Tax v. Seth Bhirdichand [1938] 6 ITR 367 (Nag.)
1484
Commissioner of Income Tax v. Seth Rarnakrisbna Ramnath [1944] 12 ITR 21 (Nag.)
1614, 1860, 1861
Commissioner of Income Tax v. Shabir & Company [1963] 7 TAX 202 (H.C.Kar.) = 1963 PTD 395 = 1963 PLD 481
1540
Commissioner of Income Tax v. Shahnawaz Ltd. and others 1992 SCC 920 = [1992] 66 TAX 125 (S.C.Pak.)
59
Commissioner of Income Tax v. Shaw Wallace & Co. 6 ITC 178 (PC)
841, 1223, 1278, 1287
Commissioner of Income Tax v. Siemen A.G. 1991 SCC 773 = PLD 1991 SC 368
443
Commissioner of Income Tax v. Sind Central Provident Funds Society Ltd. [1939] 7 ITR 333 (Sind)
710
Commissioner of Income Tax v. Sir Horni M. Mehta [1943] 11 ITR 142 (Bom.)
1589
Commissioner of Income Tax v. Sir Kameshwar Singh [1935] 3 ITR 305 (PC)
510, 845, 861
Commissioner of Income Tax v. Sir Purshottamdas Thakurdas [1946] 14 ITR 305 (Bom.)
1628
Commissioner of Income Tax v. Sir S.M. Chitnavis 6 ITC 453 (PC)
1459, 1475, 1484
Commissioner of Income Tax v. Smt. Singari Bai [1945] 13 ITR 224 (All.)
962, 1838
Commissioner of Income Tax v. Sri Talupuru Venkatasubhiah Chetty [1946] 14 ITR 227 (Mad.)
1443
Commissioner of Income Tax v. Steel Bros. & Co. Ltd. 2 ITC 119 (Rangoon)
986
(lvi) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax v. Subramanya Sastrigal 2 ITC 152 (Mad.)
508
Commissioner of Income Tax v. Surridge & Beecham [1968] 18 TAX 72 (H.C.Kar.)
205, 340
Commissioner of Income Tax v. Syed Akhtar Ali [1994] 69 TAX 38 (H.C.Kar.)
144
Commissioner of Income Tax v. Tata Sons Ltd. [1939] 7 ITR 195 (Bom.)
1617
Commissioner of Income Tax v. Tayab Moosa And Company [1967] 15 TAX 62 (H.C.Kar.)
1874
Commissioner of Income Tax v. Tehri-Garhwal State [1934] 2 ITR 1 (PC)
882
Commissioner of Income Tax v. Tejbhandas Motumal [1933] 1 ITR 202 (Sind)
1420
Commissioner of Income Tax v. Thai Airways International [1994] 69 TAX 120 (H.C.Kar.)
612
Commissioner of Income Tax v. Tika Ram & Sons Ltd. [1937] 5 ITR 544 (All.)
1594
Commissioner of Income Tax v. United Commercial Bank Ltd., Karachi [1969] 20 TAX 216 (H.C.Kar.)
1426
Commissioner of Income Tax v. United Insurance Co. of Pakistan Ltd. Karachi [1991] 63 TAX 141 (H.C.Kar.) = 1991 PTD 57
1653
Commissioner of Income Tax v. Usman Bhai [1967] 16 TAX 65 (H.C.Kar.)
851
Commissioner of Income Tax v. V.E.K.R. Savurniarnurthy [1946] 14 ITR 185 (Ma&)
730
Commissioner of Income Tax v. V.S.U.R. Firm [1935] 3 ITR 158 (Rangoon)
968
Commissioner of Income Tax v. V.T.S. Sevuga Pandia Thevar [1933] 1 ITR 78 (Mad.)
533
Commissioner of Income Tax v. VaIliammal Achi [1938] 6 ITR 720 (Mad.)
979
Commissioner of Income Tax v. Vali Bhai Kamruddin (Sind) Ltd. [1987] 56 TAX 30 (H.C.Kar.)
1061
Commissioner of Income Tax v. Valika Art Fabrics Ltd. [2001] 83 TAX 342 (H.C.Kar.)
1160
Commissioner of Income Tax v. Valliammal Achi [1938] 6 ITR 720 (Mad.)
888
Commissioner of Income Tax v. Venkatachalapathi 1 ITC 185 (Madras)
31
(lvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax v. Visweshwar Singh [1939] 7 ITR 536 (Pat.)
925
Commissioner of Income Tax v. Wali Bhai Qamaruddin [1967] 15 TAX 145 (H.C.Kar.)
1536
Commissioner of Income Tax v. Yousuf & Company [1967] 15 TAX 4 (H.C.Kar.) = 1967 PTD 161 = 1967 PLD 363
1886
Commissioner of Income Tax v. Zakia Siddiqui [1989] 59 TAX 79 (H.C.Kar.) = 1989 PTD 135
1350
Commissioner of Income Tax v. Zamindar of Singampalli 1 ITC 181 (Madras)
32
Commissioner of Income Tax, (Central Zone), Karachi v. Oxford University Press, Karachi [1984] 50 TAX 88 (H.C.Kar.)
1139, 1560, 1685
Commissioner of Income Tax, (Central) Karachi v. Habib Insurance Co. Ltd. Karachi [1969] 19 TAX 222 (H.C.Kar.)
198
Commissioner of Income Tax, (Central), Karachi v. Haji Jethabhoi Gokul & Co. [1983] 47 TAX 182 (H.C.Kar.)
1240
Commissioner of Income Tax, (East Zone), Karachi v. Mohammadi Rerolling Mills [1985] 52 TAX 161 (H.C.Kar.)
1699
Commissioner of Income Tax, (East) Karachi v. Ebrahim D. Ahmad & others [1982] 45 TAX 232 (H.C.Kar.)
25
Commissioner of Income Tax, (East), Karachi v. M. A. Toor [1984] 50 TAX 144 (H.C.Kar.)
1118
Commissioner of Income Tax, (Investigation), Lahore v. Ahmed Food Industries Ltd, Karachi [1984] 50 TAX 208 (H.C.Kar.)
1773
Commissioner Of Income Tax, (West Zone), Karachi v. Bhahawalpur Textile Mills Ltd., Hyderabad [1985] 51 TAX 71 (H.C.Kar.)
1788
Commissioner Of Income Tax, (West Zone), Karachi v. Bhahawalpur Textile Mills Ltd., Hyderabad [1985] 51 TAX 71 (H.C.Kar.)
1789
Commissioner of Income Tax, (West Zone), Karachi v. Fateh Textile Mills Ltd., Hyderabad [1984] 50 TAX 223 (H.C.Kar.)
1776
Commissioner of Income Tax, (West), Karachi v. Adamjee Sons, Karachi [1984] 50 TAX 196 (H.C.Kar.)
1403
Commissioner of Income Tax, Bengal Mufassil v. Burdhan Kuti Wards' Estate [1960] 2-TAX (Suppl.-1) (H.C.Dacca) = 1960 PTD 1050 = PLD 1960 Dacca 34
467
Commissioner of Income Tax, Burma v. Messrs Steel Brothers and Co., Ltd. [2 ITC 129 (Rangoon)]
203
Commissioner of Income Tax, Central `B', Karachi v. Philips Electrical Co. of Pakistan Ltd., Karachi [1991] 64 TAX 25 (H.C.Kar.) = 1991 PTD 672
1355
Commissioner of Income Tax, Central Karachi v. Mercantile Fire and Central Insurance Co. Ltd. [1989] 59 TAX 63 (H.C.Kar.)
1698
(lviii) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax, Central Zone `A' Karachi v. Karachi Electric Supply Corporation Ltd. [1991] 64 TAX 126 (H.C.Kar.)
1347
Commissioner of Income Tax, Central Zone `A', Karachi v. Chemdyes Pakistan Limited [1990] 61 TAX 149 (H.C.Kar.)
1422
Commissioner of Income Tax, Central Zone `A', Karachi v. Pakistan Oxygen Ltd. [1992] 65 TAX 138 (H.C.Kar.)
818
Commissioner of Income Tax, Central Zone `A', Karachi v. S. Mazhar Hussain [1988] 58 TAX 123 (H.C.Kar.)
1149
Commissioner of Income Tax, Central Zone `B', Karachi v. Cynamid (Pak.) Ltd., Karachi [1992] 65 TAX 130 (H.C.Kar.)
1690
Commissioner of Income Tax, Central Zone `B', Karachi v. Ebrahim Brothers Ltd., Karachi [1991] 63 TAX 64 (H.C.Kar.) = 1991 PTD 374
1732
Commissioner of Income Tax, Central Zone `B', Karachi v. Mackinnon Mackenzie & Co. of Pakistan (Pvt.) Ltd., Karachi [1993] 67 TAX 70 (H.C.Kar.) = 1993 PTD 46
1942
Commissioner of Income Tax, Central Zone `B', Karachi v. Tariq Siddiqui [1991] 63 TAX 90 (H.C.Kar.) = 1991 PTD 350
1665
Commissioner of Income Tax, Central Zone `C' Karachi v. Muhammad Amin Muhammad Bashir Limited [1990] 61 TAX 155 (H.C.Kar.)
1457
Commissioner of Income Tax, Central Zone `C', Karachi v. Agricultural Development Bank of Pakistan, Karachi [1992] 65 TAX 135 (H.C.Kar.)
1465
Commissioner of Income Tax, Central Zone `C', Karachi v. Algemence Bank of Netherland, Karachi [1992] 65 TAX 300 (H.C.Kar.)
1689
Commissioner of Income Tax, Central Zone `C', Karachi v. B.D. Avari [1991] 64 TAX 110 (H.C.Kar.) = 1991 PTD 839
1170
Commissioner of Income Tax, Central Zone `C', Karachi v. Grindlays Bank Limited, Karachi [1991] 64 TAX 7 (H.C.Kar.)
1452
Commissioner of Income Tax, Central Zone `C', Karachi v. M. Hussain Ahmad [1992] 65 TAX 129 (H.C.Kar.)
1189
Commissioner of Income Tax, Central Zone `C', Karachi v. Transoceanic Steamship Company Ltd. [1992] 65 TAX 212 (H.C.Kar.) = 1992 PTD 232
1730
Commissioner of Income Tax, Central Zone A, Karachi v. Phoenix Insurance Co. Ltd. 1991 SCC 842 = [1991] 64 TAX 173 (S.C.Pak.)
1709
Commissioner of Income Tax, Central Zone, Karachi v. Karachi Race Club Ltd. [1991] 63 TAX 49 (H.C.Kar.)
1505
Commissioner of Income Tax, Central Zone, Karachi v. Mushtaq Ahmed [1989] 59 TAX 20 (H.C.Kar.)
1162
Commissioner of Income Tax, Central Zone, Karachi v. Sandoz (Pak), Ltd. [1987] 56 TAX 58 (H.C.Kar.)
613
(lix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax, Central Zone, Karachi v. United Liner Agencies, Karachi [1990] 62 TAX 31 (H.C.Kar.) = 1990 PTD 829
1058
Commissioner of Income Tax, Central Zone-A, Karachi v. Pakistan Investment Ltd. [1988] 57 TAX 46 (H.C.Kar.)
1237
Commissioner of Income Tax, Central Zone-B, Karachi v. Farrokh Chemical Industries 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak)
107
Commissioner of Income Tax, Central Zone-B, Karachi v. Zakia Siddiqui [1989] 59 TAX 79 (H.C.Kar.)
293
Commissioner of Income Tax, Central, Karachi v. Alpha Insurance Co., Ltd., Karachi, Commissioner of Income Tax, Central, Karachi v. Home Insurance Co. Ltd., Karachi 1981 SCC 559 = [1981] 44 TAX 1 (S.C.Pak.)
1695
Commissioner of Income Tax, Central, Karachi v. Fakir Cotton Ginning and Pressing Industries Ltd. and another 1990 SCC 744 = [1991] 63 TAX 120 (S.C.Pak.) = 1991 PTD 573 = 1991 PLD 280
1225
Commissioner of Income Tax, Central, Karachi v. Habib Bank Executors & Trustees Co. Karachi 1984 SCC 594 = [1986] 53 TAX 59 (S.C.Pak.)
1203
Commissioner of Income Tax, Chittagong Zone, Chittagong v. Jagabandhu Saha and others [1968] 18 TAX 11 (H.C.Dacca)
1893
Commissioner of Income Tax, Companies II, Karachi v. General Tyre & Rubber Company of Pakistan 1993 SCC 1015 = [1993] 67 TAX 191 (S.C.Pak.)
1521
Commissioner of Income Tax, Companies-1, Karachi v. Premier Bank Limited, Karachi and another [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213
1526, 1694
Commissioner of Income Tax, Companies-Il, Karachi v. Ciba Geigy (Pakistan) Ltd., Karachi [1994] 69 TAX 122 (H.C.Kar.)
611
Commissioner of Income Tax, Dacca v. B. S. Trading Company, Dacca [1966] 14 TAX 7 (H.C.Dacca)
1555
Commissioner of Income Tax, Dacca v. Suresh Prosad Lahiri Chowdhury, Mymensingh [1965] 12 TAX 136 (H.C.Dacca)
485
Commissioner of Income Tax, Dacca v. Tangail General Trading & Transport Corporation Ltd., Mymensingh [1961] 4 TAX 197 (H.C.Dacca) = 1961 PTD 1092 = 1962 PLD 86
1358
Commissioner of Income Tax, Dacca Zone, Dacca v. Amin Jute Bailing Company, Dacca [1969] 19 TAX 103 (H.C.Dacca)
1863
Commissioner of Income Tax, Dacca Zone, Dacca v. Eastern Aluminium Agency, Dacca [1968] 17 TAX 78 (H.C.Dacca)
1082
Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & others 1959 SCC 68 = [1959] 1-TAX (III207)(S.C.Pak) = PLD 1959 SC 453
242, 461, 470, 484, 524
(lx) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax, East Pakistan Dacca v. Wahiduzzaman [1965 SCC 212 = [1965] 11 TAX 296 (S.C.Pak.) = PLD 1965 SC 171]
328
Commissioner of Income Tax, East Pakistan v. Aizuddin Gazi and others [1960] 2-TAX (III-474) (H.C.Dacca) = 1960 PTD 727 = 1960 PLD 535
358, 1974
Commissioner of Income Tax, East Pakistan v. Radhashyam Agarwala [1960] 2-TAX (III-157) (H.C.Dacca) = 1960 PTD 253 = 1960 PLD 233
630
Commissioner of Income Tax, East Pakistan, Dacca v. A. Khaleque (c/o Amin Agencies Ltd., Chittagong) [1968] 18 TAX 8 (H.C.Dacca)
1895
Commissioner of Income Tax, East Pakistan, Dacca v. A.K. Khan Plywood Co., Chittagong [1966] 13 TAX 271 (H.C.Dacca)
1388
Commissioner of Income Tax, East Pakistan, Dacca v. Engineers Limited, Dacca [1965] 11 TAX 181 (H.C.Dacca)
1570
Commissioner of Income Tax, East Pakistan, Dacca v. Engineers Limited, Dacca 1967 SCC 289 = [1967] 16 TAX 81 (S.C.Pak.)
66, 320, 1502
Commissioner of Income Tax, East Pakistan, Dacca v. Gulistan Cinema Company, Dacca [1968] 17 TAX 209 (H.C.Dacca)
1371
Commissioner of Income Tax, East Pakistan, Dacca v. Howrah Trading Co. Ltd., Calcutta [1960] 2-TAX (III-492) (H.C.Dacca) = 1961 PTD 900 = 1961 PLD 602
1680
Commissioner of Income Tax, East Pakistan, Dacca v. Liquidator, Khulna Bagerhat Railway Co. Ltd., Ahmadabad 1962 SCC 108 = [1962] 5 TAX 262 (S.C.Pak.)
1226
Commissioner of Income Tax, East Pakistan, Dacca v. Liquidator, Khulna-Bagerhat Railway Co. Ltd., Ahmadabad [1961] 3 TAX 48 (H.C.Dacca) = 1961 PTD 136 = 1961 PLD 108
1228
Commissioner of Income Tax, East Pakistan, Dacca v. Luxmi Narayan Cotton Mills Ltd., Dacca 1960 SCC 87 = [1960] 2-TAX (III-538) (S.C.Pak.)
817
Commissioner of Income Tax, East Pakistan, Dacca v. Noor Hussain 1964 SCC 195 = [1964] 10 TAX 206 (S.C.Pak.)
807
Commissioner of Income Tax, East Pakistan, Dacca v. Tangail General Trading & Transport Corporation Limited, Mymensingh 1966 SCC 282 = [1967] 15 TAX 1 (S.C.Pak.)
1557
Commissioner of Income Tax, East Pakistan, Dacca v. Wahidur Rahman, Income Tax Officer, Companies Circle IV, Chittagong [1961] 4 TAX 135 (H.C.Dacca) = 1961 PTD 1110 = 1962 PLD 104
357
Commissioner of Income Tax, East Zone, Karachi v. Iqbal Engineering Works and Haji Feroz-ud-Din 1986 SCC 641 = [1987] 55 TAX 1 (S.C.Pak.)
1846
Commissioner of Income Tax, East Zone, Karachi v. Sind Club, Victoria Road, Karachi [1987] 56 TAX 75 (H.C.Kar.)
1163
(lxi) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax, Karachi & other v. N.V. Philip's Gloelampenfabriaken, Karachi 1993 SCC 1022 = [1993] 68 TAX 35 (S.C.Pak.)
364
Commissioner of Income Tax, Karachi (East), Karachi v. Cogefar Astaldi Sidmail, Joint Venture, Karachi [1984] 50 TAX 133 (H.C.Kar.)
1678
Commissioner of Income Tax, Karachi (East), Karachi v. Millwala & Sons Limited, Karachi [1984] 49 TAX 118 (H.C.Kar.)
1676
Commissioner of Income Tax, Karachi (West), Karachi v. Manzoor Hussain Abdul Karim [1984] 49 TAX 1 (H.C.Kar.)
1998
Commissioner of Income Tax, Karachi (West), Karachi v. S. A. Rehman [1980] 42 TAX 147 (H.C.Kar.) = 1980 PTD 314
48, 1458
Commissioner of Income Tax, Karachi v. Arshad Javed [1989] 59 TAX 65 (H.C.Kar.)
1122
Commissioner of Income Tax, Karachi v. Crescent Star Insurance Co. Ltd. [1974] 30 TAX 111 (H.C.Kar.)
1655
Commissioner of Income Tax, Karachi v. Dalmia Cement Ltd., Karachi [1969] 20 TAX 15 (H.C.Kar.)
1515
Commissioner of Income Tax, Karachi v. Eddie Investment Company Limited [1967] 15 TAX 254 (H.C.Kar.)
1517
Commissioner of Income Tax, Karachi v. Instruments Krafts (Pvt) Ltd. [1995] 71 TAX 218 (H.C.Kar.)
1529
Commissioner of Income Tax, Karachi v. Moosa Omar & Co. Ltd. [1980] 41 TAX 19 (H.C.Kar.)
1510
Commissioner of Income Tax, Karachi v. N. Futeh Ally and Co., Karachi [1984] 50 TAX 189 (H.C.Kar.)
1404
Commissioner of Income Tax, Karachi v. New India Assurance Co., Karachi [1978] 37 TAX 273 (H.C.Kar.)
1514
Commissioner of Income Tax, Karachi v. Pak Thread Ball Manufacturers' Association, Karachi [1974] 29 TAX 179 (H.C.Kar.)
1246
Commissioner of Income Tax, Karachi v. Paracha Textile Mills, Karachi [1973] 28 TAX 155 (H.C.Kar.)
1425
Commissioner of Income Tax, Karachi v. Queensland Insurance Co., Ltd., Karachi 1991 SCC 853 = [1992] 65 TAX 229 (S.C.Pak.)
1706
Commissioner of Income Tax, Karachi v. Sadruddin [1985] 51 TAX 83 (H.C.Kar.)
314
Commissioner of Income Tax, Karachi v. Shabbir & Company, Karachi 1966 SCC 260 = [1966] 13 TAX 197 (S.C.Pak.)
1539
Commissioner of Income Tax, Karachi v. Shahennihon Steamship Co. Ltd., Karachi [1971] 23 TAX 121 (H.C.Kar.)
1376
Commissioner of Income Tax, Karachi, East Karachi v. Amsons Dairies Ltd., Karachi 1974 SCC 422 = [1975] 31 TAX 62 (S.C.Pak.)
1250
(lxii) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax, Karachi, Sind and Baluchistan v. The Netherlands Trading Society, Karachi [1960] 2-TAX (Suppl.-139) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 758 = 1957 PLD 167
1051, 1686, 1914
Commissioner of Income Tax, Karachi, v. Majestic Cinema, Karachi 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.)
645
Commissioner of Income Tax, Lahore (Now at Multan) v. Five Star Calico, Printing Works, Lyallpur (Now Faisalabad) [1993] 67 TAX 227 (H.C.Lah.)
1383
Commissioner of Income Tax, Lahore v. Abdus Salam of Sialkot [1992] 65 TAX 204 (H.C.Lah.)
1105
Commissioner of Income Tax, Lahore v. Aziz Din [1976] 33 TAX 258 (H.C.Lah.)
352
Commissioner of Income Tax, Lahore v. Chief Secretary, Government of Punjab, Lahore 1980 SCC 477 = [1980] 42 TAX 179 (S.C.Pak.)
638
Commissioner of Income Tax, Lahore v. Colony Textile Mills Ltd., Lahore 1980 SCC 471 = 1990 PTD 834
1381
Commissioner of Income Tax, Lahore v. Colony Textile Mills Ltd., Lahore. [1976] 35 TAX 40 (H.C.Lah.)
1375
Commissioner of Income Tax, Lahore v. Government Jallo Rosin and Turpentine Factory, Lahore [1976] 34 TAX 71 (H.C.Lah.)
826
Commissioner of Income Tax, Lahore v. Kohinoor Industries Ltd., Lahore [1977] 35 TAX 42 (H.C.Lah.)
348
Commissioner of Income Tax, Lahore v. National Typewriter Co. [1992] 66 TAX 186 (H.C.Lah.)
1078
Commissioner of Income Tax, Lahore v. Pak Cinemas Ltd. Lahore [1977] 36 TAX 223 (H.C.Lah.)
1681
Commissioner of Income Tax, Lahore v. The Lyallpur Central Cooperative Bank Ltd., Lyallpur. [1959] 1-TAX (III-150) (H.C.West Pakistan, Lahore Bench) = 1959 PTD 639 = 1959 PLD 627
345
Commissioner of Income Tax, Lahore v. Umar Saigal [1976] 33 TAX 245 (H.C.Lah.)
107
Commissioner of Income Tax, Lahore v. Umar Saigol, Lahore [1973] 28 TAX 159 (H.C.Lah.)
1734
Commissioner of Income Tax, Lahore v. West Punjab Factories Limited, Okara [1966] 13 TAX 122 (H.C.Lah.)
1379
Commissioner of Income Tax, Lahore Zone v. Sh. Muhammad Ismail and Co. Ltd. Lyallpur [1985 SCC 637 = [1986] 53 TAX 122 (S.C.Pak)
107
Commissioner of Income Tax, Lahore Zone, Lahore v. Badar Ice Factory, Lahore [1981] 43 TAX 100 (H.C.Lah.)
311
Commissioner of Income Tax, Lahore Zone, Lahore v. Choudhri Brothers 1980 SCC 487 = [1980] 42 TAX 119 (S.C.Pak.)
1760
(lxiii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax, Lahore Zone, Lahore v. Mian Muhammad Allah Bux, Karachi [1972] 27 TAX 145 (H.C.Lah.)
1701
Commissioner of Income Tax, Lahore Zone, Lahore v. Mian Muhammad and Sons [1990] 62 TAX 111 (H.C.Lah.)
1015
Commissioner of Income Tax, Lahore Zone, Lahore v. Muhammad Allah Bux [1977] 35 TAX 74 (H.C.Lah.) = 1977 PTD 13
1164, 1176, 1739
Commissioner of Income Tax, Lahore Zone, Lahore v. Punjab Oil Expeller Co., Lahore [1979] 40 TAX 55 (H.C.Lah.)
1511
Commissioner of Income Tax, Lahore Zone, Lahore v. Shihana Perfumery Store 1980 SCC 483 = [1981] 43 TAX 14 (S.C.Pak.)
622
Commissioner of Income Tax, Lahore Zone, Lahore v. Umar Earooq C/o Sh. Fazal Rehman, Multan [1972] 27 TAX 139 (H.C.Lah.)
606
Commissioner of Income Tax, Lahore, Zone Lahore v. Universal Life & General Insurance Co. Ltd. [1977] 35 TAX 14 (Lah.)
1654
Commissioner of Income Tax, Madras v. Sri Krishna Chandra Gajapathi Narayan Deo, Raja of Parlakimedi [2 ITC 104 (Madras)]
207
Commissioner of Income Tax, Multan Zone, Multan v. Al-Makhdoom Industries, Multan [2001] 83 TAX 487 (H.C.Lah.) = 2001 PTD 1437
1098
Commissioner of Income Tax, Multan Zone, Multan v. Messrs Muhammad Saleem Muhammad Arif Contractors, Multan 2001 PTD 1371
1976
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Colony Textile Mills Limited [1970] 22 TAX 170 (H.C.Lah.)
1898
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Crescent Textile Mills Ltd., Lahore [1974] 29 TAX 242
1897
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Khanewal Oil Mills Ltd., Khanewal [1962] 6 TAX 66 (H.C.Lah.) = 1962 PTD 611 = 1962 PLD 821
1524
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Pakistan Standard Oil & Ginning Mills, Multan [1973] 28 TAX 9 (H.C.Lah.)
1387
Commissioner of Income Tax, North Zone (West Pakistan), Lahore. v. Sheikco Ltd., Ismailabad, Multan [1962] 6 TAX 75 (H.C.Lah.) = 1962 PTD 683 = 1962 PLD 870
1884
Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Mst. Wazirunnisa Begum 1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.)
212, 1067, 1068
Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Owen Roberts & Co. Ltd., Lahore [1972] 27 TAX 95 (H.C.Lah.)
1424
Commissioner of Income Tax, Peshawar v. Ghulam Siddique [2001] 83 TAX 390 (H.C.Pesh.) = [2000] 82 TAX 426 (H.C.Pesh.) = 2000 PTD 2953
634
(lxiv) VOL-I
Income Tax Digest. Case No.
Commissioner of Income Tax, Peshawar v. Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd. and others [2001] 83 TAX 544 (S.C.Pak.) = 2001 PTD 778
1919
Commissioner of Income Tax, Peshawar Zone, Peshawar v. Siemen A.G. 1991 SCC 773 = [1991] 63 TAX 130 (S.C.Pak.)
602
Commissioner of Income Tax, Rawalpindi v. Amanat Ali [2001] 83 TAX 268 (H.C.Lah.)
2215
Commissioner of Income Tax, Rawalpindi v. Attock Oil Company Limited, Rawalpindi [1975] 32 TAX 57 (H.C.Lah.)
1543
Commissioner of Income Tax, Rawalpindi v. K.K. & Co. Ltd. [1980] 42 TAX 81 (H.C.Lah.)
211
Commissioner of Income Tax, Rawalpindi v. Noon Sugar Mills [1975] 32 TAX 273 (H.C.Lah.)
351, 1913
Commissioner of Income Tax, Rawalpindi v. Pak. Mineral Industries Ltd., Rawalpindi [1996] 73 TAX 240 (H.C.Lah.)
1345
Commissioner of Income Tax, Rawalpindi Zone v. M. Bahar Ahmad & sons 1981 SCC 567 = [1982] 45 TAX 134 (S.C.Pak.)
1353
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Batala Cotton Ginning Pressing and General Mills, Lyallpur [1977] 35 TAX 178 (H.C.Lah.)
1374
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Haji Maula Bux Corporation Ltd. Sargodha 1990 SCC 753 = [1990] 62 TAX 57 (S.C.Pak.) = 1990 PLD 990 (SC)
1096
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. K.K. & Co. Ltd., Peshawar [1980] 42 TAX 81 (H.C.Lah.)
1427
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Lyallpur Cold Storage, Lyallpur 1975 SCC 426 = [1976] 34 TAX 14 (S.C.Pak.)
35
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Malik Abdul Karim Transport Co. Ltd., Gujrat [1973] 28 TAX 13 (H.C.Lah.)
769
Commissioner of Income Tax, Rawalpindi, now Gujranwala Zone v. Abdul Karim Transport Company Ltd. Gujrat 1985 SCC 630 = [1986] 53 TAX 67 (S.C.Pak.)
774
Commissioner of Income Tax, Sales Tax, North Zone, West Pakistan Lahore v. Manzur Qadir, Bar-at-law, Lahore 1971 SCC 376 = [1971] 23 TAX 280 (S.C.Pak.)
1785
Commissioner of Income Tax, South Zone, (West Pakistan), Karachi v. Manzur Qadir, Barrister-at-Law [1966] 13 TAX 149 (H.C.Lah.)
1831
Commissioner of Income Tax, South Zone, Karachi v. Noor Jehan S. All Bhai [1992] 66 TAX 163 (H.C.Kar.)
1890
Commissioner of Income Tax, South Zone, Karachi v. Radio Hotel, Karachi [1959] 1-TAX (III-407) (H.C.West Pakistan, Karachi) = 1959 PTD 707 = 1959 PLD 539
360
(lxv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Commissioner of Income Tax, South Zone, v. Haji Ferozuddin [1967] 16 TAX 26 (H.C.Kar.)
1887
Commissioner of Income Tax, v. Oriental Dyes and Chemicals Co. Ltd. 1991 SCC 891 = [1992] 65 TAX 254 (S.C.Pak.)
1489
Commissioner of Income Tax, West Karachi v. Excide Batteries of Pakistan [1978] 38 TAX 126 (Kar.)
1512
Commissioner of Income Tax, West Zone Karachi, & Others v. Khairpur Textile Mills Ltd. and others & Pakistan Progressive Cement Industries v. Commissioner of Income Tax, Karachi Ltd. 1988 SCC 702 = [1989] 60 TAX 55 (S.C.Pak.) = 1989 PTD 500, 1989 PTD 55
1392
Commissioner of Income Tax. North Zone (West Pakistan), Lahore v. Qazi Abdul Hamid, Advocate, Lahore [1974] 29 TAX 129 (H.C.Lah.)
618
Commissioner of Income Tax/CST (Central Karachi) v. A.B. Food Industries Ltd. Karachi [1984] 50 TAX 158 (H.C.Kar.)
87
Commissioner of Income Tax/CST Rawalpindi v. Pakistan Television Corporation Rawalpindi [1978] 38 TAX 181 (H.C.Lah.)
169
Commissioner of Income Tax/Wealth Tax v. Engineering Cooperative Housing Society, Lahore [2000] 82 TAX 52 (H.C.Lah.)
596, 597, 598
Commissioner of Income Tax/Wealth Tax, Companies Zone II, Lawrence Road, Lahore v. Sarfaraz Ali Sheikh [2000] 81 TAX 341 (H.C.Lah.) = 2000 PTD 374
1100
Commissioner of Income Tax/Wealth Tax, Companies Zone, Faisalabad v. Rana Asif Tauseef C/o Rana Hosiery & Textile Mills (Pvt.) Ltd., Faisalabad [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497
243, 268, 1148
Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
65, 75, 267, 1106, 1108, 1110
Commissioner of Sales Tax (Central), Karachi v. Moosa Umer & Co., Karachi & 26 others [1985] 51 TAX 16 (H.C.Kar.)
1509
Commissioner of Sales Tax Lahore v. Lutfi & Co. Lahore [1973] 28 TAX 168 (H.C.Lah.)
265
Commissioner of Sales Tax Rawalpindi Zone, Rawalpindi v. Rashid Burner, Sialkot [1974] 29 TAX 221 (H.C.Lah.)
91
Commissioner of Sales Tax, Rawalpindi Zone, Rawalpindi v. Abdul Razaq Zia-ul-Qamar [1973] 27 TAX 99 (H.C.Lah.)
197
Commissioner of Wealth Tax (Central), Karachi v. Paracha Textile Mills Ltd., Karachi [1983] 48 TAX 145 (H.C.Kar.)
830
Commissioner of Wealth Tax v. Noor Rai Ibrahim [1992] 65 TAX 262 (S.C.Pak)
176
Commissioner of Wealth Tax, Lahore Zone, Lahore v. Mst. Fozia Mughis, Lahore [1975] 32 TAX 1 (H.C.Lah.)
176
(lxvi) Income Tax Digest.
VOL-I
Case No.
Commissioner Sales Tax v. Rizki Ink Company Ltd. [1991] 64 TAX 34 (H.C.Kar.)
293
Commissioner, Inland Revenue v. Wesleyan & General Assurance Society [1948] 30 TC 11
916
Commissioners of Inland Revenue v. John Blott [1921] 8 T.C. 101 (HL)
934
Continental Chemical Co. (Pvt.) Ltd. v. Pakistan and others [2001] 83 TAX 305 (H.C.Kar.)
11
Controller of Estate Duty, Lahore v. Muhammad Bashir Muhammad Nazir & others [1974] 29 TAX 91 (H.C.Lah.)
194
Coronet Paints & Chemicals Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi [1984] 50 TAX 115 (H.C.Kar.)
107, 1774
Cossimbazar Raj Wards Estate v. Commissioner of Income Tax [1946] 14 ITR 377 (Cal.)
855
Cowasjee Family Funds v. Commissioner of Income Tax Karachi [1984] 50 TAX 216 (H.C.Kar.)
1351
Crescent Sugar Mill v. Income Tax Officer [1999] 80 TAX 273 (H.C.Lah.) = NLR 1999 TAX 170
418
Crescent Sugar Mills & Distillery Ltd. Lahore v. Commissioner of Income Tax Lahore Zone, Lahore [1981] 43 TAX 1 (H.C.Lah.)
216, 248, 1955
Crescent Textile Mills Ltd. v. Commissioner of Income Tax, Lahore [1982] 45 TAX 47 (H.C.Lah.)
1826
Crown Bus Service Ltd. v. Commissioner of Income Tax, Lahore [1979] 39 TAX 53 (H.C.Lah.)
765
Crown Bus Service Ltd., Lahore v. Central Board of Revenue and others [1976] 34 TAX 54 (H.C.Lah.)
89, 252, 341, 350, 749, 757, 767
CST/Commissioner of Income Tax Rawalpindi v. Pakistan Television Corporation Ltd. [1978] 38 TAX 181 (H.C.Lah.)
154
Curtis v. J & G Oldfield Ltgd. 9 Tax Cas. 319
1434
D D.M. Vakil v. Commissioner of Income Tax [1946] 14 ITR 298 (Bom.)
1182
Dada Limited & Muhammad Ibrahim & Co. v. Commissioner of Income Tax 1974 SCC 407 = [1974] 30 TAX 91 (S.C.Pak.)
1970
Dada Sons, Hyderabad v. Commissioner of Income Tax (Central), Karachi [1986] 53 TAX 165 (H.C.Kar.)
1337
Dalmia Cement Ltd. v. Commissioner of Income Tax [1944] 12 ITR 50 (Pat.)
1292
Data Distribution Services v. Deputy Commissioner of Income Tax and another [2000] 82 TAX 156 (H.C.Lah.)
412
(lxvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Dawji Dadabhai & Co. v. Commissioner of Income Tax (West) Karachi [l982] 45 TAX 208 (H.C.Kar.)
1561
Dawn Sports v. Income Tax Officer [1993] 67 TAX 208 (H.C.Lah.)
1994
Day (H.M. Inspector of Taxes) v. Quick 51 Tax Cas. 583 (HL)
1134
Dayaldas Khushiram v. Commissioner of Income Tax [1943] 11 ITR 67 (Bom.)
782
Dayaldas Kushirarn v. Commissioner of Income Tax [1940] 8 ITR 139 (Bom.)
783, 794
Dbakesbwar Prasad Narain Singb v. Commissioner of Income Tax [1936] 4 ITR 71 (Pat.)
1799
De Beers Consolidated Mines Ltd. v. Howe [1906] 5 Tax Cas. 198 = [1906] AC 455 (HL)
737, 738
Delhi Cloth And General Mills Co. Ltd. v. Commissioner of Income Tax, Rawalpinidi [1977] 36 TAX 210 (H.C.Lah.)
1700
Deniti Prasad Singh v. Commissioner of Income Tax [1947] 15 ITR 165 (Pat.)
1442
Dewan Bahadur Ballbhdas & Son v. Commissioner of Income Tax 5 ITC 371 (Nag.)
961
Dhakeshwar Prasad Narain Singh v. Commissioner of Income Tax [1936] 4 ITR 71 (Pal.)
1800
Dhaniram Dharampal v. Commissioner of Income Tax [1936] 4 ITR 113 (Lahore)
1964
Dhanrajmal Mamnumal & Sons v. Commissioner of Income Tax, West Karachi [1985] 52 TAX 77 (H.C.Kar.)
107, 1094
Dibrugarh District Club Ltd. v. Commissioner of Income Tax 2 ITC 521 (Cal.)
706
Director Finance, Wapda v. Commissioner of Income Tax [2000] 82 TAX 127 (H.C.Lah.)
1915, 1936
Director Finance, Wapda, Gujranwala & another v. Commissioner of Income Tax, Gujranwala & another [2001] 83 TAX 8 (H.C.Lah.)
1935
Diwan Bahadur Sir T. Vijayaraghavacharya v. Commissioner of Income Tax [1936] 4 ITR 317 (Lahore)
1024
Diwan Chand v. Commissioner of Income Tax [1934] 2 ITR 382 (Lahore)
1818
Dma Nath Hernraj of Cawnpore v. Commissioner of Income Tax 2 ITC 304 (All.)
792
Dr. A. Razzak Kazi v. Commissioner of Income Tax [1990] 62 TAX 44 (H.C.Kar.)
1121
Dr. Col. Said Amman, Karachi v. Commissioner of Income Tax (Central), Karachi [1984] 49 TAX 24 (H.C.Kar.)
1790
Dr. Sir H.S. Gour v. Commissioner of Income Tax 3 ITC 346 (Nag.)
1746
(lxviii) Income Tax Digest.
VOL-I
Case No.
Dr. Sir Hari Singh Gour v. Commissioner of Income Tax 3 ITC 333 (Nag.)
1667
Dr. Urnar Baksh v. Commissioner of Income Tax 5 ITC 402 (Lahore)(FB)
578
Dreamland Cinema, Multan v. Commissioner of Income Tax Lahore [1977] 35 TAX 169 (H.C.Lah.)
50, 51, 99, 250, 294
Dublin Corporation v. M. Adam (Survey of Taxes) [1887] 2 Tax Cas. 387
1222
Dwarakanath Harishandra Pitale, In re [1937] 5 ITR 716 (Bom.)
698
E E.C. Danby v. Commissioner of Income Tax [1944] 12 ITR 351 (Pat.)
499, 1135
E.F.U. General Insurance Co. & others v. Federation of Pakistan & Others 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 = PTCL 1997 CL. 478
179, 285, 1703, 1721
E.M.V. Muthappa Chettiar v. Commissioner of Income Tax [1945] 13 ITR 311 (Mad.)
876, 980, 1415
E.R. Chowdhury, Pro. Late Eklasur Rahman Chowdhury Commissioner of Taxes, Chittagong [1986] 53 TAX 80 (H.C.B.D.)
v.
1173
East Khas Jharia Colliery Co. Ltd. v. Commissioner of Income Tax [1943] 11 ITR 299 (Pat.)
1360
East Wing Indusiries, Sialkot v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi [1979] 40 TAX 62 (H.C.Lah.)
1639
Eastern Federal Union Insurance Co. Ltd. v. Central Board of Revenue And Muhammad Fareed [1983] 47 TAX 50 (H.C.Kar.)
754
Eastern Federal Union Insurance Co. v. Commissioner of Income Tax [1966] 14 TAX 211 (H.C.Kar.)
220
Eastern Poultry Services v. Govt. of Pakistan & others [1993] 68 TAX 171 (H.C.Kar.)
272
Eastern Poutry Services v. Government of Pakistan and others [1993] 68 TAX 171 (H.C.Kar.)
381
Eastern Textile Mills Ltd., Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca / and / G. Merajuddin and another v. Commissioner of Income Tax, East Pakistan, Dacca [1966] 13 TAX 145 (H.C.Dacca)
353
Ebrahim Brothers (Pvt.) Ltd v. Commissioner of Income Tax, Central Zone "B", Karachi 1991 SCC 818 = [1991] 64 TAX 116 (S.C.Pak.) = 1992 PTD 1693
1731
Ebrahim Brothers (Pvt.) Ltd. v. Commissioner of Income Tax, Karachi 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.)
1727, 1728
(lxix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Elahi Cotton Mills Ltd. & others v. Federation of Pakistan & others 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
1, 104, 140, 146, 149, 156, 198, 607
Ellahi and Company v. Commissioner of Income Tax 1963 PTD 395 (H.C.Kar.) = 1963 PLD 490
1086
Emperor v. Probhat Chandra Barua 1 ITC 284 (Cal.) = [1924] ILR 51 Cal. 504 = AIR (1924) Cal. 668 = 84 IC 31
30, 55, 56, 61, 139, 299, 320, 468, 532
Eruch Maneckji and others v. Income Tax Officer, Central Circle III, Karachi [1980] 41 TAX 25 (H.C.Kar.) = 1979 PTD 461
403, 1946
Eruck Maneckji and others v. Commissioner of Income Tax [1990] 62 TAX 1 (H.C.Kar.)
1252
Essential Industries, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca [1969] 19 TAX 3 (H.C.Dacca)
233
Evershine Paints v. Commissioner of Income Tax [1995] 71 TAX 48 (H.C.Kar.)
1019
Executors of Sardar Narain Singh, In re [1943] 11 ITR 478 (Lahore) Executors of the Estate of LaIa Shankar Shah v. Commissioner of Income Tax [1945] 13 ITR 500 (Labore)
1630, 1757 703, 956
F F.E. Dinshaw v. Commissioner of Income Tax [1934] 2 ITR 319 (PC)
1473, 1480, 1481, 1486
F.M.C. United (Pvt.) Limited, Lahore v. The Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 2 others [2001] 83 TAX 500 (H.C.Lah.) = 2001 PTD 812
1950
Faisal Plaza v. Central Board of Revenue [1995] 71 TAX 282 (H.C.Lah.)
2003
Fatehchand Cbhakodilal v. Commissioner of Income Tax [1945] 13 ITR 198 (Nag.)
1798
Feroze Shah v. Commissioner of Income Tax 4 ITC 315 (Lahore)
1801, 1816
Firdaus Trading Corporation v. Commissioner of Income Tax, Karachi and others [l960] 2-TAX (Suppl.-114) (H.C.West Pakistan, Karachi Bench) = 1959 PTD 119 = 1958 PLD 220
773
First National City Bank, Karachi v. Income Tax Officer, Karachi and another [1976] 34 TAX 1 (H.C.Kar.) = PLD 1976 Kar. 552
405
Frasers Glasgow Bank Ltd. v. Commissioners of Inland Revenue 40 TC 698 (HL)
1651
Friends Construction Company v. Commissioner of Income Tax and Others [1989] 60 TAX 88 (H.C.Lah.) = 1989 PTD 843
2005
(lxx) Income Tax Digest.
VOL-I
Case No.
Frontier Ceramics v. Government of Pakistan & others 1999 PTD 4126 (H.C.Pesh.)
119
G Ganeshi LaI Chhappan LaI v. Commissioner of Income Tax [1941] 9 ITR 81 (All.)
1815
Ganeshilal Bhattawala, In re [1938] 6 ITR 489 (All.)
1369, 1593
Ganga Ram Balmokand v. Commissioner of Income Tax [1937] 5 ITR 464 (Lahore)
1809, 1813
Ganga Sagar Ananda Mohan Shaha v. Commissioner of Income Tax 4 ITC 55 (Bengal)
655, 668, 679
Gatron (Industries) Ltd. v. Government of Pakistan and others PTCL 1999 CL. 359 = 1999 SCMR 1072
373
Gaya Prasad Chhotey Lal v. Commissioner of Income Tax 8 ITC 64 (All.)
945
Gayaprasad and Chotey Lal, In re [1935] 3 ITR 177 (All.)
1265
GEC Avery (Pvt.) Ltd. v. Government of Pakistan through C.B.R., Islamabad and 2 Others [1995] 72 TAX 81 (H.C.Kar.)
394
General Bank of Netherlands Ltd. and 2 Others v. Commissioner of Income Tax, Central, Karachi 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.)
166, 1004, 1013, 1025, 1151
General Corpn. Ltd. v. Commissioner of Income Tax [1935] 3 ITR 350 (Mad.)
1572
General Tyre & Rubber Co. of Pakistan Ltd. v. Commissioner of Income Tax, Central Zone, Karachi [1989] 60 TAX 34 (H.C.Kar.)
1523
General Tyres and Rubber Co., Pakistan v. Commissioner of Income Tax (Central), Karachi [1985] 52 TAX 146 (H.C.Kar.) = 1986 PTD 52
1528
Ghilaf Gul v. Commissioner of Income Tax/Wealth Tax, Zone-B, Peshawar & 4 Others [1997] 75 TAX 298 (H.C.Pesh.) = 1997 PTD 849
1906
Ghulam Hyder Bundally v. Commissioner of Income Tax 10 ITC 141 (Sind)
1052
Ghulam Rasool v. Income Tax Officer, Rahimyarkhan and another [1975] 31 TAX 153 (H.C.Lah.)
440
Gillanders Arbuthnot & Co. v. Commissioner of Income Tax [1966] 13 TAX 163 (H.C.Lah.)
192, 1312
Girdhardas Hirivallabhdas v. Commissioner of Income Tax 3 ITC 83 (Bom.)
1432
Glaxo Laboratories Ltd. v. Inspecting Assistant Commissioner of Income Tax & others 1992 SCC 910 = [1992] 66 TAX 74 (S.C.Pak.) = 1992 PTD 932 = PLD 1992 SC 549
314
(lxxi) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Glenboig Union Fireclay Co. Ltd. v. Commissioner of Inland Revenue [1922] 12 TC 427 (HL)
868
Gloucester Railway Carriage & Wagon Co. Ltd. v. IRC [1925] 12 Tax Cas. 720 (HL)
1281
Golden Horse Shoe Ltd. v. Thurgood (Inspector of Taxes) [1933] 18 Tax Cas. 280
1568
Gomedalli Laxminarayan v. Commissioner of Income Tax 8 ITC 239 (Bom.)
658
Gopaldas Parsbottamdas v. Commissioner of Income Tax [1941] 9 ITR 130 (All.)
1965
Gopinath Biswambar Roy v. Commissioner of Income Tax, Dacca [1960] 2-TAX (Suppl.-174) (H.C.Dacca) = 1960 PTD 1079
1975
Gopinath Vir Bhan v. Commissioner of Income Tax [1938] 6 ITR 243 (Lahore)
1362, 1419
Gopiram Gobindram, In re [1936] 4 ITR 157 (Cal.)
907
Goud Saraswat Brahmin Co-operative Housing Society Ltd. v. Commissioner of Income Tax 10 ITC 422 (Bom.)
1185
Governors of the Rotunda Hospital v. Coman [1920] 7 Tax Cas. 517 (HL)
1260
Govindram Bros. Ltd. v. Commissioner of Income Tax [1946] 14 ITR 764 (Bom.)
1338, 1877
Green v. J. Gliksten & Sons Ltd. [1929] 14 TC 364 (HL)
1288
Gresham Life Assurance Society v. Styles [1892] 3 Tax Cas. 185
1218
Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC)
1261
Grindlays Bank Ltd. v. Commissioner Of Income Tax (Central), Karachi [1983] 47 TAX 39 (H.C.Kar.)
1851
Grindlays Bank Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi [1985] 51 TAX 102 (H.C.Kar.) = 1985 PTD 329
1238
Guarantee Engineers (Pvt.) Ltd. v. Federation of Islamic Republic of Pakistan through Secretary, Ministry of Finance, Islamabad and another [2000] 82 TAX 131 (H.C.Lah.)
361, 412
Gulberg Textile Mills v. Commissioner of Income Tax, Karachi [1978] 37 TAX 125 (H.C.Kar.)
1679
Gulistan Textile Mills Ltd. v. Central Board of Revenue, etc. [1994] 70 TAX 272 (H.C.Kar.)
373, 379, 431
Gunda Subbayya v. Commissioner of Income Tax [1939] 7 ITR 21 (Mad.)
1812
(lxxii) Income Tax Digest.
VOL-I
Case No.
H H.M. Abdullah v. Income Tax Officer Circle V, Karachi & 2 others 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.)
365, 412, 796
H.M. Abdullah v. Income Tax Officer, Circle-V, West Zone, Karachi [1991] 63 TAX 113 (H.C.Kar.) = 1991 PTD 217 = 1991 PTD 217
801
H.T. Conville v. Commissioner of Income Tax [1936] 4 ITR 137 (Lahore)
496, 500, 503, 1395
Habib & Sons v. Commissioner of Income Tax [1947] 15 ITR 132 (Bom.)
1963
Habib Bank Safe Deposit Vault v. Commissioner of Income Tax [1967] 15 TAX 212 (H.C.Kar.)
852
Habib Insurance Co. Ltd. & another v. Commissioner of Income Tax 1989 SCC 736 = [1990] 61 TAX 88 (S.C.Pak.)
1711
Hafiz Muhammad Arif Dar v. Income Tax Officer 1988 SCC 710 = [1989] 60 TAX 52 (S.C.Pak.)
368, 410
Haider Ali Rajab All & Company v. Commissioner of Income Tax [1980] 41 TAX 158 (H.C.Kar.) = 1980 PTD 1
1804
Haideria Transport Company Limited v. Government of Pakistan and Income Tax Officer, Companies Circle [1979] 39 TAX 147 (H.C.Lah.)
1241
Hajee Cassim Tayoob Surty v. Commissioner of Income Tax 6 ITC 41 (Rangoon)
494
Hajee Mohamed Hajee Oosman v. Commissioner of Income Tax 10 ITC 330 (Rangoon)
1047
Haji Abdul Qayum v. Commissioner of Income Tax 1963 PTD 410 = 1963 PLD 496
1857
Haji Ali Jan v. Commissioner of Income Tax [1934] 2 ITR 452 (Lahore)
1818
Haji Ghulam Hussain v. Commissioner of Income Tax [1942] 10 ITR 405 (Peshawar)
699, 1224, 1277, 1747
Haji Gula Khan v. Special Officer, Income Tax and Others [1997] 75 TAX 117 (H.C.Pesh.) = 1997 PTD 7
424
Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West), Karachi [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266
24, 346, 721
Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West) Karachi 1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak.)
718, 719
Haji Ismail Ibrahim v. Incons Tax Officer, Circle W-II, West Zone, Karachi and 2 others [1992] 65 TAX 153 (H.C.Kar.)
1987
Haji Muhammad Shafi & others v. Wealth Tax Officer & others [1992] 65 TAX 315 (S.C.Pak)
8
(lxxiii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Haji Mushtaq Ahmad v. Commissioner of Income Tax [1978] 38 TAX 1 (H.C.Kar.) = PLD 1978 Kar. 414
1881
Haji Taj Mohammad Haji Abdul Rahman & Co. v. Commissioner of Income Tax 6 ITC 240 (All.)
789
Haji Thread Manufacturing Co. Ltd., Korbaniganj, Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca [1966] 13 TAX 32 (H.C.Dacca)
1832
Haji, Muhammad Zakaria & Faruqui Flour Mills v. Commissioner of Income Tax, Karachi [1962] 5 TAX 147 (H.C.Kar.) = 1962 PTD 101 = 1962 PLD 136
651
Hakeem Muhammad Saeed v. Commissioner of Income Tax [1989] 59 TAX 102 (H.C.Kar.)
1230
Hakim Ram Prasad, In re [1936] 4 ITR 104 (Lahore)
1607
Hamdard Dawakhana (Waqf) Pakistan v. Commissioner of Income Tax Central Zone, `B' Karachi and another [1990] 62 TAX 98 (H.C.Kar.)
395
Hamdard Dawakhana (Waqf) v. Commissioner of Income Tax etc. [1987] 56 TAX 78 (H.C.Kar.)
107, 384
Hamdard Dawakhana v. Commissioner of Income Tax Karachi [1980 SCC 497 = [1980] 42 TAX 1 (S.C.Pak)
218
Hamdard Thread House, Karachi v. Commissioner of Income Tax (East), Karachi [1984] 49 TAX 91 (H.C.Kar.)
1000
Hamiduddin Samiuddin v. Commissioner of Income Tax [1976] 33 TAX 209 (H.C.Lah.)
1891
Hanmantram Ramnath v. Commissioner of Income Tax [1946] 14 ITR 716 (Bom.)
1416
Hansraj Gupta v. Dhera Dun Mussorai Electric & Tramway Co. Ltd. [AIR 1933 PC 63, 65]
317
Hanutram Bhuramal v. Commissioner of Income Tax [1938] 6 ITR 290 (Pat.)
1477
Hari Krishna Das v. Commissioner of Income Tax, UP [5 ITC 275 (Allahabad)
295
Haripur Rosin & Turpentine Factory Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1974] 29 TAX 248 (H.C.Lah.)
1209
Haripur Rosin & Turpentine Factory Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1972] 27 TAX 149 (H.C.Lah.)
1211
Harjina & Company (Pak) Limited, Karachi v. Commissioner of Income Tax [1964] 8 TAX 1 (H.C.Kar.) = 1963 PTD 867 = 1963 PLD 996
54
Haridas Purshottam, In re [1947] 15 ITR 124 (Bom.)
683
(lxxiv) VOL-I
Income Tax Digest. Case No.
Harnand Rai Harbhagat Rai v. Commissioner of Income Tax [1936] 4 ITR 366 (Lahore)
1471
Hasan Ali Karabhai v. Commissioner of Income Tax [1974] 30 TAX 203 (H.C.Kar.)
1900
Hashmi Can Company Ltd. v. Commissioner of Income Tax, Karachi [1989] 60 TAX 8 (H.C.Kar.) = 1989 PTD 570
1506
Hatz Trust of Simla v. Commissioner of Income Tax, Punjab & NWFP [5 ITC 8 (H.C.Lah.)
297
Havell Shah Sardari Lal v. Commissioner of Income Tax [1936] 4 ITR 297 (Lahore)
1157
Hazoor Bakhsh v. Senior Superintendent of Police, Rahimyar Khan and 12 others PLD 1999 Lahore 417
126, 373
Heaton (H.M. Inspector of Taxes) v. Bell 46 Tax. Cas. 211 (HL)
1142
Helal Jute Press Limited v. Commissioner of Income Tax, Dacca Zone, Dacca and another [1970] 22 TAX 157 (H.C.Dacca)
1855
Hemraj Kanji v. Commissioner of Income Tax 6 ITC 354 (Sind)
1871
Henarsidas Jagannath, In re [1947] 15 ITR 185 (Lahore)
1563
Highland Manufacturer (Pak) Ltd. v. Commissioner of Income Tax (West) Karachi [1985] 51 TAX 66 (H.C.Kar.)
293, 459, 1423
Highway Petroleum Service (Regd.), Lahore v. Islamic Republic of Pakistan and another [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797
98, 135, 249, 349, 387
Himalaya Assurance Co. Ltd., In re [1939] 7 ITR 402 (PC)
1726
Himatlal Motilal and Ramanlal Lallubhai v. Commissioner of Income Tax 6 ITC 159 (Bom.)
1324
Hira Lal Phoolchand v. Commissioner of Income Tax [1947] 15 ITR 205 (All.)
1538, 1587
Hira Mills Ltd. v. Income Tax Officer [1946] 14 ITR 417 (All.)
983, 1043, 1049
Hirala Kalyanmal, In re [1943] 11 ITR 128 (Bom.)
1280, 1861
Hiranand Jairam Singh v. Commissioner of Income Tax [1935] 3 ITR 309 (Lahore)
1319
Home Insurance Company, Limited, Karachi v. Commissioner of Income Tax, Companies-III, Karachi [1992] 66 TAX 33 (H.C.Kar.)
1715
Hon'ble Mr. Justice Iqbal Ahmad, In re [1942] 10 ITR 152 (All.)
812
Hotel Methopole Ltd. v. Commissioner of Income Tax (Central), Karachi [1984] 50 TAX 179 (H.C.Kar.)
615
Hotel Metropole Ltd., Karachi v. Commissioner of Income Tax (Central), Karachi [1973] 28 TAX 96 (H.C.Kar.)
821
Hotz Trust of Simla v. Commissioner of Income Tax 5 ITC 8 (Lahore)
702
(lxxv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Howrah Trading Co. (Pvt.) Ltd. v. Commissioner of Income Tax, East Pakistan 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.)
1028, 1393
Hudabiya Engineering (Pvt.) Ltd., Lahore v. Pakistan through Secretary, Ministry of Interior, Government of Pakistan, Islamabad [1997] 76 TAX 302 (H.C.Lah.)
175, 195, 452, 848
Hughes (Inspector of Taxes) v. Bank of New Zealand [1938] 6 ITR 636 (HL)
1578
Hughes v. Utting (B.G.) & Co. Ltd. [1940] 8 ITR (Suppl.) 57 (HL) Hulasilal Ramdayal, In re [1941] 9 ITR 635 (All.)
965, 1283 1450, 1869
Hukumchand Jagadharmal v. Commissioner of Income Tax [1935] 3 ITR 211 (Lahore)
1484
Hussain Ebrahim Agencies Ltd., Karachi v. Commissioner of Income Tax (Central), Karachi [1984] 50 Tax 226 (H.C.Kar.)
1095
Hussain Sugar Mills v. Islamic Republic of Pakistan [1981] 44 TAX 59 (H.C.Kar.)
373
Hussain Sugar Mills v. Islamic Republic of Pakistan and others [1981] 44 TAX 93 (H.C.Kar.)
400, 1952
Hydri Construction Co. Ltd., Karachi v. Commissioner of Income Tax, Central, Karachi [1967] 15 TAX 21 (H.C.Kar.)
563
I I.T.Assessments of the Estate of F.E. Dinshaw 1959 PTD 176 (H.C.Sind) = 1958 PLD 270
1735
Ibrablmbhai Mulla Badruddin v. Commissioner of Income Tax 5 ITC 302 (Nag.)
1575
Ibrahim Sons v. Commissioner of Income Tax, Karachi West, Karachi [1979] 39 TAX 127 (H.C.Kar.)
1766
ICC Textiles Limited v. Federation of Pakistan and others [1999] 79 TAX 77 (H.C.Lah.)
15
Imperial Chemical Industries India Ltd., In re [1935] 3 ITR 21 (Cal.)
1566, 1616
Imperial Tobacco Co. of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi 1958 SCC 37 = [1959] 1-TAX (III-284) (S.C.Pak.)
73
Imperial Tobacco Company of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak)
9
Imperial Tobacco Company of India v. The Secretary of State for India in Council [1 ITC 169 (Calcutta)]
96
Income Tax Appellate Tribunal, Pakistan v. Imperial Tobacco Co. of India Ltd. [1960] 2-TAX (Suppl.-79) (H.C.West Pakistan, Karachi) = 1960 PTD 747 = 1957 PLD 300
729
(lxxvi) VOL-I
Income Tax Digest. Case No.
Income Tax Assessment of Premier Tobacco Industries Ltd., in re [1986] 53 TAX 35 (H.C.Kar.)
1771
Income Tax Assessments of the Estate of F.E. Dinshaw 1959 PTD 176 (H.C.Sind) = 1958 PLD 270
567
Income Tax Commissioner v. Chitnavia [1932] LR 59 IA 290 (PC)
1429
Income Tax Officer & another v. Chappal Builders 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.)
231, 1982
Income Tax Officer & others v. Suleman Bhai Jiwa & others [1970] 21 TAX 62 (Income Tax Digest Feb. 1970)
53
Income Tax Officer & two others v. Shaikh Ghulam Shah 1991 SCC 823 = [1991] 64 TAX 91 (S.C.Pak.)
1988
Income Tax Officer (Investigation) Circle III, Karachi and Another v. Sheikh Nasim Anwar Dacca 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.)
752, 761
Income Tax Officer v. Rev. J.C. Manry [1942] 10 ITR 205 (All.)
1140
Income Tax Officer, Investigation Circle & others v. Sulaiman Bhai Jiwa & Others 1969 SCC 354 = [1970] 21 TAX 62 (S.C.Pak.)
36, 239
Income Tax Officer, Mardan v. Sanaullah Khan & Co. 1976 SCC 430 = [1977] 35 TAX 1 (S.C.Pak.)
1014, 1026
Income Tax Officer, Mirpur & 2 others v. Ch. Muhammad Bashir [1994] 69 TAX 109 (S.C.AJ&K)
456, 763
Indian Radio and Cable Communication Co. Ltd. v. Commissioner of Income Tax [1937] 5 ITR 270 (PC) = AIR 1931 PC 165
1301, 1315, 1562, 1582
Indian Turpentine & Rosin Co. Ltd. v. Commissioner of Income Tax 3 ITC 219 (All.)
1610
Indus Steel Pipes Ltd. v. Commissioner of Income Tax, Companies-II, Karachi and others [1999] 79 TAX 410 (H.C.Kar.)
14
Indus Valley Construction Co. v. Commissioner of Income Tax (East), Karachi [1984] 51 TAX 55 (H.C.Kar.)
850
Industrial Management Ltd., Karachi v. Commissioner of Income Tax, Karachi [1978] 38 TAX 5 (H.C.Kar.) = PLD 1978 Kar. 673
561, 566
Inland Revenue Commissioners v. Duke of Westminster [1939] A.C. 1 = 19 Tax Cas. 490
879
Inland Revenue Commissioners v. Wesleyan General Assurance Society [1948] 16 ITR Suppl. 101 (HL)
1307
Inspecting Additional Commissioner & others v. Pakistan Herald Ltd. 1996 SCC 1093 = [1997] 76 TAX 131 (S.C.Pak) = 1997 PTD 1485
179
Inspecting Additional Commissioner v. Chotabhai Javerbhai [1941] 9 ITR 604 (Mad.)
1968
International Beverages Ltd. v. Commissioner of Income Tax, Karachi [1984] 50 TAX 1 (H.C.Kar.)
811
(lxxvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
International Body Builders v. Sales Tax Officer, Lahore [1980] 41 TAX 60 (H.C.Kar.)
373
International Traders Ltd., Karachi v. Commissioner of Income Tax [1967] 16 TAX 46 (H.C.Kar.)
1254
IRC v. Anglo Brewing Co. Ltd. [1925] 12 Tax Cat 803
1571
IRC v. Fraser [1942] 24 Tax. Cas. 498 (HL) IRC v. Gardner Mountain & D'Ambrumenil Ltd. [1947] 29 Tax Cas. 69 (HL) IRC v. Livingston [1926] 11 Tax Cas. 538
1213, 1215 972 1214
Irfan Gul Magsi v. Haji Abdul Khaliq Soomro and others 1999 PTD 1302
178
Irum Ghee Mills Limited v. Income Tax Appellate Tribunal and another [2000] 82 TAX 3 (S.C.Pak)
264
Isabella Coal Co. v. Commissioner of Income Tax 2 ITC 87 (Cal.)
1640
Ishar Das Dharam Chand, In re 2 ITC 12 (Lahore)
1430
Islam Jewellers, Gujranwala v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi [1978] 38 TAX 71 (H.C.Lah.)
1020
Islamuddin and 3 others v. The Income Tax Officer and 4 others 2000 PTD 306
371, 416
ITAT v. Chhaganmal Mangilal [1946] 14 ITR 206 (Nag.)
1627
J J.A. Textile Mills Ltd. v. CBR [2000] 81 TAX 88 (H.C.Lah.) = 1999 PTD 4138
290
J.L. Wei & Co. v. Commissioner of Income Tax [1989] 59 TAX 108 (H.C.Kar.)
144
J.M. Casey v. Commissioner of Income Tax 4 ITC 259 (Pat.) Jamal v. The State [PLD 1960 Lahore 1962]
472, 476 312
Jamat-i-Islami Pakistan through Syed Munawar Hassan, Secretary General v. Federation of Pakistan through Secretary, Law, Justice and Parliamentary Affairs PLD 2000 S.C. 111
67, 283, 318
Jamshed Marker Brothers Ltd. v. Commissioner of Income Tax, Central Zone, Karachi [1991] 64 TAX 14 (H.C.Kar.)
1503
Jardine Henderson Ltd., Calcutta v. Commissioner of Income Tax, Dacca [1970] 22 TAX 61 (H.C.Dacca)
1040
Jeffrey (H.M. Inspector of Taxes) v. Rolls-Royce Ltd./Commissioner of Inland Revenue v. Rolls-Royce Ltd. 40 TC 443 (HL
931
Jewan Shah Maya Shah v. Commissioner of Income Tax [1934] 2 ITR 343 (Lahore)
1808
(lxxviii) Income Tax Digest.
VOL-I
Case No.
Jitumal Chamanlal v. Commissioner of Income Tax [1944] 12 ITR 296 (Lahore)
674, 677
John Emery & Sons v. Lord Advocate [1936] 4 ITR 8 (HL)
1297
John Smith & Son v. Moore [1921] 2 AC 13 (HL)
1584
Jones v. Leeming [1930] AC 415 (HL)
1216
Jugal Kishore Mukat LaI, In re [1938] 6 ITR 494 (All.)
636
Julian Hoshang Dinshaw Trust & others v. Income Tax Officer Circle XVIII, South Zone, Karachi South 1991 SCC 777 = [1992] 65 TAX 102 (S.C.Pak.) = 1992 SCMR 250
806, 1733
Julian Hoshang Dinshaw Trust v. Income Tax Officer, Circle XVIII, South Zone, Karachi and two others [1981] 43 TAX 92 (H.C.Kar.) = 1981 PTD 53
386, 778
Jullundur Cooperative Transport Society Ltd. v. Income Tax Officer 1977 SCC 442 = [1977] 36 TAX 7 (S.C.Pak.)
640
Jupudi Kesava Rao v. Commissioner of Income Tax 8 ITC 217 (Mad.)
970
Jutharam Jankidas v. Commissioner of Income Tax [1944] 12 ITR 344 (Pat.) Jyotirindra Narayan Sinha Chowdhury, in re [1945] 13 ITR 263 (Cal.)
1632, 1659 515
K K.AR.S.T. Arunachalam Chettlar v. Commissioner of Income Tax [1946] 14 ITR 61 (Mad.) K.H. Mody, In re [1940] 8 ITR 179 (Bom.) K.K.G.B.U.G.M.S.S.A. Mohammad Abdul Kareem & Co. v. Commissioner of Income Tax [1948] 16 ITR 412 (Mad.) K.M. Mody, In re [1940] 8 ITR 179 (Bom.) K.M.N.N. Swarninathan Chettiar v. Commissioner of Income Tax [1947] 15 ITR 418 (Mad.) K.T.M.T.M. Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income Tax [1939] 7 ITR 652 (Mad.) Kahan Chand & Klshan Chand v. Commissioner of Income Tax [1944] 12 ITR 472 (Lahore) Kaiser Jehan Begum v. Commissioner of Income Tax, (East), Karachi [1984] 50 TAX 168 (H.C.Kar.) Kalyanji Vithaldas v. Commissioner of Income Tax [1937] 5 ITR 90 (PC) Kamran Industries, Karachi v. Collector of Customs (Exports) Karachi and Others [1995] 72 TAX 223 (H.C.Kar.) Kangra Valley Slate Co. Ltd. v. Commissioner of Income Tax 7 ITC 375 (Lahore)
938 1279 686 1256 731 1597 1247, 1255 1090 637, 656, 665, 672, 673 377 1624
(lxxix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Kaniram Ganpat Rai v. Commissioner of Income Tax [1941] 9 ITR 332 (Pat.) Kantisen Mohanji Ganjawalla & Bros. v. Commissioner of Income Tax 10 ITC 445 (Bom.) Kanwalnen Hamir Singh v. Commissioner of Income Tax [1938] 6 ITR 675 (All.) Karachi Gymkhana, Club Road, Karachi v. Commissioner of Income Tax, (East), Karachi [1986] 53 TAX 1 (H.C.Kar.) Karachi Hospital Ltd. v. Commissioner of Income Tax [2001] 83 TAX 383 (H.C.Kar.) Karachi Industrial Corporation & 3 others v. Commissioner of Income Tax 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak) Karachi Sind Development Corporation v. Commissioner of Income Tax, West Zone, Karachi [1989] 59 TAX 104 (H.C.Kar.) Karachi Steam Navigation Co., Ltd., v. Commissioner of Income Tax [1967] 15 TAX 73 (H.C.Kar.) Karachi Textile Dyeing & Printing Works, Karachi v. Commissioner of Income Tax (Central) Karachi [1984] 49 TAX 18 (H.C.Kar.) Karachi, Textile Dyeing and Printing Works, Karachi v. Commissioner of Income Tax (Central), Karachi [1984] 49 TAX 18 (H.C.Kar.) Karim Aziz Industries Ltd. v. Commissioner of Income Tax Rawalpindi Zone [1997] 75 TAX 90 (H.C.Lah.) Kashmir Cap. House, Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore [1979] 39 TAX 6 (H.C.Lah.) Kashmir Feeds (Pvt.) Ltd. v. Central Board of Revenue through Chairman, Government of Pakistan, Islamabad and another [1999] 80 TAX 24 (H.C.Kar.) = 1999 PTD 1655 Kassam Haji Abbas Patel v. Income Tax Officer, Contractors Circle, Karachi & Another [1983] 47 Tax 162 (H.C.Kar.) Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax Gujranwala [1999] 80 TAX 262 (H.C.Lah.) Kedar Narain Singh v. Commissioner of Income Tax [1938] 6 ITR 157 (A1l.) Khairati Lal Babu Lal, In re [1941] 9 ITR 627 (All.) Khairpur Textile Mills Ltd., Karachi v. Commissioner of Income Tax, Karachi [1978] 38 TAX 120 (H.C.Kar.) Khan Muhammad Yakub Khan & Khan Muhammad Aslam Khan v. Commissioner of Income Tax 3 ITC 308 (Lahore) Khawaja Textile Mills Ltd. v. Deputy Commissioner of Income Tax & 2 others [1998] 77 TAX 1 (H.C.AJ&K) Kheraj Obbeya v. Commissioner of Income Tax 10 ITC 419 (Bom.) Khurram Saghir Industries, Lahore v. Commissioner of Income Taxx, Zone-A, Lahore [2001] 83 TAX 489 (H.C.Lah.)
1478, 1484 696 992 1175 1490 109, 764 1005 1021, 1302, 1619 1777 337 129 1662, 1767 143
399 193, 372, 1917, 1918, 1937 839, 843, 883 908 1513 509 450 693 287
(lxxx) Income Tax Digest.
VOL-I
Case No.
Killing Valley Tea Company v. Secretary of State [1 ITC 54 (Calcutta)] Kishandas Sakuio v. Commissioner of Income Tax, & others [1987] 56 TAX 35 (H.C.Kar.) Kohinoor Industries Ltd. v. Government of Pakistan etc. [1994] 70 TAX 11 (H.C.Lah.) Kohinoor Industries Ltd. v. Government of Pakistan through C.B.R., Islamabad [2001] 83 TAX 17 (H.C.Lah.) Kohinoor Industries Ltd., Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore [1973] 27 TAX 253 (H.C.Lah.) Kohinoor Raiwaind Mills Limited and others v. Central Board of Revenue through Member, Income Tax, Government of Pakistan, Islamabad and 2 others [2000] 82 TAX 539 (H.C.Lah.) = 2000 PTD 3351 Kohinoor Textile Mills Ltd. v. Commissioner of Income Tax 1974 SCC 416 = [1974] 30 TAX 138 (S.C.Pak.) Kokine Dairy v. Commissioner of Income Tax [1938] 6 ITR 145 (Rangoon) Kruddsons Limited, Karachi v. Commissioner of Income Tax `A' Zone, Karachi [1933] 57 TAX 134 (H.C.Kar.) Kumar Deba Prosad Garga v. Commissioner of Income Tax [1943] 11 ITR 546 (Cal.)
302 777 322 413 1400 809
234 544 1769 491, 492
Kumar Jagadish Chandra Sinha v. Commissioner of Income Tax [1955] 28 ITR 732 (Cal.)
481
Kunjamal & Sons, In re [1941] 9 ITR 358 (All.) Kunwar Bishwanath Singh v. Commissioner of Income Tax [1942] 10 ITR 322 (All.) Kunwar Kartar Singh v. Commissioner of Income Tax [1937] 5 ITR 569 (Lahore)
964, 1682 535, 877 519, 681
L L.Bani Mal DaIal v. Commissioner of Income Tax [1941] 9 ITR 222 (Lahore) L.Hira Lal, In re [1945] 13 ITR 512 (Lahore)
1451, 1463, 1484 949
L.N. Gadodia & Co. v. Commissioner of Income Tax 7 ITC 398 (Lahore)
1542
L.Pitamber Prasad, In re [1942] 10 ITR 370 (All.)
1962
L.R.M.S.T. Firm v. Commissioner of Income Tax 3 ITC 416 (Rangoon) Lachhman Das Brijballabh Das, In re [1942] 10 ITR 186 (All.)
1417 914, 1623
Lachhman Das v. Commissioner of Income Tax [1948] 16 ITR 35 (PC)
685
Lahore Ice Factories Association v. Commissioner of Income Tax [1934] 2 ITR 362 (Lahore)
643
Laidler v. Perry (H.M. Inspector of Taxes)
1133
(lxxxi) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Lakhshmi Insurance Co. Ltd., Lahore v. Commissioner of Income Tax, Punjab and N.W.F.P. [1960] 2-TAX (Suppl.-274) (H.C.Lah.) Lakshmi Narain Gadodia & Co., In re [1943] 11 ITR 491 (Lahore)
1154 680
Lakshmi Narayan Sen & Sons Ltd., In re [1936] 4 ITR 255 (Cal.)
1359, 1519, 1550, 1551, 1574
Lakshmi Insurance Co. Ltd. v. Commissioner of Income Tax [1950] 18 ITR 984 (Lahore)
1057, 1341
Lakshmi Narain Gadodia & Co., In re [1943] 11 ITR 491 (Lahore)
654
Lal Jagmohandas Rastogi v. Commissioner of Income Tax 3 ITC 274 (Oudh)
866
Lal Mohammed Sardar Mohammad v. Commissioner of Income Tax [1934] 2 ITR 358 (Lahore)
1966
Lal Muhammad Abdul Sattar & Co. v. Commissioner of Income Tax, Hyderabad [1996] 71 TAX 156 (H.C.Kar.)
1696
Lal Suresh Singh v. Commissioner of Income Tax 9 ITC 35 (Oudh)
523
Lala Indra Sen, In re [1940] 8 ITR 187 (All.)
1269, 1274
Latilla v. IRC [1943] AC 377/25 TC 107 (HL)
893
Laxmidas Devidas & Vannji Ruttonsey v. Commissioner of Income Tax 10 ITC 414 (Bom.)
692, 693
Leather Connections (Pvt) Limited v. The Central Board of Revenue Govt. of Pakistan, Islamabad through its Chairman [2000] 82 TAX 42 (H.C.Lah.)
236, 412
Leather Connections (Pvt.) Ltd. v. Central Board of Revenue, Islamabad [2001] 83 TAX 1 (H.C.Lah.)
235, 1934
Leeming v. Jones (Inspector of Taxes) [1930] 15 Tax. Cas. 333 (HL)
1207
Lever Brothers Pakistan Limited v. Commissioner of Income Tax [1988] 58 TAX 48 (H.C Kar.)
1495
Linga Reddi v. Commissioner of Income Tax 2 ITC 363 (Mad.)
529
Lokamanya Tilak Jubilee National Trust Fund, In re. [1942] 10 ITR 26 (Bom.)
592
Lowry (Inspector of Taxes) v. Consolidated African Selection Trust Ltd. [1940] 8 ITR Suppl. 88 (HL)
1331
Loyal Motor Service Co. Ltd. v. Commissioner of Income Tax [1946] 14 ITR 647 (Bom.)
1364
Ludlow Pakistan Co. Ltd., Dacca v. Commissioner of Income Tax, Dacca [1969] 20 TAX 21 (H.C.Dacca)
1856
Lungla (Sylhat) Tea Co. Ltd. Sylhat v. Commissioner of Income Tax Dacca Circle Dacca 1970 SCC 366 = [1975] 31 TAX 64 (S.C.Pak.)
110
(lxxxii) Income Tax Digest.
VOL-I
Case No.
M M.A.L. Chettyar Firm v. Commissioner of Income Tax 8 ITC 182 (Rangoon)
969
M.C.B. v. Federation of Pakistan [1998] 77 TAX 79 (H.C.Lah.)
1907
M.E.J. Hazari and Sons v. Commissioner of Income Tax, Karachi [1985] 52 TAX 115 (H.C.Kar.)
1772
M.H.Hogg v. Commissioner of Income Tax, North Zone, Lahore [1975] 31 TAX 156 (H.C.Lah.)
1126
M.Rehman, Income Tax Officer, and others v. Narayanganj Company (Pvt.) Ltd. 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak.)
63, 644, 836
M.S. Hameed Masood and Associates, Multan v. Commissioner of Income Tax, Lahore [1979] 39 TAX 176 (H.C.Lah.)
1830
M.T.T.K.M.M.S.M.A.R. Somasundaram Chettiar v. Commissioner of Income Tax 2 ITC 505 (Mad.)
1365
Mabarajah of Plthapuram v. Commissioner of Income Tax [1945] 13 ITR 221 (PC)
881
Macnabb v. Commissioner of Income Tax [1936] 4 ITR 306 (Lahore)
1751, 1366
Macneill & Barry Limited v. Commissioner of Income Tax, East Pakistan, Dacca 1969 SCC 340 = [1970] 21 TAX 8 (S.C.Pak.)
1027
Macneill & Barry Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca [1961] 4 TAX 147 (H.C.Dacca)
1041
Madan Mohan Muflick & Bros., In re [1938] 6 ITR 315 (Cal.)
953
Magniram Bangor & Co., In re [1941] 9 ITR 573 (Cal.)
1621
Mahabir Prasad Munna Lal v. Commissioner of Income Tax [1947] 15 ITR 393 (All.)
853, 1088, 1625
Mahanth Sah Thakur Dayal Sah v. Commissioner of Income Tax 6 ITC 188 (Pat.)
1634
Maharaj Bag Club Ltd. v. Commissioner of Income Tax 5 ITC 201 (Nag.)
707
Maharaj Kuinar of Vizianagaram, In re [1934] 2 ITR 186 (All.)
664, 669
Maharaj Sir Pateshwari Prasad Singh v. Commissioner of Income Tax [1947] 15 ITR 181 (Oudh) Maharaja Guru Mahadeo Ashram Prasad Commissioner of Income Tax 2 ITC 281 (Pat.)
Sahi
Bahadur
487
v.
530, 1396
Maharaja Kainakhya Narain Singh v. Commissioner of Income Tax [1942] 10 ITR 177 (Pat.)
976
Maharaja Kumar of Vizianagaram, In re [1934] 2 ITR 186 (All.)
518
Maharaja of Kapurthala v. Commissioner of Income Tax [1945] 13 ITR 14 (Oudh)
936
(lxxxiii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Maharaja of Kapurthala v. Commissioner of Income Tax [1945] 13 ITR 74 (Oudh)
487, 897
Maharaja of Patiala v. Commissioner of Income Tax [1943] 11 ITR 202 (Bom.)
1963
Maharajadhiraj of Darbhanga v. Commissioner of Income Tax 1 ITC 303 (Pat.)
60, 537
Maharajadhiraj of Darbhanga v. Commissioner of Income Tax 3 ITC 158 (Pat.)
516
Maharajadhiraj Sir Bijay Chand Mahtab Bahadur of Burdwan, in re [1940] 8 ITR 378 (Cal.)
512, 545
Maharajah of Pithapuram v. Commissioner of Income Tax [1945] 13 ITR 221 (PC)
890
Maharajhumar Gopal Saran Narain Singh v. Commissioner of Income Tax [1935] 3 ITR 237 (PC)
495, 844, 917
Maharani Janki Kuer v. Commissioner of Income Tax 5 ITC 42 (Pat.)
527, 920
Maharani of Bardwan v. Krishna Kamini Dasi [14 ILR PC 365] Mahmeed (Private) Ltd. v. Collector of Customs, Quetta and Another [1990] 61 TAX 12 (H.C.Quetta) Major A.U. Johit, In re [1938] 6 ITR 434 (All.)
255 1923 915
Major Conville v. Commissioner of Income Tax [1935] 3 ITR 404 (Lahore)
498, 1138
Malik Mir Hassan Khan v. Commissioner of Income Tax, Karachi [1978] 37 TAX 204 (H.C.Kar.)
1079, 1080
Malik Muhammad Akram Khan & Co. v. Income Tax Officer, Jhelum [1977] 36 TAX 216 (H.C.Lah.)
619, 820
Mallalieu v. Drummond (H.M. Inspector of Taxes) 57 TC 330 (HL)
1649
Manager, Radhika Mohan Roy Wards Estate, In re [1940] 8 ITR 460 (Cal.)
491, 492
Mandviwalla Motors Limited, Karachi v. Commissioner of Income Tax, Central Zone `B', Karachi [1991] 64 TAX 19 (H.C.Kar.)
42
Manufacturers' Life Insurance Co. of Canda v. Commissioner of Income Tax [1938] 6 ITR 321 (Bom.)
1726
Maqsudal Hossain v. Government of Pakistan 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
751, 755
Mask & Co. v. Commissioner of Income Tax [1943] 11 ITR 454 (Mad.)
1635
Maulana Mohammad Ibrahim Riza Malak v. Commissioner of Income Tax 4 ITC 486 (PC)
576
Maulvi Brothers, Lyallpur v. Commissioner of Income Tax, Rawalpindi [1980] 42 TAX 33 (H.C.Lah.)
849
(lxxxiv) VOL-I
Income Tax Digest. Case No.
Megna Industries Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi [1980] 41 TAX 148 (H.C.Lah.)
1828, 1829
Mehran Associates Ltd. v. Commissioner of Income Tax, Karachi 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak)
286, 1158
Mehran Flex International Industries (Pvt.) Ltd. v. Federation of Pakistan through Secretary Finance, Islamabad and 3 Others [1997] 75 TAX 192 (H.C.Lah.)
1921
Mela Mal Shiv Dayal v. Commissioner of Income Tax 10 ITC 126 (Lahore)
632, 1334
MeIa Mal Shiv Dayal v. Commissioner of Income Tax [1937] 5 ITR 329 (Lahore)
813
Melamal Shib Dayal v. Commissioner of Income Tax [1936] 4 ITR 206 (Lahore)
631
Memoona Ahmad v. Assistant Commissioner of Income Tax [1998] 78 TAX 299 (H.C.Quetta)
1971
Meraj Sons, Contractors v. Income Tax Officer Contarctors Circle-Il, Lahore [1982] 45 TAX 2 (H.C.Lah.)
439, 2012
Mercantile Bank of India (Agency) Ltd., In re [1942] 10 ITR 512 (Cal.)
581
Messrs Neelam Textile Mills Ltd. v. State Bank of Pakistan and 2 others [PLD 1999 Kar. 433]
344
Messrs Octavious Steel & Company Ltd. v. Commissioner of Income Tax, Dacca [1960] 2-TAX (III-88) (H.C.Dacca) = 1960 PTD 1 = 1959 PLD 907
1008
Metro Shipsreakers and another v. Pakistan through the Secretary, Ministry of Finance, Islamabad, etc. [1996] 73 TAX 85 (H.C.Queeta)
376, 454
Metro Theatre Bombay Ltd. v. Commissioner of Income Tax [1946] 14 ITR 638 (Bom.)
1193, 1408, 1573
Mian Abdul Qayyum v. Commissioner of Income Tax, Rawalpindi Zone [1981] 43 TAX 149 (H.C.Lah.)
1827
Mian Aftab Ijaz v. Commissioner of Income Tax, Lahore Zone Lahore [1977] 36 TAX 82 (H.C.Lah.)
1738
Mian Anwar-ul-Haq Ramay v. Federation of Pakistan [1993] 67 TAX 195 (H.C.Lah.)
132
Mian Aziz A. Sheikh v. Commissioner of Income Tax Investigation Lahore 1989 SCC 718 = [1989] 60 TAX 106 (S.C.Pak)
444
Mian Aziz Ahmad, Lahore v. Commissiiner of Income Tax, Lahore [1979] 39 TAX 1 (H.C.Lah.)
316, 1991
Mian Aziz S. Sheikh v. Commissioner of Income Tax Investigation Lahore 1980 SCC 474 = [1981] 43 TAX 105 (S.C.Pak)
108
Mian Channu Factories Union v. Commissioner of Income Tax [1936] 4 ITR 203 (Lahore)
690, 1407
(lxxxv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Mian Ghulam Murtaza v. Commissioner of Income Tax, Lahore Zone, Lahore [1982] 45 TAX 21 (H.C.Lah.)
1764
Mian Muhammad Allah Buksh v. Commissioner of Income Tax 1962 PTD 603 (H.C.Lah.)
356
Mian Muhammad Bashir v. Commissioner of Income Tax [1989] 59 TAX 68 (H.C.Kar.)
1748
Mian Muhammad Khalil v. Income Tax Officer Company Circle, Faisalabad and 2 others [1979] 40 TAX 113 (H.C.Lah.)
49
Mian Muhammad Mansha v. Commissioner of Income Tax, Central Zone `C' Karachi [1990] 62 TAX 20 (H.C.Kar.) = 1990 PTD 240
1349
Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180
64, 266, 1074, 1075
Millat Bottles Store, Faisalabad v. Assistant Commissioner of Income Tax [1998] 78 TAX 173 (H.C.Lah.)
1992
Millowners Mutual Insurance Association Ltd. v. Commissioner of Income Tax 6 ITC 7 (Bom.)
716
Minister of National Revenue v. Catherine Spooner [1933] 1 ITR 299 (PC)
863
Minsararasam Co. Ltd. v. Commissioner of Income Tax 6 ITC 65 (Mad.)
1586
Miran Bux Karam Bux Ltd. v. Income Tax Officer, Company Circle 12, Karachi and 2 others [1975] 31 TAX 125 (H.C.Kar.)
629
Mirza Book Agency v. Commissioner Of Income Tax, Zone-B, Lahore [1996] 73 TAX 247 (H.C.Lah.)
1889
Mitchell and Edon (H.M. Inspectors of Taxes) v. Ross 40 TC 11 (HL)
1648
Muhammad Aslam v. Commissioner of Income Tax [1936] 4 ITR 412 (All.)
694
Mobanpura Tea Co. Ltd., In re [1937] 5 ITR 118 (Cal.)
978
Modern Silk Mills Ltd. Lahore v. Commissioner of Income Tax Lahore [1979] 39 TAX 14 (H.C.Lah.)
134
Muhammad Asghar, etc. v. Central Board of Revenue, etc. [1986] 53 Tax 109 (H.C.Lah.)
2006
Muhammad Ayub Mohammad Jamil of Cawnpore, In re [1941] 9 ITR 610 (All.)
1089
Muhammad Din And Sons, Lahore v. Income Tax Appellate Tribunal (Pakistan), Lahore And Another [1973] 27 TAX 229 (H.C.Lah.)
1081
Muhammad Younas v. Chairman Municipal Committee, Sahiwal [1986] 53 TAX 93 (H.C Lah.)
1932
Muhammadi Textile Mills Ltd. v. Commissioner of Income Tax (East), Karachi [1982] 45 TAX 140 (H.C.Kar.)
1825
(lxxxvi) VOL-I
Income Tax Digest. Case No.
Mohanlal Hargovind of Jubbulpore v. Commissioner of Income Tax [1949] 17 ITR 473 (PC) Mohanpura Tea Co. Ltd., In re [1937] 5 ITR 118 (Cal.)
1556, 1596 482
Mohini Mills Limited v. Commissioner of Income Tax, East Pakistan, Dacca [1965] 12 TAX 64 (H.C.Dacca)
1406
Moin Sons (Pvt.). Ltd., Rawalpindi v. Capital Development Authority, Islamabad [1998] 78 TAX 168 (H.C.Lah.)
330
Morgan v. Perry (H.M. Inspector of Taxes) 42 Tax Cas. 351 (HL)
1133
Morris Jacob And Company v. Commissioner of Income Tax, Karachi [1967] 15 TAX 261 (H.C.Kar.)
1083
Moss Empires Ltd. v. IRC [1937] AC 785
1191
Motamal Jehumal v. Commissioner of Income Tax [1947] 15 ITR 155 (Pat.)
1537
Mothay Camp Rem v. Commissioner of Income Tax [1939] 7 ITR 149 (Mad.)
1445
Mothay Gangaraju v. Commissioner of Income Tax [1935] 3 ITR 58 (Mad.)
1212
Motichand & Devidas, In re [1946] 14 ITR 534 (Bom.)
1845
Motor Union Insurance Co. Ltd. v. Commissioner of Income Tax [1945] 13 ITR 272 (Bom.)
1052
Mrs. Qudsia Begum, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca [1968] 18 TAX 13 (H.C.Dacca)
1069
Mrs. Samina Ayub Khan v. Commissioner of Income Tax, Rawalpindi 1980 SCC 527 = [1981] 43 TAX 18 (S.C.Pak.)
833
Mrs. Sooniram Poddar v. Commissioner of Income Tax [1939] 7 ITR 470 (Rangoon)
1248, 1263
Mrs. Tahmina Daultana v. Hafiz Naeem-ud-Din [1997) 75 TAX 261 (H.C.Lah.) = 1997 PTD 821]
373
Mst. Fatima Bibi C/o Crown Bus Service, Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1962] 6 TAX 1 (H.C.Lah.) = 1962 PTD 625 = 1962 PLD 809
295
Mst. Fazal Be and 6 Others v. Commissioner of Income Tax [1996] 74 TAX 141 (H.C.AJ&K)
107, 392, 1199, 1201
Mst. Pannabal v. Commissioner of Income Tax [1943] 11 ITR 154 (Nag.)
663
Mst. Saeeda & others v. Govt. of Pakistan & another [1977] 35 TAX 180 (H.C.Kar.)
27
Mst. Sarju Bai v. Commissioner of Income Tax [1947] 15 ITR 137 (All.)
923
Mst. Tasneem Kausar v. House Building Finance Corporation [PLD 1999 Lahore 462]
125
(lxxxvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
MTT. AR.S.AR. Arunachalam Chettiar v. Commissioner of Income Tax [1945] 13 ITR 184 (Mad.)
1186
Mufti Mohammad Aslam Khalifa Mandi v. Commissioner of Income Tax 10 ITC 26 (All.)
687, 697
Muhammad Amjad v. Commissioner of Income Tax, Zone `A' Karachi [1992] 65 TAX 176 (H.C.Kar.) = 1992 PTD 513]
163
Muhammad Ansar etc. v. Administrator Town Committee Kabirwala District Khanewal and 4 others [2000] 81 TAX 60 (H.C.Lah.)
415, 1928, 1930
Muhammad Aslam v. Commissioner of Income Tax [1936] 4 ITR 412 (All.)
687
Muhammad Azim v. Commissioner of Income Tax East Zone Karachi [1991] 63 TAX 143 (H.C.Kar.) = 1991 PTD 658
62
Muhammad Bashir v. Income Tax Officer, Lahore [1983] 47 TAX 16 (H.C.Lah.)
1104
Muhammad Hanif and 21 others v. Government of Pakistan and 4 others. 2001 PTD 795
1167
Muhammad Hanif Monnoo v. Income Tax Officer Central Circle 1, Lahore [1984] 50 TAX 37 (H.C.Lah.) = PLJ 1984 Lah. 423
133, 385
Muhammad Hayat Haji Mohammad Sardar v. Commissioner of Income Tax, Punjab & NWFP [5 ITC 159 (H.C.Lah.)
296
Muhammad Ismail v. Income Tax Officer, Mirpur and 2 others [1992] 66 TAX 226 (H.C.AJ&K)
382, 2007
Muhammad Jameel and another v. Commissioner of Income Tax, Zone-B, Lahore [2001] 83 TAX 158 (H.C.Lah.) = 2001 PTD 1474
1168
Muhammad Jameel Khan v. Miss Azra Feroz Bakhat and 78 others 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
751, 755
Muhammad Jameel v. Income Tax Officer [1995] 72 TAX 1 (H.C.Lah.)
429
Muhammad Khan and Others v. Ghazanfar Ali & Others [AIR 1920 Lahore 247]
316
Muhammad Khan v. Shamsuddin and others 1969 SCC 319 = [1975] 31 TAX 94 (S.C.Pak.)
369
Muhammad Naseem Ahmad and 18 others v. Miss Azra Feroz Bakht and 58 others 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
751, 755
Muhammad Saleem Chotia, Advocate v. Zafar Iqbal Owasi, Advocate, Bahawalnagar and 4 others [PLD 1999 Lahore 446]
324
Muhammad Saleem v. Deputy Director FIA/CBC, Multan and another, PTCL 2000 CL. 465
80
Muhammad Younus v. Chairman Municipal Committee, Sahiwal [1986] 53 TAX 93 (H.C.Lah.)
224, 247
Muhammad Yousuff v. Commissioner of Income Tax, East Pakistan [1960] 2-TAX (Suppl.-146) (H.C.Dacca) = 1960 PTD 280 = 1960 PLD 298
1805
(lxxxviii) Income Tax Digest.
VOL-I
Case No.
Muhammadi Oil Trading Co. through Partner, Karachi v. Regional Commissioner of Income Tax, Southern Region, Karachi and Other [1994] 70 TAX 204 (H.C.Kar.)
1986
Muhammadi Steamship Company Ltd. v. Commissioner of Income Tax, (Central) Karachi 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828
72, 254, 265, 1896
Muhammadi Steamship Company v. Commissioner of Income Tax 1963 PTD 271 (H.C.Kar.) = 1963 PLD 385
1899
Mujibar Rahman, Prop. Shamim & Co., Dacca v. Commissioner of Income Tax, East Pakistan, Dacca [1966] 13 TAX 141 (H.C.Dacca)
732
Mujibur Rehman v. Commissioner of Income Tax [1966] 13 TAX 141
93
Mukund Sarup v. Commissioner of Income Tax 2 ITC 495 (All.)
506
Multan Electric Supply Co. Ltd., In re [1945] 13 ITR 457 (Lahore)
910
Multiline Associates v. Ardeshir Cowasjee [PLD 1995 S.C.Pak 423]
305
Munir Ahmad & Others v. Federation of Pakistan [1998] 78 TAX 217 (H.C.Lah.) = 1998 PTD 3900]
447
Musammat Radha Kuer v. Commissioner of Income Tax [1942] 10 ITR 229 (Pat.)
667
Mustafa Prestressed R.C.C.Pipe Works Ltd. Karachi v. Commissioner of Sales Tax (Investigation), Karachi [1990] 62 TAX 119 (H.C.Kar.)
84, 246, 336
Mustafa R.C.C. Pipe Works, Karachi v. Commissioner of Income Tax, Karachi [1974] 29 TAX 125 (H.C.Kar.)
768
Muttahida Qaumi Movement (MQM) through Deputy Convener, Senator Aftab Ahmad Sheikh v. Federation of Pakistan through Secretary, Ministry of Interior PLD 2000 S.C. 111
67, 283, 318
N N.A.S. Gilani & Co. Ltd., Quetta v. Commissioner of Income Tax [1967] 16 TAX 107 (H.C.Kar.)
1357
N.C. Kelkar & D.V. Vidwans, Trustees of the Kesari & Mahratta Trust v. Commissioner of Income Tax 10 ITC 65 (Bom.)
591
N.V. Philips Glocilin Peufabrikan v. Income Tax Officer & others [1990] 61 TAX 159 (H.C.Kar.)
62
Nagina Dal Factory through Allah Ditta, Partner v. Income Tax Officer, and another 1968 SCC 316 = [1968] 18 TAX 1 (S.C.Pak.)
411
Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and Another 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.)
113, 226, 229, 555, 623
Nagpur Electric Light & Power Co. Ltd. v. Commissioner of Income Tax 6 ITC 303 (Nag.)
1668
Nand Lal Bhoj Raj, In re [1946] 14 ITR 181 (Lahore)
1600
(lxxxix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Nand Ram Chhotey Lal v. Commissioner of Income Tax [1947] 15 ITR 121 (All.) Nandlal Bhandari Mills Ltd., In re [1939] 7 ITR 452 (All.)
1441 1037, 1044
Narain Das Bhagwan Das v. Commissioner of Income Tax 7 ITC 135 (Lahore)
974
Narayan Atmaram Patkar v. Commissioner of Income Tax [1934] 2 ITR 486 (Bom.)
1820
Naseer A. Shaikh & 4 others v. Commissioner of Income Tax (Investigation) Lahore & others 1992 SCC 894 = [1992] 66 TAX 55 (S.C.Pak.) = 1992 PTD 621
557
Naseer A. Sheikh v. Commissioner of Income Tax [1976] 33 TAX 121 (H.C.Lah.)
562, 1229, 1251
Naseer Mughis Ltd. v. Commissioner of Income Tax, Lahore [2001] 83 TAX 40 (H.C.Lah.)
1055
Nasir Industries, Karachi v. Commissioner of Income Tax, South Zone, West Pakistan, Karachi [1967] 15 TAX 84 (H.C.Kar.)
1783
Nasir Mahmood Dar, etc. v. Federation of Pakistan and Others [1998] 78 TAX 1 (H.C.Lah.) = 1998 PCTLR 1382
128, 1120
Nathu Sao v. Commissioner of Income Tax [1934] 2 ITR 463 (Nag.)
653, 662
National & Grindlays Bank Ltd. v. Commissioner of Income Tax (Central), Karachi [1985] 51 TAX 37 (H.C.Kar.)
1153
National Beverages (Pvt.) Ltd. v. Federation of Pakistan and others [2001] 83 TAX 359 (H.C.Kar.) = PTCL 2001 CL. 250
164
National Cooperative Supply Corporation Ltd. through Mr. Islam Madni, General Manager v. Federation of Pakistan through Secretary Finance, Islamabad [2000] 81 TAX 352 (H.C.Lah.)
599, 711
National Electric Co. (Pvt.) Ltd. Gujranwala v. Commissioner of Income Tax Gujranwala Zone [1996] 74 TAX 89 (H.C.Lah.)
453, 810
National Food v. Commissioner of Income Tax [1991] 64 TAX 60 (H.C.Kar.)
41
National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax 5 ITC 238 (Bom.)
713
National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax [1936] 4 ITR 44 (PC)
1726
National Petroleum Co. Ltd. v. Commissioner of Income Tax [1945] 13 ITR 336 (Bom.)
1435
Native Share & Stock Brokers' Association v. Commissioner of Income Tax [1946] 14 ITR 628 (Bom.)
1336
Navab Sons, Lahore v. The Assistant Commissioner Tax etc. 1999 PCTLR 387
419
(xc) Income Tax Digest.
VOL-I
Case No.
Nawab Habibullah v. Commissioner of Income Tax [1943] 11 ITR 295 (PC)
501
Nawab Nawazish Ali Khan v. Commissioner of Income Tax [1946] 14 ITR 356 (Oudh)
478, 487
Nawabzadi Mehar Bano Khanum v. Commissioner of Income Tax 2 ITC 99 (Cal.)
540
Nawaz Agencies, Lahore v. Income Tax Officer, M-Circle, Lahore [1978] 37 TAX 199 (Lah.)
1778
Nazar Muhammad v. The State [1982] 45 TAX 52 (H.C.Kar.)
1938
Nazir Ali M.H. Ganji v. Commissioner of Income Tax Companies I, Karachi [1994] 69 TAX 71 (H.C.Kar.)
107
Neelarnegham Pillai v. Secretary of State for India [1937] 5 ITR 424 (Mad.)
758
New Asiatic Insurance Co. Ltd. v. Commissioner of Income Tax [1973] 90 ITR 243 (Delhi)
1724
New India Assurance Co. Ltd. v. Commissioner of Income Tax [1946] 14 ITR 809 (Bom.)
1723
New Jubilee Insurance Company Ltd., Karachi v. National Bank of Pakistan, Karachi [PLD 1999 S.C. 1126]
323, 343
New Samanbagh Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca 1960 PTD 1121 (H.C.Dacca) = 1960 PLD 823
1205, 1352
New Snow White Dry Cleaners, Karachi v. Commissioner of Income Tax (East), Karachi [1984] 51 TAX 11 (H.C.Kar.)
1824
New York Life Insurance Co. v. Styles (Surveyor of Taxes) [1889] 2 Tax. Cas. 460 (HL)
714
Nirala and Co. v. Commissioner of Income Tax [1990] 61 TAX 71 (H.C.Lah.)
1973
Nishat Talkies Karachi v. Commissioner of Income Tax [1989] 60 TAX 45 (H.C.Kar.) = PTCL 1989 CL 660
310, 1217
Nishat Textile Mills Ltd. v. Commissioner of (Investigation), Karachi [1974] 29 TAX 143 (H.C.Kar.)
Income
Tax
1210
Nizam-ud-Din Amir-ud-Din of Lahore, In re [1943] 11 ITR 443 (Lahore)
700, 1202
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
202, 227, 240, 829, 1909, 1910, 1911, 1912
Noor Hussain, Dacca v. Commissioner of Income Tax, Dacca [1963] 7 TAX 113 (H.C.Dacca) = 1963 PTD 161 = PLD 1964 Dacca 373
354
(xci) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Nooruddin Moosaji v. Commissioner of Income Tax [1972] 25 TAX 156 (H.C.Kar.)
1749
North British & Mercantile Insurance Co., In re [1937] 5 ITR 349 (Cal.)
1726, 1905
Novitas International v. Income Tax Officer and others 1991 SCC 819 = [1991] 64 TAX 86 (S.C.Pak.)
1980
Nrisinga Chandra Nandy, In re [1936] 4 ITR 428 (Cal.)
1549
O O.R.M.O.M.S.P. Lashmanan Chettiar v. Commissioner of Income Tax 4 ITC 200 (Mad.)
1293
O.RM.OM.RM.PL. Muthukaruppan Chettiar v. Commissioner of Income Tax [1943] 11 ITR 540 (Mad.)
1320
Octavius Steel & Co. Ltd, v. Commissioner of Income Tax, Dacca 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.)
816, 1032
Odbams Press Ltd. v. Cook [1941] 9 ITR (Suppl.) 92 (HL)
1650
Official Assignee for Bengal (Estate of Jnanendra Nath Pramanik), In re [1937] 5 ITR 233 (Cal.)
1184
Oppenheim v. Tobacco Securities Trust Co. Ltd. [1951] AC 291 (HL)
587
P P.C. MaIlick & D.C. Aich, In re [1940] 8 ITR 236 (Cal.) P.C. MulIick v. Commissioner of Income Tax [1938] 6 ITR 206 (PC)
955 957, 1904
P.L.S.M. Chettyar Concern v. Commissioner of Income Tax 9 ITC 82 (Rangoon)
1333, 1868
P.M. Hutheesingh & Sons Ltd. v. Commissioner of Income Tax [1946] 14 ITR 653 (Bom.)
1065
P.R.M. Abdul Rahman & Co. v. Commissioner of Income Tax [1939] 7 ITR 662 (Mad.)
1420
P.S. Varier v. Commissioner of Income Tax [1940] 8 ITR 628 (Mad.)
1867
Packages Ltd. v. Commissioner of Income Tax 1993 SCC 1073 = [1993] 68 TAX 19 (S.C.Pak.)
1389
Pak Company, Sargodha v. Commissioner of Income Tax, Rawalpindi Zone 1985 SCC 620 = [1985] 51 TAX 181 (S.C.Pak.)
2155, 2401
Pak Industrial Development Corporation v. Federation of Pakistan, through the Secretary, Ministry of Finance 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
8, 198
Pak Industrial Development Corporation v. Pakistan through Secretary, Ministry of Finance [1984] 49 TAX 76 (H.C.Kar.)
20, 397, 398, 437
(xcii) VOL-I
Income Tax Digest. Case No.
Pak Packages Ltd. v. Commissioner of Income Tax, Central Central Zone-A, Karachi [1991] 64 TAX 105 (H.C.Kar.)
1398
Pak Services Ltd. v. Commissioner of Income Tax (Revision) Karachi 1993 SCC 1029 = (1993) 68 TAX 49 (S.C.Pak)
180
Pak-Arab Fertilizers (Pvt.) Ltd. v. Deputy Commissioner of Income Tax and Others [2000] 81 TAX 224 (H.C.Lah.) = 2000 PTD 263
412
Pak-Saudi Fertilizer Ltd. through Managing Director v. Federation of Pakistan through Secretary Finance, Islamabad and 4 others [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061
121, 390, 1949
Pak. Educational Society Karachi v. Govt. of Pakistan through Chairman & Secretary Revenue Division Islamabad [1993] 67 TAX 311 (H.C.Kar.)
204
Pakistan Burma Shell Ltd., Etc. v. Federation of Pakistan through Secretary Ministry of Finance, Government of Pakistan, Islamabad, etc. [1998] 78 TAX 234 (H.C.Kar.) = PTCL 1998 CL. 690
17
Pakistan Cement Pipe Construction Company v. Commissioner of Income Tax [1973] 28 TAX 115 (H.C.Lah.)
748, 1235
Pakistan Educational Society, Karachi v. Government of Pakistan, through Chairman & Secretary, Revenue Division, Islamabad and others [1993] 67 TAX 311 (H.C.Kar.) = [1993 PTD 804]
1996
Pakistan Electric Fittings Manufacturing Co. Ltd. through Directors v. Commissioner of Income Tax and 2 others [2000] 82 TAX 135 (H.C.Lah.)
370
Pakistan Gum Industries Ltd. v. Commissioner of Income Tax (East), Karachi [1983] 47 TAX 155 (H.C.Kar.)
1063
Pakistan Hardcastle Wand (Pak) v. Federation of Pakistan etc. [PLD 1967 SC 1]
321
Pakistan Industrial Credit and Investment Corporation Ltd. v. Commissioner of Income Tax (East), Karachi. [1980] 42 TAX 122 (H.C.Kar.)
1233
Pakistan Industrial Development Corp. v. Federation of Pakistan through the Secretary, Ministry of Finance 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
608, 814, 885, 997, 1001
Pakistan Industrial Development Corporation, Karachi Commissioner of Income Tax [1980] 41 TAX 44 (H.C.Kar.)
v.
825
Pakistan Industrial Engineering Agencies Ltd. v. Commissioner of Income Tax (Central), Karachi [1987] 55 TAX 59 (H.C.Kar.)
1402
Pakistan International Airlines Corporation v. Commissioner of Income Tax [1975] 32 TAX 225 (H.C.Kar.)
838
Pakistan International Airlines Corporation v. Commissioner of Income Tax, Karachi [1978] 37 TAX 130 (H.C.Kar.)
869
(xciii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Pakistan International Airlines Corporation v. Commissioner of Income Tax (Central Zone), Karachi [1985] 52 TAX 90 (H.C.Kar.)
1073
Pakistan Lyallpur-samundri Transport Co. Ltd. Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore [1982] 46 TAX 143 (H.C.Lah.)
23, 280, 1372
Pakistan Petroleum Limited, Karachi v. Commissioner of Income Tax, (Central), Karachi [1984] 50 TAX 130 (H.C.Kar.)
1692
Pakistan Seamen Contributory Welfare Fund Karachi v. Income Tax Appellate Tribunal & 2 Others [1993] 67 TAX 400 (H.C.Kar.)
170, 568
Pakistan Services Limited v. Commissioner of Income Tax (Revision), Karachi [1986] 54 TAX 150 (H.C.Kar.)
1234
Pakistan Services Ltd. Karachi v. Commissioner of Income Tax (Revision), Karachi 1993 SCC 1029 = [1993] 68 TAX 49 (S.C.Pak.)
1520
Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone `C' (COS-1) [1999] 80 TAX 106 (H.C.Kar.) = 1999 PTD 2901
209
Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone, Karachi [1990] 62 TAX 34 (H.C.Kar.)
1385
Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone `C' (COS-1) [1999] 80 TAX 106 (H.C.Kar.) = 1999 PTD 2901
1688
Pakistan through Commissioner of Income Tax Karachi v. Majestic Cinema 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.)
112
Pakistan Tobacco Co. Ltd. v. Government of Pakistan through Secretary Finance & 3 others 1992 SCC 946 = [1993] 67 TAX 222 (S.C.Pak.)
1687
Pakistan Tobacco Co. Ltd. v. Income Tax Officer Salary Circle and others, Karachi [1984] 49 TAX 205 (H.C.Kar.)
1124
Pakistan Tobacco Co. Ltd. v. Pakistan through The Secretary, Ministry of Finance, Islamabad and 4 others [1991] 63 TAX 163 (H.C.Kar.) = 1991 PTD 359
1384
Pakistan Tobacco Company Ltd. v. Commissioner of Income Tax, Central Zone `A', Karachi [1992] 65 TAX 98 (H.C.Kar.)
1493
Pan Islamic Steamship Co. Ltd. v. Commissioner of Income Tax, Karachi [1982] 46 TAX 31 (H.C.Kar.)
1373
Pandit Pandurang v. Commissioner of Income Tax, Central Provinces [2 ITC 69 (Nagpur)]
159, 867
Paramount Electric Company, Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore [1976] 34 TAX 92 (H.C.Lah.) = PLD 1976 Lah. 1147
1979
Parashram Chintaman Joglekar v. Commissioner of Income Tax 6 ITC 74 (Nag.)
1257
(xciv) VOL-I
Income Tax Digest. Case No.
Parma Nand Haveli Ram, ln re [1945] 13 ITR 157 (Lahore) Partington v. Attorney-General [1896] 4 HL 100
1598 878
PD. Khosla, In re [1945] 13 ITR 436 (Lahore)
1146
Peragon Silk Mills Limited v. Commissioner of Income Tax, Central Zone `C', Karachi [1992] 65 TAX 323 (H.C.Kar.)
1077
Perfume Supply Co., Mitford, Dacca v. Commissioner of Income Tax, Dacca [1968] 17 TAX 116 (H.C.Dacca)
1892
Pettison (H.M. Inspector of Taxes) v. Marine Midland Ltd. 57 TC 219 (HL)
872
Pfizer Laboratories Ltd. v. Federation of Pakistan [1998] 77 TAX 172 (S.C.Pak)
269
Pheroz Ali v. Commissioner of Income Tax (West), Karachi [1979] 40 TAX 109 (H.C.Kar.)
1853
Philips Electrical Co. Ltd. v. Commissioner of Taxes (South) Zone, Dacca [1993] 68 TAX 149 (H.C.Dacca)
776
Phra Pbraison Salarak v. Commissioner of Income Tax 3 ITC 237 (Rangoon)
959
Pimpa (Pvt) Limited v. Commissioner of Income Tax [1993] 68 TAX 193 (H.C.Kar.)
1787
Pioneer Bank Ltd. (In Liquidation), Dacca [Official Liquidator, Stale Bank of Pakistan, Dacca] v. Commissioner of Income Tax, East Pakistan, Dacca [1968] 17 TAX 214 (H.C.Dacca)
1849
Pioneer Sports Ltd. v. Commissioner of Income Tax [1933] 1 ITR 216 (Lahore)
1817, 1819
Pioneer Sports Ltd. v. Commissioner of Income Tax [1934] 2 ITR 305 (Lahore)
1821
Poibani Dolls v. Commissioner of Income Tax [1995] 71 TAX 224 (H.C.Kar.)
1491
Pokardas Dwarkadas, Karachi v. Commissioner of Income Tax, Sind and Bluchistan [1960] 2-TAX (Suppl.-14) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 786 = 1957 PLD 68
1009
Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax 5 ITC 363 (PC)
831, 946, 991, 1300
Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax AIR 1931 PC 165
1308
PR.AL.M. Mutbukaruppan Chettiar v. Commissioner of Income Tax [1939] 7 ITR 76 (Mad.)
1447, 1784, 1810
PR.AL.M. Muthukaruppan Chettiar v. Commissioner of Income Tax [1943] 11 ITR 38 (Mad).
1304
Prag Naraln v. Commissioner of Income Tax 6 ITC 110 (Mad.)
1470
(xcv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Pramatha Nath Mullick v. Pradhyumna Kumar Mullick AIR 1925 PC 139
642
Premier Construction Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 380 (PC)
463, 497
Premier Insurance Company of Pakistan Ltd., Karachi v. Commissioner of Income Tax, Companies-Ill, Karachi [1995] 72 TAX 67 (H.C.Kar.)
1713
Premier Sugar Mills and Distillery Co. Ltd., Mardan In re. [1965] 12 TAX 8 (H.C.Lah.)
1022
Prime Commercial Bank and others v. Assistant Commissioner of Income Tax [1997] 75 TAX 1 (H.C.Lah.) = 1997 PTD 605 = PTCL 1997 CL. 29]
318, 1908
Printers Combine (Mercantile) Ltd., Karachi v. Commissioner of Income Tax, Karachi (West), Karachi [1984] 50 TAX 183 (H.C.Kar.)
1803
Probynabad Stud Farm, In re [1936] 4 ITR 114 (Lahore)
536, 553, 572
Provident Investment Co. Ltd. v. Commissioner of Income Tax 6 ITC 21 (Bom.)
1268
Province of Bihar v. Maharaja Pratap Udai Nath Sahi Deo of Ratugarh [1941] 9 ITR 313 (Pat.)
538
Province of Bihar v. P.C. Lal Choudhury [1945] 13 ITR 309 (Pat.)
491
Province of East Pakistan v. Dr. Azizul Islam [PLD 1963 S.C.Pak 296]
307
Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax [1938] 6 ITR 355 (Lahore)
912
Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax [1940] 8 ITR 635 (PC)
1291, 1296
Punjab National Bank Ltd. v. Commissioner of Income Tax 2 ITC 184 (Lahore)
1652
Punjab Small Industries Ltd. v. Deputy Commissioner of Income Tax, Lahore [1995] 71 TAX 220 (H.C.Lah.)
18, 824
Q Qasim Ali and others v. Commissioner of Income Tax, Zone VI, Karachi [2000] 81 TAX 458 (H.C.Kar.) = 2000 PTD 1288
1198
Queensland Insurance Company Ltd., v. Commissioner Of Income Tax [1967] 16 TAX 112 (H.C.Kar.)
1718
R R.B. Bansilal Abirchand v. Commissioner of Income Tax 6 ITC 318 (Nag.) R.B. Seth Bansilal Abirchand v. Commissioner of Income Tax 5 ITC 338 (Nag.)
1314, 1541 1327
(xcvi) VOL-I
Income Tax Digest. Case No.
R.B. Seth Ganga Sagar Jatia v. Commissioner of Income Tax 5 ITC 458 (All.) R.B. Seth Ganga Sagar v. ITAT [1947] 15 ITR 16 (All.)
1361 1455, 1484, 1487
R.S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax [1946] 14 ITR 66 (Lahore)
950, 1643, 1646
Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan 1960 SCC 80 = [1960] 2-TAX (III-211) (S.C.Pak) = PLD 1960 S.C. 187
626
Radhey Lal Balmukand, In re [1942] 10 ITR 131 (All.)
1963
Rafhan Maize Products Co. Ltd. v. Commissioner of Income Tax [1988 SCC 663 = 1988 PTD 571]
216
Raghunath Das Govind Das v. Commissioner of Income Tax 10 ITC 98 (All.)
1633
Rahmat Jan Muhammad Haji Dossal & Sons v. Assistant Income Tax Officer, Mirpurkhas and 3 others [1978] 38 TAX 117 (H.C.Kar.)
2008
Rais Ghazi Muhammad Khan v. Commissioner of Income Tax, Lahore [1982] 45 TAX 9 (H.C.Lah.)
1852
Rais Pir Ahmad Khan (Partner of Shabbir Cotton Factory Walhar, Tehsil Sadiqabad) v. Commissioner of Income Tax, Lahore Zone, Lahore [1975] 32 TAX 22 (H.C.Lah.)
1866
Raj MaI-Pabar Chand v. Commissioner of Income Tax [1938] 6 ITR 577 (Lahore)
1479
Raja Babadur Kamakshya Naraln Singh v. Commissioner of Income Tax [1946] 14 ITR 673 (Pat)
937
Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax [1943] 11 ITR 513 (PC)
842, 900, 919, 926, 1284, 1285
Raja Bahadur Kamakshya Naraln Singh v. Commissioner of Income Tax [1946] 14 ITR 683 (Pat.)
889
Raja Bahadur Major Raja Durga Narain Singh v. Commissioner of Income Tax [1947] 15 ITR 235 (All.)
487, 490, 532
Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax [1933] 1 ITR 135 (PC)
949
Raja Habib Ahmad Khan v. Income Tax Officer 1972 SCC 400 = [1974] 29 TAX 208 (S.C.Pak.)
412, 759
Raja Mustafa Ali Khan v. Commissioner of Income Tax PLD 1948 PC 259 = [1948] 16 ITR 330 (PC)
465, 471, 486, 511, 539
Raja Pratap Bikram Shah v. Commissioner of Income Tax [1946] 14 ITR 788 (Oudh)
488, 489
(xcvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Raja Probhat Chandra Barua v. Commissioner of Income Tax 5 ITC I (PC)
942, 1116, 1187, 1743
Raja Raghunandan Prasad Singh v. Commissioner of Income Tax [1933] 1 ITR 113 (PC)
894, 905, 973
Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax 4 ITC 15 (Pat.)(FB)
477, 479, 540
Raja Shiva Prasad Singh v. Commissioner of Income Tax [1942] 10 ITR 249 (Pat.)
949
Rajah Inuganti Rajagopala Venkata Narasimha Rayanim Bahadur Varu v. Commissioner of Income Tax 6 ITC 63 (Mad.)
491
Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax [1937] 5 ITR 111 (Pat.)
884
Rajnagar Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca 1960 PTD 1121 (H.C.Dacca) = 1960 PLD 823
1205, 1352
Rajput Metal Works Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi [1976] 33 TAX 1 (H.C.Lah.) = PTD 1976 Lah. 223
1498
Raleigh Investment Co. Ltd. Governor-General in Council [1947] 15 ITR 332 (PC)
1054
Raleigh Investment Co. Ltd. v. Commissioner of Income Tax (East) Karachi [1983] 47 TAX 214 (H.C.Kar.)
172
Ram Chandra Munna Lal v. Commissioner of Income Tax [1949] 17 ITR 394 (Punj.)
1272, 1305, 1306
Ram Khelawan & Sahu Thakur Das, In re [1939] 7 ITR 607 (All.) Ram LaI Bechairam v. Commissioner of Income Tax [1946] 14 ITR 1 (All.) Ram Narain Lal v. Commissioner of Income Tax 10 ITC 292 (All.)
1845 892, 899, 984 891
Ram Rakha Mal & Sons Ltd. v. Commissioner of Income Tax [1937] 5 ITR 137 (Lahore)
1309
Ramji Das Saint & Co., In re. [1945] 13 ITR 430 (Lahore)
1660
Ramkinkar Banerji v. Commissioner of Income Tax [1936] 4 ITR 108 (Pat.)
671, 1609
Ramkola Sugar Mills & Co. Ltd., Nawanshahr v. Commissioner of Income Tax, Punjab N.W.F.P., Province [1960] 2-TAX (Suppl.-41) (Judicial Commissioner, Peshawar) = 1952 PLD 28
1010
Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax, Punjab and NWFP, Lahore. 1955 SCC 1 (Federal Court) = [1960] 2-TAX (Suppl.29) (Federal Court of Pakistan) = 1960 PTD 994 = 1955 PLD 418
308, 1016, 1017, 1018
Ramkumar Kedarnath v. Commissioner of Income Tax [1937] 5 ITR 261 (Bom.)
971, 1800, 1841
Rangoon Electric Trarnway & Supply Co. Ltd. v. Commissioner of Income Tax 6 ITC 374 (Rangoon)
1123
(xcviii) VOL-I
Income Tax Digest. Case No.
Rani Amrit Kunwar v. Commissioner of Income Tax [1946] 14 ITR 561 (All.)
840, 843, 903, 928, 929, 1117
Rani Anand Kuuwar v. Commissioner of Income Tax [1943] 11 ITR 235 (Oudh)
660
Rani (Miss) v. Commissioner of Wealth Tax Lahore [1992] 68 TAX 89 (H.C.Lah.)
153
Rani Bhubneshwari Kuar v. Commissioner of Income Tax [1940] 8 ITR 550 (Pat.)
505, 841, 921
Rani Tara Kumari Devi v. Commissioner of Income Tax [1946] 14 ITR 787 (Oudh)
487
Rao Bahadur Mothay Gangaraju v. Commissioner of Income Tax 8 ITC 76 (Mad.)
1259
Rao Bahadur S. Ramanatha Reddlar v. Commissioner of Income Tax 3 ITC 10 (Rangoon)
1564
Rao Saheb A.S. Alaganan Chetty v. Commissioner of Income Tax 3 ITC 44 (Mad.)
1642
Rarnratan Das and Madan Gopal, In re [1935] 3 ITR 183 (All.)
1057
Rashid Akhtar & Sons v. Commissioner of Income Tax Lahore [1980] 42 TAX 168 (H.C.Lah.) Ratan Singh v. Commissioner of Income Tax 2 ITC 294 (Mad.)
200 1602, 1606
Rathan Singh, Proprietor, Rathan Singh Motor Service, Madura v. Commissioner of Income Tax, Madras [2 ITC 107 (Madras)]
94
Rathna Tea Estate, Dacca v. Commissioner of Income Tax, Dacca [1965] 11 TAX 176 (H.C.Dacca)
1794, 1833
Rawji Dhanji & Co., In re [1940] 8 ITR 1 (Bom.) Rayalu Ayyar & Co. v. Commissioner of Income Tax [1937] 5 ITR 727 (Mad.)
1872 1631, 1661
Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1946] AC 295
1562
Rehman Corporation v. Income Tax Officer, Circle `A', Mirpurkhas & another [1985] 52 TAX 169 (H.C.Kar.) = 1985 PLD 787
1933
Rehmania Hospital v. Government of Pakistan through Ministry of Finance, etc. [1997] 76 TAX 138 (H.C.Pesh) = 1997 PTD 1805
421, 2002
Republic Motors Ltd. v. Income Tax Officer & Others [1990] 62 TAX 8 (H.C.Kar.) = 1990 PTD 889
433
Reyaz-o-Khalid & Co. v. Pakistan & others [l960] 2-TAX (Suppl.-114) (H.C.West Pakistan, Karachi Bench) = 1959 PTD 119 = 1958 PLD 220
773
Rhodesia Railways Ltd. v. Income Tax Collector [1933] 1 ITR 227 / AC 368 (PC)
1190, 1588, 1603
Rijaz (Pvt.) Ltd. v. Wealth Tax Officer Circle-III Lahore [1996] 74 TAX 9 (H.C.Lah.)
83, 293
(xcix) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Rivoli Theatres, Karachi v. Commissioner of Income Tax, South Zone, Karachi and another 1971 SCC 388 = [1975] 31 TAX 55 (S.C.Pak.)
1882
RM. AR. AR. RM. Arunachalam Chettiar & Son v. Commissioner of Income Tax [1935] 3 ITR 464 (Mad.)
1286
RM. AR.AR.RM. Arunachalam Chettiar v. Commissioner of Income Tax [1936] 4 ITR 173 (PC)
1328, 1440, 1875
RM.AR.AR.RM. Arunachalam Chettiar v. Commissioner of Income Tax 9 ITC 282 (PC)
1871
Robert Addle & Sons' Colleries Ltd. v. IRC [1924] 8 Tax Cas. 671
1500
Roberts Cotton Association Ltd. v. Commissioner of Income Tax, North Zone, Lahore 1982 SCC 584 = [1982] 46 TAX 133 (S.C.Pak.)
1428
Roger Pyatt Shellac & Co., v. Secretary of State [1 ITC 363 (Calcutta)]
298
Roshan Cloth House v. Commissioner of Income Tax (East), Karachi [1983] 47 TAX 148 (H.C.Kar.)
1791
Rowe & Co. v. The Secretary of State for India [1 ITC 161 (Burma)]
33, 100, 258, 301
Royal Exchange Assurance, Karachi v. Commissioner of Income Tax, Central Zone, Karachi [1989] 59 TAX 37 (H.C.Kar.)
1236
Royal Insurance Co. Ltd., In re [1941] 9 ITR 589 (Cal.)
1726
Rulia Mal-Ratinak Ram v. Commissioner of Income Tax [1934] 2 ITR 329 (Lahore)
1456, 1485, 1809
Rustam F. Cousjee & 2 others v. CBR & 2 others [1985] 52 TAX 123 (H.C.Kar.)
44
S S.A.S.S. Chellappa Chettiar v. Commissioner of Income Tax [1937] 5 ITR 97 (Mad.)
1391
S.C. Cambatta v. Commissioner of Income Tax [1946] 14 ITR 748 (Bom.)
1064
S.L.S.L. Firm v. Commissioner of Income Tax 7 ITC 398 (Rangoon)
1413
S.M. Abdullah v. Commissioner of Income Tax [1966] 14 TAX 161 (H.C.Kar.)
332
S.M. Yousuf and Brothers v. Commissioner of Income Tax [1974] 29 TAX 120 (H.C.Kar.)
1792
S.Marimuthu Pillai v. Commissioner of Income Tax [1945] 13 ITR 186 (Mad.)
745
S.N.A.AL.CT. Chidarnbaram Chettiar v. Commissioner of Income Tax [1945] 13 ITR 177 (Mad.)
1878
S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income Tax [1944] 12 ITR 254 (Mad.)
1166
(c) VOL-I
Income Tax Digest. Case No.
S.R. Mittra, In re [1942] 10 ITR 259 (Pat.)
1130
S.R.M.S. Subrahmanyam Chettiar v. Commissioner of Income Tax 7 ITC 297 (Mad.)
1258
S.R.M.S. Subrahmanyan Chettiar v. Commissioner of Income Tax [1934] 2 ITR 295 (Mad.)
1294
S.S.S. Chockalingam Chettiar & Sons v. Commissioner of Income Tax [1941] 9 ITR 278 (Mad.)
909, 1311, 1332
S.V.K.L. Somasundaram Chettyar v. Commissioner of Income Tax 6 ITC 88 (Mad.)
886
S.V.M.Moharned Jamaluddeen & Bros. v. Commissioner of Income Tax [1942] 10 ITR 484 (Mad.)
736
S.Warwick Smith v. Commissioner of Income Tax 5 ITC 451 (Rangoon)
933
Sachindra Mohan Ghosh v. Commissioner of Income Tax 5 ITC 396 (Pat.)
1755
Sadar Anjuman-i-Ahmedia, Rabwa v. Commissioner of Income Tax Rawalpindi [1977] 36 TAX 117 (H.C.Lah.)
171
Sadhucharan Roy Chowdhry, In re [1935] 3 ITR 114 (Cal.)
1756
Sadiq Traders Limited v. Commissioner of Income Tax [1987] 56 TAX 98 (H.C.Kar.)
1847, 1879
Saif Nadeem Electro Ltd. v. Collector of Customs and Central Excise/Commissioner of Sales Tax, Peshawar and 3 Others [1995] 72 TAX 274 (H.C.Pesh.)
428
Saifuddin Ghulam Ali and Sons v. Commissioner of Income Tax [1990] 61 TAX 76 (H.C.Kar.)
1999
Sainrapt & Et. Brice, Karachi v. Commissioner of Income Tax (West), Karachi [1979] 40 TAX 116 (H.C.Kar.) = PLD 1979 591
88, 347, 1862
Saleem and Co. v. Income Tax Authorities [1993] 68 TAX 173 (H.C.Lah.)
380
Saleem Automotive Industries (Pvt.) Ltd. v. Central Board of Revenue etc. [1999] 80 TAX 9 (H.C.Lah.)
420
Saltanat Begum, in re [1933] 1 ITR 379 (Oudh)
521
Sameer Electronics v. Assistant Commissioner of Income Tax, CircleB, Zone `A' Lahore [1996] 73 TAX 106 (H.C.Lah.)
427, 1978
Sanaullah Khan etc. v. Province of Balochistan etc. [1995] 71 TAX 45 (H.C.Quetta)
455, 1023
Sante International (Pvt.) Ltd. and Another v. Commissioner of Income Tax, Zone-B, Lahore and Another [1997] 75 TAX 259 (H.C.Lah.) = 1997 PTD 819
423
Sardar Bahadur Sardar Singar Singh & Sons v. Commissioner of Income Tax [1944] 12 ITR 504 (Oudh)
1592, 1595
(ci) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Sardar Saheb Sardar Singar Singh & Son v. Commissioner of Income Tax [1942] 10 ITR 441 (Oudh)
676
Sarfraz Khan, Karachi v. Commissioner of Income Tax [1967] 15 TAX 59 (H.C.Kar.)
1084
Sarupchand Hukamchand, In re [1945] 13 ITR 245 (Bom.) Sarupchand v. Commissioner of Income Tax [1936] 4 ITR 420 (Bom.)
725, 733, 734 1842, 1843
Sarwar & Co. v. C.B.R. & Others [1997] 76 TAX 1 (H.C.Lah.)
188
Scates v. George Thompson & Co. Ltd. [1927] 13 Tax Cas 83
1859
Schazoo Laboratories Ltd. v. Commissioner of Income Tax, Lahore [1977] 35 TAX 15 (H.C.Lah.) = 1976 PTD 361
1953
Searle Pakistan (Pvt.) Ltd. v. Government of Pakistan through Secretary Ministry of Finance & Another [1994] 69 TAX 79 (H.C.Kar.)
292
Secretary of Commissioner Salt v. Ramanathan Chetti, minor by guardian [1 ITC 37 (Madras)]
260
Secretary of State for India v. V.M. Meyyappa Chettiar [1936] 4 ITR 341 (Mad.)
727
Secretary of State v. Seth Khemchand Thaoomal [1 ITC 26 (Sind)
97, 101
Secretary to Commissioner Salt v. Ramanathan Chetti, minor by guardian [1 ITC 37 (Madras)]
303
Secretary to the Board of Revenue (Income Tax) v. North Madras Mutual Befit & Co [1 ITC 172 (Madras)]
257
Mahammad Faruq, In re [1938] 6 ITR 1 (All.) Seth Adam Haji Peer Mohammad v. Commissioner of Income Tax [1966] 14 TAX 203 (H.C.Kar.) Seth Ganga Sagar, In re [1934] 2 ITR 155 (All.)
1267 871 1273, 1317
Seth Gurmukh Singh v. Commissioner of Income Tax [1944] 12 ITR 393 (Lahore)
255
Seth Ismail Jamal Budhani v. Commissioner of Income Tax, Karachi [1963] 7 TAX 209 (H.C.Kar.) = 1963 PTD 413 = 1963 PLD 499
1888
Seth Kaluram Kankaria, In re [1947] 15 ITR 209 (All.) Seth Kanhaiya Lal Goenka, In re [1941] 9 ITR 25 (All.)
793, 1622 779
Seth Kanhaiyalal v. Commissioner of Income Tax [1937] 5 ITR 739 (All.)
781, 790
Seth Mathra Parshad v. Commissioner of Income Tax [1941] 9 ITR 244 (Lahore)
670, 1298
Seth Nathusa Pasusa Lad v. Commissioner of Income Tax 7 ITC 129 (Nag.)
653, 662
Seth Sheolal Ramlal v. Commissioner of Income Tax 4 ITC 375 (Nag.)
474
(cii) VOL-I
Income Tax Digest. Case No.
Seths Basant Rai & Takhat Singh v. Commissioner of Income Tax 5 ITR 442 (All.)
1196
Sh. Abdul Hakeem v. Centeal Board of Revenue, etc. [1975] 31 TAX 105 (H.C.Lah.)
441
Sh. Diwan Mohammad Mushtaq Ahmad, Karachi v. CBR & others [1969] 19 TAX 198 (H.C.Kar.)
339, 460
Sh. Ihsan Ilahi & Co., Lyallpur v. Commissioner of Income Tax, Rawalpindi Zone (West Pakistan) [1974] 29 TAX 64 (H.C.Lah.) = 1974 PTD 28 = 1974 PLD 59N22
552
Shafqat Rasool v. Islamic Republic of Pakistan through Secretary Finance, Islamabad and others [1992] 66 TAX 85 (H.C.Lah.)
1995
Shagufta Begum v. Income Tax Officer, Circle XI, Zone B Lahore 1989 SCC 715 = [1989] 60 TAX 83 (S.C.Pak.)
366, 412
Shahid Hameed, Gulberg, Lahore v. Income Tax Officer, Film Circle, Lahore and another [1976] 34 TAX 31 (H.C.Lah.)
404, 1768
Shaikh Naseem Anwar v. Income Tax Officer (Investigation), Circle III, Dacca and another [1963] 7 TAX 358 (H.C.Dacca) = 1967 PTD 774 = 1964 PLD 304
772
Shamim Ali and others v. Govt. of Pakistan and another [1973] 27 TAX 51 (H.C.Lah.)
442
Shamsher Ali Abdul Hussein v. Commissioner of Income Tax [1945] 13 ITR 240 (Nag.)
1488
Shankar Shambhaji Gangla v. Commissioner of Income Tax 9 ITC 350 (Bom.)
1601
Sheikh Akhtar Ali v. Federation of Pakistan and 4 others [1980] 42 TAX 47 (H.C.Lah.)
338, 402
Sheikh Miran Bux Karam Bux Ltd. Karachi v. Income Tax Officer, Company Circle 12, Karachi [1976] 33 TAX 99 (H.C.Kar.)
215, 551, 625, 627
Sheikh Mohammad Amin, Lyallpur v. Income Tax Officer, Jhang and another [1968] 18 TAX 105 (H.C.Lah.)
770
Sheosheyamal HiralaI v. Commissioner of Income Tax [1938] 6 ITR 485 (Pat.)
1472
Sher Muhammad and 2 others v. Miss Azra Feroz Bakhat and 80 others 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
751, 755
Shib Lal Ganga Ram v. Commissioner of Income Tax 2 ITC 425 (All.)
528
Shirin Ayub Khan, Lahore v. Commissioner of Income Tax, Lahore [1976] 33 TAX 227 (H.C.Lah.)
605, 1736
Shoaib Bilal Corporation, Faisalabad v. Commissioner of Income Tax, Faisalabad and anohter [1993] 67 TAX 233 (H.C.Lah.)
1981, 1993
Shyam Chambers Ltd. v. Commissioner of Income Tax [1941] 9 ITR 224 (Lahore)
1466
(ciii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
Siddique Trust v. Income Tax Officer and another [1987) 56 TAX 120 (H.C.Kar.)
383
Sidheshwar Prasad Narayan Singh v. Commissioner of Income Tax [1942] 10 ITR 344 (Pat.)
906
Siemens A.G. & Halske v. Commissioner of Income Tax [1983] 47 TAX 132 (H.C.Pesh)
181, 196, 201, 603
Siemens Pakistan Engineering Ltd. v. Federation of Pakistan & Other [1999] 79 TAX 605 (H.C.Kar.) = 1999 PTD 1358]
316
Simplex Rubber Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central Zone) [1988] 57 TAX 24 (H.C.Kar.)
1770
Sind Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and 3 others [1975] 31 TAX 114 (H.C.Kar.)
174, 406, 827
Sind Trading Company v. Commissioner of Income Tax [1967] 15 TAX 53 (H.C.Kar.)
183, 1553
Singer Sewing Machine Co. v. Commissioner of Income Tax and others [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554
282, 389, 1902
Sir Chinnubhai Madhavlal v. Commissioner of Income Tax [1937] 5 ITR 210 (Bom.)
1322
Sir Kameshwar Singh v. Commissioner of Income Tax [1947] 15 ITR 246 (Pat.)
1438
Sir Sarupchand Hukamcband v. Commissioner of Income Tax 5 ITC 108 (Bom.)
994
Sir Sobha Singh v. Commissioner of Income Tax [1950] 18 ITR 998 (Punj.)
993
Sir William Roberts Timber Co. Ltd., Baramula v. Commissioner of Income Tax, Punjab and N.W.F. Provinces, Lahore [1960] 2-TAX (Suppl.-90) (H.C.Lah.) = 1960 PTD 1235 = 1951 PLD 413
1011, 1042
Siva Pratab Bhattadua v. Commissioner of Income Tax [1 ITC 323 (Madras)
155
Sobhagmal Nemicband v. Commissioner of Income Tax 7 ITC 100 (Bom.)
875
Som Chand Maluk Chand v. Commissioner of Income Tax [1936] 4 ITR 382 (Lahore)
1448, 1482
South Indian Industrials Ltd. v. Commissioner of Income Tax [1935] 3 ITR 11 (Mad.)
1861, 1870
Souvenir Tobacco Co. Ltd. v. Income Tax Officer, Companies Circle XIII, Karachi And Another [1983] 47 TAX 158 (H.C.Kar.)
819
Sovaram Jokhiram v. Commissioner of Income Tax [1944] 12 ITR 110 (Pat.)
1092
Sri Hardeo Bengal Salt Co. v. Commissioner of Income Tax [1942] 10 ITR 13 (Pat.)
987
(civ) VOL-I
Income Tax Digest. Case No.
Sri Rajah Ravu Venkata Mahipathi Gangadhara Rama Rao Bahadur, Yuvarajah of Pithapuram v. Commissioner of Income Tax [1949] ITR 445 (PC)
486
Sriman Madhwa Siddhanta Onnahini Nidhi Ltd. v. Commissioner of Income Tax 7 ITC 317 (Mad.)
1343
Star Rolling Mills v. Commissioner of Income Tax [1974] 30 TAX 27 (H.C.Kar.)
208, 1779
Star Vaccum Bottle Manufacturing Co., Ltd. v. Commissioner of Income Tax (Central), Karachi [1986] 53 TAX 169 (H.C.Kar.)
1763
State Cement Corporation of Pakistan (Pvt.) Ltd. v. Commissioner of Income Tax [1997] 76 TAX 110 (H.C.Lah.) = 1997 PTD 1104= 1998 PCTLR 520 (H.C.Lah.)
422
Steel Brothers and Company Ltd., London v. Commissioner of Income Tax, Dacca 1968 SCC 313 = [1969] 19 TAX 97 (S.C.Pak.)
412
Strong and Company of Romsey Ltd. v. Woodifield [1906] 5 Tax. Cas. 215 (HL)
1303
Sudalaimani Nadar v. Commissioner of Income Tax [1940] 8 ITR 619 (Mad.)
982
Sui Southern Gas Company Ltd. v. Commissioner of Income Tax, Companies-V, Karachi [2001] 83 TAX 113 (S.C.Pak.)
1525, 1693
Sultan Textile Mills Limited v. Commissioner of Income Tax (Investigation), Karachi [1970] 22 TAX 163 (H.C.Kar.)
1780
Sun Newspapers Ltd. and the Associated Newspapers Ltd. v. Federal Commissioner of Taxation 61 Corn. LR 337
1579
Sundar Das v. Collector of Gujrat [1 ITC 189 (Lahore) Sundrabai Saheb v. Commissioner of Income Tax 5 ITC 493 (Bom.)
95, 219, 256 520
Sutlej Cotton Mills Limited, Okara v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1973] 28 TAX 185 (H.C.Lah.)
1620
Syed Akhtar Ali v. Commissioner of Income Tax Hyderabad [1994] 69 TAX 38 (H.C.Kar.)
152, 559, 1053
Syed Bhaies Pvt. Ltd. v. Government of Punjab [NLR 1999 Tax 176]
16
Syed Guulam Abbass Shah v. Income Tax Officer, Mirpur and 3 others [1985] 51 Tax 157 (H.C.AJ&K)
396
Syed Mahmood Shah v. Commissioner of Income Tax and another [2001] 83 TAX 132 (H.C.Lah.)
1076
Syed Mohainmad Mehdi v. Commissioner of Income Tax 8 ITC 210 (Lucknow)
1969
Syed Mohammad Isa v. Commissioner of Income Tax [1942] 10 ITR 267 (All.)
502
(cv) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
T T.K.E. Ibrahimsa Ravuttar v. Commissioner of Income Tax 3 ITC 33 (Mad.)
507
T.O. Foster v. Commissioner of Income Tax 3 ITC 435 (Rangoon)
1844
Tahlia Ram Amir Chand v. Commissioner of Income Tax 8 ITC 345 (Lahore)
1436
Taimur Shah v. Commissioner of Income Tax [1976] 34 TAX 151 (H.C.Kar.)
177, 251
Taj Din Maula Bux, Lahore v. Sales Tax Officer D-Circle Lahore [1972] 25 TAX 145 (H.C.Lah.)
442
Talchar Sabai Grass Trading Co. Ltd. v. Commissioner of Income Tax [1947] 15 ITR 455 (Pat.)
791
Tanveer Textile Mills Ltd. v. Commissioner of Income Tax, Central Zone `C', Karachi [1990] 61 TAX 4 (H.C.Kar.)
1697
Tapal Energy Ltd. v. Federation of Pakistan and others 1999 PTD 4037 (H.C.Kar.)
118, 122, 417
Tar Mohammad And Company v. Commissioner of Income Tax, Karachi [1967] 15 TAX 199 (H.C.Kar.)
1605
Tarak Nath Bagchi v. Commissioner of Income Tax [1946] 14 ITR 319 (Cal.)
780
Tariq Sultan & Co. v. Government of Pakistan, etc. [1999] 80 TAX 62 (H.C.Qta.)
244
Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income Tax [1937] 5 ITR 202 (PC)
1518, 1580
Tejpal Jamna Das v. Commissioner of Income Tax 10 ITC 234 (All.) TetIey, In re [1923] 1 Ch. 258 (Ch.D)
1195 570
Thakar Datt Sarma v. Commissioner of Income Tax [1939] 7 ITR 154 (Lahore)
1255
Tharparkar Sugar Mills Ltd. v. Federation of Pakistan through Secretary, Revenue Division and Chairman, C.B.R., Islamabad and another [1996] 73 TAX 215 (H.C.Kar.)
130, 375, 393
The Bharat Insurance Company Ltd. v. Commissioner of Income Tax, Punjab & NWFP [5 ITC 288 (H.C.Lah.)
217
The Bhikanpur Sugar Concern In re: [1 ITC 29 (Patna)]
263
The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others [1999] 80 TAX 79 (S.C.Pak) = 1999 PTD 2174]
102
The Imperial Tobacco Co. of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak.) = PLD 1959 S.C. 125
720
(cvi) Income Tax Digest.
VOL-I
Case No.
The Provincial Library & Others v. Commissioner of Income Tax East Pakistan 1957 SCC 34 = [1959] TAX (III-290) (S.C.Pak)
115
The Punjab National Bank Ltd. v. Commissioner of Income Tax, Punjab & NWFP [2 ITC 184 (Lahore)]
191
The Punjab Province v. The Federation of Pakistan 1955 SCC 13 (Federal Court) [1960] 2-TAX (Suppl.-3) (S.C.Pak.) = PLD 1956 F.C. 72
114, 199, 641, 648, 649, 652, 823
The State v. Amir Ali [1978] 38 TAX 191 (H.C.Kar.)
1939
Thomas v. Richard Evans & Co. Ltd. [1926] 11 Tax Cas 790
705
Tri Star Industries (Pvt.) Ltd. & 8 others v. Commissioner of Income Tax Companies-I, Karachi & 5 others [1999] 79 TAX 255 (H.C.Kar.) = 1998 PTD 3923]
373
Trichinopoly Tennore Hindu Permanent Fund Ltd. v. Commissioner of Income Tax [1937] 5 ITR 703 (Mad.)
709, 1411
Trustees of the `Tribune', In re [1939] 7 ITR 415 (PC)
583, 585, 586, 588, 589, 590
Trustees of the Port of Karachi v. Central Board of Revenue and another [1990] 61 TAX 30 (H.C.Kar.)
85, 1931
Tyrer v. Smart (H.M. Inspector of Taxes) 52 Tax. Cas. 533 (HL)
1143
U U.C. Rekhi v. Income Tax Officer [1950] 18 ITR 618 (Punj.)
388
U.Chengalvaroya Mudaliar v. Commissioner of Income Tax 7 ITC 323 (Mad.)
1597
Ujala Cotton Mills Ltd. v. Income Tax Officer etc. [1985] 51 TAX 237 (H.C.Lah.)
1972
Union Bank Ltd. v. Federation of Pakistan [1998] 77 TAX 127 (H.C.Lah.)
127, 1954
Union Bank of Bijapur & Sholapur Ltd., In re [1942] 10 ITR 21 (Bom.)
943
Union Jute Company Ltd, Narayanganj, In re. [1960] 2-TAX (Suppl.265) (H.C.Dacca) = 1960 PTD 1036
1038
Unique Enterprises, Lahore v. Assistant Commissioner of Income Tax and 2 others [1995) 71 TAX 139 (H.C.Lah.)
131
United Bank of India Ltd., v. Commissioner of Income Tax, Dacca [1960] 2-TAX (III-454) (H.C.Dacca) = 1960 PTD 768 = 1960 PLD 621
740
United Builders Corporation Mirpur, v. Commissioner of Income Tax Muzzafarabad [1984] 49 TAX 34 (H.C.AJ&K)
185, 1775
United Licence Agency v. Commissioner of Income Tax [1986] 54 TAX 155 (H.C.Kar.)
1507
(cvii) COMPARATIVE TABLE OF SECTIONS
VOL-I Case No.
United Liner Agencies of Pakistan Ltd. Karachi and others v. Commissioner of Income Tax, Central Zone, Karachi [1988] 57 TAX 160 (H.C.Kar.)
19, 1496
United Liner Agencies, Ltd., Karachi v. Commissioner of Income Tax, Karachi [1988] 57 TAX 155 (H.C.Kar.)
1059
United Lines Agency Pakistan Ltd. v. Commissioner of Income Tax (Central), Karachi [1986] 53 TAX 137 (H.C.Kar.)
1508
United Netherlands Navigation Co. Ltd. v. Commissioner of Income Tax, South Zone (West Pakistan), Karachi 1965 SCC 240 = [1965] 12 TAX 57 (S.C.Pak.)
808, 1382
Universal Engineering Co., Karachi (in the matter of) v. Commissioner of Income Tax [1963] 7 TAX 184 (H.C.Kar.) = 1963 PTD 401 = 1963 PLD 487
1085
Upper India Chamber of Commerce v. Commissioner of Income Tax [1947] 15 ITR 263 (All.)
600, 1188, 1266, 1270, 1271, 1276
Usher's Wiltshire Brewery Ltd. v. Bruce [1915] AC 433, 469 (HL)
1576
Usher's Wiltshire Brewery, Ltd. v. Bruce [1914] 6 TC 399 (HL)
1604
V V.G. Every, In re [1937] 5 ITR 216 (Cal.)
1024
V.Ramaswamy Ayyangar v. Commissioner of Income Tax [1943] 11 ITR 597 (Mad.)
1636
V.S.A.R. Firm v. Commissioner of Income Tax 8 ITC 171 (Rangoon)
969
V.S.K.S. Somasundaram Chettiar v. Commissioner of Income Tax 6 ITC 96 (Mad.)
744
Vadilal Lallubhai Mehta v. Commissioner of Income Tax [1935] 3 ITR 152 (Bom.)
659
Vallabhdas Karsondas Natha v. Commissioner of Income Tax [1947] 15 ITR 32 (Bom.)
594, 595
Vallabhdas Murlldhar v. Commissioner of Income Tax 4 ITC 318 (Bom.)
1451
Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 Tax Cas. 529
1563
Van den Berghs Ltd. v. Clark [1935] 3 ITR 17 (HL)
862
Vedathannl v. Commissioner of Income Tax [1933] 1 ITR 70 (Mad.)
662
Vellanki Lakshmi Narasayamma Rao Bahadur (Sree Raja) Zamindarini of Tiruvur v. Commissioner of Income Tax 3 ITC 428 (Mad.)
522
Vir Bhan Bansi Lal v. Commissioner of Income Tax [1936] 4 ITR 111 (Lahore)
1963
(cviii) Income Tax Digest.
VOL-I
Case No.
Vissonji Sons & Co. v. Commissioner of Income Tax [1946] 14 ITR 272 (Bom.)
1437, 1439
Vithaldas Thakordas & Co. v. Commissioner of Income Tax [1946] 14 ITR 822 (Bom.)
1585
W Wali Traders v. Income Tax Officer, etc. [1988] 58 TAX 29 (H.C.Kar.)
2295
Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax [1943] 11 ITR 559 (Bom.)
722, 785
Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 240 (PC)
739, 832, 881
Wallem & Co. (Pak.) Ltd., Karachi v. Commissioner of Income Tax [1974] 30 TAX 34 (H.C.Kar.)
1854
Wealth Tax Officer & Other v. Shaukat Afzal & 4 Others [1993] 68 TAX 145 (S.C.Pak)
412
West Pakistan Road Transport Board, Lahore v. Commissioner of Income Tax, Lahore [1974] 29 TAX 53 (H.C.Lah.)
828
Western India Life Insurance Co. Ltd., In re. [1938] 6 ITR 44 (Bom.) Westminster Bank Ltd. v. Riches [1947] 28 Tax Cas. 159 (HL) Willingale (H.M. Inspector of Taxes) v. International Commercial Bank Ltd. 52 TC 242 (HL)
1720 854 1221
Y Yagappa Nadar v. Commissioner of Income Tax 2 ITC 470 (Mad.) Yasin (East Pakistan) Ltd., Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca [1968] 17 TAX 126 (H.C.Dacca)
534 1516
Z Zafar Saleem Bros. Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi [1984] 50 TAX 233 (H.C.Kar.) Zafar Usman v. Income Tax Officer etc. [1989] 59 TAX 86 (H.C.Kar.) Zahur Textile Mills Limited v. CBR through Chairman, Government of Pakistan, Islamabad and 2 others [2000] 82 TAX 275 (H.C.Lah.) = 2000 PTD 303
1823 434 232, 846
Zam Zam Traders v. Income Tax Officer [1996] 74 TAX 21 (H.C.Lah.)
426
Zeenat Textile Mills (East Pakistan) Ltd. v. Commissioner of Income Tax, Dacca Zone and another [1969] 20 TAX 44 (H.C.Dacca)
746
(i) COMPARATIVE TABLE OF SECTIONS
VOL-I
Comparative Table of Income-tax Act, VII of 1918, Income-tax Act, XI of 1922, Income Tax Ordinance, 1979 & Income Tax Ordinance, 2001 Following is a comparative list of Sections and Provisions of Income Tax Act, 1918, Income Tax Act, 1922, Income Tax Ordinance, 1979 and Income Tax Ordinance, 2001. I.T.A. 1918 1
2(1)(2)
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
1(1)
1(1)
1(1)
1(2)
1(2)
1(2)
1(3)
1(3)
1(3)
2(1)
2(1)
41(2)
2(3)
2(2)
2(4)
2(3)
2(5)
2(4)
2(2)
2(6)
2(66)
2(3)
2(2)
2(3A)
Omitted
1
2(1)(2)
2(7)
2(5)
2(8)
2, (5A), 2(68) read with 2(26)
2(10)
2(7)
2(4)
2(11)
2(9)
2(4A)
2(12)
2(10) read with
(ii) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001 37(5)
2(4B)
2(3)
2(4)
2(5)
2(13)
2(11)
2(14)
2(11A)
2(5)
2(15)
2(13) read with 209
2(5A)
2(16)
2(12) read with 80
2(5B)
2(17)
2(14)
2(17A)
2(65)
2(18)
2(22)(a)
2(6)
2(19)
2(6A)
2(20)
2(19)
2(20) Exp.
2(1)
2(6AA)
Omitted
2(6AAA)
Otiose 2(21A)
2(25)
2(6B)
2(22)
2(26) read with 80
2(6BB)
Otiose
2(6C)
2(24), 12(12)
2(29)
2(26)
2, (29A), 2(68) & 74
2(6D)
2(27)
2(6E)
2(28)
2(3) and 63(1) &
(iii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
I.T.A. 1922
VOL-I
I.T.O. 1979
I.T.O. 2001
(2) 2(6)
2(4)
2(7) to (13)
2(7) to (13) 2(7)
2(25) 2(29)
2(46)
2(29A)
2(34), (35)
2(30)
2(37) read with 81
2(9)
2(32)
2(42) read with 80
2(10)
2(33)
2(44)
2(11)
2(26) Rev.
2(12)
2(34)
2(13)
2(36)
2(44A)
2(37)
2(48)
2(37A)
2(48A)
2(13A)
2(38)
2(13AA)
Omitted 2(40)
2(50) to (53) read with 81, 82 & 83
2(42)
2(59)
2(14)
2(43)
2(63)
2(14A)
Omitted
2(15)
2(44)
2(69), 9, 10
(iv) Income Tax Digest.
VOL-I
I.T.A. 1918
3
I.T.A. 1922
I.T.O. 1979
2(16)
2(45)
2(16A)
2(46)
2(17)
2(8) Rev.
I.T.O. 2001
3(1A)
207(2)
4A
177, 222
5
209
5(3)
210(3)
3
9(1) Rev.
3 Pr. (a)
Omitted
3 Pr. (b)
9(2)
3A
Otiose
3B(1)
10(1)
3B(2)
10(3)
4 4(1)
11(1)
11(5) & (6)
4(1) Pr. 1
11(2), 16(1) Pr.
11(5), (6), 73(1)
4(1) Pr. 2
Omitted
4(1) Ex. 1
Omitted
4(1) Ex. 2
12
2(40)
12(1)
101(1)
12(4)
101(8)
12(4) Exp.
2(54)
(v) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
12(5)
101(12)
12(5) Exp.
2(23)
4(1) Ex. 3
12(10)
101(6)
4(1) Ex. 4
12(9)
4(1) Ex. 6
Otiose
4(1) Ex. 7
12(8)
72
4(1) Ex. 8
12(7)
72(b)
12(13)
16(1)
12(14)
16(2)
12(15)
16(3)
12(16)
39(2)
12(18)
39(3), (4)
4(2A)
13(1)(a)
111(1), (2)
4(2B)
13(1)(b)
111(1), (2)
4(2C)
13(1)(c)
111(1), (2)
4(2D)
13(1)(d)
111(1), (2)
4(2E)
13(1)(e)
111(1), (2)
4(2F)
13(2)
4(3) 4
VOL-I
13(2A)
111(4)
13(3)
111(5)
14(1) & II Sch.
53(1)
4(3)(viii) 4A
2(40)
(vi) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
4B
Omitted
5(1)
3(1)
5(1A)
4(1), 5(1)(a)
5(2)
4(1), 5(1)(b)
5(3)
4(1)
208(1)
5(3A)
4(2), 4(4)
208(2)
5(4)
5(1)(b) Rev.
5(5)
5(1)(c), 5(2)
5(5A)
5(1)(c), (d) & 3(3), (4)
5(6)
5(1)(b), (c)
5(7)
3(2), 3(3)
5(7A)
5(1)
210(1)
5(7B)
7
213
5(7C)
Omitted
5(7D)
Omitted
5(8)
8
5(8) Pr.
8 Pr.
5A
133
130
5
6
15
11(1)
6
7 16(1)
12(1)
16(1)(a), (b)
2(55)
7(1)
I.T.O. 2001
207(1)
210(2)
206(1), 214
(vii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
7
8
VOL-I
I.T.A. 1922
I.T.O. 1979
7(1) Pr. 1
40(a)
7(1) Pr. 2
Otiose
7(1) Pr. 3
46
7(1) Pr. 4
Omitted
7(1) Ex. 1
16(2)(b)(i)
12(2)
7(1) Ex. 2
16(2)(c)
12(2)
16(2)(e)
2(21)
16(2)(e)
2(20)
7(1) Ex. 2 Pr.
2nd Sch
8
17(1)
8 Pr. 1
18(1)
8 Pr. 2
17(2)(a)
8 Pr. 3
17(2)(b)
I.T.O. 2001
9 9(1)
19(1), (2)(a)
4(1) & 15(1),(2)
9(1)(i)
20(1)(a)
17(1), 23
9(1)(ii)
Omitted
9(1)(iii)
20(1)(b)
17(1), 23
9(1)(iv)
20(1)(c), (d), (f)
17(1), 23
9(1)(iv) Pr.
Omitted
9(1)(iv) Ex.
20(1)(c)
17(1), 23
9(1)(v)
20(1)(e)
17(1), 23
9(1)(vi)
20(1)(g)
17(1), 23
(viii) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
9(1)(vii)
20(1)(h)
17(1), 23
9(1)(vii) Pr.
20(2)
17(5)
20(3)
17(6)
20(4)
17(3)
19(2)(b)
15(4)
19(3) Exp.
15(5)
9(2)
9
9(2) Pr. 1
Omitted
9(2) Pr. 2
Omitted
9(3)
21
66
10 10(1)
22(a) 22(1)
18(1)
22 Exp.
19(1)
10(2)(i)
23(1)(i)
10(2)(ii)
23(1)(iii)
10(2)(iii)
23(1)(v)
10(2)(iii) Pr. 1
Omitted
10(2)(iii) Pr. 2
Omitted
10(2)(iiia)
23(1)(ix)
10(2)(iiia) Pr.
23(1)(vii) Pr.
10(2)(iv)
23(1)(iv)
10(2)(v)
23(1)(iii)
22(1), (2), (11)
(ix) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
10(2)(va)
Omitted
10(2)(vi)
23(1)(v) & 3rd Sch.
10(2)(via)
Otiose
10(2)(vii)
3rd Sch.
10(2)(viii)
23(1)(vi)
10(2)(ix)
23(1)(ii)
10(2)(x)
23(1)(viii)
10(2)(xi) Pr. 1
Omitted
10(2)(xi) Pr. 2
Omitted
10(2)(xi) Pr. 3
25(a)
34(5A) & 70
25(b)
34(5A)
25(c)
34(5)
25 proviso
34(6)
23(1)(x)
29
10(2)(xii)
23(1)(xii)
26(1)
10(2)(xiii)
23(1)(xi)
10(2)(xiv)
23(1)(xii) 23(1)(xiii), (xiv)
10(2)(xiv) Pr. 1
Omitted
10(2)(xiv) Pr. 2
Omitted
10(2)(xiv) Ex.
Omitted
10(2)(xiva)
23(1)(xvii) 23(1)(xxi), (xxii)
I.T.O. 2001
28
27
30
(x) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
23(1)(xix)
31
10(2)(xivb) Pr. 14
Omitted
10(2)(xv)
23(1)(xv)
10(2)(xvi)
23(1)(vii)
10(2)(xviii)
27
23(1)(viidd)
2(39), (57)
23(1)(viidd) Exp.
2(60)
23(1)(xvi) 23
20
10(2A)
25
10(2A) Pr.
25 Pr.
10(3)
23(2)
10(3A)
3rd Sch.
10(3B)
Omitted
10(3BB)
3rd Sch, Rule 8(8)(b)
10(4)
24(a)
21
10(4)(a)
24(c)
21
10(4)(b)
24(d)
21
10(4)(bb)
24(b)
21
10(4)(c)
24(h)
21
10(4)(d)
24(i)
21
10(4)(d) Ex. 1
24(1) Ex. (i)
21
10(4)(d) Ex. 2
24(1) Ex. (ii)
21
(xi) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
10(4)(e)
24(f)
21
10(5)
23(1) Ex. (b) and 3rd Sch. Rule 8(7)
10(5A)
Omitted
10(6)
22(b)
10(7)
26(a)
99 & 100
10(8)
26(b)
99 & 100
10(8) Pr.
26(b) Pr.
99 & 100
10(9)
26(c)
99 & 100
10(9) Pr.
Otiose
10(10)
Omitted
10
11
11
12 12(1)
30(1) and (2)
39(1)
12(2)
30(1) and (2)
39
31(1)
39(5), 40(1),(3)
31(2)
40(4)
31(3)
40(5)
12(2A)
Otiose
12(3)
3rd Sch.
12(4)
3rd Sch.
12(5)
30(2)(a)
15(3)
30(2)(e)
39
(xii) Income Tax Digest.
VOL-I
I.T.A. 1918
12
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
12(6)
Omitted
12A
Omitted
12AA
33
89
12B(1)
27(1)
37(1)
12B(1) Pr. 1
27(2)(b)
37(5), 75 to 79
12B(1) Pr. 2
Omitted
12B(2)
28(1)
37(2)
12B(2) Pr. 1
29(2)
37(4A)
12B(2) Pr. 2-4
Omitted
12B(3)
29(1)
37(4A)
29(3)
68
12B(4)
Omitted
13
32(1)(Rev.)
32(1), 174
13 Pr.
32(3)
174
13 Pr. 2
32(2)
32(3), 174
13 Ex.
Omitted
13A
32A
14
2nd Sch. Cl. (103) & (109) to (111)
14 and 15 15(1)
39(1)(a), 40(b)
15(1) Pr.
39(2)(b)
15(2A)
39(2)(a)
174, 177
(xiii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
15(3)
45
15(3) Pr. 1 & 2
Omitted
15(5)
39(3)
15A
Omitted
15AA(1)
41(1)(a), (b), (d)
15AA(3)
41(2)
15AA(3) Pr. 1
41(2) Rev.
15AA(3) Pr. 2
Omitted
15AA(4)
41(3)
I.T.O. 2001
41A
62
44
63
44A
63
44AA
63
44AAA
64
15B(1)
48(1)
15B(2)
48(2)
15B(3)
48(3)
15B(4)
48(5)
15B(5)
48(6)
15B(6)
Omitted
15B(7)
48(7)
15BB
Omitted
15C(1)
41(1)(f)
(xiv) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
15C(2)
Omitted
15C(2A)
Omitted
15C(3)
41(1)(f) Ex.
15C(5)
41(5)
15CC(1)
41(1)(e)
15CC(2)
Omitted
15CC(2) Ex.
Omitted
15CCC
43
15D(1)(a)
47(1)(a)
61
15D(1)(b)
47(1)(b)
61
15D(1)(c)
47(1)(c)
61
15D(1)(d)
47(1)(d)
61
15D(1)(e)
Omitted
15D(1) Pr. 1
Omitted
15D(2)
47(3)
61
15D(2) Pr.
47(4) Rev.
61
15D(4)
2(14)
15D(5)
47(4)
15E
Omitted
15F
42
15FF
106
15G(1) to (5)
105(1) to (5)
61
(xv) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
13
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
15GG
107 Rev.
172 & 173
16 16(1)(a)
49
16(1)(b)
69(4)
16(1)(b) Pr.
Omitted
16(1)(c)
83(1) & (3)
90(1) & (3)
83(2)
90(2)
83(4)
90(4),(5),(6),(7)
83(5)(a)
90(8)
83(5)(b)
90(8)
83(5)(e)
2(33)
16(1)(c) Pr. 1 16(1)(c) Pr. 2
14
VOL-I
93(6)
16(2)
12(11)
16(2) Pr. 1 & 2
Otiose
16(3)(a)(i)
69(3)(a)
16(3)(a)(ii)
69(3)(a)
16(3)(a)(iii)
83(4)(a)
16(3)(a)(iv)
83(4)(b) & 83(5)(c)
90(4)
16(3)(b)
83(4)(c)
90(4)
16(3)(b) Pr.
83(4)(a), (b)
90(4)
3 and 17 17(1)
1st Sch. Pt. IV(3)
17(2)
1st Sch. Pt I,
(xvi) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
Para A. Pr. (d) 17(5)
1st Sch. Pt IV, Para A. (4)
17(6) 14A
Otiose
18 18(2)
50(1)
149(1)
18(2) Pr.
50(1)
149(1)
18(2A)
Omitted
18(2B)
50(3)
152(2), (3)
18(2B) Pr.
50(3)
152(2), (3)
18(3)
50(2) 50(2A)
151
18(3) Pr.
50(3) Pr.
152(2), (3)
18(3A)
50(3)
152(2), (3)
18(3A) Pr.
Omitted
18(3B)
50(3)
152(2), (3)
50(3.1)
152(4)
50(3.2)
152(5)
50(3.3)
152(6)
50(3A)
152(1)
18(3B) Pr. 1
Omitted
18(3B) Pr. 2
Omitted
(xvii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
18(3BB)
50(4)
153
50(4A)
233
18(3BBB)
50(6)
234
18(3C)
Otiose
18(3CC)
50(5)
148
50(5A), (5AA)
154(1) to (3)
50(6A)
150
18(3D)
50(7) 50(7B)
155(1), (2)
50(7C)
156
50(7E)
235(1), (2)
50(7F)
236
50(7H)
157(1)
18(3F)
Otiose
18(4)
50(8)(a)
168(1)(a)
18(5)
50(8)(b)
168(1)(b)
18(5) Pr. 1
Omitted
18(5) Pr. 2
Omitted
18(6)
50(8)(c)
158, 160
18(7)
52, 86
161
18(8)
Omitted
18(9)
51
164
18(9) Ex.
50(9)
155(3)
(xviii) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
18(10)
Omitted 52A
162
18A(1)
53(1)
147(2), (3) & (4)
18A(1) Pr. 1 to 3
Omitted
18A(2)
53(2)
18A(2) Pr.
Omitted
18A(3) & (4)
Omitted
18A(5)
53(4) 53(5)
18A(5A)
15
I.T.O. 2001
147(5) & (6)
147(8), (9), (10) & (11)
Omitted 83A
91
86
205(3), (4)
18A(6)
87(2)
205(1) & (2)
18A(7)
87(1)(b)
205(1) & (2)
18A(7) Pr.
Omitted
18A(8)
87(2)
205(1) & (2)
18A(9)(a)
87(1)(a), (b)
205(1) & (2)
18A(9)(b)
87(1)(a)
205(1) & (2)
18A(9) Pr.
Omitted
18A(10)
53(3)
18A(11)
53(1)
19 and 20
147(2), (3) & (4)
(xix) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
16
VOL-I
I.T.A. 1922
I.T.O. 1979
19
Omitted
19A
140
20
Otiose
20A
139
21 Pr.
Omitted
21A
Omitted
I.T.O. 2001
165
165
22 22(1)
55(1)
114(1),(2) & 118(1)
55(1) 1st Pr.
115(1)
55(1) 3rd Pr.
115(3)
55(1) 2nd Pr. & 143B
115(4)
55 2nd Pr.
116(2)
55 4th Pr.
118(6)
22(1) Pr.
Omitted
22(1A)
55(2)
118(2), (3)
55(2) Exp.
118(4)
55(3)
119(1) to (4)
55A
118
22(2)
56
114(5)
22(3)
57
114(6)
22(4)
61
176 & 239(2)
22(4) Pr.
61 Pr.
176 & 239(2)
22(1A) Pr. 1 & 2
(xx) Income Tax Digest.
VOL-I
I.T.A. 1918
17
18
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
22(4A)
58(1)
116(1)
22(4A) Pr.
58(2)
36
58 Proviso
115(2)
22(5)
Omitted
22A
54
137(1)
23(1)
59(1), (2)
120
23(2)
61
176 & 239(2)
23(2A)
67(1)
23(3)
62 62A
124(3)
62BB
124A
23(4) and 24
63
121
23(4) Pr. 1
Otiose
23(4) Pr. 2
Otiose
23(5)
69(1)
23(6)
69(2)
23(7)
7
23B
60 60A
123
24(1)
34
11(4), 56
24(1) Pr. 1
36(1)
58
24(1) Pr. 2
38(4)
59A, 93(2), 94
(xxi) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
24(2)
35, 36(2)
58
36(2) Exp.
2(61)
36 Exp.
19(2)
24(2) Pr. (b)
38(7)
59A, 93(2), 94
24(2) Pr. (c)
38(2) & (5)(a)
59A, 93(2), 94
24(2) Pr. (d)
38(3)
59A, 93(2), 94
24(2) Pr. (e)
38(5)(b)(c)
59A, 93(2), 94
24(2) Ex. 1
36(2) Ex.
58
24(2) Ex. 2
Omitted
24(2A)
34
56
24(2B)
37
38, 59
24(2B) Pr. 1 & 2
37 Pr. 1 & 2
59
24(2C)
Otiose
24(3)
Omitted
24A(1)
81(3)
24A(1) Pr.
Omitted
24A(2)
81(2)
114(3), 145
24B(1)
74(1), (3), (4), (5)
87, 114(3)
24B(2)
74(2)(b)
87, 114(3)
24B(3)
74(2)(a)
87, 114(3)
25(1)
72(2)
114(3), 117(2) & (4)
25(2)
72(1), 112
114(3), 117(1)
114(3)(c)
(xxii) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
25(3) to (5)
Omitted
25(6)
72(3)
25A(1)
75(1)
25A(2)
75(2)
25A(3)
Omitted
26(1) Pr. 1&2
70
98A
26(2)
73(1)
98C
26(2) Pr.
73(2), (3)
98C, 118(5)
26A(1)
68(1)
26A(2)
68(3)
26A(3)
68(4)
26A(4)
68(5)
26A(5)
68(2) 81(1), (4)
26A(5) Pr. 19
Omitted
20
28
I.T.O. 2001
114(3), 117(3), 118(5)
114(3), 145
Omitted
28(1)(a)
108(a), (b)
182(1), (2)
28(1)(b)
110
186
28(1)(c)
Omitted
28(1) Pr.
Omitted
28(1A)
109, 111(1)
(xxiii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
I.T.A. 1922
28(1A) Pr. 1
VOL-I
I.T.O. 1979
I.T.O. 2001
109
185
Otiose 112
28(1A) Pr. 2
28(1A) Ex.
28(1B), (2), (2A)
21
22
188
113 111(1)
184(1)
111(2)
184(2)
111(2A)
184(3)
Omitted 114
188
28(3)
116(b)
190(2)
28(5)
111(3)
184(4)
28(6)
116(a)
190(1), (2)
29
85
29 and 30 30(1)
129(1)
127(1)
30(1) Pr. 1
129(2)
127(2)
30(1) Pr. 2&3
Omitted
30(1A)
Omitted
30(2)
130(2), (3)
127(5), (6)
30(3)
130(1)
127(3), (4)
30A
Omitted
31 31(1)
131(1)
128(1), (2)
(xxiv) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
31(2)
131(3)
128(4)
31(3)
131(2)
128(3)
31(4)
131(4)
128(5)
31(5)
132(1)(a)(ii)
129(1)
31(6)
132(1), (2)
129(1), (2)
31(7)
132(3)
129(3)
31(8)
132(4)
129(4)
132(5)
129(5), (6)
132(6)
129(7)
132(7)
130(1)
23
32
24
33 33(1)(a)
134(1), (3)
33(1)(b) & (c)
Omitted
33(1)
134(1)
33(2)
134(2), (3)
33(2A)
134(4)
131(4)
33(3)
134(5)
131(2), (3)
33(3A)
135(1)
132(1)
33(4)(a)
135(2)
132(2)
33(4)(b)
135(3)
33(4)(c)
135(4)(a)
131(1)
132(3)
(xxv) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
33(4)(d)
135(4)(b)
132(3)
33(4)(e)
135(4)(c)
132(3)
33(4)(f)
135(5)
132(6)
33(4)(g)
135(8)
132(4)
33(5)
135(7)
132(5)
135(7A)
132(8), (9)
135(8)
132(7)
33(6)
135(9)
132(10)
33(7)
Otiose
33A(1)
138(1)
122A
33A(2)
138(2)
122A
33A(2) Pr. 1
138(2)
122A
33A(2) Pr. 2
138(5)(a)
122A
33A(2A)
138(3)
122A
33A(3)
138(4)
122A
138L
228
138N
229
138O
230
138P
231
33A(4) 25
VOL-I
Omitted
34 34(1)
65(1)
122(1)
34(1) Pr. 1
65(1) Pr. 1
122(1)
(xxvi) Income Tax Digest.
VOL-I
I.T.A. 1918
26
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
34(1) Pr. 2
65(2) Rev.
122(5)
65(2) Exp.
122(8)
34(1A)
65(1) Pr., 65(3)
122(2)
34(2)
64, 65(3)
34(2) Pr. (i)
Otiose
34(2) Pr. (ii)
64 Pr. Rev.
34(2) Pr. (iv)
66(1) Rev.
34(2) Pr. (v)
Omitted
34(2) Ex. 1
66(2)(i)
124(5)
34(2) Ex. 2
66(2)(ii)
124(5)
66(3)
125
124(1) & (2)
34(2A) & (2B)
Otiose
34(2C), (2D)
Omitted
34A
66A
122(5)(a)
35(1), (2)
156(1), (4)
221(1), (4)
35(1) Pr.
156(2)
221(2)
156(3)
221(3)
35
35(3), (4)
Otiose
35(5)
Omitted
35(6)
Otiose
35(8)
Omitted
(xxvii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
27
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
36
152
219
37 37(1)
148(1) & 158 148(1)
37(1) Pr.
Omitted
37(2)
149
38
144
38A(1)
146(2)
38A(2)
146(1)
38A(2) Pr.
144(c) Pr.
38B(1)
145
38B(2)
146(3)
29
39
Omitted
30
Omitted.
31
40
32
41
28
33
176(1) & (4)
215 & 176(1)
175(1)
175(2)
78 Rev.
172 & 173
41(1)
78 Rev.
142
41(1) Pr. 1 & 2
Omitted
41(2)
78(4)
42 42(1)
12(2)
42(1) Pr. 1
Omitted
42(1) Pr. 2
78(3)
101(2), (3), (5)
(xxviii) Income Tax Digest.
VOL-I
I.T.A. 1918
34
35
I.T.A. 1922
I.T.O. 1979
42(1) Pr. 3
Omitted
42(2)
79
42(3)
12(2) Pr.
43
78(3) Ex.(4)(a)
43 Pr. 1
78(3) Pr. (a)
43 Pr. 2
78(3) Pr. (b)
43 Ex.
Otiose
43A
77(3)
139(4)
43B
77(1), (2)
139(1),(2) & (3)
43C(1)
76(1)
141(1)
43C(2)
76(2)
141(2)
43C(3)
76(3)
141(3)
43C(4)
76(4)
141(5)
43C(5)
Omitted
43C(6)
76(5)
141(7)
44
71
98B
44A
80(1)
7, 143(3)
44B(1)
80(2)
7, 143(1)
44B(2)
80(3)
7, 143(2)
44B(3)
80(3), (5)
7, 143(3), (5)
80(4)
143(4)
80(6) Rev.
7
44C
I.T.O. 2001
108
(xxix) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
36
I.T.A. 1922
VOL-I
I.T.O. 1979
I.T.O. 2001
80A(1)
144(3)
80A(2)
144(1)
80A(3)
144(2)
80A(4)
144(4), (5)
80AA
6
80AAA
6
80B
5, 8 & 169
80C
153(6),(7) 169
80C(2)(iv)
157(2)
80CC
154(1) to (3), 169
80D(1)
113(1)
44D
Omitted
44E
84 Rev.
44F
Omitted
44G
82(1)
145
44G(1) Pr.
82(2)
145
44G(2)
82(3)
145
44G(3)
82(3)
145
44G(4)
165
44G(4) Ex.
82(4)
145
84(1)
112(1)
45
85
(xxx) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
85(1)
137(2)
85(2)
137(4)
45 Pr. & Ex.
Omitted
45A(a)
89 Rev.
205(1) & (2)
45A(b)
88 Rev.
205(1) & (2)
45A Pr. 1
89
205(1) & (2)
45A Pr. 2
90
205A
46(1)
91(1)
183, 205A
46(1A)
91(2)
183, 205A
46(2)
94
46(2) Pr.
94 Pr.
46(2A), (3) to (5)
Omitted
46(5A)
92(1), (2), (3)
140(1), (3), (6) & (10)
92(4), (5)
55 & 80D
92(2A)
140(5)
46(5A) Ex. 1 & 2
Omitted
46(8) to (10)
Omitted
46A(1)
93(1), (2), (5)
138
93A
146
46A(1A), (2)
Omitted
46B
Omitted
46C(1)
95(c)
146A
(xxxi) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
37
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
46C(2)
95(d)
146A
46C(3)
Omitted
46D
Omitted
47
85
48(1)
96
48(2)
100
48(3)
97(1) 98(a), (b)
48(4) 38
170(1)
12(7), (8)
101
49 142, 143, 143A & 143B
115(4), 118 & 165
143D
181
49AA(1)
163(1)
107
49AA(2)
163(2)
107
49AA(3)
163(3)
107
49AA(4)
Otiose
49AA(5)
163(4)
49B & C
Otiose
49D(1)
164
49D(1) Pr. 1
Otiose
49D(1) Pr. 2
Omitted
49D Ex.
Omitted
107
102 & 103
(xxxii) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
49E
104
170(3)
49F
97(2)
49G
102 102(1)
171(1)
102(2)
171(2)
99
170(2), (3), (4)
51(1)(a)
117(a)
191(1)
51(1)(aa)
117(b)
191(1)
51(1)(b)
117(c)
191(1)
51(1)(c)
Omitted
51(1)(d)
117(d)
191(1)
117(e)
196
39
50
40
51
41
42
51(1A)
Omitted
51(2)
119
51(3)
115 (Rev.)
189
51(4)
121
197
52
118
192, 195
52A
120
199
53 53(1)
125
53(1A)
124 (Rev.)
201
(xxxiii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
VOL-I
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
53(2)
126
202
53(3)
Omitted
54(1)
150(1), (2)
216(1), (2)
54(2)
122
198
123
200
54(3)
150(3)
216(3)
54(4)
150(4)
216(4)
54(4A)
150(5) Rev.
216(5)
150(5A)
216(6)
150(6)
216(7)
54(5)
150(7) Rev.
216(8)
54A(1)
127(1)
203(1)
54A(2)
127(2)
203(2)
54A(3)
Otiose
55(1)
10(1)
55(1) Pr. 1 & 2
Omitted
55(1) Pr. 3
1st Sch. Pt. IV, 2B
55(1) Pr. 4
Omitted
56
10(2)
43
58
44
58 58(1)
10(3)
58(2)
Omitted
(xxxiv) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
58A-58V
6th Sch.
58W
44
63
59(1)
165(1)
237(1)
59(2)
165(2)
237(2)
59(3)
165(3)
59(4)
165(4)
59(5)
Omitted
60(1)
14(2)
53(2)
14(2) Proviso
53(3)
60(2) 45
I.T.O. 2001
237(3)
98
61 128(1)
204(1)
128(2)
204(2)
128(3)
204(3)
61(1)
157(1)
223(1), (11)
61(2)
157(2)
223(2)
61(3)
157(3), (a), (b), 157(4), (5)
223(3), (4), (5)
61(4)
157(3)(b)
223(3)
157(6)
223(6)
157(7)
223(7)
157(8)
223(8)
157(9)
223(9)
(xxxv) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918
46
47
I.T.A. 1922
VOL-I
I.T.O. 1979
I.T.O. 2001
157(10)
223(10)
62
153
220
63(1)
154(1)
218(1)
63(2)
154(2)
218(2)
63(3)
154(6)
218(3)
154(4)
218(4)
154(6)
218(5)
64(1)
5(3)(a)
64(2)
5(3)(b)
64(3)
5(4)
64(3) Pr. 1
Omitted
64(3) Pr. 2
5(5)
64(3) Pr. 3
Omitted
64(4)
5(6)
64(5)
Omitted
48
65
161
167
49
Omitted
50
Omitted
51
66 66(1)
136(1)
133(1),(2) & (3)
66(2)
136(2)
133(4), (5)
66(3)
Omitted
66(4)
136(3)
210(4)
210(5)
210(6)
133(7), (8)
(xxxvi) Income Tax Digest.
VOL-I
I.T.A. 1918
I.T.A. 1922
I.T.O. 1979
I.T.O. 2001
66(5)
136(5)
133(10)
66(6)
136(6)
133(11), (12)
66(7)
136(7)
133(13)
66(7) Pr.
Omitted
66(7A)
136(8)
133(14)
136(9)
133(15)
136(10)
133(16)
66(8)
Otiose
66A(1)
136(4)
133(9)
66A(2)
137(1)
134(1)
66A(3)
137(2)
134(2)
66A(3) Pr. 1 & 2
Omitted
66A(4)
137(3)
134(3)
137(4)
134(4)
151
55
155
126(2)
158
50(8), 224
66BB
147
178
67
162
227
67A
160
226
67AA
159
225
67B
Otiose
66B
52
(xxxvii) COMPARATIVE TABLE OF SECTIONS
I.T.A. 1918 53
I.T.A. 1922
VOL-I
I.T.O. 1979
I.T.O. 2001
164A
180
165A
212
166(1)
44(1), 238
166(2)
44(1), 239(2) to (11)
167
240
68
(xxxviii) COMPARATIVE TABLE OF SECTIONS
VOL-I
SCHEDULES Income Tax Act, 1922
Income Tax Ordinance, 1979
1st Sch., rules
4th Sch., rules
1
1
2
2
2A
Omitted
3(a)
3(a) Rev.
3(a) Pr. 1
3(a) Pr. 1
3(a) Pr. 2
3(a) Pr. 2
3(b)
3(b)
3(b) Pr.
3(b) Pr.
3(c)
3(c)
4
4
5
7
6(1)
5
6(2)-(5)
Omitted
7&8
Omitted
9
6
2nd Sch., rules
5th Sch. Pt. I, rules
1
1
2(i)
2(1)(2)
2(i)(a)
2(3)(a)
2(i)(b)
2(3)(b)
2(i)(b) Pr.
Omitted
2(ii)
2(4)
(xxxix) COMPARATIVE TABLE OF SECTIONS
Income Tax Act, 1922
VOL-I
Income Tax Ordinance, 1979
2(iii)
2(5)
2(iii) Pr. 1 & 2
2(5) Pr.
2(iv)
2(6)
3
3 & Pr.
4(1)
4(1) & Pr.
4(2)
6(5)
5
4(2)
6
4(3)
6 Pr.
4(3) Pr.
6A
Omitted
7&8
Omitted
III Sch., rules
5th Sch. Pt. II, rules
1
1
2
2(2)
3
2(3)
4
2(4)
4 Pr.
Omitted
4A(a)
2(1)
4A(b)
3(1)
4A(c)
3(2)
4A(d)
3(3)
5(a)
4(1)
5(b)
4(2)
5(c)
4(3)
5(d)
Omitted
(xl) Income Tax Digest.
VOL-I
Income Tax Act, 1922
Income Tax Ordinance, 1979
5(e)
4(4)
5(f)
4(5)
6
Otiose
IV Sch., rules
VII Sch., rules
1(1)
7(1)
1(2)
7(2)
1(3)
7(3)
2(1)
1(1)
2(2)
Otiose
2(3)
Omitted
3
2 Rev.
4
Otiose
5(1)
3
5(2)
Omitted
6(1)
4(1)
6(2)
4(2) & Ex.
6(3)
4(3)
6(4)
4(4)
6(5)
4(5)
7
5(1)
8
5(3) Impl.
9(1) & (2)
Otiose
10
5(2)
11(1)
6(1)
11(2)
6(2)
(xli) COMPARATIVE TABLE OF SECTIONS
Income Tax Act, 1922
VOL-I
Income Tax Ordinance, 1979
11(3)
6(3)
11(4)
6(4), (5)
11(5)
6(6)
12
Otiose
(xlii) COMPARATIVE TABLE OF SECTIONS
VOL-I
Following is a comparative list of rules of the Income Tax Rules, 1962 and Income Tax Rules, 1982. Income Tax Rules, 1962
Income Tax Rules, 1982
1-2
1-2
3-5
204
6-7
Omitted
8
Omitted (now S. 20(I)(g))
9
III Sch.
10
Otiose
11
27, 29, 31 & 32
11A
34
12
Otiose
13
49 & 50
14
52
15
53 & 54
16
55
17
57
18
59
19
58
20
50
21
203
22
62
23
62
24
63
25
Otiose
26
199
27
Otiose
28
200
29(1)
56(2)
29(2)
20(2)
(xliii) COMPARATIVE TABLE OF SECTIONS
Income Tax Rules, 1962
VOL-I
Income Tax Rules, 1982
29(3)
197
29(4)
201
30
190
31
191
32
192
33
Otiose
34
194
35
195
36
196
37
25
38
Otiose
39
3-18
40
24
41
24
42
193
43 & 44
209-210
45
205(2) & 206
46
Otiose (Now S. 59)
47 & 48
Otiose
49
21
SRO 1041(K)/61, dated 31.10.1961
19
Notif No. 36, dated 22.6.1956
43
SRO 406 dated 22.8.1959
43
Notif. No. 4 dated 14.3.1952
37
SRO 884(I)/74 dated 1.7.1974
46
SRO 714(I)/72 dated 12.9.1972
211-215
SRO 57(R)/69 dated 7.4.1969
Income Tax Recovery Rules, 1961
99-189 Notif. No. 6 dated 10.3.1950
Otiose
(xliv) Income Tax Digest.
VOL-I
Income Tax Rules, 1962
Income Tax Rules, 1982
SRO 353(K)/62 & SRO 354(K)/62 dated 27.3.1962
69-84
SRO 982(I)/75 dated 12.9.1975
41
SRO 349(I)/76 dated 12.4.1976
39
1 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
Section 1 Short title, extent and commencement
PAGE NO
GENERAL PRINCIPLES OF TAXATION / RULES OF _ INTERPRETATION LEGISLATIVE POWERS
1. 2.
3. 4. 5. 6. 7. 8.
9. 10.
Legislature enjoys wide powers in framing _ laws. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
fiscal
Taxing rights of legislature are unlimited as long as these _ are not confiscatory. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) Parliament is competent to levy presumptive _ taxation. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) _ Levy of minimum tax held constitutional. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) Power to levy taxes is an attribute of sovereignty of a state. _ [1997 SCC 1097 = (1997] 76 TAX 5 (S.C.Pak) _ Restrictions on power to levy tax. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) The principle of “equality” applies equally to fiscal _ enactments. [1997] 76 TAX 5 (S.C.Pak.) _ Double Taxation is prerogative of legislature. [1992] 65 _ TAX 315 (S.C.Pak); 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
35
35 36 38 40 40 41
41
The scope of powers of legislature to tax non-residents. _ 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak)
42
Definition of word/expression “income” would mean “net income” after making all permissible allowances, deductions, depreciation etc as appearing in section 2(24) of the Ordinance. The said definition cannot be assigned to the word/expression “income” as used in section 23 of the Ordinance as the very purpose of section 23 of the Ordinance _ would be defeated. [2001] 83 TAX 376 (H.C.Kar.)
42
2 Section 1
Income Tax Digest. PAGE NO
11.
12.
13.
14.
15. 16. 17. 18.
19.
CBR circular No 19 of 1991 dated 8.7.1991, assessee was under no obligation to deduct tax at source in relation to purchases on which tax at import stage had been deducted and which constituted final discharge of liability. Jurisdiction to apply provisions of Ordinance in any manner was not restricted to proceedings for assessment or recovery of final income tax liabilities, but also related with force in respect of advance tax, be it under section 50(4) or section 53 or any other provision of the Ordinance. Proviso to section 50(4)(a) categorically confirmed that substantive provision of said section was also to be applied to non_ residents. [2001] 83 TAX 305 (H.C.Kar.)
43
Under the Indian Income Tax Act, 1961 presumptive tax regime has been made applicable to limited number of items but the deduction made at source has been made liable for adjustment against the tax demand created on regular _ assessment. [2001] 83 TAX 305 (H.C.Kar.)
45
The question of retrospective operation of the explanation of section 25 of the Ordinance would have arisen only if it has the effect of imposing new liability or obligation on the taxpayer or had affected any existing rights either by taking _ them away or curtailing them. [2001] 83 TAX 305 (H.C.Kar.)
45
Scope of Article 165 & 165A of Constitution; corporations created by provincial statutes are not “governments”. _ [1999] 79 TAX 410 (H.C.Kar.)
47
Levy of Corporate Asset Tax is constitutionally valid. _ [1999] 79 TAX 77 (H.C.Lah.)
48
Constitutional powers of levying taxes by Federation and _ provinces. [NLR 1999 Tax 176] _ Personal interest must yield to larger interest. [1998] 78 TAX 234 (H.C.Kar.) = PTCL 1998 CL. 690
48 49
Powers of Federal Government to levy income tax on any property or income, including that of Provincial _ Government. [1995] 71 TAX 220 (H.C.Lah.)
51
Parliament can introduce a new change of tax either by incorporating that change in the Income Tax Act or by _ Finance Act. [1988] 57 TAX (H.C.Kar.)
52
3 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
20.
21.
22. 23. 24.
25. 26. 27. 28. 29. 30. 31.
32.
33. 34.
Levy of tax on free reserves which had already suffered tax held not to be ultra-vires of the powers of Legislature under _ the Constitution. [1984] 49 TAX 76 (H.C.Kar.)
52
Words occurring in a constitutional provision relating to _ legislative power should be liberally construed. [1984] 49 TAX 76 (H.C.Kar.)
53
Rule of interpretation of the word “income” occurring in _ Constitutional explained. [1984] 49 TAX 76 (H.C.Kar.)
53
Redundancy cannot be readily attributed to the legislature. _ [1982] 46 TAX 143 (H.C.Lah.)
54
“Resident” of taxable territories is liable to tax on total world income including any income accruing or arising in nontaxable territories of Pakistan. _ [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266
54
Legislature has the power to enact curative legislation. _ [1982] 45 TAX 232 (H.C.Kar.)
55
Charging section and subsequent provisions only enable the _ liability to be quantified. [1980] 42 TAX 59 (H.C.Lah.)
55
Power to make and promulgate Ordinance includes the _ power to levy tax. [1977] 35 TAX 180 (H.C.Kar.)
55
Authority to legislate includes authority to legislate with _ retrospective effect. [1977] 35 TAX 180 (H.C.Kar.)
56
Rules can‟t be made by subordinate delegate authority _ unless expressly permitted. [1966] 14 TAX 174 (H.C.Kar.)
56
Charging section cannot be overlooked on hypothesis of _ history of exemption. [1 ITC 284 (Calcutta)]
56
Modification of exemption from taxation must be express _ and not in general terms or by implication. 1 ITC 185 (Mad)
56
Subsequent general enactment does not interfere with _ special provisions unless expressed clearly. 1 ITC 181 (Mad) _ Court cannot make up for any deficiency of Legislature. [1 ITC 161 (Burma)] Fair and reasonable construction for taxing statutes. _ [1 ITC 140 (Burma)]
57 57 57
4 Section 1
Income Tax Digest. PAGE NO
RETROSPECTIVE LEGISLATION
35. 36. 37.
38.
39.
40.
41. 42. 43.
44. 45.
46. 47.
48.
Retrospective application of law must be by explicit words. _ 1975 SCC 426 = [1976] 34 TAX 14 (S.C.Pak.) _ Scope of retrospective legislation. 1969 SCC 354 = [1970] 21 TAX 62 (S.C.Pak.) _ Fiscal laws and theory of retrospectivity. [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892; [2000] 82 TAX 518 (S.C.AJ&K.) _ Retroactivity of the law upheld. [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892; [2000] 82 TAX 518 ((S.C.AJ&K.)
58 58
59
60
Amendment in law which is neither clarificatory nor _ declaratory cannot be applied retrospectively. [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180
60
An amendment which is explanatory or clarificatory is _ generally to operate retrospectively. [1996] 74 TAX 9 _ (H.C.Lah.) [1977] 35 TAX 169 (H.C.Lah.)
60
In a Taxing Act there is no room for any intendment. _ [1991] 64 TAX 60 (H.C.Kar.)
61
Omission of provision from statutes held not to operate _ retrospectively. [1991] 64 TAX 19 (H.C.Kar.)
61
Substantive law amended by Finance Act, 1973 held to have _ retrospective operation to cover only pending cases. [1988] 57 TAX 71 (H.C.Kar.) _ Scope of Retrospective Legislation. [1988] 57 TAX 46 _ (H.C.Kar.) [1985] 52 TAX 123 (H.C.Kar.)
62
For the purposes of assessment of income the law applicable is that in force on the first day of the relevant assessment _ year. [1985] 52 TAX 123 (H.C.Kar.) _ A penal provision cannot operate retrospectively. [1984] 50 TAX 187 (H.C.Kar.)
65
64
65
Any Act/Ordinance cannot cover any period prior to coming _ into force of the Act/ Ordinance [1984] 49 TAX 198 (H.C.Kar.)
65
If a provision is neither declaratory nor curative it cannot be _ retrospective [1980] 42 TAX 147 (H.C.Kar.) = 1980 PTD 314
65
5 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
49.
50. 51.
52. 53. 54. 55.
56. 57.
58.
If retrospective operation of a provision results in injustice, _ it should not be applied retrospectively. [1979] 40 TAX 113 (H.C.Lah.) _ Declaratory statutes generally apply retrospectively. [1977] 35 TAX 169 (H.C.Lah.) Explanatory amendment is always applicable retrospectively _ to all relevant cases pending at the relevant time. [1977] 35 TAX 169 (H.C.Lah.) Subordinate legislation can be applied retrospectively only if _ expressly mentioned. [1976] 34 TAX 10 (H.C.Lah.) _ Rules to determine retrospective effect. [1970] 21 TAX 62 (Income Tax Digest Feb. 1970) _ Right accrued cannot be taken away by implication. [1964] 8 TAX 1 (H.C.Kar.) = 1963 PTD 867 = 1963 PLD 996 Rights conferred under statutes cannot be taken away by later legislation except by express words or by necessary _ implication. [1 ITC 284 (Calcutta)] _ Presumption against double taxation. [1 ITC 284 (Calcutta)]
66 66
67 68 68 68
68 70
Vested rights such as rights to appeal and to demand a reference already accrued, cannot be taken away by repeal of _ Act. [1 ITC 264 (Nagpur)]
71
Fiscal statutes to be strained in favour of the subject, if at _ all. [1 ITC 248 (Nagpur)]
72
REMEDIAL AND CURATIVE LEGISLATION HAS RETROSPECTIVE EFFECT
59.
Remedial and curative legislation has retrospective effect. _ 1992 SCC 920 = [1992] 66 TAX 125 (S.C.Pak.)
72
PRINCIPLE OF CONTEMPORARY EXPOSITION
_
60.
Principle of contemporary exposition.
1 ITC 303 (Pat)
61.
Practice of Revenue Authorities as contemporanea expositio. _ [1 ITC 284 (Calcutta)]
73 73
ACTION IS DEEMED ILLEGAL, THE WHOLE SUPERSTRUCTURE BUILT UPON IT IS ALSO ILLEGAL
62.
If an action is deemed illegal, the whole superstructure built _ upon it is also illegal. [1991] 63 TAX 143 (H.C.Kar.) = _ 1991 PTD 658 [1990] 61 TAX 159 (H.C.Kar.)
74
6 Section 1
Income Tax Digest. PAGE NO
INCOME CANNOT BE TAXED TWICE
63.
Income cannot be taxed twice. TAX 223 (S.C.Pak)
_
1970 SCC 370 = [1971] 23 74
ONE THING IMPLIES THE EXCLUSION OF ANOTHER
64. 65.
“Expressio unius est exclusio alterius”. (H.C.Lah.) = 2001 PTD 1180
_
[2001] 83 TAX 451 75
“Expressio unius est exclusio alterius” (Express mention of one thing implies the exclusion of another) was neither _ absolute nor was of universal application. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
76
APPLICATION OF RULE “GENERALIBUS SPECIALIA DEROGANT”
66.
Application of rule “generalibus specialia derogant”. SCC 289 = [1967] 16 TAX 81 (S.C.Pak.)
_
1967 76
INTERPRETATION OF STATUTES / GENERAL PRINCIPLES
67. 68. 69. 70.
71. 72. 73. 74. 75.
76.
Statute must be intelligibly expressed and reasonably _ definite and certain. PLD 2000 S.C. 111 _ True meaning of statute vis-a-vis duty of court. PLD 2000 S.C. 111 _ Interpretation of statute is not CBR‟s domain. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak) Proceedings of the Legislature can be resorted to when the _ words of a provision are ambiguous. [1992] 65 TAX 281 (S.C.Pak) Person sought to be taxed must come within the letter of law. _ [1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.) _ No words to be treated as surplusage. 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 _ Abrogation of International Law. 1958 SCC 37 = [1959] 1TAX (111-284) (S.C.Pak.) _ A fiscal statute should be construed strictly. 1959 SCC 68 = [1959] 1-TAX (111-207) (S.C.Pak.) Claimant of an exemption has to be the same without any _ ambiguity. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 Where a provision was open to two reasonably possible interpretations, then, the interpretation which favours the
77 77 78
78 78 79 79 79
79
7 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
_
77.
78.
79.
80. 81. 82. 83. 84. 85.
86. 87. 88. 89. 90.
taxpayer has to be adopted. [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 = 2000 PTD 2872
80
Correct interpretation of Rule 15 vis-a-vis right of appeal. _ [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 (H.C.AJ&K) = 2000 PTD 2872
80
The use of word “shall” in Section 134(5), Income Tax Ordinance, 1979 does not make it mandatory in nature. _ [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 (H.C.AJ&K) = 2000 PTD 2872
80
Principles for determining mandatory or directory provision _ of law. [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 (H.C.AJ&K) = 2000 PTD 2872 _ Things should be done as required by law. PTCL 2000 CL. 465 _ Court must confine itself to language of law. [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280 Assessing officer to apply correct law even if assessee fails to _ make a claim. [1999 PTD 325] Explanation can be added to elaborate the meanings. _ [1996] 74 TAX 9 (H.C.Lah.) _ Harmonious construction is recommended. [1990] 62 TAX 119 (H.C.Kar.)
81 81 81 82 82 82
Proceedings of the Legislature can be resorted to when the _ words of a provision are ambiguous. [1990] 61 TAX 30 (H.C.Kar.)
82
Interpretation of machinery provisions of a fiscal statute. _ [1990] 61 TAX 30 (H.C.Kar.)
82
Speech of the Federal Minister has no legal consequences or effect. [1984] 50 TAX 158 (H.C.Kar.)
83
Role of history of legislation in interpreting a provision of _ law/statute. [1979] 40 TAX 116 (H.C.Kar.)
83
Departmental construction can be used _ interpretation. [1976] 34 TAX 54 (H.C.Lah.)
83
in
aid
of
Caution should be used while borrowing the meaning attached to terms and phrases used in one statute, while _ interpreting another statute. [1975] 32 TAX 273 (H.C.Lah.)
84
8 Section 1
Income Tax Digest. PAGE NO
91.
92. 93. 94. 95. 96. 97.
Terms and phrases used in a statute prima facie should be _ construed in their popular sense. [1974] 29 TAX 221 (H.C.Lah.)
84
While interpreting a statute - nothing is to be read in and _ nothing is to be implied. [1974] 29 TAX 115 (H.C.Kar.)
84
Departmental instructions cannot be used in aid of _ interpretation. [1966] 13 TAX 141
85
Non-revenue profit/losses are not covered in Income Tax _ unless specifically provided in statute. 2 ITC 107 (Mad)
85
In dubio construction which imposes burden on taxpayer _ should be avoided. [1 ITC 189 (Lahore)] _ Courts are not to be influenced by doctrine of hardship. [1 ITC 169 (Calcutta)] Tax must be imposed by clear and unambiguous language. _ [1 ITC 26 (Sind)
85 85 86
PRINCIPLES GOVERNING INTERPRETATION OF FINANCIAL LIABILITIES
98.
Principles governing interpretation of financial liabilities _ should be strictly construed. [1977] 36 TAX 8 (Lahore)
86
PRINCIPLE OF EQUITY
99. 100. 101.
Equitable construction of a fiscal statute is not permitted. _ [1977] 35 TAX 169 (H.C.Lah.) Equitable construction is inadmissible in a fiscal statute. _ [1 ITC 161 (Burma)] _ No equitable construction in fiscal statutes. [1 ITC 26 (Sind)]
87 87 87
POWERS OF COURTS/ADMINISTRATIVE JURISDICTION
102.
103. 104. 105.
CBR and the Federal Government have no power to resort to _ judicial interpretation of law. [1999] 80 TAX 79 (S.C.Pak) = 1999 PTD 2174]
88
In granting leave to appeal rule of consistency is to be _ followed. [1999] 79 TAX 1 (S.C.Pak.)
88
Judicial approach on constitutional issues should be _ dynamic. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak)
88
Conditions under which courts can strike down a law. _ 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
89
9 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
106.
107.
108. 109. 110.
111.
112.
113. 114.
115. 116. 117.
118.
CBR is not competent to issue instructions of judicial/quasi _ judicial nature. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak)
89
High Court has only advisory jurisdiction under section 136 _ of the Ordinance. 1991 SCC 805 = [1992] 65 TAX 239 _ (S.C.Pak); [1985 SCC 637 = [1986] 53 TAX 122 (S.C.Pak); _ _ [1996) 74 TAX 141 (H.C.AJ&K); [1995] 71 TAX 271 _ _ (H.C.Lah.); [1994] 69 TAX 71 (H.C.Kar.); [1987) 56 TAX _ _ 78 (H.C.Kar.); [1985] 52 TAX 77 (H.C.Kar.); [1984] 50 _ TAX 115 (H.C.Kar.); [1976] 33 TAX 245 (H.C.Lah.)
89
Two equally possible interpretation emerge; leave to appeal _ granted. 1980 SCC 474 = [1981] 43 TAX 105 (S.C.Pak) _ Transfer of jurisdiction. 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak)
92 92
Only question of law which has substance in it can be _ referred to the High Court. 1970 SCC 366 = [1975] 31 TAX 64 (S.C.Pak.)
93
Constitutional petition dismissed as withdrawn; second _ petition on the same issue is maintainable. [1974] 29 TAX 149 (S.C.Pak.)
93
In case there is anomaly in question of law framed and referred by the Tribunal to the High Court, it should refer _ the case back to Tribunal for clarification. 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.) _ Effect of lack of jurisdiction. 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) Only Supreme Court is competent to adjudicate between the _ governments. 1956 SCC 13 (F.C.) = [1960] 2-TAX (Supp.3) (S.C.Pak) Appeal/Reference to Supreme Court governed by Income _ Tax Law. 1957 SCC 34 = [1959] TAX (III-290) (S.C.Pak) _ In tax matters Supreme Court jurisdiction is limited. 1957 SCC 34 = [1959] TAX (III-290) (S.C.Pak)
93 93
94 94 94
Preliminary objection of jurisdiction should be decided first. _ [1999] 80 TAX 115 (H.C.Lah.) = 1999 PTD 2910 = 2000 PCTLR 1046
95
Objection as to jurisdiction can be raised at any stage. _ 1999 PTD 4041 (H.C.Kar.)
95
10 Section 1
Income Tax Digest. PAGE NO
119.
120. 121.
122.
123. 124.
125.
126. 127. 128.
129. 130. 131. 132.
133.
Ombudsman has no power to declare any legally issued notification as perverse, illegal, arbitrary or discriminatory. _ 1999 PTD 4126 (H.C.Pesh.)
96
CBR has no authority to file presentation against the orders _ of Wafaqi Mohtasib. 1999 PTD 4126 (H.C.Pesh.)
96
Every order increasing tax obligation of an assessee or reducing the refund is appealable under section 129. _ [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061 [Not approved by Supreme Court in [2000] 83 TAX 119 (S.C.Pak.)]
96
Submission to jurisdiction of a Court/Authority does not confer jurisdiction which does not vest in it/him in law. _ 1999 PTD 4037 _ Objection to jurisdiction can be raised at any stage. 1999 PTD 4037 Objections to jurisdiction are to be decided by adjudicating _ authority before proceeding in the matter. [1999] 80 TAX 115 (H.C.Lah.) = 1999 PTD 2910 Courts/Tribunals have inherent powers to recall orders _ independent of any statutory provisions. [PLD 1999 Lahore 462] _ Doctrine of exhaustion explained. PLD 1999 Lahore 417 CBR has no authority to place judicial interpretation on any _ provision of law. [1998] 77 TAX 127 (H.C.Lah.) CBR‟s circular holding compensation under Golden _ Handshake Scheme as taxable declared unlawful. [1998] 78 TAX 1 (H.C.Lah.) = 1998 PCTLR 1382 _ Powers of Appellate Tribunal. [1997] 75 TAX 90 (H.C.Lah.) _ Interim stay should be given once writ is admitted. [1996] 73 TAX 215 (H.C.Kar.) _ CBR instructions are binding on tax authorities [1995) 71 Tax 139 (H.C.Lah.)
97 97
97
98 98 98
100 100 101 101
Courts cannot question the wisdom of Legislature in _ enacting provision of any law. [1993] 67 TAX 195 (H.C.Lah.)
101
Presumption of irregularity with regard to official act cannot be challenged on vague allegation of mala fide. _ [1984] 50 TAX 37 (H.C.Lah.) = PLJ 1984 Lah. 423
102
11 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
134.
135. 136. 137. 138. 139.
A question not raised before the Appellate Tribunal cannot _ be raised before the High Court. [1979] 39 TAX 14 _ (H.C.Lah.); [1976] 34 TAX 199 (H.C.Lah.)
102
Provisions of the Income Tax Act can be challenged on _ Constitutional grounds. [1977] 36 TAX 8 (H.C.Lah.)
103
Only Supreme Court is competent to adjudicate between the _ governments. [1976] 34 TAX 71 (H.C.Lah.)
104
A legal plea going to the roots of the case was allowed to be _ raised at belated stage. [1976] 33 TAX 176 (H.C.Lah.)
105
Courts have inherent jurisdiction in the interest of orderly _ dispensation of justice. [1975] 32 TAX 176 (H.C.Pesh.)
105
Courts have no concern with disputable questions of _ distributive justice. [1 ITC 284 (Calcutta)]
105
INCOME / DEEMING PROVISIONS - HOW TO BE CONSTRUED
140. 141.
142. 143. 144. 145.
Scope of deeming provisions in respect of income. SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
_
1997
Widest amplitude of an entry in legislative list does not extend to tax something which is not a citizen‟s income. _ 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) Scope of definition of „tax on income‟ under the Constitution. _ 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) _ Deeming provisions - How to be construed. [1999] 80 TAX 24 (H.C.Kar.) = 1999 PTD 1655 _ Scope of deemed income. [1994] 69 TAX 38 (H.C.Kar.); _ [1989] 59 TAX 108 (H.C.Kar.) Assessment and levy of Super tax on total income of three months at the rate applicable to twelve months‟ notional income as a condition for permitting change of previous year _ by assessee was held without legal sanction. [1979] 39 TAX 140 (H.C.Lah.)
105
106 106 107 107
107
LEGISLATIVE POWERS VIS-À-VIS DOCTRINE OF REASONABLE CLASSIFICATION
146.
Distinction between direct and indirect taxes hardly exists _ now. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
DISTINCTION BETWEEN “TAX” AND “FEE”
147.
Distinction between “tax” and “fee” explained. CL. 384
_
108
PTCL 2000 109
12 Section 1
Income Tax Digest. PAGE NO
DISTINCTION BETWEEN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH FOR THE TIME BEING IS ONLY CONTINGENT
148.
The Income Tax Law makes a distinction between actual liability in praesenti and a liability de futuro which for the _ time being, is only contingent. 2001 PTD 744
109
THEORY OF READING DOWN AS A RULE OF INTERPRETATION
149.
Theory of reading down as a rule of interpretation. SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
_
1997 110
RULE OF EVIDENCE
150. 151.
152. 153. 154. 155.
A Judge cannot be compelled to accept a piece of evidence. _ 1978 SCC 446 = [1980] 41 TAX 1 (S.C.Pak) Income Tax Authorities to establish by positive evidence that _ assessee‟s accounts are unreliable. [1996] 74 TAX 227 (H.C.Lah.) _ Standard of Proof. [1994] 69 TAX 38 (H.C.Kar.) Qanoon-e-Shahadat Ordinance is applicable to Income Tax _ Ordinance, 1979. [1992] 68 TAX 89 (H.C.Lah.) _ Provisions of Evidence Act not applicable to proceedings _ under Income Tax Act. [1978] 38 TAX 181 (H.C.Lah.) _ Statement in power of attorney not proof in itself. [1 ITC 323 (Madras)
111
111 111 112 112 113
COURTS CAN STRIKE DOWN DISCRIMINATORY AND CONFISCATORY PROVISIONS OF FISCAL LAWS
156.
Courts can strike down discriminatory and confiscatory _ provisions of fiscal laws. 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.)
113
SCOPE OF VARIOUS WORDS AND EXPRESSIONS
157. 158. 159. 160.
_ “Accrue” and “arise”. 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak) _ “Accrue” and “arise”. [1974] 29 TAX 212 (S.C.Pak.) _ “Accrue” and “arise” vis-a-vis effect of book entries. [2 ITC 69 (Nagpur)] “Agricultural Income” when remains to be such in the hands _ of recipient. 1959 SCC 53 = [1959] 1 TAX (III-1) (S.C.Pak)
113 114 114 114
13 SHORT TITLE, EXTENT AND COMMENCEMENT
161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176.
177. 178. 179.
180.
Section 1
_
“Agriculture” and “agricultural purposes”. 1959 SCC 68 = [1959] 1-TAX (III-207) (S.C.Pak.) _ _ “Annual value”. [1985] 51 TAX 5 (H.C.Kar.); [5 ITC 316] _ “Assessment”. [1992] 65 TAX 176 (H.C.Kar.) = 1992 PTD 513] Meaning of expression “assessment consciously completed”. _ [2001] 83 TAX 359 (H.C.Kar.) = PTCL 2001 CL. 250 _ Definition of the word “Business”. [1977] 35 TAX 74 _ (H.C.Lah.); [1974] 30 TAX 158 (H.C.Kar.) _ “Business connection”. 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak) _ _ “Capital” and “dividend” distinguished. 1989 SCC 740 = [1997] 75 TAX 113 (S.C.Pak) _ “Case”. [1976] 34 TAX 199 (H.C.Lah.) _ “Certified copy”. [1978] 38 TAX 181 (H.C.Lah.) _ “Charitable purposes”. [1993] 67 TAX 400 (H.C.Kar.) _ “Charity” and “charitable purposes”. [1977] 36 TAX 117 (H.C.Lah.) _ “Commercial” and “commerce”. [1983] 47 TAX 214 (H.C.Kar.) “Company” and “shareholders” - Relationship between. _ 1959 SCC 53 = [1959] 1 TAX (III-1) (S.C.Pak) _ “Company limited by guarantee”. [1975] 31 TAX 114 (H.C.Kar.) _ “Complete”. [1997] 76 TAX 302 (H.C.Lah.) _ “Debt”, “Loan”, “Owe” and “due” difference between. _ _ [1992] 65 TAX 262 (S.C.Pak); [1975] 32 TAX 1 (H.C.Lah.) _ _ “Due” meaning of. [1984] 49 TAX 198 (H.C.Kar.); _ [1976] 34 TAX 151 (H.C.Kar.) _ “Default”. [1999 PTD 1302] _ “Definite Information”. 1997 SCC 1174 = [1997] 76 TAX _ 213 (S.C.Pak); [1997] 76 TAX 131 (S.C.Pak) = 1997 PTD _ 1485; 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak) _ “Discard”. 1993 SCC 1029 = (1993) 68 TAX 49 (S.C.Pak)
PAGE NO
115 115 115 116 117 117 117 118 118 118 119 120 120 121 121
122 123 123
124 125
14 Section 1
181.
182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.
199. 200. 201. 202. 203. 204.
Income Tax Digest.
_
_
“Dividend”. 1991 SCC 773; 1959 SCC 53 = [1959] 1_ TAX (III-1) (S.C.Pak); [1983] 47 TAX 132 (H.C.Pesh) _ “Employee”. [1973] 27 TAX 95 (H.C.Lah.) _ “Enduring benefit”. [1967] 15 TAX 53 (H.C.Kar.) _ “Enemy”, “enemy territory” and “aggrieved party”. 1978 SCC 453 = [1978] 38 TAX 132 (S.C.Pak) _ “Erroneous”. [1984] 49 TAX 34 (H.C.AJ&K) _ _ “Evasion” and “Avoidance” the difference. 1992 SCC 974 = [1993] 67 TAX 51 (S.C.Pak) _ “Evasion of Tax”. 1992 SCC 974 = [1993] 67 TAX 51 (S.C.Pak) _ “Execution of Contract”. [1997] 76 TAX 1 (H.C.Lah.) _ “Expenditure” & “reserves”. [1982] 46 TAX 125 (H.C.Kar.) _ “Failure”. [1973] 28 TAX 181 (H.C.Lah.) _ “Fixed capital”. [2 ITC 184 (Lahore)] _ “Fixed capital” and “circulating capital”. [1966] 13 TAX 163 (H.C.Lah.) _ “Goods” do not include immovable property. [1999] 80 TAX 262 (H.C.Lah.) _ “Goodwill”. [1974] 29 TAX 91 (H.C.Lah.) _ “Immunity”. [1997] 76 TAX 302 (H.C.Lah.) _ “Includes”. [1983] 47 TAX 132 (H.C.Pesh) _ “Including”. [1973] 27 TAX 99 (H.C.Lah.) _ “Income”. 1997 SCC 1097 = (1997) 76 TAX 5 (S.C.Pak); _ 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD _ 576 = PLD 1992 SC 562; [1969] 19 TAX 222 (H.C.Kar.) _ “Individual” & “association of persons”. 1955 SCC 13 (Federal Court) = [1960] 2-Tax (Suppl.-3) (S.C.Pak) _ “Individual” and “such individual”. [1980] 42 TAX 168 (H.C.Lah.) _ “Interest”. [1983] 47 TAX 132 (H.C.Pesh) _ “Liable”. 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak); _ [1975] 32 TAX 273 (H.C.Lah.) _ “Manufacture”. [2 ITC 129 (Rangoon)] _ “Material”. [1993] 67 TAX 311 (H.C.Kar.)
PAGE NO
126 127 127 127 128 128 129 129 129 130 130 130 130 131 131 132 132
132 134 134 134 135 135 136
15 SHORT TITLE, EXTENT AND COMMENCEMENT
205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225.
226.
“May”.
_
[1968] 18 TAX 72 (H.C.Kar.) _ “Merge” & “Merger”. [1992] 65 TAX 281 (S.C.Pak) _ “Occupation” [2 ITC 104 (Madras)] _ “Opinion”. [1974] 30 TAX 27 (H.C.Kar.) _ “Or”. [1999] 80 TAX 106 (H.C.Kar.)=1999 PTD 2901 _ “Owners”,”ownership” and “own”. 1 ITC 140 (Burma) _ “Paid”. [1980] 42 TAX 81 (H.C.Lah.) _ “Pay”. [1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak) _ “Penalty”. [1994] 70 TAX 159 (H.C.Kar.) _ “Person”. [1980] 42 TAX 59 (H.C.Lah.) _ “Previous year”. [1976] 33 TAX 99 (H.C.Kar.) _ _ “Processing”. [1988 SCC 663 = 1988 PTD 571]; [1981] 43 TAX 1 (H.C.Lah.) _ _ “Profit”. [1973] 28 TAX 155 (H.C.Kar.); [5 ITC 288 (H.C.Lah.) _ “Property”. [1980 SCC 497 = [1980] 42 TAX 1 (S.C.Pak) _ _ “Received” person cannot receive a thing from himself. 1 ITC 189 (Lahore) _ “Repeal” & “amendment”. [1966] 14 TAX 211 (H.C.Kar.) _ “Reserve”. [1990] 62 TAX 31 (H.C.Kar.) _ “Sales” and “supplies”. [1999] 80 TAX 282 (H.C.Lah.) _ “Specify”. [1973] 27 TAX 40 (H.C.Lah.) _ “Tax”. [1986] 53 TAX 93 (H.C.Lah.) “Working capital”, “current assets” and “current liability”. _ _ [1988] 57 TAX 118 (H.C.Kar.); [1988] 57 TAX 113 (H.C.Kar.) _ Word „year‟ - How to be understood. 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.)
Section 1 PAGE NO
136 136 137 137 137 138 138 138 138 139 139 139 140 140 141 141 141 142 142 142
142 145
INTERPRETATION REGARDING WORDS AND EXPRESSIONS
227.
Rule of interpretation regarding words and expressions used _ in fiscal statute. 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
145
16 Section 1
228. 229. 230.
General and special words or terms. [1990] 62 TAX 74 (S.C.Pak.)
Income Tax Digest.
_
PAGE NO
1990 SCC 759 = 146
Stable interpretation of term „assessment year‟ should be _ adopted. 1963 SCC 167= [1963] 7 TAX 442 (S.C.Pak.)
147
Law applicable on the first day of assessment year will apply and not the one in existence during the next year. _ [1988] 57 TAX 118 (H.C.Kar.) = 1988 PTD 66
147
PAST AND CLOSED PROVISION
231.
Past and closed transactions can be reopened by giving _ retroactive effect to an amending provision. 1993 SCC _ 1026 = [1993] 68 TAX 1 (S.C.Pak.); 1981 SCC 572 = [1982] 46 TAX 6 (S.C.Pak.)
147
SPECIAL LAW VS. INCOME TAX LAW
232.
233.
Scope of protection under the Protection of Economic _ Reforms Act of 1992. [2000] 82 TAX 275 (H.C.Lah.) = 2000 PTD 303 _ General Act whether overrides the provisions of specific Act _ - Held no. [1969] 19 TAX 3 (H.C.Dacca)
148 149
MACHINERY PROVISIONS
234.
Amendments in machinery section being procedural are _ applicable to pending proceedings. 1974 SCC 416 = [1974] 30 TAX 138 (S.C.Pak.)
150
Machinery provisions cannot be construed to go beyond the _ spirit of law. [2001] 83 TAX 1 (H.C.Lah.)
151
Machinery provisions of fiscal law should be construed so as _ not to destroy recovery mechanism. [2000] 82 TAX 42 (H.C.Lah.)
151
237.
Rule of liberal construction of machinery provisions.
153
238.
Basic rules to construe charging and machinery provisions. _ [1986] 54 TAX 1 (H.C.Kar.) = 1986 PTD 316
153
235. 236.
LIMITATION PERIOD CANNOT BE EXTENDED RETROSPECTIVELY
239.
Limitation period extended retrospectively by legislation _ held not valid. 1969 SCC 354 = [1970] 21 TAX 62 (S.C.Pak.)
153
17 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
RULES OF CONSTRUCTION
240. 241. 242.
243. 244. 245. 246. 247. 248.
249.
250. 251. 252. 253. 254.
255.
_
FISCAL STATUTES
General and specific words. TAX 74 (S.C.Pak)
_
1990 SCC 759 = [1990] 62
Rule of harmonious construction of statutes. 228 = [1965] 12 TAX 95 (S.C.Pak)
_
154 1965 SCC
An equitable construction of a fiscal statute is not _ permissible. 1959 SCC 68 = (1959) 1-TAX (III-207) (S.C.Pak.) _ Strict rule of fiscal statutes emphasised. [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497 _ Rule cannot override the statutory law. [1999] 80 TAX 62 (H.C.Qta.) Words in a statutory instrument should be construed in _ their ordinary sense. [1992] 65 TAX 80 (H.C.Lah.) _ Rule of harmonious construction of statutes. [1990] 62 TAX 119 (H.C.Kar.)
154
154 155 155 155 156
Courts while interpreting a statute must adhere to the plain _ meaning of the words. [1986] 53 TAX 93 (H.C.Lah.)
156
Meaning of doubtful words to be gathered by reference to _ words associated with them. [1981] 43 TAX 1 (H.C.Lah.)
156
Inapt and inaccurate phraseology of draftsman cannot _ nullify a provision made by legislature. [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797
156
An equitable construction of a fiscal statute is not _ permissible. [1977] 35 TAX 169 (H.C.Lah.) _ Fiscal statutes should be strictly construed. [1976] 34 TAX 151 (H.C.Kar.) = PLD 1976 Kar. 1030 Construction of law should not lead to startling results. _ [1976] 34 TAX 54 (H.C.Lah.) _ Rule of harmonious construction of statutes. [1974] 29 TAX 165 (H.C.Lah.) Words in statutes cannot be treated as surplusage or _ redundant. 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 _ Punctuation marks and construction of statutes. [14 ILR _ _ PC 365]; [1944] 12 ITR 393 (Lahore); [1 ITC 244 (Madras)]
157 157 158 159
159
159
18 Section 1
256. 257. 258. 259. 260.
261. 262. 263.
Income Tax Digest.
_
Tax can only be imposed by clear words of the Act. [1 ITC 189 (Lahore)] _ Strict rule of interpretation to tax a subject. [1 ITC 172 (Madras)] Subject can only be taxed if statute expressly so provides. _ [1 ITC 161 (Burma)] _ Court must stick to the letter of the statute. [1 ITC 161 (Burma)] Subject taxable if within letter of law, not taxable if not _ within letter of law through within the spirit. [1 ITC 37 (Madras)] _ Practice as a guide to construction. 1 ITC 37 (Madras)
PAGE NO
160 160 160 161
162 162
Practice under repealed Act as an aid for construction of _ later Act. [1 ITC 37 (Madras)]
163
Long course of decisions determining construction of a repealed statute may be an aid in the construction of a new statute passed in the same terms as the former, but a single decision not. – [1 ITC 29 (Patna)]
163
_ RULE OF INTERPRETATION TWO EQUAL POSSIBLE _ INTERPRETATIONS EXEMPTION CLAUSES
264. 265.
266. 267. 268.
Exemption clauses provided under industrial incentives _ should be construed liberally. [2000] 82 TAX 3 (S.C.Pak) _ Exemption clauses vis-a-vis rules of interpretation. 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828; [1973] 28 TAX 168 (H.C.Lah.) _ Exemption clauses are to be construed strictly. [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497
164
164 165
Rule of benefit to subject where two interpretations are _ possible. [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180
165
Two equal possible interpretations of exemption clause one _ favouring the revenue to be adopted. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
165
RULE OF LIMITATION
269. 270.
Claim for refund of money paid under mistake is not barred _ by time. [1998] 77 TAX 172 (S.C.Pak)
166
The provisions of Limitation Act are mandatory and cannot _ be waived. [1995] 71 TAX 280 (H.C.Kar.)
167
19 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
271. 272.
273. 274. 275.
276. 277.
278.
Time limitation for filing appeal u/s 136 vis-a-vis section 5 _ of Limitation Act. [1999] 79 TAX 161 (H.C.Qut.) _ Period of Limitation Factors to be considered while _ computing period of limitation. [1993] 68 TAX 171 (H.C.Kar.) A reference application made beyond the prescribed time _ should be dismissed. [1991) 64 Tax 31 (H.C.Kar.) _ Delay of each day must be explained. [1979] 40 TAX 60 (H.C.Kar.)
167
168 168 168
Time spent in obtaining a certified copy should be excluded _ while computing period of limitation. [1978] 38 TAX 181 (H.C.Lah.)
168
Application of provisions of Limitation Act to proceedings _ under Income Tax Laws. [1976] 34 TAX 10 (H.C.Lah.)
169
Court holidays falling on the day of expiry of the prescribed period of limitation should be excluded in counting the _ period of limitation. [1974] 29 TAX 238 (H.C.Lah.)
169
Time required for obtaining certified copy should extend the _ period of limitation. [1974] 29 TAX 238 (H.C.Lah.)
169
REDUNDANCY SHOULD NOT BE READILY ASSIGNED BY COURTS
279. 280.
Redundancy should not be readily assigned by courts. _ [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280
170
Amendment in law implies necessarily an intention on the part of legislature to depart from earlier law in some respects redundancy cannot be attributed to the legislature. _ [1982] 46 TAX 143 (H.C.Lah.)
170
INTERPRETATION FAVOURABLE TO ASSESSEE IS TO BE ADOPTED
281. 282.
Interpretation favourable to assessee is to be adopted. _ [2000] 81 TAX 229 (H.C.Kar.) _ Exemption cannot be allowed if not claimed. [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554
RULES WHEN LANGUAGE IS AMBIGUOUS
283. 284.
Rule of interpretation of ambiguous words 111
_
170 170
PLD 2000 S.C.
Proviso cannot extend the meaning of the enacting part. _ [1999] 79 TAX 428 (S.C.Pak.)
171 172
20 Section 1
285. 286.
287. 288. 289. 290.
291.
292. 293.
294. 295.
296.
297. 298.
299.
Effect of non-obstante clause. = 1997 PTD 1693
Income Tax Digest.
_
PAGE NO
[1997] 76 TAX 213 (S.C.Pak)
If a statute is capable of two interpretations then the one _ which is favourable to the subject be adopted. 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak) Doubt or ambiguity in language should go in favour of _ taxpayer [2001] 83 TAX 489 (H.C.Lah.) _ Court must confine itself to language of law. [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280
172
172 173 173
Ambiguity in language should be resolved in the favour of _ taxpayer. [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280
174
Statutes should be interpreted strictly in accordance with _ letter of law. [2000] 81 TAX 88 (H.C.Lah.) = 1999 PTD 4138
174
In case of two equally reasonable interpretations, one strict and other beneficial, then the latter should be preferred. _ 1999 PTD 4138 (H.C.Lah.) _ Benefit of ambiguity should be given to the assessee. [1994] 69 TAX 79 (H.C.Kar.)
174
If a statute is capable of two interpretations then the one _ which is favourable to the subject be adopted. [1996] 74 _ _ TAX 9 (H.C.Lah.); [1991] 64 TAX 34 (H.C.Kar.); [1989] _ 59 TAX 79 (H.C.Kar.); [1985] 51 TAX 66 (H.C.Kar.) _ Benefit of ambiguity should be given to the assessee. [1977] 35 TAX 169 (H.C.Lah.)
175
In case of ambiguity in language, statement of objects _ and reason can be relied upon. [1962] 6 TAX 1 (H.C.Lah.) _ = 1962 PTD 625 = 1962 PLD 809; 5 ITC 275 (All.)
175
176
176
Literal rule can only be deviated in case of ambiguity in language; otherwise courts should adhere to plain words. _ [5 ITC 159 (H.C.Lah.) _ Inconsistencies are in-built in income tax. [5 ITC 8 (H.C.Lah.)
176
A new and added obligation not formerly cast upon the taxpayer cannot be extracted uut of ambiguity of the _ provisions of the Act [1 ITC 363 (Calcutta)] _ General Language not infrequently intended sub modo. [1 ITC 284 (Calcutta)]
177
176
177
21 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
300. 301. 302. 303.
Fiscal statutes should be interpreted according to their _ natural meanings. [1 ITC 161 (Burma)] _ Benefit of doubt is the right of taxpayer. [1 ITC 161 (Burma)] _ Practice not a guide where language of statute is clear. [1 ITC 54 (Calcutta)] _ No taxation except by express words. 1 ITC 37 (Mad.)
178 178 178 180
NON OBSTANTE PROVISION OVERRIDES CONFLICTING PROVISION
304.
Non obstante provision overrides conflicting provision. _ [2000] 82 TAX 73 (H.C.Kar.) = [2000] 81 TAX 249 (H.C.Kar.) = 2000 PTD 254
180
DOCTRINE OF BINDING PRECEDENT (STARE DECISIS)
305.
306. 307. 308.
309. 310.
311. 312. 313.
Division bench of a High Court cannot disagree with another Division Bench without reference to a larger bench or should leave the matter to be decided by Supreme Court. _ [PLD 1995 S.C.Pak 423]
181
Cautious approach is necessary when adopting foreign case_ law. 1981 SCC 546 = [1981] 44 TAX 40 (S.C.Pak.)
181
English decisions in pari materia and their binding value. _ [PLD 1963 S.C.Pak 296]
181
Pre-partition judgements are binding unless overruled by _ Pakistani courts. 1955 SCC 1 = [1960] 2-TAX (Suppl.-29) (S.C.Pak)
182
Per incuriam judgement of even the highest court is not _ binding. [1995 CLC 1435 (H.C.Kar.)
182
Reliance on foreign cases in the presence of contrary view _ taken by Pakistani courts is strongly disapproved. [1989] 60 TAX 45 (H.C.Kar.) = PTCL 1989 CL 660 _ Principles of “stare decisis”. [1981] 43 TAX 100 (H.C.Lah.)
182 182
Binding judgements and conduct of different benches. _ _ [PLD 1960 Lahore 1962]; [PLD 1960 Lahore 687]
183
English decisions in pari materia and their binding value. _ [1 ITC 133 (Madras)
183
22 Section 1
Income Tax Digest. PAGE NO
DOCTRINE OF MERGER
314.
315.
_ Doctrine of Merger. [1992 SCC 910 = PLD 1992 SC 549]; _ _ [1991 SCC 805 = 1992 SCMR 523]; [1985] 51 TAX 83 (H.C.Kar.)
184
On appeal original order ceases to exists and merges itself in _ the appellate order [1992] 65 TAX 205 (H.C.Lah.)
185
LEGAL MAXIMS
316.
317. 318.
319. 320. 321. 322. 323. 324. 325.
_ Audi alteram partem. 1964 SCC 176 = [1964] 10 TAX 49 _ (S.C.Pak); [1999] 79 TAX 605 (H.C.Kar.) = 1999 PTD _ _ 1358]; [1994 SCMR 2232]; [1979] 39 TAX 1 (H.C.Lah.); _ [AIR 1920 Lahore 247] _ Casus Omissus. [AIR 1933 PC 63, 65] _ Ejusdem generis - Meaning of. PLD 2000 S.C. 111; _ [1997] 75 TAX 1 (H.C.Lah.) = 1997 PTD 605 = PTCL 1997 CL 29] _ Ex abundanti cautela. [1935] 3 ITR 103 (Lah.); [1925] 9 TC 445 (HL) _ Generalia specialibus non derogant. [1967 SCC 289 = _ [1967] 16 TAX 81 (S.C.Pak); 1 ITC 284 (Cal.) _ Mens rea. [PLD 1967 SC 1] _ Noscitur a Sociis. [1994] 70 TAX 11 (H.C.Lah.) _ No one can be judge in his own cause. [PLD 1999 SC 1126] Things should be done as per law or not be done at all. _ [PLD 1999 Lahore 446] _ Ut res valeat quam pereat. [1940] 8 ITR 442 (PC)
185 186
186 187 188 188 188 189 189 189
DOCTRINE OF RES JUDICATA/ESTOPPEL
326. 327.
328. 329.
_ _ Principle of res judicata not applicable. 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak) Doctrine of res judicata - not applicable to income-tax _ proceedings. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ Income tax officer - when not bound by res judicata. [1965 SCC 212 = PLD 1965 SC 171] Principles of waiver or estoppel do not apply against a _ provision of law. [1999] 80 TAX 89 (H.C.Kar.) = [1999 PTD 2895
190
190 191
192
23 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
330.
331. 332. 333.
Doctrine of promissory estoppel could not be invoked against _ the legislature and the laws framed by it. [1998] 78 TAX 168 (H.C.Lah.) _ Equitable doctrine of estoppel. [1990] 62 TAX 91 (H.C.Lah.) _ Principle of res judicata and estoppel. [1966) 14 TAX 161 (H.C.Kar.) Executive actions are not excluded from the operation of _ promissory estoppel. [1992] 65 TAX 268 (H.C.Kar.)
192 193 194 194
NATURAL JUSTICE/DUTIES OF COURT
334.
335.
336. 337.
338. 339.
340.
341.
342. 343. 344.
Affording of an opportunity is a prerequisite for taking a _ penal action. 1969 SCC 350 = [1975] 31 TAX 101 (S.C.Pak) An order affecting the rights of a party cannot be passed _ without an opportunity of hearing to that party. [1964 SCC 176 = [1964] 10 TAX 49 (S.C.Pak) _ Duties of courts in administration of justice. [1990] 62 TAX 119 (H.C.Kar.)
194
195 195
No adverse order should be passed against a party without _ affording an opportunity to hear the case. [1984] 49 TAX 18 (H.C.Kar.)
196
Justice should not only be done but must also appear to _ have been done. [1980] 42 TAX 47 (H.C.Lah.)
196
Principles of natural justice are part and parcel of every statute unless there is specific provision in a particular _ statute to the contrary. [1969] 19 TAX 198 (H.C.Kar.)
196
Principles of natural justice cannot be invoked in deciding a _ legal issue with reference to the statutory provision. [1968] 18 TAX 72 (H.C.Kar.)
196
The court must consider the intention and not merely the _ form, while examining a document. [1976] 34 TAX 54 (H.C.Lah.) _ Judicious exercise of discretion. [1973] 27 TAX 212 (H.C.Lah.)
197 197
Article 4 of Constitution of Pakistan 1973 vis-a-vis “due _ process of law”. [PLD 1999 S.C. 1126]
197
Public power and administrative discretion ought to be _ exercised fairly. [PLD 1999 Kar. 433]
198
24 Section 1
Income Tax Digest. PAGE NO
DOCTRINE OF MUTUALITY
345.
Five-point criteria for applying “doctrine of mutuality”. _ [1959] 1-TAX (III-150) (H.C.Lah.) =1959 PTD 639 =1959 PLD 627
198
NON-APPLICATION OF FEDERAL TAX LAWS TO TRIBAL AREAS
346.
_ Non-application of Federal Tax Laws to tribal areas etc. [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954
199
RULES RELATING TO INTERPRETATION OF AMENDING PROVISIONS EXPLAINED
347. 348.
Rules relating to interpretation of amending provisions _ explained. [1979] 40 TAX 116 (H.C.Kar.) = PLD 1979 591
200
Scope and import of incorporated provisions of law _ explained. [1977] 35 TAX 42 (H.C.Lah.)
200
PRINCIPLES GOVERNING INTERPRETATION OF FINANCIAL LIABILITIES
349.
Principles governing interpretation of financial liabilities. _ [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797
201
INTERPRETATION LEADING TO DESTRUCTIVE ENDS SHOULD BE AVOIDED BY COURTS
350.
Interpretation leading to destructive ends should be avoided _ by Courts. [1976] 34 TAX 54 (H.C.Lah.)
202
TERMS AND PHRASES USED IN ONE STATUTE
351.
Phrases used in one statute borrowed as aid in support of the interpretation of a different statute meant for a different purpose and dealing with a wholly different subject matter _ is not always safe. [1975] 32 TAX 273 (H.C.Lah.)
204
MARGINAL NOTES TO THE SECTION OF AN ACT CANNOT BE REFERRED TO FOR THE PURPOSE OF CONSTRUING THE ACT
352.
Marginal notes to the section of an Act cannot be referred to _ for the purpose of construing the Act. [1976] 33 TAX 258 (H.C.Lah.)
205
25 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
PRINCIPLE OF LITERAL INTERPRETATION
353.
354.
Provisions should be interpretated in accordance with the _ plain meaning of the language used therein. [1966] 13 TAX 145 (H.C.Dacca) _ Statute should be given its ordinary meaning. [1963] 7 TAX 113 (H.C.Dacca)=1963 PTD 161 =1963 PLD 373
206 206
DOCTRINE OF FAVOURABLE INTERPRETATION
355.
Doctrine of favourable interpretation applies to charging _ and not to machinery provisions. [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311
206
DEPARTMENT CAN GO BEYOND A TRANSACTION
356.
Department can go beyond a transaction. (H.C.Lah.)
_
1962 PTD 603 207
APPLICATION OF TAX RATES THROUGH A FINANCE ACT EXPLAINED
357.
Application of tax rates through a Finance Act explained. _ [1961] 4 TAX 135 (H.C.Dacca) = 1961 PTD 1110 = 1962 PLD 104
207
ACT IS TO BE READ AS A WHOLE
358.
_ Act is to be read as a whole. [1960] 2-TAX (III-474) (H.C.Dacca) = 1960 PTD 727 = 1960 PLD 535
STATUTE SHOULD BE READ AS A WHOLE
359.
Statute should be read as a whole. (H.C.Dacca)
_
208
1960 PTD 574 208
SECTION VS. RULE
360.
Rules cannot be called in aid to interpret sections of the Act. In case of discrepancy in language of section and rules, _ section is to prevail. [1959] 1-TAX (III-407) (H.C.Kar.) = 1959 PTD 707 =1959 PLD 539
PRINCIPLE OF APPROBATE AND REPROBATE
361.
Principle of approbate and reprobate explained. TAX 131 (H.C.Lah.)
_
209
[2000] 82 210
26 Section 1
Income Tax Digest. PAGE NO
HIGH COURT IS COMPETENT TO ENTERTAIN WRIT WHERE INTERPRETATION OF LAW IS INVOLVED
362.
High Court is competent to entertain writ where _ interpretation of law is involved. [2000] 81 TAX 390 (H.C.Lah.)
211
GENERAL RULES IN RESPECT OF WRIT PETITION
363. 364. 365.
366.
367. 368.
369.
370. 371. 372.
373.
Petition challenging order under section 53 held to be _ maintainable. [2001] 83 TAX 119 (S.C.Pak.)
211
Conditions for maintainability of writ petitions explained. _ 1993 SCC 1022 = [1993] 68 TAX 35 (S.C.Pak.)
211
Constitutional jurisdiction only in extraordinary _ circumstances. 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.)
212
Writ jurisdiction can be invoked in cases of mala fide action _ by the departmental authorities. 1989 SCC 715 = [1989] 60 TAX 83 (S.C.Pak.)
213
Extraordinary jurisdiction is not necessarily a speedy remedy.
213
The assessee has other options like filing a complaint with _ Ombudsman. 1988 SCC 710 = [1989] 60 TAX 52 (S.C.Pak.)
213
Order passed without giving opportunity of being heard is _ not sustainable. 1969 SCC 319 = [1975] 31 TAX 94 (S.C.Pak.) _ No time limitation for illegal orders. [2000] 82 TAX 135 (H.C.Lah.)
213 214
Remedies not availed disentitles the party from relief if _ constitutional petition also fails. 2000 PTD 306
214
High Court can exercise constitutional jurisdiction in a case where alternate remedy is only illusory in its nature and on _ the face of order it is clearly misapplication of law. [1999] 80 TAX 262 (H.C.Lah.)
214
Writs held to be maintainable vis-a-vis doctrine of _ _ exhaustion as no bar. PLD 1999 Lahore 417; PTCL 1999 _ CL. 359 = 1999 SCMR 1072; [1999] 79 TAX 255 _ (H.C.Kar.) = 1998 PTD 3923]; [1997] 75 TAX 261 _ (H.C.Lah.) = 1997 PTD 821; [1994] 70 TAX 272 _ _ (H.C.Kar.); [1989] 59 TAX 115 (H.C.Kar.); [1988] 57
27 SHORT TITLE, EXTENT AND COMMENCEMENT
_
374.
375. 376.
377.
378.
379.
380.
381. 382.
383. 384. 385.
Section 1 PAGE NO
TAX 14 (H.C.A.J&K); [1981] 44 TAX 59 (H.C.Kar.); _ [1980] 41 TAX 60 (H.C.Kar.)
215
Writ cannot be converted into appeal under section 136. _ [1997] 76 TAX 238 (H.C.Lah.)= 1998 PCTLR 440 = 1998 PTD 874
219
Interim relief in the form of release of goods on furnishing of _ indemnity bond held. [1996] 73 TAX 215 (H.C.Kar.)
219
Constitutional jurisdiction cannot be invoked to enforce the rights which were not in existence at the time when the _ offending enactments were passed. [1996] 73 TAX 85 (H.C.Queeta)
221
Statutory period for filing revision petition long expired, petitioner could not be declared non-suit only on the ground _ of maintainability. [1995] 72 TAX 223 (H.C.Kar.)
221
If remedy provided under the law is not efficacious then _ speedy petition is maintainable. [1995] 72 TAX 218 (H.C.Lah.)
222
Writ petition admitted to regular hearing to consider the _ vires of legislation, demand could be stayed. [1994] 70 TAX 272 (H.C.Kar.)
222
Exemption of assessee from payment of Income Tax was refused by the Income Tax Authorities - High Court set aside the order of refusal of exemption and remitted the cases of assessee for decision according to law with the consent of _ parties and with a view to avoid delay. [1993] 68 TAX 173 (H.C.Lah.)
223
Stay cannot be granted without notice to the Law Officer of _ State. [1993] 68 TAX 171 (H.C.Kar.)
223
Extra-ordinary jurisdiction of the High Court could not be invoked without first availing the remedies available under _ the relevant law. [1992] 66 TAX 226 (H.C.AJ&K) _ Stay granted could not be given beyond six months. [1987) 56 TAX 120 (H.C.Kar.) _ High Court can grant stay of recovery of tax. [1987] 56 TAX 78 (H.C.Kar.) Exercise of jurisdiction of High Court is confined only to consideration-whether authority had acted with or without _ jurisdiction. [1984] 50 TAX 37 (H.C.Lah.) = PLJ 1984 Lah. 423
224 224 224
225
28 Section 1
Income Tax Digest. PAGE NO
386.
387.
388. 389.
Where alternate and equally efficacious remedy is available, the petitioner is not entitled to invoke extraordinary jurisdiction of the High Court by way of writ petition. _ [1981] 43 TAX 92 (H.C.Kar.) = 1981 PTD 53
225
Provisions of the Income Tax can be challenged on constitutional grounds inspite of alternate remedies. _ [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797
226
Where there has been suppression of material/acts, writ of _ prohibition cannot be issued. [1950] 18 ITR 618 (Punj.)
226
In writ, court cannot assume jurisdiction of income _ tax department. [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554
227
WRIT HELD MAINTAINABLE
390.
391. 392.
393. 394.
395.
396.
397.
Writ is maintainable where order is illegal notwithstanding _ the availability of alternate remedy. [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061
227
Writ is the appropriate remedy where order is void and _ without lawful authority. [1999] 79 TAX 28 (H.C.Lah.)
228
Where a finding of fact not based on evidence or where material evidence ignored, reference under section 136 is _ maintainable. [1996] 74 TAX 141 (H.C.AJ&K)
229
In case of writ, political victimization _ maintainable. [1996] 73 TAX 215 (H.C.Kar.)
229
petition
is
In cases involving fiscal rights even if alternate, adequate and effective remedies available to the petitioner, High Court can step in to prevent excess, if any, committed by _ public functionaries. [1995] 72 TAX 81 (H.C.Kar.)
231
Writ held maintainable even during the pendency of appeals when demand of taxes was huge and ran into millions and the department was pressing hard for its recovery but orders passed were against the law as held earlier by courts, _ though for different years. [1990] 62 TAX 98 (H.C.Kar.)
232
Writ maintainable provided order is unlawful although _ alternate remedy available to the petitioner. [1985] 51 TAX 157 (H.C.AJ&K)
233
Reference application pending disposal before the High Court held not a bar to maintainability of constitutional
29 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
398.
399.
400.
401.
402.
403.
404.
405.
petition challenging vires of law taxing “free reserve?‟ to _ Income Tax. [1984] 49 TAX 76 (H.C.Kar.)
234
Constitutional petition before High Court challenging vires of taxing “free reserves” to Income Tax held cannot be dismissed on ground of laches in view of nature of relief _ claimed and the circumstances of the case. [1984] 49 TAX 76 (H.C.Kar.)
235
Where alternate remedy available but not efficacious and statutory functionary acting mala-fide or in a partial, unjust and oppressive manner, High Court in exercise of its writ jurisdiction has power to grant relief to the aggrieved _ party. [1983] 47 TAX 162 (H.C.Kar.)
236
Order passed without lawful authority, partial, unjust and mala-fide; held assessee can invoke the extra-ordinary jurisdiction of the High Court even if alternate remedy is _ available by way of appeal, etc. [1981] 44 TAX 93 (H.C.Kar.)
236
Writ petition in the High Court challenging jurisdiction held _ competent even during the pending of appeal. [1980] 42 TAX 59 (H.C.Lah.)
237
In the presence of assessee‟s objection to exercise of jurisdiction on ground of bias, assessment was made without taking decision on the specific objection; held that even existence of alternate remedy would not operate to debar the assessee from invoking extraordinary jurisdiction _ of High Court. [1980] 42 TAX 47 (H.C.Lah.)
238
Order passed by a fiscal authority within jurisdiction but partial, unjust and oppressive held High Court is empowered to grant relief to aggrived party in writ _ jurisdiction. [1980] 41 TAX 25 (H.C.Kar.) = 1979 PTD 461
238
Where fact for determination was whether receipts supported by payment certificates produced by assessee were genuine and correct and claim was rejected without application of mind to this aspect, held High Court competent to interfere _ in its constitutional jurisdiction. [1976] 34 TAX 31 (H.C.Lah.)
239
If impugned action is patently without jurisdiction, writ jurisdiction of the High Court can be invoked even if _ alternate remedy is available. [1976] 34 TAX 1 (H.C.Kar.) = PLD 1976 Kar. 552
239
30 Section 1
Income Tax Digest. PAGE NO
406.
407.
408.
409.
410.
If assessment is suffering from lack of jurisdiction, writ jurisdiction of the High Court can be invoked, without _ availing of remedies available under the law. [1975] 31 TAX 114 (H.C.Kar.)
240
Writ is maintainable where action is malafide or without jurisdiction or vires of law is challenged Gulistan Textile Mills Ltd. v. CBR – [1994] 70 TAX 272 (H.C.Kar.)
241
Writ admitted during the pendency of appeals held _ maintainable. [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311
241
Writ maintainable in case where forums provided under the _ relevant statute may not be just and proper. 1999 PTD 4037
241
Writ is maintainable where notice is without lawful jurisdiction – [1990] 62 TAX 8 (H.C.Kar.) = 1990 PTD 889
242
WRIT HELD NOT MAINTAINABLE
411.
412.
413.
414.
415.
416.
Writ petition is not maintainable in the presence of adequate _ alternate remedy under the statute. PTCL 2000 CL. 316 (S.C.Pak)
242
After availing normal remedy switching over to constitutional petition is not maintainable in the absence of _ justifiable reason. 1993 SCC 1080 = [1993] 68 TAX 176 (S.C.Pak.)
242
Where adequate alternate remedy is available writ under _ Article 199 is not maintainable. 1988 SCC 710 = [1989] 60 TAX 52 (S.C.Pak.)
243
If adequate remedy is not exhausted, writ jurisdiction _ cannot be invoked. 1968 SCC 316 = [1968] 18 TAX 1 (S.C.Pak.) _ Circumstance where writ is not maintainable. [1993] 68 _ _ TAX 145 (S.C.Pak); [1993] 68 TAX 132 (S.C.AJ&K) _ 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak); 1989 SCC _ 715 = [1989] 60 TAX 83 (S.C.Pak); 1972 SCC 400 = [1974] _ 29 TAX 208 (S.C.Pak.); 1968 SCC 313 = [1969] 19 TAX 97 _ _ (S.C.Pak.); [2000] 82 TAX 156 (H.C.Lah.); [2000] 82 TAX _ _ 131 (H.C.Lah.); [2000] 82 TAX 42 (H.C.Lah.); [2000] 81 TAX 224 (H.C.Lah.) = 2000 PTD 263; Writ held not maintainable where disputed question of fact _ involved. [2001] 83 TAX 17 (H.C.Lah.)
243
243 248
31 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
417.
418.
419. 420.
421. 422. 423.
424.
425. 426.
427.
428. 429.
In presence of arbitration clause in the agreement executed between the parties, writ petition is not maintainable. _ [2001] 83 TAX 397 (H.C.Lah.)
249
Writ is not maintainable where parties themselves agreed _ for arbitration in bilateral contracts. [2000] 81 TAX 60 (H.C.Lah.)
249
Writ not maintainable in case where no right to appeal or _ reference is provided in law itself. 2000 PTD 306
250
Writ petition not maintainable when remedy of seeking reference under section 136 of the unamended provisions of Income Tax Ordinance is available to the assessee at the _ relevant time. [1999] 80 TAX 273 (H.C.Lah.) = NLR 1999 TAX 170
250
Where the petitioner conceals material facts, writ is not _ maintainable. 1999 PCTLR 387
251
Writ petition is not maintainable where appeal is pending _ before any authority. [1999] 80 TAX 9 (H.C.Lah.)
251
In the presence of statutory remedy under the Income Tax Ordinance approach to the High Court through a writ _ petition is disapproved. [1997] 76 TAX 138 (H.C.Pesh) = 1997 PTD 1805
252
In case of availing the remedy of appeal writ is not _ maintainable. [1997] 76 TAX 110 (H.C.Lah.) = 1997 PTD 1104= 1998 PCTLR 520 (H.C.Lah.)
252
Where alternate statutory remedies available, writ petition _ is not maintainable. [1997] 75 TAX 259 (H.C.Lah.)
253
Assessing officer did not give appeal effect being challenged by the department. Assessee cannot be allowed to bypass the _ available adequate remedy. [1997] 75 TAX 117 (H.C.Pesh.) = 1997 PTD 7
253
Selection of return for audit - remedy sought through _ constitutional jurisdiction held not maintainable. [1996] 74 TAX 215 (H.C.Lah.)
254
Writ is not maintainable where facts are controversial. _ [1996] 74 TAX 21 (H.C.Lah.)
254
Legality and correctness of a factual controvery could not be _ resolved in constitutional jurisdiction. [1996] 73 TAX 106 (H.C.Lah.)
254
32 Section 1
Income Tax Digest. PAGE NO
430. 431. 432.
433. 434.
435.
436.
437.
438.
439.
440.
441.
442.
High Court cannot go in the domain of factual controversy. _ [1995] 72 TAX 274 (H.C.Pesh.)
255
Writ petition not maintainable where adequate and _ alternate remedy available. [1995] 72 TAX 1 (H.C.Lah.)
255
Factual inquiry involving controversial facts cannot be undertaken by the High Court in exercise of its _ constitutional jurisdiction. [1995] 71 TAX 216 (H.C.Lah.)
256
Writ cannot be entertained where adequate remedy is _ available. [1993] 68 TAX 74 (H.C.Lah.)
256
If Income Tax Officer‟s action is jurisdictional, writ _ jurisdiction of the High Court cannot be invoked. [1989] 59 TAX 86 (H.C.Kar.)
257
Issue being controversial involving inquiry - held not a fit case to be determined under supervisory constitutional _ jurisdiction of High Court. [1987] 56 TAX 24 (H.C.Kar.)
257
Assessee cannot avail remedy of constitutional petition before High Court, being dissatisfied with the notices. _ [1986] 54 TAX 1 (H.C.Kar.) = 1986 PTD 316
258
High Court cannot examine the question of controversial _ facts in constitutional jurisdiction. [1984] 49 TAX 76 (H.C.Kar.)
259
Remedies available under the law should be exhausted before invoking the extraordinary jurisdiction of the High _ Court. [1982] 45 TAX 17 (H.C.Kar.) = 1981 PTD 217
260
If question of jurisdiction of the assessing officer is not _ challenged, writ petition is not maintainable. [1982] 45 TAX 2 (H.C.Lah.)
260
Where appeal was dismissed by Appellate authorities on ground of limitation and this order was in accordance with law, held writ petition against such order was not _ competent. [1975] 31 TAX 153 (H.C.Lah.)
261
Writ not maintainable in the presence of adequate and _ efficacious alternate remedy. [1975] 31 TAX 105 (H.C.Lah.)
262
Writ is not maintainable where adequate alternate remedy _ _ is available. [1973] 27 TAX 51 (H.C.Lah.); [1972] 25 _ TAX 145 (H.C.Lah.); [1972] 25 TAX 140 (H.C.Lah.)
262
MISCELLANEOUS
33 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1 PAGE NO
443.
444.
445.
446. 447. 448. 449.
450. 451. 452.
453. 454. 455.
456. 457.
458.
Islamic jurisprudence and rules of law are equally _ applicable to fiscal laws. [1991 SCC 773 = PLD 1991 SC 368
263
Islamic jurisprudence and rules of law are equally _ applicable to fiscal laws. 1989 SCC 718 = [1989] 60 TAX 106 (S.C.Pak)
263
The assessing officer cannot lay down in their judgment a _ rule which goes against Islamic Law. 1989 SCC 718 = [1989] 60 TAX 106 (S.C.Pak) _ Remedy to be sought within four corners of Act. [1973 SCC 403 = [1974] 29 Tax 190 (S.C.Pak) Power to make rules is subject to certain limitations. _ [1998] 78 TAX 217 (H.C.Lah.) = 1998 PTD 3900] _ Discrimination in rule-making is ultra vires. [1998] 78 TAX 217 (H.C.Lah.) = 1998 PTD 3900] Civil suit does not lie against tax authorities unless order is _ malafide or illegal. [1998] 78 TAX 119 (H.C.Kar.) = 1998 PTD 2884 _ Basis of taxation in Islam. [1998] 77 TAX 1 (H.C.AJ&K) If notice is prima facie defective and error is incurable, the _ entire proceedings are null and void. [1997 PTD 47] Provisions of Protection of Economic Reforms Act, 1992 overrides Income Tax Law to the extent protections are _ provided in the former enactment. [1997] 76 TAX 302 (H.C.Lah.) _ Powers of CBR Territorial & Administrative Jurisdiction. _ [1996] 74 TAX 89 (H.C.Lah.) _ Budget speech has no legal sanctity. [1996] 73 TAX 85 (H.C.Quetta) Government employees working in non-taxable territories _ are liable to pay income tax. [1995] 71 TAX 45 (H.C.Quetta) _ The de facto doctrine. [1994] 69 TAX 109 (S.C.AJ&K)
264 265 265 266
266 266 267
268 269 270
271 271
A notification purporting to impose a new liability or _ obligation cannot operate retrospectively. [1993] 67 TAX 395 (H.C.Lah.)
271
Only natural/legal persons have vested rights and not the _ government/state. [1988] 57 TAX 46 (H.C.Kar.)
272
34 Section 1
Income Tax Digest. PAGE NO
459.
460.
It is the duty of the legislature and not of a court to save _ income from escaping assessment. [1985] 51 TAX 66 (H.C.Kar.)
272
Proceedings under the Income Tax Act are judicial _ proceedings. [1969] 19 TAX 198 (H.C.Kar.)
272
35 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
Section 1 Short title, extent and commencement
GENERAL PRINCIPLES OF TAXATION/RULES OF INTERPRETATION LEGISLATIVE POWERS
Elahi Cotton Mills Ltd. & others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 1.
Legislature enjoys wide powers in framing fiscal laws.
That in view of wide variety of diverse economic criteria, which are to be considered for the formulation of a fiscal policy, Legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events, etc. for taxation. But with all this latitude certain irreducible desiderata of equality shall govern classification for differential treatment in taxation laws as well. That Courts while interpreting laws relating to economic activities view the same with greater latitude than the laws relating to civil rights such as freedom of speech, religion etc. keeping in view the complexity of economic problems which do not admit of solution through any doctrinaire or strait jacket formula as pointed out by Holmes J. in one of his judgments. That Frankfurter J. in Morey v. Doud (1957) U.S. 457 has remarked that „in the utilities, tax and economic regulation cases, there are good reasons for judicial self restraint if not judicial deference to the legislative judgment‟. 2.
Taxing rights of legislature are unlimited as long as these are not confiscatory.
That the taxing power is unlimited as long as it does not amount to confiscation and that the Legislature does not have the power to tax to the point of confiscation. That the word „reasonable‟ is a relative generic term difficult of adequate definition. It inter alia connotes agreeable to reason;
36 Section 1
Income Tax Digest.
conformable to reason; having the faculty of reason; rational; thinking, speaking, or acting rationally; or according to the dictates of reason; sensible; just; proper and equitable or to act within the constitutional bounds. 3.
Parliament is competent to levy presumptive taxation.
In our view, Sections 80C and 80CC of the Ordinance fall within the category of presumptive tax as under the same the persons covered by them pay a pre-determined amount of presumptive tax in full and final discharge of their liability in respect of the transactions on which the above tax is levied. If we were to read Entry 47 [of the 4th Schedule to the Constitution, Part I] in isolation without referring to Entry 52, one can urge that Entry 47 does not admit the imposition of presumptive tax as the expression „taxes on income‟ employed therein should be understood as to mean the working out of the same on the basis of computation as provided in the various provisions of the Ordinance. We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e. capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes and duties on production capacity of any plant, machinery, undertaking, establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under Sections 80C and 80CC of the Ordinance is in consonance with the above two entries if read in conjunction. Since under Sections 80C and 80CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income tax, the same is in consonance with Entry 52. The question, as to whether a particular tax is confiscatory or expropriatory, is to be determined with reference to the actual earning or earning capacity of an average prudent successful entrepreneur in a particular trade or business. The fact that a particular assessee has suffered loss/losses during certain assessment years, is not germane to the above question. In this regard reference may again be made to the case of the Madurai District Cooperative Bank Ltd. v. Third Income Tax Officer, Madurai (supra), referred to hereinabove in para 28(x), wherein taxable income of the assessee declared was Rs.51,763; whereas the tax imposed was Rs.76,674/07 including surcharge. Indian Supreme Court sustained the above levy and inter alia held that what is not income under the Income Tax Act can be made
37 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
income under the Finance Act or exemption granted by the Income Tax Act can be withdrawn by the Finance Act or its efficacy can be reduced. Reasonable classification does not imply that every person should be taxed equally. It may be pointed out that reasonable classification is permissible provided it is based on an intelligible differentia which distinct persons or things that are grouped together from those who have been left out and that the differentia must have rational nexus to the object sought to be achieved by such classification. It may further be pointed out that different laws can be validly enacted for different sexes, persons in different age groups, persons having different financial standings and that no standard of universal application to test reasonableness of a classification can be laid down as what may be reasonable classification in a particular set of circumstances, may be unreasonable in the other set of circumstances. The requirement of reasonable classification is fulfilled if in a taxing statute the Legislature has classified persons or properties into different categories which are subject to different rates of taxation with reference to income or property and such classification would not be open to attack on the ground of inequality or for the reason that the total burden resulting from such a classification is unequal. The question, as to whether a particular classification is valid or not, cannot be decided on the basis of advantages and disadvantages to individual assessees which are accidental and inevitable and are inherent in every taxing statute as it has to draw a line somewhere and some cases necessarily may fall on the other side of the line. We may observe that once the Court finds that a fiscal statute does not suffer from any constitutional infirmity, it is not supposed to entangle itself with the technical questions as to the scope and modality of its working etc. The above question pre-eminently deserve to be decided by the Government which possesses of experts‟ services and the relevant information which necessitated imposition of the tax involved unless the same suffers from any legal infirmity which may warrant interference by the Court. The impugned provisions of the Ordinance are based on reasonable classification as they are founded on an intelligible differentia which distinguishes persons covered thereunder with the other tax-payers. It has also rational nexus to the object sought to be achieved by such classification i.e. to broadening the tax base and to recover the minimum tax.
38 Section 1
4.
Income Tax Digest.
Levy of minimum tax held constitutional.
Sections 80C and 80CC cannot be equated with section 80D as the same is founded on different basis. It may again be observed that section 80D is based on the theory of minimum tax. It envisages that every individual should pay a minimum tax towards the cost of the Government. The object of the minimum tax is to ensure that the taxpayers who receive substantial amounts from exempt sources, pay at least some tax on their economic incomes of the year. This is achieved by reducing or disallowing certain itemised deductions. We may again observe that a large number of assessees though generally earn profits but on account of various tax concessions including tax holidays, depreciation allowance etc. under Schedule II and deductions allowed under the various provisions of the Ordinance, show loss instead of any net profit, with the result that they do not contribute any income tax towards the public exchequer. The levy of minimum tax has been adopted in some other countries of the world including U.S.A., Israel, France, Columbia and Thailand besides India. In United States, under section 56(a) a tax equal to 15% of the amount, by which sum of the items of tax preference exceeds the greater of (i) $100,000 (b) .. (c) .. etc. is levied. We may again point out that the NTRC, which mostly comprised the representatives of business community representing various trade associations, in its report of December, 1986, quoted hereinabove in para 17, highlighted the corruption obtaining in Government and semi-Government departments and so also the dishonest tendency on the part of the tax-payers to evade the payment of lawful taxes by using unfair means. In such a scenario, the Legislature is bound to adopt modern and progressive approach with the object to eliminate leakage of public revenues and to generate revenues which may be used for running of the State and welfare of its people. The imposition of minimum tax under Section 80D is designed and intended to achieve the above objectives. The rate of half per cent of minimum tax adopted under Section 80D seems to be on the basis of the minimum rate of tax suggested by the Exports Enhancement Committee. In our view, the above provision falls within the legislative competence under Entry 47 read with Entry 52. The approach of this Court while interpreting the Constitution should be dynamic, progressive and oriented with the desire to meet the situation effectively which has arisen keeping in view the requirement of ever changing society. Applying the above rule of interpretation, we do not find any infirmity in the impugned Section 80D of the Ordinance.
39 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
It may be stated that non-obstante clause in section 80-D is for the purpose of liability to pay minimum tax of half per cent on the annual turnover. This will exclude any provision of the Ordinance which may be inconsistent with it. But the same does not exclude the application of other provisions of the Ordinance which are not inconsistent with section 80-D. There seems to be no conflict between above Section 80D and section 35 of the Ordinance, and hence the same remains available to assessees. To claim business loss or to carry forward the same under section 35 of the Ordinance from year to year, is not affected by the above levy of half per cent on the annual turnover under section 80D. The Central Board of Revenue in a written undertaking dated 9.4.1997 filed before this Court confirmed that subject to the conditions laid down in paras 3 and 4 of Circular No. 3 of 1996 dated 18.3.1996, it has retrospective effect and will be applicable to all pending assessments. The relevant portion of the aforesaid circular has already been quoted hereinabove, the effect of which is that while computing the annual turnover of an assessee, the amounts of sales tax and excise duty charged in terms of paras 3 and 4 of the aforementioned circular would be excluded. The above undertaking of the Central Board of Revenue is incorporated as a part of this judgment. We may point out that an executive order/notification, which is detrimental or prejudicial to the interest of a person, cannot operate retrospectively. However, a beneficial executive order /notification issued by an executive functionary can be given retrospective effect. In this regard it will suffice to refer to the judgment of this Court in the case of Army Welfare Sugar Mills Ltd. and others v. Federation of Pakistan and others (1992 SCMR 1652). The above written undertaking of the Central Board of Revenue to make this circular applicable retrospectively is in consonance with the aforesaid judgment of this Court. In our view, since the provisions of Act XII of 1992 are subsequent in time and as they are contained in a special statute, they shall prevail over the provisions of Section 80D of the Ordinance, which was enacted through Finance Act, 1991, which was an earlier statute and which was part of a general statute. In this view of the matter, assessees who fulfil the conditions of the notifications referred to in the Schedule to Section 6 of Act XII of 1992, are entitled to the protection. The question, as to whether a particular assessee fulfils the conditions of the above notifications, is a question of fact, which will have to be determined by the hierarchy provided under the Ordinance and not by this Court. However, in order to eliminate
40 Section 1
Income Tax Digest.
multiplicity of litigation and to avert element of harassment to assessees, we have dealt with the legal aspect of the above contention though apparently it was not urged before the High Court as we do not find any mention in any of the judgments under appeal. Assessees who are covered by the notifications mentioned in the Schedule to Section 6 of the Protection of Economic Reforms Act, 1992 (Act XII of 1992), are entitled to the protection in terms thereof as per paras 52 to 54 hereinabove. They may approach the Income Tax Department. 5.
Power to levy taxes is an attribute of sovereignty of a state.
The power to levy taxes is sine qua non for a state. In fact it is an attribute of sovereignty of a state. It is a mandatory requirement of a state as it generate fiscal resources which are needed for running a state and for achieving the cherished goal, namely, to establish a welfare state. In this view of the matter, the legislature enjoys plenary power to impose such conditions as to liability or as to exemption as it chooses, so long as they do not exceed the mandate of the Constitution. It is also apparent that the entries in the legislative list of the Constitution are not powers of legislature but only fields of legislative needs. The allocation of the subjects to the lists is not by way of scientific or logical definition by way of mere simple enumeration of broad catalogue. A single tax may derive its sanction from one or more entries and many taxes may emanate from one single entry. It is needless to reiterate that it is a well settled proposition of law that an entry in the legislative list must be given a very wide and liberal interpretation. The word „income‟ is susceptible as to include not only what is in ordinary parlance it conveys or it is understood, but what is deemed to have arisen or accrued. It is also manifest that income tax is not only levied in conventional manner i.e. by working out the net income after adjudicating admissible expenses and other items, but the same may also be levied on the basis of gross receipts, expenditure etc. There are new species of income tax, namely presumptive tax and minimum tax. 6.
Restrictions on power to levy tax.
That the rule of interpretation that while interpreting an entry in a legislative list it should be given widest possible meaning does not mean the Parliament can chose to tax as income an item which is no rational sense can be regarded as citizen‟s income. The item taxed should rationally be capable of being considered as income of a citizen.
41 SHORT TITLE, EXTENT AND COMMENCEMENT
7.
Section 1
The principle of “equality” applies equally to fiscal enactments.
That the Legislature is competent to classify persons or properties into different categories subject to different rates of tax. But if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality amongst holders of the same kind of property, it is liable to be struck down on account of infringement of the fundamental right relating to equality. That „a State does not have to tax everything in order to tax something it is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably‟. (Willi‟s Constitutional Law). That the tests of the vice of discrimination in a taxing law are less rigorous. If there is equality and uniformity within each group founded on intelligible differentia having a rational nexus with the object sought to be achieved by the law, the constitutional mandate that a law should not be discriminatory is fulfilled. Haji Muhammad Shafi & Others v. Wealth Tax Officer & Others – [1992] 65 TAX 315 (S.C.Pak) 8.
Double Taxation is prerogative of legislature.
It is, thus, clear that unless there is any prohibition or restriction on the power of the legislature to impose a tax twice on the same subject matter, double taxation cannot be declared illegal or void though it may be oppressive and inequitable. Unless there is a clear law imposing tax twice merely by implication tax cannot be imposed twice over. There should be a clear and specific provision to that effect. Pak Industrial Development Corporation v. Pakistan, through the Secretary, Ministry of Finance 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
Unless there is any prohibition or restriction imposed on the power of legislature to impose a tax twice on the same subject-matter, double taxation though a heavy burden and seemingly oppressive and inequitable can not be declared to be void or beyond the powers of the legislature. It may, however, be noted that double taxation can be imposed by clear and specific language to that effect. Where the language is not clear or specific by implication such levy can not be permitted.
42 Section 1
Income Tax Digest.
Imperial Tobacco Company of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi – 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak) 9.
The scope of powers of legislature to tax non-residents.
This construction is consistent with the words and the sense of the definition of „British India‟ as well as with the principle observed in section 4 of Income Tax Act, and the rule of International Law that a legislature has a authority to tax its citizens wherever they be, and to tax the foreigners only if they earn or receive income in the country for which legislature has the authority to make the laws. Commissioner of Income Tax v. Faysal Islamic Bank of Bahrain, Karachi – [2001] 83 TAX 376 (H.C.Kar.) 10.
Definition of word/expression “income” would mean “net income” after making all permissible allowances, deductions, depreciation etc as appearing in section 2(24) of the Ordinance. The said definition cannot be assigned to the word/expression “income” as used in section 23 of the Ordinance as the very purpose of section 23 of the Ordinance would be defeated.
We are not in agreement with Mr. Muhammad Fareed that the definition as appearing in section 2(24) of the Ordinance of the word/expression “income” would mean “net income” after making all permissible allowances, deductions, depreciation etc. If assuming for the sake of arguments that the definition is to be taken to mean “net income”, the said definition cannot be assigned to the word/expression “income” as used in section 23 of the Ordinance as the very purpose of section 23 of the Ordinance would be defeated. As has already been stated herein above, section 3 of the Ordinance as the very purpose of section 23 of the Ordinance provides the various permissible allowances, depreciations, expenditures etc., which are to be deducted from income. Such deduction can only be made from the “gross income” and not from the “net income” as the “net income” would be arrived at after providing/deducting all the permissible allowance, expenditures, depreciation etc. Addition in section 23(1)(v), the legislature has given its clear intention that depreciation on assets given on lease shall be allowed against lease, rentals only. Cases referred to: Laxmi Insurance Co. Ltd. Lahore v. Commissioner of Income Tax, Punjab, NWFP and Delhi Provinces, (AIR 1931 Lahore 441), Shaw Wallace & Co. v. Privy Council (AIR 1932 PC 138), Pakistan Fisheries Ltd. Karachi and others v. United Bannk Ltd., and 6 others appeals (PLD
43 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
1993 SC 109), Iftikhar Ahmed and others v. President National Bank of Pakistan and others (PLD 1988 SC 53).
Continental Chemical Co. (Pvt.) Ltd. v. Pakistan and others – [2001] 83 TAX 305 (H.C.Kar.) 11.
CBR circular No 19 of 1991 dated 8.7.1991, assessee was under no obligation to deduct tax at source in relation to purchases on which tax at import stage had been deducted and which constituted final discharge of liability. Jurisdiction to apply provisions of Ordinance in any manner was not restricted to proceedings for assessment or recovery of final income tax liabilities, but also related with force in respect of advance tax, be it under section 50(4) or section 53 or any other provision of the Ordinance. Proviso to section 50(4)(a) categorically confirmed that substantive provision of said section was also to be applied to non-residents.
In our view the principle of law which thus, emerges from these Indian authorities is that where the payee/deductee pays his full tax, any short-fall in or failure to deduct income tax at source by the deductor/payer would not make the later an assessee in default, since non-deduction or short-fall in relation to thereof would be of no consequence. This principle is squarely applicable in the present case since the sellers/importers in the present case having paid their full tax, any failure to deduct the tax by the petitioner would be of no consequence. Respondent No. 3 has created a liability which cannot be ascribed as one under section 50(4)(a) of the 1979 Ordinance. In fact the deduction of tax contemplated under section 50(4)(a) also makes the following incumbent conditions: (a)
the credit of the tax deducted or imposed has to be passed on to the deductee;
(b)
the deductee shall be allowed to claim the benefit of this deduction in his return of total income tax and towards his final tax liability.
However, through the Circular under discussion the exemption in relation to deduction at source under section 50(4) has been extended to all recipients who may enjoy exemption under any the provisions of the 1979 Ordinance. This would surely include the further exemption prescribed by section 80C(4). Applying this circular also the petitioner was under no obligation to deduct tax at source under section 50(4) in relation to the purchases on which tax at import stage had been deducted under section 50(5) and which constituted a final discharge
44 Section 1
Income Tax Digest.
of liability under section 80C(4). The respondent 2 and 3 were bound to obey these orders/instructions under section 8 of the 1979 Ordinance, while these instructions were also in keeping with the provisions of the 1979 Ordinance in particular section 80C(4). Failure to disregard this CBR Circular is ipso facto an unlawful exercise of jurisdiction. The jurisdiction to apply the provisions of the 1979 Ordinance in any manner is not restricted to the proceedings for the assessment or recovery of final income tax, liabilities but also relates with the same force in respect of advance tax, be it under section 50(4) or section 53 or any other provision of the 1979 Ordinance. In the context of advance deduction of income tax at source there is no provision in the 1979 Ordinance nor any jurisdictional order issued by CBR that confers jurisdiction on the respondents Nos. 2 and 3. On the contrary, the proviso to section 50(4)(a) categorically confirms that the substantive provision of section 50(4)(a) is apply to nonresidents as well, but only mutatis mutandis. It is settled law that where impugned orders are void and completely without jurisdiction (as in this case), a petitioner can directly approach the Court in its Constitutional jurisdiction. It is an admitted position that the tax to be deducted is an advance tax, more particularly when the provision of section 50(4)(a) has been made subject to section 53 of the 1979 Ordinance. Any advance tax, of necessity thus, has otherwise to be imposed as per the scheme of advance tax under section 53, before the year runs out. The income tax to be deducted has to be a percentage of purchase and is directly linked up with the transactions. But if the tax under section 50(4)(a) or under section 53 is imposed after the end of the year to which it relates, it would cease to have the character of advance tax is to be paid or collected by 15th June. In this case for the purposes of advance tax, the assessment year 1996-97, respectively, while the respondent No.3, however, admittedly had issued his first notice on 1.6.1998 and then on 3.6.1998 and had completed orders in July/August, 1998. These proceedings and orders were thus, beyond section 50(4)(a) incompetent and time-barred as well. In case an assessee continues default of section 53 and the time for framing the regular assessment or the end of the assessment year reaches, the substantive default of section 53 (i.e. advance income tax) would automatically lapse since under law any payment of section 53 is a credit with the exchequer which is liable to be adjusted with the actual liability for that year.
45 SHORT TITLE, EXTENT AND COMMENCEMENT
12.
Section 1
Under the Indian Income Tax Act, 1961 presumptive tax regime has been made applicable to limited number of items but the deduction made at source has been made liable for adjustment against the tax demand created on regular assessment.
Under the Indian Income Tax Act, 1961 presumptive tax regime has been made applicable to limited number of items but the deduction made at source has been made liable for adjustment against the tax demand created on regular assessment. 13.
The question of retrospective operation of the explanation of section 52 of the Ordinance would have arisen only if it has the effect of imposing new liability or obligation on the taxpayer or had affected any existing rights either by taking them away or curtailing them.
A bare perusal of the explanation added to section 52 of the Ordinance is sufficient to conclude that it has not created any new obligation or liability on the taxpayers but has been solely designed to bring about a change in the forum where a person responsible for deducting advance tax on behalf of another assessee as per requirement of section 50 of the Ordinance is to be proceeded against on his failure to deduct or collect the advance tax and to deposit the same in Government treasury. The question of retrospective operation of the explanation would have arisen only if it has the effect of imposing new liability or obligation on the taxpayer or had effected any existing rights either by taking them away or curtailing them. A bare perusal of the explanation is enough to hold that it only provides a change in the forum, whereby the powers to hold that it only provides a change in the forum, whereby the powers to hold proceedings against the payer as a deemed assessee in default have been taken away from the Assessing Officer/Deputy Commissioner of Income Tax dealing with the tax proceedings of the recipients and have been conferred on the Assessing Officer/ Deputy Commissioner of Income tax having power to deal with the tax proceedings of the payer. It is a well-established principle of law that when the legislature brings about a change in the forum then the same is always with retrospective effect unless it has the effect of curtailing the existing rights available to a party for challenging any adverse order. By the aforesaid explanation, the legislature has not taken away any right of appeal or revision or has not in any manner curbed the rights available to a deemed assessee in default and is merely in the nature of a change of officer/authority.
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It may also be stated that the object of an „explanation‟ to a Statutory instrument is to clarify, to facilitate proper understanding of a provision and to serve as a guideline as pronounced by the Honorable Supreme Court in the case of Naveed Textile Mills Ltd. v. Assistant Collector (Appraisement) Customs House and other reported in PLD 1984 SC 92. By virtue of the explanation added/incorporated in section 52 of the Ordinance, the Assessing Officer/Deputy Commissioner of the Income Tax dealing with the tax assessment proceedings of an assessee would have the right to initiate and finalize the proceedings against the said assessee in cases where he is to be treated as an assessee in default. As such in view of this, no exception can be taken to the orders passed under section 52 read with section 86 of the Ordinance by Assessing Officer/Deputy Commissioner of Income Tax, respondent No. 3 against the petitioners. The petitioners should have satisfied themselves by reliable and satisfactory evidence that the said importers had been subjected to tax and should not have relied on assumptions, surmises and conjectures for non-performance of the obligations cast upon them by section 50(4) of the Ordinance i.e. deduction and collection of tax from the amount which they had paid to the eleven importers/sellers of medicines. In view of the addition/incorporation of the explanation to section 52 of the Ordinance, respondent No. 3 had the jurisdiction and authority to initiate proceedings under section 52 against the petitioners as assessee in default in the assessment proceedings relating to the petitioners and no exceptions can be taken to the order passed by him under section 52 read with section 86 of the Ordinance. Consequently, this Constitutional Petition is found to be without any substance and must fail. Case referred to: Mamy Beverages v. Saseem 1995 PTD 91, Kamran Industries v. Collector of Customs PLD 1996 Kar. 68, Union Bank Ltd. v. Federationn of Pakistan [1998] 77 TAX 125 (H.C.Lah.); [1998] 77 TAX 127 (H.C.Lah.) = 1998 PTD 2116, Elahi Cotton Mills v. Federation of Pakistan [1997] 76 TAX 5 (S.C.Pak) = PLD 1997 SC 582, Pakistan Textile Mills Owners Association v. Administrator of Karachi PLD 1963 Kar. 137, Julain Hoshing Dinshaw Trust v. Income Tax Offier 1992 SCMR 250, Commissioner of Income Tax/Wealth Tax v. Prime Dairies Ice Cream Limited 1999 PTD 4147.
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Indus Steel Pipes Ltd. v. Commissioner of Income Tax, Companies-II, Karachi and others – [1999] 79 TAX 410 (H.C.Kar.) 14.
Scope of Article 165 & 165A of Constitution; corporations created by provincial statutes are not “governments”.
Having examined 1997 PTD (Tribunal) 1435, it appears to be a correct view that a corporation created as a result of a statute was held not to be a part of the Provincial Government. The present appellant company being an assessee cannot be taken to be an organ of the State and, therefore, it seems that the issue in hand can only be resolved by examining the status of a company and looking into the important distinctive features. It would be seen that the definition of the Government in the definition clause cannot be extended to an extent so as to include bodies created by Provincial or Federal Statutes or incorporated as „public companies‟ as nothing is to be employed in statutes or documents which is inconsistent with the words expressly used. We further find that legislative intent is absent so to include corporation like the appellant company as an integral part of the Federal Government. We further find that in the present set of circumstances, the legislature has, in fact restricted this concession to companies and corporations directly owned by them and not to those, which are so owned by them through the medium of intermediate corporations. We further find that a company owned by a Government shall not, for all purposes, be deemed to be a Government Department. It may be quite correct that 50% holding of shares by a corporation for carrying on the functions in which they are engaged may be some extent are carried out on behalf of the Government and further that the income of the corporation to the extent of 50% income of the appellant company is, in fact, the income of the Government of Pakistan. One further aspect could also not be ignored that 50% shares are held by the corporation in the appellant company, than at least to the same extent, employees of the appellant company would be employees of the corporation and than whether it could be said that to the extent of 50% employees of the appellant company shall be deemed to be Government servants and all properties owned by the Corporation are owned by the Government and further all contracts made by the corporation will only be made by the President is required by Article 173 of the Constitution. Consequently, we are of the view that a company or a corporation owned by the Government shall be deemed to be a department of the Government, which was confined for the
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purposes of its immunity to tax earlier granted and available under Article 165 of the Constitution. ICC Textiles Limited v. Federation of Pakistan and others – [1999] 79 TAX 77 (H.C.Lah.) 15.
Levy of Corporate Asset Tax is constitutionally valid.
....there is no limitation placed on the use of word „assets‟ in item No. 50 of 4th Schedule [to the Constitution] and the question as to whether „gross assets‟ or „net assets‟ are to be taxed was relateable to mechanism and could be determined by the Federal Legislature while further legislating on the subject. I am, therefore, unable to agree with the learned counsel on the interpretation being placed on item No. 50 of 4th Schedule to the Constitution. No doubt tax can only be levied by the Parliament as ordained by Article 77 of the Constitution but as by promulgating section 12 of the Finance Act, 1991, the tax is being levied on the capital value of assets, no valid exception can be taken thereto. Syed Bhaies Pvt. Ltd. v. Government of Punjab – NLR 1999 Tax 176 16.
Constitutional powers of levying taxes by Federation and provinces.
It is a fundamental principle of interpretation that where Constitution distributes legislative powers between two different law-making bodies i.e. Federal and Provincial, an act enacted by any such body should be examined to ascertain its „pith and substance‟ or its true nature and character for purposes of determining real field of legislation within which subject-matter of the Act lies. Wherever legislative powers are distributed between legislative bodies through legislative lists, situations may arise where two legislative fields might apparently overlap. It is duty of Courts, however difficult it may be, to ascertain to what degree and what extent, the authority to deal with matters falling within these classes of subjects exists in each legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been intention of Constitution that a conflict should exist, and, in order to prevent such result the two provisions must be read together, and language of one interpreted, and, where necessary modified by that of the other.
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Pakistan Burma Shell Ltd., Etc. v. Federation of Pakistan through Secretary Ministry of Finance, Government of Pakistan, Islamabad, etc. – [1998] 78 TAX 234 (H.C.Kar.) = PTCL 1998 CL. 690 17.
Personal interest must yield to larger interest.
[Per Mamoon Kazi, J. Contra.] – The expression “tax on income” would not only include “within its ambit profits or gains actually received by an assessee, but even something that may be presume by the Legislature to have been received. The Legislature in order to achieve certain object would therefore, be acting within its power while resorting to this method of legislation. As was again observed in Elel Hotels‟ case, “taxation is now not a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve, fiscal and social objectives”. Although, in the present case, ostensibly gross receipts of the assessee or the turnover of his business have been deemed to be his income, but in reality only a certain percentage thereof, higher than the imposition is presumed to be his income. Inherent in the concept of income no doubt, is also the concept of profitability and any amount to be called income must have some characteristics of income as the term is ordinarily understood by its various connotations, but the Court only has to ascertain that what has been deemed to be the Income of the assessee can reasonably be deemed to be his income. Viewing the issue in the above background, it cannot be said in the present case that the Legislature has transgressed the limits provided by the Constitution. Under section 80C of the Ordinance the whole of the amount received by a person on account of supply of goods or on execution of a contract or the amount spent by an importer of goods (which shall also include customs duty and sales tax) is to be deemed to be the income of such person. Likewise, under section 80-CC of the Ordinance the whole of export proceeds of a person are to be deemed to be his income. Under section 80C of the Ordinance, a tax at the rate of one-half per cent is to be imposed as minimum tax In relation to the turnover of business or trade of a person. The liability for payment of Income Tax varies in case of sections 80C and 80CC from one half percent to one percent of the income in case of exports and from two percent in case of imports to two and one-half percent in case of supplies. These rates neither appear to be expropriatory nor confiscatory. Unless the imposition is disproportionate to income, it cannot be said to be confiscatory.
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In our opinion, the mere fact that margin of profit would be different cannot render the said provisions discriminatory or arbitrary or violative of Article 25 of the Constitution. Profitability in any trade or a business & profession is also commensurate with the relative efficiency of its management although there can be various other factors responsible for the same. However, no two companies or firms having similar trade or business can earn similar margin of profit. The impugned provisions of the Ordinance are apparently based on a presumption that a certain percentage of the assessee‟s gross receipts would be tilt minimum profit. The assesses has been taxed accordingly by the said provisions. Since the provisions are applicable to an assessee engaged in a trade or business it can be normally presumed that the assessee will keep a sufficient margin of profit on his total turnover or his gross receipts. The income tax payable does not appear to be so unreasonable as to be regarded as arbitrary or confiscatory it is noteworthy that in case of sections 80-C and 80-CC of the Ordinance the assessee is not required to file returns. The provisions have, therefore been designed to be simple avoiding tedious procedure of assessment for the convenience and. benefit of the assessee. In case of section 80-D of the Ordinance, a return has to be filed and in case the tax payable by an assesses is more than one-half percent, the same will be assessed and paid accordingly. In case, no taxes payable or the tax payable is less than one-half per cent, such tax has to be paid. The provisions of section 80-D on the face thereof do not appear to be discriminatory as they are applicable to the assessee as a class. Section 80D which also by virtue of the non-obstante clause inserted therein purport to include such companies or registered firms in the tax net in whose case no tax is payable or has been paid for any reason enumerated in section 80D of the Ordinance. The application of the provisions of section 80C or 80CC of the Ordinance to certain contractors, importers or exporters, etc. as a distinct class is also not difficult to comprehend because tax was already being deducted from them at source under section 50 of the Ordinance. Therefore, the Legislature in Its own wisdom made the above provisions applicable to them. Apparently, the tax purported to be levied is neither unreasonable nor discriminatory nor it appears to be confiscatory. However, merely because a fiscal statute is unreasonable or oppressive, its constitutional validity cannot be called in question. In the present case, companies and registered firms have been classified by the legislation as a separate class and so have been
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certain contractors, suppliers, importers and exporters. The object sought to be achieved has been shown to be to generate more funds for the public revenue or to prevent evasion of Income Tax. It can hardly be denied that in this country, one of the methods that can be effectively employed to plug loss of revenue is by resort to presumptive taxation. Therefore, there is a reasonable nexus between the legislation and the object it seeks to achieve. As was pointed out earlier, the Legislature has sufficient latitude to classify persons or things in different categories to achieve the object of the legislation. The mere fact that the legislation tends to diminish the assessee‟s profile is not sufficient to-make it confiscatory either. The petitioners have failed to discharge the burden by demonstrating that the legislation in question is not in tune with the fundamental rights. In the present case, as we also pointed out earlier, the income tax levied on the gross receipts or as the case may be, the turnover does not appear to be unreasonable and the legislation appears to be based on a presumption that the assessee‟s minimum profit from the trade or business would exceed the Income Tax imposed under the said provisions of the Ordinance. Apparently, there appears to be no ground for assuming that such a measure is discriminatory or confiscatory, barring of course, a few exceptions reference to which has just been made in this judgment. However, as has been pointed out, when a larger benefit for the community is to be achieved, individual interest must yield to the larger interest. Punjab Small Industries Ltd. v. Deputy Commissioner of Income Tax, Lahore – [1995] 71 TAX 220 (H.C.Lah.) 18.
Powers of Federal Government to levy income tax on any property or income, including that of Provincial Government.
In the constitution as originally framed, Article 165 ordains that no tax can be levied by the Federal Government on any property or income of the Provincial Government. However, later on doubts arose as to whether the income of corporation owned and controlled by the Government or set up by it under Act of Legislature can be deemed to be the income of the Government within the meaning of Article 165 of the Constitution. In order to remove these doubts, the constitution was amended by Constitution (Amendment) Ordinance (P.O. 11) 1985 and Article 165-A was added which reads as under:Article 165-A of Constitutional: “Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain corporations, etc.(1) For the removal
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of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a corporation, company or any other body or institution established by or under a Federal Law or a Provincial Law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income.” United Liner Agencies Ltd. Karachi v. Commissioner of Income Tax, Karachi – [1988] 57 TAX (H.C.Kar.) 19.
Parliament can introduce a new change of tax either by incorporating that change in the Income Tax Act or by Finance Act.
The Income Tax Act or Income Tax Ordinance is a permanent Act or Ordinance while the Finance Acts are passed every year and their primary purpose is to prescribe the rate at which the income tax will be charged under the Income Tax Act or Ordinance. But that does not mean that a new and distinct change cannot be introduced under the Finance Act. We are of the view that the exigencies of the financial year determine the scope and nature of its provisions. If the Parliament has the legislative competence to introduce a new change of tax, it may exercise that power either by incorporating that change in the Income Tax Act, or by introducing it in the Finance Act or for the matter of that in any other statute. This is generally determined by the consideration whether the new change is intended to be more or less of a permanent nature or whether its introduction is dictated by financial exigencies of the particular year. Therefore, what is not income under the Income Tax Act can be made income by a Finance Act, an exemption granted by the Act can be withdrawn by the Finance Act or the efficacy of the exemption may be reduced by the imposition of a new change. Pak Industrial Development Corporation v. Pakistan Secretary, Ministry of Finance [1984] 49 TAX 76 (H.C.Kar.) 20.
through
Levy of tax on free reserves which had already suffered tax held not to be ultra-vires of the powers of Legislature under the Constitution.
The Finance Acts, 1967 and 1968 by which the impugned amendments were introduced in the Income Tax Act providing for levy of Income Tax on „free reserves‟ are intra vires. It is stated in para. 30 of the
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petition that the amount lying in „free reserves‟ of the company were in fact profits of the corporation on which Income Tax was already paid but this fact is not sufficient to render the levy of tax on such sums ultravires of the powers of Legislature under the Constitution. On a fair reading of para. 20 of the petition we are convinced that the amounts lying in „free reserves‟ of the petitioner were nothing but unappropriated profit which could legitimately be taxed by the Legislature as „income‟ in exercise of its power under Entry No. 43(c) of the Third Schedule to the Constitution of 1962. 21.
Words occurring in a constitutional provision relating to legislative power should be liberally construed.
The cardinal rule of interpretation is that the words should be read in their ordinary, natural and grammatical meaning. However, where courts are called upon to interpret a word occurring in a constitutional provision relating to legislative power, then the words are to be deliberately construed so as to give it widest connotation. 22.
Rule of interpretation of the word “income” occurring in Constitution explained.
The word “income” has not been defined in the Constitution and, therefore, in order to interpret the same we will refer to the dictionary meaning of the word. The cardinal rule of interpretation is that the words should be read in their ordinary, natural and grammatical meaning. However, where Courts are called upon to interpret a word occurring in a Constitutional provision to power, the words are to be liberally construed so as to give it widest connotation. Income therefore, in the light of above dictionary meanings would include all moneys or other gains periodically received by an individual, corporation, etc. for labour, service or from property, investments, operations, etc. Income denotes a thing that comes in. Therefore, in its natural meaning the word income will embrace any profit or gain which is actually received. Cases referred to: Maharajkumar Gopal Saran v. Commissioner of Income Tax (1935) 3 ITR 237; K.P. Varghese v. Income Tax Officer K.L.R. (1982) C C 84; Eisner v. Macombar 64 Law End. 521; Mst. Samina Shoukat Ayub Khan v. Income Tax Officer PLD 1981 S.C. 85 and Commissioner of Income Tax v. Shaw Wallace & Co. AIR 1932 P.C. 138.
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Pakistan Lyallpur Samundri, Transport Co. Ltd. v. Commissioner of Income Tax Lahore Zone, Lahore – [1982] 46 TAX 143 (H.C.Lah.) 23.
Redundancy cannot be readily attributed to the legislature.
One of the cardinal rules of interpretation of statutes is that where an amendment in the law takes place there must be implied necessarily an intention on the part of the Legislature to depart from the earlier law in some respects. Redundancy cannot be readily attributed to the Legislature. Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West), Karachi – [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266 24.
“Resident” of taxable territories is liable to tax on total world income including any income accruing or arising in non-taxable territories of Pakistan.
We are not inclined to agree with this contention of learned counsel as we are of the view that an assessee, who was ordinarily resident in a place in Pakistan but outside Swat, would be subject to tax not only in respect of income accruing to him in Pakistan outside but Swat also income accruing to him from sources in Swat. Such an assessee being a resident of an area, to which the Income Tax Act applied would be subject to tax under the Income Tax Act and his income from Swat would also be taxable. However, if the assessee was not ordinarily resident of any in Pakistan but which Income Tax Act applied, any income accruing to him from sources in Swat would not be taxable as the Income Tax Act at that time was not applicable to Swat. In this connection reference may be made to section 4(1) of the Income Tax Act where under the total income of a person ordinarily resident of a place in Pakistan to which the Income Tax Act applies includes not only income accruing to him iii Pakistan but also in respect of income accruing to him from outside Pakistan. In the instant case, if instead of the income accruing from Swat, the assessee had derived income from sources outside Pakistan, for instance from Dubai or U. K., the assessee, if ordinarily resident of Pakistan, would have been taxed in respect of such income derived by him from sources in Dubai or U. K. In such a case, it would not have been open to the assessee to argue that as Income Tax law is not applicable to Dubai or U. K., and admittedly the Pakistan Income Tax law is not applicable to such countries, income accruing from sources in, Dubai or U.K. would not be liable to tax. The appellant could not deny that at least the wife of the assessee maintains a dwelling house where a telephone is installed in the name
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of the appellant. This fact by itself shows that a part of the wife‟s residence is reserved as a dwelling place for the assessee appellant. Since this definitely gives him right to live in Pakistan and, therefore, within the meaning of section 4A(a)(ii) a residence is maintained for him in Pakistan for more than 120 days, he becomes a resident of Pakistan and as his residence for the 9 years out of the 10 previous years is not denied, he automatically becomes resident and ordinarily resident of Pakistan. We would hold that the assessee was liable to tax for all his income in and outside Pakistan. Case review : The judgement of the Sind High Court was later on approved by the Apex Court [1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak)].
Commissioner of Income Tax, (East) Karachi v. Ebrahim D. Ahmad & others – [1982] 45 TAX 232 (H.C.Kar.) 25.
Legislature has the power to enact curative legislation.
From the principles deduced from the case law discussed hereinabove, it is evident that the Legislature has the power to enact curative legislation and to validate orders/actions which were not valid or were without jurisdiction when passed or taken in cases when some proceeding arising from such order or action remains pending. As observed hereinabove that there cannot be any cavil to the proposition that an original invalid or an order/action without jurisdiction can be validated by the Legislature while some proceeding arising therefrom remains pending and that the transaction does not become past and closed. Begum Nusrat Bhutto v. Income Tax Officer, Circle V, Rawalpindi – [1980] 42 TAX 59 (H.C.Lah.) 26.
Charging section and subsequent provisions only enable the liability to be quantified.
It has, therefore, been accepted as a true principle of taxation that the liability imposed by the charging section and subsequent provisions enable the liability only to be quantified and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately. Mst. Saeeda & others v. Govt. of Pakistan & another – [1977] 35 TAX 180 (H.C.Kar.) 27.
Power to make and promulgate Ordinance includes the power to levy tax.
(Power to make and promulgate Ordinance for peace and good Government)........ must include the power to exact tax without
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money no good Government can function. The subject of tax therefore must be included within the scope of the phrase. The only limitation that is placed on the power of the President to promulgate Ordinance is that it is subject to the like restrictions as the powers of Federal legislature to make laws and the Ordinances so promulgated may be controlled or superceded by any such act. In other words the President can promulgate an Ordinance on any subject in regard to which the Federal Legislature can legislate which impliedly defines the scope of the legislation by the use of the phrase „peace and good Government‟. 28.
Authority to legislate includes authority to legislate with retrospective effect.
“..... it is a settled principle that the authority to legislate includes the authority to legislate with retrospective effect.” Commissioner of Income Tax v. Adamji Sons – [1966] 14 TAX 174 (H.C.Kar.) 29.
Rules cannot be made by subordinate delegate authority unless expressly permitted.
It is settled principle in law that a subordinated delegate authority cannot make rules or issue notification under a statute so as to give a retrospective effect to them, unless the statute itself grants such power. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 30.
Charging section cannot be overlooked on hypothesis of history of exemption.
The fundamental fact for the purposes of construction is that the hypothesis, that the statute may have been enacted without attention to the broadest fact in Indian revenue history, is quite incredible. _ Again the purport of the charging sections if the express exemptions _ be disregarded as the reasoning requires is radically altered if an exemption of all permanently settled estates is implied. Wide areas escape the purview of the charge. Commissioner of Income Tax v. Venkatachalapathi – 1 ITC 185 (Madras) 31.
Modification of exemption from taxation must be express and not in general terms or by implication.
In case of exemption from tax any modification made should be through express words and not in general terms or by implications.
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Commissioner of Income Tax v. Zamindar of Singampalli – 1 ITC 181 (Madras) 32.
Subsequent general enactment does not interfere with special provisions unless expressed clearly.
That this exemption applies to taxes which might be imposed thereafter, as well as to taxes in force at the time of sanad is clear from the judgment of the House of Lords in Associated Newspapers, Ltd. v. City of London Corporation [1916) 2 A.C. 429] and it is not less clear from the same judgment that although it is competent to the legislature to withdraw or modify such an exemption by subsequent enactment, this can only be done expressly and not in general terms or by implication. For the latter proposition we may also refer to Maxwell on Interpretation of Statutes (6th Edition) Chapter VII, section 3. Rowe & Co. v. The Secretary of State for India – 1 ITC 161 (Burma) 33.
Court cannot make up for any deficiency of Legislature.
If the legislature, from want of foresight or for any other cause, has omitted to provide for a case, it is the province of the legislature itself, and not of the Courts, to supply the omission. Burma Railway Co. v. Secretary of State – 1 ITC 140 (Burma) 34.
Fair and reasonable construction for taxing statutes.
The rule for the interpretation of such statutes is laid down by Cotton L.J., in Gilbertson v. Fergusson [1881] 7 QBD 562 at p.572: „I quite agree we ought not to put a strained construction upon that section in order to make liable to taxation that which would not otherwise be liable, but I think it is now settled that in construing these Revenue Acts, as well as other Acts, we ought to give a fair and reasonable construction, and not to lean in favor of one side or the other, on the ground that it is a tax imposed upon the subject, and, therefore, ought not to be enforced unless it comes clearly within the words. There is another rule of interpretation, which must also be borne in mind. Where the object and intention of the legislature is clear and undoubted, that meaning should be given when possible to the words used which will best carry out the clear object and intention‟. _______________
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RETROSPECTIVE LEGISLATION
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Lyallpur Cold Storage, Lyallpur – 1975 SCC 426 = [1976] 34 TAX 14 (S.C.Pak.) 35.
Retrospective application of law must be by explicit words.
Mr. M.A. Lone, learned counsel for the Department submitted in support of these petitions, that this Court‟s decision in the case of Noor Hussain still held the field. It was argued that the majority decision in that case proceeded on the interpretation of the crucial words „constituted by‟ which had replaced the earlier expression „constituted under‟ and which despite the amendment of 1965 still remained part of the statute. Learned counsel further submitted that the amendment of 1965 is merely declaratory and was inserted ex abundati cautela, and, therefore, will, in the absence of the express words in the amending statute or by necessary implication, not have retrospective effect. Income Tax Officer, Investigation Circle & others v. Sulaiman Bhai Jiwa & Others – 1969 SCC 354 = [1970] 21 TAX 62 (S.C.Pak.) 36.
Scope of retrospective legislation.
It is fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in terms of the Act, or arises by necessary and distinct implication (see Maxwell on the Interpretation of Statutes - 9th edition - page 221 and Treaties on Statute Law by Caries - 4th edition - page 329). It follows from this rule that retrospective effect to a statute may be given either by express words or that the same may be inferred from the language employed. It is true that the Finance Act of 1964 has not expressly stated that sub-section (2D) of section 34 shall be deemed to have taken effect from a date earlier than the date of enactment of that Act. But the language employed in that sub-section necessarily implies that the provision thereof, though prospective, has retrospective operation as well. The use by the Legislature of words, such as “shall” or “hereafter”, is taken to indicate an intent that the statute is to be construed as prospective only; on the other hand the use of words denoted past time, such as “heretobefore” constitute an explicit declaration that the Act is to be construed retrospectively. When retrospective effect to statute is not given by express words, one must, apart from the language employed, “look to the general scope and purview of the statute, and at the remedy sought to be applied, and consider what was the former state of the law, and what it was
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that the Legislature contemplated”. (See Treatise on Statute Law by Caries - 4th edition - page 334). Commissioner of Income Tax (AJ&K Council), Muzaffarabad and another v. Asian D. Enterprises through Eijaz Qureshi, Managing Director and 5 others, Commissioner of Income Tax (AJ&K Council) -&- Muzaffarabad and 2 others v. Messrs Cade Creets Associates through Managing Partner, Diwan Ali Khan Ghughtai and another [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892; Commissioner of Income Tax AJK and another v. Asian D. Enterprises and other [2000] 82 TAX 518 ((S.C.AJ&K.) 37.
Fiscal laws and theory of retrospectivity.
It is evidence from the case law, referred to by the learned counsel for the appellants, that there is no proposition in support of the view that a fiscal law cannot be made operative retrospectively. Obviously, when there is no such embargo imposed upon the Legislature by the Interim Constitution Act, how such a restriction can be assumed. Thus, the very basis on which the findings of the High Court rest is without any legal substance. Even if it is assumed for the sake of argument that demand of additional income tax is „deprivation‟ of the „property‟ of the respondents within the meanings of paragraph I, that has been done in pursuance of law, i.e., the Income Tax Ordinance, 1979 and the Finance Act, 1995 and, thus, the tax demanded could not be held violative of the Fundamental Right No. 14 according to which a person can be deprived of his property according to law. Needless to say, as has been indicated above, the demand of additional advance income tax from the respondents was made in pursuance of the aforesaid statutes which have been validly adapted in the State. However, the fact of the matter is that by the impugned provision of law, the rate of income tax has not been retrospectively increased; only the rate of deduction of advance tax has been increased. The deduction of advance tax is only a tentative deduction which has to be adjusted when the final assessment of income tax to be paid by the respondents-Companies is made. Thus, the findings of the High Court that demand of additional advance income tax is violative of Fundamental Right No. 14 guaranteed by the Interim Constitution Act, are devoid of any force and are not sustainable. In the light of what has been stated above, we accept the above entitled appeals, set aside the impugned judgements of the High Court and hold that additional advance income tax was rightly demanded from the respondents-petitioners. Consequently, the writ petitions filed by the respondents are hereby dismissed.
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Retroactivity of the law upheld. It may also be pointed out that in the instant case neither it has been the case of the respondents nor there are any findings by the High Court that any of the respondents-petitioners had paid the advance Income Tax at the previous rates prior to the enforcement of the Finance Act of 1995. It is evident from the above mentioned survey of case law that the findings of the High Court that the Finance Act, 1995, which was adapted retrospectively by Ordinance No. 1 of 1998, could not operate retrospectively are not legally correct. Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others – [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180 39. Amendment in law which is neither clarificatory nor declaratory cannot be applied retrospectively. The findings of this Court in re: Prime Commercial Bank and others v. Assistant Commissioner of Income Tax 1997 PTD 605 (H.C.Lah.) are relevant. In that case a Single Bench of this Court on the authority of an earlier view held in K.G. Old Principal Christian Technical Training Center Gujranwala v. Presiding Officer Punjab Labour Court Northern Zone and 6 others (PLD 1976 Lahore 1097) found it to be a settled proposition that generally an amendment was clarificatory or declaratory in nature. In the present case there is nothing to show that the amendment in section 12(18) by Finance Act, 1998 was brought about to clarify the earlier provision and not to bring a change in it. All the more so when the amendment was not given retrospective effect normally clarificatory or declaratory amendments are given. Rijaz (Pvt.) Ltd. v. Wealth Tax Officer, Circle-III, Lahore – [1996] 74 TAX 9 (H.C.Lah.) 40. An amendment which is explanatory or clarificatory is generally to operate retrospectively. As regards question of retrospectivity suffice it to say that the power of legislature to legislate retrospectively is well recognized and in the present case the retrospective operation to the explanation has been given by a specific provision in the amending law. Be that as it may, it is trite law that an amendment which is explanatory or clarificatory always operates retrospectively. Dreamland Cinema, Multan v. Commissioner of Income Tax Lahore – [1977] 35 TAX 169 (H.C.Lah.) If the object of the statute is to explain the provisions or to remove a doubt, the law would apply retrospectively. 38.
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National Food v. Commissioner of Income Tax – [1991] 64 TAX 60 (H.C.Kar.) 41.
In a Taxing Act there is no room for any intendment.
No doubt, as has been observed by the learned Tribunal, in a taxing act there is no room for any intendment and there is no equity about a tax and there is no presumption as to a tax and nothing is to be implied but one can only look fairly at the language used. However, in case of a beneficial statute its provisions cannot be interpreted so as to bring about a result contrary to the object of the legislation. An interpretation likely to advance the remedy and suppress the mischief must be adopted in case of statutes which confer benefit on individuals or any class of persons. Mandviwalla Motors Limited, Karachi v. Commissioner of Income Tax, Central Zone ‘B’, Karachi – [1991] 64 TAX 19 (H.C.Kar.) 42.
Omission of provision from statutes held not to operate retrospectively.
The Income Tax Officer, Company, Circle II, Karachi, passed an assessment order on the return filed by the applicants for assessment year 1971-72. He determined the undistributed profit of the applicants to be Rs.10,64,690 and imposed a tax of Rs.2,92,790 in terms of section 23-A of the said Act. On appeal the amount of undistributed profits was worked out to be Rs.8,58,392 and consequently tax payable was fixed at Rs.2,25,258. As the applicants failed to pay such amount additional tax under section 45-A of the Act was levied. On plain reading of the above provision of law it is abundantly clear that no provision has been made for providing any machinery for assessment but it clearly imposes a charge on undistributed income and is therefore of substantive nature. Such a conclusion is also in conformity with the principles of interpretation of statutes laid down in the case decided by the Privy Council and reported in [1940] 8 ITR 442 and followed in the case reported in 1985 PTD 465. The first contention advanced by Mr. Muhnmmad Nasim, Advocate for the applicant has no force. Mr. Muhammad Nasim, Advocate for the applicant has not been able to show that omission of section 23-A from the Act through Finance Ordinance, 1972, was done as a remedial or curative measure. We are also unable to subscribe to the view that original order of assessment by the Income Tax Officer required to be passed after issuing a show cause notice on the subject. At any rate in absence of
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any provision of issuing a notice in the enactment the requirements of principles of natural justice stand satisfied as the applicants were heard on the subject by the Appellate Authorities. Cases referred to : [1967] 15 Tax 303; (PLD 1974 SC 180); (1987 PTD 739); (1947) 8 ITR 442 and (1985 PTD 465).
Commissioner of Income Tax v. Olympia – [1988] 57 TAX 71 (H.C.Kar.) 43.
Substantive law amended by Finance Act, 1973 held to have retrospective operation to cover only pending cases.
The general rule of construction of statutes is that the enactments are not to be given retrospective operation unless the statute expressly provides so or from the language employed it appears to be the necessary intendment of the Legislature. As, however remedial statutes are designed to redress an existing grievance and do public good, and such statutes normally do not diminish, destroy or affect any vested right, these are liberally construed. Lahore High Court had also taken the view in Rippon‟s case (1973) PLD 1973 Lah. 849 that an amending law which is purely remedial and curative, must be liberally construed in favour of subject. We also subscribe to the same view. Then as stated in Crawford, if the rule of liberal construction is to be applied as it obviously should then any doubt should be resolved in favour of retrospective operation, if such operation does not destroy or disturb vested rights, impair the obligations of contracts, create new liabilities, violate due process of law or contravene some other provision of law and if such operation will carry out the intent of the Legislature as ascertained through the application of the principles of liberal construction. In our view, as the amending provision under consideration had been inserted in subsection (6) of section 18-A to remedy a wrong that was being done to the assessees, and the amending provision does not affect any vested right or create any new obligations, the amending provision is to be given retrospective operation for extending benefit to the affected parties in pending cases, to give effect to the intent of the Legislature. As observed earlier, a wrong was being done to the assessee by providing for an indefinite period during which they were made liable for payment of additional tax at the rate of 2 per cent per mensem and this wrong was sought to be remedied by the remedial and curative amendment brought about by the Finance Act, 1973. If the intention of the Legislature had been that this remedy should be available only in respect of assessments for the year 1973-74 and subsequent years, the Legislature would have used appropriate words
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to express such intention. No such appropriate words are mentioned in the amending provision. There is no reason why the remedial provision of the amending law should not be applied to pending proceedings. In fact, this appears to be the intent of Legislature. Although we are of the view that the amending provision being remedial in nature and not affecting any vested right or creating any new obligation and is, therefore, retrospective in operation, which also seems to be the intent of the Legislature, retrospective operation can only cover cases which were pending at the time the amending law was enacted i.e. eases which had not been finally determined or proceedings which had not attained finality. The retrospective effect of the amending law would, therefore, apply only to those cases where assessments had not been made by the Income Tax Officer or where an appeal was pending before the Tribunal or a reference was subjudice before the High Court, at the time the amending law was enacted. The cases which had finally been determined or had attained finality i.e. which were past and closed transactions, cannot be reopened under the amending legislation as there are no express words to that effect employed in the amending law. We may observe here that when reference is made in any law, legal instrument, legal document, legal language or law book or dictionary, about vested right, the reference is to the vested right of a person natural or legal, and never to vested right of the State. Legal theories relating to vested rights never contemplate vested rights of State. We are unable to accept the submission made by the learned counsel for the department that by giving retrospective operation to the amending law vested right of the State will be affected. In our opinion, this contention is not relevant for answering the question referred to us. As observed earlier, the amending law has retrospective operation to cover only pending cases and this appears to be the intention of the legislature. Cases referred to: Reliance Jute and Industries Ltd. v. Commissioner of Income Tax [1981] 44 Tax 53 (S.C.); B.B.&D. Manufacturing Co. Private Ltd. v. E.S.L Corporation [(1976) PTD (Trib.) 21]; Commissioner of Income Tax v. Rippon Printing Press (PLD 1973 Lah. 849) = [1973] 28 Tax 40; Whitney v. Commissioners of Inland Revenue (1926) AC 37; Chatturam v. Commissioner of Income Tax (1947) 15 ITR 302; Vidyapat Singhania v. Commissioner of Income Tax [1978] 38 Tax 95; C.S.T. v. Kruddsons Ltd. (PLD 1974 SC 180); Adam Afzal v. Sher Afzal (PLD 1969 SC 187); Muzaffar Ahmad v. Anwar Ali (PLD 1965 Dacca 296); Income Tax Officer v. Vidayasagar [1970] 21 TAX 110; Taimur Shah v. Commissioner of Income Tax (PLD 1951 F.C. 118) and The
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Estman Phtographic Materials Company Ltd. v. The Comptroller Geenral of Patents, Designs & Trad Marks [1898] A.C. 571.
Commissioner of Income Tax v. Olympia – [1988] 57 TAX 71 (H.C.Kar.) 44.
Scope of retrospective legislation.
It is a well-settled principle of interpretation of statutes that any amendment in the existing law will not affect cases which has been finally determined or proceeding which have attained finality unless the amendment expressly provides for such effect. The general rule of construction of statutes is that the enactment are not to be given retrospective operation unless the statute expressly provides so or from the language employed it appears to be the necessary intendment of the legislature. ...... If the rule of liberal construction is to be applied as it obviously should then any doubt should be resolved in favour of retrospective operation, if such operation does not destroy or disturb vested rights, impair the obligation of contracts, create new liabilities, violate due process of law or contravene some other provision of law and if such operation will carry out the intent of the legislature as ascertained through the application of the principles of liberal construction. Rustam F. Cousjee & 2 others v. CBR & 2 others – [1985] 52 TAX 123 (H.C.Kar.) Retrospective legislation is looked upon with disfavour as a general rule, and properly so because of its tendency to be unjust and oppressive. It is a fundamental rule of law that no statute shall be construed to have retrospective operation, unless such a construction appears very clear in terms of the Act, or arises by necessary and distinct implication. Upon the presumption that the legislature does not intend to enact what is unjust, every statute which takes away or impair a vested right acquired under the existing law or creates a new obligations or imposes a new duty or attaches a new disability in respect of transactions or considerations already passed must be presumed to be intended not to have retrospective operation; If there are words in the enactment which either expressly state or, necessarily imply that the statute is to be given retrospective operation, then the Act should have retrospective operation even though the consequence may appear
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unjust and hard; a statute is not to be construed to have greater retrospective operation that its language renders necessary. 45.
For the purposes of assessment of income the law applicable is that in force on the first day of the relevant assessment year.
It is well-settled that for the purposes of assessment to income tax the law to be applied is that law that is in force in the assessment year, in other words the income tax as stands amended on the first day of July of a financial year will apply to the assessment of that year. Commissioner of Income Tax Karachi v. Nisar Ahmad – [1984] 50 TAX 187 (H.C.Kar.) 46.
A penal provision cannot operate retrospectively.
A penal provision can‟t operate retrospectively unless it is so provided by the statute itself. A.J. Hartshorn v. Commissioner of Income Tax, West Karachi – [1984] 49 TAX 198 (H.C.Kar.) 47.
Any Act/Ordinance cannot cover any period prior to coming into force of the Act/Ordinance.
The well settled principle of law is that subject to any provision of saving clause, scope and extent of any section of any Act/Ordinance cannot cover any period prior to coming into force of the Act/Ordinance. Commissioner of Income Tax, Karachi (West), Karachi v. S. A. Rehman – [1980] 42 TAX 147 (H.C.Kar.) = 1980 PTD 314 48.
If a provision is neither declaratory nor curative it cannot be retrospective
The next argument of Mr. Mansoor Ahmed Khan is that Act XI of 1966 whereby section 10(2A) was amended is a declaratory, or in any case a creative enactment. He has stated that the amendment seeks to define what is a bad or doubtful debt, or in any case cures the existing provision by giving the words a purposeful and meaningful intent. Two questions arise namely whether the amendment is in the nature of declaratory enactment and if so, whether the same would be of retrospective application. A declaratory Act generally takes a form by statement “it is declared”. Patently such words have not been used in Act XI of 1966. The second characteristic of a declaratory statute is that it intends to remove doubts as to the meaning of effect of a statute and if not expressly at least by implication the legislature exhibits the reason for passing a Declaratory Act. Blackstone, J. in Nicol v. Verelete [1779] 26 ER 751, stated “declaratory statues do not prove the law was otherwise before, but rather the reverse”. Coleridge,
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C. J. in Jones v. Bennet [1890] 63 LT 705, defined a Declaratory Act that “means to declare the law, or to declare that which has always been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue what it then is”. Such characteristics are also lacking in Act XI of 1966. Further it must be stated that our system of law abhorts retrospective legislation but if ever a necessity has arisen to give retrospective effect, the statute generally expresses such intention. Act XI of 1966 can also not be called a procedural or adjective law because it is a statutory step in determination of rights of the Income Tax Officer as well as the assessee. The right is the retention of money on behalf of others. It also makes an assessee liable to taxation in respect of moneys notionally treated as his profits while exposing him to at least a risk of demand. According to us Act XI of 1966 was intended to provide a limit of time and avoid the lying of money in a sort of suspense account for a period exceeding three years. New rights and liabilities came into existence and new concepts of law were brought into existence. This act cannot, therefore, be called a Declaratory Act. Curative statutes are by their very nature intended to operate upon and affect past transactions and are for such reason wholly retrospective. These statutes are in the nature of validating statues which operate on conditions already existing and for such reason have retrospective operation. If the enactment in question is to be in the nature of a curative law the Legislature would have stated so unambiguously. We are of the view that the amending statute is not even curative in nature. Case referred to: Nocol v. Verelet (1779) 26 E.R. 751 and Jones v. Bennet (1890) 63 L.T. 705.
Mian Muhammad Khalil v. Income Tax Officer Company Circle, Faisalabad – [1979] 40 TAX 113 (H.C.Lah.) 49.
If retrospective operation of a provision results in injustice, it should not be applied retrospectively.
Where retrospectivety not expressly provided in amended provision of law, and retrospective operation results in inconvenience or injustice to the subject. Such a provision cannot be applied retrospectively. Dreamland Cinema, Multan v. Commissioner of Income Tax, Lahore – [1977] 35 TAX 169 (H.C.Lah.) 50.
Declaratory statutes generally apply retrospectively.
All the writers are unanimous in their view that the declaratory statutes apply retrospectively. A reading of the explanation would
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show that the intention of the Legislature was to remove a doubt and explain the intended import of the original provision. Undoubtedly we have to find out the intent of the Legislature and should not be swayed merely by the use of word „declaratory‟ or otherwise. If, therefore, the object of the statute is to explain the previous provisions or to remove a doubt, the law would apply retrospectively. Dreamland Cinema, Multan v. Commissioner of Income Tax, Lahore – [1977] 35 TAX 169 (H.C.Lah.) 51.
Explanatory amendment is always applicable retrospectively to all relevant cases pending at the relevant time.
The amendment under review is of explanatory type stated to have been introduced “for the avoidance of doubt”. The rule about interpretation of such statute is distinct though the principles of interpretation of taxing statutes would apply if attracted to the situation. A reading of the explanation would show the intention of the Legislature was to remove a doubt and explain the intended import of the original provision‟. If the object of the statute is to explain the provisions or to remove a doubt, the law would apply retrospectively. The addition of Explanation 2 to section 24(2) was with the object of removing a doubt (probably created by the two judgments of the West Pakistan High Court) [in Commissioner of Income Tax v. Yousuf & Co. (1967) 15 TAX 4 and Commissioner of Income Tax v. Tayah Moosa & Co. [(1967) 15 TAX 62]. The enactment was expressly explanatory in nature. Therefore, it had to apply retrospectively to all the relevant cases pending on that date. Cases referred to : Nicol v. Verelet [(1779) 26 E.R. 751]; Jones v. Bonnet [(1890) 63 L.T. 705]; Muhammadi Bibi v. Kashi Upadhya (AIR 1926 All. 725); Joti Ram Khan v. Janaki Nath Joshi (33 I.C. 54); Mst. Rashid Bibi v. Tufail Muhammad (AIR 1941 Lah. 291); Bappu Ayyar v. Ranganayaki (AIR 1955 Mad. 394): Abdul Hamid v. The State (PLD 1963 Kar. 373); Pennirselvem v. Veerish Vendayar (AIR 1931 Mad. 83); Commissioner of Sales Tax v. Kruddsons Ltd. (PLD 1974 S.C. 180); Young v. Adams (1898 A.C. 469); Muhammad Amir Khan v. Controller of Estate Duty (PLD 1961 S.C. 119); (1961) 3 TAX 166 (S.C.); Muhammadi Steamship Co. (PLD 1966 S.C. 828); (1966) 14 Tax 281 (S.C.); Commissioner of Income Tax v. Yousuf & Co. (1967) 15 TAX 4; Commissioner of Income Tax v. Tayab Moosa & Co. (1967) 15 TAX 62; Commissioner of Income Tax v. Pakistan Standard Oil & Ginning Mills (1973) 28 TAX 9.
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Aftab Medical Stores Dera Ghazi Khan v. Commissioner of Income Tax, Lahore – [1976] 34 TAX 10 (H.C.Lah.) 52.
Subordinate legislation can be applied retrospectively only if expressly mentioned.
A subordinate legislation like rules can be applied retrospectively only if the parent Act confers such a power on the rule making authority and it is so expressly mentioned in the rules as well. Income Tax Officer & others v. Suleman Bhai Jiwa & others – [1970] 21 TAX 62 (Income Tax Digest Feb. 1970) 53.
Rules to determine retrospective effect.
The use by the legislature of the words, such as „shall‟ or „hereafter‟, is taken to indicate an intent that the statute is to be construed as prospective only; on the other hand, the use of the words denoting past time, such as „has been‟ or „hereto before‟ constitute an explicit declaration that Act is to be construed retrospectively. Harjina & Company (Pak) Limited, Karachi v. Commissioner of Income Tax – [1964] 8 TAX 1 (H.C.Kar.) = 1963 PTD 867 = 1963 PLD 996 54.
Right accrued cannot be taken away by implication.
Rights under existing laws are not to be supposed to have been repealed by implication unless intention becomes clear from language of law. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 55.
Rights conferred under statutes cannot be taken away by later legislation except by express words or by necessary implication.
I am not myself prepared to go the length of holding that rights such as those conferred under the Permanent Settlement can only be abrogated if express provisions cancelling such rights are inserted in a subsequent legislative enactment. No doubt the maxim generalia specialibus non derogant may be regarded as embodying a good working rule of construction, but where the intention of the legislature to abrogate or modify existing rights is manifest as a necessary implication from the language used in the repealing statute, it matters not, in my opinion, that the existing rights are not therein expressly and specifically modified or cancelled. Lord Selborne, Lord Chancellor, refers to this canon of construction in Seward v. Vera Cruz [(1884) to App. Ca. 59], where he observes:
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“If anything be certain it is this, that where there are general words in a later Act capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, you are not to hold the earlier and special legislation indirectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so.” Lord Justice Bowen restated the canon in In re Cuno, Mansfield v. Mansfield [(1889) 43 Ch. D. 12 at p. 17] in these words: “in the construction of statutes, you must not construe the words so as to take away the rights which already existed before the statute was passed unless you have plain words which indicate that such was the intention of the legislature.” See also Irrawaddy Flottila Company v. Bhagwandas [(1891) I.L.R. 18 Cal. 620; 18 I. A. 121]. Sunder Mull v. Ladhuram Koluram [1923) I.L.R. 50 Cal. 667; A.I.R. (1924) Cal. 240: 83 Ind. Cas. 757] and Duke of Argyll v. Commissioners of Inland Revenue [(1913) 109 L.T. 893]. In Garnett v. Bradley [(1878) 3. App. Cas. 944 at p. 967], Lord Blackburn laid down what I conceive to be the true rule of construction applicable in the circumstances of this case. His Lordship observes: “There is an other rule if it is properly applied, namely, that where there has been a particular rule established either by custom or by statute, where there is some particular law standing and a subsequent enactment has general words which would repeal that particular law or particular custom, if they were taken in all generality, ............ yet nevertheless the first particular law is not to be repealed unless there is a sufficient indication of intention to repeal it. It is not to be repealed by mere general words: the two may stand together; the first, the particular law, standing as an exceptional proviso upon the general law.” After referring to certain cases, His Lordship continues: “In all these cases, however, the particular statute relied upon was a statute in favour of a particular class of persons or the property of a particular class of persons. I do not take upon myself to say that all cases in which that rule have been applied to which that remark would
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not be applicable. But where that is the case, where the particular enactment is particular in the sense that it protects the rights, the property, the privileges of particular persons or a class of persons, the reason for the rule which has been acted upon is exceedingly plain and strong. It would be very unjust, or I would rather say unfair (I do not go further than that), to pass an enactment taking away from a particular person or class of persons his or their rights without hearing what he or they have got to say about it; and if general words were to have the effect of taking away the rights of a particular person or class which had been given to them beforehand, it would be done without their having any knowledge or opportunity of resisting it and it is not to be imputed to the legislature or to be supposed that the legislature would do what was unfair. Therefore, I think that where only general words are used, there is a strong presumption that the legislature did not intend to take away a particular privilege, right or property of a particular class, unless thy have done something to show that. If they have done something in such a way as would show that that was their intention, if they have said in negative words that those rights or privileges shall all be taken away any enactment to the contrary notwithstanding, that would prevent the presumption arising at all. But in the absence of that, I think it is an intelligible principle to say that the legislature shall not be presumed to have done anything unfair, and to have taken away this particular privilege not having stated openly that they meant to take it away, or in such open or clear language that the persons affected might come and resist and use arguments to show why it should not be taken away, but having simply used general words quite consistent with their never having thought of this privilege at all. I think, my Lords, that that principle will reconcile almost all the cases; certainly it will reconcile all I have cited, and it is a good and intelligible principle.” Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 56.
Presumption against double taxation.
Some reference was also made to what has been called a „presumption against double taxation.‟ In Manindra Chandra Nandi v. Secretary of
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State [(1907) I.L.R. 34 Cal. 257 at p. 287; 5 C.L.J. 148], royalties from a coal mine were held liable both to cess under the Cess Act, 1880 and to income tax under the Act of 1886, but it was said that „it may be conceded that Courts always look with disfavour upon double taxation and statutes will be construed, if possible, to avoid double taxes.‟ Reference was made to certain dicta of American Courts and to the English case of Carr v. Fowle [(1893) I.Q.B. 251]. But the only observation in this case was to the effect that the statute presumably did not intend that a vicar should in effect pay the same tax (land tax) twice on the same hereditament. This is plain enough. Thus the income tax is one tax, and income assessed under one Schedule cannot be assessed all over again under another. That there is any legal presumption of a general character against „double taxation‟ in any wider sense is a proposition to which I respectfully demur as a principle for the construction of a modern statute. In Maninra Chandra Nandi v. Secretary of State [(1907) I.L.R. 34 Cal. 257; 5 C.L.J. 148], it did not avail to cut down clear, though absolutely general language. Commissioner of Income Tax v. Dharamchand Dalchand – 1 ITC 264 (Nagpur) 57.
Vested rights such as rights to appeal and to demand a reference already accrued, cannot be taken away by repeal of Act.
Under the ordinary law, vested rights including rights to appeal and to demand a reference that have already accrued are taken away by the repeal of any Act; but the procedure would be under the new Act. The rule regarding vested rights is not confined to substantive rights but extends equally to remedial rights or rights of action including rights of appeal: see Maxwell‟s Interpretation of Statutes, 6th Edition 401. In Gopeshwar Pal v. Jiban Chandra [(1914) I.L.R. 41 Cal. 1125; 18 C.W.N. 804; 19 C.L.J. 549; 24 Ind. Cas. 37], it was held that, though procedure may be regulated by an Act for the time being in force, still the intention to take away a vested right without compensation or any saving, is not to be imputed to the legislature in any case unless it be expressed in unequivocal terms. [Chief Commissioner of Public Works v. Logan (1903) A.C. 355]. This was a case of right to sue. In Ramakrishna Chetty v. Subbaraya Aiyar [(1915) ILR 38 Mad. 101; 24 M.I.J. 54; (1913) MWN 303; 18 Ind. Cas. 64] which is a case of limitation, it was held that the rule regarding vested rights is not confined to substantive rights but extends equally to the remedial rights or rights of action including rights of appeal. At
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page 106 of the same ruling there is a quotation from an English case, In re Athlumney, Ex parte Wilson [(1898) 2 Q.B. 547], where wright J. observed; “Perhaps no rule of construction is more firmly established than this that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards a matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment;” And, further, their Lordships observe: “It is unreasonable to suppose that the Act intended to destroy a man‟s rights without giving him an opportunity to comply with its provisions. The Court, if asked to give retrospective effect to a statute, will bear in mind the consequences of doing so. See Ex parte Todd, In re Ashoroft [(1887) 10 Q.B.D. 186].” Balkishan Nathani v. Commissioner of Income Tax – 1 ITC 248 (Nagpur) 58.
Fiscal statutes to be strained in favour of the subject, if at all.
Technicalities in a fiscal statute must be strained in favour of the subject, if they are to be strained at all, and not against him. ________________
REMEDIAL AND CURATIVE LEGISLATION HAS RETROSPECTIVE EFFECT
Commissioner of Income Tax v. Shahnawaz Ltd. and others – 1992 SCC 920 = [1992] 66 TAX 125 (S.C.Pak.) 59.
Remedial and curative legislation has retrospective effect.
The amendment in relevant section was a remedial and curative legislation designed to soften the harsh, unjust and unreasonable law, as was then obtaining, not restricting the maximum period for levy of additional tax. There is no reason why the remedial law should not be applied to pending proceedings. Although the amendment was made by the Finance Act, 1973 but it could not be restricted to assessment year 1973-74. The retrospective remedy would be available to all „cases which were pending at the time the amending law was enacted i.e. cases which had not been finally determined or proceedings which had not attained finality. The retrospective effect of the amending law, would, therefore, apply only to those cases where assessment had not
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been made by the Income Tax Officers or where an appeal was pending before the Tribunal or a reference was sub-judice before the High Court, at the time the amending law was enacted. The cases which had finally determined or had attained finality i.e. which were past and closed, transaction, could not be reopened under amending legislation there are no express words to that effect employed in the amending law‟. _______________
PRINCIPLE OF CONTEMPORARY EXPOSITION
Maharaja of Darbhanga v. Commissioner of Income Tax – 1 ITC 303 (Patna) 60.
Principle of contemporary exposition.
Therefore, in the absence of any clear and unambiguous declaration by the authors of the Permanent Settlement, I think it is permissible to invoke the aid of the principle of „contemporary exposition.‟ Here it is not a case of one or two stray statutes in the administration of which the strict rule of construction has been overlooked. On the contrary, a uniform course of dealing is disclosed which shows that profits from permanently settled estates have been taxed for the purposes of the State without express words revoking the exemption alleged to have been given by the Permanent Settlement Regulation; and I have been unable to discover a single statute in which any such exemption has expressly or by implication been recognized. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 61.
Practice of Revenue Authorities as contemporanea expositio.
Some reference was made at the bar to the practice of the Revenue Authorities since 1886 as regards fisheries in permanently _ settled estates, but there is no agreement as to what that practice if there be a practice - has been. Assuming that it would have been open to us to place some degree of reliance upon an interpretation settled by practice as contemporanea expositio, we are in fact without any such assistance. _______________
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ACTION IS DEEMED ILLEGAL, THE WHOLE SUPERSTRUCTURE BUILT UPON IT IS ALSO ILLEGAL
Muhammad Azim v. Commissioner of Income Tax East Zone Karachi – [1991] 63 TAX 143 (H.C.Kar.) = 1991 PTD 658 62.
If an action is deemed illegal, the whole superstructure built upon it is also illegal.
It is well settled principle that if the very foundation of an action is illegal or without jurisdiction the whole superstructure built upon it cannot validly and legally stand. N.V. Philips Glocilin Peufabrikan v. Income Tax Officer & others – [1990] 61 TAX 159 (H.C.Kar.) Where any action is challenged as without jurisdiction and if it is so declared then all orders and proceedings taken on the basis of such illegal action shall also be vitiated. In 1970 Law Notes 28 (DB) Lah. it was held that if on the basis of void order subsequent orders have been passed either by the same authority or by other authorities, the whole services of such order, together with the superstructure of rights and obligations built upon them, must fall to the ground because such orders have as little legal foundation as the void order on which they are grounded. _______________
INCOME CANNOT BE TAXED TWICE
M.Rehman, Income Tax Officer & others v. Narayanganj Company (Pvt.) Ltd. – 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak) 63.
Income cannot be taxed twice.
The learned judges in the High Court relied on the following remarks of the Indian Supreme Court in the case of Commissioners of Income Tax, U.P. v. Kanpur Coal Syndication [(1964) 10 Taxation 175]: “Section 3 imposes a tax upon a person in respect of his total income. The person on whom such tax can be imposed are particularised therein, namely, Hindu undivided family, company, local authority, firm, association of persons, partners of firm or members of association individually. The
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section, therefore, does not in term confer any power on any particular officer to assess one of the person described therein, but is only a charging section imposing the levying of tax on the total income of an assessable entity described therein. The section expressly treats as association of persons and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either on the said two entities according to the provisions of the Act.” The rule issued in the case was in this view made absolute by the Division Bench of the High Court and the impugned notice under section 65 set aside, from which leave to appeal was generated to consider whether it was a case of double assessment or a case of rectification of assessment wrongly made upon individual partners in respect of the income of an unregistered firm. _______________
ONE THING IMPLIES THE EXCLUSION OF ANOTHER
Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others – [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180 64.
“Expressio unius est exclusio alterius”.
In the present case at the relevant time the express mention of the word “loan” excluded all other similar or equivalent terms, transactions, or nature of the receipts. No maxim of law was of more general and uniform application than “expressio unius est exclusio alterius”. Whenever a statute limits a thing to be done in a particular form, it necessarily includes in itself a negative, viz. that the thing shall not be done otherwise. The purpose of introduction of the provisions of section 12(18) of the Ordinance at the relevant time was to check fictitious loans and it was after quite some time that it was realized that the scope of the provisions needed to be expanded. No addition of the kind could possibly be made nor the defence taken by the assessees rejected without recording a finding of fact that these sums were injected in the business and were used as capital, circulating or otherwise. In other words the defence of the assessees could have been demolished only by recording a finding of fact that the alleged share deposit moneis were factually used in the business and therefore, could be taken as “loan” taken for catering the capital needs of the companies.
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Income Tax Digest.
Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 “Expressio unius est exclusio alterius” (Express mention of one thing implies the exclusion of another) was neither absolute nor was of universal application.
65.
The rule that express mention of one is exclusion of the rest is neither absolute nor is of universal application. _______________
APPLICATION OF RULE GENERALIBUS SPECIALIA DEROGANT
Commissioner of Income Tax, East Pakistan, Dacca v. Engineers Limited, Dacca – 1967 SCC 289 = [1967] 16 TAX 81 (S.C.Pak.) Application of rule generalibus specialia derogant.
66.
The second contention, raised by the learned counsel for the Commissioner of Income Tax, that clause (xvi) was not applicable rested on the rule that a special provision in a statute excludes the application of a general provision of similar nature. This is a well established rule of construction of statutes, but is attracted in the interpretation of clause (xvi) the relevant clauses read as follow: (xii)
any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business;
(xiv)
any expenditure of a capital nature on scientific research related to the business;
(xv)
any expenditure laid out or expended on the training abroad of citizens of Pakistan, in connection with a scheme approved by the Central Board of Revenue for the purposes of this clause; and
(xvi)
any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
The scope of clause (xvi) which is residuary nature is thus wholly different from the sums included in clause (xii), (xiv) and (xv). There being no similarity of subject-matter between clauses (xii), (xiv), (xv) and (xvi) of section 10(2) the rule generalibus specialia derogant was clearly not attracted. _______________
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INTERPRETATION OF STATUTES/ GENERAL PRINCIPLES
Jamat-i-Islami Pakistan through Syed Munawar Hassan, Secretary General v. Federation of Pakistan through Secretary, Law, Justice and Parliamentary Affairs, Muttahida Qaumi Movement (MQM) through Deputy Convener, Senator Aftab Ahmad Sheikh v. Federation of Pakistan through Secretary, Ministry of Interior – PLD 2000 S.C. 111 67.
Statute must be intelligibly expressed and reasonably definite and certain.
Statutes must be intelligibly expressed and reasonably definite and certain. An act of the Legislature to have the force and effect of law must be intelligibly express and statutes which are too vague to be intelligible are a nullity. Certainty being one of the prime requirements of a statute, a statute in order to be valid must be definite and certain. Anticipated difficulty in application of its provisions affords no reason for declaring a statute invalid where it is not uncertain. Reasonable definiteness and certainty is required in statutes and reasonable certainty is sufficient. Reasonable precision, and not absolute precision or meticulous or mathematical exactitude, is required in the drafting of statutes, particularly as regards those dealing with social and economic problems. Penal statutes contemplate notice to ordinary person of what is prohibited and what is not. Statute creating an offence must be precise, definite and sufficiently objective so as to guard against an arbitrary and capricious action on the part of the State functionaries who are called upon to enforce the statute. 68.
True meaning of statute vis-a-vis duty of court.
It is the duty of the Court to find out the true meaning of a statute while interpreting the same. The general rule is that the Courts adopt as uniform an approach as possible to the reading of ambiguous Acts of Parliament which are some times imperfect, obscure and vague. The primary rule of interpretation of statutes is that the meaning of the Legislature is to be sought in the actual words used by him which are to be interpreted in their ordinary and natural meanings. The cardinal rule for the construction of Acts of Parliament is that they should be construed according to the intention expressed in the Acts themselves. Where the language of the statute is plain and unambiguous, and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation, and the
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Court has no right to impose another meaning or to read into its limitations which are not there, based on a prior reasoning as to the probable intention of the Legislature. Court can resort to the proceedings of the Legislature when the language employed is ambiguous. Central Insurance Co. & other v. CBR Islamabad – 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak) 69.
Interpretation of statute is not CBR‟s domain.
The interpretation of any provision of the Ordinance can be rendered judicially by the hierarchy of the forums provided for under various sections of the Ordinance, namely, the Income Tax Officer, Appellate Assistant Commissioner, Appellate Tribunal, High Court and this court and not by the CBR. Therefore, interpretation of statute is not CBR‟s domain. A&B Food Industries Ltd. v. Commissioner of Income Tax/CST Karachi – [1992] 65 TAX 281 (S.C.Pak) 70.
Proceedings of the Legislature can be resorted to when the words of a provision are ambiguous.
We are inclined to hold that reference to the proceedings of the Legislature can be restored to when the words of a provision of a statute are ambiguous with the object to discover the real intention of the law-makers but when there is no ambiguity in the language employed in the relevant provisions of the statute, recourse to the proceedings of the Legislature cannot be made in order to construe the same in violation of the language employed therein. In our view, if the language of the statute is clear and unambiguous, the Court is bound to construe and to give it effect without taking into consideration anything extraneous to the same. Reference may also be made to a recent decision of this court in the case of Miss Benazir Bhutto v. Federation of Pakistan [PLD 1988 SC 416] wherein following observations were made on the question: whether the proceeding of the Parliament can be referred to while interpreting a provision of a statute. Commissioner of Income Tax North Zone, Lahore v. Mst. Wazirunissa Begum – 1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.) 71.
Person sought to be taxed must come within the letter of law.
In determining whether or not a particular matter comes within taxing statutes, it is only the letter of law that can be looked into. There is ample authority for the proposition that in a fiscal case, form
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is of primary importance, the principle being that if the person sought to be taxed comes within the letter of the law, he must be taxed, however great a hardship may thereby be involved but on the other hand if the crown cannot bring the subject within the letter of the law he is free, however, apparent in may be that his case comes within what might be called the spirit of the law. Muhammadi Steamship Company Ltd. v. Commissioner of Income Tax, (Central) Karachi – 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 72.
No words to be treated as surplusage.
It is well established rule of interpretation of statute that no words in a statute are to be treated as surplusage or redundant. The words „such capital being computed in accordance with the rules made by the Central Board of Revenue‟ could not be read as surplusage or redundant. Imperial Tobacco Co. of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi – 1958 SCC 37 = [1959] 1-TAX (111284) (S.C.Pak.) 73.
Abrogation of International Law.
Statutes are not to be construed as abrogating International Law unless their language clearly leads to that result, and that extra territorial operation of a statute over foreigners is not to be presumed as having been intended unless it is expressly so stated. Commissioner of Income Tax East Bengal v. Kumar Narayan Roy Choudhry and others – 1959 SCC 68 = [1959] 1-TAX (111207) (S.C.Pak.) 74.
A fiscal statute should be construed strictly.
A fiscal statute should be construed strictly and no question of equitable construction arises. Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 75.
Claimant of an exemption has to bring the same home without any ambiguity.
These cannot be read as exemption granting provisions. It is an established proposition of fiscal laws that the claimant of an exemption has to bring it home without any ambiguity.
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Allied Bank of Pakistan Ltd., Azad Kashmir Branches, Mirpur through Inam Elahi Azhar, EVP and Provincial Chief, PHQ (Punjab) v. Income Tax Appellate Tribunal, AJK Council, Muzaffarabad and others – [2001] 83 TAX 404 (H.C.A&JK) = [2000] 82 TAX 417 (H.C.AJ&K) = 2000 PTD 2872 76.
Where a provision was open to two reasonably possible interpretations, then, the interpretation which favours the taxpayer has to be adopted.
Where a provision was open to two reasonably possible interpretations, then, the interpretation which favours the taxpayer has to be adopted. 77.
Correct interpretation of rule 15 vis-a-vis right of appeal.
Rule 15 further contains that where the memo. of appeal is not filed in the manner specified, then, the Registrar or the Officer authorized under rule 7, may return it to the appellant or his authorized representative, if any, to bring it in conformity with the provisions of the said Rules within such time as he may think. The aforesaid rule also lends support to the arguments that section 134(5) is directory provision of law and not mandatory because it suggests that if any memo of appeal is not accompanying the necessary document then, the Registrar shall return the same and provide further time for its completion. Thus, it clearly shows that in case, the appeal fee was not deposited within time then the Registrar should have directed the appellant to deposit the requisite appeal fee. He should have also provided time to the appellant for depositing the appeal fee, so, it could not be said that this provision is a mandatory provision of law, therefore, if, at all, the memo of the appeals were not accompanying the requisite fee, then, under rule 15, it was the responsibility of Registrar to provide further time to the appellant for depositing the appeal fee. Nothing like such was done in the instant cases. It is to be noted that if it would have been a mandatory provision of law, then, the rule 11, it should have been mentioned that the memo. of appeals should accompany the requisite court-fee and the consequences for failure of which would have also been provided in the aforesaid rules. 78.
The use of word “shall” in section 134(5), Income Tax Ordinance, 1979 does not make it mandatory in nature.
No doubt, that in section 134(5), the word „shall‟ has been used but merely and simply on the basis of the word „shall‟, it could not be construed that it is mandatory provision of law.
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Both the aforesaid reports clearly conveys that where the consequences of failure to comply with the provision are not stated, the provision is directory and where the consequences are specifically mentioned, the provision is mandatory. In the instant case, the consequences of failure to comply with section 134(5) has not been given, therefore, it could not be construed as a mandatory provision of law but it is a directory provision of law. 79.
Principles for determining mandatory or directory provision of law.
No universal rule or absolute test existed for determining whether a provision of law was mandatory or directory and it was to be determined according to the intention of the Legislature and the language which had been used in the provision. Ordinarily, where consequences of failure to comply with certain provisions were not stated those were to be deemed to be directory, and where the consequences were specifically mentioned, the provision was mandatory. Statute, as a general rule was understood to be directory when it contains matter merely of directions but it was construed as mandatory when those directions were followed up by an express provision that in default of following them, he had to face the consequences. Provision was mandatory if its disobedience entitled a serious legal consequence. Muhammad Saleem v. Deputy Director FIA/CBC, Multan and another – PTCL 2000 CL. 465 80.
Things should be done as required by law.
Where a thing was provided to be done in a particular manner, it had to be done in that manner and if not so done, the same would not be lawful. Commissioner of Income Tax v. Muhammad Kassim – [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280 81.
Court must confine itself to language of law.
While interpreting a provision of statute, Court has to read the provision as it exists and to deduce or infer the meaning in accordance with the existing test or the words or particular provision. Court is not supposed to add to or subtract any word(s) from any provision of a statute while interpreting a provision so as to give same a meaning other than the one which obviously and plainly flows or can be inferred from it.
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Commissioner of Income Tax v. Prasad Film Laboratories (P.) Ltd. – 1999 PTD 325 82.
Assessing officer to apply correct law even if assessee fails to make a claim.
It is the duty of the assessing officer to correctly apply the law notwithstanding the fact that assessee failed to make a claim. Rijaz (Pvt.) Ltd. v. Wealth Tax Officer Circles III Lahore – [1996] 74 TAX 9 (H.C.Lah.) 83.
Explanation can be added to elaborate the meanings.
As a general principle it is true that an explanation does not enlarge the scope of the provision to which it is attached but it is equally wellsettled that if doubt about true interpretation of a provision have arisen, it is open to the legislation to clarify its intention by amending the law which may as well be by adding an explanation. All principles of interpretation are agreed towards finding out the true intent to the legislative which in the present case was made clear by adding an explanation which cannot be ignored. Mustafa Prestressed R.C.C.Pipe Works Ltd. Karachi v. Commissioner of Sales Tax (Investigation), Karachi – [1990] 62 TAX 119 (H.C.Kar.) 84.
Harmonious construction is recommended.
It is well-settled principle of interpretation that all the provision of an enactment have to be construed harmoniously. Trustees of the Port of Karachi v. CBR & another – [1990] 61 TAX 30 (H.C.Kar.) 85.
Proceedings of the Legislature can be resorted to when the words of a provision are ambiguous.
A taxing statute usually contains charging and machinery provisions. The former fixes the liability to pay tax and has to be construed strictly and where two reasonable interpretations are possible one which favours the subject should be accepted. Once the liability to tax is fixed the machinery provision comes into play. This has to be construed liberally and in a manner that the recovery is ensured. Where more than one reasonable interpretation of such provision is possible one which favours recovery should be adopted. 86.
Interpretation of machinery provisions of a fiscal statute.
Mr. Sheikh Haider the learned counsel for the respondent has contended that as section 50(7A) is not a charging but machinery provision it should be liberally interpreted to ensure that recovery
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of tax is made and no part of it escapes. It is true that the machinery provisions of a fiscal statute should be interpreted in such a manner that recovery is not frustrated or adversely affected. But it does not mean that to achieve this object one can travel beyond the realm of law and do violence to language and intention of the statute. The machinery can be extended only to the extent it is permissible under law. In this attempt one cannot override the rights of other parties only because a recovery has to be made. Such provision have their own limitations and they are to be found within the statute itself. Commissioner of Income Tax/CST (Central Karachi) v. A.B. Food Industries Ltd. Karachi – [1984] 50 TAX 158 (H.C.Kar.) 87.
Speech of the Federal Minister has no legal consequences or effect.
I have no hesitation in holding that the speech given by the Finance Minister cannot have any effect on the legal consequences flowing from the language employed in the enactment. Sainropt and ET Brice Karachi v. Commissioner of Income Tax West Karachi – [1979] 40 TAX 116 (H.C.Kar.) 88.
Role of history of legislation in interpreting a provision of law/statute.
It is well established that in the interpretation of statutes, the meaning of the words should be considered in the light of history of the legislation and the state of the law at the time the statute was passed, in order to consider whether the statute was intended to alter the law or to leave it exactly where it stood before. As observed by Maxwell on „Interpretation of Statutes‟, 12th edition, page 47, the court is not to be oblivious of the history of law and legislation in amending the law. Craies on „Statute Law‟, 7th edition, at page 126) observes that the cause on necessity of the Act may be discovered by considering the state of the law at the time when the Act was passed and in memorable cases the courts with a view to construing an Act have considered the existing law and reviewed the history of legislation upon the subject. Crown Bus Service Ltd. Lahore v. CBR & others – [1976] 34 TAX 54 (H.C.Lah.) 89.
Departmental construction can be used in aid of interpretation.
It was laid down in Nazir Ahmad v. Pakistan and 11 others (PLD 1970 SC 453 at page 459) that a passage from Craford‟s Statutory Construction, 1940 edition, at page 399 may be usefully reproduced to
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point out the effect of „departmental construction‟, that is to say, the construction which is placed in practice on the provisions of a statute or rule by the administrative authorities who are charged with the execution of the statute or the rules. The learned author observed; “Where the executive construction has been followed for a long timing an element of estoppel seems to be involved. Naturally many rights will grow up in reliance upon the interpretation placed upon a statute by those, whose duty it is to execute it. Often grove injustices would result should the courts reject the construction adopted by the executive authorities.” Commissioner of Income Tax Rawalpindi v. Noon Sugar Mills – [1975] 32 TAX 273 (H.C.Lah.) 90.
Caution should be used while borrowing the meaning attached to terms and phrases used in one statute, while interpreting another statute.
It is not always safe to borrow the meanings attached to terms and phrases used in one statute as aid in support of the interpretation of a different statute meant for a different purpose and dealing with a wholly different subject matter. It is of course permissible to have recourse to the ordinary dictionary meanings in interpreting a statute. Commissioner of Sales Tax Rawalpindi Zone, Rawalpindi v. Rashid Burner, Sialkot – [1974] 29 TAX 221 (H.C.Lah.) 91.
Terms and phrases used in a statute prima facie should be construed in their popular sense
There are two rules as to the way in which terms and expressions are to be construed, when used in an Act of Parliament. The first rule is that general statutes will prima facie be presumed to use words in their „popular sense‟..... critical refinement and subtle distinction are to be avoided and the obvious popular meaning of the language should, as a general rule, be followed. Commissioner of Income Tax v. Nagina Talkies (property) Karachi – [1974] 29 TAX 115 (H.C.Kar.) 92.
While interpreting a statute nothing is to be read in and nothing is to be implied.
In fiscal statutes the meaning has to be ascertained from the plain language of the statute and „nothing is to be implied‟ in such statute.
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Mujibur Rehman v. Commissioner of Income Tax – [1966] 13 TAX 141 93.
Departmental instructions interpretation.
cannot
be
used
in
aid
of
Departmental directions have nothing to do with the interpretation of the statute. Rathan Singh, Proprietor, Rathan Singh Motor Service, Madura v. Commissioner of Income Tax, Madras – 2 ITC 107 (Madras) 94.
Non-revenue profit/losses are not covered in Income Tax unless specifically provided in statute.
It is one of the fundamental principles of income tax legislation both in India and in England that capital losses are never allowed in income tax assessment unless specifically provided for in the words of the statute. It is equally true that profits arising from capital transactions are not liable to be taxed. I am fortified in this conclusion by the remarks of Schwabe C.J., in Board of Revenue v. Ramanathan Chettiar (244 ITC 247) where he states: “It does not seem probable that the legislature meant to provide a deduction for losses on sales of machinery by manufacturing concerns without at the same time bringing into account any profits that might be made on such sales. Sales of machinery are sales of parts of the capital of a concern of this kind and the resulting profits or losses on such sales are dealt with quite apart from this section.” Sundar Das v. Collector of Gujrat – 1 ITC 189 (Lahore) 95.
In dubio construction which imposes burden on taxpayer should be avoided.
It is a sound principle that the subject is not to be taxed without clear words to that effect and that in dubio you are always to lean against the construction which imposes a burden on the subject. Imperial Tobacco Company of India v. The Secretary of State for India in Council – 1 ITC 169 (Calcutta) 96.
Courts are not to be influenced by doctrine of hardship.
It is a well-established rule that Courts ought not to be influenced by any notion of hardship in exceptional or individual cases in interpreting a statute.
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Secretary of State v. Seth Khemchand Thaoomal – 1 ITC 26 (Sind) 97.
Tax must be imposed by clear and unambiguous language.
As, observed in Maxwell on the Interpretation of Statutes, 4th Ed.,page 429: „Statutes, which impose pecuniary burden, are subject to the rule of strict construction. It is a well-settled rule of law that all charges upon the subject must be imposed by clear and unambiguous language, because in some degree they operate as penalties‟. _______________
PRINCIPLES GOVERNING INTERPRETATION OF FINANCIAL LIABILITIES
Highway Petroleum Services (Regd.), Lahore v. Islamic Republic of Pakistan and another – [1977] 36 TAX 8 (H.C.Lah.) 98.
Principles governing interpretation of financial liabilities should be strictly construed.
On well based judgments, the propositions are stated in Maxwell, Rules of Interpretation, 12th Edition at page 257 as under:“It is well settled rule of law that all charge upon the subject must be imposed by clear and unambiguous language, because in some degree they operate as penalties (as in penal laws) the subject is not to be taxed unless the language of the statute clearly imposes the objection(s) and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words. „In a taxing Act‟, said Rowlett, J., „one has to look merely at what is clearly said. There is no room or any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in nothing is to be implied. One can only look fairly at the language used.‟ But this strictness of interpretation may not always ensure to the subject‟s benefit, for if the person sought to be taxed comes within the latter of the law, he must be taxed, however, great hardship may appear to the judicial mind to be.” _______________
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PRINCIPLE OF EQUITY
Dreamland Cinema, Multan v. Commissioner of Income Tax, Lahore – [1977] 35 TAX 169 (H.C.Lah.) 99. Equitable construction of a fiscal statute is not permitted. There is no dispute about the proposition that equitable construction of a fiscal statute is not permitted. A person must be taxed only if he comes with the letter of law, otherwise he is free even though his case falls within the spirit of law as held in Hira Chand v. Emperor (AIR 1931 Lah. 572). In Commissioner of Income Tax v. Ectis C. Reid (AIR 1951 Bom. 333) their Lordships observed that in interpreting a Taxing Statute the language should not be strained to hold subject liable to tax. The judicial committee of the Privy Council approved the following passage in Bank of Chittinad v. Income Tax Officer, Madras (AIR 1940 PC 183): “If the person sought to be taxed comes within the letter of law he must be taxed, however, great hardship may appear to be. On the other hand, if the Crown, seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law, the case might otherwise appear to be.” Where two equally reasonable constructions are possible, one strict and the other beneficial to the assessee, the latter should be preferred in a taxing statute in view of the rule laid down in Commissioner of Income Tax v. Hossen Kasam Dada (PLD 1961 SC 375). Rowe & Co. v. The Secretary of State for India – 1 ITC 161 (Burma) 100. Equitable construction is inadmissible in a fiscal statute. The High Court of Calcutta relying on those and other cases, in Killing Valley Tea Company, Limited v. Secretary of State for India (1 ITC 54; 48 Cal. 161; 32 CLJ 421; 61 Ind. Cas. 107) said there is no room for controversy that the Crown seeking to recover the tax, must bring the subject within the letter of the law, otherwise the subject is free, however, much within the spirit of the law the case might appear to be. There can be no equitable construction admissible in a fiscal statute; the benefit of the doubt is the right of the subject. Secretary of State v. Seth Khemchand Thaoomal – 1 ITC 26 (Sind) 101. No equitable construction in fiscal statutes. Again, the legislature may or may not be justified on moral or political grounds in cancelling or modifying the rights and privileges which
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were granted under the Permanent Settlement. Such problems are matters of policy with which the Court has not concern. _______________
POWERS OF COURTS/ADMINISTRATIVE JURISDICTION
The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others – [1999] 80 TAX 79 (S.C.Pak) = 1999 PTD 2174] 102.
CBR and the Federal Government have no power to resort to judicial interpretation of law.
It seems to be well-settled proposition of law that the Central Board of Revenue, or for that matter even the Federal Government, cannot control or curtail judicial adjudication powers vested in the forums provided under the relevant law by giving a particular interpretation to a particular provision of the relevant law or by issuing notification/S.R.O. for that purpose. Central Insurance Co. Ltd. v. Commissioner of Income Tax – [1999] 79 TAX 1 (S.C.Pak.) 103.
In granting leave to appeal rule of consistency is to be followed.
Mr.Sheikh Haider, learned Advocate Supreme Court, appearing for the official respondents/caveators, has submitted that the above petitions merit dismissal as the assessments pursuant to the impugned notices have already been finalised and recoveries have already been made and the parties have filed appeals etc. against the above assessments. Since earlier this Court has already granted leave against the judgment of the High Court which is also the subject-matter of the present petitions, in order to follow the rule of consistency, we are inclined to grant leave in the present cases to consider inter alia the question on which earlier leave has been granted. However, we are not inclined to grant any stay order. Leave is accordingly granted. Elahi Cotton Mills Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 104.
Judicial approach on constitutional issues should be dynamic.
That the policy of a tax, in its operation, may result in hardships or advantages or disadvantages to individual assessees which are accidental and inevitable. Simpliciter this fact will not constitute violation of any of the fundamental rights.
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That while interpreting constitutional provisions Courts should keep in mind, social setting of the country, growing requirements of the society/nation, burning problems of the day and the complex issues facing the people, which the Legislature in its wisdom through legislation seeks to solve. The Judicial approach should be dynamic rather than static, pragmatic and not pedantic and elastic rather than rigid. That the law should be saved rather than be destroyed and the Court must lean in favour of upholding the constitutionality of a legislation keeping in view that the rule of constitutional interpretation is that there is a presumption in favour of the constitutionality of the legislative enactments unless ex facie it is violative of a constitutional provision. 105.
Conditions under which courts can strike down a law.
That though the Legislature has the prerogative to decide the question of quantum of tax, the conditions subject to which it is levied, the manner in which it is sought to be recovered, but if a taxing statute is patently discriminatory or provides no procedural machinery for assessment and levy of tax or that is confiscatory, the court may strike down the impugned statute as unconstitutional. Central Insurance Co. & Other v. CBR Islamabad – 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak) 106.
CBR is not competent to issue instructions of judicial/quasi judicial nature.
We may point out that the Central Board of Revenue cannot issue any administrative directions in the nature which may interfere with the judicial or quasi-judicial function entrusted to the various functionaries under the statute. Commissioner of Income Tax, Central Zone-B, Karachi v. Farrokh Chemical Industries – 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak.) = 1992 PTD 523 107.
High Court has only advisory jurisdiction under section 136 of the Ordinance.
The High Court should not have raised a question of law not forming the part of the Reference expressly or by implication. The mere fact that the High Court would have come to a different finding would not justify the conclusion that the findings of the Tribunal is based on conjectures, suspicion or irrelevant material. The High Court while deciding the Reference is not entitled to proceed on its own findings on
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a question of fact but has to proceed on the facts and circumstances found by the ITAT. Commissioner of Income Tax, Lahore Zone v. Sh. Muhammad Ismail and Co. Ltd. Lyallpur – 1985 SCC 637 = [1986] 53 TAX 122 (S.C.Pak)
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 a question raised in the reference application under section 66 to the Tribunal. 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. Mst. Fazal Bibi v. Commissioner of Income Tax – (1996) 74 TAX 141 (H.C.AJ&K)
A finding of fact not based on evidence or where a material evidence is ignored a reference to the High Court will be maintainable. Commissioner of Income Tax Central Zone Lahore v. Gauher Ayub – [1995] 71 TAX 271 (H.C.Lah.)
This Court can only deal with the question of law arising out of the order of the Tribunal passed under section 34 of the Act. The question arising out of the order of Tribunal is that question which was raised before the Tribunal and which was dealt with by the Tribunal, or that question which was not raised before the Tribunal but was dealt with by it or that question which was raised and alleged before the Tribunal but was not dealt by the Tribunal. All such questions are questions of law arising from the order of Tribunal. Nazir Ali M.H. Ganji v. Commissioner of Income Companies I, Karachi – [1994] 69 TAX 71 (H.C.Kar.)
Tax
Under section 136 of the Ordinance, the provision for reference to the High Court is the same as under section 66 of the 1922 Act. The scheme of the Ordinance so far as the scheme of the reference to the High Court on question of law arises the Tribunal can and in certain circumstances must seek, at the instance of the assessee or at the instance of the Revenue, the opinion of the High Court on such
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question. The jurisdiction exercised by the High Court is purely advisory. It is not that of a Civil Court exercising original or any appellate or revisional jurisdiction. We are of the view that the powers and jurisdiction of the High Court are those which are expressed and conferred upon them and also those which inhere in the exercise of that function and jurisdiction of giving advice. The appeal is kept pending before the Appellate Tribunal. It is an admitted position that in answering questions or disposing of references under section 136 of the Ordinance, the High Court do not exercise any jurisdiction conferred upon them by the Code of Civil Procedure or the Charters or by the Acts establishing the respective High Courts. We are of the humble view that in respect of certain matters, jurisdiction exercised by the High Courts must be kept separate from the concept of inherent powers or incidental powers in exercising jurisdiction under section 136 of the Ordinance. Section 136 of the Ordinance is a special jurisdiction of a limited nature conferred not by the Code of Civil Procedure or by the Charters or by the Acts constituting such High Courts but by the special provisions of the Income Tax Ordinance for the limited purpose of obtaining the High Courts opinion on question of law. In giving the opinion properly, if any question of incidental or ancillary power arises such as giving an opportunity or restoring a reference dismissed without hearing or giving some additional time to file the paper book, such powers cannot be so construed as to confer the power of reviewing the judgment. Hamdard Dawakhana (Waqf) v. Commissioner of Income Tax etc. – [1987) 56 TAX 78 (H.C.Kar.)
High Court can grant stay of recovery of tax, subject to furnishing bank guarantee of the amounts involved (outstanding tax payable). Dhanrajmal Mamnumal & Sons v. Commissioner of Income Tax, West Karachi – [1985] 52 TAX 77 (H.C.Kar.)
In our view, this Court has always the jurisdiction to intervene if it appears that the Tribunal has arrived at a finding based on no evidence or where a finding is inconsistent with the evidence or contradictory of it or it has acted on material partly relevant and partly irrelevant or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached.
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Coronet Paints & Chemicals Ltd. Karachi v. Commissioner of Income Tax, West Karachi – [1984] 50 TAX 115 (H.C.Kar.)
It has been held by the superior Courts, that the Court would be entitled to intervene if it appears that the fact finding authority acted without any evidence which cannot reasonably entertained or facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination reached. Commissioner of Income Tax, Lahore v. Umar Saigal – [1976] 33 TAX 245 (H.C.Lah.)
An appeal from the reference under the Income Tax Law is not concerned by any of the conditions mentioned in Article 185(2), Constitution of Pakistan (1973), Article 185(3) limits the jurisdiction of the Supreme Court by providing that: „An appeal to the Supreme Court from a judgment, decree, order or sentence of a High Court in a case to which clause (2) does not apply shall lie only if the Supreme Court grants leave to appeal‟. Mian Aziz S. Sheikh v. Commissioner of Income Tax Investigation Lahore – 1980 SCC 474 = [1981] 43 TAX 105 (S.C.Pak) 108.
Two equally possible interpretations emerge - leave to appeal granted.
The question for consideration before the High Court depended upon two equally possible interpretations of the expression „unless he is himself liable to pay any income tax and super tax thereon as an agent.‟ The High Court has itself noticed the fact that there has been a great difference of opinion as to the interpretation of this expression and since a legal question which is likely to affect a large number of cases has arisen, we grant special leave to appeal. Karachi Industrial Corporation & 3 others v. Commissioner of Income Tax – 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak) 109.
Transfer of jurisdiction.
There is no provision in the law for issuance of a notice before a case is transferred from one office to another. It is urged that the rule of natural justice requires that before an order adverse to a party is passed he shall be heard. There is little force in the contention the transfer of jurisdiction in this case was to facilitate assessment at one
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place. Per se such an order does not result in any prejudice to the assessee. If the petitioners have any specific grievance against the Income Tax Officer, they should bring it to notice of the Inspecting Additional Commissioner. Lungla (Sylhat) Tea Co. Ltd. Sylhat v. Commissioner of Income Tax Dacca Circle Dacca – 1970 SCC 366 = [1975] 31 TAX 64 (S.C.Pak.) 110.
Only question of law which has substance in it be referred to the High Court.
It may be pointed out that it is not every question of law that must be referred to the High Court. There must be some substance in it. Commissioner of Income Tax Karachi v. Ashfaq Ahmad Khan & 10 others – [1974] 29 TAX 149 (S.C.Pak.) 111.
Constitutional petition dismissed as withdrawn second petition on the same issue is maintainable.
Writ petition dismissed as withdrawn - subsequent writ petition on the same issue - constitutional petition was held to be maintainable. Pakistan through Commissioner of Income Tax Karachi v. Majestic Cinema – 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.) 112.
In case there is anomaly in question of law framed and referred by the Tribunal to the High Court, it should refer the case back to Tribunal for clarification.
It might have been more appropriate course for the High Court to take, when it discovered a clear anomaly in the question referred to it, to send the case back to the Tribunal for clarification of the question referred to it, so that the High Court should have known whether it was asked to consider a question of law applying to the whole matter before the Income Tax authorities or only to a part. Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and Another – 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) 113.
Effect of lack of jurisdiction.
In the Punjab Province v. The Federation of Pakistan [PLD 1956 FC 72], it was ruled by the Federal Court that a suit brought by the Punjab Province to challenge its liability to Income Tax, on income derived from certain commercial activities of the Province, under section 204 of the Government of India Act, 1935 was not barred by section 67 of the Income Tax Act or by section 9 of the Code of Civil Procedure. It was pointed out therein that where the Income Tax
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Officer‟s order of assessment was wholly vitiated by complete lack of jurisdiction, the principle laid down by the Privy Council in cases of Relight Investment Company Limited v. Governor-General-in-Council is a representative, would not apply. The order in such a case cannot be said to have been passed under the Act, within the meaning of section 67 of the Act and a suit even in a Civil Court would not have been barred. It therefore follows that the extraordinary writ jurisdiction of the High Court could have been invoked in challenging an Income Tax assessment on the basis that the officer in question lacked jurisdiction to pass the impugned order. The writ jurisdiction was conferred on the High Court by a constitutional provision and even if there be a conflict between such a provision and another statute, the constitutional provision must prevail. The Punjab Province v. The Federation of Pakistan – 1956 SCC 13 (F.C.) = [1960] 2-TAX (Supp.-3) (S.C.Pak) 114.
Only Supreme Court is competent to adjudicate between the governments.
The principle underlying Article 184 of the Constitution of Pakistan is that all disputes whether of law or of fact are to be determined by Supreme Court of Pakistan if the parties to the dispute happens to be the Federal Government on the one side and any one or more of the provinces on the other side or if two or more provinces are arrayed against one another. The machinery provided for appeals/revisions in the Income Tax Ordinance 1979 is not relevant in such disputes. The Provincial Library & Others v. Commissioner of Income Tax East Pakistan – 1957 SCC 34 = [1959] TAX (III-290) (S.C.Pak) 115.
Appeal/Reference to Supreme Court governed by Income Tax Law.
Where the question is whether an appeal to the Supreme Court lies in income tax matter, the question has first to be decided not with reference to provision of the Code of Civil Procedure, but solely in terms of section 137(1), though once the case is held to be qualified under section 137(1) the provisions relating to appeal to the Supreme Court will apply to the appeal as if it were an appeal from decree of a High Court. 116.
In tax matters Supreme Court jurisdiction is limited.
The Supreme Court jurisdiction to entertain a statutory appeal in matters arising under the Income Tax Law is limited to the case mentioned in sub-section (2) of section 137 and that such jurisdiction
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can be invoked only where the High Court has delivered judgment on a reference made to it under section 136 and also certified the case to be fit one for appeal before the Supreme Court. Abdul Majeed Awan v. Inspecting Additional Commissioner of Income Tax – [1999] 80 TAX 115 (H.C.Lah.)=1999 PTD 2910=2000 PCTLR 1046 117.
Preliminary objection of jurisdiction should be decided first.
Admittedly, the petitioner can raise all the objections to the exercise of jurisdiction, either under section 156 of Income Tax Ordinance, or under section 66A of the Ordinance and the respondents will be dutybound to attend to the objections and determine the same by recording a well-reasoned order. The matter will be reopened only if the objection as to the exercise of jurisdiction is over-ruled. Every quasijudicial authority is under legal obligation to consider the objections as to its jurisdiction, if raised in the proceedings and to decide it as a preliminary step, before exercising the jurisdiction or invoking authority under the relevant law. The respondents are expected to first satisfy that the circumstances warrant for indulgence under the relevant provisions and that they have the jurisdiction to reopen the matter. Learned counsel for the respondents has also submitted that the objection as to the jurisdiction would be attended to by the authority concerned as a preliminary step and will be decided in accordance with law. In the circumstances noted supra, this petition is disposed of with the observations that the petitioner should raise all objections to the jurisdiction and also on the factual side, before the respondents who will decide the objections as to the jurisdiction as a preliminary step and will proceed in the matter strictly in accordance with law. If the petitioner is not satisfied with the decision, either on the question of jurisdiction or otherwise, he shall be at liberty to challenge the order in appeal, before the forum in the hierarchy of jurisdiction under Income Tax Ordinance. Tapal Energy Ltd. v. Federation of Pakistan and others – 1999 PTD 4037 (H.C.Kar.) 118.
Objection as to jurisdiction can be raised at any stage.
It is an established principle that submission to jurisdiction of a Court or Authority does not confer jurisdiction on such court or authority and in support thereof reliance is placed on the case of Mohammad Afzal v. Board of Revenue, West Pakistan and others reported in PLD
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1967 SC 314. It may also be pointed out that the objection as to the jurisdiction can be raised at any stage and for the above reliance is placed on the case of (i) Shagufta Begum v. The Income Tax Officer reported in PLD 1989 SC 360, and (ii) Pir Sabir Shah v. Shad Mohammad and others reported in PLD 1995 SC 66......” Frontier Ceramics v. Government of Pakistan & others – 1999 PTD 4126 (H.C.Pesh.) 119.
Ombudsman has no power to declare any legally issued notification as perverse, illegal, arbitrary or discriminatory.
The issuance of notification cannot be termed as maladministration because it could not be aid to have been isued for a particular person or in a particular case, it was issued for and applied to all those concerned. In the above provisions of law [Wafaqi Mohtasib Ordinance of 1983], it is no where provided that the learned Ombuds has the authority to declare any legally issued notification as perverse, illegal or arbitrary and discriminatory. 120.
CBR has no authority to file presentation against the orders of Wafaqi Mohtasib.
“.......CBR is not a person as contemplated under section 32 of the President Order 1 of 1983 and, therefore, CBR has no authority to file representations before the President of Pakistan against the recommendations/decisions of the Mohtasib.......” Pak-Saudi Fertilizer Ltd. through Managing Director v. Federation of Pakistan through Secretary Finance, Islamabad and 4 others – [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061 121.
Every order increasing tax obligation of an assessee or reducing _ the refund is appealable under section 129. [Not approved by Supreme Court in [2000] 83 TAX 119 (S.C.Pak.)]
In the context of Income tax we have been able to lay our hands on Hassan Ali Khan Kara Bhai v. Commissioner of Income Tax PLD 1974 Kar. 473 wherein Noorul Arfeen J. writing for the Court held that notwithstanding that no specific appeal was provided under section 30 of the Income tax Act, 1922 against an order under section 35, however, such appeal lay since the order under section 35 pertook the character of a fresh assessment order referable to section 23 of the 1922 Act, and therefore, such an order being in the nature of an order of assessment was appealable to the Appellant Assistant Commissioner under Section 30 of the Act. The above discussion would amply confirm that the omnibus clause in section 129 i.e. „or otherwise increasing the liability of an assessee‟
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covers every possible eventuality where the tax liability or obligation to pay income tax is increased or refund reduced, making such orders appealable under section 129. Tapal Energy Ltd. v. Federation of Pakistan and others – 1999 PTD 4037 (H.C.Kar.) 122.
Submission to jurisdiction of a Court/Authority does not confer jurisdiction which does not vest in it/him in law.
Even, otherwise failure of the petitioners to question the authority or jurisdiction of respondent No. 3 to issue the alleged notices and to initiate the said proceedings against them would not confer jurisdiction on respondent No. 3 which did not vest in him in law. It is an established principle that submission to jurisdiction of a Court or Authority does not confer jurisdiction on such Court or Authority and in support thereof reliance is placed on the case of Muhammad Afzal v. Board of Revenue, West Pakistan and others [PLD 1967 SC 314]. 123.
Objection to jurisdiction can be raised at any stage.
It may also be pointed out that the objection as to the jurisdiction can be raised at any stage and for the above reliance is placed on the cases of: (i) Shagufta Begum v. The Income Tax Officer reported in PLD 1989 SC 360, and (ii) Pir Sabir Shah v. Shad Muhammad and others reported in PLD 1995 SC 66. The objection raised by Mr. Shaikh Haider is not sustainable and is overruled. Abdul Majeed Awan v. Inspecting Additional Commissioner of Income Tax [1999] 80 TAX 115 (H.C.Lah.) = 1999 PTD 2910 = 2000 PCTLR 1046 Abdul Majeed Awan v. Inspecting Additional Commissioner of Income Tax – [1999] 80 TAX 115 (H.C. Lah.) = 1999 PTD 2910 (H.C.Lah.) = 2000 PCTLR 1046 124.
Objections to jurisdiction are to be decided before proceeding in the matter by adjudicating authority.
Admittedly, the petitioner could raise all the objections to the exercise of jurisdiction, either under section 156 of Income tax Ordinance or under section 66-A of the Ordinance and the respondents will be duty bound to attend to the objections and determine the same by recording a well reasoned order. The matter will be reopened only if the objection as to the exercise of jurisdiction is overruled. Every quasijudicial authority is under legal obligation to consider the objections as to its jurisdiction, if raised in the proceedings and to decide it as a preliminary step, before exercising the jurisdiction or invoking
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authority under the relevant law. The respondents are expected to first satisfy that the circumstances warrant for indulgence under the relevant provisions and that they have the jurisdiction to reopen the matter. Mst. Tasneem Kausar v. House Building Finance Corporation – [PLD 1999 Lahore 462] 125.
Courts/Tribunals have inherent powers to recall orders independent of any statutory provisions.
Court, Tribunal or Authority has an inherent jurisdiction to recall orders obtained from it by practising fraud and misrepresentation. Such power is inherently available to a Court/Tribunal of special or limited jurisdiction independent of any statutory provision. Hazoor Bakhsh v. Senior Superintendent of Police, Rahimyar Khan and 12 others – PLD 1999 Lahore 417 126.
Doctrine of exhaustion explained.
While parting with this order we are inclined to reiterate that rules enunciated above, flow from doctrine of exhaustion as embodied in Article 199 of the Constitution. It is hardly necessary to reiterate that this doctrine does not absolutely bar the jurisdiction of this Court to adjudicate such petitions if other remedies are available against the impugned orders/ grievance. If the Court comes to the conclusion that the orders /proceedings/actions of functionaries of State under attack are in excess of authority or totally destitude of authority if had power to come to the relief of the effected party in exceptional circumstances. Doctrine of exhaustion is regulatory in nature. In highly exceptional circumstances this Court definitely will come to the rescue of the effected party as pointed out by a celebrated Judge Mr. Justice Aftab Hussain in Haji Muhammad v. Khizar Hayat PLD 1977 Lah. 424. See Qamar-uz-Zaman v. Zila Council Bahawalpir 1990 MLD 1748. Union Bank Ltd. v. Federation of Pakistan – [1998] 77 TAX 127 (H.C.Lah.) 127.
CBR has no authority to place judicial interpretation on any provision of law.
It is not necessary to state the facts in view of the limited nature of the controversy before this Court. Suffice it to stay that according to the petitioner‟s learned counsel under section 53 of the Income Tax Ordinance, 1979 the liability of the assessee to pay advance tax has to be worked out after giving due allowance for the tax already paid under section 50 of the Income Tax Ordinance, 1979 as mentioned in
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clause (b) of sub section 1 of section 53 itself but the Central Board of Revenue while interpreting the above section in the impugned circular has opined in para-2 of the circular that the tax withheld under section 50 shall neither be included in the amount of tax assessed nor shall such tax be accounted for as payment of quarterly advance tax instalments. According to the learned counsel the direction of Central Board of Revenue that the tax withheld under section 50 be not accounted for as payment of quarterly advance tax instalment is violative of section 53 itself and cannot be given effect to. Relying upon pronouncement of the Supreme Court of Pakistan in Messrs Central Insurance Co. v. The C.B.R. and others (1993 SCMR 1232), learned counsel for the petitioner has contended that authority of the Central Board of Revenue to issue Circular No. 13 of 1997 is barred as under section 8 of Income Tax Ordinance, 1979. The jurisdiction of Central Board of Revenue for issuing instructions is confined only to administrative matters. ..................... it may be stated that prima facie this contention appears to have merit inasmuch as according to the wording of Section 53 (1)(b) the liability of the assessee is to pay the advance tax minus the tax already paid under section 50. Further discussion in this behalf is unnecessary as Mr. M. Ilyas Khan, Advocate has conceded before this court that Circular No. 13 of 1997 dated 29.9.1997 issued by the Central Board of Revenue has no binding force. He further says that neither any assessing officer nor any appellate authority under the Income Tax Ordinance has, therefore, adopted the said circular. Learned counsel has assured that the authorities concerned shall interpret section 53 of the Income Tax Ordinance, 1979 irrespective of the view taken by the Central Board of Revenue. It is a matter of some regret that the Central Board of Revenue while issuing the circulars does not follow the law declared by the Supreme Court of Pakistan which under Article 189 is binding on all authorities which are required to act in aid of Supreme Court of Pakistan. The law on the subject was clearly enunciated in Central Insurance Co.‟s case supra relied upon by the petitioner‟s learned counsel in which it was held that Central Board of Revenue is not one of the authorities in the hierarchy of officers which has jurisdiction to interpret any provision of the Ordinance. That being so, the Central Board of Revenue would be well advised to desist from issuing any such circular which influences the decision of the adjudicating authorities.
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Nasir Mahmood Dar, etc. v. Federation of Pakistan and Others – [1998] 78 TAX 1 (H.C.Lah.) = 1998 PCTLR 1382 128.
CBR‟s circular holding compensation under Golden Handshake Scheme as taxable declared unlawful.[This decision has been overturned by a Division Bench of the Lahore High Court.]
The Central Board of Revenue has no jurisdiction to issue any circular as to curtail the discretion vesting in the Adjudication Authorities .................. the circular issued holding that the amounts received under the Golden Handshake Scheme were salaries is ultra vires the powers of the Central Board of Revenue. In this view of the matter, all these petitions are allowed and the circular issued by the Central Board of Revenue on 6.11.1997 is declared to be without any lawful authority and of no legal effect. The Adjudication Officer shall proceed to decide independently of the circular as to whether the amounts received by the petitioners are tantamount to salaries or not and are taxable. The amounts, if any, withheld by the Banks and the amounts disbursed to the Department under the impugned Circular, shall be refunded to the petitioners. Karim Aziz Industries Ltd. v. Commissioner of Income Tax Rawalpindi Zone – [1997] 75 TAX 90 (H.C.Lah.) 129.
Powers of Appellate Tribunal.
A careful reading of sub-section (5) of the above provision, clearly shows that if the Appellate Tribunal is not satisfied with the orders passed by the forum below, it has the power to cancel or vary such orders and can pass necessary consequential directions as the situation may warrant. The language of this section clearly indicates that the powers of the Tribunal under this section have very wide amplitude and are almost to the power of Civil Court under Order XLI, rule 33, CPC. The ratio, deducible from the foregoing discretion is that the power of Appellate Income Tax Tribunal under section 135 of the Ordinance are almost analogous to the powers of Civil Court under Order XLI, Rule 33, CPC.These powers are of a wide sweep and arm the appellate court with the power to pass an order of remand if it comes to a finding that the orders of the courts below are illegal and there is an occasion for fresh proceeding before the first authority/court. This power is expressly embodied in the language of conclusion, we find that question referred to by the Tribunal is of academic nature and need no further examination.
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Tharparkar Sugar Mills Ltd. v. Federation of Pakistan and Others – [1996] 73 TAX 215 (H.C.Kar.) 130.
Interim stay should be given once writ is admitted.
“.......once a petition in tax matters is admitted that ispo facto shows that the petitioner has made a prima facie case and therefore interim stay may be granted.” Unique Enterprises, Lahore v. Assistant Commissioner of Income Tax and 2 others – [1995) 71 Tax 139 (H.C.Lah.) 131.
CBR instructions are binding on tax authorities
The circulars issued by CBR are of binding nature on the functionaries of Income Tax Department; and deviation from the instructions contained in the circulars is nothing but misconduct. Mian Anwar-ul-Haq Ramay v. Federation of Pakistan – [1993] 67 TAX 195 (H.C.Lah.) 132.
Courts cannot question the wisdom of Legislature in enacting provision of any law.
The law is firmly settled that it is not for the courts to question the wisdom of Legislature in enacting provision of any law in any manner and their judicial function in this regard primarily is to confine to the interpretation of the law as it is. Under Article 199 of the Constitution under which this petition has been made, this court is vested with the jurisdiction to declare any law or any custom or usage having the force of law as void to the extent so far it is inconsistent with the rights conferred by chapter I of Part II of the Constitution known as the fundamental rights beyond which the jurisdiction of this court to examine the vires of law in our view does not extend. Learned counsel for the petitioner has not been able to point out any provision of the Constitution by which the Legislature is required to lay down guidelines in the law to regulate the exercise of power which if confers on the executive. In the absence of any provision, it is difficult to hold that this court has the jurisdiction to declare any provision of law as ultra vires of the Constitution on that score. Before parting with the discussion on this aspect of the case we may observe that we should not be understood to have held that the absence of any guide-lines for exercise of discretionary power conferred under the statute gives to the authority concerned a free had to exercise the same arbitrarily and whimsically. We may state here that in our considered view to which no exception can be taken the authority is required to exercise power reasonably, justly and
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fairly on the basis of relevant consideration having legal nexus with the object of law, with wisdom and maturity keeping in view above all the interest of the state. In our opinion these principles shall be read in the statute as guiding principles to regulate the exercise of powers conferred on the functionaries of the state and they are of so fundamental in character that they need not be expressly provided in the statute itself. Muhammad Hanif Monnoo v. Income Tax Officer Central Circle 1, Lahore – [1984] 50 TAX 37 (H.C.Lah.) = PLJ 1984 Lah. 423 133.
Presumption of irregularity with regard to official act cannot be challenged on vague allegation of mala fide.
It is well settled that there is to start with, a presumption of regularity with regard to all official acts and until that presumption is rebutted, the action cannot be challenged upon mere vague allegations of mala fide. The petitioner has failed to rebut the presumption of regularity attached to the impugned proceedings. Case referred to: Federation of Pakistan v. Saeed Ahmed Khan PLD 1974 SC 151.
Modern Silk Mills Ltd. Lahore v. Commissioner of Income Tax Lahore – [1979] 39 TAX 14 (H.C.Lah.) 134.
A question not raised before the Appellate Tribunal cannot be raised before the High Court.
Now it is well settled principle of law that unless a question has been raised before the Appellate Tribunal or arises out of its order the same cannot be raised for the first time before the High Court. Abdul Rashid (c/o Union Traders GoIe Cloth, LyalIpur) v. Special Judge (Central), Lahore and another – [1976] 34 TAX 199 (H.C.Lah.)
The first question is whether there is substance in the argument that the Central Board of Revenue was required to be constituted again in Pakistan under section 9 of the Governor General‟s Order 20. Before determining this question may observe that in my view the argument of Mr. Ilyas Khan that the point about the necessity of the constitution of the Board of Revenue should have been taken and urged before the Income Tax Authorities is not without force. The Central Board of Revenue exercises functions under various enactments e.g. The Income Tax Act, the Central Excise & Salt Act, Wealth Tax Act, Gift Tax Act, Sales Tax Act, Customs Act and Estate Duty Act. It is the first authority described in section 5 of the Income Tax Act, other
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authorities being the Commissioner of Income Tax, Income Tax Officers etc. Since the year 1962 and by virtue of the provisions of Ordinance 31 of 1962 which amended the Income Tax, Act, the Central Board of Revenue is also the appointing authority of other Income Tax authorities. An attack on the existence of the Board of Revenue by the petitioner who was assessee after 1962 is an attack on the vires of the appointment of the other Income Tax authorities and ultimately on the legality of the assessment. The challenge to the constitution of Board of Revenue should have been thrown at the time of assessment; otherwise it would lead to an anomalous situation in so far as the assessment is treated as legal while the approval for prosecution on the basis of that assessment is attacked as a nullity. The dictum in Ghulam Mohy-ud-Din v. Chief Settlement Commissioner PLD 1964 S.C. 829 (840) applies to this case and the writ ought to be refused. The other point that no member of the Central Board of Revenue in Pakistan has been or can be treated to have been appointed by the competent authority i.e. the Central Government, cannot be allowed to be taken since this point was neither raised before the Income Tax authorities nor before the Special Judge nor in the writ petition. This objection is also belated. I agree with the argument of Mr. Ilyas Khan that his point raises a question in the nature of quo warranto even in regard to existing members who would be necessary parties to this petition. It falls within sub-clause (ii) of clause (b) of sub-Article 1 of Article 199 which authorises the High Court to require a person within its territorial jurisdiction holding or purporting to hold a public office to show under what authority of law he claims to hold that office. These words clearly make the person holding office a necessary party to the writ petition and in the absence of such party the petition cannot be treated to be properly constituted. The impleading of Central Board of Revenue through its Chairman cannot cure this defect. Case relief upon: Ghulam Mohy-ud-Din v. Chief Settlement Commissioner (PLD 1964 SC 829).
Highway Petroleum Service (Regd.) Lahore v. Islamic Republic of Pakistan & another – [1977] 36 TAX 8 (H.C.Lah.) 135.
Provisions of the Income Tax Act can be challenged on constitutional grounds.
The learned counsel for the petitioners have submitted that there is no right of appeal against the impugned orders and that a revision or reference is no right of a litigant. Further, that as the impugned
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provisions are being challenged on constitutional grounds, inspite of alternate remedies, the petitioners have a right to challenge the same by means of a petition under the constitution and that, lastly, since the questions raised in these petitions relate to the challenge of the provisions in the Income Tax Act itself, to declare the same to be invalid. It is submitted that a court interpreting the constitution finally is an appropriate forum to raise the questions. The submission is obviously sound and is sustained. Commissioner of Income Tax Lahore v. Govt. Jallo Rosin and Turpentine Factory, Lahore – [1976] 34 TAX 71 (H.C.Lah.) 136.
Only Supreme Court is competent to adjudicate between the governments.
On the merits the additional objection raised before us has considerable force. In this connection Article 185(1) of the 1973 Constitution lays down that the Supreme Court shall, to the exclusion of every other court, have original jurisdiction in any dispute between any two or more governments. In the 1962 Constitution there was a corresponding provision in the form of Article 57. Chief Secretary, Government of The Punjab Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1976] 33 TAX 176 (H.C.Lah.) = PLD 1976 Lah. 258 137.
A legal plea going to the roots of the case was allowed to be raised at belated stage.
It was, therefore, alleged in this application that under Article 184(1) of the Constitution of Islamic Republic of Pakistan, 1973 only the Supreme Court has the exclusive jurisdiction to entertain this dispute between the Central Government and the Provincial Government...... This was an altogether new plea which was for the first time raised in this court belatedly after the conclusion of the arguments. But as it was a purely legal plea gong to the root of the case we allowed the permission to the respondent to raise the objection for whatever its worth, even at this late stage. Commissioner of Income Tax Rawalpindi v. Wolf Gang Matzke – [1975] 32 TAX 176 (H.C.Pesh.) 138.
Courts have inherent jurisdiction in the interest of orderly dispensation of justice.
It is common knowledge, that a statute normally does not provide for each and every conceivable eventuality and in respect of some unforeseen events arising in a case for which it has made no provision,
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the courts would be deemed to have inherent jurisdiction in the interest of orderly dispensation of justice. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 139.
Courts have no concern with disputable questions of distributive justice.
In construing a fiscal statute the Court has no concern with disputable question of distributive justice - this upon the plainest ground that by very strong presumption the legislature has not intended that questions of equality or fairness in taxation should be left to any decision save its own. _______________
INCOME / DEEMING PROVISIONS
_
HOW TO BE CONSTRUED
Elahi Cotton Mills Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 140.
Scope of deeming provisions in respect of income.
That generally the effect of a deeming provision in a taxing statute is that it brings within the tax net an amount which ordinarily would not have been treated as an income. In other words, it brings within the net of chargeability income not actually accrued but which supposedly to have accrued notionally. That when a statute enacts that something shall be deemed to have been done which in fact and in truth was not done, the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. That where a person is deemed to be something the only meaning possible is that whereas he is not in reality that something, the Act required him to be treated as he were with all inevitable corollaries of that state of affairs. That the legal fictions are limited for a definite purpose, they cannot be extended beyond the purpose for which they are created. That income tax is a tax on a person in relation to his income. It is a tax imposed upon a person (natural or artificial) in relation to his income. That any legislation whereby either the prices of marketable commodities are fixed in such a way as to bring them below the cost of production and thereby make it impossible for a citizen to carry on his business or tax is imposed in such a way so as to result in acquiring property of those on whom the incidence of taxation fell, then such
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legislation would be violative of the fundamental rights to carry on business and to hold property as guaranteed in the Constitution. 141.
Widest amplitude of an entry in legislative list does not extend to tax something which is not a citizen‟s income.
That the rule of interpretation that while interpreting an entry in a legislative list it should be given widest possible meaning does not mean that Parliament can choose to tax as income an item which in no rational sense can be regarded as a citizen‟s income. The item taxed should rationally be capable of being considered as the income of a citizen. That before charging tax, an assessee must be shown to have received income or the same has arisen and accrued or deemed to be so under the statute. Any amount which cannot be treated as above is not an income and, therefore, cannot be subject to tax. That there is a marked distinction between a tax on gross revenue and a tax on income, which for taxation purposes, means gains and profits. There may be considerable gross revenues, but no income taxable by an income tax in the accepted sense. 142.
Scope of definition of „tax on income‟ under the Constitution.
We may state that at this juncture, it will not be out of context to take up Mr. Iqbal Naim Pasha‟s submission that the definition of the term „tax on income‟ given in Article 260 of the Constitution provides guideline as to the import and scope of Entry 47 of the Fourth Schedule to the Constitution, Part I, by providing that „tax on income‟ includes a tax in the nature of excess profits tax or a business profits tax which, according to him, have the same connotations which were understood in respect of Excess Profits Tax Act, 1940, and the Business Profits Tax Act, 1947. The above contention is devoid of any force, firstly, for the reason that the definition of the term „tax on income‟ given in Article 260 of the Constitution, used the words „tax on income‟ includes a tax in the nature of an excess profits business or a business profits tax. The factum that the word „includes‟ has been employed and not the word „means‟ indicates that the definition given in Article 260 of the above term is not exhaustive. Secondly, the entries in the Legislative List, as pointed out hereinabove, are to be construed liberally and not in a pedantic manner. The word „income‟ as highlighted hereinabove in various reports and treatises is susceptible to a very wide meaning. We may point out that the question, as to whether the impugned taxes are direct or indirect taxes highlighted by Mr. Sikandar Hayat with the aid of above three Privy Council cases, is not relevant. In the
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above cases the controversy in issue was, whether the Dominion concerned Legislature had the power to levy the impugned tax or the Province concerned. There is no such controversy involved in the instant case. Even otherwise, the impugned taxes are direct taxes. Kashmir Feeds (Pvt.) Ltd. v. Central Board of Revenue through Chairman, Government of Pakistan, Islamabad and another – [1999] 80 TAX 24 (H.C.Kar.) = 1999 PTD 1655 143.
Deeming provisions - How to be construed.
When a statute contemplates that a state of affairs should be deemed to have existed, it clearly proceeds on the assumption that, in fact, it did not exist at the relevant time but by a legal fiction one has to assume as it did exist. Commissioner of Income Tax v. Syed Akhtar Ali – [1994] 69 TAX 38 (H.C.Kar.) 144.
Scope of deemed income.
Setion 12(7) envisages „deemed income‟ as income where an assessee makes any loan or advances to any person which is either interest free or on which interest at a nominal rate is charged. We are of the view that in such a situation, interest worked out at the rate of two percent above the bank rate as reduced by the interest, if any, charged by the assessee shall be deemed to be interest income of the lender. J.L. Wei & Co. v. Commissioner of Income Tax – [1989] 59 TAX 108 (H.C.Kar.)
The law clearly provides that all the entires found in the assessee‟s account books for the previous year unless clearly explained and the nature and source are disclosed satisfactorily, the same will be treated as income and will be charged to tax. Commissioner of Income Tax v. Nishat Cinema, Lyallpur – [1979] 39 TAX 140 (H.C.Lah.) 145.
Assessment and levy of super tax on total income of three months at the rate applicable to twelve month‟s notional income as a condition for permitting change of previous year by assessee was held without legal sanction.
We heard the learned counsel for the Department who urged that under this proviso the Income Tax Officer had wide discretion to burden the permission for change of previous year, with such conditions as he may think fit. The assessment of notional income and imposition of super tax thereon, according to the learned counsel are
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reasonable conditions, which can justifiably be imposed on the assessee by the Income Tax Officer, to accord his consent. It is thus obvious that the tax is to be levied on the profits and gains of the business carried on by an assessee. Gain is the equivalent of profit and profit accrues if the receipts from the business exceed the expenditure incurred for acquiring the receipts. Section 10 is, however, subject to the other provisions of the Act. The combined effect of sections 3, 4, 6 and 10 is that to sustain the levy there should have been income attributable to the business carried on by the assessee. The concept of notional income of a previous year, by multiplying 3 months‟ income by 4 is thus not vouched by the provisions of the Income Tax Act. It appears to us that in imposing conditions on an assessee, to allow him to change his previous year, there is an overriding limitation on the powers of the Income Tax Officer not to levy such a condition which is not warranted by the Income Tax Act itself. The learned counsel for the Revenue has placed reliance on the proviso to spell out the powers for the assessing authority to set out the impugned condition. But as observed above this power is qualified and has to be exercised within the limits fixed by the statute. The proviso has to be interpreted in harmony with the other provisions of the Income Tax Act and not to nullify those provisions. Cases referred to: Ikram Bus Service v. Board of Revenue (PLD 1963 S.C. 564); Kohinoor Textile Mills v. The Province of Punjab (PLD 1972 SC 100) and the Guardian of the Poor of the West Derby Union v. The Metropolitan Life Assurance Society (1897) AC 647. _______________
LEGISLATIVE POWERS VIS-À-VIS DOCTRINE OF REASONABLE CLASSIFICATION
Elahi Cotton Mills Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 146. Distinction between direct and indirect taxes hardly exists now. That a direct tax is one which is demanded from the very person, who it is intended or desired should pay it, whereas indirect taxes are those, which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, like custom duties, excise taxes and sales taxes, which are borne by the consumers. That levy of building tax on the basis of the covered area without taking into consideration, the class to which a particular building
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belongs, the nature of construction, the purpose for which it is used, its situation and its capacity for profitable use and other relevant circumstances bearing on the matters of taxation is not sustainable in law for want of reasonable classification. That there is a clear distinction between the subject matter of a tax and the standard by which the amount of tax is measured keeping in view the practical difficulties, which are encountered by the Revenue to locate the persons and to collect the tax due in certain trades, if the Legislature in its wisdom thought that it would facilitate the collection of tax due from specified traders on a presumptive basis, the same is not violative of the Fundamental Right relating to equality. _______________
DISTINCTION BETWEEN “TAX” AND “FEE”
Biafo Industries v. Federation of Pakistan – PTCL 2000 CL. 384 147.
Distinction between “tax” and “fee” explained.
Therefore, the distinction between a tax and fee lies primarily in the fact that tax is levied as a part of common burden or general revenue, while a fee is a payment for special benefit or privilege. This distinction between tax and fee was adopted in the case of Abdul Majid and others PLD 1960 Dacca 502 and in the case of Mahboob Yar Khan PLD 1975 Lah. 748. However, it should not be forgotten that there is no generic difference between a tax and fee. Both are compulsory exaction of money by public authorities. A tax is imposed for public purposes and is not supported by any consideration of service rendered in return. Whereas a fee is levied in view of services rendered. Consequently, there is an element of quid pro quo between the payer of the fee and the authority which imposes it. _______________
DISTINCTION BETWEEN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH FOR THE TIME BEING IS ONLY CONTINGENT
Commissioner of Income Tax v. Kesar Sugar Works Ltd. – 2001 PTD 744 148.
The Income Tax Law makes a distinction between actual liability in praesenti and a liability de futuro which, for the time being, is only contingent.
The Income Tax Law makes a distinction between actual liability in praesenti and a liability de futuro which, for the time being, is only
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contingent. The former is deductible but not the latter. The controversy to be decided in this case therefore is whether the present liability, accrued against the assessee in the assessment years under consideration. This has to be decided by taking into account all the facts and circumstances of the case. If the liability is an actual liability in praesenti in the year under consideration, it is deductible. If it is a contingent liability, it cannot be the subject-matter of deduction even under the mercantile system of accounting. There is no dispute in the present case that in the years under consideration the liability to pay interest was an actual liability. It was no more contingent. There is no dispute on this count. The only ground on which the claim of the assessee for deduction was denied by the Income Tax Officer was that the assessee was disputing the liability by filing an appeal to the Supreme Court. This view of the Income Tax Officer did not find favour with the Commissioner (Appeals) and the Tribunal. The law in this regard is well-settled by the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax (1971) 82 ITR 363, that if there is actual liability in praesenti, deduction cannot be denied on the ground that the assessee is disputing the liability. As a result, in the case of an assessee maintaining the mercantile system of accounting the amount payable by the assessee would be deductible as an accrued liability even though the assessee objects to it and seeks to get the order of the concerned authority reversed, subject, however, to any statutory provision to the contrary (viz., section 43B of he Income Tax Act, 1961, as inserted by the Finance Act, 1983, with effect from April 1, 1984, which provides that certain liabilities can be deducted only on actual payment). _______________
THEORY OF READING DOWN AS A RULE OF INTERPRETATION
Elahi Cotton Mills Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 149.
Theory of reading down as a rule of interpretation.
That denial of reliefs provided by sections 28 to 43C of the Indian Income Tax Act to the particular business or trades covered by section 44AC thereof without showing some basis fair and rational and without having nexus to the object sought to be achieved by the Legislature, held unfair, arbitrary, disproportionate to the prevalent evil and constitutes denial of equal treatment. Consequently, the Indian Supreme Court did not press into service non-obstante clause
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of section 44AC by applying theory of reading down as a rule of interpretation. That it is an accepted canon of taxation to levy tax on the basis of ability to pay. The sections 115J and 115JA incorporated in Indian Income Tax Act, 1961, were intended and designed to bring within the tax net the companies, which though making huge profits and also declaring substantial dividends, but have been managing their affairs in such a way by availing of tax concessions etc. as to avoid payment of income tax. That the theory of reading down is a rule of interpretation which is resorted to by the Courts when they find a provision read literally seems to offend a fundamental right or falls outside the competence of the particular legislature. _______________
RULE OF EVIDENCE
Miss Asia v. Income Tax Appellate Tribunal etc. – 1978 SCC 446 = [1980] 41 TAX 1 (S.C.Pak) 150.
A Judge cannot be compelled to accept a piece of evidence.
There is no rule of law compelling a judge to accept evidence, even though it is uncontradicted, which he believes to be a pack of lies. Amin Bricks Company v. Commissioner (Revision) etc. – [1996] 74 TAX 227 (H.C.Lah.) 151.
of
Income
Tax
Income Tax Authorities to establish by positive evidence that assessee‟s accounts are unreliable.
The contention of the learned counsel for the department that no obligation is cast on Income Tax authorities to establish by positive evidence that the assessee‟s accounts are unrealisable, seems to be misconceived; the power of assessing officer under the law is not merely discretionary power but amounts to a statutory duty; it is not a purely subjective or arbitrary exercise of discretion and is required to be exercised judicially and adverse inference cannot be drawn unless the assessing officer is satisfied that the accounts have been suppressed by the assessee. Syed Akhtar Ali v. Commissioner of Income Tax Hyderabad – [1994] 69 TAX 38 (H.C.Kar.) 152.
Standard of proof.
It is always to be remembered that the standard of proof applicable to prove a positive fact and the one which is required to prove a negative
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fact cannot be the same. A high standard is always applied for the proof of a positive fact while the standard of preponderance of probability is sufficient to prove a negative fact. The assessee is required to prove that the failure to return correct income did not arise from any fraud or gross or wilful neglect. The assessee merely has to place materials of the primary facts or the circumstances which in all reasonable probability would show that he was not guilty of any fraud or gross or wilful neglect. He may discharge this onus by placing the facts found in the assessment order to show that the facts found therein had not in the least given an inkling of fraud or gross or wilful neglect, on the part of the assessee and, therefore, it must be held without proof of any other fact that there was no fraud committed by the assessee in his failure to return the correct income nor was he acting grossly or wilfully negligently. Miss Rani v. Commissioner of Wealth Tax Lahore – [1992] 68 TAX 89 (H.C.Lah.) 153.
Qanoon-e-Shahadat Ordinance is applicable to Income Tax Ordinance, 1979.
The Qanoon-e-Shahadat Order, 1984 has been made applicable to all judicial proceedings before any court, a Tribunal or any other Authority exercising judicial or quasi-judicial powers or jurisdiction except an Arbitrator. The scope of applicability of Qanoon-e-Shahadat Order, 1984, is thus much larger than that of Evidence Act, 1972. It cannot be doubted that the proceedings before the Income Tax Authorities are judicial in nature and further that they are exercising quasi-judicial, if not judicial powers. The applicability of the Qanoon-e-Shahadat Order, 1984 to tax proceedings is, therefore, established as the Income Tax Ordinance, 1979. CST/Commissioner of Income Tax Rawalpindi v. Pakistan Television Corporation Ltd. – [1978] 38 TAX 181 (H.C.Lah.) _ 154. Provisions of Evidence Act not applicable to proceedings under Income Tax Act. It is correct that the Evidence Act is not applicable to the proceedings under the Income Tax Act.
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Siva Pratab Bhattadua v. Commissioner of Income Tax – 1 ITC 323 (Madras) 155.
Statement in power of attorney not proof in itself.
It is argued that the power of attorney, which was filed by the agent, stated that it was a joint family, but a statement in a power of attorney would not prove itself. It will be like any other statement made by a person. _______________
COURTS CAN STRIKE DOWN DISCRIMINATORY AND CONFISCATORY PROVISIONS OF FISCAL LAWS
Elahi Cotton Mills Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 156.
Courts can strike down discriminatory and confiscatory provisions of fiscal laws.
That though the Legislature has the prerogative to decide the questions of quantum of tax, the conditions subject to which it is levied, the manner in which it is sought to be recovered, but if a taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax or that is confiscatory, the Court may strike down the impugned statute as unconstitutional. _______________
SCOPE OF VARIOUS WORDS AND EXPRESSIONS
Cement Agencies Ltd. v. Income Tax Officer Central Circle-II, Karachi – 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak) 157.
“Accrue” and “arise”.
The policy of the Ordinance is to make the amount of income taxable when it is received either actually or constructively. So far as the words „accrue‟ and „arise‟ are concerned. We are to take ordinary dictionary meaning of these words. Since both the words have been used in the provision in question they must be taken to have distinct meanings. „Accrue‟ conveys the sense of growing up by way of additional or increase or as accession or advantage, while the word „arises‟ connotes comes into existence or notice or presents itself. It is, however, to be noticed that these two words have been used in contradistinction to the word „received‟ indicating a right to receive. The words „accrues‟ and „arises‟ represent a state anterior to the point
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of time when the income becomes receivable and connote a character of the income which is more or less inchoate. Commissioner of Agricultural Income Tax v. BWM Abdur Rehman – [1974] 29 TAX 212 (S.C.Pak.) 158.
“Accrue” and “arise”.
Whereas „receive‟ clearly connotes a specified sum passing into the possession of the receiver. The word „accrued‟, in the context, obviously means no more than that a right had arisen in a certain person to recovery of a certain sum. The expression „accrued‟ in the context also, carries plainly the sense of an accrual for the benefit of the person concerned, as distinguished from the sense of merely receiving money under legal obligation to pass it on to another person or authority, which is incidental to the recovery of cesses by an assessee. Pandit Pandurang v. Commissioner of Income Tax, Central Provinces – 2 ITC 69 (Nagpur) 159.
“Accrue” and “arise” vis-a-vis effect of book entries.
In a very recent case decided by the Privy Council, St. Lucia Usines and Estates Co. v. St. Lucia [(1924) A.C.508 at p. 512], Lord Wrenbury has observed:– “The words „income arising or accruing‟ are not equivalent to the words „debts arising or accruing.‟ To give them that meaning is to ignore the word „income‟. The words mean „money arising or accruing by way of income‟ There must be a coming in to satisfy the word „income‟........ If the taxpayer be the holder of stock of a foreign Government carrying say 5 per cent interest, and the Government is that of a defaulting state which does not pay the interest, the tax-payer has neither received nor has there accrued to him any income in respect of that stock. A debt has accrued to him but income has not. It does not follow that income is confined to that which the tax-payer actually receives. Where income tax is deducted at the source the tax-payer never receives the sum deducted but it accrues to him.” Commissioner of Income Tax Punjab, NWFP & Bahawalpur v. Mrs. E.V. Miller – 1959 SCC 53 = [1959] 1-TAX (III-1) (S.C.Pak) 160.
“Agricultural Income” when remains to be such in the hands of recipient.
A servant employed on an agricultural farm under a contract of service can no more claim his salary to be agricultural income on the
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ground that he is paid by his master out of his agricultural income than a shopkeeper can claim exemption from tax because the price which he has received for his wages has come out of the agricultural income of the buyer. But if income lying in reserve with a person is agricultural income which he himself cannot enjoy and is meant to be distributed among its rightful claimants, it cannot be disputed that no change of character is implied in the distribution of that income because income is earned for expanding and a person who is precluded in law from expanding it on his own enjoyment and holds it for the benefit of the others does not bring out any change in the nature of that income when he posses it on to the beneficiary. Commissioner of Income Tax East Bengal v. Kumar Narayan Roy Choudhry and others – 1959 SCC 68 = [1959] 1-TAX (III-207) (S.C.Pak.) 161.
“Agriculture” and “agricultural purposes”.
The word „agriculture‟ is not used in the Act in its extended dictionary meaning. It has been used in a narrow sense and so interpreted, it means that an operation to be agricultural must involve or be connected with the cultivation of the soil. Commissioner of Income Tax v. Kathiawar Coopperative Housing Society – [1985] 51 TAX 5 (H.C.Kar.) 162.
“Annual value”.
From plain reading of sub-section (2) of section 19, it would appear that the actual rent received by the landlord is not the basis for determining the taxable amount, but the amount which the leased property is likely to fetch by way of rent or which the property might reasonably be expected to fetch from year to year shall be the basis of calculating the taxable amount. Chhuna Mal Salig Ram v. Punjab NWFP – 5 ITC 316
The annual value of property under section 9 of the Income Tax Act does not include sums paid by the tenants to the owner on account of house tax payable by the owner...... Muhammad Amjad v. Commissioner of Income Tax, Zone ‘A’ Karachi – [1992] 65 TAX 176 (H.C.Kar.) = 1992 PTD 513] 163.
“Assessment”.
Kanga and Palkhivala‟s in the Law and Practice of Income Tax, Eighth Edition Volume I, at page 1127 have commented upon the word „assessment‟. They have observed that “the word „assessment‟ is
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used in the Act as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable; and sometimes the whole procedure laid down in the Act for imposing liability on the taxpayer. The word „assessment‟ must be understood in each section of this Act with reference to the context in which it is used, in some sections it has a comprehensive meaning and includes reassessment (e.g. section 265) and in some sections it has a restricted meaning and is used as distinct from re-assessment (e.g. section 147)”. They have further observed that “the method prescribed by the Act for making an assessment to tax using the word assessment in its most comprehensive sense as including the whole procedure for imposing liability upon the taxpayer consists of the following steps. In the first place, the taxable income of the assessee has to be computed. In the next place, the sum payable by him on the basis of such computation has to be determined. Finally, a notice of demand in the prescribed form specifying the sum so payable has to be served upon the assessee.” National Beverages (Pvt.) Ltd. v. Federation of Pakistan and others – [2001] 83 TAX 359 (H.C.Kar.) = PTCL 2001 CL. 250 164.
Meaning of expression “assessment consciously completed”.
The expression “assessment consciously completed” has been elaborately explained by the Supreme Court in the case of Pakistan Tobacco Co. Ltd. v. Government of Pakistan and 3 Others (PTCL 1992 CL. 376 = 1993 SCMR 493) as under:6.
The question as to when reopening of the case under section 65 of Income Tax Ordinance, 1979 is allowed and justified in spite of the fact that all material facts were already on the record when previous finding was given, came up for detailed examination before this Court in the case of Edulji Dinshaw Limited (supra) in which nearly the whole caselaw on the subject has been noticed. It is held in the reported judgement of that case once all the facts have been fully disclosed by the assessee and considered by the Income Tax Authorities and assessments have been consciously completed and no new fact has been discovered there can be no scope for interference with these concluded transactions under the provisions of section 65 on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been underassessed in the meaning of section 65(1)(a)(b) of the Ordinance. Maximum emphasis in this ruling is on use of words to the effect „assessments have been unconsciously
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completed‟. Requirement spot-lighted is that Income Tax Officer has applied his mind consciously to the facts of the case and perusal of the record. If there is conscious application of mind, then rule laid down in this case will apply with full force. If there is no conscious application of mind by Income Tax Officer, then rule laid down in this case will not be attracted.” Commissioner of Income Tax Lahore Zone, Lahore Muhammad Allah Bux – [1977] 35 TAX 74 (H.C.Lah.) 165.
v.
Definition of the word “business”.
The term „business‟ has been defined in section 2(4) of the Act. „Business‟ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It has been repeatedly observed that „business‟ with the aid of meaning given in dictionary be deprecated. Commissioner of Income Tax v. New China Glassware Company – [1974] 30 TAX 158 (H.C.Kar.)
The definition of the word „business‟, as contained in section 2(4) of the Act, embraces only such activities as are in the nature of trade, commerce or manufacture. General Bank of Netherlands Ltd. v. Commissioner of Income Tax, Central Karachi – 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak) 166.
“Business connection”.
After survey of case law, learned Judges in the High Court correctly took the view that in order to bring a case under the head of „business connection‟, it is necessary that there should be some activity in the taxable territory which contributes, directly or indirectly, to the earnings of those profits or gains which are to be taxed. Their Lordship also agreed with the view canvassed by the appellant that „the interest earned on the securities in questions cannot be said to be profits or gains accruing or arising from any business connections in Pakistan‟. Commissioner of Income Tax v. Pakistan Insurance Corporation & other – 1989 SCC 740 = [1997] 75 TAX 113 (S.C.Pak) _ 167. “Capital” and “dividend” distinguished. The words „capital‟ and „dividend‟ though related have entirely different considerations. In the context of the Income Tax Law, very
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broadly speaking „capital‟ would signify investment whereas „dividend‟ would denote gain or return on the investment. However, in clause (d) of section 2(6A) of the Act, an extended meaning has been given to the word „dividend‟ so to bring to tax such payment also that a company may make by manipulating its share capital ..... The scope of this clause can not be extended when the company merely returns to the shareholders only their original investment. Abdul Rashid v. Special Judge (Central) Lahore & another – [1976] 34 TAX 199 (H.C.Lah.) 168.
“Case”.
The word „case‟ in section 5 of the Act has recorded statutory interpretation in the explanation to sub-section (7-A) of section 5 in the following manner:“In this section, the word „case‟ in relation to any person whose name is specified in an order or any direction issued thereunder, means all or any proceedings under this Act in respect of any year which may be pending on the date of such order or direction which may have been completed on or before such date, and includes all proceedings under this Act which may be commenced after the date of such order or direction in respect of any year.” Commissioner of Income Tax/CST Rawalpindi v. Pakistan Television Corporation Rawalpindi – [1978] 38 TAX 181 (H.C.Lah.) 169.
“Certified copy”.
A certified copy will, therefore, be one which answers the requirements as given in section 76 of the Evidence Act, by reference, even though Evidence Act is not applicable. It may, therefore, be supplied in any form provided that it bears a certificate of an authorised officer that it is a true copy of the original in his custody. Pakistan Seamen Contributory Welfare Fund Karachi v. Income Tax Appellate Tribunal & 2 Others – [1993] 67 TAX 400 (H.C.Kar.) 170.
“Charitable purposes”.
As is evident from clause 2(14), the definition of „charitable purpose‟ is not exhaustive but the same is an inclusive definition which only has the effect of enlarging the ordinary meaning of the expression „charitable purposes‟. It would, therefore, be erroneous to assume that the definition in any case restricts the meaning of the said expression to what has been referred to be in the said definition. Consequently,
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the mere fact that the object, for which the petitioner institution has been constituted, is not public benefit, cannot in any manner disentitle the petitioner to claim exemption under clause (94). Sadar Anjuman-i-Ahmedia, Rabwa v. Commissioner of Income Tax Rawalpindi – [1977] 36 TAX 117 (H.C.Lah.) “Charity” and “charitable purposes”.
171.
It is undoubtedly very difficult to define „charity‟ with precision. The literature on the point is as vast as despairing. The question strictly speaking is not whether „a charity exists, but whether the trust on which property is held as „trusts for a charitable purpose‟. In determining its legal meaning the courts have to be guided by the lists of charitable objects set out in the preamble to the statutes 43 Eliz I. C.4, 1601. The best classification of charitable purposes under the above Act has been given by Lord Macnaughtan‟s speech in Commissioner of Income Tax v. Pensel ((1891) A.C.531) which is being consistently followed by the English Courts. It was stated that „charity‟ in its legal sense comprises four principle divisions: i) ii)
trusts for relief of poverty; trusts for the advancement of education;
iii)
trusts for the advancement of religion; and
iv)
trusts for the purposes beneficial to the community, not falling under any of the preceding heads.
That judgment added that the trusts referred to are not the less charitable in the eye of law because incidentally they benefit the rich as well as the poor, as indeed, every charity that deserves the name must do so either directly or indirectly. The American Law Institute in the Restatement of Trusts adds two more headings. v) vi)
promotion of health; and governmental and municipal purposes.
The religious and charitable objects of Muslim Waqfs cannot be of any assistance in the cases in hand. A perusal of the explanation after the second proviso in section 4(3)(i) of the Act, would show that the scope of the term „charitable purpose‟ in the Act are as extensive as adopted by the British or American Courts and guidance can be sought from them in view of the paucity of authority in this country. Further, it is well established principle of law of charities that a purpose is not charitable unless its benefit is directed either to the public-at-large or a sufficient section of public or community
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sufficiently defined or identified by some quality of a public nature.......... Raleigh Investment Co. Ltd. v. Commissioner of Income Tax (East) Karachi – [1983] 47 TAX 214 (H.C.Kar.) “Commercial” and “commerce”.
172.
(i)
_ Word „commercial‟ meaning of According to Ballentine‟s Law Dictionary, 3rd Edition, page 222, means: “Pertaining to the purchase and sale or exchange of goods and commodities and connoting as well forms of, and occupation in business enterprises not involved in trading in merchandise; in a broad sense, embracing every phase of commercial and business activity and intercourse.”
(ii)
Word „Commerce‟ meaning of: “According to Black‟s Law Dictionary, 4th Edition, page 336 the word „commerce‟ is defined as, the exchange of goods, productions or property of any kind.”
Commissioner of Income Tax Punjab, NWFP & Bahawalpur v. Mrs. E.V. Miller – 1959 SCC 53 = [1959] 1 TAX (III-1) (S.C.Pak) 173.
“Company” and “shareholders” - Relationship between.
The constituents of a company are its shareholders because its promoters must subscribe to its shares in order to bring it into existence. The company has a memorandum of association which controls its business activity. For the management of its affairs it has its own articles of association and a board of directors. The assets of a company are owned by it and not by its shareholders but the company is constituted for the purpose of earning profits and the shareholders are not only entitled to rateable distribution of its assets on its being wound up, but also indirectly control the management of the company by appointing the directors. Thus the shareholders have ultimate control over the management of the company, though they do not directly manage its affairs. It is true the directors derive their authority from the law, but as their own appointment rests with the shareholders, they are, in substance, the agents or delegates of the general body of the shareholders. What is of vital importance, however, is that a company is brought into existence and exists for sole purpose of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the reison d‟entre of the company, a company would be defeating the object of its own existence if croesus-like it filled coffers with gold and did not
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distribute it as dividend to its shareholders. A company cannot enjoy its own income, the ultimate beneficiaries of the income being the shareholders themselves who, on the recommendation of the directors, declare the dividends. If a company went on taking its profits to reserve every year and did not distribute it among its shareholders, it would be acting contrary to all business principles and the shareholders would be compelled either to change its management or to dissolve it because they invest their capital for the purposes of enjoying the income and not for the purpose of the company accumulating such income. True, a company is a person but it is only a juridical person, having no mouth to feed or person to shelter and sustain, and if it is taxed, it is taxed not on any general principle of law but because such is the policy of the statute that taxed it. Its own income is but notional and it is only on its distribution that it becomes the actual income of its shareholders. Sind Industrial Trading Estate Ltd. Karachi v. Central Board of Revenue – [1975] 31 TAX 114 (H.C.Kar.) 174.
“Company limited by guarantee”.
A company limited by guarantee is generally a non-profit making association and such a company in an alternative to a company by shares. Under the scheme of Companies Act 1913, a company cannot be created in which the members are free from any liability whatsoever. Therefore, ordinarily a company created under the Companies Act is limited by shares, that is, the members of the company are made liable as contributories to the extent of the shares they have taken or they have agreed to take in the company. But such a company is not suitable for non-profit making association, and therefore, as an alternative to such a company, the companies Act permits the incorporation of a company limited by guarantee, that is, a company in which the members agree that, in the event of liquidation of the company they will subscribe an agreed amount. In effect, such members are guarantor of the company‟s debts up to the agreed amount. As regards the working capital of such a company, it generally comes from other sources, that is, endowments, grants, fees, subscriptions, etc. Hudabya Engineering (Pvt.) Ltd. Lahore v. Pakistan through Secretary Minister of Interior – [1997] 76 TAX 302 (H.C.Lah.) 175.
“Complete”.
According to Black‟s Law Dictionary, 6th edition, at page 285, complete as adjective means „full‟, „entire‟, „including every item or element‟ of the thing spoken of, without omissions or deficiencies; as, a
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„complete‟ copy, record, schedule or transcript, perfect, consummate; not lacking in any element or particular; as in the case of a „complete legal title‟ to land, which includes the possession, and the right of property. In Corpus Juris Secundum, volume 15-A at page 118 „complete‟ has been defined as „absolutely finished‟; completed or concluded; consummate, entire, filled up, free from deficiency, perfect, including every item or element of the thing spoken of, without omissions or deficiencies, whole; lacking nothing, with no part, item, or element lacking; having all needed or normal parts, elements or details. Similarly in Words and Phrases, permanent edition 8, at page 386, while defining „complete‟ it is stated that the word „complete‟ means filled up with no part, item or element lacking, free from deficiency, entire, perfect, consummate. Commissioner of Wealth Tax v. Noor Rai Ibrahim – [1992] 65 TAX 262 (S.C.Pak) _ 176. “Debt”, “loan”, “owe” and “due” difference between. From these judgments, definitions and meanings it can safely be stated that the word „debt‟ has a wide meaning and is an obligation to pay an ascertained sum in present or in future. Any amount owed to some other person would be a debt owed by him to the creditor. The essence of the word „debt‟ is the obligation to pay and the amount which is payable. It is a liability to the person who has an obligation to pay, the amount which may be certain or calculable readily. Commissioner of Wealth Tax, Lahore Zone, Lahore v. Mst. Fozia Mughis, Lahore – [1975] 32 TAX 1 (H.C.Lah.)
It is further to be noticed that the word „debt‟ is to be kept distinct from what is known as a „loan‟, for every loan may be a „debt‟ but every „debt‟ will not necessarily be a loan. Our view is that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation debitum in praesenti solvendum in futuro. In some cases it may not be presently payable and it may be uncertain in amount which will become certain when accounts are finally dealt with. In other words it is a present liability to pay an amount in future, though it was not ascertained but was ascertainable. As regards the word „owed‟ in Aiyer‟s Law Lexicon (1940 Edition page 931) it is written that „owe‟ means to be under obligation to pay.
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It is to be remembered that strictly speaking there is a difference between the words „owed‟ and „due‟ for that which is due is always owed by the debtor, but which is „owed‟ may not be due at a particular date .....the former refers to liability whereas the latter to payability. A.J. Hartshorn v. Commissioner of Income Tax (West) Karachi – [1984] 49 TAX 198 (H.C.Kar.) _ 177. “Due” meaning of. In Stroud‟s Judicial Dictionary, IVth Edition, meaning of the word „due‟ is „immediately payable‟ (it is common signification). The word „due‟ signifies a fixed and settled obligations or liability which has to be determined in each case from its own context and usually is neither contingent nor dependent on any happening. Taimur Shah v. Commissioner of Income Tax – [1976] 34 TAX 151 (H.C.Kar.)
We find ourselves unable to agree with the broad proposition of Mr. Nusrat that the word „due‟ has an implication of a liability which is continuing from the past. Irfan Gul Magsi v. Haji Abdul Khaliq Soomro and others – 1999 PTD 1302 178.
“Default”.
Expression „default‟ connotes an element of wilful and deliberate failure to fulfil an obligation and negligence in the performance of the duty. Every failure on the part of a person without any ulterior design and mala fide intention would not equate with the expression „default‟ as used in its strict legal sense. Before a person is declared to be in default, it is absolutely necessary that there should have been a demand to make payment of a determined sum which should have remained unresponded and unattended for a period beyond the period prescribed by law. Issue of „default‟ in the context of Rent Laws was set at rest in the famous case reported as Ghulam Muhammad Lundkhor v. Safder Ali (PLD 1967 SC 530). In the words of the apex Court the word „default‟ in legal terminology necessarily imports an element of negligence or fault and means something more than mere non-compliance. To establish default one must show that the noncompliance has been due to some avoidable cause, for a person who ought not to be made liable for a failure due to some cause for which he is, in no way, responsible or which was beyond his control. It is not lightly to be presumed that the law intends to cause injustice or
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hardship, thus, unless the Legislature has made its intention clear that construction must be preferred which will prevent manifest injustice and obviate hardship. On this principle also the expression „default‟ should mean an act done in breach of a duty or in disregard of an order or direction. This view was followed in the subsequent cases reported as Muhammad Hassan Khan v. Mirza Abdul Hamid (1981 SCMR 799), Irshad Hussain v. Abdul Rehman Kazi (1983 SCMR 471), M. Imamuddin v. Surriya Khanum (PLD 1991 SC 317) and NDFC v. Naseemuddin (PLD 1997 SC 564). E.F.U. General Insurance Ltd. & Others v. Federation of Pakistan & Others – 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) 179.
“Definite Information”.
It was observed that the words „definite information‟ are the keywords for the purpose of justifying action under sub-section (1) [Section 65] and, as the said words had not been defined in the Ordinance they will carry their literary meanings. It was observed that every information cannot be treated as the basis for re-opening of the assessment but the information should be of the nature which should qualify as „definite information‟ and that the expression „definite information‟ could not be given a universal meaning but it will have to be construed in each case. It was further observed that where an assessee discloses all the material facts without any concealment and the assessment had been consciously completed by the Income Tax Officer, in such a case, in the absence of the discovery of any few facts which can be treated as „Definite Information‟ there cannot be any scope for reopening of the assessment under section 65. It was further observed that any change of opinion on the basis of the same material by the Income Tax Officer will not meant pressing into service the said provision. It was observed that a circular from the Central Board of Revenue interpreting any provision of a law not a „definite information‟ for reopening of assessment by an Income Tax Officer. It was then observed that expression „definite information‟ will include factual information as well as information about the existence of a binding judgment of a competent court of law/forum for the purposes of section 65 of the Ordinance, but any interpretation of a provision of law by a functionary which has not been entrusted with the function to interpret such provision judicially cannot be treated as a „definite information‟.
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Inspecting Additional Commissioner & another v. Pakistan Herald Ltd. – [1997] 76 TAX 131 (S.C.Pak) = 1997 PTD 1485
The term „definite information‟ conveys a meaning which is not the same „as change of opinion‟. A different interpretation of any provision of law or deriving a different conclusion from a given set of facts will not amount to a definite information. It will be a change of opinion. Therefore, the basis for reopening the assessment was a change of opinion of the respondent. The respondent therefore could not have taken any action under section 65 of the Income Tax Ordinance as it was not based on any definite information, but on change of opinion.” Central Insurance Co. & Others v. C.B.R. Islamabad – 1993 SCMR 1232 = 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak)
Mere guess, gossip or rumour cannot be treated as definite information. However, the expression „definite information‟ cannot be given a universal meaning, but it will have to be construed in the circumstances of each case. The term „definite information‟ conveys a meaning which is not same as change of opinion. A different interpretation of any provision of law or deriving a different conclusion from a given set of facts will not amount to definite information. It will be a change of opinion. Receiving or obtaining by an assessing officer certain interpretation of a particular provision of law from any department, be it a ministry of law or Central Board of Revenue or any legal adviser or from his knowledge and reading law books would not constitute „information‟ in terms of section 65. Dangerous results may follow from a liberal interpretation of the word „information‟ as sometime advocated by the Department, as it will give unrestricted discretion in the hands of the assessing officers who may on their own interpretation of law set at naught the settled and final assessment. Pak Services Ltd. v. Commissioner of Income Tax (Revision) Karachi – 1993 SCC 1029 = (1993) 68 TAX 49 (S.C.Pak) 180.
“Discard”.
No doubt that extended meaning of „discard‟ given in the dictionary includes „abandonment‟. However, all abandonment of property cannot and does not amount to discarding of the property. The word „discard‟ entails a choice, a selection, a voluntary act of leaving behind, causing of leaving or abandoning. Without such a choice, selection or volition,
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the word „discarded‟ would be inappropriate to use. For example, if one was made to forcibly leave his house that would not amount to discarding the house. Commissioner of Income Tax Peshawar Zone, Peshawar v. Siemen A.G. – 1991 SCC 773 181.
“Dividend”.
The word „return‟ is generally understood as profit in the nature of dividend and not in the nature of interest and/ or obligatory charge. „Return on capital‟ as guaranteed in the agreement between the parties was thus „dividend‟ within the meaning of term as defined in Income Tax law. The Income Tax authorities cannot change the nature of the contract intended by the parties „under the pretext that the rule of interpretation of a fiscal law in this behalf is different‟. The courts are bound to apply Islamic rules of interpretation to all laws, and fiscal laws are no exception. Commissioner of Income Tax Punjab, NWFP & Bahawalpur v. Mrs. E.V. Miller – 1959 SCC 53 = [1959] 1-TAX (III-1) (S.C.Pak)
The company, though a separate legal person in the contemplation of law and liable to assessment as a subject chargeable with tax, is not, for all purposes, to be regarded as entirely separate and distinct from the shareholders. The underlying principle of the clause, as the commissioner in stating the present case has recognised is „that the dividend represents merely the shareholders‟ share in the income of the company‟. Siemens A.G. & Halske v. Commissioner of Income Tax – [1983] 47 TAX 132 (H.C.Pesh)
„Dividend‟ according to Black‟s Law Dictionary, may denote, a fund set apart by a corporation out of its profits, to be apportioned among the shareholders, or the proportionate amount falling to each. Prima facie a “dividend” according to Stroud‟s Judicial Dictionary, means a payment to share holders when a company is a going concern. In Halsbury‟s Laws of England Volume VII, 4th Edition, the ordinary meaning of „dividend‟ is share of profits, whether at fixed rate or otherwise, allocated to the holders of shares in a company. The term is generally used with reference to trading or other companies, and to payments made to members of a company as such and not by way of remuneration for services.
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Commissioner of Income Tax North Zone, Lahore v. Owen Roberts & Co. Ltd. Lahore – [1973] 27 TAX 95 (H.C.Lah.) 182.
“Employee”.
The word „employee‟ is too well understood in the English language and usage to require any elucidation and we would restrict overselves to observe that the expression „employee‟ clearly envisages the relationship of master and servant and can hardly be applied to a person who is an alter ego of a juristic person. Sindh Trading Company v. Commissioner of Income Tax – [1967] 15 TAX 53 (H.C.Kar.) 183.
“Enduring benefit”.
The expression „enduring benefit‟ does not imply that it necessarily lasts for ever. It only means that it should endure in the way that fixed capital endures. What degree of durability or permanence it should possess for qualifying as a capital asset depends upon the facts of each case. The main consideration in such cases always is, whether the expenditure concerned, is part of the company‟s working expenses, or in other words, expenditure laid down as part of the process of profit-earning or whether on the other hand, it is a capital outlay, viz. expenditure necessary for the acquisition of property or of rights of a more or less permanent character, the possession of which is a condition of carrying on its trade at all. Associated Cement Companies Ltd. v. Pakistan – 1978 SCC 453 = [1978] 38 TAX 132 (S.C.Pak) 184.
“Enemy”, “enemy territory” and “aggrieved party”.
Now in the following rules namely, the Defence of Pakistan Rules, framed under section 3, „enemy‟ and „enemy territory‟ have been comprehensively defined as under:2-(2)
„enemy‟ means - any person or state at war with, or engaged in military operations against Pakistan.
2-(3)
„enemy territory‟ means -
(a)
any area which is under the sovereignty of, or administered by, or for the time being in occupation of, state at war with, or engaged in military operations, against Pakistan.
(b)
any area which may be notified by the Central Govt. to be enemy territory for the purposes of these rules or such of them as may be specified in the notification.
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Aggrieved party:- Now in order to be „aggrieved party‟ within the meaning of sub-Article (2) of Article 98, of the Constitution of Pakistan 1962, it would be imperative for a party to show that any of his proprietary or personal right as recognized by the laws of the country, has been invaded or denied to him. „Right‟ and „remedy‟ are no doubt complementary concepts, because right without remedy would be meaningless just as it would be inconceivable to think of a remedy without a corresponding right. In other words „a right‟, be it tangible or intangible such as the right of a person to enjoy his property or to remain secure in his reputation, clearly postulates something of value to a person for the protection or the realisation of which remedy is provided in every civilised legal system. Inevitably, therefore, if a person is unable to show that any of his right as recognized by law has been invaded or denied to him then he would have no cause of action to seek any relief, for evidently he cannot claim to be „aggrieved‟. United Builders Corporation Mirpur, v. Commissioner of Income Tax Muzzafarabad – [1984] 49 TAX 34 (H.C.AJ&K) 185.
“Erroneous”.
The word „erroneous‟, as defined in Oxford Dictionary, means, mistaken, incorrect, in the legal sense, an order was considered erroneous if it deviated from the law. Commissioner of Income Tax Companies II Karachi v. Sultan Ali Jeoffery & Others – 1992 SCC 974 = [1993] 67 TAX 51 (S.C.Pak) _ 186. “Evasion” and “Avoidance” the difference. In the field of taxation, tax avoidance and tax evasion are two different terminologies conveying completely different meaning. Tax avoidance occurs when a person in a legitimate manner as provided by law adopts a course by which the mechanism within the provisions of law. In Aruna v. State of Mairas 55 ITR 642 relying on Latilla v. IR 11 ITR (Suppl.-78) (HL) and Howard v. IR 25 TC 121, it was observed that „avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly not bad morality for anybody to so arrange his affairs as to reduce the burnt of taxation to a minimum‟. Avoidance of tax by adopting legal methods will not amount to evasion of tax. But the moment avoidance is sought by illegal contrivance, deceitful methods and adopting a course not permissible in law it turns into evasion.
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Commissioner of Income Tax Companies II, Karachi v. Sultan Ali Jeoffery & Others – 1992 SCC 974 = [1993] 67 TAX 51 (S.C.Pak) “Evasion of Tax”.
187.
Evasion with reference to taxation laws means to illegally manipulate things in such a manner that the tax payable under law cannot be assessed. By an act of evasion the assessee can reduce his tax liability or completely eliminate it. Evasion of tax or duty is always in breach of the applicable and binding law. In taxation law evasion will mean adoption of such deceitful mechanism and manipulation not permitted by law which may result in reduction or elimination of legal tax liability. Sarwar & Co. v. C.B.R. & Others – [1997] 76 TAX 1 (H.C.Lah.) “Execution of Contract”.
188.
The meaning being placed by the learned counsel on the expression „execution of contract‟ is neither borne by the context in which it has been used nor by its dictionary meaning. In Black‟s Law Dictionary, 5th Edition, at page 510, „execution of contract‟ has been defined as including performance of all acts necessary to render it complete. Similarly, according to Words and Phrases permanent edition, „execution‟ means, completion, fulfilment or perfecting of anything. Commissioner of Income Tax (Central) Karachi v. New Jubilee Insurance Co. Ltd. – [1982] 46 TAX 125 (H.C.Kar.) “Expenditure” & “reserves”.
189.
(i)
„expenditure‟, meaning of, Expenditure‟ is thus what is „paid out or away‟ and is something which is gone irretrievably.
(ii)
„reserves‟, meaning of, According to Ballentine‟s Law Dictionary, third edition, page 1101, „reserves‟ means: Verb: To appropriate to a particular purpose, to exclude, to set aside, to set apart from that which has been granted, to make a reservation. Noun: In insurance, a sum of money variously computed or estimated, which, with accretions from interest, is set aside, as a fund with which to nature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims, and claim accrued but contingent and indefinite as to amounts or time of payment.
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Commissioner of Income Tax North Zone, Lahore v. Waris Silk Weaving and Knitting Mills, Gujranwala – [1973] 28 TAX 181 (H.C.Lah.) 190.
“Failure”.
If a person is required by law to do something which becomes impossible for him to do, not on account of his own negligence or fault, but on account of something which was unavoidable and in any case not subject to his control, he cannot be said to have failed to perform that which the law or an order passed under the law required him to do. The Punjab National Bank Ltd. v. Commissioner of Income Tax, Punjab & NWFP – 2 ITC 184 (Lahore) 191.
“Fixed capital”.
Securities purchased by banks are permanent investments being part of their „fixed capital‟. They do not form part of their stock-in-trade. Gillander Arbuthnot & Co. v. Commissioner of Income Tax – [1966] 13 TAX 163 (H.C.Lah.) 192.
“Fixed capital” and “circulating capital”.
„Fixed capital‟ represents the amount spent on setting up structure of the business, e.g. land and machinery, for manufacture of goods, the sum paid for acquiring a concern and the amount spent on purchase of stock and securities, etc. Appreciation of their value is not a trading receipt and their depreciation not a trading expense to be incorporated in the profit and loss account. Circulating or floating capital in the amount spent on running the concern, in „carrying on‟ and „carrying out‟ „an operation of business for making profit‟, for example purchase of raw-material, pay-roll, directors‟ fee, etc. Literally, it is that capital which keeps circulating and floating in the course of business and does not constitute its outer framework. The amount spent in this account is trading expense and an increase on it a trading receipt to be incorporated and circulating capital is, however, not inflexible, e.g., land and machinery will be circulating capital in the hands of a real estate dealer and manufacturer of machinery, respectively, but fixed capital in the hands of a manufacturer of goods. Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Gujranwala – [1999] 80 TAX 262 (H.C.Lah.) 193.
“Goods” do not include immovable property.
The interpretation of word „Goods‟ as adopted by the Assessing Officer does not find support either from the Income Tax Ordinance or for that matter from any other law. The consistent view of the Superior
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Courts in Pakistan that in cases of fiscal statutes only the letter of law should be seen has sufficiently been highlighted in re: Collector of Customs v. S.M. Ahmad & Company (supra) and re: Muhammad Younis v. C.B.R. (supra). It is also an accepted proposition that the words used in a statute if not defined therein should be assigned their ordinary dictionary meaning. Reference to the aforesaid two dictionaries supports the contention of the learned counsel. The sale of immovable property including land and building alongwith machinery installed therein could by no imagination be treated as supply goods or services rendered. Controller of Estate Duty, Lahore v. Muhammad Bashir Muhammad Nazir & others – [1974] 29 TAX 91 (H.C.Lah.) 194.
“Goodwill”.
A goodwill is a thing very easy to describe, very difficult to define, it is the benefit and advantage of the good name and reputation and connection of a business. It is the attractive force which brings in customers. It is the one thing which distinguishes an old established business from a new business at its first start. The term „goodwill‟ is nothing more than a summary of the rights accruing to the purchaser from their purchase of the business and property employed in it. The goodwill of a partnership may be said in a general way to be the value of its business, over and above the value of its tangible assets and which grows out of the firm name, trade worked up and publicity obtained. It is as much an asset of the firm, to the amount of its actual value to the business, as is its physical property, and consequently, is the subject of sale and other contract or of a right of action for a trust concerning it, as is any other property of the firm. Like any other form of goodwill, the goodwill of partnership depends very largely upon the continuance of the business and a cessation of the business, for any extended time will generally in whole or in part, destroy the value of the goodwill..... Goodwill being an asset of the firm is subject to a partial ownership of every member thereof and is ascertained in the same manner as any other asset, by settlement of partnership. Hudabya Engineering (Pvt.) Ltd. Lahore v. Pakistan through Secretary Minister of Interior [1997] 76 TAX 302 (H.C.Lah.) 195.
“Immunity”.
In Ballentine‟s Law Dictionary, 3rd Edition, the following definition of „immunity‟ appears at page 584:
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A personal favour granted by law, contrary to the general rule ex parte levy, 43 Ark 42. A privilege or special privilege, a favour granted, an affirmative act of selection of special subjects of favours not enjoyed in general by citizen under constitution, statute, or laws, Hammer v. State 173 Ind. 199, 89 NE 850. A right in the negative form of freedom from action or restraint which otherwise might be taken against or imposed upon a person such as the right of witness to be free from arrest while attending court. Siemens A.G. & Halske v. Commissioner of Income Tax – [1983] 47 TAX 132 (H.C.Pesh) 196.
“Includes”.
The word „includes‟ [in section 2(6-A) of I.T.A. 1922] is significant and it is apparent that the word „means‟ has not been used in the section. The „includes‟ denotes that the definition is inclusive and not exhaustive. The meaning of both these words has been given at page 197 of Crais on Statute Law, 1952 Edition, and it is remarked that „there are two forms of interpretation clause‟. In one, where the word defined is declared to „mean‟ so and so, the definition is explanatory and prima facie restrictive. In the other, where the word defined is declared to „include‟ so and so, the definition is extensive. Commissioner of Sales Tax, Rawalpindi Zone, Rawalpindi v. Abdul Razaq Zia-ul-Qamar – [1973] 27 TAX 99 (H.C.Lah.) 197.
“Including”.
We have already seen that the word „including‟ is used for enlarging the scope and for bringing in species which would otherwise not be covered. Elahi Cotton Mills Ltd. & others v. Federation of Pakistan through Secretary Finance, Islamabad – 1997 SCC 1097 = (1997) 76 TAX 5 (S.C.Pak) 198.
“Income”.
The expression „income‟ entails wide spectrum. It covers actual as well as constructive receipts and benefits in cash or kind. It even includes what one saves by using it for oneself. For example, use of house by its owner. That as per dictionary, the word income means „a thing that comes in‟. Its natural meaning embraces any profit or gain which is actually received. However, while construing the above word used in any entry
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in a legislative list, the above restrictive meaning cannot be applied keeping in view that the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of mere simple enumeration of broad categories. That what is not income under the „income tax act‟ can be made „income‟ by Finance Act. An exemption granted by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge, of course, subject to Constitutional limitations. That the question, whether a particular kind of receipt is income or not would depend on its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by an assessee, facts which are generally within his peculiar knowledge the Income Tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source. In Haig‟s language, income is „increase or accretion in one‟s power to satisfy his wants in a given period in so far as that power consists of (a) money itself, or (b) anything susceptible of valuation in terms of money‟, whereas, Simon equates personal income with algebraic sum of consumption and change in network. That the process of income determination is often expressed as one, of matching costs and revenues. It involves the process of working out costs used in connection with the earning of the revenue in a particular accounting period. Pak Industrial Development Corporation v. Federation of Pakistan – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
Word „Income‟ as used in section 2(24) should be read in its ordinary, natural and grammatical meaning. However, when this term is to be viewed in the constitution conferring legislative powers, the most liberal construction should be put upon this word so that the same may have effect in their widest amplitude. Commissioner of Income Tax, (Central) Karachi v. Habib Insurance Co. Ltd. Karachi – [1969] 19 TAX 222 (H.C.Kar.)
Having held that the word „income‟ in the Government of India Act 1935 has to be given the widest possible meaning the court observed that the gains taxed under section 12(B) were profits that were
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received by the assessee. It was in this context that the court went on to say that, according to its ordinary meaning, income means „a thing that comes in.‟....... We have to construe the word „income‟ in the widest possible manner and, in our opinion the word is wide enough to include capital gains on the appreciation of investment as provided in rules 3 and 6 even though such gains have not been realised. The Punjab Province v. Federation of Pakistan – 1955 SCC 13 (Federal Court) = [1960] 2-Tax (Suppl.-3) (S.C.Pak) 199.
“Individual” & “association of persons”.
There can be no doubt that the word „individual‟ can only mean a natural person i.e. a human being. While every individual must be a person, the converse is not true because an artificial juridical person or a legal person, whether it is a corporation aggregate or corporation sole, is not an individual. By no stretch of imagination the provincial government can be held to be an „association of persons. Rashid Akhtar & Sons v. Commissioner of Income Tax Lahore – [1980] 42 TAX 168 (H.C.Lah.) 200.
“Individual” and “such individual”.
There are in fact three reasons for giving to the words „any individual‟ now a meaning different from one that is urged..... Firstly, the word „individual‟ as held in the case of Khatija Begum, in its ordinary meaning, and as it was then used in section 3 of the Income Tax Act, implied both a male and a female....... Secondly, any doubt in this respect has been further removed by the substitution of the expression „her husband‟ by the expression „he or she‟ in clause (i). The context now is such that it positively indicates that the individual could be male or a female....... Thirdly, in clause (ii) the use of the expression „such individual‟ takes us back to the individual mentioned in the opening words of sub-section (3) of section 16. The scope of expression „such individual‟ is, as wide as that of the expression „an individual‟. Siemens A.G. & Halske v. Commissioner of Income Tax – [1983] 47 TAX 132 (H.C.Pesh) 201.
“Interest”.
The word „interest‟ has not been defined in the Income Tax Act. Various meaning of „interest‟ have been given in Stroud‟s Judicial Dictionary and at serial no. 42 it is shown to mean compensation paid by the borrower to the lender for deprivation of the use of his money.
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Interest, according to Black‟s Law Dictionary, means the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money. According to Wharton‟s Law Lexicon, „interest‟ means money paid at a fixed rate percent for the loan or use of some other sum, called the principal. Noon Sugar Mills Ltd. v. Commissioner of Income Tax Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak) 202.
“Liable”.
The word „liable‟ inter alia carries the meaning as subject to an obligation, that for which one is liable, a debt, bound or obliged in law or equity, responsible, chargeable, answerable, legally subject or amenable to, compellable to make satisfaction, compensation or restitution. The above quoted definitions of word „liable‟ indicate that it inter alia carried the meaning as „subject to an objection‟, „that for which one is liable‟, „a debt‟ „bound or obliged in law or equity‟, „responsible‟ „chargeable‟ answerable legally subject or amenable to‟, „compellable to make satisfaction compensation or restitution. It is also evident that the meaning of the word „liable‟ is not restricted to denote an absolute and fixed liability but has the meaning expressed by phrase „within the range of possibility. Commissioner of Income Tax Rawalpindi v. Noon Sugar Mills – [1975] 32 TAX 273 (H.C.Lah.)
The word „liable‟ is susceptible of two interpretations. In a wider and a broader sense it means answerable or responsible in law. In narrow and stricter sense it only connotes held liable, after the liability has been fixed on him by adjudication. Commissioner of Income Tax, Burma v. Messrs Steel Brothers and Co., Ltd. – 2 ITC 129 (Rangoon) 203.
“Manufacture”.
In Murray‟s New English Dictionary, „manufacture‟ is defined as „to work up (Material) into forms suitable for use‟. In Annandale‟s Concise English Dictionary, „manufacture‟ is defined as „the operation of reducing raw materials into a form suitable for use by more or less complicated processes.‟ In Chamber‟s Twentieth Century Dictionary „manufacture‟ is defined as „to make from raw materials by any means into a form suitable for use.‟ According to these definitions it appears to me to be self-evident that Messrs. Steel‟s
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operations in the milling of rice, in the extraction and conversion of timber, in the ginning of raw cotton and the pressing of oil-seeds all amount to „manufacture‟. Pak. Educational Society Karachi v. Govt. of Pakistan through Chairman & Secretary Revenue Division Islamabad – [1993] 67 TAX 311 (H.C.Kar.) “Material”.
204.
The meaning of the word „material‟ given in Legal Thesaurus by W.C.Burton „basic, capital, cardinal, central, compelling, consequential, essential, extensive, far-reaching, fundamental, indispensible, influential, key, heading, main, major, memorable, momentous, necessary, paramount, pertinent, pivotal, prevalent, primary, principal, relevant, remarkable, salient, signal, significant, substantial, valuable, vital, weighty, worth considering‟. (i)
“Material Evidence”: The expression „material evidence‟ has been defined by Black‟s Law Dictionary as under:Material Evidence: - Such as is relevant and goes to the substantial matters in dispute, or has a legitimate and effective influence, or bearing on the decision of the case. „Materiality‟, with reference to evidence does not have the same signification as „relevancy‟.
Commissioner of Income Tax v. Surridge & Beecham – [1968] 18 TAX 72 (H.C.Kar.) 205.
“May”.
Ordinarily the word „may‟ is used in a permissive or an enabling sense. But this is not universally true. There are cases in which it is used in the imperative sense. When statutes authorise persons to do acts for the benefit of others or for public good or the advancement of justice, the use of expression „may‟ has a compulsory force. A&B Food Industries Ltd. v. Commissioner of Income Tax/CST Karachi – [1992] 65 TAX 281 (S.C.Pak) 206.
“Merge” & “Merger”.
The definitions of the words „merge‟ and „merger‟ given in Corpus Juris Secundum, Vol 57, pages 1067 and 1068, read as follows:„Merge‟ The verb „to merge‟ has been defined as meaning to suck or disappear in something else; to be lost to view or absorbed into something else; to become absorbed or extinguished; to be combined or be swallowed up; to lose identity or individuality. It has also been defined as
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meaning to sink the identity or individuality of; to cause to disappear; to make to disappear in something else; to cause to be absorbed or engrossed; to swallow up. It is frequently used with the words „in‟ or „into‟. „Merger‟. In law it is the absorption or extinguishment of one estate or contract in another. It is said that merger is an operation of law not depending on the intention of the parties. However, it has also been stated that it is the law that merger is largely a question of intention to a great extent depending on the circumstances surrounding each particular case, and it is said that the courts will always presume against it whenever it will operate to the disadvantage of a party. In merger there is a carrying on of the substance of the thing, except that the substance is merged into, and becomes a part of a separate thing with a new identity......” Commissioner of Income Tax, Madras v. Sri Krishna Chandra Gajapathi Narayan Deo, Raja of Parlakimedi – 2 ITC 104 (Madras) 207.
“Occupation”
If, however, he (that is the owner) furnishes it (that is, the vacant house) and keeps it ready for habitation whenever he pleases to go to it, he is an occupier though he may not reside in it one day in a year. Star Rolling Mills v. Commissioner of Income Tax – [1974] 30 TAX 27 (H.C.Kar.) 208.
“Opinion”.
An opinion on the basis whereof a statutory authority is entitled or empowered to take any action or initiate any legal proceeding, may by accurate or erroneous, but it must be an honest opinion or conviction, based on tangible material capable of sustaining such opinion, and not mala fide opinion or colourable exercise of statutory power. Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone ‘C’ (COS-1) – [1999] 80 TAX 106 (H.C.Kar.) = 1999 PTD 2901 209.
“Or”.
We do not see any reason for holding that word „or‟ appearing in Explanation (i) to section 24(i) of the Ordinance is not to be used in its ordinary and natural use as disjunctive and to use it as conjunctive as to relate to the word „bonus‟ with the expression „payable to an employee in accordance with the terms of his employment as remember‟.
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Burma Railway Co. v. Secretary of State – 1 ITC 140 (Burma) 210.
“Owners”, “ownership” and “own”.
It must be presumed that the legislature was aware that the expressions „owner‟, „ownership‟ and the verb „to own‟ in its various tenses have been frequently used in Acts of a similar nature and further that they can be and are used in various meanings in different Acts, in some of which they have been specially defined for the purposes of particular sections. Nevertheless the expression has not been defined for the purposes of this Act. It may have the narrow and technical meaning of the full ultimate and legal owner, but if this was intended, it could easily have been expressed and the failure to do so points to its not having been so intended. Commissioner of Income Tax, Rawalpindi v. K.K. & Co. Ltd. – [1980] 42 TAX 81 (H.C.Lah.) 211.
“Paid”.
The word „paid‟ used in the context of the bonus under section 10(2)(x) could not be so extended as to cover any provision of payment at the end of the year unless the obligation is discharged by actual payment of the sum involved during the accounting year. Commissioner of Income Tax, North Zone, Lahore v. Mst. Wazirunnissa Begum – 1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.) 212.
“Pay”.
The word „pay‟ in section 16(2) means to satisfy, to set at rest, to discharge, to require with what is due or deserved etc., and it is obvious that the word as used in the aforesaid provision means when the money is actually delivered and not when a decision is made to make the payment. City Bank N.A. Karachi v. Commissioner of Income Tax, Central Zone ‘C’ Karachi – [1994] 70 TAX 159 (H.C.Kar.) 213.
“Penalty”.
Term „penalty‟ according to the Black‟s Law Dictionary is an elastic term with many differentiations of meaning. It involves an idea of punishment corporeal or pecuniary, civil or criminal, although its meaning generally is confined to pecuniary punishment. There can not be two opinions about such meaning of the term. But in order to understand the real import of a term in a statute, it is necessary to examine the statute itself as an aid to interpretation.
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Begum Nusrat Bhutto v. Income Tax Rawalpindi – [1980] 42 TAX 59 (H.C.Lah.) 214.
Section 1
Officer
Circle-V,
“Person”.
The power of authority of the present day legislature is not limited to the following of principles of jurisprudence and treat a dead man as a non-entity which in actual fact is; the Legislature can treat the dead man as alive as for certain purposes, it can treat a living human being as dead for example in cases of bankruptcy or insolvent. Sheikh Miran Bux Karam Bux Ltd. Karachi v. Income Tax Officer, Company Circle 12, Karachi – [1976] 33 TAX 99 (H.C.Kar.) 215.
“Previous year”.
Previous year‟ had only one definition in the Income Tax Act, 1918. However, by a subsequent legislation, namely, the Income Tax Act of 1922, the definition of „previous year‟ was enlarged. While retaining the old definition, paragraph (b) was added, and paragraph (c) was introduced by the Income Tax (Amendment) Act 1939. Looking at the two paragraphs, it is clear that, in case of paragraph (a), the previous year meant an accounting year comprised of a full period of twelve months and corresponding to a financial year preceding the financial year of assessment. But in paragraph (b), the use of words „such period‟ was unqualified and gave a discretion to the Central Board of Revenue or such authority, as was authorised by the Board in this behalf to lay down the length of the period which could either be less than one year or more than one year of a year. Rafhan Maize Products Co. Ltd. v. Commissioner of Income Tax – 1988 SCC 663 = 1988 PTD 571 216.
“Processing”.
Admittedly the operation of freezing, preserving or canning of these items would not change their identity and, therefore, the word processing as used in the aforesaid legal provision, is also to be interpreted or understood in the same manner, i.e. the identity of the raw material is not destroyed in the operation or operations. Crescent Sugar Mills & Distillery Ltd. Lahore v. Commissioner of Income Tax Lahore Zone, Lahore – [1981] 43 TAX 1 (H.C.Lah.)
The term „manufacture‟ has often been understood as transformation of one article into a commercially different commodity. The Tribunal does not appear to be wrong in confining the „processing‟ to undergoing a treatment which does not change the identity of the
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goods. May be, that in some shades in exactly, the connotation of the word „manufacture‟ and „processing‟ overlap but we, feel, that here the word processing is not amenable to extended meaning and conceivably has been used along with the associated words in the cognate sense as a phenomenon of the food processing industry which includes, the canning, freezing and preservation of good through various methods. Commissioner of Income Tax Karachi v. Paracha Textile Mills Karachi – [1973] 28 TAX 155 (H.C.Kar.) 217.
“Profit”.
The word „profits‟ has not been defined in the Income Tax Act. Firstly the word „profits‟ as occurring in the said proviso must be understood in its context, and that is, in relation to the bonus paid to the employees and the requirement of reasonableness between profits and bonus, including as aforesaid, commercial expediency. The Bharat Insurance Company Ltd. v. Commissioner of Income Tax, Punjab & NWFP – [5 ITC 288 (H.C.Lah.)
In Mersy Docks and Harbour Board v. Lucas (2 Tax Cas. 25) interpreted by the House of Lords to mean „the net proceeds of a concern after deducting the necessary outgoing without which those proceeds could not be earned or received‟ or „income of whatever character it may be over and above the costs of receipts and collection‟, and the „gains of a trade‟ were taken to be „whatever was gained by the trading, for whatever purpose it was used‟. The same view was adopted by the majority of that House in Last v. London Assurance Corporation (2 Tax Cas. 100). There is nothing to show that the word „profit‟ is used in different sense in the Indian Income tax Act. In Board of Revenue v. Al.A.R.RM Arunachalam Chethiar (1 ITC 75), a similar interpretation was adopted by a Special Bench of the Madras High Court on the basis of several English decisions...... The Income Tax then in force was the Act of 1918, but there seems to be no material difference in the provision of that Act and the present Act so far as the point under discussion is concerned. Hamdard Dawakhana v. Commissioner of Income Tax Karachi – 1980 SCC 497 = [1980] 42 TAX 1 (S.C.Pak) 218.
“Property”.
There is consensus of judicial opinion that the term „property‟, as used in clause (i) is a term of the wide import and subject to any limitation
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or qualification which the context might require, it signifies every possible interest, which a person can acquire, hold and enjoy. It is comprehensive enough so as to cover even business, cash, deposits, securities and other such things. There is nothing in the language of the clause in question to restrict in any manner the normal and accepted meaning to the word „property‟ so as to exclude business from its contention. Sundar Das v. Collector of Gujrat – 1 ITC 189 (Lahore) _ 219. “Received” person cannot receive a thing from himself. The Act contains no definition of the word „receive‟ or „received‟ but in Murray‟s Oxford Dictionary the expression „receive‟ is defined as „To take in one‟s hand or into one‟s possession (something held out or offered by another), to take delivery of (a thing) from another, either for oneself or for a third party.‟ In the Imperial Dictionary the same expression is defined as „to get or obtain; to take, as a thing offered, given, sent, committed, paid, communicated or the like; to accept.‟ It seems to me that the word „receive‟ implies two persons, namely, the person who receives and the person from whom he received. A person cannot receive a thing from himself. Taking the expression „received‟ in its ordinary dictionary meaning, I am of opinion that the assessee, who had already received the money in Baluchistan, did not receive it again when he brought it into, or forwarded it to, the Punjab. I would, therefore, hold that he is not taxable on the alleged income mentioned in the reference. Eastern Federal Union Insurance Co. v. Commissioner of Income Tax – [1966] 14 TAX 211 (H.C.Kar.) 220.
“Repeal” & “amendment”.
There is no difference in principle between repeal and amendment. Section 6 of General Clauses Act is applicable to the present case. Under this provision of law the repeal does not affect any right, privilege, obligation or liability, acquired, accrued under any enactment so repealed.” Commissioner of Income Tax Central Zone Karachi v. United Liner Agencies, Karachi – [1990] 62 TAX 31 (H.C.Kar.) 221.
“Reserve”.
The word „reserve‟ in its ordinary sense means keeping apart something with a view to utilise it on a future date for a particular or specific purpose. Therefore, any amount which has been kept apart with reference to its particular use at a future time will be called a
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reserve. But if there is an unappropriated amount in the profit and loss account without specifically keeping it apart for utilising for any purpose in future, it will not be deemed to be a reserve. Commissioner of Income Tax v. Prime Dairies Ice Cream Limited – [1999] 80 TAX 282 (H.C.Lah.) 222.
“Sales” and “supplies”.
......‟the supply may include sale but this cannot be synonymous with the aforesaid expression‟...... The expression „supplies‟ as embodied in section 50(4) of the Income Tax Ordinance, 1979 (XXXI of 1979) does include „sales‟. Commissioner of Income Tax North Zone, Lahore v. Lahore Central Iron and Hardware Machinery, Merchants – [1973] 27 TAX 40 (H.C.Lah.) 223.
“Specify”.
To sum up, therefore, if something has been described „as far as is reasonably possible‟ or „as far as a careful man of business could and would do without going into the unreasonable particulars‟ and it need not „be a completely accurate and detailed description‟ and it can be „unambiguously identified‟ it would be said to have been „specified‟. This in fact is a specification „by reference and this is nothing usual. Muhammad Younus v. Chairman Town Committee Sahiwal – [1986] 53 TAX 93 (H.C.Lah.) 224.
“Tax”.
A tax is a compulsory extraction or a contribution imposed by a sovereign authority or required by the general body of the subjects and citizens. The power to levy a tax has to be founded in a statute whereby authority is given to levy and collect the compulsory contribution in the good of the citizens or for running the administration...... Commissioner of Income Tax v. Pakistan Tobacco Company Ltd. – [1988] 57 TAX 118 (H.C.Kar.) = 1988 PTD 66 225.
“Working capital”, “current assets” and “current liability”, meaning of.
From the above quoted passages from the various books on accounting the following deductions can be deduced with reference to the terms, „working capital, current liability and current assets‟:
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(i)
The working capital is the amount that remains for the running or working of a business after the purchase price of the fixed assets has been paid.
(ii)
That the difference between the current assets and current liabilities is also called working capital.
(iii)
Working capital can also be defined as the money which has been put into business and which to stay there, the amount of cash and supplies necessary to be kept in hands to meet current expenses and contingencies as they arise for the proper, safe and convenient conduct of the business having regard to the owner‟s ordinary outstanding both payable and receivable.
(iv)
Total the working capital represents the investment of the company‟s medium and longer term funds in assets which are expected to be realised within the year of trading. It is not a permanent investment but turn over many times in a year. It is required for maintenance of inventories i.e. stock of raw-materials, work-in-progress, and purchase of goods, for extending credit to customers and for maintaining a cash balance. The total requirement is met partly by the credit that the suppliers of goods and services rendered to the firm and the remaining by the firm itself.
(v)
That according to Machullan Dictionary of Accounting, working capital is current assets less current liability other than those for taxation and proposed dividends.
(vi)
Current liability is a financial obligation of company falling due within one year or within an operating cycle if it is longer than one year.
(vii)
Current liabilities are debts which business must pay in near future not later than 12 months from the date of the last balance sheet which includes inter alia taxes.
Commissioner of Income Tax v. Pakistan Tobacco Company Ltd., etc. – [1988] 57 TAX 113 (H.C.Kar.)
In the instant ease it is an admitted position that the dividend was not even declared by the respondent company when the above provision was included by the Income Tax Officer for the purpose of levying 10% surcharge of income tax and super tax instead of excluding the above amount. The conclusion arrived at by the learned Income Tax Appellate Tribunal that the provision for the proposed
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dividend should have been excluded for the purpose of computing the above tax and should have been included in the amount retained for meeting the working capital requirement seems to be correct. Our answer accordingly is that the learned Tribunal was justified in holding that the provision for proposed dividend was retained income as requirement of working-capital and was not liable to surcharge. Any payment under section 18A of the Act is merely on account in respect of the liability which is to be determined after the coming into force of the new Finance Ordinance or Act for the relevant year and that the mere fact that certain amount of advance tax goes out of the control of an assessee does not change the legal character of the amount as it remains a provision for tax. There cannot be any cavil to the legal proposition propounded in the above two cited cases. The legal position is very obvious, namely, that accounting year is different from assessment year. The law applicable to a particular assessment year will be the law which is in force in that year and not the law which was in force during the accounting year unless otherwise stated or implied. As a matter of fact, contrary to this was not convassed by the learned counsel for the respondent assessees. it was not contended that the above substituted proviso pertaining to surcharge which was effective from assessment year 1981-82 was applicable to the present cases which pertain to the assessment years prior to the above year but what was Contended and referred to hereinabove is that the factum that the legislature thought it fit to provide definition of the words „retained income‟ in explanation (a) and to‟ exclude, tax and super tax payable, indicate that law prior to it did include the amount of tax and super tax payable within the ambit of the definition of „retained income‟ which submission is supported by the above Supreme Court Case. For the aforesaid reasons, our answer to the question referred to hereinabove in para 1 is that the Tribunal was justified in holding that income tax liability payable for relevant assessment year could be included for purposes of working out „retained income‟ for levy of surcharge. Cases referred to : [1979] 40 Tax 47 (Trib.); 1987 PTD (Trib.) 347; Hirjina & Co., (Pakistan) Ltd.; Karachi v. CST, Central, Karachi (1975) 31 Tax 78 (SC); Commissioner of Income Tax v. Isthmian Steamship Lines (1951) 20 ITR 572; Maneklal Vallabhdas Parikh & Sons v. Commissioner of Income Tax (1969) 72 ITR 637.
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Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur & others – 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) Word „year‟ - How to be understood.
226.
Definition alone cannot extend a period of (limitation) which had already commenced to run many years earlier, according to a fixed measure of time, namely, a year of twelve months. The legislature never intended that the period of limitation prescribed in the Act should become variable with the changes in the “financial year” or “year” inserted by Finance Act for certain other purposes, namely, to accord with the new accounting years adopted by Government. _______________
INTERPRETATION REGARDING WORDS AND EXPRESSIONS
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) Rule of interpretation regarding words and expressions used in fiscal statute.
227.
The rule of interpretation of statutes referred to in the above two cases of English jurisdiction has been consistently pressed into service by the superior Courts in Pakistan. In this behalf reference to the following judgments of this Court will not be out of context:(i)
Mehar Khan v. Yaqub Khan and another (1981 SCMR 267); in which this Court while construing the word “inquiry” used in sections 190(I)(3) and 344 (1) Cr. P.C., inter alia observed as follows:“No doubt the elementary rule of construction is that the words used in a Statute should be construed literally but according to what is termed as the „Golden Rule of Interpretation‟ by Maxwell, the ordinary meaning of a word need not be adhered to if a construction based on it, would be at variance with the intention of the Legislature as collected from the statute itself or if it leads to an absurdity. In such cases the language may be varied or modified so as to avoid such absurdity or inconvenience Beck v. Smith (1836) 2 MW (191). While interpreting the statutes like the one before us, the proper mode of interpretation or discovering the true intention of the Legislature would be to consider as to what was the state of law before the statute
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or its provision was given its present form and as to what was the mischief of difficulty which was sought to be suppressed and remedy which the Legislature had intended to advance. Ref: Abdul Majid Khan v. Chief Settlement and Rehabilitation Commissioner (PLD 1968 S.C. 154); Divisional Superintendent, P.W.R. v. Bashir Ahmad (PLD 1973 S.C. 589); and Rabnawaz v. Jahana (PLD 1974 S.C. 210) and Maxwell on the Interpretation of Statutes, 12th Edn. at p. 40”. (ii)
Hirjan Salt Chemicals (Pak) Ltd. v. Union Council & others (1982 SCMR 522); in which this Court made the following observations on the question in issue:“It is now a well established principle of interpretation of Statutes that Rules which are merely subordinate legislation, cannot over-ride or prevail upon the provisions of the parent Statute and whenever there is an inconsistency between a Rule and Statute, the latter must prevail. This, however, envisages that all efforts to reconcile the inconsistency must first be made and the provisions of the parent statute prevail only if the conflict is incapable of being resolved. We also do not have any cavil with the proposition that when construing any word used in a Statute which has not been defined therein, it should be understood to have been used in its dictionary meaning or even its ordinary or popularly understood meaning . . . . . ”
228.
General and special words or terms.
Reference may also be made to para 189 from the Construction of Statutes by Earl T. Crawford 1940 Edition, which reads as follows:189.
General and Special Words or Terms.-It is also a basic rule of construction that general words should be given a general construction; that is, they should be given their full and natural meaning, unless the statute in some manner reveals that the legislative intent was otherwise. Such a contrary intent may be found in the purpose and subject matter, or context of the statute, so that as a result the general terms may be qualified or restrained . . . . .” .
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Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur & others – 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) 229.
Stable interpretation of term „assessment year‟ should be adopted.
The word “assessment year” should not be broken into two segments i.e., “assessment” and “year”. It must be given stable interpretation and must be held to mean a period of twelve months. The “year” here does not mean period of shorter or longer duration than a time frame of 12 months. Commissioner of Income Tax v. Pakistan Tobacco Company Ltd. – [1988] 57 TAX 118 (H.C.Kar.) = 1988 PTD 66 230.
Law applicable on the first day of assessment year will apply and not the one in existive during the next year.
The legal proposition is very obvious, namely, that accounting year is different from assessment year. The law applicable to a particular assessment year will be the law which is in force in that year and not the law which was in force during the accounting year unless otherwise stated or implied. _______________
PAST AND CLOSED PROVISION
Income Tax Officer & another v. Chappal Builders – 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.) 231.
Past and closed transactions can be reopened by giving retroactive effect to an amending provision.
We are of the opinion that, even though the amending provisions in question, were a part of the procedural laws, they cannot be given retrospective effect, in the facts of the present case. There is no dispute between the parties, that but for the amendments, the business profits for the chargeable accounting period in question, were not liable to be assessed on 31.1.1958. On the expiry of the period of four years under section 14, the assessee had, therefore, clearly acquired a right and the assessment for the said year became a past and closed transaction. This right could not, therefore, be taken away by giving retroactive operation to the amended statutory provisions extending the period for assessment. The contentions advanced on behalf of the appellant are without substance.
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Commissioner of Income Tax v. Eastern Federal Union Insurance Company – 1981 SCC 572 = [1982] 46 TAX 6 (S.C.Pak.)
We are of the opinion that, even though the amending provisions in question, were a part of the procedural laws, they cannot be given retrospective effect, in the facts of the present case. There is no dispute between the parties, that but for the amendments, the business profits for the chargeable accounting period in question, were not liable to be assessed on 31.1.1958. On the expiry of the period of four years under section 14, the assessee had, therefore, clearly acquired a right and the assessment for the said year became a past and closed transaction. This right could not, therefore, be taken away by giving retroactive operation to the amended statutory provisions extending the period for assessment. The contentions advanced on behalf of the appellant are without substance. _______________
SPECIAL LAW VS. INCOME TAX
Zahur Textile Mills Limited v. CBR through Chairman, Government of Pakistan, Islamabad and 2 others – [2000] 82 TAX 275 (H.C.Lah.) = 2000 PTD 303 232.
Scope of protection under the Protection of Economic Reforms Act of 1992.
From a perusal of various provisions of Act, 1992 it becomes clear that it provides protection to the various economic measures taken on or after 7.11.1990. Although it is true that section 6 of the Act, 1992 does not use the words “economic reforms” but it is to be seen that this word does not appear anywhere except in the preamble and the definition clause. In case of doubt about interpretation of this statutory provision preamble can validly be referred to. It reads as under:“Whereas it is necessary to create a liberal environment for savings and investments and other matters relating thereto; And whereas a number of economic reforms have been introduced and are in the process of being introduced to achieve the aforesaid objectives; And whereas it is necessary to provide legal protection to these reforms in order to create confidence in the establishment and continuity of the liberal economic environment created thereby.”
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The definition of “economic reforms” in the Protection of Economic Reforms Act, 1992 is contained in section 2(b) which reads as under:2(b)
„economic reforms‟ means economic policies and programmes, laws and regulations announced, promulgated or implemented by the Government on and after the seventh day of November, 1990, relating to privatization of public sector, enterprises, and nationalized banks, promotion of savings and investments, introduction of fiscal incentives for industrialization and deregulation of investment, banking, finance, exchange and payment systems, holding and transfer of currencies; and;”
A cumulative reading of section 2(b) and the preamble would who that the saving clause apply only to the economic measures taken after 5th November, 1990 pursuant to the economic policy of the Government which granted the incentives. The Intention of the Legislature becomes manifest from a perusal of the Schedule. If the argument of the learned counsel is correct that section 6 applies to all the notifications issued before the promulgation of the Act, then there was no necessity of specifically mentioning two notifications in the Schedule. It is thus obvious that what section 6 says is the measures taken by the Government after 5th November, 1990 which was the date on which the then Government came into power. Essential Industries, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca – [1969] 19 TAX 3 (H.C.Dacca) 233.
General Act - Whether overrides the provisions of Specific Act Held no.
For the charge year 1953-59 an application for registration under section 26A was made on behalf of the assessee-firm comprising of five partners and constituted under a partnership deed dated the 12th February. 1954. Applications for renewal of registration for the subsequent two years were also made on the basis of the same partnership. deed. The Income Tax Officer refused to grant registration and renewal of registration for all these years on the ground that these applications were not signed by all the partners of the firm. When the matter reached the High Court it was contended on behalf of the assessee that (i) the provisions of subsections (1) and (2) of section 26A and section 18 of the Partnership Act do not provide that application for registration or renewal of registration should be signed by all the partners; (ii) Rule S of the Income Tax Rules which requires that such as application shall be signed by all the partners is ultra vires of sub-section (i) and (2) of section 26A of the Income Tax
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Act; and (iii) if the application for registration had not been decided after a lapse of over four years the assessee could have filed the subsequent applications duly signed by all the partners well within the period of limitation. Held, that (i)
the expression such person or persons occurring in subsection (2) of section 26A clearly shows that the power of fixing the number of persons requiring to file such application has been delegated to the Rule making authorities. Therefore, the contention that rule 3 of the Income Tax Rules is ultra vires of section 26A is of no substance;
(ii)
it is clearly laid down in the Rules that the application should be signed by the partners and the Income Tax authorities have, therefore, rightly refused to entertain this application in question;
(iii)
the Partnership Act is a general law which will govern the business transaction of the firm but it cannot override a specific provision. In fact, this specific provision shall override the general provisions made in the Partnership Act; and
(iv)
it is indeed deplorable that such applications are left unattended by the department for years and then are turned down for technical defects. Had the list application been disposed of expeditiously the assessee would have been spared some financial toss. At the same time it is also true that a firm should be vigilant about its rights and should be aware of the rules required to file. _______________
MACHINERY PROVISIONS
Kohinoor Textile Mills Ltd. v. Commissioner of Income Tax – 1974 SCC 416 = [1974] 30 TAX 138 (S.C.Pak.) 234.
Amendments in machinery section being procedural are applicable to pending proceedings.
We have carefully re-examined the provisions of the Finance Act of 1957 and have come to the conclusion that the applicability of statutory amendments could not possibly have been made to depend upon modifications to be made by the executive for then the executive could have rendered the statute nugatory by one making the
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necessary modifications. The use of the words “modifications, if any,” clearly indicated that even if no modifications were made the amendment would still be operative. The statute which had come into force by the will of legislature could not also remain “dormant” at the will of the executive. It operated of its own force and it becomes the duty of the executive to give effect to it as far as possible even without the modifications which could, at best be only of a consequential nature. We are unable, therefore, to agree with the High Court that without the modifications the amendment was not applicable. We are also unable to agree that the amendment did not apply to pending proceedings because, the provisions of section 34 of the Income Tax Act impose no charge on the subject but merely deal with the machinery of assessment as held by the Privy Council in the case of the Commissioner of Income Tax, Bengal v. Messrs Mahaliram Ramjidas [(1940) 8 ITR 442]. This was, therefore, an amendment of procedure in which no assessee has a vested right. Such procedural amendments operate retroactively and apply even to pending proceedings. Leather Connections (Pvt.) Ltd. v. Central Board of Revenue, Islamabad – [2001] 83 TAX 1 (H.C.Lah.) 235. Machinery provisions cannot be construed to go beyond the spirit of law. It is settled proposition of law that principle of strict construction of fiscal statute is applicable only to taxing provisions such as charging provisions and not to those parts of statutes which contain machinery provisions as per principle laid down in (1980 Tax Law Report 185). It is true that the machinery provisions of a fiscal statute should be interpreted in such a manner that recovery is not frustrated or adversely affected. But it does not mean that to achieve this object one can travel beyond the spirit of law and do violence to language and intention of the statute. The machinery can be extended only to the extent it is permissible under the law. In this attempt one cannot override of other parties only because a recovery has to be made. Such provisions have their own limitation and they are to be found within the statute itself. Leather Connections (Pvt) Limited v. The Central Board of Revenue Govt. of Pakistan, Islamabad through its Chairman – [2000] 82 TAX 42 (H.C.Lah.) 236. Machinery provisions of fiscal law should be construed so as not to destroy recovery mechanism. Mere reading of aforesaid section, notification and letter dated 4.4.1995 reveal that the same are in accordance with law. Section
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50(7BB) was inserted by the Competent body by Finance Act No. 10 of 1993, as per principle laid down by the Hon‟ble Supreme Court in Ellahi Cotton Mills‟s case (PLD 1997 SC 582). Proviso (ii) of aforesaid section 50(7BB)(b) confer powers to C.B.R. therefore, C.B.R. issued S.R.O. No. 614/93, dated 18.7.1993 which was published in official gazette on 18th July, 1993, therefore, contention of petitioner‟s counsel has no force that C.B.R. has no authority to issue notification. Similarly the contention of petitioner‟s counsel has no force that notification was not published in the official gazette. C.B.R. has given formula to determine the estimated cost of construction of a building on the basis of cost of construction as specified by Pakistan Public Works Department or Provincial Building Department does not indicate at all that the CBR has delegated its powers to the other department on the well known principle of adoption or legislation by Reference which is known principle. In arriving to this conclusion I am fortified by judgment of this Court “P.I.A. Corp‟s case (PLD 1979 Lah 415). It is also settled proposition of law that interpreting a fiscal statute that Court must look all the words of statute and interpret the same in the light of what is clearly expressed and Court has no jurisdiction to imply anything which is not expressed. In this behalf reliance is placed on Hirjina and Company v. Commissioner (1971) 23 Tax 230 (S.C.Pak) = (1971 SCMR 128) and Collector of Custom‟s case (1977 SCMR 371). It is settled proposition of law that principle of strict construction of fiscal statute is applicable only to taxing provisions such as charging provisions and not to those parts of statutes which contain machinery provisions as per principle laid down in (1980 Tax Law Report 185). It is true that the machinery provision of a fiscal statute should be interpreted in such a manner that recovery is not frustrated or adversely affected. But it does not mean that to achieve this object one can travel beyond the spirit of law and do violence to language and intention of the statute. The machinery can be extended only to the extent it is permissible under the law. In this attempt one cannot over-rights of other parties only because a recovery has to be made. Such provisions have their own limitation and they are to be found within the statute itself. In arriving to this conclusion I am fortified by the following judgments: Commissioner of Income Tax‟s case AIR 1940 PC 124 Maithram v. Ranjidas.
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Escorts Limited‟s case [1975] 31 TAX 164 (H.C.Lah.) = 1975 SCMR 570. 237.
Rule of liberal construction of machinery provisions.
It is also settled proposition of law that machinery provisions of fiscal statute should be liberally construed to ensure recovery as per principle laid down by this Court in W.P. Province v. K.B. Amir-uddin (P.L.D. 1953 Lah 433). The aforesaid judgment was confirmed by Federal Court reported as (P.L.D. 1956 Federal Court 220) The same was again upheld by the Hon‟ble Supreme Court in Let. Con. Nawabzada Muhammad Amir Khan‟s case (PLD 1961 SC. 119) The contention of learned counsel for respondent No. 3 has a force that in case of non-deduction of advance tax on the basis of aforesaid section penal consequences have to be faced by respondent No. 3 as is held by D.B. of Karachi High Court in Raman‟s case (1985 P.T.D. 787). Arafat Woollen Mills Ltd. v. Income Tax Officer, Companies Circles E-1, Karachi – [1986] 54 TAX 1 (H.C.Kar.) = 1986 PTD 316 238.
Basic rules to construe charging and machinery provisions.
Income Tax Act/Ordinance provides structure for levying and collection of tax and purpose of scheme of Act/Ordinance relating to this object must be kept in view. Provisions of Income Tax Act/ Ordinance are to be construed in such a way as to make it workable. Sections which impose charge should be strictly construed and those which deal with machinery of assessment and collection should not be subjected to strict construction. _______________
LIMITATION PERIOD CANNOT BE EXTENDED RETROSPECTIVELY
Income Tax Officer, Investigation Circle & others v. Sulaiman Bhai Jiwa & Others – 1969 SCC 354 = [1970] 21 TAX 62 (S.C.Pak.) 239.
Limitation period extended retrospectively by legislation held not valid.
The orders annulling the assessments in question on ground of limitation in view of the extension of the period of limitation by ex post facto legislation, shall be deemed to have been made without lawful authority. _______________
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RULES OF CONSTRUCTION
_
FISCAL STATUTES
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak) 240.
General and specific words.
Reference may also be made to para 189 from the Construction of Statute by Earl T. Crowford 1940 edition, which reads as follows: „General and special words or terms: It is also basic rule of construction that general words should be given a general construction, that is, they should be given their full and natural meaning, unless the statute in some manner reveals that the legislative intent was otherwise. Such a contrary intent may be found in the purpose and subject matter, or context of the statute, so that as a result the general terms may be qualified or restrained......‟.” Commissioner of Income Tax Karachi v. Khatija Begum, partner Shakil Impex Karachi – 1965 SCC 228 = [1965] 12 TAX 95 (S.C.Pak) 241.
Rule of harmonious construction of statutes.
Now it is well-settled that the words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonize with the object of the enactment and the object which the legislature had in view. See Maxwell on Interpretation of Statute. The same author also says that: “To arrive at the real meaning it is always necessary to get an exact conception of the aim, scope and object of the whole Act, to consider according to Lord Coke (I) what was the law before the Act was passed; (ii) what was the mischief or defect for which the law had not provided; (iii) what remedy Parliament has appointed; and (iv) the reasons of the remedy.” Commissioner of Income Tax, East Bengal v. Kumar Naryan Roy Choudhry & others – 1959 SCC 68 = (1959) 1-TAX (III-207) (S.C.Pak.) 242.
An equitable construction of a fiscal statute is not permissible.
A fiscal statute should be construed strictly and no question of equitable construction arises.
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Commissioner of Income Tax/Wealth Tax, Companies Zone, Faisalabad v. Rana Asif Tauseef C/o Rana Hosiery & Textile Mills (Pvt.) Ltd., Faisalabad – [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497 243.
Strict rule of fiscal statutes emphasised.
Before proceeding further, we feel necessary to reiterate three wellknows rules of construction of fiscal statute. Firstly, that fiscal statutes are to be construed strictly and a citizen is to be taxed within the letter and spirit of a charging statute. Briefly, the imposition of tax must be affected by plain words of Legislature. Lord Atkinson stated this principle in case of Ormond Investment Co. v. Betts, (1928) A.C. 143, 162 in the following words:It is well-established that one is bound, in construing Revenue Acts, to give a fair and reasonable construction to their language without learning to one side or the other, that no tax can be imposed on a subject by an Act of Parliament without words in it clearly showing an intention to lay the burden upon him, that the words of the statute must be adhered to, and that so-called equitable constructions of them are not permissible. Tariq Sultan & Co. v. Government of Pakistan, etc. – [1999] 80 TAX 62 (H.C.Qta.) 244.
Rule cannot override the statutory law.
Rule 96ZZ [Central Excise Rules, 1944] being subordinate legislation cannot supersede to the provisions of Section 3-C of the Act; [Central Excise Act, 1944] secondly it mainly deals with special procedure in respect of certain manufactured goods as provided under Chapter-XV of the Central Excise Rules, 1944. This Chapter deals with regard to filing of the application and the revised procedure, maintenance of current account, deposit of goods in the store room, clearance of goods on payment of duty, clearance of goods exempted from duty etc. but does not deal in respect of the event when determination of tariff value and of rate of duty will be worked out, therefore, the argument put forth by the learned counsel has not substance. Commissioner of Income Tax Companies Zone Lahore v. Naveed A. Sheikh – [1992] 65 TAX 80 (H.C.Lah.) 245.
Words in a statutory instrument should be construed in their ordinary sense.
It is well settled and needs no authority that the words used in a statutory instrument are to be construed in their ordinary and natural
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sense and if different words are used by the legislature, the object is to convey different meaning, unless the context otherwise requires. Mustafa Prestressed R.C.C.Pipe Works Ltd. Karachi v. Commissioner of Sales Tax (Investigation), Karachi – [1990] 62 TAX 119 (H.C.Kar.) 246.
Rule of harmonious construction of statutes.
It is well-settled principle of interpretation that all the provisions of an enactment have to be construed harmoniously. Muhammad Younus v. Chairman Sahiwal – [1986] 53 TAX 93 (H.C.Lah.) 247.
Municipal
Committee,
Courts while interpreting a statute must adhere to the plain meaning of the words.
It is also true that the historical background of a statute serve as a useful guide in ascertaining the intention of the legislature, but, only if the words used are capable of more than one interpretation; but it has never been held that courts may depart from the plain meaning of the words employed in statute because of its historical background. The court remains under an obligation to adhere to the plain meaning of the words employed in it. Crescent Sugar Mills Distillery Ltd. Lahore v. Commissioner of Income Tax Lahore Zone, Lahore – [1981] 43 TAX 1 (H.C.Lah.) 248.
Meaning of doubtful words to be gathered by reference to words associated with them.
It is one of the cordinal rules of the construction of statute that when several words have been used in an enactment, the meaning of the doubtful words may be gathered by reference to words associated with it. Highway Petroleum Services (Regd.) Lahore v. Islamic Republic of Pakistan & another – [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797 249.
Inapt and inaccurate phraseology of draftsman cannot nullify a provision made by legislature.
I put on the phrase „additional amount of tax‟, renders the last two words virtually redundant but clearly I am of this view also, that an inapt and inaccurate phraseology of the draftsman cannot and should not nullify a provision made by the legislature which is consistent with existing legal norms. A passage from Sweet and Maxwell, 11th edition, at page 221, based on sound judicial precedents, may be quoted in support of this view. It is to the following effect:
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“Where the language of a statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. This may be done by departing from the rules of grammar, by giving an unusual meaning to particular words, by altering their collection, or by rejecting them altogether, under the influence, no doubt, of an irresistible conviction that the legislature could not possibly have intended what its words signify, that the modifications thus made are mere corrections of careless language and really give the true meaning. Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsman‟s unskillfulness or ignorance of the law, except in a case of necessity or the absolute intractability of the language used.” Dreamland Cinema, Multan v. Commissioner of Income Tax Lahore – [1977] 35 TAX 169 (H.C.Lah.) 250.
An equitable permissible.
construction
of
a
fiscal
statute
is
not
There is no dispute about the proposition that equitable construction of a fiscal statute is not permitted. A person must be taxed only if he comes within the letter of law, otherwise he is free even though his case falls within the spirit of law. Taimur Shah v. Commissioner of Income Tax – [1976] 34 TAX 151 (H.C.Kar.) = PLD 1976 Kar. 1030 251.
Fiscal statutes should be strictly construed.
The provisions of the aforesaid (section 45A) come into play only when an assessee fails to pay the tax due from him. It is, therefore, to be seen when a Tax is due from a person leaving aside the deduction of Tax at source under section 18 or the payment of advance tax under section 18-A, neither of which provisions are applicable in the instant case, tax is to be determined and assessed under the provisions of section 23 of the Act, mainly, on the basis of the returns of income to be made under section 22. On such assessment being made, the Tax becomes due and a notice of demand is to be issued under section 29 of the Act specifying the sum due and payable.
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The amount specified in the notice of demand is required to be paid with the time specified in the notice, as provided in section 45, An assessee this would be deemed to have failed to pay the tax due from him if he fails to pay the tax by the date specified in the notice of demand issued under section 29. In the instant case, as already pointed out, the three notices of demand for the three charge years in question were all issued in September 1965 much after section 45A had been added to the Income Tax Act. As such the assessee‟s failure to pay the tax due from him occurred after section 45A had become a part of the Income Tax Act. No question, therefore, of retrospective operation of section 45A arises in the instant case. If the intention of the Legislature had been that the application of this section should be restricted to the tax due for the_charge years following insertion of the said section then this intention would have been made manifest by the use of appropriate words. There is, however, nothing in section 45A which implies that its application is restricted to tax due for the year following the insertion of the said section. in a fiscal statute, its provision have to be strictly construed and no additions to or omissions therefrom are permissible. As such, we are unable to construe section 45A of the Act so as to limit its application to tax due for the years following its addition to the Act as this can only be done if we were to add these words or words of similar „import‟ in the section, which is not permissible to us. According to Maxwell, 10th Edition : “It is but a corollary to the general rule of literal construction that nothing is to be added to or taken from a statute unless there are similar adequate grounds to justify the inference that the Legislator intended spine thing which it omitted to express”. As observed by Lord Mersey in (1910) AC 409, 420: “It is a strange thing to read in an Act of Parliament words which are not there, and, in the absence of clear necessity, it is a wrong thing to do”. Crown Bus Service Ltd. Lahore v. CBR and others – [1976] 34 TAX 54 (H.C.Lah.) 252.
Construction of law should not lead to startling results.
It is well settled that courts should follow that construction of law which does not lead to startling results or destructive ends.
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Commissioner of Income Tax Lahore Zone Lahore v. Malik & Co. Lahore – [1974] 29 TAX 165 (H.C.Lah.) 253.
Rule of harmonious construction of statutes.
Rules and the section are to be read together in harmony and not in derogation of one another. Muhammadi Steamship Company Ltd. v. Commissioner of Income Tax, (Central) Karachi – 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 254.
Words in statutes cannot be treated as surplusage or redundant.
Provisions granting exemptions or privileges have to be construed strictly against the person claiming the exemption or the privilege. It is a well established rule of interpretation of statutes that no words in a statute are to be treated as surplusage or redundant. Maharani of Bardwan v. Krishna Kamini Dasi – 14 ILR PC 365 255.
Punctuation marks and construction of statutes.
It is an error to rely on punctuation in construing Acts of the Legislature. Seth Gurmukh Singh v. Commissioner of Income Tax – [1944] 12 ITR 393 (Lahore)
“........ in the interpretation of statute punctuation, not being a part of the statute to be construed, is not a determining factor and if the proviso as punctuated leads to an absurd result or conflicts with some other provision of the statute which is unambiguous and free from doubt, the punctuation must yield to an interpretation that is reasonable and makes it consistent with the other provisions of the Act ........” [p. 424]. Board of Revenue v. Ramanathan Cheltian – 1 ITC 244 (Madras)
It is then argued that, on the true construction of clause (vii), all sales of machinery are included irrespective of whether they are sold by reason of their being obsolete; in other words, that the words „as obsolete‟ govern the word „discarded‟ appearing immediately before them and not the word „sold.‟ The phraseology of this clause is not very happy because it is obvious that the words could bear either meaning; but the statute has been punctuated, and we must take the punctuation marks as part of the statute. If it were intended to read
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the words „as obsolete‟, as governing „sold‟ one would expect to find a comma after the word „sold‟ There is none, the comma being put after the word „obsolete‟. Sundar Das v. Collector of Gujrat – 1 ITC 189 (Lahore) 256.
Tax can only be imposed by clear words of the Act.
„No tax can be imposed except by words which are clear and the benefit of the doubt is the right of the subject‟ [per Lord Justice FitzGibbon in In re Finance Act, 1894 and Studdert [(1900) 2 Ir. R. 400], and the Court is not entitled to substitute for express words or an irresistible inference a process of guess-work, however subtle the reasoning or ingenious the marshalling of facts by which such a process is supported. „If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute‟. Secretary to the Board of Revenue (Income Tax) v. North Madras Mutual Befit & Co – 1 ITC 172 (Madras) 257.
Strict rule of interpretation to tax a subject.
It is a commonplace that in statutes of taxation the imposition of a duty must be in plain terms [Per Buckley L.J., in Inland Revenue Commissioners v. Gribble [(1913) 3. K.B. 212 at p. 219]; such a statute must be construed strictly and the onus lies upon the Crown to show that the person whom it is sought to tax falls clearly within its operation. Rowe & Co. v. The Secretary of State for India –1 ITC 161 (Burma) 258.
Subject can only be taxed if statute expressly so provides.
In Tennant v. Smith [(1892) A.C.150 at page 154], Lord Halsbury L.C.said: This is an Income Tax Act, and what is intended to be taxed is income. And when I say what is intended to be taxed, I mean what is the intention of the Act as expressed in its provisions, because in a taxing Act, it is impossible, I believe, to assume any intention, any governing purpose in the Act, to do more than take such tax as the statute imposes. In various cases the principle of construction of
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taxing Act has been referred to in various forms, but I believe they may be all reduced to this, that inasmuch as you have no right to assume that there is any governing object which a taxing Act is intended to attain other than that which it has expressed by making such and such objects the intended subject for taxation, you must see whether a tax is expressly imposed. Cases, therefore, under the taxing Acts always resolve themselves into a question whether or not the words of the Act would have reached the alleged subject of taxation. Lord Wensleydale said in Micklethwaite, In re [(1855) II Ex. 452 at p.456], „It is a well established rule, that the subject is not to be taxed without clear words for that purpose; and also, that every Act of Parliament must be read according to the natural construction of its words‟. 259.
Court must stick to the letter of the statute.
In Attorney-General v. Milne [(1914) A.C.765 at p. 771] Viscount Haldance L.C. said: „It may be that, if probabilities, apart from the words used, are to be looked at, there is, on the construction which the Court of Appeal have put on the statute, a causus omissus which the legislature was unlikely to have contemplated. But, my Lords, all we are permitted to look at is the language used. If it has a natural meaning we cannot depart from that meaning unless, reading the statute as a whole, the context directs us to do so. Speculation as to a different construction having been contemplated by those who framed the Act is inadmissible, above all in a statute which imposes taxation,‟ and in the same case Lord Atkinson said:“To succeed the Crown must bring the case within the letter of that enactment. It is not enough to bring the case within the spirit of it, or to show that if the section be not construed as the Crown contends it should be construed, property which ought to be taxed will escape taxation, or will enjoy....an immunity from successive levies of estate duty. These evils, if such they be, must, if they exist, be cured by legislation. Judicial tribunals must in interpreting these taxing Act stick to the letter of the statute.” Again in Lumsden v. Inland Revenue Commissioners [(1914) A.C.877 at p. 887], Viscount Haldane L.C.said:“The duty of a court of construction in such cases is not to speculate on what was likely to have been said if those who framed the statute had thought of the point which has arisen; but, recognising that the words leave the intention
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obscure, to construe them as they stand, with only such extraneous light as is reflected from within the four corners of the statute itself, read as a whole.” Secretary of Commissioner Salt v. Ramanathan Chetti, minor by guardian – 1 ITC 37 (Madras) 260.
Subject taxable if within letter of law, not taxable if not within letter of law through within the spirit.
In Partington v. Attorney-General [(1869) 4 E.G.I.App. H.L. 100], Lord Cairns stated the rule thus“As I understand the principle of all fiscal legislation, it is this. If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law the subject if free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction certainly such a construction is not admissible in a taxing statute where you should simply adhere to the words of the statute.” In Coltness Iron Company v. Black [(1881) 6 App. Cas. 315] Lord Blackburn stated the same rule somewhat differently. The noble Lord said: “No tax can be imposed on the subject without words in an Act of Parliament clearly showing an intention to lay a burden on him. But when that intention is sufficiently shown it is not open to speculate on what would be the fairest and most equitable mode of levying that tax.” 261.
Practice as a guide to construction.
We are justified in assuming that the legislature was aware of this practice, and if with that knowledge they repeated in the new enactment the same words on which the practice of the Government was founded, it gives rise to the presumption that they did not want to assess such incomes. If the legislature intended to tax these incomes and it would have been a very substantial source of public revenue they could have easily said, as in the English statute, that income accruing to a person in British India from any business wherever carried on is liable to be assessed.
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Section 1
Practice under repealed Act as an aid for construction of later Act.
The language employed by some of the noble Lords in that case was very strongly relied on by the learned Advocate-General. The observations of Lord Davey who subsequently explained the position in Commissioners of Taxation v. Kirk [(1900) A.C. 588] do not support the view that by giving general instructions the business is carried on in the country from which these instructions issue. Moreover, the facts in De Beers Consolidated Mines, Limited v. Howe [(1906) A.C. 455] and in Cesena Sulphur Company v. Nicholson [(1876) I Fx. D., 428] and in Mitchell v. Egyptian Hotels, Limited [(1915) A.C. 1022] were different from the facts on which we have been asked to give our opinion. I do not therefore think any good will be served by discussing these cases. In my opinion the facts to which our attention has been drawn are not specific enough to enable us to say that the business was really carried on in British India. There is only one other remark that need be made. It was elicited in the course of the argument that until the year 1914 or 1915 no income tax was levied in respect of foreign trades of principals residing in British India. The old Act of 1886 was repealed in 1918. So, for about 30 years at least, the executive Government in India did not levy income tax upon business of this kind. Mr. Krishnaswami Ayyar relied on this practice and quoted Commissioner for Special Purposes of Income Tax v. Pemsel [(1891) A.C. 531] and Yewens v. Noakes [(1880) 6 Q.B.D. 530] as enunciating that the practice under a repealed enactment can be looked into for construing the later enactment. Whatever may be the weight we may attach to it, it seems to me that Courts will not acting wrongly in referring to the practice in construing the Act. However, I do not invoke the aid of this practice as in my opinion there is nothing in the Act, which on the face of it imposes a duty upon income of this kind. As I started by saying, unless the words are clear, a fiscal enactment should not be construed as imposing a tax by implication. For these reasons I am of opinion that the assessee is not taxable. The Bhikanpur Sugar Concern In re: [1 ITC 29 (Patna)] 263.
Long course of decisions determining construction of a repealed statute may be an aid in the construction of a new statute passed in the same terms as the former, but a single decision not.
The provisions of the previous Acts in practically identical language and must, therefore, be taken to have concurred in the interpretation
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placed upon the Act by the Commissioner of Tirhut in 1912. It appears, however, that in 1914 the Board of Revenue were not satisfied with this decision and placed the matter before the Local Government and finally before the Government of India, with the result that the Bhikanpur factory was assessed on the whole of its profits for the year 1916-17. This assessment has been paid under protest and a suit is still pending in connection with it, which it has been agreed shall abide the result of the present reference. I agree where there has been a long course of decisions determining the construction of a statute, this may be taken into consideration in construing a new enactment passed in the same terms as pre-existing statutes, but a single decision such as that referred to cannot, in my opinion, from the basis of any presumption as to the intention of the legislature in the present case. _______________
_ RULE OF INTERPRETATION TWO EQUAL POSSIBLE _ INTERPRETATIONS EXEMPTION CLAUSES
Irum Ghee Mills Limited v. Income Tax Appellate Tribunal and another – [2000] 82 TAX 3 (S.C.Pak) 264.
Exemption clauses provided under industrial incentives should be construed liberally.
For the reasons discussed above, the appeal is allowed, the ex-parte order dated 30.06.1997, the subsequent appellant orders and judgement of the High Court, dated 26.6.1998 are set aside, and the appellant is declared entitled to the exemption granted by clause 118E of the Second Schedule to Income Tax Ordinance, 1979. Since the principal objection of the clause was to encourage setting up of industrial undertakings by offering tax incentives to boost up industrial growth a benefit view was to be taken rather than to defeat its object on technical grounds. Muhammadi Steamship Company Ltd. v. Commissioner of Income Tax, (Central) Karachi – 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 265.
Exemption clauses vis-a-vis rules of interpretation.
Provisions granting exemptions or privileges have to be construed strictly against the person claiming the exemption or the privilege.
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Commissioner of Sales Tax Lahore v. Lutfi & Co. Lahore – [1973] 28 TAX 168 (H.C.Lah.)
Since the exemption creates an exception to the general rule of taxation, it would be for the assessee to show that his case falls strictly within the scope of the exemption. Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others – [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180 266.
Rule of benefit to subject where two interpretations are possible.
Where two interpretations of a taxing statute are equally possible then the one favourable to the subject was to be adopted. Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 267.
Two equal possible interpretations of exemption clause one favouring the revenue to be adopted.
Further that in case of doubt or two equally possible interpretations the one favour to the revenue shall be adopted. For reference see the judgement in re: Army Welfare Sugar Mills Ltd. v. Federation of Pakistan (1992 SCMR 1652). Commissioner of Income Tax/Wealth Tax, Companies Zone, Faisalabad v. Rana Asif Tauseef C/o Rana Hosiery & Textile Mills (Pvt.) Ltd., Faisalabad – [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497 268.
Exemption clauses are to be construed strictly.
Where the fiscal legislation embodies exemption/deduction provisions, the same are construed strictly and against assessee. See Iram Ghee Mills Ltd. v. Income Tax Appellate Tribunal, (1998 PTD 3835); Thirdly; an exemption/deduction provision should be construed by liberal approach with an eye on the underlying purpose of said provisions. If the language of that provision is doubtful, the same should be resolved in favour of assessee on the touch-stone of the intention of legislature. See P.A. Likunju, Cashew Industries v. Commissioner of Income Tax (V. 166 (1986) ITR 804), Commissioner of Income Tax, Luknow v. U.P. Cooperative Federation Ltd. (V. 176 (1989) ITR 435 and Collector of Central Excise, Bombay-I, and another v. Parle Export (P) Ltd. (V. 183 (1990) ITR 624). Reference be made also to Heartland v. Damon‟s Estate (103 V. 519, 156, Atl. 518) and
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Kimball v. Potter (N.H. 196 Atl. 272). Observation of learned Judge, in first case, in following terms:A law for the assessment and collection of taxes is to be construed with the utmost liberality. But in order to be subjected to a tax, the property must be such as is ordinarily included, in the description given in the statute, and not such as can be brought within it by a process of reasoning only or by a strained construction because the legislature must be presumed to be fairly able to describe such property as it desires to tax without resorting to a strained construction or a course of fine reasoning. _______________
RULE OF LIMITATION
Pfizer Laboratories Ltd. v. Federation of Pakistan – [1998] 77 TAX 172 (S.C.Pak) 269.
Claim for refund of money paid under mistake is not barred by time.
The above resume of the case-law of Indian, English and Pakistani jurisdiction, indicates that the latest judicial trend is to deprecate and to discourage withholding of a citizen‟s money by a public functionary on the plea of limitation or any other technical plea if it was not legally payable by him. It is also evident that the claims for the refund of the amount paid as a tax or other levy on account of mistake as to want of constitutional/legal backing or because of exemption are at par. It is also apparent that such payments are held to be not covered by rule 11 of the Central Excise Rules, 1944, or section 27(1) of the Indian Customs Act, 1951, or section 33 of the Act etc. The refunds of such amounts are allowed by the Superior Courts inter alia in India on the basis of section 72 off the Contract Act which provides that „a person to whom money has been paid or anything delivered by mistake or under coersion must repay or return it.‟ Such refunds can be claimed either by filling a suit for the recovery of the amount for which the period of limitation applicable would be three years under Article 96 of the First Schedule to the Limitation Act (which provides period of three years from the date mistake becomes known to the plaintiff) or the same can be recovered through a constitutional petition if no disputed fact is involved. The Indian Supreme Court and the various High Courts referred to in the cited case-law, hereinabove had ordered the refund of the amounts involved in exercise of their constitutional jurisdiction under Article 226 of the Indian
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Constitution. In Pakistan, Sindh and Lahore High Courts have also allowed the refund of such amounts under Article 199 of the Constitution in exercise of their constitutional jurisdiction in the cases of Ghulam Abbas v. Member (Judicial), CBR and Kohinoor Industries Ltd. Faisalabad v. Ministry of Finance. But it may not be understood that we are laying down that a party is free to claim refund of a tax or any other levy paid under a mistake of fact or law at his sweat will at any time even after the expiry of 20 years. If a suit is to be filed for the refund, it should be within statutory period provided under the relevant Article of the First Schedule to the Limitation Act, or if the refund of the same is to be claimed by invoking in aid the constitutional jurisdiction of a High Court, the petitioner should approach the court promptly. The petition should not suffer from laches which may defeat the claim. We can‟t approve the view that a party can claim the refund of an amount paid to a Government functionary under a mistake without any constraint of limitation as it would adversely affect the good governance in financial matters. Commissioner of Income Tax Companies Zone Lahore v. Mst. Khursheed Begum – [1995] 71 TAX 280 (H.C.Kar.) 270.
The provisions of Limitation Act are mandatory and cannot be waived.
The words of section 3 of the Limitation Act are mandatory in nature and that every suit or application instituted after period of limitation shall, subject to the provisions of section 4 to 25 of that Act, be dismissed although limitation has not been set up as defence. The law, therefore, does not leave the matter of limitation to the pleadings of the parties as it imposes a duty in this regard upon the court itself. The limitation being a matter of statute and the provisions being mandatory cannot be waived and even if waived can be taken up by the party waiving it and by the Courts themselves. Commissioner of Income Tax Sukkur Zone, Sukkur, through Deputy Commissioner of Income Tax v. Gatron (Industries) Ltd. – [1999] 79 TAX 161 (H.C.Qut.) 271.
Time limitation for filing appeal under section 136 vis-a-vis section 5 of Limitation Act.
It is an admitted feature of the case that the order of Appellate Tribunal was received on 14.5.1997, and reference application could have been made within 60 days, but it was made on 21.7.1997 which is time-barred and it should have been filed on or before 14.7.1997 and as such, it is time-barred by 7 days for which no explanation
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whatsoever has been given but factum of delay has been taken very lightly and even the exact number of days were not mentioned regarding which condonation is required. Insofar as section 5 of Limitation Act is concerned it is well-settled by now that once limitation starts running no subsequent event can stop or suspend it and that matters dealt with by the Limitation Act shall be determined according to the true construction of the word used by the legislature and the doctrine of equity, justice and good conscience cannot be applied as to over-ride and abrogate the express provisions of the Limitation Act. The statutes of limitation should consequently be applied without regard to equitable consideration. Eastern Poultry Services v. Govt. of Pakistan & others – [1993] 68 TAX 171 (H.C.Kar.) _ 272. Period of Limitation Factors to be considered while computing period of limitation. Section 160(b) of the Income Tax Ordinance provides that the period during which any assessment or other proceedings under the Ordinance are stayed by any Court shall be excluded while computing the period of limitation. Commissioner of Income Tax Central Zone ‘A’ Karachi v. S.M. Naseem Allahwala – [1991) 64 Tax 31 (H.C.Kar.) 273.
A reference application made beyond the prescribed time should be dismissed.
So far as the second issue is concerned, it has been dealt with in several cases, holding that if the Reference Application is made beyond the prescribed time Tribunal has no discretion but to dismiss the same unless the statutory provision to the contrary is made. Khalid Cotton Factory, Multan v. Income Tax Officer, A-Circle, Multan – [1979] 40 TAX 60 (H.C.Kar.) 274.
Delay of each day must be explained.
It is settled principle of law of limitation that each day‟s delay in filing of reference application has to be explained. Commissioner of Income Tax/CST Rawalpindi v. Pakistan Television Corporation Ltd. Rawalpindi – [1978] 38 TAX 181 (H.C.Lah.) 275.
Time spent in obtaining a certified copy should be excluded while computing period of limitation.
An intending appellant has got the right to get excluded the time requisite for obtaining a certified copy even though an attested copy
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had been supplied to him by the Income Tax Officer, alongwith the notice of demand or even if he is not required to file one with an application for reference. Aftab Medical Stores, Dera Ghazi Khan v. Commissioner of Income Tax Lahore – [1976] 34 TAX 10 (H.C.Lah.) 276.
Application of provisions of Limitation Act to proceedings under Income Tax Laws.
We are, therefore, of the considered opinion that section 14 of the Limitation Act is applicable to the proceedings before the Income Tax Authorities. Alyani Cotton Ginning and Pressing Factory, Rahimyar Khan v. Assistant Commissioner of Income Tax and another – [1974] 29 TAX 238 (H.C.Lah.) 277.
Court holidays falling on the day of expiry of the prescribed period of limitation should be excluded in counting the period of limitation.
Only court holidays which are to be allowed in addition to the prescribed period of limitation for filing suit, appeal or application are those which fall on the day of the expiry of that period or immediately following it. If the period of limitation is still running when the court re-opens, the plaintiff or the appellant cannot claim the exclusion of such holidays. Alyani Cotton Ginning and Pressing Factory, Rahimyar Khan v. Assistant Commissioner of Income Tax and another – [1974] 29 TAX 238 (H.C.Lah.) 278.
Time required for obtaining certified copy should extend the period of limitation.
The principle, that the period of limitation comprises two elements namely, the primary period plus the periods allowed by the various provisions of the Limitation Act itself, is certainly not open to any exception, and as long as this period has not expired, the right of appeal subsists. Such being the case an application for obtaining a certified copy of the judgement or decree can be made within this period, with the result that the period shall stop running until such time as the copy is delivered. To put it more simply, the period of limitation would stand extended by the time requisite, for obtaining the certified copy. _______________
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Income Tax Digest.
REDUNDANCY SHOULD NOT BE READILY ASSIGNED BY COURTS
Commissioner of Income Tax v. Muhammad Kassim – [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280 279.
Redundancy should not be readily assigned by courts.
It is a well-established principle of interpretation of statutes that no provision of an enactment is to be treated as redundant or surplus and has to be given its meaning and effect to. Pakistan Lyallpur-samundri Transport Co. Ltd. Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1982] 46 TAX 143 (H.C.Lah.) 280.
Amendment in law implies necessarily an intention on the part of legislature to depart from earlier law in some respects redundancy cannot be attributed to the legislature.
One of the cardinal rules of interpretation of statutes is that where an amendment in the law takes place there musts be implied necessarily an intention on the part of the Legislature to depart from the earlier law in some respects. Redundancy cannot be readily attributed to the Legislature. The position canvassed by the learned counsel for the petitioner would lead us to the conclusion that such an amendment is redundant because inspite of it the position in regard to the adjustment of unabsorbed depreciation carried forward remained as it was before the amendment. This cannot be readily accepted. There must be something in the law to irresistibly indicate, that the alteration sought has not been achieved on the words or expressions used in the amending Act. _______________
INTERPRETATION FAVOURABLE TO ASSESSEE IS TO BE ADOPTED
Commissioner of Income Tax v. Muhammad Kassim – [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280 281.
Interpretation favourable to assessee is to be adopted.
If there is any doubt or ambiguity in the language used in the statute which renders it capable of several interpretations, then the interpretation favourable to the assessee or the citizen is to be adopted. Singer Sewing Machine Co. v. Commissioner of Income Tax and others – [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554 282.
Exemption cannot be allowed if not claimed.
Assessee was entitled to relief under section 15B of 1922 Act, but he did not claim this relief in the return of income. It is held that
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assessing officer was not bound to grant relief as ignorance of law is no excuse. Judicial Review : OVERRULED by the Supreme Court of Pakistan in 1965 SCC 234 = [1965] 11 TAX 364 (S.C.Pak). Their Lordships observed: “. . . That such a proceeding in revision would be a judicial proceeding and not merely departmental affair. The power of revision has to be exercised, according to judicial principles. The provision of section 33A(2) of 1922 Act apparently envisages a remedy alternative to a regular appeal from assessment. In the circumstances, it became the duty of the Commissioner to grant relief if the entitlement was clear. The learned Commissioner apparently misdirected himself in holding that he had no power to interfere in the matter.” “. . . All these factors go to establish the bona fides of the assessee-company in claiming that the assessment in question was not appealed against, owing to misapprehension of the correct position. The High Court has observed, in this connection, that ignorance of law was no excuse. That may be conceded, but section 33, sub-section (20) provided on alternative judicial remedy to the assessee, of which it availed itself and the relief was denied to it, on an erroneous view of law by the Commissioner.” “. . . It must be found as a result of the above discussion that the Commissioner declined to exercise his undoubled jurisdiction in the case, on a ground which was legally not supportable. This fact calls for correction of his order. We allow the appeal and quash the order passed by the Commissioner of Income Tax in this case.” _______________
RULES WHEN LANGUAGE IS AMBIGUOUS
Jamat-i-Islami Pakistan through Syed Munawar Hassan, Secretary General v. Federation of Pakistan through Secretary, Law, Justice and Parliamentary Affairs -&- Muttahida Qaumi Movement (MQM) through Deputy Convener, Senator Aftab Ahmad Sheikh v. Federation of Pakistan through Secretary, Ministry of Interior – PLD 2000 S.C. 111 283.
Rule of interpretation of ambiguous words.
It is a well-settled rule of construction of statutes that if the words used are ambiguous and admit of two constructions and one of them leads to a manifest absurdity or to a clear risk of injustice and the
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other leads to no such consequence, the second interpretation must be adopted. Commissioner of Income Tax v. Nasir Ali and another – [1999] 79 TAX 428 (S.C.Pak.) 284.
Proviso cannot extend the meaning of the enacting part.
It is a well-settled principle of interpretation that a proviso deals with the subject, which is covered by the enacting part of the provisions. The proviso only carves out an exception which, but for the proviso, would fall within the language and meaning of the enacting part. A proviso, therefore, has to be interpreted strictly, and where the language of main enacting part is clear and unambiguous, the proviso cannot by implication exclude from its purview what clearly falls within the express terms of the main enacting part. Accordingly, we hold that the export rebate contemplated under section 3(4)(a) of the Ordinance is admissible both to the registered firm as well as its partners in respect of super-tax and income tax payable by them, respectively. E.F.U. General Insurance Company Ltd. and Others v. The Federation of Pakistan & Others – [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 285.
Effect of non-obstante clause.
Effect of said non-obstante clause is that the specified sections of the Act or rest of the Ordinance to the extent that these are inconsistent with Section 10(7) and First Sched. of the Act or Section 26 and Fourth Schedule of the Ordinance shall not be given effect to. No inconsistency exists between the special provision relating to general insurance business in the Act or Ordinance and the applicable Schedules containing general provisions for computation of tax on business. Such general provisions then apply for computation of tax on income from general insurance business. Mehran Associates Ltd. v. Commissioner of Income Tax, Karachi – 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak) 286.
If a statute is capable of two interpretations then the one which is favourable to the subject be adopted.
The cardinal principles of interpretation of a fiscal statute seem to be that all charge upon the subject are to be imposed by clear and unambiguous words. There is no room for any intendment nor there is any equity or presumption as to a tax. A fiscal provision of a statute is to be construed liberally in favour of the taxpayer and in case of any substantial doubt, the same is to be resolved in favour of the citizen.
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Khurram Saghir Industries, Lahore v. Commissioner of Income Taxx, Zone-A, Lahore – [2001] 83 TAX 489 (H.C.Lah.) 287.
Doubt or ambiguity in language should go in favour of taxpayer.
The use of word “prior” in second proviso to sub-section (1) of section 13 and in sub-section (2) makes it very clear that two “prior” separate approvals of the Inspecting Additional Commissioner were required where an Assessing Officer was to make addition to the declared value of any valuable property. Obviously the requirement of prior approval was meant to safeguard the interest of the assessee to avoid arbitrary exercise of jurisdiction vested in the Assessing Officer. A simultaneous approval normally will not serve the purpose of the provisions because more often than not a simultaneous approval would be a fait accompli. Lastly as remarked by the learned Division Bench of the Karachi High Court in the aforesaid judgement even if there was any doubt or ambiguity in the language the interpretation favourable to the assessee had to be adopted as laid down by the apex Court in re: B.P. Biscuit Factory Ltd. For the aforesaid reasons we are of the considered view that two separate prior approvals under section 13(2) and in proviso to section 13(1) of the Ordinance were required and a combine approval obtained under both these sub-sections or of the draft assessment order did not fulfil the requirement of law. Cases referred to: Commissioner of Income Tax v. Muhammad Kassim [2000] 81 TAX 229 (H.C.Kar.), V.N. Rakhani & Company v. M.V. Lakotoi Express and 2 others [PLD 1994 SC 894], Biscuit Factory Ltd. v. Wealth Tax Officer (1996 SCMR 1470).
Commissioner of Income Tax v. Muhammad Kassim – [2000] 81 TAX 229 (H.C.Kar.) = 2000 PTD 280 288.
Court must confine itself to language of law.
While interpreting a provision of statute, Court has to read the provision as it exists and to deduce or infer the meaning in accordance with the existing test or the words or particular provision. Court is not supposed to add to or subtract any word(s) from any provision of a statute while interpreting a provision so as to give same a meaning other than the one which obviously and plainly flows or can be inferred from it.
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Income Tax Digest.
Ambiguity in language should be resolved in the favour of taxpayer.
If there was any doubt or ambiguity in the language used in the statute which rendered same capable of several interpretations, then the interpretation favourable to the assessee or the citizen was to be adopted. J.A. Textile Mills Ltd. v. CBR – [2000] 81 TAX 88 (H.C.Lah.) = 1999 PTD 4138 290.
Statutes should be interpreted strictly in accordance with letter of law.
It is an established principle that fiscal statutes should be interpreted strictly in accordance with the letter of law used and the words employed. For reference see 1977 SCMR 371 re: Collector of Customs, Karachi & Others v. Abdul Majeed Khan & Others. Also that in case of any ambiguity or doubt arising from construction, the same should be resolved in the favour of subject. For reference sees PLD 1961 SC 375 re: Commissioner of Income Tax East Pakistan v. Hossen Kasam Dada, Karachi & others and Abdul Majeed Khan and others (supra). The ratio settled in 1993 SCMR 274 = 1993 PTD 69 re: Mehran Associate Limited v. Commissioner of Income Tax, Karachi also supports this kind of approach in fiscal matters. 291.
In case of two equally reasonable interpretations, one strict and other beneficial, then the latter should be preferred.
“.......in case of other laws and statutes which infringe upon the rights of citizen or a party the apex court in re: Abdul Rehman v Inspector General of Police, Lahore and 2 others (PLD 1995 SC 546) favoured a beneficial interpretation. The rule settled in re: Commissioner of Income Tax, East Pakistan v. Hossen Kasam Dada, Karachi (PLD 1961 SC 375) states that when two equally reasonable constructions are possible one strict and other beneficial then the latter should be preferred. The situation, thus, calls for employing at least two general principles. First, that where an article or income can equally be placed under two heads of income or tariff then the one favourable to the taxpayer should be adopted. Second when an item or income etc. expressly falls into one clause then its placing into another clause would be unjustified. All the moreso, when the other clause is subject to a higher rate of tax.
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Searle Pakistan (Pvt.) Ltd. v. Government of Pakistan through Secretary Ministry of Finance & Another – [1994] 69 TAX 79 (H.C.Kar.) 292.
Benefit of ambiguity should be given to the assessee.
There is no cavil about the settled principle of interpretation that taxing provisions should be strictly interpreted and the benefit of ambiguity, if any, must go to the subject. Rijaz (Pvt.) Ltd. v. Wealth Tax Officer Circle-III Lahore – [1996] 74 TAX 9 (H.C.Lah.) 293.
If a statute is capable of two interpretations then the one which is favourable to the subject be adopted.
It was observed that according to the well-accepted principles of interpretation the doubt has to be resolved in favour of the citizen. In these circumstances, the law-maker could clarify its intention by adding an explanation which cannot be legitimately objected to. Commissioner Sales Tax v. Rizki Ink Company Ltd. – [1991] 64 TAX 34 (H.C.Kar.)
“...... according to us, if two interpretations are possible then any interpretation which favours the assessee has to be preferred.” Commissioner of Income Tax, Central Zone-B, Karachi v. Zakia Siddiqui – [1989] 59 TAX 79 (H.C.Kar.)
It is well recognised principle of interpretation that if a fiscal statute is capable of two reasonable interpretations then the one which is favourable to the subject be adopted. Highland Manufacturers (Pak) Ltd. v. Commissioner of Income Tax, West Karachi – [1985] 51 TAX 66 (H.C.Kar.)
We would observe that the Income Tax provisions have to be strictly construed and should be interpreted in a manner which is more favourable to the subject.
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Dreamland Cinema, Multan v. Commissioner of Income Tax Lahore – [1977] 35 TAX 169 (H.C.Lah.) 294.
Benefit of ambiguity should be given to the assessee.
Where two equally reasonable constructions are possible, one strict and the other beneficial to the assessee, the latter should be preferred in a taxing statute. Mst. Fatima Bibi c/o Crown Bus Service, Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore – [1962] 6 TAX 1 (H.C.Lah.) = 1962 PTD 625 = 1962 PLD 809 295.
In case of ambiguity in language, statement of objects and reason can be relied upon.
Statement of objects and reasons be referred when there is ambiguity in fiscal statute. In such a case are to benefit should go to subjects. Hari Krishna Das v. Commissioner of Income Tax, UP – 5 ITC 275 (Allahabad)
The Income tax Act is a fiscal enactment and in the case of an ambiguity, it is to be construed by the well-known principle in favour of the subject and not against the subject. Muhammad Hayat Haji Mohammad Sardar v. Commissioner of Income Tax, Punjab & NWFP – 5 ITC 159 (H.C.Lah.) 296.
Literal rule can only be deviated in case of ambiguity in language; otherwise courts should adhere to plain words.
But the argument ab inconvenient as well as that based upon the order in which the two sections stand, may influence the interpretation of a statute when its language is ambiguous and capable of more than one meaning ....... When once the meaning is plain, it is not the province of a Court to scan its wisdom or its policy. Its duty is not to make the law reasonable, but to expound it as it stands, according to the real sense of the words. Hatz Trust of Simla v. Commissioner of Income Tax, Punjab & NWFP – 5 ITC 8 (H.C.Lah.) 297.
Inconsistencies are in-built in income tax.
It is true that the interpretation of the Indian Income Tax Act is far form being an easy matter. It is founded on the English Acts with certain differences to meet different conditions. The English Acts have been added so or varied to meet certain attempts to evade them and
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the same is true of the Indian Acts. The result is that there may appear to be certain inconsistencies. Roger Pyatt Shellac & Co., v. Secretary of State – 1 ITC 363 (Calcutta) 298.
Out of ambiguity of the provisions of the Act cannot be extracted a new and added obligation not formerly cast upon the taxpayer.
It is, I think, important to remember the rule, which the Courts ought to obey, that, where it is desired to impose a new burden by way of taxation, it is essential that this intention should be stated in plain terms. The Courts cannot assent to the view that if a section in a taxing statute is of doubtful and ambiguous meaning, it is possible out of that ambiguity to extract a new and added obligation not formerly cast upon the taxpayer. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta) 299.
General Language not infrequently intended sub modo.
General language is not infrequently intended sub modo, and even in statutes cannot be taken at the foot of the letter. But in the first place an Income tax Act may be taken to have been framed so as to express intentions of the legislature on a matter of cardinal importance for its purpose. Secondly, the words employed in section 4 - the charging section - are calculated to an end which in the absence of any saving clause they are apt and sufficient to secure, that is, they place on the subject claiming exemption the burden of making out his case under the strict provisions of the statute. Thirdly, the modification sought to be implied overlaps a modification made expressly and with much care to limit and define its scope. Fourthly, the basis of the express modification is the payment of land revenue, and the legislature so far from moving in diversa materia, may very easily be supposed to regard its own provision as a precise formula, probably of compromise, adequately meeting the obligations imposed on it for modern purposes by the Permanent Settlement as well as the demands of others (e.g., the more highly assessed holders of estates temporarily settled) for some degree of uniformity in the incidence of direct taxation. It is difficult indeed to believe that the effect of the tax upon such important subjects as mining profits in permanently settled provinces was left to be thrashed out as against all interests upon the terms of the Regulation. Nor can it reasonably be taken as axiomatic that it is any more fair or just to tax forthwith an estate subject to periodical revision as regards land revenue than to tax an estate permanently settled.
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Fiscal statutes should be interpreted according to their natural meanings. _ _ I am not at all sure that in a case of this kind a fiscal case form is not amply sufficient; because, as I understand the principle of all fiscal legislation, it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of law the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.” These observations were cited by Collins M.R. in Attorney General v. Selborne [(1902) 1 K.B. 388 at p. 396] and the learned judge proceeded to say: 300.
“Therefore, the Crown fails, if the case is not-brought within the words of the statute interpreted according to their natural meaning; and if there is a case which is not covered by the statute so interpreted, that can only be cured by legislation, and not by an attempt to construe the statute benevolently in favour of the Crown.” Rowe & Co. v. The Secretary of State for India – 1 ITC 161 (Burma) 301.
Benefit of doubt is the right of taxpayer.
In Finance Act, 1894 and Studdert, In re [1900] 2 Ir. R. 400 at p. 410] Fitzgibbon L.J. said: “The benefit of the doubt is the right of the subject”. Killing Valley Tea Company v. Secretary of State – 1 ITC 54 (Calcutta) 302.
Practice not a guide where language of statute is clear.
In great stress has naturally been laid by Sir Binod Mitter, who appeared on behalf of the Company, on the important fact that no attempt was ever made to assess the Company to income tax under the corresponding provisions of the Indian Income Tax Act, 1886, which have been, so far as the present question is concerned, reproduced with no substantial variation in the Indian Income tax Act, 1918. This is no doubt a circumstance to be taken into consideration, for an interpretation which has long been acted on, will not be disregarded by a Court of law [Lancashir and Yorkshire
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Railway Co., v. Sury Corporation [(1889) 14 App. Cas. 417 at p. 422], Tancred Arrol and Co., v. Steel Co., of Scotland [(1890) 15 App. Cas. 125 at p. 141]] and the Court should have regard to the construction put upon a statute when it first came into force; Morgan v. Crawshay [(1871) L.R. 5 H. L. 304 at p. 315], Fermoy Peerage Claim [(1856) 5 H.L.C. 716 at p. 747], Goldsmith Co., v. Wyatt [(1905) 2 K.B. 586 at p. 596]. But as Channell J. observed in the case last mentioned, where the Court is called upon to construe an Act of Parliament expressed in unambiguous language, it ought to put its own construction upon it, regardless of the construction that has been commonly put upon it; the fact that a mistaken interpretation has been generally put upon it cannot alter the law. To the same effect are the observations in Baleshwar v. Bhagirathi [(1908) ILR 35 Cal. 701 at p.713; 7 CLJ 563; 12 CWN 657]. “It is a well-settled principle of interpretation that Courts, in construing a statute, will give much weight to the interpretation put upon it, at the time of its enactment and since, by those whose duty it has been to construe, execute and apply it. I do not suggest for a moment that such interpretation has by any means a controlling effect upon the Courts; such interpretation may, if occasion arises, have to be disregarded for cogent and persuasive reasons and, in a clear case of error, a Court would without hesitation refuse to follow such construction.” This view is supported by the dictum of Sir Robert Phillimore in Evanturel v. Evanturel [(1869) L.R. 2 P.C 462 at p. 488] and has been applied in the case of Corporation of Calcutta v. Benony Krishna Boos [(1919) 12 C.L.J. 476; 15 C.W.N. 84; 7 Ind. Cas. 890] and Mathura Mohan Saha v. Ramkumar Saha [(1915) L.L.R. 43 Cal. 790 at p. 816; 23 C.L.J. 26; 20 C.W.N. 370; 35 Ind. Cas. 305]. We may add that it was stated by the Advocate-General that there has been some divergence of opinion among successive legal advisers of the Crown and that the assessment has been made in this instance with a view to obtain a judicial determination of the true meaning of the legislative provisions on the subject. Clearly, we cannot, in such circumstances, allow our decision to be controlled by the conduct of the Revenue Authorities in the past. We have finally been pressed to apply the elementary rule that taxing statutes must be construed strictly; Manindra Chandra v. Secretary of State for India [(1907) I.L.R. 34 Cal. 257; 5 C.L.J. 148], Mylapore Hindu Permanent Fund, Limited v. Corporation of Madras [(1908) I.L.R. 31 Mad. 408; 3 M.L.T. 400; 18 M. L.J. 349], Tenant v. Smith [(1892) A.C. 150 at 154], Lumsden v. Inland
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Revenue Commissioners [(1914) A.C. 877 at p. 897], Attorney-General v. Milne [(1914) A.C. 765]. Now, there is no room for controversy that the Crown, seeking to recover the tax, must bring the subject within the letter of the law, otherwise the subject is free, however much within the spirit of the law the case might appear to be. There can be no equitable construction admissible in a fiscal statute; the benefit of the doubt is the right of the subject; Partington v. Attorney-General [(1869) 4 E. & I. App. H. L. 100 at p. 122], Pryce v. Monmouthshire Canal Company [(1879) L.R 4 H.L. 197 at p. 202]. Secretary to Commissioner Salt v. Ramanathan Chetti, minor by guardian – 1 ITC 37 (Madras) 303.
No taxation except by express words.
Unless the words are clear, a fiscal enactment should not be construed as imposing tax by implication. _______________
NON OBSTANTE PROVISION OVERRIDES CONFLICTING PROVISION
Commissioner of Income Tax v. National Agriculture Ltd., Karachi – [2000] 82 TAX 73 (H.C.Kar.) = [2000] 81 TAX 249 (H.C.Kar.) = 2000 PTD 254 304.
Non obstante provision overrides conflicting provision.
....if two provisions of a Statute are not consistent or are in conflict with each other then the provision of the section starting with the expression “notwithstanding” or with “non obstante” clause would have preference and would override the provisions or the sections of the Statute dealing with the same subject-matter. _______________
DOCTRINE OF BINDING PRECEDENT (STARE DECISIS)
The doctrine of stare decisis is one of the policies grounded on the theory that justice and certainty require that the established legal principle, under which right may accrue, be recognised and followed. In Constitution of Pakistan, this doctrine is reflected in Article 189 and 201 which read as under: 189.
Any decision of the Supreme Court shall, to the extent that it decides a question of law or is based upon or enunciates a principle of law, be binding on all other courts in Pakistan.
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Subject to Article 189, any decision of a High Court shall, to the extent that it decides a question of law or is based upon or enunciates a principle of law, be binding on all courts subordinate to it.
Multiline Associates v. Ardeshir Cowasjee – PLD 1995 S.C.Pak 423 305.
Division bench of a High Court cannot disagree with another Division Bench without reference to a larger bench or should leave the matter to be decided by Supreme Court.
In such circumstances, legal position which emerges is that the Second Division Bench of the High Court should not have given finding contrary to the findings of the 1st Division Bench of the same court on the same point and should have adopted the correct method by making a request for constitution of a larger Bench, if a contrary view had to be taken. In support reference can be made to the cases of the Province of East Pakistan v. Azizul Islam PLD 1963 SC 296 and Sindheswar Ganguly v. State of West Bengal PLD 1958 SC (Ind.) 337, which is the case of Indian Jurisdiction. We, therefore, hold that the earlier judgement of equal Bench in the High Court on the same point is binding upon the Second Bench and if a contrary view had to be taken, then request for constitution of a larger Bench should have been made. Beach Luxury Hotel Ltd. v. Commissioner of Income TAX (Central), Karachi – 1981 SCC 546 = [1981] 44 TAX 40 (S.C.Pak.) 306.
Cautious approach is necessary when adopting foreign case-law.
There is, however, a word of caution, a reservation to be kept in view in all such historical and comparative studies. Not much help can be directly obtained in construing a particular provision of our Income Tax Act, by reference to interpretation of similarly, or analogous provisions, in Income Tax Legislation in England or India. However, on analogous provisions, fundamental concepts and general principles, unaffected by the specialities of either, the authorities may be helpful as guides. Province of East Pakistan v. Dr. Azizul Islam – PLD 1963 S.C.Pak 296 307.
English decisions in pari materia and their binding value.
If there is decision which constitutes direct authority on a question by High Court another Bench of same strength of the High Court if inclined to take to a different view they should have referred the matter to a larger Bench. Alternately, they could have expressed their doubts regarding the view taken in the precedent case in a court of equal strength, while yet following the view and left the matter to be raised in appeal before Supreme Court.
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Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax Punjab & NWFP – 1955 SCC 1 = [1960] 2-TAX (Suppl.-29) (S.C.Pak) 308. Pre-partition judgements are binding unless overruled by Pakistani courts. The judgements of Indian courts are binding, unless overruled by Pakistani Courts, having being pronounced prior to the partition of the sub-continent. Abdul Razzak v. Collectors of Customs – 1995 CLC 1435 (H.C.Kar.) 309. Per incuriam judgement of even the highest court is not binding. A per incuriam decision, even of the highest court, does not bind any other court and it matters little that such court itself be at the lowest rung of the hierarchy of courts. [N.B. The position after adoption of 1973 Constitution is different as Article 189 and 201 specifically provide the binding nature of orders passed by the Supreme Court and High Courts. Recent decisions explain the correct position that decisions of co-equal benches cannot be ignored by subsequent benches unless the matter is referred to a larger bench or a contrary judgement of a higher court is available. For detailed discussion see Article “Tax laws and law of binding precedent” in Tax Review, May 2005.]
Nishat Talkies Karachi v. Commissioner of Income Tax – [1989] 60 TAX 45 (H.C.Kar.) = PTCL 1989 CL 660 310. Reliance on foreign cases in the presence of contrary view taken by Pakistani courts is strongly disapproved. We disapprove the practice of not considering and relying upon the judgements of our Superior Courts. It is the duty of every court and Tribunal in Pakistan to follow the judgements of Supreme Court. Under Article 189 of the Constitution any judgement of the Supreme Court which decides a question of law or enunciates a principle of law is binding on all Courts in Pakistan. Likewise and in the same terms, Article 201 provides that subject to Article 189 all judgements of the High Court are binding on all the Courts subordinate to it. We hope in future learned Tribunal will be careful in this regard. Commissioner of Income Tax, Lahore Zone, Lahore v. Badar Ice Factory, Lahore – [1981] 43 TAX 100 (H.C.Lah.) 311. Principles of “stare decisis”. The Tribunal agreed with the departmental representative‟s assertion that each assessment is final and conclusive and should not be allowed to operate as estoppel or resjudicata on the other assessments, but it was of the view that as a general rule it would not be permissible to abandon a consistently applied formula. it accordingly directed the
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Income Tax Officer to work out the assessee income on the tank capacity basis, after taking into consideration admissible allowance. The Income Tax Officer had in this particular case, rejected the prevailing 1/3rd tank capacity formula and applied his own formula, which according to him was a better one. The formula suggested by the Income Tax Officer did not find favour with the Tribunal, and we have no doubt that a more accurate formula could have found favour with the Tribunal, as it itself rejected the department‟s plea of stare decisis. Having found that the formula suggested by the Income Tax Officer was neither lucid nor certain and that it was dependent upon varied and uncertain factors, which in turn were capable of manipulation, and adoption of such a formula could result in arbitrariness, it was within the competence of the Tribunal to reject the same. Jamal v. The State – PLD 1960 Lahore 1962 312.
Binding judgements and conduct of different benches.
......a decision of a Division Bench was not binding on another Division Bench. It is unnecessary to give here elaborate reasons for that view and all that needs to be said is that it is not obligatory for a Division Bench if it does not agree with the view of another Division Bench to follow the views it does not agree with, and in case it is not prepared to do this, to refer the case to a Full Bench. Bashir Ahmad v. The State – PLD 1960 Lahore 687
(1)
The decision of the Full Bench of the Court cannot be dissented from by a Division Bench or a Single Bench.
(2)
The decision of a Division Bench of the Court cannot be dissented from by a Single Bench.
(3)
The decision of a Division Bench of the Court can be dissented from by another Division Bench or even by the same Bench and may be overruled by a Full Bench but it cannot be dissented from by a Single Bench and
(4)
The decision of a Single Bench can be dissented from by another or the same Single Bench and can be overruled by a Division Bench or a Full Bench.
Commissioner Income Tax v. Anantapur Gold Mines – 1 ITC 133 (Mad) 313.
English decisions in pari materia and their binding value.
As regards this particular case, I will only say that while the Commissioner has rightly based his decision on the language of the
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Indian section, which differs materially from the corresponding section of the English Act, he has fallen into error in supposing that in Imambandi v. Mutsaddi [1918) I.L.R. 45 Cal. 878; 45 I.A. 73: 35 M.L.J. 422; 16 A. L.J. 800: 24 M. L.T. 330; 28 C.L.J. 409; 23 C.W. N. 50; 5 P.L.W. 276; 20 Bom. L.R. 1022; (1919) M. W.N. 91; 9 L.W. 518; 47 Ind. Cas. 513], the Privy Council deprecated the practice of referring to English decisions, which are the basis of so much of our law in India. The decisions in question were American decisions and were correctly described as foreign, an adjective which is inapplicable and would certainly not have been applied by the Privy Council to the decisions of the English Courts. As regards income tax, the Indian Act generally follows the lines of the English Act, and where the provisions are similar, English decisions are the best guide to their meaning. The revenue authority no doubt may not always find it easy to apply them, and that is one reason why the Act empowers and requires it to make a reference to the High Court in appropriate cases. _______________
DOCTRINE OF MERGER
Glaxo Laboratories Ltd. v. Inspecting Assistant Commissioner of Income Tax & Others – 1992 SCC 910 = [1992] 66 TAX 74 (S.C.Pak.) = 1992 PTD 932 = PLD 1992 SC 549 314.
Doctrine of Merger.
Section 66A authorises Inspecting Additional Commissioner to examine and initiate action if the decision is erroneous and prejudicial to the interest of revenue. The Inspecting Additional Commissioner did not have the jurisdiction or power to initiate same action in respect of the orders passed by the appellant authorities or the Tribunal. However, as observed above such power has now been vested in Inspecting Additional Commissioner from the year 1991. The controversy is whether after the appellate authority has passed an order the Inspecting Additional Commissioner can still go to take action under section 66A. In Corpus Juris Secundum, Volume 57, at page 1067 words „Merge‟ and „Merger‟ have been defined as follows:“The verb „to merge‟ has been defined as meaning to sink or disappear in something else, to be lost to view or absorbed into something else, to become absorbed or extinguished, to be combined or be swallowed up.
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„Merger‟ is defined generally as the absorption of a thing of lesser importance by a greater, whereby the lesser ceases to exist, but the greater is not increased, an absorption or swallowing up so as to involve a loss of identity and individuality.” Commissioner of Income Tax v. Farrokh Chemical Industries – 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak.) = 1992 PTD 523
It was observed that „the order of the Income Tax Officer upon appeal merged in the ......... order of the Income Tax Appellate Tribunal‟. Here the assessment order made by Income Tax Officer was reopened under section 65 and a revised assessment was framed which has been set aside by the Tribunal. Thus, the order of the Income Tax Officer has merged in the order of the Tribunal which holds the field. Commissioner of Income Tax, Karachi v. Sadruddin – [1985] 51 TAX 83 (H.C.Kar.)
The view that has consistently been prevailing and has been followed is that after the Appellate Court has passed an order, the order of the Original Court is merged into it. Commissioner of Income Tax Faisalabad v. Chief Glass House – [1992] 65 TAX 205 (H.C.Lah.) 315. On appeal original order ceases to exist and merges itself in the appellate order Indeed it is well recognised general principle that on appeal the original order ceases to exist and merges itself in the appellate order of variance. As a necessary corollary, with all the proceedings taken in pursuance to the original order would be washed away and obliterated. _______________
LEGAL MAXIMS
Commissioner of Income Tax Pakistan v. Fazlur Rehman & Sayeedur Rehman – 1964 SCC 176 = [1964] 10 TAX 49 (S.C.Pak) 316.
Audi alteram partem.
No man should be condemned unheard is not confined to courts extend to all proceeding by whomsoever held with may effect person a property or other rights of the parties concerned in dispute, and the maxim [audi alterm partem] will apply with no force to proceedings which effect liability to pay a tax.
but the the less
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Siemens Pakistan Engineering Ltd. v. Federation of Pakistan & Other – [1999] 79 TAX 605 (H.C.Kar.) = 1999 PTD 1358]
Audi alteram partem i.e. no one shall be condemned unheard is a universally established principle of law. This rule is applicable to both judicial and non-judicial proceedings (1994) SCMR 2232). Anisa Rehman v. PInspecting Additional Commissioner – 1994 SCMR 2232
No order is maintainable if affected person is denied his right of audi alteram partem. Mian Aziz Ahmad, Lahore v. Commissioner of Income Tax Lahore – [1979] 39 TAX 1 (H.C.Lah.)
The right to be heard is not confined to proceedings which are judicial in form. The maxim „no man shall be condemned unheard‟ is not confined to courts but extends to all proceedings, by whomsoever held which may affect the person or property or other right of the parties concerned in the dispute, and the maxim will apply with no less force to proceedings which affect liability to pay a tax. Muhammad Khan and Others v. Ghazanfar Ali & Others – AIR 1920 Lahore 247
Orders violating the principles of audi alterm partem are void. Hansraj Gupta v. Dhera Dun Mussorai Electric & Tramway Co. Ltd. – AIR 1933 PC 63, 65 317. Casus Omissus. A casus omissus cannot be supplied by the court except in the case of clear necessity and when reasons for it is found in the favour corners of statutes itself. Jamat-i-Islami Pakistan through Syed Munawar Hassan, Secretary General v. Federation of Pakistan through Secretary, Law, Justice and Parliamentary Affairs & Muttahida Qaumi Movement (MQM) through Deputy Convener, Senator Aftab Ahmad Sheikh v. Federation of Pakistan through Secretary, Ministry of Interior – PLD 2000 S.C. 111 318. Ejusdem generis - Meaning of. The doctrine of ejusdem generis is well-settled. It means that where general words follow an enumeration of persons or things, by words of
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a particular and specific meaning such general words are not to be construed in their widest extent, but are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned. However, the doctrine will apply when there is nothing in the provision or Act to show a wider sense was not intended or the intention to give to the general term a broader meaning than the doctrine requires was not manifested. General terms following particular ones apply only to such persons or things as are ejusdem generis with those comprehended in the language of the Legislature. In other words, the general expression is to be read as comprehending only things of the same kind as that designated by the preceding particular expressions, unless there is something to show that a wider sense was intended. The rule of doctrine of „ejusdem generis‟ will apply unless intention to the contrary is clearly shown. Where general words follow the enumeration of particular classes of persons or things, the general words, under the rule or maxim of construction known as „ejusdem generis‟, will be construed as applicable only to persons or things of the same general nature or class as those enumerated unless an intention to the contrary is clearly shown. The doctrine applies when the following five conditions exist: (1)
The statute contains an enumeration by specific words;
(2)
the members of the enumeration constitute a class;
(3)
the class is not exhausted by the enumeration;
(4)
a general term follows the enumeration; and
(5) there is not clearly manifested an intent that the general term be given a broader meaning than the doctrine requires. Prime Commercial Bank v. Assistant Commissioner of Income Tax – [1997] 75 TAX 1 (H.C.Lah.) = 1997 PTD 605 = PTCL 1997 CL 29]
The provision itself which if read as a whole leaves no room to hold that the words (special deposit receipt) must be interpreted ejusdem generis and must take colour from the preceding and subsequent words. Beli Ram & Bros. v. Commissioner of Income Tax – [1935] 3 ITR 103 (Lah.) & AG v. Aramago [1925] 9 TC 445 (HL) 319.
Ex abundanti cautela.
An assessment which is made ex abundanti cautela by the assessing authority is called protective or precautionary assessment or
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alternative assessment. When the department has any doubt as to person who is or will be deemed to be in receipt of the income, protective or alternative assessment is permitted. Thus there is no double assessment if the first assessment is void. Commissioner of Income Tax, East Pakistan, Dacca Engineers Ltd. – 1967 SCC 289 = [1967] 16 TAX 81 (S.C.Pak) 320.
v.
Generalia specialibus non derogant.
The scope of clause (xvi) [parallel to section 23(i)(xviii) of Income Tax Ordinance, 1979] which is residuary in nature is thus wholly different from the sums included in clauses (xii), (xiv) and (xv). There being no similarity of subject matter between clauses (xii), (xiv) and (xvi) of section 10(2) the rule Generalia specialibus non derogant was clearly not attracted. Emperor v. Probhat Chandra Barua – 1 ITC 284 (Calcutta)
No doubt the maxim generalia specialibus non derogant may be regarded as embodying a good working rule of construction, but when the intention of the legislature to abrogate or modify existing rights is manifest as a necessary implication from the language used, it matters not, in my opinion, that the existing rights are not therein expressly and specifically modified or cancelled. Pakistan Hardcastle Wand (Pak) v. Federation of Pakistan etc. – PLD 1967 SC 1 321.
Mens rea.
Even in the case of statutory offence, the presumption is that mens rea is an essential in gradient. Kohinoor Industries Ltd. v. Government of Pakistan etc. – [1994] 70 TAX 11 (H.C.Lah.) 322.
Noscitur a Sociis.
The words used in statute are to receive the meaning which the context in which they appear admits. Maxwell on Interpretation of Statute 12th Edition at page 289 explains the principle of noscitur a sociis:“Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis they are understood to be used in their cognate sense. They take, as it were, colour from each-other, the meaning of the more general being restricted to a sense analogous to that of the less general.”
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New Jubilee Insurance Company Ltd., Karachi v. National Bank of Pakistan, Karachi – PLD 1999 S.C. 1126 323.
No one can be judge in his own cause.
Before delisting the name of the Insurance Company from the list of approved Insurance Companies, the Bank was not obliged to obtain adjudication as to the genuineness of its claim against the Insurance Policy. The basic question was as to whether there was material available on record on the basis of which a reasonable unbiased person could have concluded that there was no basis for rejection of the claim. In the present case if the Bank would have invoked section 44-B, of the Insurance Act, and if the second Surveyor would have given report to the effect that the Insurance Company‟s rejection of the Bank‟s claim was unjustified/unwarranted by law, it would have been justified to delist the Company from the list of approved Insurance Companies. Bank did not opt to get an independent surveyor appointed by the Controller of Insurance under sub-section (1) of section 44B of the Act, nor it had recourse to the remedies provided under the Insurance Policy, namely, arbitration, nor it invoked the jurisdiction of a competent Court of law. The Bank had itself adjudicated upon the question of genuineness and correctness of its claim. In other words it had become a judge in its own cause and delisted the Company‟s name from the list of approved Insurance Companies, and in consequence thereof it carried with it a stigma to the effect that the Company was an Insurance Company which did not honour its legal obligation under the Insurance Policies. The Bank not only delisted the Company from the list of approved Insurance Companies, but circulated the copy of the same inter alia to all of their offices and branches. Muhammad Saleem Chotia, Advocate v. Zafar Iqbal Owasi, Advocate, Bahawalnagar and 4 others – PLD 1999 Lahore 446 324.
Things should be done as per law as not to be done at all.
Where law had provided a thing to be done in a particular manner then it ought to be done in that manner and all other modes of doing it would stand excluded. Commissioner of Income Tax v. Mahaliram Ramjidas – [1940] 8 ITR 442 (PC) 325.
Ut res valeat quam pereat.
It is a crucial rule of interpretation of statutes that the words of the statute should be given a sensible meaning so as to make them effective....... The provisions in a taxing statute dealing with machinery
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for assessment have to be constrained according to the ordinary rules of construction, that is to say, in accordance with the clear intention of the Legislature which is to make a charge levied effectively. _______________
DOCTRINE OF RES JUDICATA/ESTOPPEL
Commissioner of Income Tax Central Zone B, Karachi v. Farrokh Chemical Industries – 1991 SCC 805 = [1992] 65 TAX 239 (S.C.Pak.) = 1992 PTD 523 _ 326. Principle of res judicata not applicable. The doctrine of res judicata does not strictly apply to Income Tax cases. The previous decisions or findings can be reopened if fresh facts come to light which on investigation would lead to a conclusion different from that of his predecessor. Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 Doctrine of res judicata - not applicable to income tax proceedings.
327.
It is now well-settled that principles of res-judicata cannot be applied to the cases on assessments under the Income Tax Act in the same manner as it is applied in Civil proceedings. Reference can be made to Commissioner of Income Tax v. Waheeduzzaman PLD 1965 SC 171, which was followed in a recent judgement namely Commissioner of Income Centre Zone B v. Farrokh Chemical Industries, Case Nos. 104 to 111 K of 1984. In both the cases the applicability of principles of res-judicata was restricted and in the later case following Waheeduzzaman‟s case it was observed as follows: It may be reiterated that a previous decision of an Income Tax Authority will not be a bar in the following cases: (i) (ii)
Where the earlier decision is clearly open to some objections; if it is a decision which is not reached after proper inquiry;
(iii)
if it is a decision as could not reasonably have been reached on the material before the authority;
(iv)
it is a decision which suffers from a defect which falls within the purview of the ground mentioned in section 100, CPC and liable to correction thereunder in second appeal, if it were a decision of a Civil Court; and
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if fresh evidence having a material bearing on the point decided in the previous decision is available.
Commissioner of Income Tax, East Pakistan Dacca v. Wahiduzzaman – 1965 SCC 212 = [1965] 11 TAX 296 (S.C.Pak.) = PLD 1965 SC 171 328.
Income tax officer - when not bound by res judicata.
Where there is no statutory provisions barring reopening of a matter the applicability of the principle of res-judicata depends on the necessity of giving finality to litigation and the injustice of vexing a person twice in respect of the same matter and these being only general considerations relating to administration of justice with no technical and defined limits the applicability of res judicata in such cases will be governed by considerations arising with respect to the particular statute under which a matter has been determined. The dominant consideration always being that the cause of the justice be advanced..... under the circumstances the ends of justice will be served by confining the bar of res judicata in relation to decision of Income Tax Authorities to cases where the decision is not clearly open to some objection. On the basis of assessments for the year 1945-46 and 1946-47, it was contended that the findings of the Income Tax Appellate Tribunal, so far as the amounts in question were concerned, operated as resjudicata and these questions could not be re-agitated in the subsequent assessment proceedings of the same assessee. The Bombay High Court held in Seth Ram Nath Daga v. Commissioner of Income Tax [1971] 82 ITR 287 that the question of res-judicata need not detain us long, as there is a plethora of decisions holding that the income tax authority is not a court and the decision of an income tax authority in a prior year does not operate as res-judicata in the assessment proceedings of the subsequent years. To quote a few, they are: Perianna Pillai v. Commissioner of Income Tax (1929, 4 TRC 217), Kaniram Ganpat Rai v. Commissioner of Income Tax (1929, ITR 332 (Pat.), Tejmal Bhojraj v. Commissioner of Income Tax (1941, 22 ITR 208) (Nag.) Omar Salay Mohammad Sait v. Commissioner of Income Tax, etc. v. Commissioner of Income Tax; Colombo (1961, 2 All S.R. 436 (PC) and Joint Family of Udayan Chinubhai, etc. v. Commissioner of Income Tax (1967, 63 ITR 416). In Kaniram Ganpat Rai v. Commissioner of Income Tax (1941, 9 ITR 332) the Patna High Court held that the Income-tax Officer is not bound by rule of res-judicata or estoppel and he can reopen the assessment if fresh facts came to light which on investigation would entitle the officer to come to a conclusion different from that of his predecessor. Similarly, in Tejmal Bhojraj v.
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Commissioner of Income Tax (1952, 22 ITR 108) (Nag.) it has been held that the principle of res-judicata or estoppel by record has no application and the previous finding or decision may be re-open by the department when the previous decision has not been arrived at after due enquiry, or the said decision is arbitrary or fresh facts come to light. In view of this, if the assessee in a subsequent year is able to satisfy the income tax authority that the previous finding is not correct either because it was not arrived at after due enquiry or because it is arbitrary of if the assessee has put before the income tax authority fresh facts from which a different conclusion can be arrived at, then in that case the income tax authority would be justified in arriving a different conclusion than what was arrived at in the previous proceeding. C.W.T., Southern Region, Karachi v. Abid Hussain – [1999] 80 TAX 89 (H.C.Kar.) = [1999 PTD 2895 329.
Principles of waiver or estoppel do not apply against a provision of law.
There is no waiver or estoppel against a provision of law and furthermore the question of exemption, being a question of law, it could be raised at any stage of the proceedings. If any authority is required in support of this it is to be found in the case of Shad Muhammad v. Pir Sabir Shah, reported in PLD 1995 SC 66. Moin Sons (Pvt.). Ltd., Rawalpindi v. Capital Development Authority, Islamabad – [1998] 78 TAX 168 (H.C.Lah.) 330.
Doctrine of promissory estoppel could not be invoked against the legislature and the laws framed by it.
The Capital Development Authority would be under an obligation under the law to deduct Income Tax on all the bills to be paid to the petitioner in accordance with the rate or rates specified in the First Schedule to the Income Tax Ordinance, 1979, pursuant to sub-section (4) of section 50 thereof. In the case, of failure to deduct tax in accordance with the rate specified in the First Schedule to the Ordinance, the Capital Development Authority will be liable to penal action specified in section 52 of the Income Tax Ordinance, 1979, meaning thereby that irrespective of sub-clause 73.1 of the agreement between the petitioner and the Capital Development Authority the liability of payment of tax at the rate or rates specified in the First Schedule to the Ordinance will remain intact. As held by the Supreme Court in Pakistan through Secretary Ministry of Commerce and 2 Others v. Salahuddin and 3 others (PLD 1991 SC 546). The doctrine of
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promissory estoppel cannot be invoked against the Legislature or the laws framed by it. It was held by the Court that payments received by the contractors are deemed to be their income in terms of section 80C of the Income Tax Ordinance, 1979, which does not contain any provision that the rate of tax shall relate back to the date on which agreement was entered into and not when the payments were received. It was, thus, held therein that the contractors were liable to, pay tax on the payments received by them under the contracts of the nature specified by sub-section (2) of section 80C of the Income Tax Ordinance, 1979, at the rate prevailing at the time of receipt of payments and not on the date the contrat under which these payments were made were entered into. In the instant case, the petitioner is not being asked to pay tax at the, enhanced rate on the payments which had been made to him prior to the first, July, 1995, but the tax at the prevailing rate of 5% is being collected on the payments to be received by him on and after the first July, 1995, when the rate of tax was enhanced under the Finance Act, 1995, from 3% to 5% on the payments to be made to the contractors. Hence, in view thereof, the deduction of tax at the enhanced rate cannot be claimed to have been given retroactive operation. Cases referred to: Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary, Ministry of Finance, lsMmabad and 6 others (1997) 76 Tax 5 (S.C.Pak.) = (PLD 1997 SC 582); Al-Samrez Enterprise v. The Federation of Pakistan (1986 SCMA 1917); Secretary Ministry of Commerce and 2 others v. Salahuddih and 3 others (PLD 1991 SC 546); Altaf Construction Co. v. Central Board of Revenue and others (1995 PTD 804) = (1996) 74 Tax 39 (H.C.Lah.) and Sarwar & Co. v. C.B.R. and others (1997) 76 Tax 1 (H.C.Lah.) = (1997 PTD 1138).
Afzal Construction Co. (Pvt.) Ltd. v. Chairman, CBR – [1990] 62 TAX 91 (H.C.Lah.) 331.
Equitable doctrine of estoppel.
As regards technical objection to the sustenance of the writ petition, it may be observed that estoppel does not flow out of the proceedings which are violative of law. The rule that a litigant on account of his conduct may be disentitled to discretionary relief under writ jurisdiction, is an equitable doctrine by which the court regulates its jurisdiction and is not an absolute rule.
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S.M. Abdullah v. CIT – [1966) 14 TAX 161 (H.C.Kar.) 332.
Principle of res judicata and estoppel.
The doctrine of res judicata or estoppel by record cannot be applied to proceedings pending before the Income Tax authorities. Admittedly the proceedings before them are not judicial proceedings in the sense that they are before the courts of law. The assessment of Income Tax authorities for a particular year is binding on the parties to the extent of that assessment. But the question is whether the Income Tax authorities are entitled to change the basis of assessment or the footing on which the previous assessment was made in subsequent years. In other words, whether they are entitled to blow hot and cold in the same breath? On principles of natural justice, finality and certainty of decision is expected and desirable even before quasi-judicial tribunals like the Income Tax authorities, and if such a tribunal arbitrarily and capriciously comes to a different conclusion from another tribunal on the same question, it will create uncertainty in the minds of the assessee. In order to avoid resulting injustice, there is an implied limitation on the power of such tribunal, namely, that it cannot reopen a question unless some fresh facts comes to its notice or the previous decision was arrived at without equity and is perverse. This implied restriction is inherent in every quasi judicial tribunal and there is no reason why it should not be applied in the case of Income-tax authority. Ahmed Maritime Breakers Ltd. v. Central Board of Revenue etc. – [1992] 65 TAX 268 (H.C.Kar.) 333.
Executive actions are not excluded from the operation of promissory estoppel.
Bare perusal of the above citation would make it clear that executive actions are not excluded from the operation of the doctrine of promissory estoppel. _______________
NATURAL JUSTICE/DUTIES OF COURT
Commissioner of Income Tax East Pakistan & 2 others v. Aswab Ali & others – 1969 SCC 350 = [1975] 31 TAX 101 (S.C.Pak) 334.
Affording of an opportunity is a prerequisite for taking penal action.
It is an elementary principle of law that no person can be subjected to an obligation without affording him an opportunity to show cause.
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Similarly, an order favouring a person passed by a competent authority cannot be varied to his disadvantage without hearing him. Commissioner of Income Tax East Pakistan v. Fazlur Rahman & Saeedur Rahman – 1964 SCC 176 = [1964] 10 TAX 49 (S.C.Pak) 335.
An order affecting the rights of a party cannot be passed without an opportunity of hearing to that party.
We do not think the mere absence of a provision as to notice can override the principle of natural justice that an order affecting the rights of party cannot be passed without an opportunity of hearing to that party. Yet it cannot be said that it is not necessary to hear the parties affected in a proceeding under section 115, CPC.The fact that the proceedings are judicial or quasi-judicial in nature is sufficient to entitle a party to a hearing in the absence of specific provision to the contrary. Mustafa Prestressed R.C.C.Pipe Works Ltd. Karachi v. Commissioner of Sales Tax (Investigation), Karachi – [1990] 62 TAX 119 (H.C.Kar.) 336.
Duties of courts in administration of justice.
The Courts and quasi-judicial officers are required not only to do justice but to perform their duties in such a manner that justice is seen to have been done. In discharge of such duties no steps should be taken which may create apprehension in the mind of a litigant that justice may not be done. If a subordinate officer submits his proposed order to his revisional appellate or superior authority and after his approval announces it then it will furnish a strong ground for challenging it, although such authority may not have amended the order. Such reference indicates that the judicial mind of the officer passing the judgment was not free and sufficiently tainted as he had in the mind the feeling that he has to submit the proposed order to his superior officer and thus may have thought fit to make such an order which may be acceptable to him. If the documents are such which a party has to produce the same may not be looked into if not produced at the relevant time, but if reference is to be made to the notifications or gazettes then they have to be treated differently from the documents which require proof. Duly notified order can be referred by looking to the gazettes. It is the primary duty of every party to produce all the records and documents relevant to the case. But so statute, rules and notifications which are notified and gazetted are concerned they should not escape notice of the court and all efforts should be made to find them out so that a
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wrong order may not be passed. Therefore, the court should not entirely rely upon the parties and their advocates for producing these documents, but should make search, to find out the state of law applicable to a case. Karachi, Textile Dyeing and Printing Works, Karachi v. Commissioner of Income Tax (Central), Karachi – [1984] 49 TAX 18 (H.C.Kar.) 337.
No adverse order should be passed against a party without affording an opportunity to meet the case.
No party can be condemned on basis of evidence or information adduced behind his back and without any notice to him. It is true that technicalities of Evidence Act cannot fetter the exercise of power of the Assessing Authority but rule of justice demands that before any adverse order, penalty or liability is passed or imposed upon a party he should be afforded full opportunity to meet the case and rebut the evidence used against him. Sheikh Akhtar Ali v. Federation of Pakistan and 4 others – [1980] 42 TAX 47 (H.C.Lah.) 338.
Justice should not only be done but must also appear to have been done.
Justice should not only be done but must also appear to have been done. Sh. Diwan Muhammad Mushtaq Ahmad, Karachi v. CBR – [1969] 19 TAX 198 (H.C.Kar.) 339.
Principles of natural justice are part and parcel of every statute unless there is specific provision in a particular statute to the contrary.
It has been irrevocably held by decisions of the Supreme Court that the rules of natural justice are to be read as part and parcel of every statute unless and until there is a specific provision in a particular statute to the contrary. Commissioner of Income Tax v. Surridge and Beecheno – [1968] 18 TAX 72 (H.C.Kar.) 340.
Principles of natural justice cannot be invoked in deciding a legal issue with reference to the statutory provision.
We are doubtful of the application of the principles of natural justice by the learned Tribunal inasmuch as the matter has to be decided in the first instance strictly in legal plane with reference to the statutory provision whose proper application clinches the issue.
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Crown Bus Service Ltd. Lahore v. CBR and others – [1976] 34 TAX 54 (H.C.Lah.) 341.
The court must consider the intention and not merely the form, while examining a document.
We may observe as a matter of principle, all that the courts of law are required to examine while considering a document or an instrument is the intention and not merely the form of any order or direction continued therein depending upon the facts, circumstances and the context of each case. Commissioner of Income Tax Rawalpindi Zone, Rawalpindi v. New Afza Hotel Rawalpindi – [1973] 27 TAX 212 (H.C.Lah.) 342.
Judicious exercise of discretion.
Since the discretion is objective it is to be exercised according to the rules of reason and justice and not according to the private opinion, according to law, and not humour. It is to be not arbitrary, vogue and fanciful but legal and regular. And it must be exercised within the limit to which an honest man competent to the discharge of his office ought to exercise. New Jubilee Insurance Company Ltd., Karachi v. National Bank of Pakistan, Karachi – PLD 1999 S.C. 1126 343.
Article 4 of Constitution of Pakistan 1973 vis-a-vis “due process of law”.
There are certain basic norms of justice. One of the cardinal principles of such basic norms is that one cannot be a judge in his own cause. The breach of the said cardinal principle of jurisprudence will in fact be violative of the right of „access to justice to all‟ which is a wellrecognised inviolable right enshrined in Article 4 of the Constitution. This right is equally founded in the doctrine of „due process of law‟. The right of access to justice includes the right to be treated according to law, the right to have a fair and proper trial and the right to have an impartial Court or Tribunal. The term „due process of law‟ can be summarised as follows:(1) A person shall have notice of proceedings which affect his rights, (2) He shall be given reasonable opportunity to defend, (3) That the Tribunal or Court before which his rights are adjudicated is so constituted as to give reasonable assurance of its honesty and impartiality, and (4) That it is a Court of competent jurisdiction. Above are the basic requirements of the doctrine „due process of law‟
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which is enshrined, inter alia, in Article 4 of the Constitution. It is intrinsically linked with the right to have access to justice which is a fundamental right. This right, inter alia, includes the right to have a fair and proper trial and a right to have an impartial Court or Tribunal. A person cannot be said to have been given a fair and proper trial unless he is provided a reasonable opportunity to defend the allegation made against him. Messrs Neelam Textile Mills Ltd. v. State Bank of Pakistan and 2 others – PLD 1999 Kar. 433 344.
Public power and administrative discretion ought to be exercised fairly.
We may further observe that it is by now settled law that all public power and administrative discretion ought to be exercised fairly and reasonably and a burden imposed must bear a reasonable nexus with the harm caused. The concept of proportionality in the exercise of public power has been recognised and approved by our Courts and in the case of Independent Newspaper Corporation v. Chairman Fourth Wage Board (1993 SCMR 1533) the Honourable Supreme Court observed „the principle is well-settled that when express statutory power is conferred on a public functionary, it could not be pushed too far, for such conferment implies a restraint in operating that power, so as to exercise it justly and reasonably. In the words of Scarman, L.J‟ excessive use of lawful powers is itself unlawful. _______________
DOCTRINE OF MUTUALITY
Commissioner of Income Tax, Lahore v. The Lyallpur Central Co-operative Bank Ltd., Lyallpur – [1959] 1-TAX (III-150) (H.C.West Pakistan, Lahore Bench) = 1959 PTD 639 = 1959 PLD 627 345.
Five-point criteria for applying “doctrine of mutuality”.
The assessee was registered under the Co-operative Societies Act 1912. Up to 1948, income of all co-operative societies and banks was exempt from payment of tax, but on the 20th August 1948, the exemption was withdrawn. Shortly after this, the Central Board of Revenue issued a circular that profits earned by co-operative credit societies registered under the Co-operative Societies‟ Act 1912 from dealing with their own members would continue to be exempt under the doctrine of mutuality. The Income Tax Officer while making
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assessment for the charge year 1950-51 declined to exclude such profits from the income of the assessee on the ground that it was not derived on the basis of mutuality. The Appellate Assistant Commissioner upheld the Income Tax Officers‟ order on the ground that since the assessee‟s business consisted of financing Co-operative Societies and other parties and loans were not restricted exclusively to members, the income in question had arisen not because of the relationship between the assessee and its members but because of the loans advanced to them. The Appellate Tribunal accepted the assessee‟s contention that doctrine of mutuality was applicable incase of income derived from members because one could not assess income arising to oneself. After discussing a good deal of the case law the Department‟s reference failed and the Tribunal‟s finding was upheld. Their Lordships while examining the cases cited, observed that each of those cases was based on its own peculiar facts. Judicial review: This is perhaps the only case in Pakistan where their Lordships have considered the doctrine of mutuality at a great length, considering a number of cases cited at bar. Their Lordships laid down five point criteria in determining the applicability of the doctrine of mutuality. After applying the said criterion, their Lordships observed that interest on loans advanced to members of the assessee should be exempt from tax. Cases referred: Last v. London Assurance Corporation (2 Tax cases 100 CH. L.); Styles (Surveyor of Taxes) v. New York Life Insurance Company (2 Tax cases 460 CH. L.); Secretary, Board of Revenue (Income Tax) Madras v. The Mylopore Hindu Permanent Fund Ltd. (1) Income Tax cases 217 (Madras) Trichmopoly Tennore Hindu Permanent Fund Ltd., v. Commissioner of Income Tax Madras (1937 ITR 703); Commissioner of Income Tax Madras v. Salem District Urban Bank Ltd. (1940 ITR 269); The English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner. of Agr. Income Tax Assam (1945 ITR 295); The English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agr. Income Tax Assam (1948 ITR 270 (P.C.); Municipal Mutual Insurance Ltd., v. Hills (16 Tax cases 430). _______________
NON-APPLICATION OF FEDERAL TAX LAWS TO TRIBAL AREAS
Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West), Karachi – [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266 346.
Non-application of Federal tax laws to tribal areas etc.
According to the above Article of the 1962 Constitution, no central law was to apply to any tribal area unless the Governor of the Province
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which the tribal area was situated, with the previous approval of the President, so directed. In the circumstances we are of the view that Income Tax Act, 1922 was not applicable to Swat for the assessment years in question. _______________
RULES RELATING TO INTERPRETATION OF AMENDING PROVISIONS EXPLAINED
Sainrapt & Et. Brice, Karachi v. Commissioner of Income Tax (West), Karachi [1979] 40 TAX 116 (H.C.Kar.) = PLD 1979 591 347.
Rules relating to interpretation of amending provisions explained.
It is well established that in the interpretation of statutes, the meaning of the words should be considered in the light of history of the legislation and the state of the law at the time the statute was passed, in order to consider whether the statute was intended to alter the law or to leave it exactly where it stood before. As observed by Maxwell on “Interpretation of Statutes” (12th Edition page 47), the Court is not to be, oblivious of the history of law and legislation and the Court has to say what is the object of the legislation in amending the law. Craies on “Statute Law” (7th Edition at page 126) observes that the cause and necessity of the Act may be discovered by considering the state of the law at the time when the Act was passed and in innumerable cases the Courts with a view to construing an Act have considered the existing law and reviewed the history of legislation upon the subject. Cases referred to : Rais Pir Ahmad Khan v. Commissioner of Income Tax, Lahore Zone, Lahore (1975 PTD 70) = [1975] 32 TAX 22; Sitaram Motiram Jain v. Commissioner of Income Tax [1961] 43 ITR 405; Wallem & Co. (Pak) Ltd. Karachi v. Commissioner of Income Tax [1974 PTD 207] = [1974] 30 TAX 34; Pherozali v. Commissioner of Income Tax (Est) Pakistan, Karachi [PLD 1978 Kar. 765] = [1979] 40 TAX 109 and Abdul Aziz and another v. Muhammad Ibrahim [PLD 1977 SC 442].
Commissioner of Income Tax, Lahore v. Kohinoor Industries Ltd., Lahore – [1977] 35 TAX 42 (H.C.Lah.) 348.
Scope and import of incorporated provisions of law explained.
The learned counsel for the petitioner did not dispute the well established position of law that when some provisions of an earlier Act are incorporated in a later Act, the incorporated provisions, for all practical purposes, become part and parcel of the later Act and no subsequent change in the earlier Act even though retrospective in its
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application, shall apply to the incorporated provisions of the later Act unless the same had been made applicable express or by necessary intendment. _______________
PRINCIPLES GOVERNING INTERPRETATION OF FINANCIAL LIABILITIES
Highway Petroleum Service (Regd.), Lahore v. Islamic Republic of Pakistan and another [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797 349.
Principles governing interpretation of financial liabilities.
Before adverting to the contentions of the learned counsel for the petitioners on merits which he canvassed very ably, if I may say so with respect, it may be said straight-away, that he is quite right when he made the submissions about the principles governing interpretation of financial liabilities. The tax can be imposed on “income” and not on any thing else much less on expenditure or tax, which is not an “income” but a liability. But all this does not solve the problem and help the petitioners. They are not being imposed a tax. What is happening to them is that for non-compliance of the relevant provisions for paying the tax either in full or part they are being asked to pay an additional amount. In other words, for withholding the amount which they were liable to pay, they are being told that for user of that amount or depravation of the use of the same by the rightful owner i.e, the State, the person concerned must pay an additional amount. Now, it is quite common in Civil Law that a person withholding somebody else‟s money and using the same or depriving the rightful owner of used, the former may be liable to make good the gain derived by him, or, suffer the loss which the rightful owner had undergone for not getting his money. Therefore when the petitioners are asked to pay additional amount of tax for non payment of the tax contrary to law, they are not being imposed additional amount of tax on their income but are being asked to defray the liability for non-compliance of the law. The use of the phrase “additional amount of tax” and since that is calculable with reference to the non paid or underpaid amount of the tax, gives an impression that the demand is of “additional amount of tax” on the non paid or unpaid “tax”, and that, no additional amount of tax can be levied on. tax, the latter being not an income but an expenditure
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or liability, Though the phrase “additional amount of tax” as a whole is loose and it would have sufficed to say that for nonpayment or under payment. The defaulting persons would be liable to pay additional amount” without saying “of tax”, yet, for an inaccurate or inapt phrase, the provision cannot be rendered nugatory.....an inapt and inaccurate phraseology of the draftsman cannot and should not nullify a provision made by the Legislature which is consistent with existing legal norms. Cases referred to : Maxwell, on Interpretation of Statutes, 12th Edition, p.157; Craies, on Statute Law, 17th Edition, pp.112-115; Bank Chettinad Ltd. v. Commissioner of Income Tax (1940) 1 ITR 523; D‟avigdor Goldmid v. Inland Revenue Commissioner (1953) A.C. 347; Wijesuriya v. Amit (l965) 33 All. E.R. 72 and (1944) AIR F.C. 73. _______________
INTERPRETATION LEADING TO DESTRUCTIVE ENDS SHOULD BE AVOIDED BY COURTS
Crown Bus Service Ltd., Lahore v. Central Board of Revenue and others – [1976] 34 TAX 54 (H.C.Lah.) 350.
Interpretation leading to destructive ends should be avoided by Courts.
In Act IV of 1924 no particular mode of constituting the Central Board of Revenue has been mentioned except, perhaps, by making appointments of its members and we are doubtful as to whether any such plea in his context can be successfully advanced by the petitioner. The objection of the learned counsel for the petitioner is based on the assumption that under section 2 of Act IV of 1924 two formalities viz. (a) constitution of Central Board of Revenue and (b) appointments of its members, had to be independently performed and if, for instance, certain person or persons are straightaway appointed as members of the Central Board of Revenue that probably is not enough. We do not agree, because, there is nothing to lead to such a corollary in the wording of section 2 of Act IV of 1924. Confining ourselves to the notification dated 29.8.1947 we may observe as a matter of principle, all that the courts of law are required to examine while considering a document or an instrument is the intention and not merely the form of any order or direction continued therein depending upon the facts, circumstances and the context of each case. Acting on that principle we hold that if the intention of making appointments of certain officer or officers as members of the Central Board of Revenue is for example with a view
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to establish the Central Board of Revenue and similarly if the appointments cannot be made except when it implies a creation of the Central Board of Revenue, then on the facts and overall circumstances in such situations, it can be safely held that the aforesaid appointment inter alia implied the constitution of the Central Board of Revenue as well and a specific and independent recital regarding the creation of the Central Board of Revenue is not to be considered as a must, especially when as already pointed out, in Act IV of 1924 no particular form and procedure for constituting a Central Board of Revenue had been laid down. The view of our government has also been the same. This will bear out the deductions which we have made from Governor-General‟s Orders Nos. 2 and 12 of 1947 hereinbefore referred to. The first was issued by Lord Mountbatten and the letter by the Quaid-i-Azam Muhammad Ali Jinnah in their capacities as Governor-General of their respective countries. These two Orders implied that the Central Board of Revenue constituted as a legal entity in 1924 continued with necessary adaptation for each Dominion and it was on that assumption that without staging its recreation or reconstitution various powers, functions and directions were given or assigned to it, because, otherwise there was no justification to quote or make mention of Central Board of Revenue for Pakistan and Central Board of Revenue for India in those two Orders when no such Boards as alleged by the petitioner existed then and thereafter. We were told that neither in India nor in Pakistan there was staged any re-creation or re-constitution of the Central Board of Revenue afresh and that both the countries acted on the premises that the Central Board of Revenue constituted in 1924 was a legal entity which had duly come into being in that year and later on only appointments of its members were to be made whenever necessary. It was on that construction of the relevant law that both the countries uptil now worked. The Central Board of Revenue is referred to in (i) Income Tax Act XL of 1922 (ii) Central Board of Revenue Act VI of 1924; (iii) Excess Profits Tax Act XV of 1940; (iv) Business Profits Tax Act XXI of 1947; (v) Central Excise and Salt Tax Act I of 1944; (vi) Sea Customs Act VII of 1888; and (vii) Land Customs Act XIX of 1924. If the contention of the learned counsel for the petitioner is accepted it will mean that almost whole of the revenue financial laws of the country came to a stand still due to non-creation of the Central Board of Revenue as alleged. Obviously we cannot endorse such a plea. If the contention as suggested by the learned counsel for the petitioner is accepted that
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will create complications and confusions for all concerned leading to a great deal of chaos in the country and will throw open all the actions taken, functions performed, orders passed and directions issued by the Central Board of Revenue after 1947 up to-date or, as a matter of fact, onward from 1924. On the other hand, the view taken by us will not lead to any destructive results. It is well settled that courts should follow that construction of law which does not lead to startling results or destructive ends. Cases referred to : Bashir Ahmnad Khan v. Mahniud Ali Khan Chowdhury (PLD 1960 S.C 195); United Netherland Navigation Co. Ltd. v. Commissioner of Income Tax (PLD 1965 S.C. 412); [1965] 12 TAX 57 and Nazir Ahmad v. Pakistan and others (PLD 1970 S.C. 453). _______________
TERMS AND PHRASES USED IN ONE STATUTE
Commissioner of Income Tax, Rawalpindi v. Noon Sugar Mills – [1975] 32 TAX 273 (H.C.Lah.) 351.
Phrases used in one statute borrowed as aid in support of the interpretation of a different statute meant for a different purpose and dealing with a wholly different subject matter is not always safe.
It is not always safe to borrow the meanings attached to terms and phrases used in one statute as aid in support of the interpretation of a different statute meant for a different purpose and dealing with a wholly different subject matter. It is of course permissible to have recourse to the ordinary dictionary meanings in interpreting a statute. Cases referred to: Littlewood v. George Wimpey & Co. Ltd. British Overseas Airway Corporation (1953, 2A. B.R. 915); Roberts v. Roberts L (1962, 2 A.E.R. 697); Wallance Brothers and Co. Ltd. v. Commissioner of Income Tax, Bombay (1938) 16 ITR 240; Chatturam Horilram Ltd. v. Commissione of Income Tax, Bihar and Orissa (1955) 27 ITR 709; Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan (PLD 1960 S.C. 187); (1960) 2-TAX (III-211) (S.C.). _______________
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MARGINAL NOTES TO THE SECTION OF AN ACT CANNOT BE REFERRED TO FOR THE PURPOSE OF CONSTRUING THE ACT
Commissioner of Income Tax, Lahore v. Aziz Din – [1976] 33 TAX 258 (H.C.Lah.) 352.
Marginal notes to the section of an Act cannot be referred to for the purpose of construing the Act.
But in this connection before us reliance was strongly placed on the marginal note to section 46 of the Act which speaks of the “Mode and time of recovery”. It was, therefore, contended that sub-section (I) of this section recovery of imposition of penalty is nothing but a provision for mode of relating to the tax and a part of the machinery provided to facilitate the recovery of tax. It is lever and a handle to exert pressure on the assessee and even to force him to pay the arrears of tax due from him. But we see no force in this contention. These marginal notes do not form part of the section. These observations were cited with approval by Their Lordships of the Supreme Court in The Commissioner of Agricultural Income Tax, East Bengal v. B.W.M. Abdul Rehman Manager, Taki Bara Taraf Wards Estate [(1973) SCMR 445] and the Court observed that in interpreting a fiscal statute only the letter or the law must be looked to and there is no room for any intendment. Also in Mssrs Hirjina & Co. (Pakistan) Ltd.. Karachi v. Commissioner of Sales Tax Central, Karachi [(1971) SCMR 128], the Court held that in interpreting a taxing statute the Courts must look to the words of the Statute and interpret it in the light of what is clearly expressed. It cannot imply anything which is not expressed, It cannot import provisions in the statute so as to support assumed deficiency. In the instant case, we find that in the adaptation order passed by the Central Board of Revenue, it is not expressly stated that the penalty provisions contained in sub-section (1) of section 46 of the Income Tax Act are applicable to the amount payable in virtue of Martial Law Regulation No. 43/48 and it is not permissible to import any such construction into that order by implication. Cases referred to: Sushil Kumar v. Emperor (AIR 1943 Cal. 489); Sutton v. Sutton [(1882) 22 Ch.D 511]; Balraj Kumar and annher v. Jagat Pal Singh [(1904) ILR 26 All. 393]; Commissioner of Income Tax v. Ahmadbhai Umarbhai & Co. (AIR 1950 S.C. 134); Cap Brandy Syndicate v. In land Revenu Commissioner [(1921) 1 K.B. 64]; Commissioner of Agricultural Income Tax v. B.W.M. Abdul Rahman, Manager Taki Bara Taraf Wards Estate [(1973) SCMR 445]; Hirjina & Co. (Pak.) Ltd. v. Commissioner of Sales Tax [1971] SCMR 128]; [1975] 31 TAX 78 (S.C.); Rajba v. Lala and another
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(PLD 1971 Lah. 1056) and Siraj Din v. Mst. Iqbal Begum (PLD 1968 Lah. 639). _______________
PRINCIPLE OF LITERAL INTERPRETATION
Eastern Textile Mills Ltd., Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca / and / G. Merajuddin and another v. Commissioner of Income Tax, East Pakistan, Dacca – [1966] 13 TAX 145 (H.C.Dacca) 353.
Provisions should be interpretated in accordance with the plain meaning of the language used therein.
It is an accepted principle of interpretation that a statute is to be understood in accordance with the plain meaning of the language used. in it. “If there is one rule of construction of statutes and other document, it is that you must dot simply anything in them which is inconsistent with the words expressly used”. Noor Hussain, Dacca v. Commissioner of Income Tax, Dacca – [1963] 7 TAX 113 (H.C.Dacca) = 1963 PTD 161 = 1963 PLD 373 354.
Statute should be given its ordinary meaning.
Interpretation of one statute by analogy to interpretation of another is unsafe, particularly when two statutes not pari materia. Proper way of construction is to give effect to all words of relevant provisions dispassionately. Fiscal statute must be strictly construed in favour of assessee. Golden rule is that statute must prima facie be given its ordinary meaning. _______________
DOCTRINE OF FAVOURABLE INTERPRETATION
Barnala Commission Shop, Chak-Jhumra v. Income Tax Officer, B-Ward, Lyallpur – [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311 355.
Doctrine of favourable interpretation applies to charging and not to machinery provisions.
Fiscal provision in case of ambiguity should be interpretation in favour of subject. This doctrine applies to charging provisions of Act and not to collecting provisions. CASE APPROVED: [1961] 4 TAX 94 (Trib). _______________
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DEPARTMENT CAN GO BEYOND A TRANSACTION
Mian Muhammad Allah Buksh v. Commissioner of Income Tax – 1962 PTD 603 (H.C.Lah.) 356.
Department can go beyond a transaction.
In case of splitting into four subsidiary firms of partners of an existing firm the deponent could decide whether it constitutes „transaction‟ designed to evade tax liability. Burden of proof rests with the department, which can go behind transaction to find affirmatively whether there was intention to evade tax. _______________
APPLICATION OF TAX RATES THROUGH A FINANCE ACT EXPLAINED
Commissioner of Income Tax, East Pakistan, Dacca v. Wahidur Rahman, Income Tax Officer, Companies Circle IV, Chittagong [1961] 4 TAX 135 (H.C.Dacca) = 1961 PTD 1110 = 1962 PLD 104 357.
Application of tax rates through a Finance Act explained.
The assessee, an Income Tax Officer, received a sum of Rs.4,581 as his salary for the period from 1st April, 1956 to 3rd March, 1957. Under section 18(2) of the Income tax Act tax was deducted at source from month to month at the rates laid down by the Finance Act, 1956. In making the assessment for the assessment year 1957-58 the assessing Income Tax Officer worked out the total income at Rs.4,585, including his income chargeable under the head “salaries”. The income was assessed to tax at the rates laid down by the Finance Act, 1956 and after giving credit for the tax deducted at source, provident fund contributions, etc., a net amount of Rs.4/2/- was found payable by the assessee. The assessee filed an appeal before the Appellate Assistant Commissioner contending that for the assessment year 1957-58 the minimum taxable income was fixed at an amount exceeding Rs.5,000 and as his income during the year 1956-57 was below the limit of Rs.5,000 he was not liable to be assessed and pay any tax at all. The Appellate Assistant Commissioner accepting the contention reversed the assessment order. The Department filed a second appeal and contended before the Tribunal that the proviso to the Schedule to the Finance Acts of 1956 and 1957, providing for exemption of income not exceeding Rs.4,200 and Rs.5,000 respectively, are inseparable parts of the rate structure and in the case of salary earner what should be considered to be immune from taxation for the taxing year 1957-58 is
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Rs.4,200 under the proviso to the Schedule to the Finance Act, 1956 and not Rs.5,000 under the proviso to the Schedule to the Finance Act, 1957. The Tribunal could not accept the contention of the Department and affirmed the order of the Appellate Assistant Commissioner. On a reference by the Department the High Court upholding the order of the Tribunal: Held, that: (i)
sub-section (3) of section 17 of the Finance Act, 1957 is only applicable to those cases where the assessee himself is chargeable to Income Tax under section 17 of the Finance Act of 1957. If he is not chargeable, there is no scope for application of sub-section (3) of section 17 of the Finance Act of 1957; and
(ii)
in section 17(3) of the Finance Act, 1957 the reference to the Finance Act, 1956 is only for the purpose of calculation of income tax on the salaried portion of the total income and in doing so it may be on the basis of the exemption amount of Rs.4,200, provided his total income is chargeable i.e., exceeding Rs.5,000. _______________
ACT IS TO BE READ AS A WHOLE
Commissioner of Income Tax, East Pakistan v. Aizuddin Gazi and others – [1960] 2-TAX (III-474) (H.C.Dacca) = 1960 PTD 727 = 1960 PLD 535 358.
Act is to be read as a whole.
Act should be so construed as not to render other parts superfluous, void or insignificant. It should be construed as a whole. It is court‟s duty to reconcile different provision of law especially in case of taxing statute. _______________
STATUTE SHOULD BE READ AS A WHOLE
Commissioner of Income Tax v. Hoosen Kasam Dada Karachi – 1960 PTD 574 (H.C.Dacca) 359.
Statute should be read as a whole.
One section in statute should not be read independently of all others and should be given unreasonable interpretation.
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Judicial analyses : CONFIRMED by the Supreme Court of Pakistan in Commissioner of Income Tax, East Pakistan Dacca v. Hossen Kasam Dada, Karachi 1961 SCC 102 = [1961] 4 TAX 96 (S.C.Pak.) with the following observations: “Such a reading of the provisions of Business Profits Tax Act appears to us not only to be reasonable but also the one which produce a consistency with the various provisions thereof. To hold otherwise would produce the anomalous result that whilst a dishonest assessee would be protected from harassment after the lapse of four year, an hones assessee would remain exposed to the harassment for even 10 to 50 years. It is difficult to impute such an iniquitous intention to the Legislature. _______________
SECTION VS. RULE
Commissioner of Income Tax, South Zone, Karachi v. Radio Hotel, Karachi – [1959] 1-TAX (III-407) (H.C.West Pakistan, Karachi) = 1959 PTD 707 = 1959 PLD 539 360.
Rules cannot be called in aid to interpret sections of the Act. In case of discrepancy in language of section and rules, section is to prevail.
Three references were simultaneously decided by a joint order. In all these references the partnership deeds were executed after the lapse of the relevant year of account and on this ground the Income Tax Officer had refused to allow registration under section 26A of the Income Tax Act. The Tribunal in all these cases had allowed registration. At the instance of the Department the Tribunal referred the following question of law to the High Court “Whether, in the facts and circumstances of the case, the assessee firm which came into existence by verbal agreement, long before the relevant year of account is entitled to be registered under section 26A of the Income Tax Act, in respect of the assessment year 1951-52 relevant to the previous year ending the 31st March, 1951, when the instrument of partnership was drawn up on the 16th April, 1951, that is to say, after the expiry of the relevant „previous year‟.” Following the case of Commissioner of Income Tax v. Rashid Motors [(1957) 32 ITR 101] it was held that it is not necessary to bring a partnership into existence, that such an instrument may legitimately
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record the previous history of the partnership and that what is being registered is not the instrument but the firm. Judicial analyses : FOLLOWED BY - Commissioner of Income Tax v. Rashid Motors [1957] 32 ITR 101, wherein it was held that it not necessary to bring a partnership into existence, that such an instrument may legitimately record the previous history of the partnership and that what is being registered is not the instrument but the firm. Cases relied: Dwarkadas Khetan and Co., Bombay v. Commissioner of Income Tax, Bombay City [AIR 1956 Bom. 321] and Commissioner of Income Tax, East Bengal v. Messrs. Rashid Motors, Chittagong [PLD 1957 Dacca 459]. Cases descended from: R. C. Mitter & Sons v. Commissioner of Income Tax, West Bengal [AIR 1956 Cal. 303]; Kalsi Mechanical Works, Nandpur v. Commissioner of Income Tax, Simla [AIR 1953 Pb. 301]; Messrs. Padam Parshad Rattan Chand of Delhi v. Commissioner of Income Tax, Delhi [AIR 1954 Pb. 188] and B. N. Dheer & Sons v. Commissioner of Income Tax, Delhi [AIR 1958 Pb. 463]. _______________
PRINCIPLE OF APPROBATE AND REPROBATE
Guarantee Engineers (Pvt.) Ltd. v. Federation of Islamic Republic of Pakistan through Secretary, Ministry of Finance, Islamabad and another – [2000] 82 TAX 131 (H.C.Lah.) 361.
Principle of approbate and reprobate explained.
Mere reading of sub-clause (2) of clause 54* clearly reveals that petitioner has to pay income tax in accordance with the prevailing Income Tax Law of the Government of Pakistan, therefore, petitioner is estopped to agitate the matter before High Court on the well-known principle of approbate and reprobate as per rule laid down by the Hon‟ble Supreme Court in Ghulam Rasool‟s case (PLD 1971 SC 376). The petitioner wants enforcement of contract, through constitutional jurisdiction which is not permissible as per principle laid down by the Hon‟ble Supreme Court in the following judgements:PLD 1958 SC 267 (The Chandpur Mills Ltd. v. The District Magistrate, Tippera etc.) PLD 1962 SC 108 (Messrs Momin Motors Co. v. The Regional Transport Authority, Dacca etc.). 1999 YLR 950 (Muhammad Insar etc. v. Administrator, Town Committee, Kabirwala and 4 others). _______________
* This is subsection (2) of section 54 of the Contract Act (IX of 1872)
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HIGH COURT IS COMPETENT TO ENTERTAIN WRIT WHERE INTERPRETATION OF LAW IS INVOLVED
Bank of Punjab v. Federation of Pakistan – [2000] 81 TAX 390 (H.C.Lah.) 362.
High Court is competent to entertain writ where interpretation of law is involved.
The fate of this case turns upon the interpretation of section 53(b) of the Income Tax Ordinance, 1979 and the said dispute can very well be decided by this Court in the exercise of its constitutional jurisdiction without insisting that the petitioner should follow the remedies provided by the Income Tax Ordinance, 1979. Furthermore, it appears that the Deputy Commissioner of Income Tax was influenced by Circular No. 13 of 1997 issued by the Central Board of Revenue which had been declared as without lawful authority by this Court. In view of what has been said above, this petition is allowed, the impugned order of the Deputy Commissioner of Income Tax to the extent it disallowed the petitioner to deduct the tax paid by it under section 50 of the Income Tax Ordinance, 1979 while computing the payment of advance tax payable under section 53, is declared to be without any lawful authority and of no legal effect. _______________
GENERAL RULES IN RESPECT OF WRIT PETITION
Chairman, Central Board of Revenue v. Pak-Saudi Fertilizer Ltd. – [2001] 83 TAX 119 (S.C.Pak.) 363.
Petition challenging order under section 53 held to be maintainable.
The petition under Article 199 of the Constitution was maintainable and the learned members of Division Bench of Sindh High Court rightly held so. Commissioner of Income Tax, Karachi & other v. N.V. Philip’s Gloelampenfabriaken, Karachi – 1993 SCC 1022 = [1993] 68 TAX 35 (S.C.Pak.) 364.
Conditions for maintainability of writ petitions explained.
“………We may now revert to the question, whether the appellant was justified to file above constitutional petition against the order of the Tribunal instead of invoking section 136 of the Ordinance for making
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a reference to the High Court. According to Mr. Rehan Naqvi, a reference under the above provision would not have been adequate and efficacious remedy as it would have taken years before it could have been heard. The same could be true for a onstitutional petition. The tendency to bypass the remedy provided under the relevant statute and to press into service constitutional jurisdiction of the court has developed lately which is to be discouraged. However, in certain cases invoking of constitutional jurisdiction of the High Court instead of availing of remedy provided for under the relevant statute may be justified, for example when the impugned order/action is palpably without jurisdiction and/or malafide. To force an aggrieved person in such a case to approach a forum provided for in the relevant statute may not be just and proper. H.M. Abdullah v. Income Tax Officer Circle V, Karachi & 2 others – 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.) 365.
Constitutional circumstances.
jurisdiction
only
in
extraordinary
Income Tax Ordinance is a complete code in itself which creates rights in favour of an assessee and in certain circumstances in favour of the Revenue as well, and also provides remedy for redress of the grievances of the aggrieved party. In every tax case, constitutional jurisdictions as an alternate remedy in terms of Article 199 of the Constitution cannot be availed. Reference in this connection may be made to the following observations appearing in Commissioner of Income Tax, Companies II, Karachi & others v. Hamdard Dawakhana (Waqf) Pakistan 1992 SCC 957 = [1993] 67 TAX 1 (S.C.Pak) = PLD 1992 SC 847 at p.861: “In cases where any party resorts to statutory remedy against an order he cannot abandon or bypass it without any valid and reasonable cause and file constitutional petition challenging the same order. Such practice, in cases where statute provides alternate and efficacious remedy up to High Court, cannot be approved.”
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Shagufta Begum v. Income Tax Officer, Circle XI, Zone B Lahore – 1989 SCC 715 = [1989] 60 TAX 83 (S.C.Pak.) 366.
Writ jurisdiction can be invoked in cases of mala fides action by the departmental authorities.
In case of mala fides, particularly when the allegation, is that the departmental authorities on account of political or other reasons would either be not free to decide correctly or on account of their own departmental compulsion be prejudiced in rendering a particular verdict, writ jurisdiction under Article 199 is the appropriate remedy. 367.
Extraordinary jurisdiction is not necessarily a speedy remedy.
In practice it takes longer time for disposal of writ petitions than departmental appeals. For example in this very case the writ petition was filed in September 1984. About five years have passed but the matter has not yet been disposed of. This has happened despite the dismissal of the writ petition in limine. Had it been admitted to hearing it might have taken much longer period to reach the Supreme Court. It is accordingly in the interest of litigants themselves first to choose the speedier remedy with the Department Authorities and thereafter if needed they can invoke the extraordinary jurisdiction of the High Court. Hafiz Muhammad Arif Dar v. Income Tax Officer – 1988 SCC 710 = [1989] 60 TAX 52 (S.C.Pak.) 368.
The assessee has other options like filing a complaint with Ombudsman.
In case the petitioner has not allowed any relief by the departmental authorities (despite the observations by the Supreme Court) the petitioner would have no immediate remedy at all against the highhandedness of the department. In such circumstances amongst other remedies, he can file a complaint/grievance application before the Federal Ombudsman, who can provide effective redress. Muhammad Khan v. Shamsuddin and others – 1969 SCC 319 = [1975] 31 TAX 94 (S.C.Pak.) 369.
Order passed without giving opportunity of being heard is not sustainable.
On merit the point raised in the writ petition falls within the principle laid down by this Court, in the case of Dina Sohrab Katrak [PTD (1959) S.C. 45]. The order of the Provincial Government setting aside the sale without hearing the appellant cannot be upheld.
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As a result the appeal is allowed. The judgment of the High Court is set aside and it is declared that the order dated the 5th July 1955, passed by the Government of Sindh, was passed without lawful authority. Respondent No. 4, the Province of West Pakistan, is directed to dispose of the applications for setting aside the sale filed by respondent Nos. 1 to 3 after notice to the appellant. Parties are directed to bear their own costs. Pakistan Electric Fittings Manufacturing Co. Ltd. through Directors v. Commissioner of Income Tax and 2 others – [2000] 82 TAX 135 (H.C.Lah.) 370.
No time limitation for illegal orders.
The principle of law that orders in contravention of mandatory provisions of law are a nullify and no limitation runs against such orders seems well settled; in this respect reference is invited to Khawaja Muhammad v. Marduman Babar Kahol 1987 SCMR 1543; also see Ali Muhammad v. Hussain Bakhsh PLD 1976 SC 37. Islamuddin and 3 others v. The Income Tax Officer and 4 others – 2000 PTD 306 371.
Remedies not availed disentitles the party from relief if constitutional petition also fails.
It is also an established principle of law that when the petitioner failed to avail himself of the remedies available to him under any statute he would have no locus standi to file a Constitutional petition in the High Court to challenge the legality and validity of the orders. Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Gujranwala – [1999] 80 TAX 262 (H.C.Lah.) 372.
High Court can exercise constitutional jurisdiction in a case where alternate remedy is only illusory in its nature and on the face of order it is clearly misapplication of law.
As far the maintainability is concerned, I will agree that the assessment order in question on the face of it is a clear case of misapplication of law. Reliance of the learned counsel in this regard re: Jullien Hoshanj Dinshaw Trust (supra) is relevant and pertinent. I will also agree that the alternate remedy in the facts and circumstances of the case is only illusory in nature. In such situation the apex Court in re: Collector of Customs v. S.M. Ahmed & Company (supra) approved the exercise of Constitutional jurisdiction by this Court. Learned counsel is correct in pointing out that the Central Board of Revenue having adopted the stated interpretation of the
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provisions in question no Officer in the hierarchy in all probability would show indulgence for the petitioner. Cases referred to: Messrs Hirjina & Co. (Pakistan) Ltd. v. Commissioner of Sales Tax Central, Karachi (1971) 23 Tax 230 (S.C.Pak.) = (1971 SCMR 128); Muhammad Younus v. Central Board of Revenue Government of Pakistan and others (PLD 1964 SC 113); Nagina Silk Mill, Lyallpur v. Income Tax Officer (1963) 7 Tax 442 (S.C.Pak.) = (PLD 1963 SC 322); Messrs Julian Hoshang Dinshaw Trust and others v. Income Tax Officer (1992) 65 Tax 102 (S.C.Pak.) = (1992 SCMR 250); EduIji Dinshaw Limited v. Income Tax Officer (1990) 61 Tax 105 (S.C.Pak.) = (PLD 1990 SC 399); Collector of Customs, Customs House Lahore and 3 others v. Messrs S.M. Ahmad & Company (Pvt.) Ltd. Islamabad (1999 SCMR 138); Adamjee Insurance Company Ltd. v. Pakistan (1993) 68 Tax 176 (S.C.Pak.) = (1993 SCMR 1998); Government of Pakistan v. Hashwani Hotel (PLD 1990 SC 68); Trust Ceramics Industry v. Deputy Collector CE & LC. (1991 SCMR 138); Star Vacuum Bottle Manufacturing Company v. Collector of Customs (PLD 1972 Karachi 210); H.M. Abdullah v. Income Tax Officer (1993) 68 Tax 29 (S.C.Pak.) = (1993 SCMR 1195); Nagina Dal Factory v. The Income Tax Officer (1968 SCMR 1035); Steel Brothers & Co. v. C.B.R. (1969) 19 Tax 97 (S.C.Pak.) = (1968 SCMR 374).
Hazoor Bakhsh v. Senior Superintendent of Police, Rahimyar Khan and 12 others – PLD 1999 Lahore 417 373.
Writs held to be maintainable vis-a-vis doctrine of exhaustion as no bar.
While parting with this order we are inclined to reiterate that rules enunciated above, flow from doctrine of exhaustion as embodied in Article 199 of the Constitution. It is hardly necessary to reiterate that this doctrine does not absolutely bar the jurisdiction of this Court to adjudicate such petitions if other remedies are available against the impugned orders/grievance. If the Court comes to the conclusion that the orders/proceedings/actions of functionaries of State under attack are in excess of authority or totally destitute of authority it had power to come to the relief of the affected party in exceptional circumstances. Doctrine of exhaustion is regulatory in nature. In highly exceptional circumstances this Court definitely will come to the rescue of the affected party as pointed out by a celebrated Judge Mr. Justice Aftab Hussain in Haji Muhammad v. Khizar Hayat PLD 1977 Lah. 424. See Qamar-uz-Zaman v. Zila Council Bahawalpir 1990 MLD 1748. Gatron (Industries) Ltd. v. Government of Pakistan and others – PTCL 1999 CL. 359 = 1999 SCMR 1072
The rule about invoking the constitution jurisdiction only after exhausting all other remedies, is a rule of convenience and discretion
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by which the Court regulates its proceedings and it is not a rule of law affecting the jurisdiction. A constitution petition is competent if an order is passed by a Court or Authority by exceeding its jurisdiction even if the remedy of appeal/revision against such order is available, depending upon the facts and circumstances of each case. Tri Star Industries (Pvt.) Ltd. & 8 others v. Commissioner of Income Tax Companies-I, Karachi & 5 others – [1999] 79 TAX 255 (H.C.Kar.) = 1998 PTD 3923]
Keeping in view the allegations of the plaintiffs as levelled in the plaint and for the facts and law stated hereinabove, I am of the considered view that in the peculiar circumstances of this suit, the jurisdiction of this Court is not barred. For this view, I am fortified by the observations made in the case of Al-Ahram Builders (supra), also reported in (1993 SCMR 29) where at page 38/39 it was held that „in certain cases invoking of Constitutional jurisdiction of the High Court instead of availing of remedy provided for under the relevant statute may be justified, for example when the impugned order/action is palpably without jurisdiction and/or mala fide. To force an aggrieved person in such a case to approach the forum provided under the relevant statute may not be just and proper‟. Mrs. Tahmina Daultana v. Hafiz Naeem-ud-Din – (1997) 75 TAX 261 (H.C.Lah.) = 1997 PTD 821
I have give my anxious consideration to the arguments addressed at the Bar. No doubt the petitioner directly approached this Court without availing the rights of appeal, revision and reference etc. as provided under Chapter VI of the Act, the present writ petition was still maintainable as in such circumstances where the efficacious and speedy remedy was not available the writ petitions are maintainable. Reliance is placed on Premier Cloth Mills v. Sales Tax Officer (1974) 29 Tax 199 (S.C.Pak = PLD 1972 SC 257 and Nagina Silk Mills Ltd. v. Income Tax Officer and another (1963) 7 Tax 442 (S.C.Pak) = PLD 1963 SC 322. It is very clear from the impugned notice that the respondent had under Tax. Recovery Rules framed under subsection (5) of section 93 of Income Tax Ordinance, 1979, further proceeded to direct that the petitioner shall not sell or deal with any property belonging to her except with the permission in writing to that effect granted by the
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Tax Recovery Officer. It is clear from the contents of the notice impugned that prejudice in fact was caused to the petitioner and a legal right to appeal which was available to her and which was to be notified to her in Form-C, format of notice under section 30 of the Wealth Tax act, was infringed. The provision of section 45-A of Wealth Tax Act, 1963 do not cure the irregularity or omission on the part of the respondent in not issuing the notice in the format prescribed under Wealth Tax Act, 1963, resulting in substantial prejudice to the petition. In view of the above the notices issued to the petitioner under section 85 of Income Tax Ordinance, 1979 on 29.4.1995 for payment of tax assessment at Rs.1,10,301 for the year 1993-94 and Rs.1,02,138 for the year 1994-95 and notice under section 93(2) of the said Ordinance for payment of assessed amount under section 93(2) thereof are declared to be without lawful authority and without any effect against the petitioner.” Gulistan Textile Mills Ltd. v. Central Board of Revenue, etc. – [1994] 70 TAX 272 (H.C.Kar.)
While it is true that where alternative remedy is provided by a statute those remedies should first be resorted to before seeking relief under Article 199 of the Constitution, in cases where an action is alleged to be mala fide or is obviously without jurisdiction or where vires of legislation is in question, the petition under Article 199 would be maintainable. Car Tunes v. Income Tax Officer etc. – [1989] 59 TAX 115 (H.C.Kar.)
The learned counsel for the respondent, however, very vehemently argued before us that mere issuance of notice could not furnish any ground to the petitioner to approach this Court in its constitutional jurisdiction as the Income Tax Ordinance 1979 provided adequate and efficacious remedy in this regard which should have been exhaust by the petitioner before approaching this Court. Although detailed reasons are not given in the above quoted order but it is quite clear that existence of another remedy under the relevant law was not considered as a bar for issuance of direction under Article 199 of the Constitution. It cannot be denied that interference of notice can be made by this Court in exercise of its constitutional jurisdiction where the proposed action lacks jurisdiction on the part of authority
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initiating the action or on the basis of admitted facts the action proposed by the authority is shown to be unsustainable in law. We have already reached the conclusion in this case that the notice dated 11.4.1987 issued by the successor Income Tax Officer is based merely on a change of opinion which could not in law justify reopening of the case under section 65 of the Income Tax Ordinance. In these circumstances no useful purpose will be served by allowing the continuation of proceedings in pursuance of the aforesaid before the hierarchy of Income Tax Department. We accordingly accept this petition and declare the notice dated 11.4.1987 issued by the respondent as without authority. Case referred to: Civil Appeal No. 5-K of 1986, dated 16.5.1988 (S.C.).
Abdul Hamid & Others v. Deputy Collector Excise & Taxation – [1988] 57 TAX 14 (H.C.A.J&K)
Ordinarily a person aggrieved of an order of a statutory authority under the Income Tax Ordinance, must avail of himself the remedies provided in the Ordinance and he is not entitled to by pass those remedies and seek Civil judicial review of the said, right away when the order was passed by the authority, in exercise of the powers vested in him but if the order sought to be reviewed or quashed, was passed by the said authority without jurisdiction or in exercise of a colourful jurisdiction or the spirit of natural justice was violated or the order was passed without providing an opportunity of being heard to the aggrieved person and it was patently illegal and no adequate remedy was available against it, the relief sought for by way of writ petition, cannot be refused. Hussain Sugar Mills v. Islamic Republic of Pakistan – [1981] 44 TAX 59 (H.C.Kar.)
It is now a settled law that the jurisdiction of this Court under Article 199 is always available to the party in cases where the impugned orders are without lawful authority, partial, unjust and mala fide even in cases where alternate remedy by way of appeal etc., is available.
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International Body Builders v. Sales Tax Officer, Lahore – [1980] 41 TAX 60 (H.C.Kar.)
It is also now well established that it is a rule of practice and not of law for this court to entertain a petition despite the fact that another remedy was available. The question to be considered in all such cases is whether the remedy available under the law is adequate, efficacious, speedier and shall provide a petitioner with the relief claimed? Abdul Hameed Awan v. Tax Recovery Officer-04 Coys Zone, Income Tax Building at Rawalpindi and 3 others – [1997] 76 TAX 238 (H.C.Lah.) = 1998 PCTLR 440 = 1998 PTD 874 (H.C.Lah.) 374.
Writ cannot be converted into appeal under section 136.
The learned counsel for the petitioner in reply has submitted that this writ petition be converted into a reference under section 136 of the Income Tax Ordinance, 1979. I am afraid this cannot be done firstly because the last order passed by the Income Tax Appellate Tribunal on review petition was made on 14.11.1993 and the reference was required to be filed within 90 days of the date of original decision of the Tribunal which was rendered on 3.4.1991. However, instead of availing a proper remedy under section 136 of the Income Tax Ordinance, the petitioner opted to move a miscellaneous application against the decision of the Appellate Tribunal. This would hardly justify the conversion of this writ petition to a reference which has now been patently and hopelessly time-barred. Even otherwise all the factual and legal issues have been thoroughly thrashed at the level of Income Tax Appellate Tribunal and the learned counsel for the petitioner has not been able to show me any material from which a question of law may be framed under section 136 of the Income Tax Ordinance. Needless to say that the reference in the High Court is to be dealt with by a Division Bench if at all it is to be preferred. Tharparkar Sugar Mills Ltd. v. Federation of Pakistan through Secretary, Revenue Division and Chairman, C.B.R., Islamabad and another – [1996] 73 TAX 215 (H.C.Kar.) 375.
Interim relief in the form of release of goods on furnishing of indemnity bond held reasonable.
Per Amanullah Abbasi, J. - The arguments and contentions of the petitioner and respondents have been examined. According to respondents SRO 484(I)/92 allows exemption from Customs duty and
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Sales Tax to machinery imported during the period commencing from 1st December 1990 and ending on 30.6.95. The value and rate is determined as on the date the manifest is delivered and bill of entry is field. This SRO cannot be made applicable to the goods which arrived after 30.6.1995. The goods of petitioner arrived on 30.6.1995 and manifest was filed after 30.6.1995 after the expiry of SRO 484(1)192. Accordingly it can be said that benefits of SRO 484(I)/92 were available in all cases where import General Manifest was filed prior to 30.6.1995 and bill of entry was also submitted before this date. There is_ a dispute of few days Only and according to petitioner delay was caused because of political victimization otherwise he was entitled to benefits of SRO 484(I)/92. The counter affidavit filed by Mr. Ahmed Mujtaba Memon Asstt Collector Customs mentions that duty is chargeable on standard rate of duty/taxes. It is stated that vessel arrived on 30.6.1995 but ft has not been clarified in the affidavit as to how much amount is payable by petitioner. The petitioner wants the machinery for installation as allowed and the respondents want duty/taxes. The amount is not mentioned. The learned advocate for the petitioner has submitted that vested rights were created because all contracts were prior to 30.6.1995. In similar cases to Hon‟ble Supreme Court and Lahore High Court following the order of Supreme Court in Petition No. 695-L/1995 dated 11.2.1996 we order that the machinery in question be released to the petitioner on furnishing of indemnity bond to the satisfaction of Collector of Customs, Karachi. The petition may be fixed for regular hearing within three months. Per Dr. Ghous Muhammad, J. - In view of these facts as also because of the reason that the Government of Pakistan, Finance Division, (Investment Wing) in 2 letters attached as Annexures C-1 and E-3 has confirmed that any delay is not attributable to the sponsors/petitioners and that the petitioner‟s project has been politically victimized, I have come to the conclusion that the petitioner has a prima facie case which warrants further probe and analysis and it would be very unreasonable to deny interim relief in the form of release of goods till disposal of the petition, especially because the petition already stands admitted on this score vide admission orders of any other bench dated 17.12.1995. Cases referred to: Associated Trading Co. Ltd. v. C.B.R. (PLD 1987 Kar 63); Al Samrez Enterprise v. Federation of Pakistan (1986 SCMR 1917); lnayat Hussein v. Union of India (1980) 122 ITR 227; Guilstan Textile Mills v. Federation of Pakistan (1994) 70 TAX 272 (H.C.Kar.) = (1994 PTD 581); Kamran Industries v. Collector of Customs (1995) 72 TAX 223 (H.C.Kar.) = (PLD 1996 Kar. 68); Usmania Glass Sheet Factories Ltd. v. Assistant Collector Customs (1966) 14 TAX 176 (H.C.Dacca) = (PLD 196 Dacca 276);
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Inter Ocean Cargo Services Karachi v. Federation of Pakistan (1992 PTD 1411); Nasir Flour Mills (Pvt.) Ltd., Karachi v. Federation of Pakistan (1994 PTD 1421); International Tea Traders v. Federation of Pakistan (1994 PTO 1422); Pakistan Paper Products v. Income Tax Officer; Mansoor Ali v. Federation of Pakistan; Abdul Cadir Adam Saedat v. Federation of Pakistan; S. Abdullah & Co. v. Collector of Customs (PLD 1992 Kar. 258); Salochistan Textile Mills Ltd. v. C.B.R. (1984 CLC 2192); Molasses Trading v. Federation of Pakistan (1993 SCMR 1905); M.Y. Electronics Industries (Pvt) Ltd. v. Govt. of Pakistan (1994 SCMR 2123); Trustees of Port of Karachi v. Manzoor Sans Corporation (1993 SCMS 69) and Ashique Hussain v. The State (PLD 1994 SC 879).
Metro Shipbreakers and another v. Pakistan through the Secretary, Ministry of Finance, Islamabad, etc. – [1996] 73 TAX 85 (H.C.Queeta) 376.
Constitutional jurisdiction cannot be invoked to enforce the rights which were not in existence at the time when the offending enactments were passed.
In the light of what has been discussed above, It can be safely inferred that the import fee was legally charged from the petitioner at the relevant time when Letter of Credit was opened in view of the Provisions as contained in Import Fee Order, 1993, which have nat been challenged. Since the facts of C.P. No. 261 of 1994 C.P. No. 262 of 1994, and C.P. No. 193 of 1994 are common and law points involved are also similar and indentical, therefore all the petitions are disposed of by this common judgment and keeping in view the above discussion being devoid of force merit dismissal. Kamran Industries, Karachi v. Collector of Customs (Exports) Karachi and Others – [1995] 72 TAX 223 (H.C.Kar.) 377.
Statutory period for filing the revision petition has long expired - Whether petitioner could non-suit only on the ground of maintainability - Held no.
We feel that the facts and circumstances of this case would not justify us to dismiss the petition only on grounds of maintainability. Considering that his view of the recovery drive the alternate revisional remedy was hardly efficacious. Also of this stage, once the petition has already been admitted if we were to non-suit the petitioner only on grounds of maintainability the petitioner would be left without any remedy since the 30 day statutory period for filing the revision petition under section 196 of the Customs Act has long expired. We accordingly held that the petition is maintainable also because it appears to be a point of first impression which has to be decided as to
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whether the Customs authorities have any jurisdiction to question into the valuation and scrutinize the description of the goods imported into the EPZ. Cases referred to: S.M. Anwar Sethi v. South British Insurance Co. Ltd. (PLD 1975 Kar. 458); Barkat Ali v. The State (PLD 1973 Kar. 659); Mst. Safia Begum v. Mst. Malkani and another (PLD 1965 Lah. 576); Akbar Ali v. Ehsan Elahi (PLD 1980 Lah. 145); Government of Pakistan v. Moulvi Ahmad Saeed (NLR 1982 Rev. 217); Muhammad Sarwar v. Fazal Rehman (1982 CLC 1286); Sardar Ghulam Nabi Khan v. Azad Government of State of Jammu and Kashmir (1984 CLC 325); Eastern Rice Syndicate v. C.B.R. (PLD 1959 SC Pak. 364); The Collector, Central Excise and Land Customs, Chittagong v. lmdad Ali (1969) SCMR 708) Latif Bors. v. Deputy Collector Customs, Lahore (1992 SCMR 1083) and Mst. Zainab v. Kamal Khan (PLD 1990 SC 1051).
Basharat Ali and another v. Deputy Superintendent, Central Excise and Sales Tax, Mananwala Circle, Sheikhupura [1995] 72 TAX 218 (H.C.Lah.) 378.
If remedy provided under the law is not efficacious and speedy petition is maintainable.
No doubt the remedy of appeal and revision was provided under Sales Tax Act, 1990 but whether the same was efficacious also is to be seen in the circumstances of the writ petitions. I am of the view that the remedy provided under the law was not efficacious and speedy so far as the carriers were concerned. Cases relied on: Premier Cloth Mills v. S.T.O. (1972 SCMR 257) = (1974) 29 TAX 199 (S.C.Pak.); Salah ud Din v. Friends Sugar Mills (PLD 1975 S.C. 244) and Nagina Silk Mills v. Income Tax Officer, etc. [1963] 7 TAX 442 (S.C.Pak.) = (PLD 1963 S.C. 322).
Gulistan Textile Mills Ltd. v. Central Board of Revenue, etc. – [1994] 70 TAX 272 (H.C.Kar.) 379.
Writ petition admitted to regular hearing to consider the vires of legislation, demand could be stayed.
In the circumstances, we are of the opinion that the petition having been admitted to regular hearing, it is necessary that further action not recovery of the amount mentioned in the application be stayed. We, therefore, direct that no further action will be taken for recovery of the tax on account of profits on sales of assets, to the extent of Rs.66,98,424/- subject to the petitioner furnishing security to the satisfaction of the Nazir of this Court to the extent of that amount plus profits thereon @ 24% per annum from the date of demand till payment.
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Saleem and Co. v. Income Tax Authorities – [1993] 68 TAX 173 (H.C.Lah.) 380.
Exemption of assessee from payment of Income Tax was refused by the Income Tax Authorities - High Court set aside the order of refusal of exemption and remitted the cases of assessee for decision according to law with the consent of parties and with a view to avoid delay.
As against the arguments addressed by the learned counsel for the petitioners, Mr. Muhammad Ilyas Khan, Advocate learned counsel for the respondents has contended that in Writ No. 404 of 1990 case of the petitioner Nos.1 and 2 has been decided so far whereas the case of other petitioners in still pending adjudication with respondent No. I and, therefore, in order to avoid the piecemeal decision of the matter in issue, the respondents have no objection to the acceptance of both the writ petitions and setting aside of the impugned order and remission of the cases of the petitioners to respondent No.1 for decision thereof in accordance with law. Learned counsel for the petitioners has accepted the offer made by the learned counsel for the respondents and has stated that in view of the apprehension of the petitioners that decision of the cases shall be delayed, the period of one month may be fled for decision of the cases of all the petitioners. Learned counsel for the respondents has no objection to the fixation of the period of one month for decision of the cases. Resultantly, we accept both the writ petitions, set aside the impugned orders and remit the cases of the petitioners which have been decided and direct that their cases as well as the cases of other petitioners which have not been decided as yet and which are pending adjudication shall be decided within a period of one month w.e.f. today. The assessment of income tax as against the petitioners shall not be finalised till disposal of the cases by respondent No. 1. It is observed, however that in case the petitioners are not satisfied after the matter is finally decided by the respondents, they shall be at liberty to move this Court again. Eastern Poutry Services v. Government of Pakistan and others – [1993] 68 TAX 171 (H.C.Kar.) 381.
Respondent‟s contention that stay shall not be granted unless the prescribed Law Officer has been given notice of the application and an opportunity of being heard - Whether argument was without merit - Held yes.
He submits that stay cannot be granted in view of the provisions of Article 199(4) of the Constitution. The argument is without merit.
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Article 199(4) provides that stay shall not be granted unless the prescribed Law Officer has been given notice of the application and an opportunity of being heard. Such notice and opportunity have been given in this ease. Muhammad Ismail v. Income Tax Officer, Mirpur and 2 others – [1992] 66 TAX 226 (H.C.AJ&K) 382.
Extra-ordinary jurisdiction of the High Court could not be invoked without first availing the remedies available under the relevant law.
Even a right of appeal has been given before the Supreme Court. Any person who is affected by the order of any authority, first of all, has to seek remedy under the relevant law on the subject. The extraordinary jurisdiction of this Court could be invoked only in cases where efficacious and alternate remedy is not available. No party can be allowed to avail writ jurisdiction without first availing the remedies available to it under the relevant law. As said in the early part of the order, the right of appeal under section 129 was available against the order of Income Tax Officer dated 20.9.1989. The petitioner had not availed this remedy. Therefore, under these circumstances, the order of assessment passed by the Income Tax Officer had attained finality. Siddique Trust v. Income Tax Officer and another – (1987) 56 TAX 120 (H.C.Kar.) 383.
Stay granted could not be given beyond six months.
Operation of notices under sections 56 & 61. Stay granted for extension of short period could be given beyond six months cannot be held. Cases referred to: (PLD 1960 Kar. 174); (PLD 1975 Lah. 7); (PLD 1982 Lah. 452); (PLD 1973 SC 589); (AIR 1949 FC 135); (AIR 1962 Bombay 92); (AIR 1981 SC 1284); (AIR 1960 SC 56); (PLD 1965 SC 479); (PLD 1971 SC 242); (PLD 1970 Kar. 179); (PLD 1973 Kar. 383); (PLD 1981 Kar. 123); (PLD 1979 SC 44).
Hamdard Dawakhana (Waqf) v. Commissioner of Income Tax, etc. – [1987] 56 TAX 78 (H.C.Kar.) 384.
High Court can grant stay of recovery of tax.
Since another Division Bench of this Court by an order dated 5.3.1937 passed in Constitution Petition No. D-69 85 in an identical writ petition filed by the present petitioner has granted the stay subject to furnishing security in respect of the tax amount, we would grant the
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stay but subject to furnishing bank guarantee of the amounts involved in three writ petitions (either a joint bank guarantee or three separate bank guarantees) within a month and thereafter the above petition as well as the other connected petitions be fixed for regular bearing as Case. No. 1. Muhammad Hanif Monnoo v. Income Tax Officer Central Circle 1, Lahore – [1984] 50 TAX 37 (H.C.Lah.) = PLJ 1984 Lah. 423 385.
Exercise of jurisdiction of high Court is confined only to consideration whether authority had acted with or without jurisdiction.
There is no cavil with the proposition that where the question of jurisdiction of the authority passing the impugned order is raised, the remedy of appeal is not an adequate remedy and in such cases the constitutional jurisdiction can be invoked. The exercise of jurisdiction is, however, confined only to consideration whether the authority had acted with or without jurisdiction. The precedents cited at the Bar by the learned counsel for the petitioner, on closer examination, have been found to be not applicable to the facts of the present case. The scope of interference in this case, under Articles 9 of the Provisional Constitution order is, therefore, limited to the inquiry, whether the Income Tax Officer had definite information on the basis of material on record or he had already obtained previous approval of the Inspecting Assistant Commissioner, If the answer in the affirmative, this Court will stay its hand and will not substitute its belief for that of the Income Tax Officer. If the answer is in the negative, an appropriate writ may be granted. Case referred to: Paramount Electric Company, Lahore v. Commissioner of Income Tax, Lahore Zone [1974] 29 Tax 77 (H.C.Lah.); Begum Nusrat Bhutto v. Income Tax Officer, Circle V, Rawalpindi [1980] 42 Tax 59 (H.C.Lah.); Escorts Limited v. Income Tax Officer, Lahore [1975] 31 Tax 164 (H.C.Lah.)
Julian Hoshang Dinshaw Trust v. Income Tax Officer, Circle XVIII, South Zone, Karachi and two others – [1981] 43 TAX 92 (H.C.Kar.) = 1981 PTD 53 386.
Where alternate and equally efficacious remedy is available, the petitioner is not entitled to invoke extraordinary jurisdiction of the High Court by way of writ petition.
The petitions are not competent under Article 199 of the Constitution as the petitioners have other alternate and equally efficacious remedy, the learned counsel for the respondents is on much firmer ground. In
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the first two petitions the petitioners have still an opportunity to raise their plea before the Income Tax Officer and in case of an adverse decision file an appeal before the Appellate Tribunal and eventually the matter can come up before the High Court in a reference under section 136 of the Income Tax Ordinance. Cases referred to : Burmah Oil Co. v. Trustees of the Port Trust, Chittagong (PLD 1962 SC 113); Bashir Co. v. Income Tax Officer (1968 SCMR 997); Habib Ahmad v. Income Tax Officer (1972 SCMR 631) and Colony Textile Mills Ltd. v. Income Tax Appellate Tribunal (PLD 1971 Lah. 861). Judicial Review: OVERRULED by the Supreme Court of Pakistan in 1993 SCC 777 = (1992) 65 Tax 102 = 1992 SCMR 250 = PTCL 1992 CL 181.
Highway Petroleum Service (Regd.), Lahore v. Islamic Republic of Pakistan and another – [1977] 36 TAX 8 (H.C.Lah.) = 1977 PTD 183 = 1977 PLD 797 387.
Provisions of the Income Tax can be challenged constitutional grounds inspite of alternate remedies.
on
The learned counsel for the petitioners has submitted that there is no right of appeal against the impugned orders and that a revision or reference is no right of a litigant. Further, that as the impugned provisions are being challenged on constitutional grounds, inspite of alternate remedies, the petitioners have a right to challenge the same by means of a petition under the Constitution and that, lastly, since the questions raised in these petitions relate to the challenge of the provisions in the Income Tax Act. It would not be possible for the authorities created by the Income Tax Act itself, to declare the same to be invalid. It is submitted that a Court interpretation the Constitution finally is an appropriate forum to raise the questions. The submission is obviously sound and is sustained. U.C. Rekhi v. First Income Tax Officer – [1950] 18 ITR 618 (Punj.) 388.
Where there has been suppression of material/facts, writ of prohibition cannot be issued.
A writ of prohibition is issued only where there is something done in the absence of jurisdiction or in excess of jurisdiction. Thus, where there had been suppression of material facts in the affidavit which was filed by the petitioner, the court would refuse a writ of prohibition without going into the merits of the case.
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Singer Sewing Machine Co. v. Commissioner of Income Tax and others – [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554 389.
In writ court cannot assume jurisdiction of income tax department.
Exercise of extraordinary jurisdiction is not called for even where relief ought to be granted on ascertainment of facts as High Court cannot assume functions of Income Tax Authorities. Judicial Review: OVERRULED BY - The Supreme Court of Pakistan in 1965 SCC 234 = [1965] 11 TAX 364 (S.C.Pak). Their Lordships observed: “. . . That such a proceeding in revision would be a judicial proceeding and not merely departmental affair. The power of revision has to be exercised, according to judicial principles. The provision of section 33A(2) apparently envisages a remedy alternative to a regular appeal from assessment. In the circumstances, it became the duty of the Commissioner to grant relief if the entitlement was clear. The learned Commissioner apparently misdirected himself in holding that he had no power to interfere in the matter.” “. . . All these factors go to establish the bona fides of the assessee-company in claiming that the assessment in question was not appealed against, owing to misapprehension of the correct position. The High Court has observed, in this connection, that ignorance of law was no excuse. That may be conceded, but section 33, sub-section (20 provided on alternative judicial remedy to the assessee, of which it availed itself and the relief was denied to it, on an erroneous view of law by the Commissioner. It must be found as a result of the above discussion that the Commissioner declined to exercise his undoubled jurisdiction in the case, on a ground which was legally not supportable. This fact calls for correction of his order. We allow the appeal and quash the order passed by the Commissioner of Income Tax in this case.” _______________
WRIT HELD MAINTAINABLE
Pak-Saudi Fertilizer Ltd. through Managing Director v. Federation of Pakistan through Secretary Finance, Islamabad and 4 others [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061 390.
Writ is maintainable where order is illegal notwithstanding the availability of alternate remedy.
Though we have held that the impugned order under section 53 is appealable under section 129, we still feel that in the present
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circumstances the petition would be maintainable since the impugned order is completely without jurisdiction and extraneous to the very powers conferred under the 1979 Ordinance on the Assessing Officer. It is settled law that availability of alternate remedies would be no bar to the maintainability of Constitutional petitions where impugned orders are completely without jurisdiction, mala fide, unlawful and of no legal effect. The latest pronouncement of the Honourable Supreme Court in this regard in Gatron (Industries) Ltd. v. Government of Pakistan, 1999 SCMR 1072, which reiterates this principle yet again, and which was earlier echoed by this Court in Kamran Industries v. Collector of Customs PLD 1996 Kar. 68. When it is amply demonstrated that the impugned order is completely without jurisdiction, it would be a travesty of justice, as in the present circumstances, to decline relief as the impugned exercise of power goes to the very root of the jurisdiction. Board of Intermediate & Secondary Education v. Central Board of Revenue, etc. – [1999] 79 TAX 28 (H.C.Lah.) 391.
Writ is the appropriate remedy where order is void and without lawful authority
The instant writ petition has been admitted to regular hearing, therefore, the question of alternative remedy is not available to the respondents. The order on its face is a void order and made without lawful authority. The provision of section 50 and the provision of section 48 of the Income Tax Act on its bare reading explain that it relates to a person who is liable to pay tax in excess of what was required from him. It does not apply to one who is exempted from payment of income tax. Therefore, it was incumbent upon the respondents to see and apply conscious mind to the facts that they had wrongly deducted the income tax on the securities belonging to the petitioner which were admittedly exempted from payment of income tax. When an order is void and made without lawful authority this Court has the jurisdiction to deal with the matters in order to determine the legal rights of the parties. In the instant case admittedly the petitioner on coming to know about the illegal deduction had filed numerous reminders and appeal before the respondents and the limitation of four years as envisaged in section 50 and section 48 of the Income Tax Act was obviously not applicable to the petitioner‟s case. Therefore, it was incumbent upon the respondents to refund the income tax on Securities illegally deducted by them.
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The petitioner was not liable to pay income tax, therefore, was not governed by the provisions of Income Tax Act. He was making hectic efforts but all the respondents were misapplying their mind holding that the claim made by the petitioner is time barred which was not time barred as their original action of illegal deduction of income tax, from tax exempted security, was void ab initio, and arbitrary in nature, was not sustainable in law. Where any authority guided and governed by law exceeds jurisdiction and interferes in any person‟s right by passing a void order, this Court in the exercise of extraordinary jurisdiction can determine the rights of such party against a void order and writ jurisdiction is available to such party. Case referred to: Singer Sewing Machine Company v. Commissioner of Income Tax, Karachi and others (1982 PTD 274) = (1983) 47 TAX 10 (H.C.Kar.); Syed Nazir Hassan v. Settlement Commissioner and another (PLJ 1974 Lah. 598); The Punjab Province v. Federation of Pakistan (PLD 1956 F.C. 72); Adamjee Insurance Company Ltd. v. Pakistan through the Secretary to the Government of Pakistan in the Ministry of Finance, Islamabad and 5 others [1993] 68 TAX 176 (S.C.Pak.) = (1993 SCMR 1798); Wealth Tax Officer and another v. Shaukat Fazal and 4 others [1993] 68 TAX 145 (S.C.Pak.) = (1993) SCMR 1810) and The Commissioner of Income Tax, Karachi and 2 others v. N.V. Philip‟s Gloeilampen Fabriaken, Karachi [1993] 68 TAX 35 (S.C.Pak.) = (1993 PTD 865).
Mst. Fazal Be and 6 Others v. Commissioner of Income Tax – [1996] 74 TAX 141 (H.C.AJ&K) 392.
Where a finding of fact not based on evidence or where material evidence ignored, reference under section 136 is maintainable.
From the perusal of the authority quoted herein before it follows that a finding of fact not based on evidence or where material evidence is ignored a reference to the High Court will be maintainable. Cases referred to: [PLD 1958 (S.C.Ind). 151]; [1974 PTD 207]; [PLD 1976 Lah. 353]; [1962] TAX 239 and [1953] 24 ITR 506.
Tharparkar Sugar Mills Ltd. v. Federation of Pakistan through Secretary, Revenue Division and Chairman, C.B.R., Islamabad and another [1996] 73 TAX 215 (H.C.Kar.) 393.
In case of writ, maintainable.
political
victimization,
petition
is
I would now like to deal with the objection of the learned D.A.G. that the petition is pre-mature and warrants dismissal since no bill of entry has been filed and no assessment or evaluation thereon has been made by the Respondents to examine whether in the first place the
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petitioner is or not entitled to the sought exemption. I am of the view that this objection is not tenable. Article 199 of the Constitution clearly spells out that the High Court in a writ jurisdiction has not only the power to pass a corrective order by curring a defect in an existing order but it also has the power to prohibit a functionary from passing an illegal order. In other words the High Court under Article 199 has squarely the power to pass a prohibitory order of restrain against a threatened action as well. Such interpretation is quite apparent from the language employed in Article 199(1)(a)(i). I am of the view that there is nothing wrong with the course adopted by the petitioner who became aggrieved the moment the subsequent notifications dated 4.10.1995 and 29.10.1995 were issued by the C.B.R. There is every indication that assessment on the bill of entry is a mere formality as is also apparent by the stance taken in the counter affidavit. I, accordingly hold that the petition is not premature while in doing so I may also point out that nowhere in the counter affidavit has this objection been taken. The stance taken by the learned D.A.G. in this regard is quite at variance with the stance taken in the counter-affidavit wherein it had been categorically stated that the petitioner is not entitled to relief under S.R.O. 484. I feel that the courts while granting interim relief in a tax mailer ought to consider that It would be completely against the concept of writ jurisdiction to give such terms to the assessee which would amount to directly or indirectly depositing the demand amount. If the assessee is an identificable person and also holds assets it can be asked not to sell or dispose of that property whereon some lien or charge can be created or otherwise the assessee can be asked to arrange an insurance guarantee to the satisfaction of Nazir of the Court according to the directions given by the Hon‟ble Supreme Court in Trustees of Port of Karachi v. Manzoor Sons Corporation (1993 SCMR 69). I have also noticed that in income tax matters since the assessees are associated with the exchequer not only in a one-off transaction the courts have been willing to grant unconditional stays. In the end a lot would depend upon the facts and nature of each individual case and the above are only some guidelines. Although I was inclined to direct release of goods upon submission of an insurance guarantee to the satisfaction of Nazir and/or upon an undertaking of the petitioners that till disposal of the petition the factory shall not be sold, however, in identical petitions the Lahore High Court in W.P. No. 1174/95 and W.P. No. 1221/95 has granted an interim relief by directing the Respondents to release goods in terms of S.R.O. 484 subject to the petitioner furnishing an indemnity bond
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for the disputed amount, interestingly, in another identical mailer the Lahore High Court directed the petitioner to submit a bank guarantee instead of indemnity bond while on appeal in that matter the Supreme Court through order dated 11.2.1996 in Civil Petition No. 695-L/96 modified the order of the Lahore High Court and directed release of goods on furnishing of indemnity bond to the satisfaction of Collector of Customs. It would not be out of point to cite Ashique Hussain v. The State (PLD 1994 SC 879) wherein a full bench of the Supreme Court has sternly admonished the courts below to follow the decisions of the Supreme Court. Accordingly the respondents are directed to release the goods of the petitioners as per list enclosed as annexure F-3 and F-4 (i.e. for goods where contracts are finalized prior to 30.6.1995) of the petition in terms of S.R.O. 484(I)/92 dated 14.5.1992 upon the petitioner submitting an indemnity bond to the satisfaction of the Collector of Customs. In view of the delay occasioned in disposing of the listed interim application we direct the Collector of Customs to comply with the instant order as expeditiously as possible without any further delay. GEC Avery (Pvt.) Ltd. v. Government of Pakistan through C.B.R., Islamabad and 2 Others – [1995] 72 TAX 81 (H.C.Kar.) 394.
In cases involving fiscal rights even if alternate, adequate and effective remedies available to the petitioner, High Court can step in to prevent excess, if any, committed by public functionaries.
The Central Board of Revenue has already issued a circular in this regard indicating a process to be followed by the Assessing Officer while applying the provisions of sub-section (5) of section 80-C of the Ordinance. By working backward, a figure of income is to be first determined, which if taxed at normal rates, would have resulted into a tax liability equal to the presumptive tax paid. Any sum in excess of that amount is to be regarded as unexplained investment with reference to the relevant provisions of section 13. Now, in view of such clear instructions issued by the Board in the said Circular, it cannot be understood what useful purpose would have been served if the assessee had first availed the remedies provided in the Ordinance. Many instances can be found where even the Income Tax Appellate Tribunal has been found to endorse the opinion held by the Board of Revenue. Even otherwise, as has been held by the Supreme court in the case of Julian Hoshang Dinshaw Trust, in cases involving fiscal rights, the superior Courts have always stepped in to prevent excess,
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if any, committed by public functionaries. We are, therefore, not inclined to consider the preliminary objection. Cases referred to: Julain Hoshang Dinshaw Trust and others v. Income Tax Officer [1992] 65 TAX 102 (S.C.Pak.) = (1992 PTD 1); Usmania Glass Sheet Factory Ltd. v. S.T.O. [1971] 22 TAX 229 (S.C.Pak.) = (PLD 1971 SC 205) and Edulji Dinshaw v. Income Tax Officer [1990] 61 TAX 105 (S.C.Pak) = (1990 PTD 155).
Hamdard Dawakhana (Waqf) Pakistan v. Commissioner of Income Tax Central Zone, ‘B’ Karachi and another – [1990] 62 TAX 98 (H.C.Kar.) 395.
Writ held maintainable even during the pendency of appeals when demand of taxes was huge and ran into millions and the department was pressing hard for its recovery but orders passed were against the law as held earlier by courts, though for different years.
Before considering the arguments on merit, in the above cases, it will be appropriate to first decide the preliminary objection raised by the respondents regarding maintainability af the above petitions. The Contention of the learned counsel for the respondents is that the petitioner in all the above cases while filing petitions under Article 199 of the Constitution against the orders of Income Tax Officer had also simultaneously filed the departmental appeals which were subsequently decided during the pendency of these petitions and thereafter, the petitioner filed further departmental appeals before Income Tax Appellate Tribunal which are still pending.. It is accordingly contended that the petitioner having opted for availing of the departmental remedy in the cases under the Ordinance, was not entitled to invoke the Constitutional jurisdiction of this Court without having first exhausted all the remedies provided under the Ordinance. We are in respectful agreement with the above observations of the learned Judges of the Division Bench and applying the test laid down in the above case to the present cases, we are of the view that the above petitions cannot be dismissed as not maintainable. Besides, the fact that the controversy involved in the above petitions rests mainly on the interpretation and affect of the Judgments in cage of the petitioner by the Supreme Court, (reported in PLD 1980 SC 84) and that of the Division Bench of this Court in Civil Reference No. 5 of 1966 dated 24.3.1981 with reference to Clause 93 of the Second Schedule to the Ordinance, the admitted position in the cases is that the appeals filed before the Tribunal by the petitioner against the
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order of 1st Appellate Authority in 1986 have not been heard and disposed of as yet and the learned counsel for the department is still unable to state when these are likely to be decided. It is also admitted before us that demand of taxes against the petitioner on account of rejection of their claim for exemption is huge and runs into millions and the department is pressing hard for its recovery and as there is no stay, the petitioner had to agree to pay the same in instalments of ten millions each. We are, therefore, of the view that the departmental appeals of the petitioner pending before the Income Tax Appellate Tribunal since 1986 in the circumstances of the case can neither be treated efficacious nor a speedy remedy so as to dis-entitled the petitioner from invoking the Constitutional jurisdiction of this Court. We, therefore, do not agree with the learned counsel for the department that in the circumstances of the cases, the above writ petitions are not maintainable. Cases referred to: Tripura Modern Bank Ltd. v. Khan Bahadur Khalilur Rehman & 3 others (PLD 1971 S.C. 236); Shagufta Begum v. Income Tax Officer [1989] 60 TAX 83 (S.C.Pak) = (1989 PTD 544); Julian Hoshang Dinshaw Trust v. Income Tax Officer (1981 PTD 53) = [1981] 43 TAX 92 (H.C.Kar.); Nagina Dal Factory v. Income Tax Officer [1968] 18 TAX 1 (S.C.Pak) = (1968 SCMR 1035); Steel Brothers and Company Ltd. v. C.B.R. (1968 SCMR 374) = (1969) 19 Tax 97 (S.C.Pak.); Raja Habib Ahmad Khan v. Income Tax Officer (1972 SCMR 556); Nagina Silk Mills Lyalpur v. Income Tax Officer [1963] 7 TAX 442 (S.C.Pak.); The Income Tax Appellate Tribunal Pakistan (PLD 1963 SC 322); Eruch Maneckji and 2 others v. Income Tax Officer (1979 PTD 461) = (1980) 41 Tax 25 (H.C.Kar.); Utility Stores Corporation of Pakistan Ltd. v. Punjab Labour Appellate Tribunal and others (PLD 1987 S.C. 447); Premier Cloth Mills Ltd. Lyallpur v. STO (1972 SCMR 257) and Husein Sugar Mills Ltd. Raraehi v. The Islamic Republic of Pakistan and another (1981 PTD 169).
Syed Guulam Abbass Shah v. Income Tax Officer, Mirpur and 3 others – [1985] 51 TAX 157 (H.C.AJ&K) 396.
Writ maintainable provided order is unlawful although alternate remedy available to the petition.
Replying to the point whether there is an alternate remedy, Ch. Muhammad Afzal Advocate has referred to me section 30 of the Income Tax Act of 1922 = section 129 of the Income Tax Ordinance of 1979. The appealable orders are mentioned in this section. The impugned order does not fall under this section, and, therefore, the learned counsel fox the petitioner has submitted that he filed a Revision Petition before the learned Commissioner Income Tax and when the learned Commissioner Income Tax rejected the said revision
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petition, there was no other remedy available to him, and therefore, he knocked at the doors of the High Court and invoked its constitutional jurisdiction under section 44 of the Azad Jammu and Kashmir Interim Constitution Act of 1974. I do not think that the petitioner was guilty of any laches or delay. As soon as be came to know about the Recovery Certificates he approached the learned Commissioner income Tax in Revision Petition but when his revision petitions failed, he came to the High Court and invoked its constitutional jurisdiction. Even otherwise, the objection of laches and delay or acquiescence is not available to the respondents in this case because the impugned Recovery Certificates have been issued without a Notice of Demand and have been issued for the Recovery of the liabilities against a dead person (assessee). An order which is a nulty in the eye of law is not an order at all and can be ignored all together even if no Writ Petition is moved to impeach it. Cases referred to: United Builders v. Commissioner of Income Tax (1984) 49 TAX 34; Dr. H.K. Mahtab v. Income Tax Officer [1980] 41 TAX 136 and Abdul Karim v. Commissioner of Income Tax (H.C.AJ.K.) unreported
Pakistan Industrial Development Corporation v. Pakistan – [1984] 49 TAX 76 (H.C.Kar.) 397.
Reference application pending disposal before the High Court held not a bar to maintainability of constitutional petition challenging wires of law taxing “free reserve?‟ to Income Tax.
The above observations on the contrary support the contention of petitioner in the present case as it is an admitted position that the petitioner specifically prayed before the Court while with drawing the earlier petition that he reserves the right to bring fresh petition on the same cause of action and the Court allowed withdrawal of the earlier petition but did not specifically grant permission to bring the fresh petition. Mr. Fazeel, contended that in view of the fact that the Court did not specifically grant the permission it should be presumed that the permission to bring a fresh petition asked for was declined. We are unable to accept this contention. In our view in the absence of an express order by the Court granting permission to file a fresh proceedings while allowing withdrawal under sub-rule (2) of rule 1 of Order XXIII, C.P.C. it will necessarily follow that such a permission has been granted by the Court or otherwise the court while allowing withdrawal in such a case cannot refuse to grant permission. We may also mention here that Mr. Khalid
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Anwar the learned count-self or the petitioner also referred us to the case of Durvas and others v. State of U.P. [AIR 1961 SC 1457] in which the Supreme Court of India considered the scope of applicability of principles of res judicata and constructive res judicata to constitutional petition. The following observations were made by the Indian Supreme Court at page 1465 of the report with which we fully agree. Cases referred to: Karim Bakhsh v. Jan Muhammad PLD 1977 - Lah. 1033; Karim Gul v. Shahzad Gul 1978 SCMR 141 and Durvao and others v. State of U.P. AIR 1961 S.C. 1457.
Pakistan Industrial Development Corporation v. Pakistan – [1984] 49 TAX 76 (H.C.Kar.) 398.
Constitutional petition before High Court challenging vires of taxing “free reserves” to Income Tax held cannot be dismissed on ground of laches in view of nature of relief claimed and the circumstances of the case.
From the statement made in the counter-affidavit it appears that the objection regarding delay is founded on the ground that the impugned orders are challenged after about 10/12 years of the creation of liability against the petitioner. We may mention here that the respondents did not mention in their counter-affidavit the dates of orders impugned in the petition and from the certified copies of the orders produced in the petition we were unable to ascertain their dates. We, therefore, enquired from the learned counsel for the respondents about the dates of these orders but they were unable to give the same. The petitioner in its rejoinder has denied that 10/12- years period had passed when the liability was created against them and it is claimed that the final order imposing penalty was passed against them only, on 30th May, 1979 and immediately thereafter Petition No. 981/79 was filed by them challenging the action of respondents and the vires of legislation but the petition was subsequently withdrawn in the circumstances stated above and as the matter was not settled amicably the present petition was filed in this Court on 10.1.1980. It is, therefore contended that there was no delay at all in filing the present petition. Keeping in view the nature of relief claimed in the petition and the circumstances stated above we are satisfied that the present petition cannot be dismissed on the ground of ladies alone.
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Kassam Haji Abbas Patel v. Income Tax Officer, Contractors Circle, Karachi & Another – [1983] 47 TAX 162 (H.C.Kar.) 399.
Where alternate remedy available but not efficacious and statutory functionary acting mala-fide or in a partial, unjust and oppressive manner, High Court in exercise of its writ jurisdiction has power to grant relief to the aggrieved party.
Since show-cause notice has been issued without there being any sufficient reason or legal authority we should not decline to exercise on jurisdiction. The availability of alternate remedy in every case is not a ground to refuse the relief when the remedy is not efficacious, for, if in spite of showing cause any additional amount bad been assessed the same could have been recovered through coercive process, on petitioners failure to pay the same. In the case of East and West Steamship Co. v. Pakistan this Court has held that where a statutory functionary acts mala-fide or in a partial, unjust and oppressive manner, the High Court in the exercise of its writ jurisdiction has power to grant relief to the aggrieved party. Cases referred to: Nawabzada Muhammad Amir Khan v. Controller of Estate Duty and others (PLD 1961 SC 119) = [1962] 6 TAX 84 (S.C.); Burmah Oil Company (Pakistan Trading) v. The Trustees of the Port of Chittagong (PLD 1962 SC 113); Pakistan and another v. Qazi Ziauddin (PLD 1962 SC 440); Nagina Silk Mills, Lyallpur v. The Income Tax Officer, A-Ward, Lyallpur and another (PLD 1963 SC 322) = [1963] 7 TAX 442 (S.C.); Syed Ali Abbas and others v. Vishan Singh and others (PLD 1967 SC 294); Abdul Ghani and another v. Government of Pakistan and others (PLD 1968 SC 131); Usmania Glass Sheet Factory Ltd., Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 SC 125) = [1970] 22 TAX 229 (S.C.) and the Murree Brewery Co. Ltd. v. Pakistan through the Secretary to Government of Pakistan, Works Division and others (PLD 1972 SC 279) Case relied on: East and West Steamship Co. v. Pakistan (PLD 1958 SC 41)
Hussain Sugar Mills v. Islamic Republic of Pakistan and others – [1981] 44 TAX 93 (H.C.Kar.) 400.
Order passed without lawful authority, partial, unjust and mala-fide held assessee can invoke extra-ordinary jurisdiction of the High Court even if alternate remedy is available by way of appeal, etc.
It is now a settled law that the jurisdiction of this Court tinder Article 199 is always available to the party in cases where the impugned orders are without lawful authority, partial, unjust and mala-fide even in cases where alternate remedy by way of appeal etc., is available.
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In the present case as observed by us that the impugned orders passed by the Income Tax Officer under the provisions of section 18A and 45A(b)(ii) were without lawful authority and unjust. Cases referred to : Murree Brewery Co. Ltd. v. Pakistan (PLD 1972 SC 279); Usmania Glass sheet Factory Ltd. v. Sales Tax Officer (PLD 1971 SC 205) = [1970] 22 TAX 229 (S.C.Pak.); Miss. Tayyaba v. Controller of Examinations (PLD 1976 Kar. 481); First National City Bank, Karachi v. Income Tax Officer, Karachi (PLD 1976 Kar. 552) = [1976] 34 TAX 1 (Kar.); Municipal Committee Multan v. Burmah Shell Storage and Distributing Co. of Pakistan and another (PLD 1976 Lah. 726) and [1968 SCMR 1035].
Begum Nusrat Bhutto v. Income Tax Rawalpindi – [1980] 42 TAX 59 (H.C.Lah.) 401.
Officer,
Circle-V,
Writ petition in the High Court challenging the jurisdiction held competent even during the pending of appeal.
The writ is not competent where an appeal is pending or where a reference under the provisions of the Income Tax Act can be made to the High Court. Where there is another adequate and efficacious remedy open to the petitioner, a petition under Article 199 of the Constitution of 1973 would be incompetent unless the legal remedies including remedies as provided in the Income Tax Act are exhausted. But one essential condition for applicability of this rule is that the alternative remedy should be adequate and efficacious. Where the question of jurisdiction of the Authority passing the impugned order is raised, the remedy of appeal is not as adequate or efficacious as the writ jurisdiction of the High Court and consequently in such cases a petition under Article 199 would be competent. Cases referred to : S.A. Haroon and others v. Collector of Customs, Karachi (PLD 1959 S.C.Pak. 177); Lt. Col. Nawabzada Muhammad Amir Khan v. Controller of Estate Duty (PLD 1961 SC 119) = (1961) 3 TAX 165 (SC); Premier Cloth Mills Ltd., Lyallpur v. The Sales Tax Officer (1972 SCMR 257); Salahuddin and others v. Frontier Sugar Mills (PLD 1975 SC 244); The Burmah Oil Co. (Pakistan Trading) Ltd., Chittagong v. The Trustee of the Port of Chittagong (PLD 1962 SC 113); Pakistan and another v. Qazi Ziauddin (PLD 1962 SC 440); Nagina Silk Mills, Lyallpur v. The Income Tax Officer and another (PLD 1963 SC 322) = (1963) 7 TAX 442 (S.C.); Abdul Ghani and another v. Subedar Shoedar Khan Co. and others (PLD 1968 SC 131); Usmania Glass Sheet Factory Ltd., Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 PLD 205) = (1970) 22 TAX 229 (S. C.); The Murree Brewery Co. Ltd. v. Pakistan etc. (PLD 1972 SC 279); Batala Engineering Co. Ltd.‟s case (1974) 29 TAX 190 (S.C); Raja Habib Ahmed Khan v. Income Tax Officer (1974) 29 TAX 209 (S.C); Nizamuddin Ahmad V. Commissioner of Sales Tax and 3 others (1975) 31 TAX 71 (S.C) and The International Body Builders v. Commissioner of Income Tax, Lahore and another (1971 PTD 513) = (1972) 25 TAX 133.
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Sheikh Akhtar Ali v. Federation of Pakistan and 4 others – [1980] 42 TAX 47 (H.C.Lah.) 402.
In the presence of assessee‟s objection to exercise of jurisdiction on ground of bias assessment was made without taking decision on the specific objection held that even existence of alternate remedy would not operate to debar the assessee from invoking extraordinary jurisdiction of High Court.
It is contended that the petitioner in this case had an adequate alternate remedy available to him by way of reference under the provisions of section 66 of the Income Tax Act, 1922 and for. that reason it was not open to the petitioner to have invoked the extraordinary jurisdiction of this Court. After giving the matter our anxious consideration we are of the view that the alternate remedy in this case was not adequate and equally efficacious and even the existence of an alternate remedy would not operate to debar a petitioner from invoking the extraordinary jurisdiction of this Court. Cases referred to : Nagina Silk Mills v. Income Tax Officer (PLD 1963 S.C. 322) = (1963) 7 TAX 442 (S.C.); Premier Cloth Mills Ltd. v. Sales Tax Officer (1972 SCMR 237) = (l974) 29 TAX 199 (S.C.); Murree Brewery Co. Ltd. v. Pakistan (PLD 1972 S.C. 279) and Salahuddin v. Frontier Sugar Mill and Distillery Ltd. (PLD 1975 S.C. 244).
Eruch Maneckji and others v. Income Tax Officer, Central Circle III, Karaciu – [1980] 41 TAX 25 (H.C.Kar.) = 1979 PTD 461 403.
High Court is empowered to grant relief to aggrived party in writ jurisdiction where order passed by a fiscal authority within jurisdiction but partial, unjust and oppressive
Mr. Mansoor Ahmad Khan, the learned counsel for the respondent Income Tax Officer had a limited contention to raise and that was that the order made was within jurisdiction and this Court will not interfere merely because the order made cannot be justified for reasons given therein. It is, however, well settled that where a statutory functionary and more so, a fiscal authority, acts in a partial, unjust or the oppressive manner the High Court in exercise of writ jurisdiction has the power to grant the relief to the aggrieved party. (See PLD 1972 SC 279), In PLD 1971 SC 205, it was held that where a dispute arises between the parties in respect of a fiscal right based upon a statutory instrument the same can be easily determined in writ jurisdiction. Cases referred to : Usmania Glass Sheet Factory Ltd., Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 SC 205) = (1970) 12 Taxaiion 229 (S.C.) and Murrey Brewery Co. Ltd. v. Pakistan (PLD 1972, SC 279).
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Shahid Hameed, Gulberg, Lahore v. Income Tax Officer, Film Circle, Lahore and another [1976] 34 TAX 31 (H.C.Lah.) 404.
High Court competent to interfere in its constitutional jurisdiction where fact for determination was whether receipts supported by payment certificates produced by assessee were genuine and correct and claim was rejected without application of mind to this aspect
The learned counsel for the respondent finally submitted that in any case the orders passed by the authorities below cannot be said to be without lawful authority and of no legal effect in view of the rule laid down by their Lordships of the Supreme Court in case of Muhammad Hussain Munir and others v. Sikandar and others (PLD 1974 S.C. 139), the relevant portion of which reads as under: “It is well-settled that where a Court or tribunal has jurisdiction and it determines that question, it cannot be said that it acted illegally or with material irregularity merely because it came to an erroneous decision on a question of fact or even of law.” The contention of the learned counsel that the High Court cannot interfere in its constitutional jurisdiction in a case of this nature is not correct. In view of what has been discussed above, I have no option but to declare the impugned orders to be without lawful authority and of no legal effect. The Income Tax Officer is directed to reconsider the return filed by the petitioner and complete the same in accordance with law. Cases referred to : Muhammad Hussain Munir and others v. Sikandar and others (PLD 1974 SC 139); Abdul Jabbar and others v. Abdul Waheed Khan and others (PLD 1974 SC 331); Usmania Glass Sheet Factory Ltd. v. Sales Tax Officer (PLD 1971 SC 205); [1970] 22 TAX 229; Zafarullah Khan (PLD 1964 SC 865); Province of-East Pakistan v. Abdus Sobhani Sowdagar (PLD 1964 SC 1) and Islamic Republic of Pakistan v. Abdul Wali Khan (1976 PLD SC 57).
First National City Bank, Karachi v. Income Tax Officer, Karachi and another – [1976] 34 TAX 1 (H.C.Kar.) = PLD 1976 Kar. 552 405.
If impugned action is patently without jurisdiction, writ jurisdiction of the High Court can be invoked even if alternate remedy is available.
Mr. S.A. Nusrat, Advocate for the respondents submitted that the petition is not maintainable as the petitioner had not availed of the
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other remedies provided under the Income Tax Recovery Rules, 1969 which according to him, afforded adequate remedy. No doubt upon receiving the recovery notice from the Tax Recovery Officer dated 9.5.1975, the petitioner could have objected to the attachment of the money under rule 9(1) of the said Rules, which requires the Tax Recovery Officer to proceed to investigate the objection. The order of the Tax Recovery Officer was also appealable under 74 to the Inspecting Assistant Commissioner of Income Tax, as is also provided in section 30(A) of the Income Tax Act A further revision and review is also provided. But where the impugned action is patently without jurisdiction, relief in Constitutional petition cannot be refused on the ground that an alternate remedy is available. Cases referred to: Nagina Silk Mill, Lyallpur v. Income Tax Officer and others (PLD 1963 S.C. 322); (1963) 7 TAX 442 (S.C.); Premier Cloth Mills Ltd. v. Sales Tax Officer (1972) SCMR 257; (1974) 29 TAX 199 (S.C.) and Murree Brewery Cold v. Pakistan (PLD 1972 S.C. 279).
Sind Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and 3 others – [1975] 31 TAX 114 (H.C.Kar.) 406.
If assessment is suffering from lack of jurisdiction, writ jurisdiction of the High Court can be invoked, without availing of remedies available under the law.
Mr. S.A. Nusrat, the learned counsel for the Income Tax Department contended that the petitioners should in the first instance, have exhausted the remedies available to them by way of appeal and reference under the Income Tax Act, 1922. Mr. S.A. Nusrat stated that, in fact some appeals filed by the petitioners are still pending for adjudication. But, in our opinion, the fact of the Income Tax Department in assessing, or in proposing to assess, the petitioners to income tax is without jurisdiction altogether, and it is, therefore, not incumbent upon the petitioners to avail themselves of the remedies provided to them under the Income Tax Act or even to wait for adjudication of their appeals or references, if any. Cases referred to : Muhammad TufaiI v. Abdul Ghafoor and others PLD 1958 S.C.Pak 20; Lt..Col. Nawabzada Muhammad Amir Khan v. Controller of Ectate Duty and others (PLD 1961 S.C. 119) = [1961] 3 TAX 165 (S.C.) and Nagina Silk Mill, Lyallpur v. The Income Tax Officer, A-Ward, Lyallpur and another PLD 1963 S.C. 322 = [1963] 7 TAX 409 (S.C.Pak).
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Gulistan Textile Mills Ltd. v. CBR – [1994] 70 TAX 272 (H.C.Kar.) 407.
Writ is maintainable where action is malafide or without jurisdiction or vires of law is challenged
Writ challenging action alleged to be mala fide or without jurisdiction or vires of legislation calls into question is maintainable though appeal is pending the Income Tax Appellate Tribunal. Barnala Commission Shop, Chak-Jhumra v. Income Tax Officer, B. Ward, Lyallpur – [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311 408.
Writ admitted maintainable.
during
the
pendency
of
appeals
held
Failure of Income Tax Officer to comply with provision of condition precedent to issuing notice to assessee under section 34(1), Income Tax Act (XI of 1922). Objection was not raised to any part of proceedings on any ground at any stage before income tax Officer. Petition, otherwise deserving dismissal in limine, admitted to hearing since point of objection arose also in several other petitions. Income tax assessment proceedings under section 34, Income Tax Act (XI of 1922), completed beyond time. Alternative remedy by appeal under Income Tax Act (XI of 1922) availed but, without waiting for result, assessee preferring petition invoked writ-jurisdiction of High Court. Petition otherwise deserving dismissal in limine admitted to hearing, since point of objection arose also in several other petitions. Tapal Energy Ltd. v. Federation of Pakistan and others –1999 PTD 4037 409.
Writ maintainable in case where forums provided under the relevant statute may not be just and proper
We are of the view that the aforesaid Constitutional petitions are maintainable notwithstanding the fact that the adequate and alternate remedy by way of first and second appeal.........the pronouncement made in the case of Ahram Builders Ltd. v. Income Tax Appellate Tribunal (1993 SCMR 29) to the following effect would be attracted: The tendency to bypass the remedy provided under the relevant statute and to press into service the Constitution jurisdiction of the High Court has developed. However, in certain cases involving of constitutional jurisdiction of the High Court instead of availing remedy provided for under the statute may be justified, for example when the
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impugned order/action is palpably without jurisdiction and/a mala fide. To force an aggrieved person in such a case to approach the forum provided under the relevant statute may not be just and proper.” Republic Motors Ltd. v. Income Tax Officer & Others – [1990] 62 TAX 8 (H.C.Kar.) = 1990 PTD 889 410.
Writ is maintainable where notice is without lawful jurisdiction
“......where the action of any authority is challenged on the ground of lack of jurisdiction, the aggrieved party is entitled to invoke constitutional jurisdiction without availing or exhausting the alternate remedy.......As notice under section 65 was without jurisdiction all subsequent orders passed by the same authorities or other authorities the whole series of such orders will be void. How an appellate order which confirms such an order can become valid.” _______________
WRIT HELD NOT MAINTAINABLE
Amin Textile Mills (Pvt.) Ltd. v. Commissioner of Income Tax and 2 others – PTCL 2000 CL. 316 (S.C.Pak) 411.
Writ petition is not maintainable in the presence of adequate alternate remedy under the statute.
The High Court was right to observe that the petitioner should, in the first instance, approach the hierarchy of the forums provided for under the Ordinance instead of filing a Constitutional petition. Apart from the bald assertion that the impugned order is void ab initio there is nothing on record to substantiate the above plea. In the case of Al Ahram Builders (Pvt.) Ltd. v. Income Tax Appellate Tribunal (1993 SCMR 29), this Court discouraged the tendency to bypass the remedy provided under the relevant statute to press into service Constitutional jurisdiction of the High Court. Adamjee Insurance Co. Ltd. and others v. Pakistan through Secretary Ministry of Finance – 1993 SCC 1080 = [1993] 68 TAX 176 (S.C.Pak.) 412.
After availing normal remedy switching over to constitutional petition is not maintainable in the absence of justifiable reason.
Once the appellant had opted to avail of the hierarchy of forums provided for under the Ordinance upto the stage of filing of appeal before the Tribunal, it would have been proper on his part to have invoked section 136 of the Ordinance for making a reference to the
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High Court instead of filing of constitutional petition. Once a party opts to invoke the remedies provided for under the relevant statute, he cannot, at his sweet will, switch over to constitutional jurisdiction of the High Court in the mid of the proceedings in the absence of any compelling and justifiable reason. Hafiz Muhammad Arif Dar v. Income Tax Officer – 1988 SCC 710 = [1989] 60 TAX 52 (S.C.Pak.) 413.
Where adequate alternate remedy is available writ under Article 199 is not maintainable.
One of the conditions for grant of relief in writ jurisdiction of the High Court is that the petitioner before it should not have any alternate adequate remedy. Since the petitioner has availed the right of appeal, the High Court correctly held that no relief could be granted under Article 199 of the Constitution. Nagina Dal Factory through Allah Ditta, Partner v. Income Tax Officer, and another – 1968 SCC 316 = [1968] 18 TAX 1 (S.C.Pak.) 414.
If adequate remedy is not exhausted, writ jurisdiction cannot be invoked.
The High Court has declined to give relief on the ground that the petitioner firm has invoked its extraordinary jurisdiction under Article 98 of the Constitution without first exhausting its statutory remedies as provided by the Act. We can see no fault in the order of High Court. When a statute under which action is taken itself provides remedies, recourse must be had to those remedies first. Direct access to the High Court for relieve in writ jurisdiction thus bypassing the special forums, which are created by the special law itself, is not permissible. Article 98, in terms, precludes action under it where another adequate relief is available. In the present case it is not disclosed that the impugned action suffered from lack of jurisdiction for invocation of writ jurisdiction by the High Court directly without first availing of the other remedies as provided by the special law. Wealth Tax Officer & Other v. Shaukat Afzal & 4 Others – [1993] 68 TAX 145 (S.C.Pak) 415.
Circumstance where writ is not maintainable.
Before parting with the judgment we may observe that in cases where any party resorts to a statutory remedy against an order he cannot abandon or bypass it without any valid and reasonable cause and file constitutional petition challenging the same order. Such practice, in
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cases where statute provides alternate and efficacious remedy up to High Court, cannot be approved or encouraged. Abdul Rehman & Another v. Income Tax Officer Mirpur & another – [1993] 68 TAX 132 (S.C.AJ&K)
It is, therefore, difficult to agree in the light of prevalent constitutional provisions that if an interpretation placed by an executive authority is palpably wrong and leads to miscarriage of justice and High Court can directly entertain a writ petition. The High Court only directly entertains a writ petition if it finds that alternate remedy is not adequate. In our view existence of another adequate remedy is a rule of law which ousts the jurisdiction of the High Court and we hold accordingly. H.M. Abdullah v. Income Tax Officer, Circle V Karachi – 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak)
Income Tax Ordinance is a complete code in itself which creates rights in favour of an assessee and in certain circumstances in favour of the Revenue as well, and also provides remedy for redress of the grievances of the aggrieved party. In every tax case, Constitutional Jurisdiction as an alternate remedy in terms of Article 199 of the Constitution cannot be availed. Shagufta Begum v. Income Tax Officer, Circle-II, Zone-B, Lahore – 1989 SCC 715 = [1989] 60 TAX 83 (S.C.Pak)
In all such cases where a Tribunal lacks jurisdiction and this aspect is discoverable on the record, it is permissible for an aggrieved person to go directly to the High Court against the issuance of a notice without approaching the authority concerned in this behalf in the first instance. The oratical speaking it might be correct; mainly, because wastage of time spent before the departmental authorities could be avoided by expeditious disposal of the writ petition in the High Court and if the matter is brought higher up in the Supreme Court it would still be a speedier remedy. We do not agree with this submission. In practice, it takes longer time than the normal departmental remedies. It is accordingly in the interest of litigants themselves first to choose the speedier remedy with departmental authorities and thereafter if need be, invoke the extraordinary jurisdiction of the High Court.
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Raja Habib Ahmad Khan v. Income Tax Officer – 1972 SCC 400 = [1974] 29 TAX 208 (S.C.Pak.)
The assessee preferred appeals against the assessment orders, as also filed a petition under Article 98 of the Constitution of 1962. Supreme Court while deciding the petition for leave to appeal held that: “That the writ petition was misconceived and not maintainable. The petitioner should have been left to pursue his remedy by the appeal which he had already filed. He had elected first to follow that remedy. He should not, therefore, have been allowed to simultaneous pursue an alternate remedy under Article 98 of the Constitution of 1962.” Steel Brothers and Company Ltd., London v. Commissioner of Income Tax, Dacca – 1968 SCC 313 = [1969] 19 TAX 97 (S.C.Pak.)
We are not convinced that the matter in dispute here will not be adequately determined in the reference pending in the High Court. The principle of law, once settled, would apply to all the assessment years and it is conceded by Mr. Mohammad Fazlur Rehman that in respect of the years mentioned in the reference, the same question of law is being agitated as would apply to the other years. The Income Tax Appellate Tribunal has, apparently given a decision in favour of the petitioner-Company in respect of the apportionment of the Managing Agency income, accruing to the petitioner-Company and on some other points. That decision is being challenged in the reference, on behalf of the department, in the High Court. On some other points going against the petitioners in proceedings before the Tribunal, the petitioner has been successful in obtaining a reference to the High Court. It would be circumventing the provisions of the Income Tax Act if parallel proceedings are started, under Article 98 of the Constitution, to deal with the same questions. We see no ground for grant of special leave to appeal in the circumstances of this case and dismiss the petition. Data Distribution Services v. Deputy Commissioner of Income Tax and another – [2000] 82 TAX 156 (H.C.Lah.)
In case aforesaid paragraphs of parawise comments and writ petition are put in juxta position, then it brings the case of petitioners in the
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area of disputed question of facts. It is settled proposition of law that this Court has no jurisdiction to resolve the disputed question of facts in Constitutional jurisdiction as the principal laid down by the Hon‟ble Supreme Court in Muhammad Younas Khan‟s case (1993 SCMR 618). The petitioner‟s counsel appeared in Pak-Arab Fertilizer (Pvt.) Ltd. v. Deputy Commissioner Income Tax (2000 PTD 263) and cited almost all the case law which was considered by this Court and laid down principle that writ petition is not maintainable against show-cause notice and also observed that party cannot be allowed to by-pass jurisdiction vested by law in special Tribunal. As mentioned above I have already dismissed the writ petitions qua the similar controversy on the question of law in Pak-Arab Fertilizer (Pvt.) Ltd.‟s case (supra). It is settled proposition of law that previous decision should have been accepted and binding on me as per principle laid down by the Hon‟ble Supreme Court in Muhammad Muzafar Khan v. Muhammad Yousaf Khan (PLD 1959 SC (Pakistan) (9). Guarantee Engineers (Pvt.) Ltd. v. Federation of Islamic Republic of Pakistan through Secretary, Ministry of Finance, Islamabad and another – [2000] 82 TAX 131 (H.C.Lah.)
The contents of the writ petition as well as contentions of the learned counsel of the petitioner do not reveal that the petitioner has challenged vires of the provisions of the Finance Act, therefore, responsent No. 2 is well within his right to deduct the income tax from the petitioner to the tune of 5 per cent on the basis of provisions of Finance Act, 1995-96. It is settled proposition of law that Court should save the laws instead of declaring them ultra vires. I am fortified by the following judgements:PLD 1995 SC 432 (Multi National‟s case) PLD 1983 SC 457 (Fauji Foundation‟s case) The learned counsel of the petitioner does not mention any provision of Finance Act in the contents of the writ petition which was framed by the competent authority which is in violation of Articles 2A, 3 and Article 25 of the Constitution. It is settled proposition that Constitution should be read as organic whole. The Articles of the Constitution do not reveal prohibition that the Pakistani Legislature/Parliament and Provincial Assembly do not possess the right to make retrospective legislation which every sovereign Legislature possesses. The only express limit imposed upon the power of retrospective legislation is that Legislatures cannot make retrospective penal laws meaning thereby any other law including
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Taxation Law may, therefore, be made with retrospective effect under the Constitution. In arriving to this conclusion I am fortified by the leading judgement of the subjection by the Hon‟ble Supreme Court in Salauddin‟s case PLD 1991 SC 546. The aforesaid proposition of law is also supported by the judgement of Hon‟ble Supreme Court in Haider Automobile Ltd. v. Pakistan (PLD 1969 SC 623). In the present case as mentioned above there is no retrospective effect of the Finance Act since the contention was raised by the learned counsel of the petitioner and the contention of the learned counsel of the Petitioner has no force on the basis of the aforesaid judgement of the Hon‟ble Supreme Court. In view of clause 54(2) of the Contract executed between the petitioner and respondent No. 2 principle of Reciprocal Promises is not attracted. Leather Connections (Pvt) Limited v. The Central Board of Revenue Govt. of Pakistan, Islamabad through its Chairman – [2000] 82 TAX 42 (H.C.Lah.)
In view of what has been discussed above, this writ petition is not maintainable. Any how the letter issued by respondent No.2 to respondent No. 3 on 16.5.1996 by fixing cost of construction at the rate of Rs.400/- per sq. ft is not borne out and is not in accordance with notification issued by C.B.R. dated 18.7.1993 under the aforesaid Section 50(7BB). The letter does not contain any comparative rates of the other departments; therefore, same is not sustainable in the eyes of law. The Notification of C.B.R. is misconstrued by the subordinate functionaries of C.B.R. In view of these circumstances, let a copy of this order judgment be sent to Chairman C.B.R. Islamabad, who is directed to issue general instructions to all the functionaries to issue letters to the Administrative officer concerned in accordance with law and Notification dated 18.7.1993, after comparison of the rates mentioned by different departments in the Notification or the Chairman C.B.R. must issue a notification and fix rate either yearly basis for each area or 2/3 years so that poor citizen should not be penalized. He is also directed to issue direction in the light of notification, preferably within one month, after receiving the order of this Court. Pak-Arab Fertilizers (Pvt.) Ltd. v. Deputy Commissioner of Income Tax and Others – [2000] 81 TAX 224 (H.C.Lah.) = 2000 PTD 263
The nature of controversy between the parties to the petition by itself falls in the area of factual controversy. In case the contents of writ
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petitions and parawise comments are put in juxta position which cannot be resolved in Constitutional jurisdiction of High Court. Even otherwise writ petition is not maintainable in view of the law laid down by the Hon‟ble Supreme Court in Bashir & Company‟s case [1968] 17 Tax 207 (S.C.Pak) = (1968 SCMR 997) in which it was held that a party cannot be allowed to by pass jurisdiction vested by the law in special tribunal, and writ petition cannot be invoked, special remedy is available under the Income Tax Ordinance. I am fortified by the judgements of Abdul Rehman Mayet‟s case (1988 SCMR 1712). Kohinoor Industries Ltd. v. Government of Pakistan through C.B.R., Islamabad – [2001] 83 TAX 17 (H.C.Lah.) 416.
Writ held not maintainable where disputed question of fact involved.
In the present case learned counsel for the respondents or any official of the respondents did not give any concession. It is admitted fact that tribunals below have given con-current finding of fact against the petitioner. Therefore, writ petition is not maintainable as per principle laid down by the Hon‟ble Supreme Court in the following judgments: 1974 SCMR 279 (Khuda Bakhsh‟s case) PLD 1981 S.C. 246 (Muhammad Sharif‟s case) PLD 1981 S.C. 522 (Abdul Rehman Bajwa‟s case). It is also settled principle of law that this court has no jurisdiction to substitute its own decision in place of the finding of the tribunal below as per principle laid down by the Division Bench of this court in Mussaduq‟s case PLD 1973 Lahore 600. The tribunal below have given finding of fact against the petitioner that bags were not warehoused at Karachi with the connivance of the petitioner in original condition whereas the case of the petitioner that petitioner is not responsible for that mis-chief. It is the Paul Corporation who committed this mischief. This fact brings the case in the area of disputed question of fact and this court has no jurisdiction to resolve the disputed question of fact in a Constitutional jurisdiction as per principle laid down by the Hon‟ble Supreme Court in Muhammad Younis‟s case 1993 SCMR 618. Petitioner has alternative remedy for resolution of the disputed question of fact by filing civil suit under section 9 of the CPC before the competent court. In this view of the matter writ petition is also not maintainable as per principle laid down by the Hon‟ble Supreme Court in Muhammad Ismail‟s case PLD 1996 S.C. 246. In view of that has been discussed above, this writ petition is dismissed with no order as to costs.
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Amir Nawaz Khan, etc. v. Government of Pakistan, through Secretary Finance, Islamabad, etc. – [2001] 83 TAX 397 (H.C.Lah.) 417.
In presence of arbitration clause in the agreement executed between the parties, the writ petition is not maintainable.
It is admitted fact that petitioner executed agreement with the respondent No. 5 of his own free will which contains the arbitration clause. In presence of Arbitration Clause in the agreement executed between the parties, the writ petition is not maintainable. The writ petition is also not maintainable on the well known principle of approbate and reprobate. It is also settled proposition of law that the contract cannot be enforced through Constitutional jurisdiction as the petitioner has alternative remedies either to file a civil suit or invoke arbitration clause. It is also settled proposition of law that leave granting order by the Honorable Supreme Court is not judgment. Cases referred to: Muhammad Ansar, etc. v. Administrator Town Committee, Kabirwala, District Khanewal & 4 others [2000] 81 TAX 60 (H.C.Lah.), Bismillah & Co. v. Secretary, Government of the Punjab, etc. [1997] 75 TAX 109 (H.C.Lah.), Adam Khan Mirza v. Muhammad Sultan PLJ 1975 SC 21, Shameer v. Board of Revenue 1981 SCMR 604.
Muhammad Ansar etc. v. Administrator Town Committee Kabirwala District Khanewal and 4 others – [2000] 81 TAX 60 (H.C.Lah.) 418.
Writ is not maintainable where parties themselves agreed for arbitration in bilateral contracts.
It is settled proposition of law that specific arbitration clause has been provided in the agreement as mentioned above and if the petitioners have got any grievance against the contents of the said agreements they can avail their remedies before the appropriate forum as it needs a detail inquiry. Since the petitioners have voluntarily executed an agreement with arbitration clause with the respondents then the petitioners are stopped to challenge the same in writ jurisdiction on the well known principle of approbate and reprobate as the principle laid down by the Hon‟ble Supreme Court in Haji Ghulam Rasool‟s case PLD 1971 S.C. 376. It is settled principle of law that contractual obligations cannot be enforced through a writ petition as the petitioners have alternative remedies to invoke the jurisdiction of a
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Civil Court by means of regular suit. I am fortified by the following judgements of Hon‟ble Supreme court of Pakistan:(i) (ii) (iii)
PTD 1981 S.C. 604 (Shameer‟s case); PTD 1986 Quetta 181 (Pakistan Mineral Development Corp‟s case); PTD 1958 S.C. 387 and PTD 1962 SC 108.”
Islamuddin and 3 others v. The Income Tax Officer and 4 others – 2000 PTD 306 419.
Writ not maintainable in case where no right to appeal or reference is provided in law itself.
It is also an established principle that where a statute does not provide the remedy by way of appeal or Reference against the order then the same cannot be challenged by way of a Constitutional petition as it would amount to rendering the provision of statute which does not provide an appeal for a reference or any other remedy against a particular order. In support of this proposition reliance is placed on the cases of Syed Saghir Ahmed Naqvi v. Province of Sindh and another reported in 1996 SCMR 1165 and Abdul Wahab Khan v. Government of Punjab and others, reported in PLD 1989 SC 508. Crescent Sugar Mill v. Income Tax Officer – [1999] 80 TAX 273 (H.C. Lah.) = NLR 1999 TAX 170 420.
Writ petition not maintainable when remedy of seeking reference under section 136 of the unamended provisions of Income Tax Ordinance is available to the assessee at the relevant time.
This writ petition is disposed of with the observation that present writ petition is not maintainable as the remedy of seeking reference under section 136 of the unamended provisions of Income Tax Ordinance were available at the relevant time. The petitioner having once approached the authority in the hierarchy of jurisdiction is required to exhaust his remedy before invoking the Constitutional jurisdiction. The petitioner may, if so advised, apply for reference to the Appellate Tribunal alongwith application for condonation of delay, on the plea of proceedings in due vigilance in the Constitutional jurisdiction, which application if filed will be decided by the Tribunal, in accordance with law and on its own merits. Keeping In view the circumstances noted supra.
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Nawab Sons, Lahore v. The Assistant Commissioner Tax etc. – 1999 PCTLR 387 421.
Where the petitioner conceals material facts, writ is not maintainable.
The contents of the writ petition revealed that the petitioner has concealed material facts from this Hon‟ble Court qua the appeal filed by the petitioner before the appellate authority against assessment order, therefore, petitioner is not entitled to get any discretionary relief under Article 199 of the Constitution. I am not inclined to exercise discretion in favour of petitioner who concealed the material facts from this Hon‟ble Supreme Court. I am fortified by the following judgments:C.M. Malik‟s case (1990 C.L.C. 1783); Ronaq Ali‟s case (PTD 1973 S.C. 326); Saif Ullah‟s case (PTD 1989 S.C. 166); Rana Arshad‟s case (1998 SCMR 1462); For what has been discussed above, this writ petition is dismissed in limine, as the petitioner did not approach this Court with clean hands as well as the petitioner has availed alternate remedy which is pending adjudication. Saleem Automotive Industries (Pvt.) Ltd. v. Central Board of Revenue etc. – [1999] 80 TAX 9 (H.C.Lah.) 422.
Writ petition is not maintainable where appeal is pending before any authority.
The petitioner has already travelled through some of the forums provided under the law. His appeal before the Customs Tribunal is still pending in which injunction order restraining the recovery of disputed amount has also been made in his favour. In such situation, the entertainment of the petition or to make the kind of declaration prayed for by the appellant will not only frustrate the whole scheme of the law providing for various stages and forums of appeal but also will amount to pre-suppose an order by a judicial authority namely the Customs Excise and Sales Tax Appellate Tribunal. The view of the Supreme Court as well as of this Court on the issue is quite clear. Two cases decided by the Supreme Court are directly relevant on the issue. These are reported as re: Wealth Tax officer and another v. Shaukat Afzal and 4 others (1993) 68 Tax 145 (S.C.Pak.) and re: H.M. Abdullah v. Income Tax Officer, Circle-V. Karachi and 2 other (1993) 68 Tax 29 (S.C.Pak.). In the first reported judgement the assessee respondents were before the Tribunal for the redressal of
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their grievances. During the pendency of the appeal, they approached the High Court in its Constitutional jurisdiction which was allowed by a division bench of Sindh High Court whereby the order passed by the Wealth Tax Officer treating the disputed properties as “assets” of the assessee was declared as without lawful authority and of no legal effect. Like-wise in a recent judgment reported as re: Sameer Electronics v. A.C. of Income Tax, Lahore (1996) 73 Tax 106 (H.C.Lah.) this Court refused to entertain a Constitutional petition under Article 199 of the constitution and rejected the contentions similar to those now being made by the learned counsel before me. Rehmania Hospital v. Government of Pakistan etc. – [1997] 76 TAX 138 (H.C.Pesh) = 1997 PTD 1805 423.
In the presence of statutory remedy under the Income Tax Ordinance approach to the High Court through a writ petition is disapproved.
“...... it seems the preponderance and the recent trend in the judgments of the Superior Courts ..... is that in the presence of statutory remedy under the Income Tax Ordinance approach to the High Court through a writ petition is disapproved.” State Cement Corporation of Pakistan (Pvt.) Ltd. v. Commissioner of Income Tax –[1997] 76 TAX 110 (H.C.Lah.) = 1997 PTD 1104= 1998 PCTLR 520 (H.C.Lah.) 424.
In case of availing the remedy of appeal writ is not maintainable.
Before these petitions could be argued on merits, learned counsel for respondent has raised a preliminary objection that against the decisions of respondent dated 7.8.1994, the petitioner has already filed appeals which are pending before the Income Tax Appellate Tribunal where they have raised the same depute as to whether or not any Income Tax is payable on the cement development funds received by the petitioner company under Ordinance, II of 1979. This is not denied by the learned counsel for respondent who has, however, submitted that the petitioner had earlier filed W.P. No. 6584 of 1994 which was disposed of with the direction that the plea raised in the Constitutional petition may be repeated before the Commissioner of Income Tax before whom the proceedings are pending. Learned counsel for the petitioner has attempted to argue that notwithstanding filing of the appeal by the petitioner, these petitions are maintainable as it has been held by the Supreme court in various
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cases that it is not essential to file a departmental appeal when the matter relates to the interpretation of statutory instrument and the matter can be brought directly to this Court. There may not be any cavil with this proposition but here the position is different as the petitioner has itself invoked the jurisdiction of the Income Tax Appellate Tribunal by filing appeals and there is no reason also as to why the Appellate Tribunal should not be allowed to decide the questions which are arising in these petitions. In view of what has been stated above, these petitions are held to be not maintainable at this stage and dismissed, leaving the parties to bear their own costs. No doubt the petitioner had raised various pleas before the Commissioner of Income Tax who by his detailed order dated 7.8.1994 has rejected the same and against his order the petitioner has gone to the Income Tax Appellate Tribunal. As the petitioner has chosen its remedy by filing appeals before the Appellate Tribunal, these petitions are clearly not maintainable. It is also to be noted that if the decision of the Appellate Tribunal goes against the petitioner, it can come to this Court by filing an application under section 136 of the Income Tax Ordinance, 1979 which is to be heard by a Division Bench of this Court. The petitioner cannot be allowed to bypass the normal procedure. Sante International (Pvt.) Ltd. and Another v. Commissioner of Income Tax, Zone-B, Lahore and Another – [1997] 75 TAX 259 (H.C.Lah.) = 1997 PTD 819 425.
Where alternate statutory remedies available, writ petition is not maintainable.
Since the petitioner had alternate statutory remedies in the hierarchy of the income Tax Department as already mentioned above, this petition is not maintainable Accordingly, the petition being premature Is dismissed in limine. However, all available objections, Including the one relating to the Jurisdiction of the Income Tax Officer, may be taken before the appropriate forum, If so advised. Haji Gula Khan v. Special Officer, Income Tax and Others – [1997] 75 TAX 117 (H.C.Pesh.) = 1997 PTD 7 426.
Assessing officer did not give appeal effect being challenged by the department; assessee cannot be allowed to bypass the available adequate remedy.
It may be stated at the very outset that the petitioner can file an appeal before respondent No. 3 against the impugned order recorded by respondent No. 1. As an adequate remedy has been made available to the petitioner under the relevant law, therefore, he cannot be
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allowed to by pass the same and approach this Court straightaway under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973. We are, therefore, of the view that this writ petition is misconceived. Agha Ice Factory, Sheikhupura v. Regional Commissioner Of Income Tax, Central Region, Lahore and 4 Others – [1996] 74 TAX 215 (H.C.Lah.) 427.
Selection of return for audit challenged through constitutional jurisdiction held not maintainable.
The manner, answers to questions raised in the petition; have been sought by the petitioner is unwarranted and misconceived; as the income Tax Ordinance itself is a complete Code and procedure for referring a question of law to the High Court has been provided under section 136(1) of the income Tax Ordinance. The writ petition even otherwise being devoid of merits is not maintainable. Zam Zam Traders v. Income Tax Officer – [1996] 74 TAX 21 (H.C.Lah.) 428.
Writ is not maintainable where facts are controversial.
I am of the opinion that it is a controverted question of fact and such a question cannot be resolved In constitutional jurisdiction of the High Court; without prejudging the issue; the petitioner, who has already submitted the returns in response to the notice under section 65. and proceedings have already been initiated by the respondent by issuing the mandatory notice under section 62 of the Ordinance; ft is undesirable for the petitioner to switch over to the constitutional jurisdiction of the High Court at his sweet will in the mid of the proceedings in the absence of any compelling and justifiable reasons. Sameer Electronics v. Assistant Commissioner of Income Tax, Circle-B, Zone ‘A’ Lahore – [1996] 73 TAX 106 (H.C.Lah.) 429.
Legality and correctness of a factual controversy could not be resolved in constitutional jurisdiction.
Section 65(2) of the Income Tax Ordinance provides that no proceedings under sub-section (1) shall be initiated unless definite information has come into the possession of the Income Tax Officer and he has obtained the previous approval of Assistant Commissioner of Income Tax in writing to do so. The respondent No. 1 positively is in possession of information as indicated in his letter dated 11.3.1995. The respondent No. 1 in the said letter alleged that the petitioner is carrying on the business of releasing Indian films after obtaining expensive master prints from Karachi and hundreds of films are
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available in the Video Market bearing the name of petitioners concern. The petitioner vide his letter dated 20.3.1995 in response to the said notices denied the fact of “Releasing” Hindi films being without any evidence and proof and added that neither the import of Indian films is allowed to Pakistan nor violated any provision of law in that regard; the nature of controversy, particularly the legality and correctness of “releasing” Indian films is a factual controversy; such a question cannot be resolved in Constitutional jurisdiction of High Court and refrains (sic) from substituting Its own finding of fact as observed by their Lordships in case Muhammad Younus Khan and 12 others v. Government of N.W.F.P. through Secretary Forest and Agriculture, Peshawar and others (1993 SCMR 618) as it is a consistent view of Supreme Court that in cases where factual controversies are involved, constitutional petition is not the proper remedy. Cases referred to: Julian Hoshang Dlnshaw Trust and others v. Income Tax Officer (1992 SCMR 250); Muhammad lsmail v. Abdul Rasheed and 2 others (1983 SCMR 168) and Muhammad Younas Khan and 12 others v. Government of N.W.F.P. through Secretary Forest and Agriculture, Peshawar and others (1993 SCMR 618).
Saif Nadeem Electro Ltd. v. Collector of Customs and Central Excise/Commissioner of Sales Tax, Peshawar and 3 Others – [1995] 72 TAX 274 (H.C.Pesh.) 430.
High Court cannot go in the domain of factual controversy. (a)
In the first instance the questions of fact have been raised and the High Court cannot go in the domain of such controversy.
(b)
In the next place, the petitioner instead of seeking adequate and alternate remedy from the department concerned, including the C.B.R. has straight away came to this Court, for the redress of his grievance, it may be mentioned here that the petition in hand cannot be entertained unless all the remedies available and open to the petitioner are not exhausted, in the first instance.
Muhammad Jameel v. Income Tax Officer – [1995] 72 TAX 1 (H.C.Lah.) 431.
Writ petition not maintainable where adequate and alternate remedy available.
The petitioners were provided proper opportunity to represent their facts and were properly heard by the Assessing Officer; rather the conduct of petitioners remained objectionable and did not appear
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before him with clean hands. As already observed the Income Tax Ordinance is a complete code in Itself. In view of the above observations made by their Lordships, I am of the view keeping in view the conduct of petitioners; who have not come with clean hands before this Court even otherwise have remedy by way of appeal. The instant petition is not entertainable and is dismissed in limine. Cases referred to: Julian Hoshang Dinshaw Trust and others v. Income Tax Officer and anothers (1992) 65 TAX 102 (S.C.Pak) = (1992 SCMR 250) and Hafiz Muhammad Arif Dar v. Income Tax Officer (1989) 60 TAX 52 (S.C.Pak) = (PLD 1989 SC 109).
Allied Cans v. Income Tax Officer, Circle-8, Multan and others – [1995] 71 TAX 216 (H.C.Lah.) 432.
Factual inquiry involving controversial facts cannot be undertaken by the High Court in exercise of its constitutional jurisdiction.
It is a field, experts of which are the Income Tax people, and it is not that pure and simple legal proposition, which calls for a determination by this Court. Estimation of income etc. evidently involves a factual inquiry, which this Court in exercise of its writ jurisdiction cannot possibly undertake. The petitioner concern, if genuinely aggrieved, can avail of the remedies available under the Income Tax Ordinance, 1979, and it would not be correct to say that a writ petition is the only remedy, which could be invoked for redressal of the grievances in question. There is no worth-while explanation forthcoming to the inordinate delay of two years and two months, with which this Court was approached in the matter. This ground alone will disentile the petitioner to the discretionary relief, for the move made is illintentioned, as also misconceived and the object is to derive an undue advantage, by making the Income Tax Authorities helpless in the matter. I am not at all convinced about the competence of the writ petition, as also bona fides of the petitioner, and proceed to dismiss the petition. Azmat Farooq v. Regional Commissioner of Income Tax Central Region Lahore and another – [1993] 68 TAX 74 (H.C.Lah.) 433.
Writ cannot be entertained where adequate remedy is available.
Be that as it may, it stands admitted that no revision at all was filed by the petitioner before the Commissioner but only a representation was made to the Regional Commissioner of Income Tax who forwarded it to the Commissioner of Income Tax. That being so, the Regional
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Commissioner, to whom the representation was addressed being an officer higher thin the Commissioner of Income Tax, was certainly entitled to interfere. In the end, learned counsel for the petitioner has tried to argue that even on the basis of the material which has been annexed by the respondents alongwith the report to this petition, it is evident that the assertion regarding the undervaluation of the properties is incorrect. If that be so, it is open to the petitioner to demonstrate this fact before the Income Tax Officer and to satisfy him that the properties in question were not undervalued. No interference is, however, called for in the exercise of this Courts Constitutional jurisdiction at this stage. Case applied: Commissioner of Income Tax Zone-D, Karachi v. Jennings Private School [1992] 66 TAX 156 (S.C.Pak).
Zafar Usman v. Income Tax Officer etc. – [1989] 59 TAX 86 (H.C.Kar.) 434.
If Income Tax Officer‟s action is jurisdictional, writ jurisdiction of the High Court cannot be invoked.
We are, therefore, of the view that we cannot at this stage hold that the impugned notice is without jurisdiction as to warrant the interference by this Court in exercise of constitutional jurisdiction and deprive jurisdiction of the hierarchy of the forums provided under the Ordinance. Cases referred to: Arafat Woollen Mills Ltd. v. The Income Tax Officer, Companies Circle C-1, Karachi (C.A. No. 5-K of 1986); Arafat Woollen Mills Ltd. v. The Income Tax Officer, Companies Circle E-1, Karachi [1986] 54 TAX 1 and Wali Traders v. Income Tax Officer, Circle XVIII, East Zone, Karachi [1988] 58 TAX 29.
Brilliant Farbics & Silk Factory, Karachi v. Income Tax Officer, West Zone, Karachi & others – [1987] 56 TAX 24 (H.C.Kar.) 435.
Issue being controversial involving inquiry into is not a fit case to be determined under supervisory constitutional jurisdiction of High Court.
His submission was that the person who had appeared before the Income Tax Officer was not authorised by him. On the other hand we find that Mr. Zakaria Loya had appeared before Income Tax Officer in the first instance and had taken time. Moreover, the receipt of notice issued by the Income Tax Officer on 24th January, 1983 to the petitioner is not denied and, therefore, it was incumbent upon the petitioner to keep track or the case and it could not take shelter under the plea that one Mr. Mansoor Ahmed who had appeared for him before the Income Tax Officer was not entitled to appear. No affidavit
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of Mr. Zakaria Loya has been filed before us to substantiate allegation that Mr. Mansoor was not an associate of Mr. Zakaria Loya. It is common knowledge that different associates of the lawyer firms or be Income Tax Consultants appear before the Courts or the relevant Authorities and they ate allowed to appear as such. The petitioner has not sought any damages from Zakaria Loya & Co. for not having represented the petitioner or for having sent a person who was not authorised to represent Zakaria Loya and Co. or the petitioner for that matter. Therefore, the submission that the petitioner was not property represented is unfounded. The appellate authority has stated that Mr. Mansoor was an associate of Zakaria Lays & Co. and the said finding coming from the concerned department, which has knowledge of such facts, is binding. The position that the petitioner was immune from scrutiny, as shown in this petition, has been taken up by the petitioner from the initial stage, by a letter of 10th, January, 1983/18th January, 1983, is not entirely correct. The Department in its comments has clearly stated that such a letter of the assessee was never received by them and we find that in the rejoinder affidavit filed by the petitioner there is no further contravention in respect of the receipt of the Mid alleged letter of protest allegedly sent by petitioner to the Department. Therefore, this becomes a controversial matter of fact and not fit matter of controversy in the supervisory constitutional jurisdiction. Moreover, in the assessment order passed by the Income Tax Officer and the appellate orders the findings are that petitioner has been guilty of concealment and suppression. These findings are findings of facts and they have not been shown to be completely wrong and, therefore, the petitioner is not entitled to seek the intervention of this Court which has supervisory jurisdiction and it should not exercise its discretion in favour of a wrong door. The learned counsel has also tried to show that certain findings of the Income Tax Officer were not justified but we are afraid that we are not the appellate authority in respect of these findings and, therefore, the same could have been agitated only before the higher income Tax Authorities. Petitioner had three opportunities in the Department but with no success. Arafat Wollen Mills Limited v. Income Tax Officer – [1986] 54 TAX 1 (H.C.Kar.) = 1986 PTD 316 436.
Assessee cannot avail remedy of constitutional petition before High Court being dissatisfied with the notices.
Assessee‟s factory was still in process of erection and installation and had not yet started commercial production. Income Tax Officer made
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assessment after due scrutiny and tax demand created which was paid by the assessee. Assessee filed appeal before Commissioner of Income Tax against the Income Tax Officer‟s order during pendency of appeal Income Tax Officer issued notices which were replied by the assessee. Assessee can not avail remedy of constitutional petition before High Court being dissatisfied with the notices. Commissioner was satisfied on the material placed before him that an action has to be taken against assessee. The question of satisfaction of the Commissioner could not be challenged in writ petition. Proposition that extraordinary jurisdiction of High Court cannot be sought on each and every case where alternate remedy available is not universal proposition of law. In case where an authority had taken action when it had no jurisdiction on subject-matter of dispute and where absence of jurisdiction was apparent on face of record, Constitutional remedy could be availed of. So also where alternate remedy was cumbersome and not effectual and would not give proper relief, in that case also High Court might entertain petition. But while dealing with matter on Constitutional side, basic principle before Court would be that case could be decided on basis of available material and it did not require a detailed enquiry and facts were admitted and only question of law and its interpretation required decision of Court. In cases where no such conditions exist and an alternate remedy is provided under statute then High Court would not entertain writ petition. Judicial Review: OVERRULED by the Supreme Court of Pakistan in 1988 SCC 672
Pakistan Industrial Development Corporation v. Pakistan – [1984] 49 TAX 76 (H.C.Kar.) 437.
High Court cannot examine the question of controversial facts in Constitutional jurisdiction.
The learned counsel for the petitioner attempted to argue that the „free reserves‟ of the petitioner were consisted of several sums of money received by the company through different sources which may also have included scale of some of the capital assets of petitioner and revaluation of some of the capital assets of the company on account of devaluation of Pakistan currency etc. which may not legitimately fall within the meaning of „income‟. No such case is set out by the petitioner in the petition and in the absence of any specific allegation in the petition in this regard we cannot examine the same. We may however, observe that several instructions issued by Central Board of Revenue, issued in this regard were referred by Mr. Khalid Anwar, which laid down the criteria for determining „free‟ and “unfree
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reserves” of the company. If the petitioner feels that its „free reserves‟ were not constituted of those items as arc declared by the Central Board of Revenue as „free reserves‟ he may agitate it before appropriate forum, if available to him under the law. B.P. Biscuit Factory Ltd., Karachi v. Wealth Tax Officer, IICircle, Karachi & another [1982] 45 TAX 17 (H.C.Kar.) = 1981 PTD 217 438.
Remedies available under the law should be exhausted before invoking the extraordinary jurisdiction of the High Court.
They clearly lay down that in such a situation an illegality in the exercise of jurisdiction by the assessing authority would confer jurisdictions on this Court in the Constitutional Petition rather than an assumption alone as has been done in the instant case. It would, therefore, be clear that the assessing authority would in the first instance exercise jurisdiction on the basis of the evidence and the documents before it as to whether the property in question is liable to assessment of taxes and to what extent and that the available remedies are exhausted under the ordinary law before the extraordinary jurisdiction of this court is invoked in the Constitutional petition. Cases referred to: Managing Director Pakistan Agricultural Storage Service Corporation Ltd., Lahore and another v. Nawab Din and two others (1981 CLC 284); Pakistan through Ministry of Defence v. Province of Punjab and others (PLD 1975 S.C. 37); Gulzar Cinema, etc. v. Government of Pakistan and 4 others (PLD 1978 500).
Meraj Sons, Contractors v. Income Tax Officer Contarctors Circle-Il, Lahore – [1982] 45 TAX 2 (H.C.Lah.) 439.
If question of jurisdiction of the assessing officer is not challenged, writ petition is not maintainable.
A preliminary objection has been raised by the learned Deputy Attorney-General that the Writ petition under Article 9 of the Provisional Constitution Order No. I of 1981 is not maintainable unless the petitioner exhausts adequate legal remedies of appeal and revision available under the Ordinance. I agree with the learned Deputy Attorny-General that where there is another adequate and efficacious remedy open to the petitioner, a petition under Article 9 of the Provisional Constitution Order, 1981 would be incompetent unless the legal remedies as well as the remedies provided in the Ordinance are exhausted. There is, however, an ample authority on the proposition that where the question of jurisdiction or the authority passing the impugned order is raised, the remedy of appeal is not
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adequate and efficacious as the writ jurisdiction of the High Court and consequently in such cases, a petition under Article 9 of the Provisional Constitution would be competent. Cases referred to: S.A.Haroon and others v. Collector of Customs, Karachi [PLD 1959 S.C.Pak. 1977]; Lt. Col. Nawabzada Muhammad Amir Khan v. Controller of Estate Duty (PLD 1961 S.C. 119) = (1961) TAX 165 (S.C.); Premier Cloth Mills Ltd., v. The Sales Tax Officer (1972 SCMR 257) = (1974) 29 TAX 199 (S.C.); Salah-ud-Din and others v. Frontier Sugar Mills (PLD 1975 S.C. 244); The Burmah Oil Co. (Pakistan Trading) Ltd., Chittagong v. The Trustee of the Port of Chittagong (PLD 1962 S.C. 113); Pakistan and another v. Qazi Ziauddin (PLD 1962 S.C. 440); Nagina Silk Mills, Lyallpur v. The Income Tax Officer and another (PLD 1963 S.C. 322) = (1963) 7 TAX 442 (S.C.); Abdul Ghani and another v. Subedar Shoedad Khan Company and other (PLD 1968 S.C. 131); Usmania Glass sheet Factory Ltd., Chittagong v. Sales Tax Officer, Chittagong (PLD 1971 S.C. 205) = (1970) 27 TAX 229 (S.C.); and the Muree Brewery Co. Ltd., v. Pakistan etc. (PLD 1972 S.C. 219).
Ghulam Rasool v. Income Tax Officer, Rahimyarkhan and another – [1975] 31 TAX 153 (H.C.Lah.) 440.
Where appeal was dismissed by Appellate authorities on ground of limitation and this order was in accordance with law, held writ petition against such order was not competent.
The Appellate Assistant Commissioner dismissed the appeals holding that the appeals were barred by time as the demand notice was served on 29.1.1971 and the appeals were filed on 9.3.1971. The Appellate Tribunal affirmed the decision and held that the delay in filing appeals before the Appellate Assistant Commissioner remained unexplained and the Appellate Assistant Commissioner rightly refused to interfere with the orders of assessment. On these facts the High Court: Held that the petitioners have not succeeded in bringing their petitions within the ambit of Article 199 of the Constitution. Each one of the orders passed by the authorities in the hierarchy of the Income Tax Department is perfectly within their jurisdiction and in accordance with law. The writ petitions fail and are dismissed. Cases referred to : Commissioner of Income Tax v. Mubarak Ahmad (PLD 1972 Lahore 787); Commissioner of Income Tax v. E.V. Miller (PLD 1959 SC (Pak) 219) = (1959) 1 TAX I (SC); Nagina Silk Mills v. Income Tax Officer (PLD 1963 SC 322) = (1963) 7 TAX 422 (S.C.); Premier Cloth Mills Ltd. v. Sales Tax Officer (1972) SCMR 257; Usmania Glass Sheet Factory v. Sales Tax Officer (PLD 1971 SC 205); Bennet & White, Calgary Ltd. v. Municipal District of Sugar City No. 5 (PLD 1951 PC 78); Provincial Government of Madras v. J S. Basappa (AIR 1964 SC 1873); Yousuf Ali v. Muhammad
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Aslam Zia (PLD 1958 SC Pak. 104) and Sisil Kumar Das Purkhayastha v. State of Assam and others (1957) S.T.C. 416.
Sh. Abdul Hakeem v. Central Board of Revenue, etc. – [1975] 31 TAX 105 (H.C.Lah.) 441.
Writ not maintainable in the presence of adequate and efficacious alternate remedy.
The application dated 19.12.1970 submitted by the Advocate of the petitioner, clearly shows that the petitioner agreed to be assessed on consolidated income for the “years agreed at” and according to the Authorities he has been assessed to tax strictly according to his agreement. If this be the correct position, then even if the impugned order is found to have been passed without lawful authority, the petitioner is nevertheless disentitled to any relief in the exercise of the equitable writ jurisdiction of the Court. Cases referred to: State v. Ziaur Rehman (PLD 1973 (S.C.) 49; Federation of Pakistan v. Saeed Ahmad Khan and others (P.L.J. 1974 S.C. 77); Hafeezuddin v. Mian Khadim Hussain (PLD 1965 Lahore 439); Ghulam Mohyuddin v. Chief Settlement Commissioner (PLD 1964 S.C. 829; Pannalal Binraj and others v. Union of India and others (AIR 1957 S.C. 397) and Rex v. Williams Phillips; Exparte [(1914) I.KB. 608].
Shamim Ali and others v. Govt. of Pakistan and another – [1973] 27 TAX 51 (H.C.Lah.) 442.
Writ is not maintainable where adequate alternate remedy exists
As adequate alternate remedies exists for correcting any assessment made to the detriment of a particular party or made in an unjust and oppressive manner, in a given case, the present writ petition is, therefore, premature. Taj Din Maula Bux, Lahore v. Sales Tax Officer D-Circle Lahore – [1972] 25 TAX 145 (H.C.Lah.)
That remedy provided under Article 98 is a discretionary remedy and when an aggrieved person has an adequate relief elsewhere, there is a bar for the High Court to entertain a petition. Colony Textile Mills Ltd. Lahore v. Income Tax Appellate Tribunal (Pak) & another [1972] 25 TAX 140 (H.C.Lah.)
The Income Tax Act provides a complete machinery for assessment of tax and for obtaining relief in respect of any improper or illegal order passed by the Income Tax authorities and an assessee cannot unless
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the order impugned, is without jurisdiction or in excess of jurisdiction, invoke the jurisdiction of the High Court under Article 98 of the Constitution when he had adequate remedy open to him under the Act itself. _______________
MISCELLANEOUS
Commissioner of Income Tax v. Siemen A.G. – 1991 SCC 773 = PLD 1991 SC 368 443.
Islamic jurisprudence and rules of law are equally applicable to fiscal laws.
So long as the existing statutes were not brought in conformity with the injunction of Islam [Article 227 of the Constitution of Pakistan, 1973] their interpretation, application and enforcement wherein discretionary judicial elements were involved, only that course will be adopted which was in accord with the Islamic philosophy, its common law and jurisprudence. It was noted that the courts were bound to apply Islamic rules of interpretation. Unless excluded otherwise, in preference to the contrary so-called accepted rules of interpretation under the other jurisprudential concepts and fiscal laws were no exceptions in that behalf. As a necessary conclusion drawn from the foregoing, it can be safely held in this case also that on the touchstone of Islamic Rules of Interpretation, which unless excluded otherwise, under the present Constitutional set-up the courts are bound to apply in preference to the contrary so-called accepted rules of interpretation under the other jurisprudential concepts (and the fiscal laws are no exception in this behalf), the income tax authorities cannot change the nature of the contract intended by the parties thereto, under the pretext that the rule of interpretation of a fiscal law in this behalf, is different.” Mian Aziz A. Sheikh v. Commissioner of Income Tax Investigation Lahore – 1989 SCC 718 = [1989] 60 TAX 106 (S.C.Pak) 444.
Islamic jurisprudence and rules of law are equally applicable to fiscal laws.
Neither legislature under the command contained in Article 227(1) of the Constitution has power to enact a law in any field including
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those relating to taxes which is repugnant to injunctions of the Islam nor any other functionary including the Income Tax Authorities have any such power to lay down any un-Islamic rule which has a force of law. 445.
The assessing officer cannot lay down in their judgment a rule which goes against Islamic Law.
Article 227(1) not only requires that all existing laws shall be brought in conformity with the Injunctions of Islam but it also commands as a mandate that “no law shall be enacted which is repugnant to such injunctions”. It is command to all law-making bodies and functionaries. It will be anomalous to assume that although in Article 227 there is a command to all the legislative bodies not to enact any law which is repugnant to Islamic Injunctions, nevertheless it permits the functionaries of the State at all levels to go on enacting rules like those of evidence which have the force of law and which are repugnant to the Injunctions of Islam. It is in this context that the earlier made remarks about the conduct of State functionaries in Pakistan get illustrated, i.e., none would ever assert that he has power or would lay down a rule having the force of law, which is repugnant to Injunctions of Islam. In the context of the present case, neither the legislature, under the command contained in Article 227(1), has the power to enact a law in any field including those relating to Taxes, which is repugnant to Injunctions of Islam; nor any other functionary including the Income Tax Authorities has any such power to lay down any unIslamic rule which has a force of law. It is true that with regard to the statutory enactments Article 227 in its Clause (2) commands that: effect shall be given to the aforediscussed negative command in Clause (1), “only in the manner provided in this part (Part IX)”. And thus it may be argued, it also applies to Statutory Rule. But, this prohibition in Clause (2) of Article 227 does not apply to decisions by functionaries of State where in the judicial, quasi-judicial or other spheres involving exercise of judgment, as distinguished from exercise of law-making or statutory rule-making authority, they take decisions. In other words whatever a decision is contained in any such judgment of any such functionary which lays down a rule of law or declares so as a rule of law the superior Courts, shall be within their competence in a properly instituted proceedings to strike it down both under the general mandate contained in Clause (1) of Article 227 as well as under Article 2A read with the Objectives Resolutions.
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This is in addition to the reasoning which prevailed in the case: Muhammad Bashir v. The State (PLD 1982 S.C. 139) which had approved the judgment of the Lahore High Court in the case of Haji Nizam Khan v. Additional District Judge, Lyallpur and others (PLD 1976 Lahore 930). The approach then was that although it was not possible for the Courts to enforce Islamic Law in those fields which were fully occupied by statutory dispensation, yet, it was not only open to the Courts but they were duty bound to apply common law of Islam, its jurisprudence and philosophy, in fields which were not occupied by statutory dispensation. Various examples of those subjects are enumerated in the concluding part of the judgment of Haji Nizam‟s case. What was held in Muhammad Bashir‟s case and for that matter Haji Nizam‟s case, can now be further supported with reference to Articles 2A and 227(1) of the Constitution; as also, what has been held and enforced from amongst the principles of policy by this Court, in the case of Miss Benazir Bhutto. The foregoing rules of interpretation, would apply to the present case, to the decision of the Income Tax Authorities laying down in their judgment, a rule of evidence which goes against Islamic Law and jurisprudence. It was upheld by the High Court, though with respect wrongly, It has to be set aside and declared as of no effect. That being so, while setting aside the High Court judgment the question referred to the High Court, quoted in Paragraph 5 supra, is answered in the negative. The result is that the Income Tax Tribunal was not „right in holding that the sum of Rs.50,072 was properly included in the income of the assessee under section 16(3)(iii) of the Income Tax‟. Batala Engineering Ltd. v. Income Tax Officer Lahore – 1973 SCC 403 = [1974] 29 TAX 190 (S.C.Pak) 446.
Remedy to be sought within four corners of Act.
In the first place, prima facie, a suit does not lie under section 67 of Income Tax Act. The Income Tax Act is a complete code by itself and any grievance in regard to the assessment can be remedied within the four corners of that Act. Besides, the petitioner had a remedy under the Income Tax Act under section 30 and 33. Munir Ahmad & Others v. Federation of Pakistan – [1998] 78 TAX 217 (H.C.Lah.) = 1998 PTD 3900] 447.
Power to make rules is subject to certain limitations.
The power has been delegated to the Board to frame rules so as to determine the market value of the asset. The use of the word „market‟ is not without significance, for it requires that the value should be
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such which a willing buyer shall pay to a willing purchaser. If in a rule, valuation fixed has no reference to the market value, it would be ultra vires of the Act as it is against section 46. 448.
Discrimination in rule-making is ultra vires.
The rule provides for working out the market value i.e. break up value of the share. If this measure has been adopted for fixing the value of the share, there could possibly be no objection. Further more, if in the case of listed companies it is either the listed value or the face value whichever is less which constitutes the market value, the same treatment should have been meted out in case of non-listed companies by providing that the value shall be either the face value or the break up value worked out by the Wealth Tax Officer whichever is less. The rule is thus clearly discriminatory. Abbas S. Sharoff and another v. Income Tax Officer and Others – [1998] 78 TAX 119 (H.C.Kar.) = 1998 PTD 2884 449.
Civil suit does not lie against tax authorities unless order is malafide or illegal.
I am of the considered view that a suit seeking setting aside or annulment of an assessment order passed by Income Tax Authority will not be maintainable. In order to maintain a suit challenging any order passed under the Income Tax Ordinance, 1979, it is incumbent upon the plaintiff to show presence of these three elements i.e. mala fides, illegality and absence of jurisdiction to pass such order, otherwise provisions of Section 162 of the Ordinance, 1979 will come into play. Khawaja Textile Mills Ltd. v. Deputy Commissioner of Income Tax & 2 others – [1998] 77 TAX 1 (H.C.AJ&K) 450.
Basis of taxation in Islam.
In so far as the violation of Islamic Provision is concerned, it was argued that money collected a turnover of business become the property of the individual and cannot be snatched away through the imposition of taxes. Even in Islam, the imposition of taxes has a background, Zakat, Ushr, Jaziah are various forms of taxes. Zakat is not realized only on new income of the individuals rather it is levied on the entire belongings of an individual even if there is no income. The tax on the turn over a business is thus of a lesser gravity than that of Zakat. Jaziah is realized from non-Muslims, for defence services rendered by the state. In the present day world, the state is managing various affairs and also provides different services to the people in the shape of, defence,
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health, education and so many other developments for the benefits of the citizens. All this requires a huge sum of money which has to be collected from the people. Without taxes, it is not possible for a Government to defend the country and to provide other services and facilities or perform certain functions for the welfare and well being of the people. Thus the taxes have to be levied for different purposes in different shapes on different classes of persons. The question of classification has been discussed in detail in the judgement delivered by the Supreme Court and justified. The Islamic Shariah does not prohibit the collection of taxes, from any particular class of persons in the Islamic Society. The categorization of the people for the purpose of realizing the tax is not against the injunctions of Islam. The learned council for the petitioners had argued that realization of this type of tax is fraud, lie, deception, cheating, falsification, injustice and switching of the property of the petitioners through „Zulam‟. The various references made by the learned counsel to the books on Islamic jurisprudence, do not support his contention. Baby-own v. Income Tax Officer – 1997 PTD 47 451.
If notice is prima facie defective and error is incurable, the entire proceedings are null and void.
Provisions of section 65 stipulate three conditions for issuance of notice under section 65 of the Ordinance; firstly, the income chargeable to tax has escaped; secondly income has been underassessed; or assessed at too low a rate or has been the subject of excessive relief for a refund and thirdly if assessment is made under section 59(1) and there are reasons to believe that any of the aforementioned defects exists in assessment order. The notice, dated 21.2.1995 under section 65 aforementioned issued to the petitioner does not indicate under what subsection of the section has been issued; when confronted, the learned counsel for the department contended that as already show-cause notice was issued to the petitioner; to which the petitioner had submitted explanation; is understood that the notice has been issued under sub-para (c) of section 65(1) of the Ordinance, which is misconceived; as under the law, the assessing officer is required to apply his mind cautiously and to indicate the assessee under section 65(1) under what reason his assessment is sought to be reopen as reopening of a case to some extent is a penal action, so the assessee be prepared to meet the consequences of reopening of an assessment. As the notice prima facie is defective and the error is not curable as it does not indicate the reason to reassess the said income already
268 Section 1
Income Tax Digest.
assessed in the hands of the petitioner. The entire proceedings are null and void. Hudabiya Engineering (Pvt.) Ltd., Lahore v. Pakistan through Secretary, Ministry of Interior, Government of Pakistan, Islamabad – [1997] 76 TAX 302 (H.C.Lah.) 452.
Provisions of Protection of Economic Reforms Act, 1992 override Income Tax Law to the extent protections are provided in the former enactment.
In our opinion on its plain reading, section 5 not only grants full immunity to the holders of foreign currency accounts but also provides that complete secrecy be maintained in respect of the transactions in these accounts. We are also of the view that section 5 and 9 of the Act have different scope and operate in different fields and are, therefore, not complementary to each other. While section 5 of the Act in itself provides complete code so far as foreign currency accounts are concerned, section 9 applies to transactions other than those in foreign currency. There may be no cavil with the principle of interpretation relied upon by the learned single Judge that various provisions in the Act must be read together and the Act should be construed as a whole but that principle has no application in the present case. Be that as it may, all principles of interpretation of Statutes are nothing but tools which the Courts employ to find true legislative intent which cannot be defeated by relying upon some abstract principle. It will be seen from the above that Protection of Economic Reforms Act, 1992 was promulgated pursuant to the Policy of the Federal Government to protect various economic reforms undertaken by it in order to provide incentives to investors and to encourage inflow of foreign currency into Pakistan. While interpreting such a law relating to economic matters the Courts should so far as possible adopt that interpretation which furthers the object for which the same has been promulgated. The grant of immunity to the foreign exchange accounts is not something new or unique. In the past, the Government time and again introduced various schemes with a view to attract investment particularly in foreign currency in the country. These include the issuance of foreign exchange bearer certificates, foreign currency bearer certificates and foreign deposit bearer certificates. All these measures are part of fiscal policies which a Government is entitled to lay down keeping in view the national and economic interest. It is also to be seen that as section 4 and 5 of the Act, both deal with foreign currency, while interpreting section 5, section 4 of the Act
269 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
cannot be lost sight of. It provides complete freedom to all citizens of Pakistan and all other persons to bring, hold, sell and take out foreign currency in any form. It specifically provides that no person shall be required to make any foreign currency declared at any stage and also ordains that no one shall be questioned in regard to the same. This clearly brings out the legislative intent that no question can be asked from the person holding any foreign currency in respect of the same. That being so, no inquiry either into the source or the holding of the foreign currency can be initiated or made by any agency especially when non-obstante clause in section 3 of the Act provides that the Act shall over-ride all other laws. On consideration of various provisions of the Protection of Economic Reforms Act, 1992, we have reach the conclusion that so far as foreign currency accounts are concerned, the holders thereof, have complete immunity from inquiry and scrutiny and complete secrecy must be maintained in respect of those accounts which cannot be violated by any Agency or functionary. That being so, neither the Income Tax Authorities nor Federal Investigation Agency had any jurisdiction to hold any inquiry in respect of the transactions in the foreign currency accounts nor could the same be made basis of criminal prosecution. National Electric Co. (Pvt.) Ltd. Gujranwala v. Commissioner of Income Tax Gujranwala Zone – [1996] 74 TAX 89 (H.C.Lah.) _ 453. Powers of CBR Territorial & Administrative Jurisdiction. Learned counsel for the petitioner has argued that the Tribunal was not justified in holding that Central Board of Revenue had exercised its authority with law by assigning the cases to the Inspecting Assistant Commissioner of Central Zone, Lahore. This argument need not be adverted to as almost on the similar ground the petitioner had challenged the order of the Central Board of Revenue by filing writ petition which was dismissed with the following observations: I do not think I can accept the contention of the learned counsel. Apportionment or distribution or work among the various officers of the Income Tax Department is essentially an administrative matter and is to be regulated by considerations mainly of convenience. The Central Board of Revenue stands at the apex in the hierarchy of Income Tax Authorities. Under section 8 of the Income Tax Ordinance it can give binding directions to all other Income Tax Authorities. It is, therefore, difficult to accept the
270 Section 1
Income Tax Digest.
contention of the learned counsel that in exercise of its powers under section 8, it can not transfer a case or a class of cases from one authority to another. The order passed by this court was upheld by the Supreme Court. The petitioner cannot, therefore, be allowed to reagitate the same matter again. METCO Shipbreakers & others v. Federation of Pakistan through Ministry of Finance, Islamabad – [1996] 73 TAX 85 (H.C.Quetta) 454.
Budget speech has no legal sanctity.
We have also focused our attention to the budget speech of the Minister made before National Assembly and the relief claimed for also resolves around it. Insofar as such speeches are concerned, in our view the same are without legal sanctity behind it and the Minister‟s speech is of no importance till the policies as highlighted in such speeches are given legal effect or cover by way of notification or instruction duly issued by Ministry concerned. Such speeches are usually motivated by political consideration and there is considerable difference in between such speeches and that of a policy recognized by some statute or enactment. The possibility of exaggeration in such speeches cannot be ruled out. The pivotal question is whether the points as highlighted in the speech or the policy intended to be formulated was subsequently given effect by issuance of a notification based on some enactment or statute meaning thereby that whether any legal coverage was given or otherwise. The Minister‟s speech can be termed as representation made on behalf of Government to highlight certain fiscal policies intended to be formulated but it must not be lost sight of that a „representation must relate to an existing fact or a past event; mere statement of intention or a promise de futuro does not create an estoppel. A representation, in order to give rise to an estoppel must be a statement which purports to affirm, deny, describe, or which otherwise relates to, an existing fact, circumstances or thing, or any past event. Not doubt that the Minister‟s speech has created false hopes and high expectations which could not be materialized but the speech having no legal sanctity behind it at the best it can be declared as „promise-de futuro‟ which cannot be enforced by invoking the constitutional jurisdiction of this court.
271 SHORT TITLE, EXTENT AND COMMENCEMENT
Section 1
Sanaullah Khan etc. v. Province of Balochistan etc. – [1995] 71 TAX 45 (H.C.Quetta) 455.
Government employees working in non-taxable territories are liable to pay income tax.
Perusal of above provision manifestly discloses that every Government employee, receiving salary from Federal Government, Provincial Government or any local authority of Pakistan is bound to pay income tax at prescribed rates irrespective of his status of residence, place of posting or nature of work. The question about applicability of Income Tax Ordinance, 1979 in tribal areas has absolutely no relevancy because income tax deductions are based upon entitlement of persons for receiving salaries from State exchequer. Therefore, we are inclined to respectfully observe that reference to above quoted judgment or bar under Article 227 of the Constitution which considering liability of Government employees regarding payment of Income Tax has no nexus with the proposition under consideration. We, therefore, feel no difficulty in concluding that once Government employee is receiving his salary from State exchequer, he automatically becomes liable to pay tax on his income, without any bar of locality, place of service or nature of duties unless specifically exempted. Income Tax Officer, Mirpur & 2 others v. Ch. Muhammad Bashir – [1994] 69 TAX 109 (S.C.AJ&K) 456.
The de facto doctrine.
The de facto doctrine which is to the effect that if an appointment order is found to be defective the acts performed by a functionary are not invalidated. However, it has been clearly laid down in the judgement that this doctrine has no application to a person who has not been appointed to a post and starts functioning without any order, valid or invalid. Coram non judice functions performed by such a person would not qualify for validation under the de facto doctrine. Bashir Sons (Pvt.) Ltd. v. CBR – [1993] 67 TAX 395 (H.C.Lah.) 457.
A notification purports to impose a new liability or obligation cannot operate retrospectively.
It is trite law that a notification which has the effect of imposing liability or obligation cannot operate retrospectively in the absence of any legal sanction in the statute itself.
272 Section 1
Income Tax Digest.
Commissioner of Income Tax v. Olympia – [1988] 57 TAX 46 (H.C.Kar.) 458.
Only natural/legal persons have the vested rights and not the government/state.
We may observe here that when reference is made in any law, legal document, legal language or law book or dictionary, about vested rights, the reference is to the vested right of a person natural or legal, and never to vested right of the state. Legal theories relating to vested rights never contemplate vested rights of state. Highland Manufacturer (Pak) Ltd. v. Commissioner of Income Tax (West) Karachi – [1985] 51 TAX 66 (H.C.Kar.) 459.
It is the duty of the legislature and not of a court to save income from escaping assessment.
We may observe here that the appellate tribunal or the courts can barely assume themselves the position of saving the income from escaping assessment. That jurisdiction vests in the legislature and those problems are, therefore, really for the legislature to solve and not for the courts and tribunals to worry about. Sh. Diwan Mohammad Mushtaq Ahmad, Karachi v. CBR & others – [1969] 19 TAX 198 (H.C.Kar.) 460.
Proceedings under the Income Tax Act are judicial proceedings.
The proceedings under the Income Tax Act, 1922 are judicial proceedings.
273 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Section 2(1)* Agricultural Income
PAGE NO
SCOPE OF TERM „AGRICULTURE‟
461. 462.
463.
464.
465.
466.
Term „agriculture‟ is used in a narrow sense. = [1959] 1-TAX (III-207) = PLD 1959 SC 453
_
1959 SCC 68 281
“Agricultural purpose” and “Cultivation” of lands and “basic _ operations” explained. 1959 SCC 68 = [1959] 1-TAX (III207) = PLD 1959 SC 453
281
If income received by assessee falls within agricultural income, in what character assessee receives it is immaterial. _ [1948] 16 ITR 380 (PC)
282
Application of human skill and labour are essential _ ingredients of agricultural income. [1948] 16 ITR 433 (Nag.)
283
Unless there is cultivation and employment of skill and labour, land cannot be said to have been used for _ agricultural purposes. PLD 1948 PC 259 = [1948] 16 ITR 330 (PC)
283
In order to determine whether income is agricultural income or not regard must be had to the source of such income. _ [1940] 8 ITR 416 (Pat.)
284
LAND USED FOR AGRICULTURAL PURPOSES
467.
468.
*
Annual rent received for wasteland leased out for housing refugees temporarily held not to be agricultural income. _ [1960] 2-TAX (Suppl.-1) (H.C.Dacca) = 1960 PTD 1050 = PLD 1960 Dacca 34
284
Income derived from pasturage is income “derived from land which is used for agricultural purposes” within the meaning of the section 2(1)(a) of the Income Tax Act and is therefore exempt from assessment under section 14(3)(viii) of the Act. _ 1 ITC 284 (Cal.) = (1924) ILR 51 Cal. 504 = AIR (1924) Cal. 668 = 84 IC 31
285
Corresponding to section 2(1) of the 1922 Act.
274 Section 2(1)
Income Tax Digest. PAGE NO
469.
470. 471.
Income derived from fisheries and from sthaljat (i.e. land used for stacking timber) is not “agricultural income” or income “derived from land which is used for agricultural purposes” within the meaning of the section 2(1)(a) of the Act and is therefore not exempt from tax. Onus to establish agriculture income is on the assessee. _ [1959] 1-TAX (III-207) = 1959 SCC 68 = PLD 1959 SC 453 _ The term “such lands” explained. [1948] 16 ITR 330 (PC)
AGRICULTURAL PROCESS
_
472.
“Market” connotation of.
473.
If there is a market for produce in its original form, no process performed on it can be said to be a process necessary _ for rendering it fit to be taken to market. [1946] 14 ITR 611 (Bom.) _ Ginning of cotton. 4 ITC 375 (Nag.) _ „Flue curing‟ of tobacco. [1944] 12 ITR 1 (Mad.) _ Sisal fibre from aloe plants. 4 ITC 259 (Pat.)
474. 475. 476. 477. 478.
4 ITC 259 (Pat.)
Conditions as to requirement of building as a dwelling _ house, etc. 4 ITC 15 (Pat.)(FB) _ Condition as to vicinity to land. [1946] 14 ITR 356 (Oudh)
285 286 287
287
287 288 289 289 289 290
RENT / REVENUE, CONNOTATION OF
479.
Revenue whilst it may be a species of agricultural income _ has a wider meaning than rent. 4 ITC 15 (Pat.)(FB)
LAND MUST BE SITUATED IN PAKISTAN
480.
In case of land situated in Burma. (Mad.)
_
290
[1945] 13 ITR 122 290
LAND MUST BE ASSESSED TO LAND REVENUE
481.
482.
_ Position prior to Income Tax Ordinance, 1979. [1946] 14 ITR 554 (Sind); [1945] 13 ITR 122 (Mad.); [1955] 28 ITR 732 (Cal.) _ Position prior to Income Tax Ordinance, 1979. [1937] 5 ITR 118 (Cal.)
DIVIDENDS TO SHAREHOLDERS OUT OF „AGRICULTURAL INCOME‟
483.
Dividends distributed by a company to its shareholders out of “agricultural income” are “agricultural income” in the
291 291
275 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
_
hands of shareholders and are exempt from tax. [1960] 2-TAX (Suppl.-49) (H.C.Lah.) = 1956 PLD 45 = 29 ITR 296
PAGE NO
291
SALE OF TREES OF SPONTANEOUS GROWTH – NOT AGRICULTURAL INCOME
484.
485.
486.
487.
488. 489. 490.
Income from the sale of forest trees growing naturally on the soil does not constitute “agricultural income” within the meaning of section 2(1) of the Income Tax Ordinance, 1979 so as to be exempt from income tax under clause (1), Part I of the Second Schedule of the Income Tax Ordinance, _ 1979. [1959] 1-TAX (III-207) = 1959 SCC 68 = PLD 1959 SC 453
293
Income from forest of spontaneous growth without any aid of _ human skill and labour is not agricultural income. [1965] 12 TAX 136 (H.C.Dacca)
293
Income from sale of forest trees of spontaneous growth is not _ _ agricultural income. [1948] 16 ITR 330 (PC); [1949] ITR 445 (PC)
294
Income from sale of forest trees of spontaneous growth and self planted, determination of exempt portion as agricultural _ income held to be necessary. [1945] 13 ITR 74 (Oudh); [1946] 14 ITR 356 (Oudh); [1946] 14 ITR 787 (Oudh); [1947] 15 ITR 98 (All.); [1947] 15 ITR 181 (Oudh); [1947] 15 ITR 235 (All.)
295
Sale proceeds of fruits of trees of spontaneous growth. _ [1946] 14 ITR 788 (Oudh) _ Grass of spontaneous growth. [1946] 14 ITR 788 (Oudh) In case of income from sale of grass, moonj and forest trees _ which were not grown by actual cultivation. [1947] 15 ITR 235 (All.)
298 298
298
INTEREST ON ARREARS OF RENT
491.
492.
Income on arrears of rent payable in respect of land used for _ agricultural purposes is not agricultural income. [1948] 16 ITR 325 (PC); [1943] 11 ITR 532 (Mad.); [1943] 11 ITR 546 (Cal.); [1945] 13 ITR 309 (Pat.); 6 ITC 63 (Mad.); [1940] 8 ITR 460 (Cal.)
298
Income on arrears of rent payable in respect of land used for _ agricultural purposes is not agricultural income. [1940] 8 ITR 460 (Cal.); [1943] 11 ITR 546 (Cal.)
301
276 Section 2(1)
Income Tax Digest. PAGE NO
493.
494.
Income on arrears of rent payable in respect of land used for _ agricultural purposes is not agricultural income. [1943] 11 ITR 532 (Mad.) _ Where loan was repaid in form of agricultural produce. 6 ITC 41 (Rangoon)
301 301
ANNUITY
495.
Where agricultural land is exchanged for annuity, annuity _ is not agricultural income. [1935] 3 ITR 237 (PC)
302
COMMISSION
496.
Commission received by owner for selling agricultural _ produce of tenants is not agricultural income. [1936] 4 ITR 137 (Lahore)
303
SALARY / REMUNERATION
497.
498.
499.
500.
501.
502.
Where portion of income of managed company consists of agricultural income, it does not imply that any part of remuneration paid to managing agent is agricultural _ income. [1948] 16 IR 380 (PC)
303
Allowance paid to co-owner of agricultural land for _ managing land is not agricultural income. [1935] 3 ITR 404 (Lahore)
304
Remuneration to partner of a firm having agricultural income, for managing estate, is not agricultural income in _ partner‟s hands. [1944] 12 ITR 351 (Pat.)
304
Remuneration received by the lambardar for collecting land _ revenue is not agricultural income. [1936] 4 ITR 137 (Lahore)
304
Remuneration paid to mutawalli of wakf having _ agricultural properties, is not agricultural income. [1943] 11 ITR 295 (PC)
305
Where Remuneration to mutawalli held as agricultural _ income. [1942] 10 ITR 267 (All.)
306
Rent received for site of flour mill is not agricultural income. _ [1936] 4 ITR 137 (Lahore)
307
Rent collected by receiver and paid over to mortgagee of land _ is not agricultural income in mortgagee‟s hands. [1941] 9 ITR 56 (Mad.)
307
RENT
503. 504.
277 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1) PAGE NO
505.
Composite rent for agricultural/non-agricultural land. _ [1940] 8 ITR 550 (Pat.)
INCOME FROM MORTGAGE
_
506.
Income from mortgaged land.
507.
Income received by assessee money-lender from usufructuary _ mortgage of agricultural land, is agricultural income. 3 ITC 33 (Mad.)
308
Where assessee money-lender leases land, usufructuary mortgaged to him, to mortgagor, payment received for such _ lease will not be agricultural income in assessee‟s hands. 2 ITC 152 (Mad.)
308
If a person who lends a sum of money on security of land of which he takes a mortgage with possession on condition that he will receive an annual payment during term of mortgage, does not receive payment stipulated upon, but obtains a further mortgage deed for arrears due and finally purchases land and receives payment by way of deduction from sale money agreed upon of original sum loaned plus annual recurring payment due, sum received in excess of original loan be regarded as interest and not as agricultural income. _ 3 ITC 308 (Lahore)
309
Where assessee-money-lender made loan under a zarpeshgi lease with usufructuary mortgage, and indenture provided that (a) lessor-mortgagor was to convey agricultural lands to lessee-mortgagee, and (b) certain rent was reserved to mortgagor as thika rent and mortgagee was to take balance of profits, profits received by assessee was agricultural _ income. [1935] 3 ITR 305 (PC)
310
Rent received under mortgage, where held as agricultural _ income. [1948] 16 ITR 330 (PC)
311
508.
509.
510.
511.
2 ITC 495 (All.)
308
308
LEASE RENT
512.
513.
Whether lease rent is agricultural income or not has to be determined not with reference to purpose of lease when originally let out but by reference to use to which land has _ been put in relevant previous year. [1940] 8 ITR 378 (Cal.)
312
Income from lease of land for grazing cattle required for _ agricultural pursuits is agricultural income. [1948] 16 ITR 350 (Mad.)
313
278 Section 2(1)
Income Tax Digest. PAGE NO
514.
Unjust exactions made by landlord while renewing lease, _ are agricultural income. [1945] 13 ITR 174 (Mad.)
SALAMI (LUMPSUM PAYMENT)
515. 516.
Salami for letting out agricultural land. 263 (Cal.)
_
313
[1945] 13 ITR
Salami paid to landlord for recognising transfer of land. ITC 158 (Pat.)
_
314 3 314
MAINTENANCE ALLOWANCE
517. 518. 519.
520.
521.
522. 523.
In case of maintenance allowance received by junior member _ / others out of impartible estate. [1935] 3 ITR 356 (Oudh)
314
In case of maintenance allowance received by junior member _ / others out of impartible estate. [1934] 2 ITR 186 (All.)
314
In case of maintenance allowance received by junior member _ / others out of impartible estate. [1937] 5 ITR 569 (Lahore)
314
Maintenance received by widow out of agricultural income of estate of her deceased husband, is not agricultural _ income. 5 ITC 493 (Bom.)
315
Maintenance received by widow out of agricultural income of estate of her deceased husband, is not agricultural _ income. [1933] 1 ITR 379 (Oudh) _ Allowance to daughters. 3 ITC 428 (Mad.) _ Relinquishment of estate for monthly allowance. 9 ITC 35 (Oudh)
315 315 316
„FORESTRY‟ AND „AGRICULTURE‟ NOT SYNONYMOUS
524. 525. 526. 527. 528. 529. 530. 531. 532.
„Forestry‟ and „agriculture‟ not synonymous. (III-207) = 1959 SCC 68 = PLD 1959 SC 453 _ Pasturage. [1948] 16 ITR 350 (Mad.) _ Lac cultivation. [1948] 16 ITR 433 (Nag.) _ Brick-making. 5 ITC 42 (Pat.) _ Quarries. 2 ITC 425 (All.) _ Salt manufacturing. 2 ITC 363 (Mad.) _ Sale of earth. 2 ITC 281 (Pat.)
_
[1959] 1-TAX
Sale of water from Water canal held not to be agricultural _ income. 2 ITC 52 (Lahore) _ Fisheries. [1947] 15 ITR 235 (All.)
316 316 317 317 317 317 318 318 318
279 DEFINITIONS OF „AGRICULTURAL INCOME‟
533. 534. 535. 536. 537. 538. 539. 540.
Section 2(1) PAGE NO
_
Fisheries. [1933] 1 ITR 78 (Mad.) _ Toddy. 2 ITC 470 (Mad.) _ Nazrana. [1942] 10 ITR 322 (All.) _ Dharat. [1936] 4 ITR 114 (Lahore)
318 319 319 _
Jalkar/Hat/Ghattagi/Terries/Moorings. 1 ITC 303 (Pat.) _ Bankar/Lahkar/Phalkar. [1941] 9 ITR 313 (Pat.) _ Malikhana. [1948] 16 ITR 330 (PC) _ Mutation fee. 2 ITC 99 (Cal.)
319 319 319 320 321
TEA MANUFACTURERS
541.
Rule 8 is applicable only in respect of a seller who manufactures tea which he had himself grown and which he _ himself sells. [1946] 14 ITR 287 (Cal.)
321
COFFEE MANUFACTURERS
542.
Although income from coffee growing in certain cases may be treated as income from business, it will still be _ „agricultural income‟. [1939] 7 ITR 48 (PC)
322
SUGAR MANUFACTURERS
543.
Where business income comprises both agricultural and non-agricultural income, expenditure for earning _ agricultural income is not allowable. [1938] 6 ITR 194 (Rangoon)
322
REFERENCE TO THE HIGH COURT
544.
545.
546.
547.
Question as to whether income derived from a business is _ agricultural income or not, is not a question of fact. [1938] 6 ITR 145 (Rangoon)
323
It is entirely a question of fact whether in the year in question the rent was derived from land which was used for _ agricultural purposes. [1940] 8 ITR 378 (Cal.)
323
Question as to whether forest trees are of spontaneous _ growth or not is a question of fact. [1948] 16 ITR 433 (Nag.)
323
Question as to whether the process employed by the assessee agriculturist is a process ordinarily employed by a cultivator to render the produce fit to be taken to market, is essentially _ a question of fact. [1946] 14 ITR 611 (Bom.)
324
280 Section 2(1)
Income Tax Digest. PAGE NO
548.
549.
Conclusion of the Tribunal that process employed by assessee is a process ordinarily employed by a cultivator is _ one of fact. [1946] 14 ITR 611 (Bom.)
324
Question as to whether the process of „flue curing‟ was a process coming within section 2(1)(b)(ii), is a question of _ fact. [1944] 12 ITR 1 (Mad.)
324
281 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Section 2(1)* Agricultural Income
SCOPE OF TERM „AGRICULTURE‟
Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & others – 1959 SCC 68 = [1959] 1-TAX (III-207) = PLD 1959 SC 453 461.
Term „agriculture‟ is used in a narrow sense.
Where the assessee has made no contribution by way of cultivation no question can arise either of the land being used for agricultural purposes or of the trees grew on such land and the income they produce being the result of agriculture. The term “agriculture” has been used in the Ordinance in a narrow sense. It means that an operation to qualify as “agricultural” must involve or to be connected with the cultivation of the soil. The word “agriculture” is not used in its extended meaning. No assistance is to be sought from the meaning ascribed to the word “agriculture” in other statutes. 462.
“Agricultural purpose” and “Cultivation” of lands and “basic operations” explained.
Unless there is some measure of cultivation of land, some expenditure of skill and labour on it, it cannot be said to have been used for agricultural purposes. Cultivation in the strict sense of the term is restricted to the tilling of the land, sowing of the seeds, planting and similar operations on the land. The cultivation of land does not comprise merely of raising the products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting and similar work done on the land but also includes the subsequent operations. Basic operations would require the expenditure of human skills and labour upon the land itself. There are, however, subsequent operations *
Corresponding to section 2(1) of the 1922 Act.
282 Section 2(1)
Income Tax Digest.
necessary to be performed after the produce sprout from the land e.g. weeding, digging the soil around the growth, removing of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pets but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. The later would all be subsequent operations when taken in conjunction with the basic operations. One cannot dissociate the basic operations from the subsequent operations even though they are divorced from the basic operations. Premier Construction Co. Ltd. v. Commissioner of Income Tax – [1948] 16 ITR 380 (PC) 463.
If income received by assessee falls within agricultural income, in what character assessee receives it is immaterial.
Where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income, it earns exemption, in whatever character the assessee receives it. Note: See also Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC). Judicial analysis: EXPLAINED IN - Commissioner of Income Tax v. Mrs. E.V.H. Miller [1956] 29 ITR 296 (Lahore) with the following observations: “. . . . . What follows from Premier Construction Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 380 (PC) is that the source was of no importance if the income itself was not of the character of agricultural income. But if it possessed that character, then it did not matter in what character the assessee received it, that is to say, whether he received it as shareholder or managing agent or mortgagee, or even as a cast-iron moneylender who peeled off agriculturists like Newton apples. It would be agricultural income, if it is derived from land of a certain type.” (p. 317).
FOLLOWED IN - Commissioner of Income Tax v. Maddi Venkatasubbayya [1951] 20 ITR 151 (Mad.), Raja Bahadur Vishweshwara Singh v. Commissioner of Income Tax [1954] 26 ITR 573 (Pat.), Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income Tax [1957] 32 ITR 377 (Pat.), S.A. Ramaraj v. CAIT [1969] 71 ITR 108 (Ker.) and Commissioner of Income Tax v. Mahasamund Kissan Co-op. Rice Mill & Marketing Society Ltd. [1976] 103 ITR 499 (MP).
283 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Beohar Singh Raghubir Singh v. Commissioner of Income Tax – [1948] 16 ITR 433 (Nag.) 464.
Application of human skill and labour are essential ingredients of agricultural income.
Agricultural is the art or science of cultivating the ground. The essence of agriculture, even when it is extended to include „forestry‟ is the application of human skill and labour. Without that it can be neither art nor a science. It is essential that the income should be derived from some activity which necessitates the employment of human skill and labour and which is not merely a product of man‟s neglect or inaction except for the gathering in of the spoils. Not only must he labour to reap the _ harvest - that of course he must do else there could be no income but he must also labour to produce it. The burden being on the assessee to bring himself within the purview of the exemption, and he not having proved that the forest was „cultivated‟ by him in the sense that its produce was due to the skill and labour which he expended on it as opposed to produce which would come in any way from natural causes despite inaction on his part, income arising to the assessee from such land is not agricultural income. Raja Mustafa Ali Khan v. Commissioner of Income Tax – PLD 1948 PC 259 = [1948] 16 ITR 330 (PC) 465.
Unless there is cultivation and employment of skill and labour, land cannot be said to have been used for agricultural purposes.
No assistance is to be got from the meaning ascribed to the word „agriculture‟ in other statutes and, though it must always be difficult to draw the line, yet, unless there is some measure of cultivation of the land, some expenditure of skill and labour upon it, it cannot be said to be used for agricultural purposes within the meaning of the Act. Case review : Yuvarajah of Pithapuram v. Commissioner of Income Tax [1946] 14 ITR 92 (Mad.) and Benoy Ratan Banerji v. Commissioner of Income Tax [1947] 15 ITR 98 (All.) approved. Judicial analysis : EXPLAINED IN - Commissioner of Income Tax, East Bengal v. Kumar Ram Naryan Roy Chaudhry & Other [1959] 1-TAX (III-207) = 1959 SCC 68 by the Honourable Supreme Court of Pakistan in the following words: “The entire finding on points was fully extracted in the statement of the case. From this finding it follows that the trees sold during the years in question were of spontaneous growth without any human effort or skill, and as the Privy Council had held in Raja Mustafa Ali Khan v. Commissioner of Income Tax, [75 I.A. 268;
284 Section 2(1)
Income Tax Digest.
P.L.D. 1948 P.C. 259], the Income from the sale of such trees was not “agricultural” income within the meaning of the Act, there was no necessity for a reference. Nevertheless, the Tribunal on an application of the assessee thought it fit to make a reference.”
Commissioner of Income Tax v. Pandit Dhaneshwardhar Misra – [1940] 8 ITR 416 (Pat.) 466.
In order to determine whether income is agricultural income or not regard must be had to the source of such income.
In order to determine whether the income is agricultural income or not regard must be had to the source of such income. Where the assessee had been granted annual ex gratia amount in 1936 on resumption in 1919 of the thikadari lease given to the assessee‟s ancestors in consideration of some services rendered by them in the remote past, it was held that the ex gratia amount could not be regarded as agricultural income as the source of the income was the order granting ex gratia amount and not land. _______________
LAND USED FOR AGRICULTURAL PURPOSES
Commissioner of Income Tax, Bengal Mufassil v. Burdhan Kuti Wards‟ Estate – [1960] 2-TAX (Suppl.-1) (H.C.Dacca) = 1960 PTD 1050 = PLD 1960 Dacca 34 467.
Annual rent received for wasteland leased out for housing refugees temporarily held not to be agricultural income.
. . . . . the Government took on temporary lease about 500 bighas of waste land of the assessee in order to house and accommodate refugees from Burma and agreed to pay Rs.50,000/- as salami, and Rs.5,000/. as yearly rent to the assessee. The acquisition of the land by the Government was not compulsory. The transaction was purely contractual and the land continued to remain the property of the assessee although burdened with a lease during the period of war. The amount of the salami (Rs.50,000) and the rent (Rs.5,000)/-) received by the assessee was assessed to tax. Assessee‟s contentions that the salami was by way of compensation or in the nature of capital receipt and the rent (even if treated as income) were both agricultural income were overruled both by the Income Tax Officer and Appellate Assistant Commissioner. On a further appeal, the Tribunal agreed with the contentions of the assessee. On a reference, the High Court held that both the items were rightly treated as income and assessed to tax.
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Section 2(1)
Judicial review: It was an established fact in the case that during accounting period the land was not used for “agricultural purposes”. It was held that under section 2(1) of the Act it is the actual use of the land which is to be looked into as the decisive factor and not the purpose of lease. Mustafa Ali Khan v. Commissioner of Income Tax [AIR 36 1949 PC 13] was followed. Cases referred to: Mustafa Ali Khan v. Commissioner of Income Tax AIR 1949 PC 13 and Maharajadhiraj Sir Rijoy Chand Mahtab [1940] 8 ITR 378.
Emperor v. Probhat Chandra Barua – 1 ITC 284 (Cal.) = [1924] ILR 51 Cal. 504 = AIR (1924) Cal. 668 = 84 IC 31 468.
Income derived from pasturage is income “derived from land which is used for agricultural purposes” within the meaning of the section 2(1)(a) of the Income Tax Act and is therefore exempt from assessment under section 14(3)(viii) of the Act.
The question as regard income from pasturage is not now in dispute, and I agree with the Commissioner and the learned Vakil who appears for the Crown in thinking it to be reasonably plain that income from pasturage is “derived from land which is used for agricultural purpose”, and is, therefore, in the case of a permanently settled estate, within the exemption given by section 4, sub-section (3), clause (viii) of the Act to “agricultural income” as defined by section 2, sub-section (1), clause (a). in the circumstance that income is derived from fees realised from graziers who graze their cattle in the forest areas and waste lands there is nothing to render inapplicable the definition of “agricultural income” contained in clause (a). 469.
Income derived from fisheries and from sthaljat (i.e. land used for stacking timber) is not “agricultural income” or income “derived from land which is used for agricultural purposes” within the meaning of the section 2(1)(a) of the Act and is therefore not exempt from tax.
The last question for decision relates to what is called sthaljat or rent received for the use of land for stacking timber. In the application of the assessee it is thus described:“For the purpose of collecting the rent of the forests periodic leases are granted to parties permitting them to fell timber. Rent in kind is realised by a share of the timber felled or by a share of the sale-proceeds thereof. The timber so felled is not subjected to any process of manufacture. The lessees stack the felled timber at places for the purpose of sale and
286 Section 2(1)
Income Tax Digest.
payment of rent and for such stacking they pay rent of the site under the name of sthaljat. Here, again, the question is whether this rent is “derived from land which is used for agricultural purposes” under section 2(1)(a) of the Act. The contention of the assessee is that this rent is part of his income from the forest. That the land is used for purposes of forestry and that forestry is within the meaning of the term “agriculture” as used in Act. The learned Senior Government Pleader declines to concede that there is anything in the Income Tax Act which exempts income derived from forestry and contends that in any case this income is not a part of forestry income. The Commissioner of Income Tax, Assam, in the letter of reference to this court says: The land is used not by the applicant for the sale of his agricultural produce, but by persons to whom the applicant gives the right to cut, convert, transport and sell timber. While the profits arising to the landlord from forestry are exempt from Income Tax, I am of opinion that the profits of the persons who work the timber arise from „business‟ and are therefore assessable to Income Tax. Consequently rent received by the applicant is rent received from business premises and therefore does not come under the head of „agriculture‟ and is taxable”. I am not convinced that the legislature, if it intended to include “even „forestry‟” would have been content to say “agriculture” but in the circumstances I desire to prejudice this question no further than by an expression of this doubt. The contention of the assessee, however, must reach so far as to establish that land rented to purchasers of timber whereon they conduct operations of and incidental to the business of selling timber is land used for agricultural purposes by reason that the timber is bought from him, that the site is within or adjacent to his forest and that the amount due to him is paid there, or is in some manner calculated there. I think that this is to stretch ordinary language beyond its reasonable limits, and that the income in question is liable to assessment. Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & others – [1959] 1-TAX (III-207) = 1959 SCC 68 = PLD 1959 SC 453 470.
Onus to establish agriculture income is on the assessee.
The language of the section is quite plain, and all that the assessee is required to show for the purpose of earning the exemption is that the
287 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
income in question was derived from the land which is “used for agricultural purposes”. Raja Mustafa Ali Khan v. Commissioner of Income Tax – [1948] 16 ITR 330 (PC) 471.
The term “such lands” explained.
Whether exemption is sought under section 2(1)(a) or section 2(1)(b) of the 1922 Act the primary condition that must be satisfied is that the land in question is used for agricultural purposes; the expression „such land‟ in sub-clause (b) refers back to the land mentioned in sub-clause (a) and must have the same quality. Judicial analysis: FOLLOWED IN - Commissioner of Income Tax v. Burdhan Kuti Wards Estate [1949] 17 ITR 191 (Dacca).] _______________
AGRICULTURAL PROCESS
J.M. Casey v. Commissioner of Income Tax – 4 ITC 259 (Pat.) 472.
“Market” connotation of.
The word „market‟ in section 2(1) implies a real centre of economic exchange and the purchase by jails is merely an artificial condition having no relation to a market for agricultural produce. Brihan Maharashtra Sugar Syndicate Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 611 (Bom.) 473.
If there is a market for produce in its original form, no process performed on it can be said to be a process necessary for rendering it fit to be taken to market.
The produce must retain its original character in spite of the process unless there is no market for selling it in that condition. If there is no market to sell the produce, then any process which is ordinarily employed to render it fit to reach the market, where it can be sold, would be covered by the definition. Where the assessee grew sugarcane, but instead of selling it in raw form it made gur and sold this product, and the finding of fact was that the sugarcane grown by the assessee-company could either be sold to other factories or utilised by the factory to produce gur or sugar: Held that the income from the sale of gur was not agricultural income since there was a market where this sugarcane could be sold without passing through any process.
288 Section 2(1)
Income Tax Digest.
Judicial analysis: EXPLAINED IN - Sakarlal Naranlal v. Commissioner of Income Tax [1965] 56 ITR 503 (Guj.) with the following observations: “ . . . . . In Brihan Syndicate‟s case [1946] 14 ITR 611, Kania J., as he then was, after referring to section 2(1)(b)(iii), said: „Reading the words used in the definition section with their natural meaning they must mean that the produce must retain its original character in spite of the process unless there is no market for selling it in that condition. If there is no market to sell the produce then any process which is ordinarily employed to render it fit to reach the market, where it can be sold, would be covered by the definition . . .‟ The learned judge agreed with the Patna High court in J.M. Casey‟s case AIR 1930 Pat. 44 that market must mean a ready and available market where produce of the kind grown by the assessee is bought and sold and observed that since the statement of the case itself showed that there was a market for sugarcane, the process employed by the assessees in converting it into gul could not be said to be a process ordinarily employed to render it fit to be taken to market where it can be sold. Now it must be conceded straightaway that, in view of the decision of the Supreme Court in Dooars Tea Company Ltd.‟s case [1962] 44 ITR 6 (SC), the statement contained in the passage quoted above can no longer be regarded as good law in so far as it says that if there is no market for selling the produce in its original character, the character of the produce may be altered by performing a process necessary to render it fit to be taken to market and such a process too would be covered by section 2(1)(b)(ii). It is now clear that the produce must retain its original character and if the effect of the process is to alter the character of the produce, the process would not be a process within the intendment of section 2(1)(b)(ii). But this much is certainly established by this decision, namely, if there is a market for the produce, no process performed on it can be said to be a process necessary for rendering it fit to be taken to market.” (pp. 515-516)
Seth Sheolal Ramlal v. Commissioner of Income Tax – 4 ITC 375 (Nag.) 474.
Ginning of cotton.
Although it may be distinctly advantageous, even from the mere point of view of transport to have the cotton ginned first, it cannot be said that ginning cotton is essential in order to enable the produce to be „fit to be taken to market‟.
289 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Commissioner of Income Tax v. Katragadda Madhusudhana Rao – [1944] 12 ITR 1 (Mad.) 475.
„Flue curing‟ of tobacco.
Process of „flue curing‟ can be termed as the process ordinarily employed by the cultivator of virginia tobacco to render it fit to be taken to the market. J.M. Casey v. Commissioner of Income Tax – 4 ITC 259 (Pat.) 476.
Sisal fibre from aloe plants.
The assessee among other activities of an agricultural nature cultivated aloe plants and from them by means of machinery prepared sisal fibre which he sold in the market. The department did not claim to recover tax on such portion of his profits as was attributable to the production of the aloe leaves but it was contended that the manufacture of the fibre from these leaves constituted a manufacturing process as opposed to an agricultural process the profits from which were not exempt as agricultural income. Held that the department‟s case was not sustainable. Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax – 4 ITC 15 (Pat.)(FB) 477.
Conditions as to requirement of building as a dwelling house, etc.
The word „requires‟ in proviso to section 2(1)(c) means that the assessee demands to appropriate the building for the purpose of a dwelling house, or as a store house, or other out-building and the words „by reason of his connection with the land‟ mean that only the fact of his being a receiver of rent or revenue or the fact of his being a cultivator, or the fact that he is a receiver of rent in kind entitles him to claim any building as a dwelling house, a store house or an out-building. If he should not occupy any of these positions in connection with the land he is not entitled to claim, as tax free accommodation of the kind specified. In other words, the expression „by reason of this connection with the land‟ is merely used to explain the nature of the class of persons entitled to exemption. it has been said that punctuation must not be used in construing a statue other than as a mere temporanea expositio, and for this limited purpose it may be noticed that the words are not separated by a comma or otherwise from the words „the receiver of the rent or revenue or the cultivator or the receiver of the rent in kind.‟ Whereas the very „requires‟ is separated by a comma from the grammatical subject and the phrase „by reason of his connection with the land‟. Thus, the conclusion is that this phrase has a qualitative and not a quantitative significance. Of course there must be a bona fide use
290 Section 2(1)
Income Tax Digest.
of the building as a dwelling house, store house or out-building and the assessee is not at liberty to claim arbitrarily the exemption of any building which he may at his own choice describe as dwelling house, store house or out-building without regard to the actual facts. Further held that on the finding that the building is required by the assessee by reason of his connection with the land, the Income Tax authorities have no jurisdiction to determine what portion of the building is as a matter of the fact required by the assessee in his capacity of receiver of rent or revenue and that the assessee is entitled to claim the entire annual value as agricultural income within the meaning of section 2(1)(c). Nawab Nawazish Ali Khan v. Commissioner of Income Tax – [1946] 14 ITR 356 (Oudh) 478. Condition as to vicinity to land. Where the finding of fact was that the residential house was at a distance of 16 miles from land, it was held that the Tribunal was right in not allowing exemption as the building could not be deemed to be in the immediate vicinity of land. _______________
RENT / REVENUE, CONNOTATION OF
Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax – 4 ITC 15 (Pat.)(FB) 479. Revenue whilst it may be a species of agricultural income has a wider meaning than rent. The word „revenue‟ is not to be construed as ejusdem generies, with rent. „Rent‟ has characteristics which are well known to lawyers. „Revenue‟ whilst it may be a species of agricultural income has a wider meaning than rent. _______________
LAND MUST BE SITUATED IN PAKISTAN
Chockalingam Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 122 (Mad.) 480. In case of land situated in Burma. Income from agricultural land in Burma is not covered by the definition given in section 2(1)(a). Note:
It refers to repealed Act of 1922. The same definition is contained in section 2(1) of the Income Tax Ordinance, 1979. _______________
291 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
LAND MUST BE ASSESSED TO LAND REVENUE
Commissioner of Income Tax v. Jhamandas Devkishendas [1946] 14 ITR 554 (Sind); A. Chockalingam Chettiar v. Commissioner of Income Tax [1945] 13 ITR 122 (Mad.); Kumar Jagadish Chandra Sinha v. Commissioner of Income Tax [1955] 28 ITR 732 (Cal.) 481.
Position prior to Income Tax Ordinance, 1979.
For the purposes of section 2(1) for a land to be assessed to land revenue in British India or subject to a local rate, it must be land situated in British India and rate should be collected by officers of the Crown (Government of India). Accordingly, where the produce of agricultural land situated in native State was sold in British India, the income derived from sale was not agricultural income. Note: Kumar Jagadish Chandra Sinha v. Commissioner of Income Tax [1955] 28 ITR 732 (Cal.) was approved in Commissioner of Income Tax v. Carew & Co. Ltd. [1979] 120 ITR 540 (SC).
Mohanpura Tea Co. Ltd., In re [1937] 5 ITR 118 (Cal.) 482.
Position prior to Income Tax Ordinance, 1979.
Section 4(3)(viii) of the 1922 Act did not exempt income derived from lands assessed to land revenue in an Indian State. _______________
DIVIDENDS TO SHAREHOLDERS OUT OF „AGRICULTURAL INCOME‟
Commissioner of Income Tax v. Mrs. E. V. H. Miller / Mitchell R. (c/o The Colyana Estate, Okara) [1960] 2-TAX (Suppl.-49) (H.C.Lah.) = 1956 PLD 45 = 29 ITR 296 483.
Dividends distributed by a company to its shareholders out of “agricultural income” are “agricultural income” in the hands of shareholders and are exempt from tax.
The dividends declared out of agricultural income of the Company were included by the Income Tax Officer in the total income of the assessee, a shareholder. On appeal the Tribunal held that the dividends declared out of agricultural income retained the character of agricultural income and as such was not assessable, On a reference by the Department it was „held that, Per KAYANI, A.C. J. (as he was then).-The dividends distributed by a Company to its shareholders out of agricultural income is agricultural income in the hands of such
292 Section 2(1)
Income Tax Digest.
shareholders within the meaning of section 4(3)(viii) of the Income Tax Act. Per AKHLAQUE HUSAIN, J.(i)
The definition of “dividend” in subsection (6-A) of section 2 clearly indicates that it is the profits of „the Company which are distributed amongst its shareholders, that is to say, it is agricultural income itself which, in part or in whole, is distributed amongst its shareholders. Provisions in the Act entitling a shareholder to benefit, or refund, of the Income Tax paid by the Company also unmistakably point to the conclusion that the Act treats the income of a shareholder received by way of a dividend the same as the income of the Company;
(ii)
The dividend out of the agricultural income of a Company is agricultural income in the hand of a shareholder because the latter receives it in recognition of his right to it; and
(iii)
The real test in all cases is whether the recipient has received the income of the Company in pursuance of a right to receive it as such. It is wholly immaterial for the purposes of the Act whether the agricultural income has been received directly or indirectly, mediately or immediately, it is enough that it has been received as of right.
Judicial analysis : The main principle highlighted was that agriculture income is exempt in every one‟s hands received directly or indirectly. Since the sharesholders have right to participate in the income of a company, the dividends arising out of agricultural income of a company received by them are nothing but agricultural income. Later on, the department on the strength of section 151, specifically inserted in the Income Tax Ordinance, 1979 in the wake of this decision to nollify its effect, tried to argue that this case is no more valid. The Honourable Apex Court, however, in Julian Hoshange Dinshaw Trust v. Income Tax Officer (1992) 65 TAX 102 (S.C.Pak) = 199 SCC 777 observed that “if receipt is basically outside the purview of taxing statute, this section [section 151] has no validity at all as such a receipt cannot be brought under chargeability when received for the second time by a person other than the original recipient”. Judicial review: UPHELD by the Honourable Supreme Court (1959) 1-TAX (III-1) = 1959 SCC 53. Cases referred to: Commissioner of Income Tax v. Hungerford InvestmenI Trust [1936 P.C. 219]; Governor-General v. Raleigh Investment Co. [1944 ITR 265]; Mrs. Bacha F. Guzdar v. Commissioner of Income Tax (1955) 27 ITR 1; Mrs. Bacha F. Guzdar v. Commissioner of Income Tax (1952) 22 ITR
293 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
158; Vishweshwar Singh v. Income Tax Commissioner (AIR 1954 Pat. 581); Canadian Eagle Oil Company Ltd. v. The King (L.R. 1946 A.C. 119); Makund Sarup v. Commissioner of Income Tax, U. P. [1928 ITR 50 All. 495], Gresham Life Assurance Society v. Style [1892 A.C. 309]; F.H. Hamilton v. Commissioners of Inland Revenue (16 T.C. 213); Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income Tax, Bihar & Orissa [1935 ITR 237]; Nawab Habibulla v. Commissioner of Income Tax [1943 ITR 295 and The Premier Construction Co. v. Commissioner of Income Tax, Bombay City [PLD 1948 P.C. 178]. Cases distinguished : Canadian Eagle Oil Co. v. The King [1946 A.C. 119] and Income Tax Commissioner, Bihar & Orissa v. Kamakhaya Narayana Singh (PLD 1948 P.C. 224). _______________
SALE OF TREES OF SPONTANEOUS GROWTH - NOT AGRICULTURAL INCOME
Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & Others – [1959] 1-TAX (III-207) = 1959 SCC 68 = PLD 1959 SC 453 484.
Income from the sale of forest trees growing naturally on the soil does not constitute “agricultural income” within the meaning of section 2(1) of the Income Tax Ordinance, 1979 so as to be exempt from income tax under clause (1), Part I of the Second Schedule of the Income Tax Ordinance, 1979.
The income from the sale of forest trees growing naturally on the soil does not constitute “agricultural income” within the meaning of section 2(1) of the Income Tax Ordinance, 1979 so as to be exempt from income tax under clause (1), Part I of the Second Schedule of the Income Tax Ordinance, 1979. Commissioner of Income Tax, Dacca v. Suresh Prosad Lahiri Chowdhury, Mymensingh – [1965] 12 TAX 136 (H.C.Dacca) 485.
Income from forest of spontaneous growth without any aid of human skill and labour is not agricultural income.
The assessee leased out its forest to the Government and derived income in various kinds. The income so derived was charged to tax by the Income Tax Officer on the ground that as admitted by the assessee himself “the forest was of spontaneous growth without any aid of human skill and labour.” On appeal the Appellate Assistant Commissioner excluded the forest income from the assessment. The Appellate Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference, at the instance of the department:
294 Section 2(1)
Income Tax Digest.
Held, that it is claimed even on behalf of the assessee that “forest is of spontaneous growth without any aid of human skill and labour”. This would not constitute an agricultural income. Case applied : Commissioner, of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhury and others (1959) 1-TAX 207 (S.C.). Case referred to : Gopal Das Choudhury v. Commissioner of Agricultural Income Tax, East Bengal [4 P.L.R. 439 (Dacca)].
Raja Mustafa Ali Khan v. Commissioner of Income Tax – [1948] 16 ITR 330 (PC) 486.
Income from sale of forest trees of spontaneous growth is not agricultural income.
Where there was nothing to show that the assessee was carrying on any regular operations in forestry and that the jungle from which trees had been cut and sold was of spontaneous growth, it was held that income from the sale of trees was not agricultural income. Case review: Decision of the Oudh High Court in Raja Mustafa Ali Khan v. Commissioner of Income Tax [1945] 13 ITR 98 affirmed. Judicial analysis : FOLLOWED IN - Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & Others [1959] 1-TAX (III207), 1959 SCC 68, Commissioner of Income Tax v. R.B. Rai Shamsherjang Bahadur [1953] 24 ITR 1 (All.) and Raja Benoy Kumar Sahas Roy v. Commissioner of Income Tax [1953] 24 ITR 70 (Cal.) DISTINGUISHED ON FACTS IN - Vikram Deo Varma, Maharaja of Jeypore v. Commissioner of Income Tax [1956] 29 ITR 76 (Orissa) on the ground that in the case before the Prvy Council, it was admitted that the trees grew without the intervention of human agency and the forest was of spontaneous growth, whereas in the case on hand, if was not only admitted that the trees had grown on land naturally, but the assessee had claimed that he was carrying on regular operations in forestry under expert advice. (pp. 95-96)
Sri Rajah Ravu Venkata Mahipathi Gangadhara Rama Rao Bahadur, Yuvarajah of Pithapuram v. Commissioner of Income Tax – [1949] ITR 445 (PC)
Income derived from the sale of forest trees growing on land naturally and without the intervention of human agency, even if the land is assessed to land revenue, is not „agricultural income‟ within the meaning of section 2(1) of the 1922 Act and is not, therefore, exempt from income tax under clause (1) Part 1 of the Second Schedule to the Income Tax Ordinance, 1979.
295 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Case review: Decision of the Madras High Court in Yuvarajah of Pithapuram v. Commissioner of Income Tax [1946] 14 ITR 92 affirmed. Judicial analysis: FOLLOWED IN - Viswanatha Cettiar v. Agl. Income Tax Officer [1965] 55 ITR 692 (Mys.)
Maharaja of Kapurthala v. Commissioner of Income Tax – [1945] 13 ITR 74 (Oudh); Nawab Nawazish Ali Khan v. Commissioner of Income Tax – [1946] 14 ITR 356 (Oudh); Rani Tara Kumari Devi v. Commissioner of Income Tax – [1946] 14 ITR 787 (Oudh); Benoy Ratan Banerji v. Commissioner of Income Tax – [1947] 15 ITR 98 (All.); Maharaj Sir Pateshwari Prasad Singh v. Commissioner of Income Tax – [1947] 15 ITR 181 (Oudh); Raja Bahadur Major Raja Durga Narain Singh v. Commissioner of Income Tax – [1947] 15 ITR 235 (All.) 487.
Income from sale of forest trees of spontaneous growth and self planted, determination of exempt portion as agricultural income held to be necessary.
Mere regeneration and preservation of trees cannot be said to be expenditure of human skill and labour upon the land itself, and the land cannot under the circumstances be held to be used for agricultural purposes nor can it be held that any process of agriculture is being carried on It is agreed on all hands that products which grow wild on the land or are of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture and the income derived therefrom is not agricultural income. There is no process of agriculture involved in the raising of these products from the land. There are no agricultural operations performed by the assessee in respect of the same, and the only work which the assessee performs here is that of collecting the produce and consuming and marketing the same. No agricultural operations have been performed and there is no question at all of the income derived therefrom being agricultural income within the definition given in section 2(1) of 1922 Act. Where, however, the assessee performs subsequent operations on these products of land which are of wild or spontaneous growth, the nature of those operations would have to be examined to see if they are performed in conjunction with the basic operations of cultivation of the land. If so, the product can be treated as agricultural product. The assessee owned an area of 6,000 acres of forest land assessed to land revenue and grown with sal and piyasal trees. The forest was
296 Section 2(1)
Income Tax Digest.
originally of spontaneous growth, not grown by the aid of human skill and labour and it had been in existence for about 150 years. Considerable income was derived by the assessee from sale of trees from this forest. The tribunal had found that the forest was occasionally parcelled out for the purposes of sale and space from which trees sold were cut away, was guarded by forest guards to protect offshoots. It had been satisfactorily proved that considerable amount of human labour and care was being applied year after year for keeping the forest alive as also for reviving the portions that get denuded as a result of destruction by cattle and other causes. The staff was employed by the assessee to perform the following specific operations: (a) pruning, (b) weeding, (c) felling, (d) clearing, (e) cutting of channels to help the flow of rain water, (f) guarding the trees against pests and other destructive elements, and (g) sowing of seeds after digging of the soil in denuded areas. The Tribunal found that the employment of human labour and skill on items (a) to (f) was necessary for the maintenance and upkeep of any forest of spontaneous growth. Regarding item (g), however, it found that the said operation had been performed only occasionally and over a small fraction of the area where the original growth had been found to have been completely denuded. Such occasions were, however, few and far between; the normal process being that whenever a tree was cut, a stump of about 6” height was left intact which set forth offshoots all round bringing about fresh growth in course of time. This went on perpetually unless an area got otherwise completely denuded. The question was whether the impugned income was agricultural income. Held that forest in question was of spontaneous growth. If there were no other facts found, that would entail the conclusion that the income was not agricultural income. But then, it had also been found by the Tribunal that the forest was more than 150 years‟ old, though portions of the forest had from time to time been denuded, that is to say, trees had completely fallen and the proprietors had planted fresh trees in those areas, and they had performed operations for the purpose of nursing the trees planted by them. It could not be denied that so far as those trees were concerned, the income derived therefrom would be agricultural income. In view of the fact that the forest was more than 150 years‟ old, the areas which had thus become denuded and replanted could be considered to be negligible. The position, therefore, was that the whole of the income derived from the forest could not be treated as non-agricultural income. If the enquiry had been directed on proper lines, it would have been possible for the Income Tax authorities to ascertain how much of the income was attributable to
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Section 2(1)
forest of spontaneous growth and how much to trees planted by the proprietors. But no such enquiry had been directed, and in view of the long lapse of time, it was not desirable to direct any such enquiry now. The expenditure shown by the assessee for the maintenance of the forest was about Rs.17,000 as against a total income of about Rs.51,000. Having regard to the magnitude of this figure, a substantial portion of the income must have been derived from the trees planted by the proprietors themselves. As no attempt had been made by the department to establish which portion of the income was attributable to forest of spontaneous growth, the impugned income was agricultural income. Case review : Decision of the Calcutta High Court in Raja Benoy Kumar Sahas Roy v. Commissioner of Income Tax [1953] 24 ITR 70 affirmed. Judicial analysis : The following are the significant observation of Commissioner of Income Tax v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC): “The expenditure shown by the assessee for the maintenance of the forest is about Rs.17,000 as against a total income of about Rs.51,000. Having regard to the magnitude of this figure, we think that a substantial portion of the income must have been derived from trees planted by the proprietors themselves. WERE EXPLAINED IN - Commissioner of Income Tax v. Ramakrishna Deo [1959] 35 ITR 312 (SC) in the following words: “. . . . . These observations do not lay down that if considerable amounts are expended in the maintenance of forests, then it must be held that the trees were planted by the proprietors. They only mean that if a considerable portion of the forests is found to have been planted, a substantial portion of the forest income may be taken to have been derived therefrom. And this too, it must be remarked, is only a presumption of fact, the strength of which must depend on all the facts, found . . . . .” EXPLAINED IN - Commissioner of Income Tax v. Kanan Devan Hills Produce Co. Ltd. [1993] 200 ITR 453 (Calcutta) with the following observations: “. . . . . the view of the Supreme Court appears to be that, where the trees have been planted and nurtured, the operations of planting and nurturing trees would be agricultural and the income derived from sale of such trees would be agricultural income . . . . . ” (p.459) FOLLOWED IN - Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income Tax [1957] 32 ITR 587 (SC), Commissioner of Income Tax v. Jyotikana Chowdhurani [1957] 32 ITR 705 (SC) and Commissioner of Income Tax v. Ramakrishna Deo [1959] 35 ITR 312 (SC).
298 Section 2(1)
Income Tax Digest.
Raja Pratap Bikram Shah v. Commissioner of Income Tax – [1946] 14 ITR 788 (Oudh) 488.
Sale proceeds of fruits of trees of spontaneous growth.
Income from sale of fruits of trees of spontaneous growth is not agricultural income. Raja Pratap Bikram Shah v. Commissioner of Income Tax – [1946] 14 ITR 788 (Oudh) 489.
Grass of spontaneous growth.
Income from sale of grass of spontaneous growth is not agricultural income. Raja Bahadur Major Raja Durga Narain Singh Commissioner of Income Tax – [1947] 15 ITR 235 (All.) 490.
v.
In case of income from sale of grass, moonj and forest trees which were not grown by actual cultivation.
Income from the sale of grass, moonj and patwar and forest trees which had not grown as a result of actual cultivation is not agricultural income, even though the land on which they were grown is assessed to land revenue. _______________
INTEREST ON ARREARS OF RENT
Commissioner of Income Tax v. Raja Bahadur Kamakhaya * Narayan Singh [1948] 16 ITR 325 (PC) ; Al. VR. V.P. Pethaperumal Chettiar v. Commissioner of Income Tax [1943] 11 ITR 532 (Mad.); Kumar Deba Prosad Garga v. Commissioner of Income Tax [1943] 11 ITR 546 (Cal.); Province of Bihar v. P.C. Lal Choudhury [1945] 13 ITR 309 (Pat.); Rajah Inuganti Rajagopala Venkata Narasimha Rayanim Bahadur Varu v. Commissioner of Income Tax 6 ITC 63 (Mad.); Manager; Radhika Mohan Roy Wards Estate; in re [1940] 8 ITR 460 (Cal.) 491.
Income on arrears of rent payable in respect of land used for agricultural purposes is not agricultural income.
Interest clearly is not rent. Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrears is not such a payment. It is not part of the rent, nor is it an accretion to it, though it is received in respect of it. Equally clearly the interest on rent is revenue, but it is not revenue derived from land. It is no doubt true
299 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
that without the obligation to pay rent - and rent is obviously derived from land - there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of fact. All that emerges is that as regards the interest, land rent and nonpayment of rent stand together as cause sine quibus non. The source from which the interest is derived has not thereby been ascertained. The word „derived‟ is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest, land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition. There is no commercial connection between the interest and the rented land and effective source - not land - has become apparent. The mere fact that for a considerable period Income Tax authorities had not treated interest on rent in arrears as taxable, and that in their Manuals published from time to time this view was openly stated, was not a valid contention so as to draw the inference that the Legislature had by the repetition of the debated phrase adopted the meaning attributed to it by the taxing authorities. There was indeed no evidence that the Legislature was aware of the practice. It could not be assumed that a practice purporting to give effect to a definition had resulted in the creation of such a generally received meaning embodying that practice as would justify the inference that the attributed meaning had been silently adopted by the Legislature. Accordingly, interest on arrears of rent payable in respect of land used for agricultural purposes is not agricultural income within the definition of that phrase contained in section 2(1) of the 1922 Act. Note: See also Premier Construction Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 380 (PC). Case review: Decision of the Patna High Court in Zainuddin Hussain Mirza v. Commissioner of Income Tax [1944] 12 ITR 428 affirmed. Manager, Radhika Mohan Roy Wards Estate, in re [1940] 8 ITR 460 (Cal.) and AL. VR. V.P. Pathaperumal Chettiar v. Commissioner of Income Tax [1943] 11 ITR 532 (Mad.) approved. Mst. Sarju Bai v. Commissioner of Income Tax [1947] 15 ITR 137 (All) and Srimati Lakshmi Daiji v. Commissioner of Income Tax [1944] 12 ITR 309 (Pat.) overruled. Judicial analysis: EXPLAINED IN - Mrs. Bacha F. Guzdar v. Commissioner of Income Tax [1952] 22 ITR 158 (Bom.) in the following words:
300 Section 2(1)
Income Tax Digest.
“This decision [i.e. Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC)] in terms emphasises that in order to give a meaning to the word „derived‟, although you may look back into the source of the income, you must not go right back to its ultimate source. The moment you come to an immediate and effective source, one ought not to go any farther.” (p. 175) EXPLAINED IN - Hindustan Lever Ltd. v. Commissioner of Income Tax [1980] 121 ITR 951 (Bom.) in the following words: “The Privy Council [in Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC)] restricted the effect and the meaning to be ascribed to the word „derived‟. In its view if an inquiry was to be made as to the genealogy of the item under consideration, the inquiry was required to be stopped as soon as the effective source is discovered.” (p. 961) DISTINGUISHED IN - Manubhai A. Sheth v. N.D. Nirgudkar, Second Income Tax Officer [1981] 128 ITR 87 (Bom.) with the following observations: “. . . . . We fail to see how this decision supports the case of the respondents. If one were to trace the genealogy of gains or profits arising from transfer of lands, the immediate and effective source of such gains or profits, which are revenue would be land. This revenue would not have been earned but for the land which has been sold. The fact that section 45 uses the words „arising from the transfer of a capital asset‟ makes no difference. From this it does not follow that profits or gains arising from the transfer of land is not revenue derived from land . . . . . ” (pp.107-108) DISTINGUISHED ON FACTS IN o
ITAT v. B. Hill & Co. (P.) Ltd. [1983] 142 ITR 185 (All.), on the ground that, in the case before the Privy Council the nature or character of the relationship between the parties underwent a legal change, whereas in the case on hand, the business of export of carpet and the sale of import entitlements was part of the same business of the assessee. (p.194)
o
CAIT v. Malayalam Plantations Ltd. [1948] 115 ITR 624 (Ker.) since the Privy Council decision merely illustrated what would not constitute agricultural income, but was not of much assistance in deciding what should be the outgoings therefrom under an essentially different statutory scheme. (p.627)
PRINCIPLES REGARDING SOURCE FOLLOWED IN - Maharaja Pratap Singh Bahadur v. Province of Bihar [1949] 17 ITR 202 (pat.), Commissioner of Income Tax v. Maddi Venkatasubbayya [1951] 20 ITR 151 (mad.), Mr. Bacha F. Guzdar v. Commissioner of Income Tax [1952] 22 ITR 158 (Bom.), J.K. Trust v. Commissioner of Income Tax/CEPT [1953] 23 ITR 143 (Bom.),
301 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Jyotikana Chowdhurani v. Commissioner of Income Tax [1954] 26 ITr 424 (Assam)(SB), Sir Kameshwar Singh v. Commissioner of Income Tax [1954] 26 ITR 121 (pat.), Raja Bahdur Vishweshwara Singh v. Commissioner of Income Tax [1954] 26 ITR 573 (Pat.). Puthuthottam Estates (1943) Ltd. v. Agrl. Income Tax Officer [1958] 34 ITR 764 (Mad.), M.L. Narasimhiah Setty v. Agrl. Income Tax Officer [1965] 55 ITR 616 (Mys.) (dividends), CAIT v. Narayanan Tratan Namboodiripad [1967] 64 ITR 57 (Ker.), Commissioner of Income Tax v. Saraf Trading Corpn. [1968] 69 ITR 62 (Ker.), Commissioner of Income Tax v. K.S. Imam Saheb [1969] 71 ITR 724 (Mad.), Fakir Chand v. Commissioner of Income Tax [1963] 49 ITR 842 (All.) (interest on mortgage), Commissioner of Income Tax v. All India Tea & Trading Co. Ltd. [1978] 113 ITR 545 (Cal.) (land compensation), Cochin Co. v. Commissioner of Income Tax [1978] 114 ITR 822 (Ker.)(import entitlements), Addl. Commissioner of Income Tax v. Challapalli Sugars Ltd. [1979] 116 ITR 255 (AP), Commissioner of Income Tax v. D.G. Goenka [1981] 129 ITR 260 (Bom.)(dividends), Commissioner of Income Tax v. Gauri Shankar Agrawal [1981] 131 ITR 27 (All.), Ahmedabad Mfg. & Calico Printing Co. Ltd. v. Commissioner of Income Tax [1982] 137 ITR 616 (Guj.)(Export profits), Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Commissioner of Income Tax [1983] 143 ITR 590 (MP)(import entitlements) and Sterling Foods v. Commissioner of Income Tax [1984] 150 ITR 292 (Kar.)(profits from new industrial undertakings).
Manager, Radhika Mohan Roy Wards Estate, in re [1940] 8 ITR 460 (Cal.); Kumar Deba Prosad Garga v. Commissioner of Income Tax – [1943] 11 ITR 546 (Cal.) 492.
Income on arrears of rent payable in respect of land used for agricultural purposes is not agricultural income.
Income arising from interest on arrears of rent under section 67 of the Bengal Tenancy Act is not agricultural income within the meaning of section 2(1)(a). AL. VR. V.P. Pethaperumal Chettiar v. Commissioner of Income Tax [1943] 11 ITR 532 (Mad.) 493.
Income on arrears of rent payable in respect of land used for agricultural purposes is not agricultural income.
Interest on arrears of rent payable by a ryot to a landholder under section 61 of the Madras Estates Land Act is not agricultural income within the meaning of section 2(1)(a). Hajee Cassim Tayoob Surty v. Commissioner of Income Tax – 6 ITC 41 (Rangoon) 494.
Where loan was repaid in form of agricultural produce.
The assessee, who was a landowner, claimed that income from loans on the sabape system made to his tenants was agricultural income.
302 Section 2(1)
Income Tax Digest.
Loans made on the sabape system were loans made in cash at the beginning of the cultivating season and repayable in paddy at harvest time. The excess in value of the paddy received by the assessee over the cash lent by him to the cultivators was taken as his taxable income from this source. Held that as the sabape loans under consideration were transactions between a lender and a borrower the mere fact that the lender happened to be the landlord of the borrower was nihil ad rem, these transactions being loan transactions, the income accruing to the assessee therefrom was not „agricultural income‟ within the meaning of that term in section 2(1)(a). _______________
ANNUITY
Maharajhumar Gopal Saran Narain Singh v. Commissioner of Income Tax – [1935] 3 ITR 237 (PC) 495.
Where agricultural land is exchanged for annuity, annuity is not agricultural income.
Where the assessee had exchanged his agricultural land for a certain annual sum payable for life, payment of which was secured by creating a charge on land, and claimed that the annuity was agricultural income, it was held that it was impossible to hold that this annual payment was agricultural income within the meaning of the Act; it was not rent or revenue derived from land; it was money payable under a contract imposing a personal liability on the covenantor the discharge of which was secured by a charge on land; the covenantor was at liberty to make the payments out of any of her moneys, and was bound to make them whether the land was sufficiently productive or not. Case review: Decision of Patina High Court in Commissioner of Income Tax v. Gopal Sharan Narain Singh [1934] 2 ITR 264 affirmed. Judicial analysis: DISTINGUISHED ON FACTS IN - Munabhai A. Sheth v. N.D. Nirgudkar, Income Tax Officer [1981] 128 ITR 87 (Bom.), since the case before the Supreme Court turned upon its own facts and the question of capital gains did not arise in that case because at that time no capital gains tax had been leviable. (p. 109) _______________
303 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
COMMISSION
H.T. Conville v. Commissioner of Income Tax – [1936] 4 ITR 137 (Lahore) 496.
Commission received by owner for selling agricultural produce of tenants is not agricultural income.
Where the assessee had undertaken to sell the produce of the tenants either to Government or in the market, it was held that the net profit from commission did not fall within the definition of agricultural income under section 2(1). _______________
SALARY / REMUNERATION
Premier Construction Co. Ltd. v. Commissioner of Income Tax – [1948] 16 IR 380 (PC) 497.
Where portion of income of managed company consists of agricultural income, it does not imply that any part of remuneration paid to managing agent is agricultural income.
Where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income, it earns exemption, in whatever character the assessee receives it. The assessee was the managing agent of a company, and was entitled to a minimum annual salary of Rs.10,000, which was payable irrespective of whether or not the principal company had made any profit, and if, in any year ten per cent of the profits made by the principal company exceeded Rs.10,000, then the agent got remuneration calculated as a percentage upon the profits of the principal company, without regard to the sources from which those profits were derived. Part of the managed company‟s income was agricultural income. The question for consideration was whether any part of the managing agency remuneration could be treated as agricultural income. Held that the assessee received no agricultural income as defined by the Act, but it received remuneration under a contract of personal service calculated on the amount of profits earned by the employer, payable, not in specie out of any item of such profits, but out of any
304 Section 2(1)
Income Tax Digest.
moneys of the employer available for the purpose. No part of the remuneration, therefore, was agricultural income. Case review : Decision of the Bombay High Court in Premier Construction Co. v. Commissioner of Income Tax [1945] 13 ITR 391 affirmed. Judicial analysis: DISTINGUISHED ON FACTS IN - Choudhary Md. Nazirul Hassan v. State of Bihar [1957] 31 ITR 385 (Pat.) on the ground that, while the assessee in the case before the Supreme Court received remuneration under a contract of service, the assessee in the case on hand was entitled to be treated as a beneficiary, and not as a servant of the trust by contract. (pp. 394-95)
Major Conville v. Commissioner of Income Tax – [1935] 3 ITR 404 (Lahore) 498.
Allowance paid to co-owner of agricultural land for managing land is not agricultural income.
Allowance paid by one co-owner of agricultural estate to another coowner to manage it is not agricultural income. E.C. Danby v. Commissioner of Income Tax – [1944] 12 ITR 351 (Pat.) 499.
Remuneration to partner of a firm having agricultural income, for managing estate, is not agricultural income in partner‟s hands.
Remuneration paid to the partner of a firm, owning agricultural estate, for managing estate is not agricultural income in the partner‟s hands. Such remuneration, even though the property managed is agricultural, is in the nature of „salary‟, the mere fact that its ultimate source is agricultural property will not make it agricultural income because the payment is received not as part of his profit from the agricultural property, but as remuneration due to him for work done as manager of the property. H. T. Conville v. Commissioner of Income Tax – [1936] 4 ITR 137 (Lahore) 500.
Remuneration received by the lambardar for collecting land revenue is not agricultural income.
Section 2(1) applies to the case of a person who gets agricultural income from the use of the land by direct operation. It is not applicable to a person who gets certain fees which constitutes his remuneration for the work of the collection of the land revenue. Thus, remuneration received by the lambardar for collecting land revenue is not agricultural income.
305 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Nawab Habibullah v. Commissioner of Income Tax – [1943] 11 ITR 295 (PC) 501.
Remuneration paid to mutawalli of wakf having agricultural properties, is not agricultural income.
The assessee was the mutawalli of a wakf and was entitled to monthly remuneration. Under the scheme the assessee had only powers of management of the wakf estate and those powers were limited in certain respects by the control of a Committee of management. The wakf had agricultural properties and the recovery of the rents depended on the rights of the wakf estate, and on the assessee‟s performance of his duties of management as mutawalli, and the amount of his remuneration did not depend either on the nature of the properties or assets which constituted the wakf estate, nor on the amount of the income derived therefrom by the wakf estate. The question for consideration was whether the remuneration received by the mutawalli could be treated as agricultural income. Held that, albeit the income received by the wakf estate was within the definition of agricultural income in section 2(1) of the 1922 Act, the sums drawn therefrom as remuneration by the assessee were not agricultural income received by the assessee. Obiter dicta: “Their Lordships desire to add that a different question might have arisen if the appellant‟s remuneration had been by way of a fractional part of the income of the wakf estate, or by a percentage commission. That case may be considered if and when it arises, and their Lordships express no opinion thereon.” Case review: Decision of the Calcutta High Court in K. Habibullah, in re [1941] 9 ITR 292 affirmed. Judicial analysis : EXPLAINED IN - Obiter dicta was explained in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income Tax [1957] 32 ITR 377 (Pat.) in following words: “. . . . . the observations of the Privy Council in this decision cannot prevail over the concluded opinion of the Privy Council in the subsequent case [of Premier Construction Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 380]”. (p.392) DISTINGUISHED ON FACTS IN - Commissioner of Income Tax v. Mrs. E.V.H. Miller [1956] 29 ITR 296 (Lahore). FOLLOWED IN - Premier Construction Co. v. Commissioner of Income [1945] 13 ITR 391 (Bom.), Jawad Ali Shah v. Commissioner of Income [1950] 18 ITR 95 (All.), Mathew Abraham v. Commissioner of Income [1964] 51 ITR 467 (Mad.) and Bhagavandas Narayandas v. Agrl. Income Officer [1968] 70 ITR 128 (Mad.).
Tax Tax Tax Tax
306 Section 2(1)
Income Tax Digest.
Syed Mohammad Isa v. Commissioner of Income Tax – [1942] 10 ITR 267 (All.) 502.
Where Remuneration to mutawalli held as agricultural income.
The assessee was the mutawalli in respect of three trusts. The corpus in each case consisted of landed as well as house properties. He was to realize the income from agricultural and non-agricultural properties and distribute a portion thereof among the charitable institutions. The mutawalli was required to perform the functions of his office and, so long as he did so, he was entitled, in consideration for these services, to appropriate the residue of the profits. In each case he was a beneficiary with an obligation attached to his enjoyment of the benefit. He had two capacities, one as mutawalli and the other as beneficiary. The question for determination was whether the assessee, when as beneficiary he appropriated the money from the fund held by himself as mutawalli, he „received‟ it as agricultural income within the meaning of section 4(3) of the 1922 Act or whether, in the process of passing through his hands as mutawalli into his hands as beneficiary, it lost its character of agricultural income; whether in other words, a new source was created, the effect of which was that the money which passed into his hands as beneficiary ceased to be agricultural income. Held that the trustee is the channel through which the beneficiary receives the money, and the latter is for all intents and purposes the direct recipient. There is thus no change of source and no alteration in the character of the income; it remains agricultural income after it has passed into the hands of the beneficiary. Therefore, the money received by the assessee on the assumption that it all originated from zamindari property, was agricultural income in the hands of the assessee within the meaning of section 2(1) of the Act. This finding, however, did not dispose of the reference, for, in this particular case there were two classes of income, one from zamindari and the other from urban property. Presumably the two sets of income formed a composite fund in the hands of the mutawalli; it was not suggested that two separate funds were maintained by him and that payments therefrom were separately made and recorded. Assuming, therefore, that there was a composite fund for the income from zamindari and for the income from non-agricultural property, the question which fell for consideration was whether the agricultural income having once passed into this common fund, lost its character as agricultural income and passed out of it as assessable income. The Act made no provision for such a case as the present one and it seemed that some equitable method must be evolved which will operate justly both as regards the assessee and as regards the
307 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
department. The obvious method to apply was to treat the residue in the hands of the assessee as being composed of agricultural and nonagricultural income in the same ratio as the total of these two classes of income bore to each other at the time when they passed into the common fund. Case review - K. Habibullah, in re [1941] 9 ITR 292 (Cal.)* distinguished with the following observation. “The facts of that case were distinguishable, from the facts of the case which is now before us in two respects. In the first place the remuneration received by the mutawalli took its origin from a scheme of administration which was drawn up under a compromise decree; and in the second place the remuneration was payable either out of income or out of the corpus. In the present case the balance of the income from the zamindari property goes through the mutawalli to the beneficiary (who happens to be one and the same person) by virtue of an obligation imposed under the terms of the trust-deed itself upon the income of the property”. (p. 276) _______________
RENT
H.T. Conville v. Commissioner of Income Tax – [1936] 4 ITR 137 (Lahore) 503.
Rent received for site of flour mill is not agricultural income.
The rent of the site of a flour mill cannot be regarded as rent or revenue derived from land which is used for agricultural purposes. The working of a flour mill is not an agricultural operation. Thus, the rent of the site of the flour mill does not fall within any of the other provisions of section 2(1), and therefore, it cannot be regarded as agricultural income. AL.VR. ST. Veerappa Chettiar v. Commissioner of Income Tax – [1941] 9 ITR 56 (Mad.) 504.
Rent collected by receiver and paid over to mortgagee of land is not agricultural income in mortgagee‟s hands.
Where in a suit for recovery of debt a receiver was appointed under a compromise decree, who collected the rent of mortgaged land and paid it over to the assessee-mortgagee who was not even in the position of a sufructuary mortgagee but he held a simple mortgage and the title of
*
Affirmed in Nawab Haibullah v. Commissioner of Income Tax [1943] 11 ITR 295 (PC).
308 Section 2(1)
Income Tax Digest.
the estate had not vested in him, it was held that the rent received by the mortgagee was not agricultural income. Rani Bhubneshwari Kuar v. Commissioner of Income Tax – [1940] 8 ITR 550 (Pat.) 505. Composite rent for agricultural/non-agricultural land. Where a single amount is received as rent for agricultural and nonagricultural land, it is open to the Income Tax authorities to apportion it and assess the portion attributable to non-agricultural land to Income Tax. _______________
INCOME FROM MORTGAGE
Mukund Sarup v. Commissioner of Income Tax – 2 ITC 495 (All.) 506. Income from mortgaged land. If a person carrying on money-lending business lends money in the course of such business on the security of lands of which he take as usufructary mortgage and if he immediately leases those lands back to the mortgagor with a stipulation for fixed annual payments, which amount to a definite percentage (8-1/2 in the instant case) on the sum advanced, those annual payments be excluded from the assessment of the profits and gains of his business as being agricultural income within the meaning of section 2(1)(a). T.K.E. Ibrahimsa Ravuttar v. Commissioner of Income Tax – 3 ITC 33 (Mad.) 507. Income received by assessee money-lender from usufructuary mortgage of agricultural land, is agricultural income. Where the assessee money-lender lent money in interest-free simple usufructuary mortgage of agricultural land, and the income from the mortgaged properties was enjoyed by the assessee-mortgagee with possession: Held that the income derived from the mortgaged lands was rent derived from land used for agricultural purpose and thus exempt from assessment. Commissioner of Income Tax v. Subramanya Sastrigal – 2 ITC 152 (Mad.) 508. Where assessee money-lender leases land, usufructuary mortgaged to him, to mortgagor, payment received for such lease will not be agricultural income in assessee‟s hands. Where in the course of his money-lending business, the assessee lent money on the security of lands usufructuary mortgaged to him, but
309 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
simultaneously the assessee leased the lands to the mortgagor with stipulations for fixed annual payment as rent: Held that since the mortgage was taken in the course of business, the annual payment could not be taken as agricultural income. Khan Muhammad Yakub Khan & Khan Muhammad Aslam Khan v. Commissioner of Income Tax – 3 ITC 308 (Lahore) 509.
If a person who lends a sum of money on security of land of which he takes a mortgage with possession on condition that he will receive an annual payment during term of mortgage, does not receive payment stipulated upon, but obtains a further mortgage deed for arrears due and finally purchases land and receives payment by way of deduction from sale money agreed upon of original sum loaned plus annual recurring payment due, sum received in excess of original loan be regarded as interest and not as agricultural income.
If a person who lends a sum of money on the security of land of which he takes a mortgage with possession on the condition that he will receive an annual payment during the term of the mortgage, does not receive the payment stipulated upon, but obtains a further mortgage deed for the arrears due and finally purchases the land and receives payment by way of deduction from the sale money agreed upon of the original sum loaned plus the annual recurring payment due, the sum received in excess of the original loan be regarded as interest and not as „agricultural income‟ within the meaning of section 2(1) of the Act. Under a possessory mortgage of lands the assessee-mortgagee, a money-lender, was entitled to receive lease amounts from the lessee already in possession, and in case of default in payment by the lessor, the lease amount was added to the mortgage amounts for being recovered from the mortgagor. For such successive defaults, the lease amounts were added to the principal mortgage amount. Ultimately the assessee purchased the lands, after paying sale price less lease amounts aggregated in the above manner. The assessee claimed that the lease amounts so adjusted, were his agricultural income. Held that the mortgage, though described as with possession, was in fact a simple mortgage and, from its terms, it was clear that the mortgagee was only entitled to a fixed sum in consideration for the money lent, and had otherwise no concern in the produce of the land
310 Section 2(1)
Income Tax Digest.
or with the possession thereof. This fixed sum, therefore, could not be said to be income from the land. Commissioner of Income Tax v. Sir Kameshwar Singh – [1935] 3 ITR 305 (PC) 510.
Where assessee-money-lender made loan under a zarpeshgi lease with usufructuary mortgage, and indenture provided that (a) lessor-mortgagor was to convey agricultural lands to lesseemortgagee, and (b) certain rent was reserved to mortgagor as thika rent and mortgagee was to take balance of profits, profits received by assessee was agricultural income.
Agricultural income is excluded altogether from the scope of the Act. The exemption is conferred indelibly on a particular kind of income and does not depend upon the character of the recipient. Such income does not become assessable as business profits merely because it is received by the assessee, not as an ordinary landlord or proprietor, but as a a part of the income profits or gains of a money-lending business carried on by him. In 1929, the assessee‟s father, who carried on an extensive moneylending business, made a loan under an indenture described as a „zarpeshgi lease with usufructuary mortgage‟. By this deed the lessormortgagor conveyed to the lessee-mortgagee certain land for a period of fifteen years. A certain portion of the rents was reserved to the mortgagor as thika rent and the mortgagee was allowed to take the balance of the profits after deducting the expenses as thika profits in consideration of the loan. The indenture further provided that the thika rent should form part of the yearly payments which the lessormortgagor thereby undertook to make in reduction of the loan and should be increased as the amount of the loan diminished by 6 per cent on the sums with a corresponding reduction in the thika profits. The question was whether thika profit received by the assesseemortgagee was agricultural income. Held that thika profit received by the assessee, lessee-mortgagee, was agricultural income. Case review: Decision of the Patna High Court in Commissioner of Income Tax v. Sir Kameshwar Singh (Maharaja of Darbhanga) [1934] 2 ITR 107 affirmed. Mukund Sarup v. Commissioner of Income Tax 2 ITC 495 (All.) approved. Judicial analysis : DISTINGUISHED ON FACT IN o
Commissioner of Income Tax v. Asian Assurance Co. Ltd. [1962] 46 ITR 560 (Bom.), on the ground that, while the establishment of
311 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
the fact that a particular income was agricultural income was sufficient to take it out from the total income of the assessee, merely establishing that a particular income was income from house property built between 1946 and 1956 was not sufficient to claim the benefit of section 4(3)(xii) of the 1922 Act. (pp. 567-568) o
Maharajadhiraja Sir Kameshwar Singh v. Commissioner of Income Tax [1961] 41 ITR 169 (SC), since the earlier decision was concerned with the nature of the primary receipt by mortgagee and not with the appropriation made under the covenant of the deed of mortgage. (p. 174)
FOLLOWED IN - Raja Mustafa Ali Khan v. Commissioner of Income Tax [1948] 16 ITr 330 (PC), State of Bihar v. Maharajadhiraja Sir Kameshwar Singh Bahadur of Darbhanga [1952] 21 ITR 382 (Pat.), K.Simrathmull v. Commissioner of Income Tax [1967] 64 ITR 166 (Mad.), Syed Mohammed Isav. Commissioner of Income Tax [1942] 10 ITR 267 (All.) and Manubhai A. Sheth v. N.D. Nirgudkar, Second Income Tax Officer [1981] 128 ITR 87 (Bom.).
Raja Mustafa Ali Khan v. Commissioner of Income Tax – [1948] 16 ITR 330 (PC) 511.
Rent received under mortgage, where held as agricultural income.
Under a compromise of a long-standing dispute between the Raja of Nanpara Estate and the Raja of the Utraula Estate, the assessee, it was agreed between the parties that there was due from the former estate to the latter a sum of Rs.12,13,079 and a scheme for liquidation of this sum should be funded and liquidated over a period of 10 year bearing interest at 3-1/2 per cent per annum on the unpaid part of the principal amount in the meantime, and should be liquidated by equal annual instalments of Rs.1,45,862 to cover both principal and interest. At the same time, and as part of the liquidation scheme, a deed of mortgage of certain Nanpara Estate Property dated 4.11.1937, and described as a „usufructuary mortgage deed‟ was executed by the Raja of Nanpara as mortgagor in favour of the Court of Wards, acting on behalf of the assessee, the Raja of Utraula, as mortgagee. Simultaneously, and also as part of the scheme, the Court of Wards acting on behalf of the assessee leased back to the Raja of Nanpara by a lease of the same date the whole of the mortgaged property at an annual instalment payable under the mortgage, namely, Rs.1,45,862. The mortgagor paid to the assessee in the relevant previous year a certain sum towards the annual rent. The question was whether the sum paid as rent in respect of lands used for agricultural purposes and assessed to land revenue was in the hands of the assessee „agricultural income‟ and as such exempt from tax.
312 Section 2(1)
Income Tax Digest.
Held that it was immaterial whether any part of the sum in any account as between mortgagor and mortgagee was or ought to be appropriate to the payment of principal or of interest or to any other purpose and it was also not necessary to analyses the payment nor to consider whether, insofar as any part of it was in respect of a principal sum, that principal sum was itself an aggregate of a principal sum and interest. The salient and decisive fact was that the assessee being in possession of the mortgaged property was entitled to receive and received the rents thereof. It was conceded that if the assessee was truly a usufructuary mortgagee within the meaning of section 57(d) of the Transfer of Property Act, 1882, and in that capacity received the rent in question, it would be in his hands agricultural income and exempt from tax. But it was contended that, if the assessee was not such a usufructuary mortgagee then, notwithstanding that he went into possession and received the rent, it was not agricultural income. For this reason the revenue was at pains to show that the mortgage in question was not a usufructuary mortgage within section 57(d) of the said Act. But it was unnecessary to pursue this question, for the rent of agricultural land received by a usufructuary mortgagee was agricultural income not because he was a usufructuary mortgagee but because, being a usufructuary mortgagee, he had gone into possession and received the rent. So also the assessee, being a mortgagee, usufructuary or other, had gone into possession and the rent that he received was agricultural income. Thus, the impugned sum was agricultural income. Case review : Decision of the Oudh Chief Court in Raja Mustafa Ali Khan v. Commissioner of Income Tax [1945] 13 ITR 98 affirmed. Commissioner of Income Tax v. Janab Haji Muhammad Sadak Khoyee Sahib [1935] 3 ITR 1 (Mad.) approved. _______________
LEASE RENT
Maharajadhiraj Sir Bijay Chand Mahtab Burdwan, in re – [1940] 8 ITR 378 (Cal.) 512.
Bahadur
of
Whether lease rent is agricultural income or not has to be determined not with reference to purpose of lease when originally let out but by reference to use to which land has been put in relevant previous year.
It is entirely a question of fact whether in the year in question the rent was derived from land which was used for agricultural purposes.
313 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
It is not a question what the land was leased for originally or what it was used for when the lease was originally made. If the zamindar wishes to bring himself within the exemptions from taxation provided by the Act in the case of agricultural land, it is for him to show that the income was derived from land which was used for agricultural purposes. That is a question of fact. Thus, whether lease rent is agricultural income or not has to be determined not with reference to the purpose of the lease when originally let out but by reference to use to which land has been put in the relevant previous year. Chellaiah Pillai v. Commissioner of Income Tax – [1948] 16 ITR 350 (Mad.) 513.
Income from lease of land for grazing cattle required for agricultural pursuits is agricultural income.
A vital point of distinction exists between mere sale of grass and lease of land for purpose of pasture for cattle used solely for agricultural purposes. In a case where land is leased for grazing of cattle required for agricultural pursuits, it must be deemed to be used for an agricultural purpose. Thus, income derived from the land leased for the grazing of cattle required for agricultural pursuits, is to be deemed to be agricultural income as in such a case the land would be deemed to have been used for agricultural purposes. Commissioner of Income Tax v. K.C. Manavikraman Rajah – [1945] 13 ITR 174 (Mad.) 514.
Unjust exactions made by landlord while renewing lease, are agricultural income.
Where the assessee, who had leased certain agricultural lands owned by him to tenants, took from the lessees some money in addition to the usual renewal fee before granting them renewal of the leases, it was held that as the assessee got the additional sum also as owner of the agricultural lands in connection with the renewal of leases, such additional sum was also agricultural income, even if the further exactions were reprehensible. _______________
314 Section 2(1)
Income Tax Digest.
SALAMI (LUMSUMP PAYMENT)
Jyotirindra Narayan Sinha Chowdhury, in re – [1945] 13 ITR 263 (Cal.) 515. Salami for letting out agricultural land. Salami received on letting out of agricultural land is agricultural income. Maharajadhiraj of Darbhanga v. Commissioner of Income Tax – 3 ITC 158 (Pat.) 516. Salami paid to landlord for recognising transfer of land. Nazar or salami paid by the raiyats* to the landlord in consideration of latter‟s recognising the transfer of a holding which is not legally transferable or the legality of the transfer of which is doubtful, is agricultural income. _______________
MAINTENANCE ALLOWANCE
Commissioner of Income Tax v. Lal Suresh Singh – [1935] 3 ITR 356 (Oudh) 517. In case of maintenance allowance received by junior member / others out of impartible estate. Where a junior member of an impartible estate was under an agreement to be paid a certain allowance, which though made a charge on the estate, could be paid from any source, it was held that the allowance was not rent or revenue and was not agricultural income. Maharaja Kumar of Vizianagaram, In re – [1934] 2 ITR 186 (All.) 518. In case of maintenance allowance received by junior member / others out of impartible estate. Where the assessee, a junior member of the impartible Hindu Raj, was given allowance from the income of the impartible estate, it was held that it was not agricultural income inasmuch as the immediate source of the income to the assessee was not the original source through which the estate received the money, i.e., the agricultural estate, but the bounty or gift of the estate. Kunwar Kartar Singh v. Commissioner of Income Tax – [1937] 5 ITR 569 (Lahore) 519. In case of maintenance allowance received by junior member / others out of impartible estate. Where descent of jagir was approved by Government on condition of successor paying fixed allowance to junior member „out of the *
It means “subjects of landlords”.
315 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
assignment‟, which was agricultural income, the allowance received by junior member was also agricultural income. Sundrabai Saheb v. Commissioner of Income Tax – 5 ITC 493 (Bom.) 520.
Maintenance received by widow out of agricultural income of estate of her deceased husband, is not agricultural income.
The assessee was a widow of the deceased who left a will under which the assessee was given Rs.100 a month for maintenance. The widow subsequently applied to the court for a greater allowance by way of maintenance and the High Court ordered that she should get maintenance at Rs.900 a month and be allowed to reside in her present bungalow. The contention of the assessee was that the estate of her husband consisted of land of an agricultural character, the income of the estate was not liable to Income Tax having regard to section 4(3)(viii) of the 1922 Act and thus her allowance by way of maintenance was to be treated as really giving her a part of the estate of her husband and, therefore, something which was free of Income Tax. Held that she was not given a part of the estate or a part of the income but she was given out of the estate a monthly sum of Rs.900. It might be payable out of the income or it might be payable out of the corpus and the mere fact that if it was payable out of the income, that income itself might not be subject to tax was wholly irrelevant. therefore, the monthly maintenance of Rs.900 and the rent of the bungalow were liable to Income Tax. Saltanat Begum, in re – [1933] 1 ITR 379 (Oudh) 521.
Maintenance received by widow out of agricultural income of estate of her deceased husband, is not agricultural income.
Where monthly allowance was paid to the widow of a late Raja, which allowance was made a charge on the Raja‟s taluqdari estate, it was held that it could not be allowed exemption as agricultural income. Vellanki Lakshmi Narasayamma Rao Bahadur (Sree Raja) Zamindarini of Tiruvur v. Commissioner of Income Tax – 3 ITC 428 (Mad.) 522.
Allowance to daughters.
Under a will executed by the zamindar, his wife was appointed as executrix and was given a life interest in the whole of his agricultural properties, with absolute remainder in favour of his daughters. There was a further provision directing that if at any time during the
316 Section 2(1)
Income Tax Digest.
lifetime of his wife either of the daughters should desire to live separately from their mother, such daughter should be paid by the wife an allowance of Rs.600 per mensem. On the question whether arrears of legacy allowance so paid were to be treated as agricultural income. Held that the payment was not agricultural income. The income was in this case derived by the petitioner-daughter from the legacy bequeathed under her father‟s will. The will itself did not direct the executrix to pay the allowance to the petitioner from any specific land or lands used for agricultural purposes. It could have been paid out of the non-agricultural income of the estate just as much as out of the agricultural income and it was not contended or proved that the ultimate source from which the executrix found the money to pay the daughter was identifiable. Even if this had been the contention it did not affect the character of the income so far as the petitioner was concerned, for she derived it not from any land which she owned or possessed, but from the legacy bequeathed to her by the testator. Lal Suresh Singh v. Commissioner of Income Tax – 9 ITC 35 (Oudh) 523.
Relinquishment of estate for monthly allowance.
Where the assessee relinquished his claims in a taluqdari estate in consideration of a monthly allowance, which was a charge on the estate, it was held that allowance was not agricultural income even though the allowance was secured by a charge on the estate as the estate holder was at liberty to make the payments out of any of his moneys. _______________
„FORESTRY‟ AND „AGRICULTURE‟ NOT SYNONYMOUS
Commissioner of Income Tax, East Bengal v. Kumar Ram Narayan Roy Chaudhary & others – [1959] 1-TAX (III-207) = 1959 SCC 68 = PLD 1959 SC 453 524.
„Forestry‟ and „agriculture‟ not synonymous.
The expression “forestry” is not synonymous with “agriculture”. Chellaiah Pillai v. Commissioner of Income Tax – [1948] 16 ITR 350 (Mad.) 525.
Pasturage.
A vital point of distinction exists between mere sale of grass and lease of land for purpose of pasture for cattle used solely for agricultural purposes.
317 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
In a case where land is leased for grazing of cattle required for agricultural pursuits, it must be deemed to be used for an agricultural purpose. Thus, income derived from the land leased for the grazing of cattle required for agricultural pursuits, is to be deemed to be agricultural income as in such a case the land would be deemed to have been used for agricultural purposes. Note : Decision in Mahendralal Choudhari v. Commissioner of Income Tax [1949] 17 ITR 454 (Nag.), Emperior v. Probhat Chandra Barua 1 ITC 284 (Cal.), Commissioner of Income Tax v. R.B. Rai Shamsherjang Bahadur [1953] 24 ITR 1 (All.) does not hold good in view of the Supreme Court decision in Commissioner of Income Tax v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466.
Beohar Singh Raghubir Singh v. Commissioner of Income Tax – [1948] 16 ITR 433 (Nag.) 526.
Lac cultivation.
Lac cultivation cannot be regarded as agricultural operation and, therefore, income from such cultivation is not agricultural income. Maharani Janki Kuer v. Commissioner of Income Tax – 5 ITC 42 (Pat.) 527.
Brick-making.
Where the assessee-landlord has received rent and royalties for granting licences to brick-makers to erect brick kilns on his and to take away earth for manufacturing bricks, such rent and royalties are income chargeable to tax and are not agricultural in nature. Shib Lal Ganga Ram v. Commissioner of Income Tax – 2 ITC 425 (All.) 528.
Quarries.
The assessee was the owner and occupier of certain cultivable lands, which were not actually cultivated. The lands contained valuable stone quarries. Thus, the assessee was paying land revenue to the Government and was assessed upon the basis of the rental value arrived at by taking into account the profits derived from the working of the quarries. Held that the said profits from the quarries could not be said to be agricultural income. Linga Reddi v. Commissioner of Income Tax – 2 ITC 363 (Mad.) 529.
Salt manufacturing.
It would be a gross misnomer to hold that „agricultural purposes‟ could be held to cover the process of flooding the land occupied by letting in
318 Section 2(1)
Income Tax Digest.
the sea water and then extracting the sodium chloride from it by eliminating the other chemical constituents. Maharaja Guru Mahadeo Ashram Prasad Sahi Bahadur v. Commissioner of Income Tax – 2 ITC 281 (Pat.) 530.
Sale of earth.
Income from Nimksayar, i.e. settlement of the right to collect a particular kind of earth in a particular area for the purposes of extracting salt petre, is not exempt from assessment. Colonel Malik Sir Umar Hayat Khan v. Commissioner of Income Tax – 2 ITC 52 (Lahore) 531.
Sale of water from Water canal held not to be agricultural income.
The assessees who were owners of private canals were drawing water directly from a river. This water was used by them (i) to irrigate their own land, and (ii) to irrigate the land of others. The assessee received from the owners of the land irrigated by the surplus water a fourth share of the produce. The question arose, as to whether the income derived by the assessees from the owners of the land irrigated by the surplus water could be held to be „agricultural income‟. Held that the direct source of the income was the supply of the water and the income was simply the price paid for the water supplied. The mere fact that it was paid in kind instead of in cash did not affect the question. The income was directly derived from the sale of water and not from the land to which the water was supplied so far as the assessees were concerned. Therefore, the income in question not being derived from land, could not be regarded as agricultural income. Emperior v. Probhat Chandra Barua – 1 ITC 284 (Cal.) & Raja Bahadur Major Raja Durga Narain Singh v. Commissioner of Income Tax [1947] 15 ITR 235 (All.) 532.
Fisheries.
Income derived from fisheries and land used for stacking timber, is not agricultural income. Commissioner of Income Tax v. V.T.S. Sevuga Pandia Thevar – [1933] 1 ITR 78 (Mad.) 533.
Fisheries.
Where the owner of a permanently settled zamindari derived income by leasing the right to fish in tanks and irrigation supply channels used for agricultural purposes and situate on land assessed to land
319 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
revenue, it was held that the income so derived was not agricultural income as fish are not the produce of the land, their natural element is the water and their cultivation and the welfare depend in no sense upon agriculture. Yagappa Nadar v. Commissioner of Income Tax – 2 ITC 470 (Mad.) 534.
Toddy.
Income derived from toddy is agricultural income when it is received by the actual cultivator, whether owner or lessee of the land on which the trees grow. If the income is obtained by a person who has not produced the trees from which the toddy is tapped, or has not done any agricultural operations whereby those trees have been raised, it is not agricultural income within the meaning of the Act. Kunwar Bishwanath Singh v. Commissioner of Income Tax – [1942] 10 ITR 322 (All.) 535.
Nazrana.
Where the assessee-ruler of a native State used to customarily receive (i) zar-i-chaharum, i.e. one-fourth of the sale price on all transfers of property in his State, and (ii) nazrana, an amount to grant permission to build a house, it was held that these receipts were not agricultural income, and were taxable. Probynabad Stud Farm, In re – [1936] 4 ITR 114 (Lahore) 536.
Dharat.
Income from dharat, i.e. collections from person who are permitted to erect temporary stalls on agricultural lands on weekly bazar days, are not agricultural income. Maharajadhiraj of Darbhanga v. Commissioner of Income Tax – 1 ITC 303 (Pat.) 537.
Jalkar/Hat/Ghattagi/Terries/Moorings.
The rent paid for jalkar (fishing rights), hat, ghattagi (terries or moorings), is not income derived from agriculture. Province of Bihar v. Maharaja Pratap Udai Nath Sahi Deo of Ratugarh – [1941] 9 ITR 313 (Pat.) 538.
Bankar/Lahkar/Phalkar.
The following income is held to be not agricultural as it is not derived from cultivation of land.
320 Section 2(1)
Income Tax Digest.
Bankar: Income from sale of wood from virgin jungle or jungle land not actually cultivated - where trees grow naturally without the intervention of human agency. Lahkar: This is income derived from letting land and trees for the cultivation of lac. Lac is a substance produced by certain insects which are placed on certain trees. Lac does not seem to be the result of any cultivation but is the creation of a particular insect when placed on particular trees. Nothing appears to be done beyond placing the insects on the trees. Phalkar: This is income derived from wild jungle fruits, and it cannot be said that the fruit gathered is the result of the cultivation. Raja Mustafa Ali Khan v. Commissioner of Income Tax – [1948] 16 ITR 330 (PC) 539.
Malikhana.
The assessee‟s ancestors, who held right to a small feudal tribute and to manorial dues, could not manage their estate properly on account of the continued warfare between the neighbouring estates. Therefore, they transferred, made grants of or sold a large number of villages to certain persons for monetary consideration. In doing so they surrendered all their zamindari and proprietary rights and lost all their title to real property in respect of those villages. They, however, retained the right of a small annual cash payment by virtue of their position as the old „pargana lord‟, called the malikhana. The amount of the malikhana was fixed by a settlement decree and was not variable. It was payable whether the land on which it was supposed to be a charge was used for agricultural purposes or not or whether it yielded any profits or not. It was used for agricultural purposes or not or whether it yielded any profits or not. It was admitted that suits for the recovery of this due were cognizable by the Civil Courts and not by the Revenue Courts. The question for consideration was whether the malikhana so received by the assessee would constitute agricultural income. Held that malikhana would never have become payable to the ancestors of the assessee had they not been feudal proprietors of the land. But that did not mean that it was now rent or revenue derived from the land: on the contrary it was paid just because the original proprietors relinquished their claims to the land and it represented the consideration for the relinquishment. The land was in no real sense its source; and even if it was to be regarded as secured by a charge on the land that was no more decisive of the question. The impugned receipt would not, therefore, constitute agricultural income.
321 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
Case review : Decision of the Oudh High court in Raja Mustafa Ali Khan v. Commissioner of Income Tax [1945] 13 ITR 98 affirmed. Judicial analysis : EXPLAINED IN - Implications flowing from above decision in the case of Raja Mustafa Ali Khan v. Commissioner of Income Tax [1948] 16 ITR 330 (PC), were stated in Pydah Suryanarayana Murty v. Commissioner of Income Tax [1961] 42 ITR 83 (AP) in the following words: “. . . . . Where the agricultural land is let out for purposes other than agriculture, such as, for the use of potteries or as brick fields, or as stone quarries or for erecting shops, the income derived therefrom may be indirectly referable to land, but it would not be agricultural income, because it is not derived from the carrying on of agricultural operations.” (p. 90) FOLLOWED IN - Maharaja Pratap Singh Bahadur v. Province of Bihar [1949] 17 ITR 202 (Pat.) and CAIT v. Narayanan Tratan Namboodiripad [1967] 64 ITR 57 (Ker.).
Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax – 4 ITC 15 (Pat.)(FB), Nawabzadi Mehar Bano Khanum v. Commissioner of Income Tax – 2 ITC 99 (Cal.) 540.
Mutation fee.
Mutation fees paid by the assessee‟s tenants upon succeeding to holdings or tenures by inheritance are covered by the term „agricultural income‟. _______________
TEA MANUFACTURERS
Commissioner of Income Tax v. Khan Bahadur Waliur Rahman – [1946] 14 ITR 287 (Cal.) 541.
Rule 8 is applicable only in respect of a seller who manufactures tea which he had himself grown and which he himself sells.
Rule 24* of the 1922 Rules is applicable only in respect of a seller who manufactures tea which he has himself grown and which he himself sells. A and his wife owned their separate tea estate, but jointly purchased a tea manufacturing factory to manufacture and sell their own tea. The Income Tax Officer treated the tea manufacturing business as a partnership. The question was whether rule 24 of the 1922 Rules was applicable to the tea manufactured by this firm.
*
Parallel to rule 25 of the Income Tax Rules, 1982.
322 Section 2(1)
Income Tax Digest.
Held since the tea estates were not the assets of the partnership, rule 24 was not applicable. _______________
COFFEE MANUFACTURERS
Commissioner of Income Tax v. Diwan Bahadur S.L. Mathias – [1939] 7 ITR 48 (PC) 542. Although income from coffee growing in certain cases may be treated as income from business, it will still be „agricultural income‟. The assessee had coffee estates on which coffee was grown by labour recruited by him mainly at another place M where manure, spray materials, tool, crop bags, etc., were also purchased. The crops were harvested by labour and brought to M in raw state because there was no market for raw coffee. The assessee got the green coffee cured at M by persons owning curing factories on payment of a commission to them. The cured coffee was insured against fire till sale. The question was whether the assessee was running a business and if so, whether the income could still be treated as income from agriculture. Held that the assessee was carrying on a „business‟ within the meaning of that word in section 2(4) and 10 of the 1922 Act. The profits as the assessee derived from his possession of land were derived by means of a business; and the fact that agricultural operations formed an element in the business did not render it anytheless a business. On the other hand, the mere circumstance that income was to be placed under the head „business‟ had no effect to negative its being agricultural income as defined by section 2(1) of the 1922 Act. Thus, the impugned income was agricultural income. Case review : Decision of the Madras High Court in Commissioner of Income Tax v. Diwan Bahadar S.L. Mathias [1937] 5 ITR 435 reversed. _______________
SUGAR MANUFACTURERS
Commissioner of Income Tax v. N.S.A.R. Concern – [1938] 6 ITR 194 (Rangoon) 543.
Where business income comprises both agricultural and nonagricultural income, expenditure for earning agricultural income is not allowable.
The expression „such profits or gains‟ in clause (ix) of section 10(2) of the 1922 Act does not include agricultural income and consequently,
323 DEFINITIONS OF „AGRICULTURAL INCOME‟
Section 2(1)
when the business of an assessee comprises both agricultural income as defined in the Act, and other (taxable) income, the assessee is not entitled under section 10(2)(ix) to deduct from such other income the expenditure incurred for the purpose of earning the agricultural income. _______________
REFERENCE TO THE HIGH COURT
Kokine Dairy v. Commissioner of Income Tax – [1938] 6 ITR 145 (Rangoon) 544.
Question as to whether income derived from a business is agricultural income or not, is not a question of fact.
The question whether income derived from a business is agricultural income or not is not a question of fact but a question of law. Maharajadhiraj Sir Bijay Chand Mahtab Burdwan, In re – [1940] 8 ITR 378 (Cal.) 545.
Bahadur
of
It is entirely a question of fact whether in the year in question the rent was derived from land which was used for agricultural purposes.
It is entirely a question of question of fact whether in the year in question the rent was derived from land which was used for agricultural purposes. It is not a question what the land was leased for originally or what it was used for when the lease was originally made. If the Zamindar wishes to bring himself within the exemptions from taxation provided by the Act in the case of agricultural land, it is for him to show that the income was derived from land which was used for agricultural purposes. That is a question of fact. Beohar Singh Raghubir Singh v. Commissioner of Income Tax – [1948] 16 ITR 433 (Nag.) 546.
Question as to whether forest trees are of spontaneous growth or not is a question of fact.
Where the Tribunal clearly found that there was no plantation of trees by the estate authorities worth the name, and that the trees, the income from which was the subject-matter of assessment, must have been of spontaneous growth, it was held that it was a finding of fact which was binding on the Court in a reference.
324 Section 2(1)
Income Tax Digest.
Brihan Maharashtra Sugar Syndicate Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 611 (Bom.) 547.
Question as to whether the process employed by the assessee agriculturist is a process ordinarily employed by a cultivator to render the produce fit to be taken to market, is essentially a question of fact.
The question whether the process employed by the assesseeagriculturist is a process ordinarily employed by a cultivator to render the produce fit to be taken to market, is essentially a question of fact. Brihan Maharashtra Sugar Syndicate Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 611 (Bom.) 548.
Conclusion of the Tribunal that process employed by assessee is a process ordinarily employed by a cultivator is one of fact.
The conclusion of the Tribunal that the process employed by the assessee as mentioned in section 2(1) is a process ordinarily employed by a cultivator is one of fact. Commissioner of Income Tax v. Katragadda Madhusudhana Rao – [1944] 12 ITR 1 (Mad.) 549.
Question as to whether the process of „flue curing‟ was a process coming within section 2(1)(b)(ii), is a question of fact.
The question whether the process of „flue curing‟ was a process coming within section 2(1)(b)(ii), is a question of fact.
325 DEFINITION OF „ASSESSEE‟
Section 2(6)
Section 2(6)* Assessee
PAGE NO
SCOPE OF DEFINITION
550.
551. 552.
Custodian of “enemy property” is an “assessee” so long as _ company remains an “alien enemy”. 1978 SCC 453 = [1978] 38 TAX 132 (S.C.Pak.)
326
Word „assessee‟ in the definition has not the same meaning _ as in sections, 24, 64. [1976] 33 TAX 99 (H.C.Kar.)
326
A registered firm does not cease to be “assessee” after _ apportionment of tax liability between the partners. [1974] 29 TAX 64 (H.C.Lah.) = 1974 PTD 28
326
ASSESSEE VIS-A-VIS - TRUST
553.
*
“Assessee” is a person who is in control of income of trust. _ [1936] 4 ITR 114 (Lahore)
Corresponding to section 2(2) of the 1922 Act.
328
326 Section 2(6)
Income Tax Digest.
Section 2(6)* Assessee
SCOPE OF DEFINITION
Associated Cement Companies Ltd. v. Commissioner of Income Tax, Lahore Range, Lahore and others – 1978 SCC 453 = [1978] 38 TAX 132 (S.C.Pak.) 550.
Custodian of “enemy property” is an “assessee” so long as company remains an “alien enemy”.
The provisions of section 4 of Defence of Pakistan Ordinance, 1965 has ascendancy over all other laws including the Income Tax Ordinance, 1979. Therefore, for the purposes of section 2(6) of Income Tax Ordinance, 1979, “the Custodian of Enemy Property” would be an assessee having supplanted the company in Pakistan for all purposes so long as the company remains an “alien enemy”. He is, therefore, justified in representing the company before the Income Tax authorities and paying the income tax dues on behalf of the company. Sheikh Miran Bux Karam Bux Ltd., Karachi v. Income Tax Officer, Company Circle 12, Karachi – [1976] 33 TAX 99 (H.C.Kar.) 551.
Word „assessee‟ in the definition has not the same meaning as in sections, 24, 64.
It will have to be seen, in a given case, whether paragraph (b) should be given a different meaning in the context of the provisions of the Act, as in the case of the term „assessee‟, which has not given the same meaning in section 24 and 64, as is defined in section 2(2) of the Act. Sh. Ihsan Ilahi & Co., Lyallpur v. Commissioner of Income Tax, Rawalpindi Zone (West Pakistan) – [1974] 29 TAX 64 (H.C.Lah.) = 1974 PTD 28 552.
A registered firm does not cease to “assessee” apportionment of tax liability between the partners.
after
The definition of the term „assessee‟ read with the charging section 3 and section 23(5) of the Act go to show that a registered firm does not *
Corresponding to section 2(2) of the 1922 Act.
327 DEFINITION OF „ASSESSEE‟
Section 2(6)
cease to be the assessee despite the apportionment of the tax liability between the partners of the firm. For the purposes of assessment at all relevant material stages under sections 22 and 23 it is the firm that is treated as an assessee. When a return of income is made for the relevant year it is a return with regard to the total income of the firm that has to be submitted . under section 22 and when an assessment is levied under section 23 the Income Tax Officer determines the total income of the firm. The effect of the relevant provision of section 23, therefore, is that for the assessment of the total taxable income it is the affairs of the assessee firm that are investigated and examined and when the total income of the firm is ascertained, it is allocated to its individual partners in proportion to their respective shares. The result of such allocation undoubtedly is to make the partners liable to pay. tax in respect of their taxable income thus allocated, but that cannot justify the inference that the firm is not an assessee in the relevant proceedings. Under the general law, a partnership has no separate entity and is merely a compendious name for the partners collectively. But for the purposes of Income Tax a firm has a separate status and existence and a distinct entity apart from its individual partners. Iii section 2(2) of the Income Tax Act an “assessee‟‟ is defined as a person by whom Income Tax is payable and includes every person who is required to file a return of income under section 22. Under section 2(9) a person is defined to include a firm for the purposes of the Act. According to section 3 of the Act a firm as such, is a taxable unit. It is by itself a unit of assessment and chargeable as a distinct assessable, entity under the Act. Section 23(5)(a) and (b) prescribes a special procedure for the assessment of a firm and draws a distinction between a registered and unregistered firm. In general there are three distinct stages in assessment proceedings, (i) computation of the taxable income, (ii) determination of tax payable and (iii) demand for the tax found due. The registration of a firm makes no difference for the purposes of the first stage. The income of the firm is computed in its hands as that of an entity irrespective of the fact whether the firm is registered or unregistered. But a departure is made from the normal procedure in the next two stages. Clause (a) of sub-section (5) of section 23 (as inserted by the Income Tax) (Amendment) Act, 1930 lays down that in the case of a registered firm the sum payable by the firm itself shall not be determined but the total income of each partner of the firm including therein his share of his income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. The registered firm did not have to pay the tax and accordingly under the law the tax
328 Section 2(6)
Income Tax Digest.
payable by the firm was not determined; but each partner‟s share in the firm‟s profit is added to his other income for the purposes of the assessment. The tax payable by each partner of the basis of the total income (including his share on the firm‟s profit) is determined and the demand of the levy is made on the partners individually. This clause was further amended by the Finance Act (XXX of 1956). By virtue of this amendment it was laid down that in the case of a registered firm super tax (but not Income Tax) payable by the firm itself shall be determined and the total income of each partner of the firm, including therein his share of the income, profits and gains of the previous year. shall be assessed and the sum payable by him on the basis of such assessment-shall also be determined. Cases referred to: St Rahtm and others v. Commissioner of Punjab and N.W.F.P. (1959 PLD 315); Seth Badridas Daga and another v. Commissioner of Income Tax, Central and United Provinces [1949] 17 ITR 209; Y. Narayana Chetty and others v. The Income Tax Officer, Nellore Main Circle and others (1964) 25 ITR 310; Scindia Steam Navigation Co. Ltd., Bombay v. Commissioner of Income Tax, Bombay City, Bombay, (AIR 1955 Bom. 230); Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan (Central Secretariat) (PLD 1960 S.C. 187) and Stevens (Surveyor of Tax) v. The Durban-Roodepport Gold Mining Company. Ltd. 5 TC 402. _______________
ASSESSEE VIS-A-VIS TRUST
Probynabad Stud Farm, In re – [1936] 4 ITR 114 (Lahore) 553.
“Assessee” is a person who is in control of income of trust.
„Assessee‟ includes a person who is in overall control of income of a trust, even if he is neither a beneficiary nor a trustee.
329 DEFINITION OF „ASSESSMENT‟
Section 2(7)
Section 2(7) Assessment
PAGE NO
WORDS “ASSESSMENT” & “RE-ASSESSMENT” EXPLAINED
554.
Assessment, re-assessment and final order after the highest appellate authority are all steps in judicial proceedings. _ [1990] 62 TAX 67 (H.C.Kar.) = 1990 PTD 549
330
330 Section 2(7)
Income Tax Digest.
Section 2(7) Assessment
WORDS “ASSESSMENT” AND “RE-ASSESSMENT” EXPLAINED
Chanda Motors, Karachi v. Central Board of Revenue – [1990] 62 TAX 67 (H.C.Kar.) = 1990 PTD 549 554.
Assessment, re-assessment and final order after the highest appellate authority are all steps in judicial proceedings.
In the instant case the assessments were finalized under section 59(1) of the Ordinance. It is an admitted fact that the assessments were opened under section 65 of the Ordinance. The reassessment orders under section 62 read with section 65 of the Ordinance were passed on 15.6.1983. It has come on record that the said orders were set aside by the appellate authority on 6.12.1986. Consequent upon giving effect to the appellate order assessment orders were passed on 31st May, 1988, with agreement of the petitioner on income notice against each assessment orders. These are the only assessment orders which are in the filed. Applying the dictum laid down in PLD 1964 SC page 520 PLD 1964, Karachi 578 and PLD 1957 (India) S.C. 448, we hold that the original assessment orders, reassessment orders and the final assessment orders are really but steps in a series of judicial proceedings all connected by an intrinsic unity and are to be regarded as one legal proceeding. It would, therefore, be apparent that provisions of clause 172 and para III(d) of Circular No. 9 of 1985 are attracted in the instant case and the petitioner is entitled to set off special National Fund Bonds against the additions made in the assessment order dated 6.12.1986 and 31.5.1988. Cases applied: F.A. Khan v. Govt of Pakistan (PLD 1964 SC 520); Garikapati Veeraya v. N. Subbiah Choudhry and others (PLD 1957 SC Ind. 448) and Flour Mills Employees Union v. Karachi Steam Roller Flour Mills (PLD 1964 587). APPROVED: by Supreme Court in 1992 SCC 931.
331 DEFINITION OF „YEAR‟
Section 2(8)
Section 2(8)* Assessment Year
PAGE NO
WORD „YEAR‟ - HOW TO BE CONSTRUED
555.
556.
*
Change in definition clause does not intend to change _ limitation period. 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) _ “Year”, meaning of. [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311
Corresponding to section 2(17) of the 1922 Act.
332 332
332 Section 2(8)
Income Tax Digest.
Section 2(8)* Assessment Year
_ WORD „YEAR‟ HOW TO BE CONSTRUED
Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and Another – 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) 555.
Change in definition clause does not intend to change limitation period.
In all probability, the Legislature never intended that the period of limitation prescribed in the Act should become variable with the changes in the “financial year” or “year” inserted in the Act for certain other purposes, namely, to accord with the new accounting years adopted by Government. The conclusion we have reached therefore is that the period of “four years” mentioned in sub-section (2) of section 34 must continue to receive a stable interpretation and it must be held to mean a period of four years consisting of twelve months each. On this view clearly the assessment even in the second case was open to exception as having been made beyond the time during which the Income Tax Officer had power to pass such an order. Barnala Commission Shop, Chak-Jhumra v. Income Tax Officer, B-Ward, Lyallpur – [1963] 7 TAX 153 (H.C.Lah.) = 1963 PTD 534 = 1963 PLD 311 556.
“Year”, meaning of.
. . . . . the word “year” in the main provision of the second sub-section of section 34 of the Income Tax Act, means what it is defined to mean by the Act, but in the first proviso to that sub-section, it means a period of twelve months from the date of the notice computed according to the British Calendar. If the period of four years in this case is computed in accordance with this interpretation, it ends on‟ the 30th of June 1963. The assessment having been made on the 4th May
*
Corresponding to section 2(17) of the 1922 Act.
333 DEFINITION OF „YEAR‟
Section 2(8)
1961, is thus made within the permitted time and consequently is valid. During the course of the judgment Manzur Qadir, C.J. observed as under: “Even if it be assumed that both forms exist side by side and are used for distinguishing one category from the other, what is the case here? The officer used a particular form which was to be used when he had no definite information. His using of that form, it is said, must be taken to be the true index of what he really thought, and his statement that he had definite information must on that account be held to be untrue. But the officer did not only use that form. There was something else also. He did not obtain an approval which had to be obtained unless he had definite information. His omission to take approval is as such a part of his conduct as his using of a particular form, and that omission is as much entitled to „be considered as a true index to what he really thought as his using of the form he did, I am, consequently, of the opinion that the foundation of the fact in this case, on which this question of law was raised‟, is far from satisfactory. I am further of the opinion that while a clear answer can be given to a part of this question of law, that answer is incapable of being applied in practice by a Court except in some extreme cases. It not being clear that the non-completion of the assessment within the time during which it is said that it should have been completed, is not partly due to the conduct of the petitioning firm itself, I would refuse to exercise my discretion in its favour, for this reason also.” Judicial analyses: The „assessment year‟ is a fixed period of 12 months as defined in section 2(8) of the Income Tax Ordinance, 1979. The same was the position under the repealed Income Tax Act, 1922. However, in 1959 Pakistan changed it financial year from April to March and July to June. In pursuance of this change the Finance Ordinance, 1960 inserted clause (17) in section 2 giving a new definition of the word „year‟. It enlarged the period to 15 months in case of certain income year. This case should be read with this specific background in mind. However, under the Income Tax Ordinance, 1979 there are separate and specific definitions of „income year‟ [Section 2(26)] and assessment year [section 2(8)] while calculating
334 Section 2(8)
Income Tax Digest.
limitation periods which hardly leave any room for controversy over the expression „year‟. Case approved: I.T.A. No. 1125 of 1958-59 [1961] 4 TAX 94 (Trib.). Case distinguished: 61 I.A., p.50.
335 DEFINITION OF „BUSINESS‟
Section 2(11)
Section 2(11)* Business
PAGE NO
ADVENTURE IN THE NATURE OF TRADE
557. 558.
559.
560.
561.
562.
563.
_ Scope of the term “adventure in the nature of trade”. 1992 SCC 894 = [1992] 66 TAX 55 (S.C.Pak.) = 1992 PTD 621
337
Sale of right shares purchased as investment is not _ adventure in the nature of trade. 1992 SCC 894 = [1992] 66 TAX 55 (S.C.Pak.) = 1992 PTD 621
337
Purchase and sale of agricultural land constituted an adventure in the nature of trade, the profit are liable to be _ taxed as business income. [1994] 69 TAX 38 (H.C.Kar.)
337
Mere sale and purchase of shares is not sufficient to _ constitute adventure in the nature of trade. [1980] 41 TAX 10 (H.C.Kar.)
338
Number of transactions are not determining factor even a single transaction can be held to be adventure in the nature _ of trade. [1978] 38 TAX 5 (H.C.Kar.) = PLD 1978 Kar. 673
339
Definition of the word “business” is not exhaustive; it has extending force and not a limiting connotation. Determination of venture in the nature of trade depends on circumstances of each case. Single and isolated business _ may constitute an adventure in the nature of trade. [1976] 33 TAX 121 (H.C.Lah.)
339
Contractor engaged in building construction work and sold property sometime after construction; transaction, though _ solitary held to be adventure in the nature of trade. [1967] 15 TAX 21 (H.C.Kar.)
340
DEFINITION OF THE WORD “BUSINESS”
564.
*
Horse-racing and betting activities carried on for a number of years and yielding substantial profits held not to be “business” within the meaning of sub-section (4) of section 2. _ [1974] 30 TAX 158 (H.C.Kar.) Corresponding to section 2(4) of the 1922 Act.
342
336 Section 2(11)
Income Tax Digest. PAGE NO
565.
Transaction not interlinked with the trade or directly connected with the carrying on or carrying out of the object _ of the. business are held not to be business income. [1967] 15 TAX 127 (H.C.Kar.)
343
PURCHASE AND SALE OF HEAVY SHARES WITH BORROWED CAPITAL TO SISTER CONCERN AT MARKET RATE
566.
Purchase and sale of heavy shares with borrowed capital and sale of bulk of the shares to sister concern at market _ rate do constitute profits derived from business. [1978] 38 TAX 5 (H.C.Kar.) = PLD 1978 Kar. 673
344
337 DEFINITION OF „BUSINESS‟
Section 2(11)
Section 2(11)* Business
ADVENTURE IN THE NATURE OF TRADE
Naseer A. Shaikh & 4 others v. Commissioner of Income Tax (Investigation) Lahore & others – 1992 SCC 894 = [1992] 66 TAX 55 (S.C.Pak.) = 1992 PTD 621 557.
Scope of the term “adventure in the nature of trade”.
The question as to whether or not a transaction is an adventure in the nature of trade has to be determined keeping in view the intention of the assessee in the light of the legal requirements of concept of the business. No single fact has decisive significance and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant material brought on the record. 558.
Sale of right shares purchased as investment is not adventure in the nature of trade.
Since the purchase of right shares was as an investment, the gain from the sale of the shares was an accretion to the capital; the question as to whether or not the sale constituted an adventure in the nature of trade resulting in revenue gain does not arise. Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad – [1994] 69 TAX 38 (H.C.Kar.) 559.
Purchase and sale of agricultural land constituted an adventure in the nature of trade, the profit are liable to be taxed as business income.
It is apparent that right from the beginning the applicant intended to sell the land. This is a very strong indication that the sole intention in purchasing the land was of reselling it at a profit. He did not want to keep it to utilize it for agricultural, purpose. In fact, he did not have even enough money to pay to the owners and entered into sale agreements with Agra Co-operative Housing Society Ltd to be able to pay to them. If he had held the land, making full payment to the *
Corresponding to section 2(4) of the 1922 Act.
338 Section 2(11)
Income Tax Digest.
owners, probably the situation would have been different. The owners learnt of his sales and realised that they had suffered in the deals. Therefore, they went back on the agreements. But the intention of the applicant was evident from the inception, to make profit through sales at higher price. He was aware about the Government policy. He appears to have intended to develop the land to break into plots and to dispose of the same, or to construct on part of it for business purpose. It clearly shows that the whole idea in purchasing the land was to make profit. Having considered the totality of the circumstances, we are of the opinion that the purchase of agricultural land and the sale thereof constituted an adventure in the nature of trade and the profit from sales was liable to be taxed as business income. Cases referred to: Califormian Copper Syndicate v. Harris (5 Tax 159); Martin v. Lowny (11 Tax Cases 297); C.I.R. v. Livingston and others (11 Tax Cases 538); G. Venkataswami Naidu & Co. v. Commissioner of Income Tax (1959) 35 ITR 594; Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITP 765; Kishan Prasad & Co., Ltd. v. Commissioner of Income Tax Punjab (1955) 27 ITR 49; Saroj Kumar Mazumdar v. Commissioner of Income Tax, West Bengal (1959) 37 ITR 242; Dalmia Cement Ltd. v. Commissioner of Income Tax, New Delhi (1976) 105 ITR 633; Hydri Construction Co., Ltd., Karachi v. Commissioner of Income Tax, Central Karachi (1967) 15 Tax 21; Commissioner of Income Tax v. Himalayan Tiles and Marbles Private Ltd. (1975) 100 ITR 177; and Rukmani Company (Pvt) Ltd. v. Commissioner of Income Tax (1964) 52 ITR 599.
Commissiomer of Income Tax, Karachi v. A. Razak H. K. Dada – [1980] 41 TAX 10 (H.C.Kar.) 560.
Mere sale and purchase of shares is not sufficient to constitute adventure in the nature of trade.
In the absence of evidence of the assessee‟s intention to make profits at the time of purchase of the shares, the mere purchase and sale of shares by themselves would not be sufficient to constitute an adventure in the nature of trade. No evidence of any such intention other than the purchase and sale of shares was produced by the department to show the change of conduct of the respondent. The burden was on the department to show that the motive of the respondent was to make profits which the department had failed to discharge. In the instant case the shares were purchased against ready delivery and were also sold in ready delivery in one lot in a single transaction in cash. Dividend income from the shares which were held, for
339 DEFINITION OF „BUSINESS‟
Section 2(11)
sometime, were also offered for assessment. There is no material to controvert the statement of the respondent that the sale of shares in question was merely a change of investment under the apprehension that prices way go down in future, which in fact they did. Cases referred to : Industrial Management Ltd. Karachi v. Commissioner of Income Tax, Karachi (1978) 5 TAX 38; Edwards (Inspector of Taxes) v. Bairstow and Harrison (35 T.C. 207) and Lalit Pam Mangi Rem of Cawnpore v. Commissioner of Income Tax (1950) 18 ITR 286.
Industrial Management Ltd., Karachi v. Commissioner of Income Tax, Karachi – [1978] 38 TAX 5 (H.C.Kar.) = PLD 1978 Kar. 673 561.
Number of transactions are not determining factor even a single transaction can be held to be adventure in the nature of trade.
The number of transactions is not the determining factor for deciding whether any purchases of sales are in the nature of an ordinary investment and its realisation or an adventure in trade. Although multiplicity of transactions would ordinarily be indicative of trading, a single venture could be held to be an adventure in trade if it is connected with the assessee‟s ordinary line of business or the intention to venture in trade is manifest. Cases referred to : Wisdom v. Chamberlain (45 Tax Cases 92); California Copper Syndicate v. Harris (5 Tax Cases 159); Indra Singh and Sons Ltd. v. Commisioner of Income Tax [1951] 19 ITR 1 and Punhali Co-operative Bank Ltd. v. Commissioner of Income Tax [1940] L.R. 464.
Naseer A. Sheikh v. Commissioner of Income Tax – [1976] 33 TAX 121 (H.C.Lah.) 562.
Definition of the word “business” is not exhaustive; it has extending force and not a limiting connotation. Determination of venture in the nature of trade depends on circumstances of each case. Single and isolated business may constitute an adventure in the nature of trade.
The term “business” is defined in section 2(4) of the Income Tax Act to include any trade commerce or manufacture or any adventure of concern in the nature of trade, commerce or manufacture. This definition is not exhaustive; it has extending force and not a limiting connotation. What actually constitute a venture in the nature of trade is difficult to define and will depend on the circumstances of each case. Thus a person, who having a collection of pictures for personal use, sells one of them, is not taxable on the profits of the sale. But a picture dealer would be assessable to tax on the profits of sale of pictures. In
340 Section 2(11)
Income Tax Digest.
determining whether a case is one of trade all the relevant facts must be considered. The nature of the assets bought and sold, the circumstances of the sale and purchase, the duration for which the assets were held by the assessee and his vocation are some of the relevant considerations to be borne in mind. Sometimes even a single and isolated transaction may constitute an adventure in the nature of trade. Cases referred to: Atherton v. British Insulate and Helsby Cables Ltd. (10 Tax Cases 155); Brickson v. Last (4 Tax Cases 422); California Copper Syndicate v. Harris (5 T.C. 159); Commissioner of Taxes v. Melborne Trust Ltd. (1914 A.C. 1001); Commissioner of Taxes v. British Australian Wool Realisation Association (1931 A.C. 224) Rees Roturbo Syndicate v. Ducker (13 T.C. 366); Thew v. South West Africa Co. (9 Tax Cases 141); and Balyomnnie Land Trust Ltd. v. I.R. (14 T.C. 684). Judicial review : See remarks of honourable apex court in [1992] 66 TAX 55 (S.C.Pak) = 1992 SCC 894 wherein in this particular case it has been held that sale of right shares purchased as investment is not adventure in the nature of trade.
Hydri Construction Co. Ltd., Karachi v. Commissioner of Income Tax, Central, Karachi – [1967] 15 TAX 21 (H.C.Kar.) 563.
Contractor engaged in building construction work and sold property sometime after construction; transaction, though solitary held to be adventure in the nature of trade.
The assessee, a limited company, was engaged in building construction work. Under the terms of the Memorandum of Association the assessee was authorised to deal in property and articles of all kinds. In April 1954 it purchased a plot of land and constructed building thereupon in 1955 which was let out to tenants in December 1955. In November 1956 the building was sold for Rs.11 lacs and in this way the assessee earned profit in the sum of Rs.2,88,559. In making the assessment for the charge year 1957-58 the Income Tax Officer included the amount in the total income of the assessee on the ground that (i) the Memorandum of Association authorised it to deal in buildings ; and (ii) there was hardly any time lag between the completion of the construction and sale. This treatment was affirmed on appeals by both the Appellate Assistant Commissioner and the Appellate Tribunal. The plea of the assessee that the profits arising in the above deal was an accretion to the capital was rejected by the Appellate Tribunal which held that the sale in question was rightly taken by the Income Tax Officer to be an item of assessee‟s ordinary business transaction. On a reference the
341 DEFINITION OF „BUSINESS‟
Section 2(11)
main contentions of the assessee before the High Court were that (i) the company throughout its existence never carried on the business of buying and selling properties and the isolated instance of purchase and sale of property could not lead to the conclusion that it was doing the business in sale and purchase of property and (ii) the burden lay on the department that an adventure was undertaken from a motive of making profit and not from any other motive. Held, that having regard to the fact that the sale and purchase Is one of the objects of the company and there was a very little gap between the construction and the sale of the property, the department was perfectly justified in coming to the conclusion that the transaction in question was an adventure in the nature of trade. The question of onus has very little bearing on the decision of such cases. If two interpretations are possible of an assessee‟s action, the one favourable to him should be adopted has nothing to do with the question of initial onus. It is pertinent to note that section 2 subsection (4) of the Income Tax Act does not refer to trade but to an adventure in the nature of trade and even an isolated transaction can satisfy the description of an adventure in the nature of trade. The main consideration in such cases ought to be whether the transaction involved in it was in the ordinary course of business of an assessee and was carried on in the same way as is usually done in the line of such business. In the present case it is in evidence that one of the objects of the business of the company is to buy and sell and deal in property and articles of all kinds and to purchase for investment or re-sale and to traffic in land and house other property of any tenure and any interest therein and to create, sell and deal with the freehold and leasehold ground rents and to make advances upon security of land or house or other properties or any interest therein and generally to deal in traffic by way of sale, lease, exchange or otherwise with the land, house property and any other property whether immovable or movable. It cannot, therefore, be said that the transaction in question was not in the line of the business of the assessee-company. The mere fact that at first it was let out to tenants does not lead one to the inference that it was not constructed for sale and making profit. Cases referred to: Leeming v. Jones (15 Tax Cases 333); Rutledge v. Commissioners of Inland Revenue (14 Tax Cases 490); Commissioners of Inland Revenue v. Reinhold (34 Tax Cases 389); Saroj Kumar Majumdar v. Commissioner of Income Tax [1959] 1 TAXATION 217 (S.C.); Balgownie Land Trust Ltd., v. Commissioners of Inland Revenue (14 Tax Cases 684);
342 Section 2(11)
Income Tax Digest.
Californian Copper Syndicate v. Harris (5 Tax Cases 159); Martin v. Lowry (11 Tax Cases 297) and Commissioners of Inland Revenue v. Livingstone (11 Tax Cases). _______________
DEFINITION OF THE WORD “BUSINESS”
Commissioner of Income Tax v. New China-Glassware Company – [1974] 30 TAX 158 (H.C.Kar.) 564.
Horse-racing and betting activities carried on for a number of years and yielding substantial profits held not to be “business” within the meaning of sub-section (4) of section 2.
The definition of the word “business”, as contained in section 2(4) of the Act, embraces only such activities as are in. the nature of trade, commerce or manufacture. Could it be said that betting on horse races and maintaining race horses for the purposes of entering them in race in the hope that they may win a prize or a trophy, is a trade, commerce or manufacture, however, extended a meaning we may give to these words and terms. We are inclined to the view that such activities cannot be given the status of or considered to be “business” for the purposes of the Act,‟ though such activities may extend over a number of years and may also be a possible or even a substantial source of income. Reference in this connection may also be made to the first proviso to sub-section (1) to section 24 of the Act which provides that speculative transactions, which are in the nature of business, shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee. This proviso clearly suggests that the Legislature did not intend that all speculative transactions, and betting clearly is a form of a speculative transaction, were to be considered to be business for the purposes of the Act, but only such speculative transactions, which are in the nature of business, are to be deemed to be “business”. Even in connection with horse-racing, there can certainly be certain activities, such as the functions of bookies, the training of race horse, maintenance of stables for breeding of race horses or the lease of horses on profit for racing, which undoubtedly would fall within the ambit of “business”, as defined in the Act, but the maintenance of racehorses by an owner for the purposes of entering them in races or betting on races, would not, in our opinion, be considered to be a “business” for the purposes of the Act. For the reasons given above, we are inclined to the view that the horse-racing and betting activities of the assessee, though they were
343 DEFINITION OF „BUSINESS‟
Section 2(11)
carried on for a number of years and in certain years yielded him substantial, amounts, did not constitute “business” within the meaning of section 2(4) of the Act. Cases referred to: Graham v. Green 9 Tax Cases 309; Howes v. Gardner 31 T.C. 957; Jano A. Syed Jalal v. Commissioner of Income Tax (1960) Tax Laws, Vol. 2, 569; In re: Lala Indra Sen (1940) 8 I.R. 187; Norman v. Evan 42 T.C. 188 and Commissioner of Income Tax v. V. P. Ram 18 ITR 825.
Commissioner of Income Tax v. Habib Bank Executors And Trustees Co. Ltd., Karachi – [1967] 15 TAX 127 (H.C.Kar.) 565.
Transaction not interlinked with the trade or directly connected with the carrying on or carrying out of the object of the. business are held not to be business income.
The assessee, a public limited company, carried on business as trustees and executors. In December 1953 it purchased 39,166 shares of the Habib Bank Limited and 11,000 shares of the Habib Insurance Company Limited. It also received 4,000 bonus shares in the year 1956. During the accounting year 1958-59 the assessee-company sold 2,500 shares out of the shares purchased from the Habib Bank Limited and 4,000 shares out of the shares received from the Habib Insurance Company and made a total profit of Rs.1,65,860. In making assessment for the charge year 1959-60 the Income Tax Officer rejecting the assessee‟s claim that the profit earned was capital gain assessed to tax the amount in question treating it as revenue receipt. This treatment was confirmed on appeal by the Appellate Assistant Commissioner but on further appeal by the assessee the Appellate Tribunal held that the profit earned by the assessee was not a revenue receipt. On a reference, it was contended before the High Court on behalf of the department, that the profit of Rs.1,65,860 earned by the assessee by sale of shares was within the objects of the assessee‟s business as laid in the Memorandum of Association and as such it was liable to tax as revenue profit. Affirming the order of the Appellate Tribunal: Held, that the selling and purchasing of the shares was not within the objects of Messrs. Habib Bank Executors, and Trustee Company nor were the shares sold by them to carry on or carry out their business and as such the profit earned by them of Rs.1,65,860 out of the sale of shares was not a revenue receipt. It is not every profit earned by an assessee that will necessarily become a revenue receipt. The sine qua non of taking profit as revenue receipt is whether the profit has been made on a transaction which had been entered into for the purpose of carrying on or carrying out
344 Section 2(11)
Income Tax Digest.
the business of the assessee. The quantum of transaction for the determination of this issue is absolutely unnecessary. The safest guide to resolve the question in controversy is to find out whether the transaction out of which the profit has arisen can be interlinked with the trade or directly connected with the carrying on or carrying out of the business. If a particular transaction can be shown to be indirectly connected with the objects of the company and can be represented to be one of the objects of the business that could be carried on by the company that by itself will not be sufficient to treat the profit on the transaction as revenue receipt. It is the actual business done by the company which must be connected with the transaction. The transaction cannot be connected hypothetically with the business that could have been carried on. In the instant case clauses 3(b) and 3(1) of the Memorandum of Association will indicate that purchasing and selling of the shares does not fall directly within the objects of the company, it having been formed primarily to function as Executors and Trustees. There is thus no clause in the objects of the company on which the learned counsel for the department can place reliance and point out to us that the business of purchasing and selling the shares fall directly within the objects of the company. Cases referred to: Punjab Co-operative Bank v. Commissioner of Income Tax [1940] ITR 635; Commissioner of Inland Revenue v. Reinhold (34 Tax Cases 389) and Hydri Construction Co. Ltd., v. Commissioner of Income Tax [1967] 15 TAX 21. Cases review: UPHELD by Supreme Court of Pakistan 1964 SCC 594 = [1966] 53 TAX 59 (S.C.Pak). _______________
PURCHASE AND SALE OF HEAVY SHARES WITH BORROWED CAPITAL TO SISTER CONCERN AT MARKET RATE
Industrial Management Ltd., Karachi v. Commissioner of Income Tax, Karachi – [1978] 38 TAX 5 (H.C.Kar.) = PLD 1978 Kar. 673 566.
Purchase and sale of heavy shares with borrowed capital and sale of bulk of the shares to sister concern at market rate do constitute profits derived from business.
Since one of the objects of the assessee was to act as capitalist and financier and to undertake all kinds of financial operations, the purchase and sale of securities would be a normal step in the business of the assessee. The mere fact that it invested mainly in the concerns
345 DEFINITION OF „BUSINESS‟
Section 2(11)
controlled by the Fancy Group would make no difference. As found by the Tribunal the shares were mainly purchased by the assessee with borrowed capital. In the assessment year 1960-61, the assessee purchased shares of the value of Rs.9,89,390. Such heavy purchases are clearly indicative of the intention to do business in such shares or at least establish that it is a normal step in the carrying on the business of the assessee. The fact that the bulk of the shares purchased by the assessee were sold to a sister concern would also make no difference, since the shares were sold to it at the market rate. Apparently the shares were sold to a sister concern in an attempt to escape tax on the profits earned from these shares. On the fact as found by the Tribunal, the purchases and sales of shares by the assessee was not in the nature of a capital investment and its realisation but the carrying on of the business and the profits earned from such activities were taxable. Case referred to : Commissioner of Inland Revenue v. Scotish Automobile and General Insurance Co. Ltd. (16 Tax Cases 381); Doughty v. Commissioner of Taxes [1927] L.R. 327; Commissioner of Income Tax v. B.R. & Sons (P.) Ltd. (1976 PTD 288).
346 Section 2(12)
Income Tax Digest.
Section 2(12)* Capital Asset
PAGE NO
„CAPITAL ASSET‟ - SCOPE OF
567.
*
Right or interest in property is a „capital asset‟. 176 (H.C.Sind) = 1958 PLD 270
Corresponding to section 2(4A) of the 1922 Act.
_
1959 PTD 347
347 DEFINITION OF „CAPITAL ASSET‟
Section 2(12)
Section 2(12)* Capital Asset
„CAPITAL ASSET‟
_
SCOPE OF
Income Tax Assessments of the Estate of F.E. Dinshaw – 1959 PTD 176 (H.C.Sind) = 1958 PLD 270 567.
Right or interest in property is a „capital asset‟.
Any right or interest of assessee in any property comes within definition of capital asset.
*
Corresponding to section 2(4A) of the 1922 Act.
348 Section 2(14)
Income Tax Digest.
Section 2(14)* Charitable purpose
PAGE NO
GENERAL CONDITIONS FOR EXEMPTION
568.
Important condition for grant of exemption to the petitioner _ is that it must ensure benefit of the public. [1993] 67 TAX 400 (H.C.Kar.)
351
CHARITABLE VS. NON-CHARITABLE TRUST
569.
570. 571. 572. 573.
574.
Construction of statutory provision on charitable purpose, as _ well as real purpose of trust are questions of law. [1944] 12 ITR 482 (PC) _ Trust for a patriotic purpose is not charitable. [1923] 1 Ch. 258 (Ch.D) _ Trust for attainment of political objects is invalid. [1917] AC 406 (HL)
352 352 352
If objects of the trust are not certain, it fails as a charitable _ trust. [1936] 4 ITR 114 (Lahore)
353
Before an institution can be held to be „charitable‟ _ beneficiaries must not be able to claim the benefit. [1936] 4 ITR 397 (All.)
353
If settlor has unrestricted use of trust property till charitable Institution is founded, trust is not entitled to exemption. _ [1942] 10 ITR 358 (Mad.)
353
MIXED TRUSTS
575.
576.
Where objects of trust include non-charitable object and trustees have power to spend money on any of objects, trust _ is not entitled to exemption. [1944] 12 ITR 179 (Mad.)
354
Where some of the purposes were neither religious nor charitable, and no part of the property had been earmarked for such purposes, income of trust will not qualify for _ exemption. 4 ITC 486 (PC)
355
*
Corresponding to section 4(3)(i) of the 1922 Act and read with clause (93) & (94), Part I of the
Second Schedule to the Ordinance.
349 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14) PAGE NO
577.
If a definite portion of trust income is earmarked for _ charitable purpose, that portion is exempt. [1946] 14 ITR 144 (Bom.)
355
RELIEF OF POOR - PREFERENCE TO RELATIVES
578.
579. 580.
581. 582.
Object of maintenance of the donor and his family cannot _ be considered as a charitable object. 5 ITC 402 (Lahore)(FB)
356
A wakf for needy dependents of donor is not charitable. _ [1941] 9 IT14 375 (Mad.)
356
A settlement for the settlor‟s poor relations is not a settlement for a charitable purpose and if the whole of the income can be devoted to it, exemption is not available. _ [1944] 12 ITR 179 (Mad.) _ In case of trust for poor employees. [1942] 10 ITR 512 (Cal.) _ Others. [1943] 11 ITR 603 (Bom.)
356 356 357
RESIDUARY HEAD - OBJECT OF GENERAL PUBLIC UTILITY CONNOTATION OF
583.
584. 585.
586.
In determining whether an object is of genera/public utility, English ideas may be inapplicable, rather the standard of _ customary law may he taken into consideration. [1939] 7 ITR 415 (PC)
357
Connection with political organisation will not affect _ charitable nature of trust. [1944] 12 ITR 482 (PC)
358
Whether object is an object of general public utility does not _ depend entirely on opinion of senior. [1939] 7 ITR 415 (PC)
359
Whether a particular object is of general public utility, is a _ question of law. [1939] 7 ITR 415 (PC)
359
PUBLIC- CONNOTATION OF
587. 588.
Trust for benefit of employees/children of employees is not a _ trust for public benefit. [1951] AC 291 (HL)
359
Claim of settlor that trust is beneficial to public would not discharge Court of its responsibility in coming to a finding as to character of object of a trust - a matter which bears _ directly upon its validity. [1939] 7 ITR 415 (PC)
360
350 Section 2(14)
Income Tax Digest. PAGE NO
ELEMENT OF PRIVATE GAIN
589.
It cannot be regarded as an element necessarily present in any purposes of general public utility, that it should provide something for nothing or for less than it does or for less than the ordinary price; an eleemosynary element is not essential. _ [1939] 7 ITR 415 (PC)
360
ILLUSTRATIONS
590.
591.
592. 593.
594. 595.
Running a newspaper whose dominant object is not _ political, is an object of general public utility. [1939] 7 ITR 415 (PC) Running a newspaper to indulge in politically-motivated _ activities is not an object of general public utility. 10 ITC 65 (Bom.) _ Political advancement and political education. [1942] 10 ITR 26 (Bom.) Development of the village industry of hand-spinning and hand-weaving is charitable purpose even if allied object _ serves political purpose. [1944] 12 ITR 482 (PC) _ Supply of fodder to animals. [1947] 15 ITR 32 (Bom.) _ Purposes beneficial to Hindu community. [1947] 15 ITR 32 (Bom.)
361
362 362
362 363 363
351 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
Section 2(14)* Charitable purpose
GENERAL CONDITIONS FOR EXEMPTION
Pakistan Seamen Contributory Welfare Fund, Karachi v. Income Tax Appellate Tribunal and 2 others – [1993] 67 TAX 400 (H.C.Kar.) 568.
Important condition for grant of exemption to the petitioner is that it must ensure benefit of the public.
We find no force in Mr. Shaik Haider‟s contention. So far as the first contention of the learned counsel is concerned, proviso to clause (94) refers only to a private religious trust: Since admittedly the petitioner, is not‟ a religious trust, the said proviso cannot be invoked, in the petitioner‟s case. If the said proviso is not applicable to the petitioner‟s case, then the petitioned is only required to satisfy the other conditions laid down in clause (94). In this regard it may be pointed out that nothing can be spelt out from any of the orders impugned by the petitioner that the status of the petitioner as a charitable institution or the nature of the contributions or donations etc. received by the petitioner are under dispute. Consequently, in our opinion the petitioner‟s entitlement to claim exemption under clause (94) on the aforesaid ground cannot be challenged. As is evident from clause 2(140), the definition of “charitable purposes” is not exhaustive but the same is an inclusive definition which only has the effect of enlarging the ordinary meaning of the expression “charitable purposes”. It would, therefore, be erroneous to assume that he definition is any case restricts the meaning of the said expression to what has been referred to be in the said definition. Consequently, the mere fact that the object, for which the petitioner institution has been constituted, is not public benefit, cannot in any manner disentitle the petitioner to claim exemption under clause (94). As earlier pointed out, the case of the petitioner clearly falls within the purview of clause (94) and, therefore, in our opinion, the learned *
Corresponding to section 4(3)(i) of the 1922 Act and read with clause (93) & (94), Part I of the
Second Schedule to the Ordinance.
352 Section 2(14)
Income Tax Digest.
Tribunals were not justified in invoking the proviso to the said clause (94) in the case of the petitioners. In fact, we find that none of the Tribunals below have addressed itself to the real issue involved in the case as they have proceeded only on an assumption that the object, for which the petitioners came into existence, was not to benefit public-atlarge. This, in view of the provisions of clause (94), was clearly an erroneous view taken by the learned Tribunals below. Case distinguished: Commissioner of Income Tax v. Pakistan Management Association (1985 PTD 287). _______________
CHARITABLE VS. NON-CHARITABLE TRUST
All India Spinners‟ Association v. Commissioner of Income Tax – [1944] 12 ITR 482 (PC) 569.
Construction of statutory provision on charitable purpose, as well as real purpose of trust are questions of law.
The construction of section 4(3)(i) of the 1922 Act [corresponding to section 2(14) of the 1979 Ordinance] is a question of law. Similarly, on the question of the real purpose of a trust, the Court must make its decision on the basis of facts found by it but given the facts, the question is one of law. Tetley, In re – [1923] 1 Ch. 258 (Ch.D) 570.
Trust for a patriotic purpose is not charitable.
It is impossible to hold that every application of the fund for a patriotic purpose must be beneficial to the community and therefore charitable. What is or is not patriotic is in many cases a mere matter of opinion. Subsidizing a newspaper for the promotion of particular political or fiscal opinions would be a patriotic purpose in the eyes of those who considered that the triumph of those opinions would be beneficial to the community. It would not be an application of funds for a charitable purpose. Bowman v. Secular Society Ltd. – [1917] AC 406 (HL) 571.
Trust for attainment of political objects is invalid.
A trust for the attainment of political objects has always been held invalid, not because it is illegal, for, everyone is at liberty to advocate or promote by any lawful means a change in the law, but because the court has no means of judging whether a proposed change in the law will or will not be for the public benefit, and therefore cannot say that the gift to secure the change is a charitable gift.
353 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
Probynabad Stud Farm, In re – [1936] 4 ITR 114 (Lahore) 572.
If objects of the trust are not certain, it fails as a charitable trust.
However benevolent or liberal the objects of a trust may be, so long as the trustee has any discretion left in the matter, the trust cannot be called as a charitable legacy. The test whether the profits of a business carried on under a trust are exempt under the section is not whether the business is of general public utility but whether its profits go to charitable purposes including any object of general public utility. A stud farm was founded by an army officer with the main object of supplying remounts for the army and to improve horse breeding in India. There was no deed defining the objects of the trust. The Commanding Officer of an army unit acted as trustee of the stud farm and had full discretion to make disbursements out of the farm‟s income and the disbursements actually made included expenses by way of farewell party and wedding party and bonus to men of the unit. On the question whether income of the stud farm was exempt under section 4(3)(i) of the 1922 Act: Held that the trust failed as a charitable trust for want of certainty as to its objects; and its income was not exempt. Chamber of Commerce v. Commissioner of Income Tax – [1936] 4 ITR 397 (All.) 573.
Before an institution can be held to be „charitable‟ beneficiaries must not be able to claim the benefit.
Before an institution can be held to be charitable, there must be an element of altruism, that is to say, the beneficiaries must not be able. to claim the benefit. Thus, where the assessee-chamber of commerce claimed that it was a mutual concern, it was held that there was no element of altruism and that it was not charitable institution for the purposes of exemption under the Act. Commissioner of Income Tax v. G.D. Naidu Educational Trust – [1942] 10 ITR 358 (Mad.) 574.
Industrial
If settlor has unrestricted use of trust property till charitable Institution is founded, trust is not entitled to exemption.
The assessee-trust was created by N by purporting to endow it with shares held by him in some transport companies of which he had control, and some immovable property. Though its objects were admittedly charitable, the institution through which the charitable objects were sought to be achieved was not to be brought into being
354 Section 2(14)
Income Tax Digest.
immediately, and the companies in which the founder had interest were to enjoy the benefits of the assets of the trust. The founder was also the managing trustee, and had powers to borrow for any purpose on the property of the trust and also reserved to himself the power to revoke the trust at any time. Held that the said trust was not a charitable trust within the meaning of section 4(3)(i) of the 1922 Act. The idea that some day the institution contemplated by the deed may be found was not sufficient compliance with the section. _______________
MIXED TRUSTS
Commissioner of Income Tax v. Aga Abbas Shirazi – [1944] 12 ITR 179 (Mad.) 575.
Where objects of trust include non-charitable object and trustees have power to spend money on any of the objects, trust is not entitled to exemption.
A business was held in trust and one of the objects of the trust was to manufacture, buy, sell and distribute pharmaceutical, medicinal, chemical, and other preparations and articles such as medicines, drugs, medical and surgical articles, preparations and restoratives of food, which was neither charitable nor religious. Other objects were charitable. However, under the deed, the trustees had power to apply the whole or any part of the trust property or fund (whether Capital or income) for or towards all or any of the purposes of the trust. The question was whether donations made to the trust were entitled to the benefit of section 15B of the 1922 Act [corresponding to clause (93), Part I, Second Schedule to the Ordinance]. Held that if the trustees can, under a trust held validly, spend the entire income of the trust on this non-charitable object, it was difficult to hold that the trust property was held under a trust or other legal obligation wholly for religious or charitable purposes within the meaning of section 4(3)(i) of the 1922 Act [corresponding to clause (91), Part I, Second Schedule to the Ordinance]. In view of the absolute power of selection granted to the trustees to select between charitable and non-charitable objects, the provisions of section 4(3)(i) of the 1922 Act could not be applied to the trust and no exemption could be granted to the assessee under section 15B of the 1922 Act.
355 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
Maulana Mohammad Ibrahim Riza Malak v. Commissioner of Income Tax – 4 ITC 486 (PC) 576.
Where some of the purposes were neither religious nor charitable, and no part of the property had been earmarked for such purposes, income of trust will not qualify for exemption.
Some of the purposes of a trust set up for a particular community were, (i) for carrying on the agricultural, industrial, commercial and other pursuits of the said community, (ii) for entertaining guests, giving at home or parties, and (iii) for such donations for charitable or religious purposes, contributions to memorials, funds raised for holding social, educational, religious, industrial or political conferences or congresses, and for public entertainments, as the then spiritual head may deem fit: Held that the income of the trust could not be treated as income derived from property held under trust or other legal obligation wholly for religious or charitable purposes so as to be exempt from tax, especially when it was not suggested that any part of the property was set aside for any charitable or religious purposes so that it could be identified as appropriated exclusively for such purposes. Chaturbhuj Vallabhdas v. Commissioner of Income Tax – [1946] 14 ITR 144 (Bom.) 577.
If a definite portion of trust income is earmarked for charitable purpose, that portion is exempt.
Under a will the bequest was in the following terms: “My trustee shall utilise my residuary property for such acts of charity as he deems proper. But if my trustee thinks fit, he can give a one-fourth part of my residuary property to all or one or more than one of my daughters or to the sons of my daughters.” Held that the testator had directed his trustee to utilise three-fourths of the income of the residuary estate for charity. That clearly fell within the first part of section 4(3)(i) of the 1922 Act. As regards the remaining one-fourth part the trustee was given the option to spend it either for charity or to give the same over to one or more of the testator‟s daughters or the son of his daughter. To that part the second portion of section 4(3)(i) of the 1922 Act may be applied. _______________
356 Section 2(14)
Income Tax Digest.
RELIEF OF POOR
_
PREFERENCE TO RELATIVES
Dr. Urnar Baksh v. Commissioner of Income Tax – 5 ITC 402 (Lahore)(FB) 578.
Object of maintenance of the donor and his family cannot be considered as a charitable object.
The object of maintenance of the donor and his family cannot be considered as a charitable object. Commissioner of Income Tax v. M. Jamal Mohammad Sahib – [1941] 9 ITR 375 (Mad.) 579.
A wakf for needy dependents of donor is not charitable.
Where the wakf‟s object is to provide for maintenance of the needy descendants of the donor, the wakf‟s object will not fall within the residuary clause of section 4(3)(i) of the 1922 Act, i.e., for the benefit of public. Commissioner of Income Tax v. Aga Abbas Ali Shirazi – [1944] 12 ITR 179 (Mad.) 580.
A settlement for the settlor‟s poor relations is not a settlement for a charitable purpose and if the whole of the income can be devoted to it, exemption is not available.
A settlement for the settlor‟s poor relations in not a settlement for a charitable purpose and if the whole of the income can be devoted to it, exemption is not available. Mercantile Bank of India (Agency) Ltd., In re – [1942] 10 ITR 512 (Cal.) 581.
In case of trust for poor employees.
A trust was created for the benefit of the past, present and future employees of a company. Under the trust deed the administrators of the trust could not only help person in indigence, ill-health or in specially necessitous circumstances but also could reward persons in respect of their services. Held that it was not a trust wholly for charitable purposes. It is doubtful whether the object to relieve a person from some other specially necessitous circumstances can be said to be relieving him from poverty. Necessitous circumstances might include the case of a superior employee earning some thousands of rupees per month, who owing to some misfortune say the burning down of his house, or the loss of his property might find himself suddenly in necessitous circumstances.
357 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
Commissioner of Income Tax v. Karirn Bros. Charity Fund – [1943] 11 ITR 603 (Bom.) 582.
Others.
A wakf deed provided among other public charities, a fixed percentage of income of the Family Charity Fund for the maintenance, support or well-being of the poor, needy, destitute, distressed, disabled or unemployed members of the families of one Y, his sons, grandsons and male lineal descendants from generation to generation, including payments in the shape of monthly or periodical doles or pensions or of lump sums on religious or ceremonial occasions. Held that unless one gives some restricted meaning to the word „unemployed‟ people in that category did not fall within the concept of charity. Many persons are unemployed, not because they are poor, but because they are wealthy enough not to need employment. Little class of unemployed is confined to those who are poor or needy, the class is superfluous because the poor and needy are included in the earlier words. And if „unemployed members of the families‟ is held to include only persons who are anxious to he employed, but cannot get employment, one is reading into the clause something which is not there. Thus, the trust was not held solely for charitable purposes. There was a further difficulty in that the income of this fund may be spent on ceremonial occasions, for example, on marriage ceremonies of persons who happened to be unemployed. It was difficult to see how marriage ceremonies could be regarded as charitable. _______________
RESIDUARY HEAD - OBJECT OF GENERAL PUBLIC UTILITY - CONNOTATION OF
Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC) 583.
In determining whether an object is of genera/public utility, English ideas may be inapplicable, rather the standard of customary law may he taken into consideration.
Considering that under the Income Tax Act the test of general public utility is applicable not only to trusts in the English sense but is to be applied to property held under trust „or other legal obligation‟ - a phrase which would include Muslim wakfs and Hindu endowments. In determining whether an object is of general public utility, English ideas may be inapplicable, rather, the standard of customary law may be taken into consideration. The Court must in general apply the
358 Section 2(14)
Income Tax Digest.
standard of customary law and common opinion amongst the community to which the parties interested belong. In support of the contention that a purpose which is charitable under the personal law of the parties has to be accepted as such for the purposes of the Income Tax Act, learned counsel relies upon the observations of the Privy Council in Trustees of the Tribune, In re [1939] 7 ITR 415. In that case, the Privy Council approved of the statement of the law enunciated by Sir Raymond West in Fatima Bibi v. Advocate-General ILR 6 Bom. 42 in the following terms. „But useful and beneficial in what sense? The courts have to pronounce whether any particular object of a bounty falls within the definition; but they must in general apply the standard of customary law and common opinion amongst the community to which the parties interested belong‟. The above observations cannot be taken out of context and made use of by the assessee in the present case. In that very case, the Privy Council held that the test of „general public utility‟ prescribed under the Indian Income Tax Act was applicable not only to trusts in the English sense but also the properties held under trust or other legal obligation including Muslim wakfs and Hindu endowments and that the admissibility of claiming exemption from Income Tax should be determined by the language of the special provision made by the Indian Income Tax Act in that behalf. We agree with learned counsel for the Revenue that unless a trust falls within the definition contained in the Income Tax Act and satisfies the conditions, it cannot claim exemption from liability to pay Income Tax. All India Spinners‟ Association v. Commissioner of Income Tax – [1944] 12 ITR 482 (PC) 584.
Connection with political organisation will not affect charitable nature of trust.
If an association is set on foot by a political organisation and is connected with it but still has for its real object the relief of poverty, its connection with the political organisation does not make its real object any less charitable. Judicial analysis : There is, in law, nothing to prevent a purely political organisation from carrying on certain activities of general public utility in such a manner as entitle the organisation to exemption in respect of the income held in trust for such charitable purposes. The best illustration of this is the case of All India Spinners‟ Assocition [1944] 12 ITR 482 (PC), in which the Privy Council held that where an association was set on foot by a political organisation and was connected with it but still had for its real object the
359 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
relief of poverty, its connection with the political organisation did not make its real object the relief of poverty, its connection with the political organisation did not make its real object anytheless charitable. On the other hand, if the objects of an organisation are primarily political in character, then the mere fact that there may be subsidiary motive of carrying on activities of public utility will not be sufficient to make it a charitable trust. What, therefore matters is not the character of the body in question but the dominant object and purpose with which the body is established. If that dominant object or purpose is a charitable object then the assessee would be entitled to exemption notwithstanding that the origin or character of the body in question may be considered to be political in character. On the other hand, if the dominent object is a politicla object, then the claim for exemption will fall.
Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC) 585.
Whether object is an object of general public utility does not depend entirely on opinion of senior.
The fact that the settlor thought that the object of the trust was beneficial to the public would not by itself make the object one of general public utility and discharge the Court of its responsibility in coming to a finding as to the character of the object of the trust. Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC). 586.
Whether a particular object is of general public utility, is a question of law.
The question whether a particular object is of general public utility, like the question whether a particular trust is charitable, is a question of law, though doubtless it is for the Commissioner (now Tribunal) to find and state any facts bearing thereon. _______________
PUBLIC- CONNOTATION OF
Oppenheim v. Tobacco Securities Trust Co. Ltd. – [1951] AC 291 (HL) 587.
Trust for benefit of employees/children of employees is not a trust for public benefit.
A group of persons may be numerous, but if the nexus is their personal relationship to a single propositus or to several propositi, they are neither the community nor a section of the community for charitable purposes. Thus, where a trust was created by a British Limited Company and the trustees were directed to apply certain income in providing for the
360 Section 2(14)
Income Tax Digest.
education of children of_ employees or „former employees‟ of the company or any of its subsidiary or allied companies, it was held (by majority) that, though the group of persons indicated was numerous, the nexus between them was employment by particular employers and accordingly the trust did not satisfy the test of public benefit requisite to establish it as charitable. Judicial analysis: The personal element or personal relationship which takes a group out of a section of the community for charitable purposes is of the nature which is to be found in cases of the aforesaid type.
Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC) 588.
Claim of settlor that trust is beneficial to public would not discharge Court of its responsibility in coming to a finding as to character of object of a trust-a matter which bears directly upon its validity.
If a testator by stating or indicating his view that a trust is beneficial to the public can establish that fact beyond question, trusts might be established in perpetuity for the promotion of all kinds of fantastic (though not unlawful) objects. But this would not discharge the Court of its responsibility in coming to a finding as to the character of the object of a trust-a matter which bears directly upon its validity. _______________
ELEMENT OF PRIVATE GAIN
Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC) 589.
It cannot be regarded as an element necessarily present in any purposes of general public utility, that it should provide something for nothing or for less than it does or for less than the ordinary price; an eleemosynary element is not essential.
It cannot be regarded as an element necessarily present in any purpose of general public utility, that it should provide something for nothing or for less than it does or for less than the ordinary price. An eleemosynary element is not essential. There seems to be no solid distinction to be made under the phrase „general public utility‟ between a school founded by a testator but charging fees to its pupils and a newspaper founded by a testator and sold to its readers. The purpose of providing the poor or the community in general with some useful thing without price or at low price may doubtless be, in itself a purpose of general public utility. But if another object, independently in itself, be of general public utility, the circumstance that the
361 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
testator‟s bounty was only in respect of the initial capital assets, or had only to meet a working loss temporarily and not permanently, will not, necessarily at least, alter the character of the object. Where the trust was bringing out a newspaper and selling it for a price, it was held that the object did not cease to be of general public utility by this circumstance. _______________
ILLUSTRATIONS
Trustees of the „Tribune‟, In re – [1939] 7 ITR 415 (PC) 590.
Running a newspaper whose dominant object is not political, is an object of general public utility.
The testator, who was running a newspaper, in his life-time created a testamentary trust to maintain the said press and newspaper in an efficient condition, keeping up the liberal policy of the said newspaper and devoting the surplus income of the said press and newspaper towards defraying all current expenses in improving the said newspaper, and placing it on a footing of permanency. The question was whether running a newspaper was an object of general public utility: Held that the testator having expressed his intentions by reference to a newspaper which had been published in his life-time and to a policy the character and purpose of which must necessarily be collected from its previous issues, it was not necessary or relevant to inquire as to the manner in which the object of the trust had been or was being carried out since the date of the testators death. The question was as to the true nature and character of the trust. The object of the paper may fairly be described as the object of supplying the province with an organ of educated public opinion‟ and that it should prima facie be held to be an object of general public utility. Though a trust for conducting a newspaper as mere vehicle for the promotion of a particular political or fiscal opinion may not be within the exemption, where the object is to disseminate news and ventilate opinion on matters of public interest, the fact that the paper may have, or may acquire, a particular political complexion would not „take away its exemption. Case review: Decision of the Lahore High Court in Trustees of the „Tribune‟ In re [1935] 3 ITR 246 reversed.
362 Section 2(14)
Income Tax Digest.
N.C. Kelkar & D.V. Vidwans, Trustees of the Kesari & Mahratta Trust v. Commissioner of Income Tax – 10 ITC 65 (Bom.) 591.
Running a newspaper to indulge in politically-motivated activities is not an object of general public utility.
The assessee-trust was running a newspaper during the Swaraj movement and one of its objects was to organise public movements, calculated to promote national ideal, and the other objects were charitable in nature. The department held that, since the above was non-charitable, the trust was not entitled to exemption qua its income. Held that the application of profit towards a movement designed to bring Government to an end by a policy of systematic disobedience to the law was a breach of the terms of the trust, and such an application of funds would not be furthering an object of public utility. The trust was, therefore, rightly held as not eligible for exemption. Lokamanya Tilak Jubilee National Trust Fund, In re – [1942] 10 ITR 26 (Bom.) 592.
Political advancement and political education.
Trusts for the benefit of the inhabitants of a particular locality are regarded as charitable and that principle would apply to the inhabitants of British India. On the other hand, it is clear that trusts for the benefit of a particular political party, or for the advancement of particular political opinions are not regarded as charitable. Where the assessee-trust was set up for the political advancement of India, diffusion of political education and knowledge and for any other purpose which in the opinion of the managing committee was of national importance: Held that the trust could not be treated as a charitable trust under section 4(3)(i) of the 1922 Act. All India Spinners‟ Association v. Commissioner of Income Tax – [1944] 12 ITR 482 (PC) 593.
Development of the village industry of hand-spinning and hand-weaving is charitable purpose even if allied object serves political purpose.
Development of the village industry of hand-spinning and handweaving is charitable purpose even if allied object serves political purpose. Case review : Decision of the Bombay High Court in All India Spinners Association, In re [1941] 9 ITR 484 reversed.
363 DEFINITION OF „CHARITABLE PURPOSE‟
Section 2(14)
Vallabhdas Karsondas Natha v. Commissioner of Income Tax – [1947] 15 ITR 32 (Bom.) 594.
Supply of fodder to animals.
Supply of fodder to animals and cattle is a charitable object. Vallabhdas Karsondas Natha v. Commissioner of Income Tax – [1947] 15 ITR 32 (Bom.) 595.
Purposes beneficial to Hindu community.
Where the residual object of the trust was „such other purposes beneficial to the Hindu community and Indians in general‟, it was held to be a charitable object falling under object of „general public utility‟.
364 Section 2(16)
Income Tax Digest.
Section 2(16)* Company
PAGE NO
WORD “FORM”, MEANING OF
596.
The word “form” as used in Section 2(16)(b) explained. _ [2000] 82 TAX 52 (H.C.Lah.)
365
EXPRESSIONS “BY” AND “UNDER” EXPLAINED
597. 598. 599.
Expressions “by” and “under” explained. (H.C.Lah.)
*
[2000] 82 TAX 52
“Corporate body under the law” explained. 52 (H.C.Lah.)
_
365 [2000] 82 TAX
Cooperative Society is an AOP and not “company” for the _ purpose of Income Tax Ordinance, 1979. [2000] 81 TAX 352 (H.C.Lah.)
CHAMBER OF COMMERCE
600.
_
Chamber of commerce is “company”. (All.)
Corresponding to section 2(5A) of the 1922 Act.
_
366
367
[1947] 15 ITR 263 367
365 DEFINITION OF „COMPANY‟
Section 2(16)
Section 2(16)* Company
WORD “FORM”, MEANING OF
Commissioner of Income Tax/Wealth Tax v. Engineering Cooperative Housing Society, Lahore – [2000] 82 TAX 52 (H.C.Lah.) 596. The word “form” as used in section 2(16)(b) explained. The word “form” used in section 2(16)(b) is to conceive, create, constitute and establish a body though there is no specific provision in the Act, relating to the formation of a co-operative society. However, from the collective reading of the provisions of sections 7 and 9 of the Act, a society is formed when, a society of which no member is a society, at least 10 members, qualified in accordance with section 7(1) and in case of a society of which a member is a society by duly authorized persons on behalf of every such society and where all the members of the societies are not a society by 10 other members and where there are less than 10 members, by all of them, through a duly signed application apply to the registrar accompanied with the proposed bye laws of the society, for its registration. According to section 10 if the Registrar is satisfied that the provisions of the Act and the rules framed there under have been complied with and proposed bye laws, are not contrary to the Act, he may register the society and its bye-laws. According to section 23 of the Act, the registration of a society shall render it a “body corporate” by name under which it is, registered with perpetual succession and a common seal, and with powers to hold the property, to enter into a contract, to institute and defend a suit etc. _______________
EXPRESSIONS “BY” AND “UNDER” EXPLAINED
Commissioner of Income Tax/Wealth Tax v. Engineering Cooperative Housing Society, Lahore – [2000] 82 TAX 52 (H.C.Lah.) 597.
Expressions “by” and “under” explained.
It is clear that while creating this body corporate, both the expressions “by” and “under” have been used by the legislature. *
Corresponding to section 2(5A) of the 1922 Act.
366 Section 2(16)
Income Tax Digest.
Thus, while enacting section 2(16)(b), the legislature was duly conscious of this position and thus covered these two expressions in the definition. We find weight in the submissions of learned counsel for the respondents, that if the contention of appellants about interpretation of section 2(16)(b) is accepted, it will render the provisions of subsection (a) of the section as nugatory. Nothing of the sort can be attributed to a legislative instrument. Obviously, for the reasons, if all body corporate registered under the relevant law, are construed to mean “a company” under clause (b), there would have been no need for the Legislature to include within the meaning of the company, such company as defined in the Company Ordinance, 1984. _______________
BODY “CORPORATE UNDER THE LAW” EXPLAINED
Commissioner of Income Tax/Wealth Tax v. Engineering Cooperative Housing Society, Lahore – [2000] 82 TAX 52 (H.C.Lah.) 598.
“Corporate body under the law” explained.
“......it is manifest that the formation of a society takes place through the individuals, by virtue of endorsing to the instrument of the bye laws of the society. Thereafter, upon registration by the Registrar, it only attains a status of a “corporate body” with certain rights and obligations. According to section 15 of the Companies Ordinance, 1984, mode of forming a company has been laid down i.e. any seven or more persons, associated for any lawful purpose, may by subscribing their names to a memorandum of association and complying with the requirements of the ordinance, in respect of the registration, form a public company and any two or more persons so associated may, in the like manner form a private limited company. Upon registration with the Registrar of the company, a company so formed becomes a legal entity and a “body corporate. This vividly indicates that the concept and act of forming a company is an independent act of the individual and precedes the registration, the latter only confers a legal recognition and status to the company so formed. It is held that the respondents are not the companies within the meaning of section 2(16)(b) of the Income Tax Ordinance, 1979.
367 367 DEFINITION OF ‘COMPANY’ Section 2(16)
National Cooperative Supply Corporation Ltd. through Mr. Islam Madni, General Manager v. Federation of Pakistan through Secretary Finance, Islamabad – [2000] 81 TAX 352 (H.C.Lah.) 599.
Cooperative Society is an AOP and not “company” for the purpose of Income Tax Ordinance, 1979.
A Cooperative Society has been separately defined in the Income Tax Ordinance, 1979. This clearly shows that the law itself has treated a Company as different and distinct from Cooperative Society as otherwise there was no occasion for a separate definition. In these circumstances, the respondents could not change the status from “Cooperative Society” to a “Private Limited Company”. Furthermore, the petitioner was being treated as “Association of persons” since 1968-69 and the respondents could not deviate from this practice. So far as the definition of “person” in section 2(32) is concerned, it not only includes an individual but also an association of persons, a Company and every artificial juristic person. If under the Income Tax Ordinance, a company was to be equated with Cooperative Society, there was no need of separately defining the Cooperative Society under section 2(17) of the Income Tax Ordinance, 1979. _______________
CHAMBER OF COMMERCE
Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 600.
Chamber of commerce is “company”.
A chamber of commerce registered without the word „Limited‟ under section 26 of the Indian Companies Act, 1913, is a “company”, and can be assessed to Income Tax according to the rates applicable to a company. Case review : The same position prevailed after partition under the Companies Act, 1913, which was replaced in Pakistan in 1984 by Companies Ordinance, 1984. The status of “company” is to be assigned to Chamber of Commerce and Industry.
368 Section 2(20)
Income Tax Digest.
Section 2(20)* Dividend
PAGE NO
SCOPE OF TERM “DIVIDEND”
601.
602. 603. 604.
605.
606.
*
The “distribution of profit” vis-a-vis-preference shareholders. _ 1997 SCC 740 = [1997] 75 TAX 113 (S.C.Pak) = 1997 PTD 49 _ “Return” on capital is dividend. 1991 SCC 773 = [1991] 63 TAX 130 (S.C.Pak.) _ Meaning of “dividend” explained. [1983] 47 TAX 132 (H.C.Pesh.)
369 369 370
Preference shares redeemed by company in terms of its Article, is paid the assessee face value of his shares _ which held not to be “dividend”. [1980] 41 TAX 183 (H.C.Kar.)
372
Bonus share is income of both the company and the shareholders and liability of the company to pay tax does _ not exclude the liability of the shareholders. [1976] 33 TAX 227 (H.C.Lah.)
372
Dividend declared out of company‟s profits exempt under sections 15BB held to be exempt in the hands of shareholder _ of the company. [1972] 27 TAX 139 (H.C.Lah.)
374
Corresponding to section 2(6A) of the 1922 Act.
369 DEFINITION OF „DIVIDEND‟
Section 2(20)
Section 2(20)* Dividend
SCOPE OF TERM “DIVIDEND”
Commissioner of Income Tax v. Pakistan Insurance Corporation & others – 1989 SCC 740 = [1997] 75 TAX 113 (S.C.Pak) = 1997 PTD 49 601.
The “distribution of profit” vis-a-vis-preference shareholders.
There is a finding by the Tribunal that on redemption of the preference shares the respondents have paid only the face value of their fully paid up shares. The words „capital‟ and „dividend‟ though related have entirely different considerations. In the context of the Income Tax law, very broadly speaking „capital‟ would signify investment whereas „dividend‟ would denote gain or return on the investment. However, in clause (d) of section 2(6A) of the Act, an extended meaning has been given to the word „dividend‟ so to bring to tax such payment also that a company may make by manipulating its share capital as are in evidence a return or gain on the original investment of the shareholders. The scope of this clause cannot be extended when the company merely returns to the shareholders only their original investment, the intention had been otherwise, express words to that effect would have been used in the clause. We are, therefore, in agreement with the High Court that the definition of the word „dividend‟ as given in the Act itself envisages return of profit to the shareholders in any form whatsoever which is declared to be dividend in law and since in the present cases return is no more than what the respondents had invested in the company, it does not fall within the definition of „dividend‟. Commissioner of Income Tax, Peshawar Zone, Peshawar v. Siemen A.G. – 1991 SCC 773 = [1991] 63 TAX 130 (S.C.Pak.) 602.
“Return” on capital is dividend.
The word „return‟ is generally understood as profit in the nature of dividend and not in the nature of interest and/or obligatory charge. „Return on capital‟ as guaranteed in the agreement between the *
Corresponding to section 2(6A) of the 1922 Act.
370 Section 2(20)
Income Tax Digest.
parties was thus „dividend‟ within the meaning of term as defined in Income Tax law. The Income Tax authorities cannot change the nature of the contract intended by the parties „under the pretext that the rule of interpretation of a fiscal law in this behalf is different‟. The courts are bound to apply Islamic rules of interpretation to all laws, and fiscal laws are no exception. Siemens AG & Halske v. Commissioner of Income Tax – [1983] 47 TAX 132 (H.C.Pesh.) 603.
Meaning of “dividend” explained.
The Government of Pakistan, Siemens & Halske AG of Munich, Germany and Farid Sons Limited of Karachi entered into an agreement for incorporation of a limited company under the title “Telephone Industries of Pakistan” and various terms and conditions were embolded in the said agreement. It was inter alia provided by the agreement that a dividend of 4% was to be declared On the paid up share-capital for the time being or proportionately lower sums in years of less production as the case may, be, that net profits that may accrue shall first be used for declaring a dividend not exceeding 4% on invested capital and for paying other charges and that dividends were contingent on sufficient profits being made and were not otherwise guaranteed. With the expansion of the project and requirement of more capital an amended agreement was entered into on 22nd day of July, 1966 whereby Siemens & Halske AG agreed to contribute additional capital towards investment subject to the condition that a fair return would be granted on such investment. It was, therefore, stipulated that their investment under the first expansion programme will bear a return of 4% per annum with effect from 1st April, 1964 and all subsequent investments will bear a return of 5% per annum and that the Government guaranteed the performance by T.I.P. of its part to this agreement. Siemens & Halske submitted their return of income for the assessment year 1968-69 and showed in it a sum of Rs.4,39,769/- as income from dividend. The Income Tax Officer, Peshawar, per his order dated 30.6.1971, held that the amount was interest and not dividend. Siemens AG took an appeal to the Income Tax Appellate Tribunal, Peshawar Bench, Peshawar but the same was dismissed on 6.6.1972 on the ground that the amount was interest in the hands of the petitioner taxable as income from other sources. Held, that the disputed amount was dividend within the meaning of the term as defined in section 2(6A) of the Income Tax Act.
371 371 DEFINITION OF ‘DIVIDEND’ Section 2(20)
The word “includes” [in section 2(6A)] is significant and it is apparent that the word “means” has not been used in the section. The “includes” denotes that the definition is inclusive and not exhaustive. The meaning of both these words has been given at page 197 of Caries on Statute Law (1952 Edition) and it is remarked that “there are two forms of interpretation clause. In one, where the word defined is declared to “mean” so and so, the definition is explanatory and prima facie restrictive. In the other, where the word defined is declared to “include” so and so, the definition is “extensive”. “Dividend”, according to Black‟s Law Dictionary, may denote a fund set apart by a corporation out of its profits, to be apportioned among the shareholders, or the proportionate amount falling to each. Prima facie a “dividend”, according to Stroud‟s Judicial Dictionary, means a payment to shareholders when a company is a going concern. In Halsbury‟s Laws of England. Volume VII (4th Edition) of the ordinary, meaning of “dividend” is a share of profits, whether at a fixed rate or otherwise, allocated to the holders of shares in a company. The term is generally used with reference to trading or other companies, arid to payments made to members of a company as such and not by way of remuneration for services. The word “interest”, has not been defined in the Income Tax Act. Various meanings of “interest” have been given in Stroud‟s Judicial Dictionary and at serial No. 42 it is shown to mean compensation paid by the borrower to the lender for deprivation of the use at‟ his money. Interest, according to Black‟s Law Dictionary, means the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money. According to Wharton‟s Law Lexicon, “interest” means money paid at a fixed rate percent for the loan or use of some other sum, called the principal. It is manifest from the meanings of the word “dividend” and “interest” enumerated above that both stand on distinguishable pedestals. It is pertinent to note that in the instant case- neither the word “„dividend” nor “interest” has been used by the T.I.P. in its accounts with regard to Rs.4,39,769/, an amount which has been described as return on investments. There is no denying the fact that the petitioner had invested a particular amount as a shareholder and had not advanced the amount as loan. The relationship between the parties to the agreements was obviously that of shareholders and not that of borrower and creditor. It is worth mentioning that a company‟s share capital is not “capital borrowed” and is not a debt payable by the company to the shareholders. It follows that a shareholder is in the eye of law not a creditor of the company for the share capital of the
372 Section 2(20)
Income Tax Digest.
latter and the payment to him out of the profits earned by the company on his investment cannot be termed as interest. It may be said in a particular case that the dividend received by the shareholder was not properly declared or that the necessary procedure was not followed, but in its plain natural meaning the receipt by the shareholder under the circumstances just referred to, must be described as dividend and must have the characteristics of a dividend. Commissioner of Income Tax (Central), Karachi v. Pakistan Insurance Corporation – [1980] 41 TAX 183 (H.C.Kar.) 604.
Preference shares redeemed by company in terms of its Article, is paid the assessee face value of his shares which held not to be “dividend”.
The definition itself envisages return of profits to the shareholders in any form whatsoever which is deemed to be dividend in law and since in the present case the return is no more than what the respondent had invested in the company it does no fall within the definition of dividend. In this view of the matter it is unnecessary to examine the question whether or not the respondents case fall within the proviso to clause (d) of sub-section (2) (6-A) defining dividend. We will, therefore, reframe the question as follows and answer it in the negative: “Whether in the facts and circumstances of the case the Tribunal was justified in holding that the redemption value relating to the preference of Colony Textile Mills Ltd., received by the assessee was dividend within the meaning of the expression defined in section 2(6-A)(d) or that it is taxable in the hands of the respondent assessee?”. Miss Shirin Ayub Khan, Lahore v. Commissioner of Income Tax, Lahore – [1976] 33 TAX 227 (H.C.Lah.) 605.
Bonus share is income of both the company and the shareholders and liability of the company to pay tax does not exclude the liability of the shareholders.
The definition of the terms „dividend‟ and „income‟ would clearly show that whereas the amount appropriated by the company towards its paid up capital against issuance of bonus shares is the income of the company it is also the income of the shareholder. The payment of tax by the company or its liability to pay tax would not automatically absolve the petitioner (the shareholder) to pay tax under section 12B,
373 373 DEFINITION OF ‘DIVIDEND’ Section 2(20)
read with sections 2(6A) and 2(6C). This being also the income of the petitioner she would be liable to pay her tax separately. According to law the receipt of bonus shares is equal to receipt of dividend which is an income. Companies which are doing well in their business generally do not distribute their entire profits to the shareholders. The undistributed profits of a year or the accumulated profits of the company are generally used for its business either by capitalising it or as floating capital. But whenever the company intends to increase its paid up capital, it may instead of inviting outside capital, issue shares at the face value to its existing shareholders in proportion to their existing holdings and appropriate an equal amount from the undistributed profits of a year or the accumulated profits of previous years to its paid up capital. The shares issued against such a fund are called bonus shares. When issuance of such shares is a result of the distribution of the profits of that year or the accumulated profits of the company, the face value thereof would be a „dividend‟ within the definition of section 2(6A)(a) and „income‟ under section 2(6C) of the share-holder. Under Explanation 4 to section 4(1), read with the above provisions, the amount appropriated by the company, having its registered office in Pakistan, towards its paid up capital for issuance of the bonus shares to its share-holders in any year wholly or partly out of its reserves, or profits of that year or the accumulated profits, shall also be deemed to be the income of the company for that year. Section 4 is subject to the provisions of the Act. Section 2(6C), section 4(1), Explanation 4 and section 2(6A) when read together would go to show that none of these provisions exclude the liability of the shareholder if the amount in question is the income of the company under the above Explanation. There is no exemption either. True, the same amount would be taxed three times i.e., once when it was declared as profit in a particular year, secondly when it was distributed as accumulated profit and thirdly when the same amount was received by the shareholder in the form of bonus share under section 2(6A)(a), but there is nothing to suggest that it is illegal or prohibited by law. However, this income shall be referable to the year when the bonus shares were received and not to the year when sold. Cases referred to : Commissioners of Inland Revenue v. Blott (1921) 2 A.C. 171; Trevor v. Whitworth (12 App. Cas. 409); Commissioner of Income Tax v. Dalmia Investment Co. Ltd. (1964) AIR 1464 S.C.; (1964) 10 TAX 75 (S.C.) and Commissioner of Income Tax v. Umar Saigol (1973) PTD 450; (1973) 26 TAX 159.
374 Section 2(20)
Income Tax Digest.
Cases review: In the wake of this judgement an amendment was made in the Income Tax Ordinance, 1979 in section 2(24) to expressly exclude from the ambit of word “income” any amount representing the face value of any bonus share or the amount of bonus declared, issued or paid by the company to its shareholders with a view to increase its paid up capital. The case is therefore no more relevant.
Commissioner of Income Tax, Lahore Zone, Lahore v. Umar Earooq C/o Sh. Fazal Rehman, Multan – [1972] 27 TAX 139 (H.C.Lah.) 606.
Dividend declared out of company‟s profits exempt under sections 15BB held to be exempt in the hands of shareholder of the company.
The assessee was a shareholder of a limited company which enjoyed tax holiday under section 1588 of the Income Tax Act. In the accounting year, relevant to the assessment year 1970-71, the assessee received dividend amounting to Rs.31,878 out of the profits of the company. The Income Tax Officer charged to tax the aforementioned dividend income received by the assessee. When the matter reached the Appellate Tribunal, it held that the income from dividend declared out of the company‟s profits exempt from tax under section 1588 of the Income Tax Act was also exempt from tax in the hands of the assessee-shareholder. On a reference: Held, that the dividend received by the assessee from a company enjoying a tax holiday is merely his determinate share in the income of the undertaking. This share income continues to remain exempted in the hands of the shareholder even when it takes the shape of dividend. Case relied on: Commissioner of Income Tax v. E.V.H. Miller (1959) 1 TAX 1 (S.C.); (1959) PTD 645; PLD (1959) S.C. 219.
375 DEFINITION OF „INCOME‟
Section 2(24)
Section 2(24)* Income
PAGE NO
CONNOTATIONS OF WORD “INCOME”
607. 608.
609.
610.
611. 612.
613. 614.
Connotations of word “Income”. 76 TAX 5 (S.C.Pak.)
_
1997 SCC 1097 = [1997] _
“Income” - Meaning and connotation. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ Amount which is not income cannot be taxed. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ “Free reserve” is not income of a company. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
377
377
377
377
Casual income, subsidy, received from parent company held _ as casual receipt. [1994] 69 TAX 122 (H.C.Kar.)
377
Casual income subsidy received from the parent company _ without consideration was held as causal receipt. [1994] 69 TAX 120 (H.C.Kar)
378
“Promotional allowance” is not in the nature of income. _ [1987] 56 TAX 58 (H.C.Kar.) _ “Income” - the import and scope. [1985] 52 TAX 98 (H.C.Kar.) = 1985 PTD 389
378 379
CRITERIA TO DETERMINE TAXABLE & TAX FREE INCOME
615.
616.
*
Service charges from boarders and lodgers for payment to hotel employees do not become liable to tax in the hands of _ the hotel owner. [1984] 50 TAX 179 (H.C.Kar.)
379
Assessee a director of a company had income from dividend and capital gains. He also earned a small portion of income from singing but not for his livelihood held exempt being _ casual. [1984] 49 TAX 23 (H.C.Kar.)
380
Corresponding to section 2(6C) of the 1922 Act.
376 Section 2(24)
617.
618.
Income Tax Digest.
Sale of machinery after two years without use as installation _ of the machinery held not to be business income. [1977] 35 TAX 121 (H.C.Lah.)
381
Remuneration received for translation of religious books into English by a practising lawyer held to be a casual receipt. _ [1974] 29 TAX 129 (H.C.Lah.)
381
[SEE MORE CASES RELATING TO WORD “INCOME” UNDER SECTION 9].
377 DEFINITION OF „INCOME‟
Section 2(24)
Section 2(24)* Income
CONNOTATIONS OF WORD “INCOME”
Elahi Cotton Mills Ltd. & others v. Federation of Pakistan & Others – 1997 SCC 1097 = [1997] 76 TAX 5 (S.C.Pak.) 607. Connotations of word “Income”. The expression “income” entails wide spectrum. It covers actual as well as constructive receipts and benefits in cash or kind. It even includes what one saves by using it for oneself. For example, use of a house by its owner. Pakistan Industrial Development Corp. v. Federation of Pakistan through the Secretary, Ministry of Finance – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 608. “Income” - Meaning and connotation. Word “income” as used in section 2(24) should be read in its ordinary, natural and grammatical meaning. However, when this term is to be viewed in the Constitution conferring legislative powers, the most liberal construction should be put upon this word so that the same may have effect in their widest amplitude. 609. Amount which is not income cannot be taxed. Any amount which is not an income cannot be classified as income and cannot be subject to tax. 610. “Free reserve” is not income of a company. After income tax has been assessed on the income of a company and part of it is treated as “free reserve” the same cannot again be subject to tax because such free reserve is not income. Commissioner of Income Tax, Companies-Il, Karachi v. Ciba Geigy (Pakistan) Ltd., Karachi – [1994] 69 TAX 122 (H.C.Kar.) 611. Casual income, subsidy, received from parent company held as casual receipt.
*
Corresponding to section 2(6C) of the 1922 Act.
378 Section 2(24)
Income Tax Digest.
It was held by a Division Bench of this Court that a voluntary payment which is made entirely without consideration and is not traceable to any source of his income, but depends entirely on the whim of the donor, cannot fall in the category of the income. The facts and circumstances of the instant case being on all fours with the above cited above, we would like to respectfully follow the decisions and hold that the Tribunal‟s order seems to be in consonance with law. Our answer to the above question is, therefore, in the affirmative. Cases referred to: Commissioner of Income Tax v. Sandoz (Pakistan) Ltd. [1987] 56 TAX 58 (H.C.Kar.) = (1987 PTD 482) Commissioner of Income Tax v. Smith Kline & French of Pakistan Ltd. [1985] 52 TAX 17 (H.C.Kar.) and Commissioner of Income Tax v. Smith Kline & French of Pakistan Ltd. and others [1991] 64 TAX 37 (S.C.Pak) = (1991 PTD 999).
Commissioner of Income Tax v. Thai Airways International – [1994] 69 TAX 120 (H.C.Kar.) 612.
Casual income subsidy received from the parent company without consideration was held as causal receipt.
It was held by a Division Bench of this Court that a voluntary payment which is made entirely without consideration and is not traceable to any source of his income, but depends entirely on the whim of the donor, cannot fall in the category of the income. Commissioner of Income Tax, Central Zone, Karachi v. Sandoz (Pak), Ltd. – [1987] 56 TAX 58 (H.C.Kar.) 613.
“Promotional allowance” is not in the nature of income.
On the other hand, as we have reproduced the extract of the Tribunal it appears to us that there was material available to the Tribunal that the amounts paid by the Switzerland company were merely voluntary A payments without there being any legal obligation upon them to do the same or without there being any liability or obligation to that effect. They had made payment voluntarily in order to save their international reputation. Mere recurrence of payment without their being any definite understanding to that effect cannot convert those payments into receipts for business. There is no evidence to that effect; therefore, in the absence of that evidence the explanation tendered by Sandoz Limited (Basic) had to be accepted by the Tribunal. We therefore, do not find any justification for the question which had been posed before us because the judgment of the Tribunal is based upon the relevant facts produced before it.
379 DEFINITION OF „INCOME‟
Section 2(24)
Consequently, the question No. 1 is answered in affirmative; question No. 2 is again answered in affirmative as letter of Sandoz Ltd. (Basic) did provide a justification for treating the amount sent by them to the Pakistan company as promotion allowance. The 3rd question is answered as under the promotion allowance received by the Pakistan company is not liable to tax in view of the letters of Switzerland company explaining the position that they were making voluntary payment to safeguard their International reputation. Cases referred to : PLD 1975 Kar. 924 and 11 ITR 513.
Commissioner of Income Tax (Central Zone), Karachi v. Karachi Electric Supply Corporation Limited – [1985] 52 TAX 98 (H.C.Kar.) = 1985 PTD 389 614.
“Income” - the import and scope.
The brief facts of the case are that the assessee filed return of income showing a loss of Rs.57,72,933 for taxable units. Subsequently, the asses - see company submitted the revised return showing a loss of Rs.52,04,540 bonus shares of the value of Rs.55,05,500 were declared out of the accumulated profits by the assessee company. Under the provisions of section 2(6)(c) of the Act, those bonus shares constituted income of the respondent. The Income Tax Officer after setting off loss of Rs.51,02,856 sustained by the assessee company in carrying on business against income from bonus shares amounting to Rs.55,05,550 the residual total income amounting to Rs.3,12,644 as the income from other sources. The bones shares, declared, issued or paid by the assessee company cannot be treated as income but it was a deemed income, it was, therefore, wholly erroneous on the part of the Income Tax Officer to deduct the amount from the income. This could not be intention of the Legislature in enacting Explanation 4. While still on this point, we may state here that a Circular No. 9 [C.No.48(5)I.I.R.], dated 15.4.1959. _______________
CRITERIA TO DETERMINE TAXABLE & TAX FREE INCOME
Hotel Metropole Ltd. v. Commissioner of Income Tax (Central), Karachi – [1984] 50 TAX 179 (H.C.Kar.) 615.
Service charges from boarders and lodgers for payment to hotel employees do not become liable to tax in the hands of the hotel owner.
380 Section 2(24)
Income Tax Digest.
It was open to the Department to have produced sufficient evidence and given a definite finding that the practice of recovery of service charge is resorted to by the assessee, for the purpose of making taxfree income. Nor there is any finding that the amount received as service charges has not been disbursed for a very long time raising an inference that the whole practice was colourable procedure to make tax-free income. On the other band, Mr. Ali Athar, the learned counsel for the applicant has point out that the amount of service charges has been verifying from year to year and is not accumulating. He has contended that in fact from the variation of figures it is clear that disbursement was made to the staff members. In this state of affair on record it is not possible to draw an inference against the assessee. In view of this discussion and particularly due to the absence of any finding that the practice of collecting “service charges” adapted by the assessee is colourable device for making tax-free income. Case relied on: Tettersall Space [1935-39] 22 Tax Cas. 51. Cases referred to: Hotel Metropole, Ltd. Karachi v. Commissioner of Income Tax, (Central), Karachi [1973] 28 TAX 96 = (1973) PTD 371.
Commissioner of Income Tax Karachi (West), Karachi v. Habib Vali Muhammad, Karachi – [1984] 49 TAX 23 (H.C.Kar.) 616.
Assessee a director of a company had income from dividend and capital gains. He also earned a small portion of income from singing but not for his livelihood held exempt being casual.
No doubt the respondent is a well known singer, but the question is, whether he is a professional singer and earns his livelihood from this profession. It is an admitted position that he has shown his income of Rs.70,265/- which is certainly not drawn entirely from singing. He is a director of a Company and has also earned income from dividend and capital gains. His source of living is not singing. To ascertain whether an artist is a professional, one has first to inquire whether the artist is engaged in performing work of art for earning his living and substantial portion of his income is drawn by pursuing such performances. If the substantial portion of earning is from such performance and it is the main source of living then such artist will be called professional. Where not only substantial, but major part of earning of an assessee is from business or vocation and small portion is only from singing be cannot, be termed as a professional artist. In these circumstances in the present case, the learned Tribunal after considering the facts at record has drawn
381 DEFINITION OF „INCOME‟
Section 2(24)
correct conclusion that the respondent/assessee was not a professional artist. Commissioner of Income Tax (Investigation), Lahore v. Colony Textile Mill – [1977] 35 TAX 121 (H.C.Lah.) 617.
Sale of machinery after two years without use as installation of the machinery held not to be business income.
The Luma‟s Saw Gins were purchased by them for their own use as is borne out inter alia by the fact that PICIC advanced a loan to them for the purpose which is normally done after obtaining a feasibility report in respect of the purchase sought to be made. After the machinery had been imported into the country the assessee found that it was more economical not to instal it straightaway; he consequently waited to see if in the long run it would be in the interest of the Company to install the same. After keeping it for about two years the assessee came to a different conclusion and therefore, adopted the only course open to it i.e. to dispose of it to somebody who wanted to purchase it. He acquired the machinery as a fixed capital for the company and it was not even remotely intended to invest money in it as a trading or floating capital. Its disposal did not covert it into the latter and it cannot be said that the sale could be equated with sale of „fruit‟. It was the tree and remained the tree. The observations reproduced above are further strengthened by the fact that when the Legislature found it necessary to tax capital gains it introduced section 12B into the Income Tax Act in the year 1947 for that purpose. These gains have been defined and made taxable in the Act now, but this section is not attracted to the facts of the case before us because the sale in this case took place during a period which is not covered by section 12B. Cases referred to : Secretary of State in Council of India v. Sir Andrew Scoble and others (1903 AC 299); Ryall v. Hoare (1923) 2 K B 447; Davies v. The Shell Co. of China Ltd. (1952) 22 ITR Supp.-I (C A); John Smith & Son v. Moore (1921) 2 AC 103 and British South Africa Co. v. Commissioner of Income Tax (1946) ITR Supp.-17.
Commissioner of Income Tax. North Zone (West Pakistan), Lahore v. Qazi Abdul Hamid, Advocate, Lahore – [1974] 29 TAX 129 (H.C.Lah.) 618.
Remuneration received for translation of religious books into English by a practising lawyer held to be a casual receipt.
382 Section 2(24)
Income Tax Digest.
The assessee was a practising Advocate. He received a sum of Rs.792 for translation of two religious books into English. The Income TaxOfficer over-ruling the assessee‟s claim that the receipt was of a casual and non-recurring nature added this amount to the total income of the assessee and subjected it to tax, The Appellate Tribunal deleted the amount in question from the total income, holding that it was of a casual and non-recurring mature. In doing so, the Tribunal held that (i) the assessee was motivated by consideration of religious merits in undertaking the work of the translation into English; (ii) the payment in question was made to him by the Religious Organisation of its own accord without any semblance of a demand as of right from the assessee; (iii) the fact that the translation work was being given to the assessee every year did not detract from its non-recurring nature so far as the assessee was concerned and (iv) the payment actually received by the assessee was meager as compared to the amount of translation work involved. Affirming the Tribunal‟s order the High Court: Held, that a, voluntary gift depending entirely upon the goodwill of the donor does not cease to be of a casual and nonrecurring in mature by reason merely of the fact that the gift is repeated. It is not always that the payments in the nature of gifts or donations are treated as casual payments and it depends on the circumstances in each case. In the instant case, however, the Tribunal was of the considered opinion that the payment in question received by the assessee was of casual and non-recurring nature. This was a conclusion of fact drawn up by the Tribunal from the proved facts before it. Its order, therefore, did not give rise to any question of law. It is contended that the payment in question was even otherwise exempt from the tax under section 4(3)(viib) of the Act at the payment received by the assessee; not being a professional writer, journalist, or artist, was remuneration or compensation for literary or artistic work. This contention was never raised before. It raises a mixed question of law and fact for the first time in this Court. In the circumstances this new plea cannot be allowed to be entertained for the first time in this Court. Cases referred to: Cassimbazar Raj Wards Estate v. Commissioner of Income Tax (1946) 14 ITR 377 and Rani Amrit Kunwar v. Commissioner of Income Tax (1946) 14 ITR 551.
383 DEFINITION OF „INCOME TAX OFFICER‟
Section 2(25)
Section 2(25)* Income Tax Officer
PAGE NO
DEFINITION OF „INCOME TAX OFFICER‟
619.
*
Definition of „Income Tax Officer‟ in section 2(25) includes an „Assistant Income Tax Officer‟ who is competent to make _ income tax assessment. [1977] 36 TAX 216 (H.C.Lah.)
Corresponding to section 2(7) of the 1922 Act. This clause (25) has been omitted by
Finance Act, 1993.
384
384 Section 2(25)
Income Tax Digest.
Section 2(25)* Income Tax Officer
DEFINITION OF „INCOME TAX OFFICER‟
Malik Muhammad Akram Khan & Co. v. Income Tax Officer, Jhelum – [1977] 36 TAX 216 (H.C.Lah.) 619.
Definition of „Income Tax Officer‟ in section 2(25) includes an „Assistant Income Tax Officer‟ who is competent to make income tax assessment.
It is, however, admitted that there was no Income Tax Officer appointed to this Circle at the relevant time. According to the definition as given in section 2(7) of the Income Tax Act, an, Income Tax Officer‟ includes an „Assistant Income Tax Officer‟. We, therefore, have no doubt that the assessment was made by a competent officer. A similar view was taken by this court in the case Mumtaz Industries in Writ Petition No. 1181 of 1971, decided on 27th November, 1975. Case referred to: Mumtaz Industries v. Sales Tax Officer [1976] 34 TAX 13.
*
Corresponding to section 2(7) of the 1922 Act. This clause (25) has been omitted by Finance Act, 1993.
385 DEFINITION OF „INCOME YEAR‟
Section 2(26)
Section 2(26)* Income Year
PAGE NO
CHANGE OF YEAR
620.
621.
Change of income years is permissible only with the consent _ of assessing officer. 1991 SCC 801 = [1991] 64 TAX 69 (S.C.Pak.)
387
The assessing officer is empowered to impose conditions for _ allowing income year. 1991 SCC 801 = [1991] 64 TAX 69 (S.C.Pak.)
387
CAN INCOME YEAR BE OF MORE THAN 12 MONTHS?
622.
Leave to appeal granted to examine the issue of consolidated _ assessment for a period of 15 months. 1980 SCC 483 = [1981] 43 TAX 14 (S.C.Pak.)
WORD „YEAR‟ EXPLAINED
623. 624.
Word „year‟ explained. (S.C.Pak.)
_
1963 SCC 167 = [1963] 7 TAX 442
Period of limitation - When to start. [1963] 7 TAX 442 (S.C.Pak.)
EXPRESSION “SUCH PERIOD”
625.
387
Meaning of the expression “such period”. (H.C.Kar.)
_
388 1963 SCC 167 = 388
_
[1976] 33 TAX 99 389
EXPRESSION “PREVIOUS YEAR”
626.
627.
*
CBR is not competent to change “income year” _ retrospectively. 1960 SCC 80 = [1960] 2-TAX (III-211) (S.C.Pak) = 1960 PLD 187
390
Assessee is entitled to have different previous years in respect of different sources of income falling under the same _ head of business [Position prior to 1.7.1979]. [1976] 33 TAX 99 (H.C.Kar.)
390
Corresponding to section 2(11) of the 1922 Act.
386 Section 2(26)
628.
629.
630.
631.
Central Board of Revenue is not competent authority to alter by notification normal previous year after the Finance Act _ has come into force. [1976] 33 TAX 99 (H.C.Kar.)
391
Notification issued by Central Board of Revenue declaring previous year covering period of more than 12 months is _ ultra vires. [1975] 31 TAX 125 (H.C.Kar.)
393
Central Board of Revenue is competent authority to alter by issue of notification normal previous year with retrospective _ operation. [1960] 2-TAX (III-157) (H.C.Dacca) = 1960 PTD 253 = 1960 PLD 233
394
Different previous years in respect of different sources of _ income - Position prior to 01.07.1979. [1936] 4 ITR 206 (Lahore)
396
MISCELLANEOUS
632.
Income Tax Digest.
In case of branches.
_
10 ITC 126 (Lahore)
396
387 DEFINITION OF „INCOME YEAR‟
Section 2(26)
Section 2(26)* Income Year
CHANGE OF YEAR
Commissioner of Income Tax Lahore v. Noorani Calendaring and Finishing Mills, Lyallpur – 1991 SCC 801 = [1991] 64 TAX 69 (S.C.Pak.) 620. Change of income years is permissible only with the consent of assessing officer. If the assessee wants to change his income year, he must obtain the consent of the Income Tax Officer, who may accord such consent on proper terms. 621. The assessing officer is empowered to impose conditions for allowing income year. The Income Tax Officer is empowered under the law to refuse to give his consent for change of income year, but if he does give his consent, he has ample power to impose conditions that the full period from the end of “income year” of the preceding year‟s assessment to the end of the new accounting year should be taken as income year for the relevant assessment year. Note: The power to grant change of income year is no more relevant as with effect from assessment year 1995-96 the law has been amended and now assessees cannot exercise an option to adopt calendar year as income year. This case is, however, relevant for all the years prior to this amendment. _______________
CAN INCOME YEAR BE OF MORE THAN 12 MONTHS?
Commissioner of Income Tax, Lahore Zone, Lahore v. Shihana Perfumery Store – 1980 SCC 483 = [1981] 43 TAX 14 (S.C.Pak.) 622. Leave to appeal granted to examine the issue of consolidated assessment for a period of 15 months.
*
Corresponding to section 2(11) of the 1922 Act.
388 Section 2(26)
Income Tax Digest.
The learned Judges in the High Court found that in an earlier case Commissioner of Income Tax v. S. National Music Store, Anarkali, Lahore a Division Bench of the High Court in answer to a similar question in interpreting section 2(11) of the Income Tax Act was of the opinion that the assessing officer was not justified in framing one consolidated assessment for the income towards the period of fifteen months ending 30.6.1959 relevant to the assessment year 1959-60. This dictum was followed with approval in another case Ubrio Cooperative Sports Ltd. v. Commissioner of Income Tax v. Abdul Majid. Sh. Abdul Haque, in support of this petition for leave to appeal, has submitted that the view of the High Court that one assessment could not be made for fifteen months in the circumstances of the case is not legally correct. According to him, the law does not prohibit assessment for a period of more than twelve months. He further submits that this court has granted leave to appeal against the decision of the High Court in Commissioner of Income Tax v. S. National Music Store, Anarkali, Lahore. Leave to appeal is granted. Office to put up this appeal along with the appeal directed against the decision of the High Court in Commissioner of Income Tax v. S. National Music Store, Anarkali, Lahore (C. Ref No. 29 of 1961). _______________
WORD „YEAR‟ EXPLAINED
Nagina Silk Mills, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and Another – 1963 SCC 167 = [1963] 7 TAX 442 (S.C.Pak.) 623. Word „year‟ explained. The word “year” as defined in clause (59) of section 3 of the General Clauses Act, for the relevant period, continued to mean “a year reckoned according to the British calendar”, which means a year of twelve months. As the order of assessment under section 23 of the Act was passed by the Income Tax Officer in the first case on 29th June, 1959, it was clearly one without jurisdiction for the time of four years commencing with the end of the assessment year 1954-55, during which the Income Tax Officer could have passed such an order, had long since expired on 31st March, 1959. The question raised in the first appeal must, therefore, in any event, be answered in favour of the appellant and it appears on the face of the record that the impugned order of assessment was vitiated by complete lack of jurisdiction. 624. Period of limitation - When to start.
389 DEFINITION OF „INCOME YEAR‟
Section 2(26)
The limitation in this case under sub-section (2) of section 34 of the Act had started running on the 1st of April 1956, and that fixed the terminal date of the period of four years as the 31st of March, 1960, with certainty under the law as it then stood. It is a well-recognised principle of the law of limitation that once time begins to run from a specified date it cannot be interrupted or extended unless the Legislature intervenes and makes express provision to the contrary. By a mere process of construction it cannot be argued therefore that new definition of “year” inserted by the Ordinance of 1960 in the Act, was calculated to effectuate a change in this respect, so as to convert the period of four years limitation into years of unequal length and to introduce an element of uncertainty where previously stability existed. The altered definition of the word “year” brought in by the Ordinance of 1960, seems to have direct application only to the terminal date of the year of assessment commencing on the 1st of April 1958, which receives an extension of three months so as to end with 30th of June 1959. An indication to this effect is provided by section 6 of the Ordinance of 1959. The new definition contains no words such as could operate to extend a period which had already commenced to run many years earlier, according to a fixed measure of time, namely, a year of twelve months. _______________
EXPRESSION “SUCH PERIOD”
Sheikh Miran Bux Karam Bux Ltd., Karachi v. Income Tax Officer, Company Circle 12, Karachi – [1976] 33 TAX 99 (H.C.Kar.) 625.
Meaning of the expression “such period”.
„Previous year‟ had only one definition in the Income Tax Act, 1918. However, by a subsequent legislation, namely, the Income Tax Act of 1922, the definition of „previous year‟ was enlarged. While retaining the old definition, paragraph (b) was added, and paragraph (c) was introduced by the Income Tax (Amendment) Act 1939. Looking at the two paragraphs, it is clear that, in case of paragraph (a), the previous year meant an accounting year comprised of a full period of twelve months and corresponding to a financial year preceding „the financial year of assessment. But in paragraph ( ), the use of the words “such period” was unqualified and gave a discretion to the Central Board of Revenue or such authority, as was authorised by the Board in this behalf to lay down the length of the period which could either be less than one year or more than one year of a year.
390 Section 2(26)
Income Tax Digest.
By the addition of such words retrospectivity is confined merely to the extent of fixing the date of the beginning of the previous year, which in no way, alters the meaning of the words “such period”. Cases referred to : Nagina Silk Mills v. Income Tax Officer (1963) PLD 322 S.C.; (1963) 7 TAX 422 (S.C.); Commissioner of Income Tax v. K. Srinivasan and another (AIR (1951) S.C. 113); Jethamal Sadasukh v. Commissioner of Income Tax (AIR (1953) 697); General Commercial Corporation Co. Ltd. v. Commissioner of Income Tax (AIR (1955) 64); Esthuri Aswathiah v. Commissioner of Income Tax (60 ITR 411); Bhai Kirpa Singh v. Rassaldar Ajaipal Singh and others (AIR (1928) 627). _______________
EXPRESSION “PREVIOUS YEAR”
Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan – 1960 SCC 80 = [1960] 2-TAX (III-211) (S.C.Pak) = PLD 1960 S.C. 187 626.
CBR is not competent to change “income year” retrospectively.
Liability of an assessee becomes determinable with the enforcement of Finance Act. Any notification issued by the CBR to alter it is illegal and has no operative force. Sheikh Miran Bux Karam Bux Ltd., Karachi v. Income Tax Officer, Company Circle 12, Karachi [1976] 33 TAX 99 (H.C.Kar.) 627.
Assessee is entitled to have different previous years in respect of different sources of income falling under the same head of business [Position prior to 1.7.1979].
There can be no manner of doubt that a „previous year‟ could have been prescribed under paragraph (b) in respect of a source of business, for, under the same head, there can be two sources as an example, there may be different businesses, each of which would provide a different source of income, and it is always open to the assessee to have one previous year of one business and another previous year for the second business, even though both the sources may fall under the same head of business. But the basic feature nonetheless remains that the liability to tax under section 3 of the Act is on the total income and not the income from any source, which obviously means that, in the event of two previous years, there has to be a return of total income. This is founded on the principle that the income tax is only one tax, and there are not as many taxes as there are heads of income, or sources of a particular head.
391 DEFINITION OF „INCOME YEAR‟
Section 2(26)
Equally a loss sustained in any year under any of the heads may be set oil‟ against the income under any other head in that year (Section 24). A fortiori a loss sustained or allowable expenditure incurred in respect of a source of income under any one head should be set off against income from other sources chargeable under the same head, in order to arrive at the net figure chargeable under that head. It would, therefore, be a violation of the scheme of the Act to call for a separate return of income of one source only for the purpose of being taxed. Again, looking to the language of section 3 of the Act, what is taxed by the Central Act is the total income of the previous year, or, the previous years, as the case may be, of every person, and not the income of the assessee in the year of assessment. Cases referred to : Shri Sobhag Mal Lodha v. Commissioner of Income Tax (63 ITR 124) and Scindia Steam Navigation Co. Ltd. v. Commissioner of Income Tax (AIR (1955) 230). 628.
Central Board of Revenue is not competent authority to alter by notification normal previous year after the Finance Act has come into force.
For the purpose of the charging section the “previous year” is corelated to the year of assessment immediately following it i.e. the “previous year must end on the day following the day on which the assessment year begins. But under clause (a) of the impugned notification “special previous year” is one continuous period of twentyfour months, which does not end before the assessment year close but ententes to the assessment year 1973 upto 31st December, 1973. The “special previous year” provided by clause (b) of the Notification commences on the day on which the assessment year 1972 begins and extends up to 31st of December, 1973. In either case it remains a question to be considered whether it can be co-related with the assessment year 1973-74. Therefore, it is the position that existed on the passing of the Finance Act, which was material i.e. the petitioner‟s liability will thus become determinable on the basis of its having adopted a calendar year under paragraph (c) of sub-clause (i) of clause (11) Of section 2 of the Act on the date the Finance Act was passed i.e. 1st of July 1973, in the absence of any period having been determined by the Central Board of Revenue under clause (b), Thus, the petitioner was entitled to the benefit of the observations in the above-cited case to the effect that it was entitled to choose its own year of accounting, provided it did not exceed twelve months, and this option was absolute, because no order
392 Section 2(26)
Income Tax Digest.
of the Central Board of Revenue, restricting- or curtailing it, existed,, and therefore the liability as determined by the Income Tax Act read with the Finance Act continued to be the same throughout the period, unless it was altered retrospectively by an Act of the Legislature. Mr. S. A. Nusrat, on behalf of the Revenue, contended that, by the addition of the words in paragraph (h) by the Finance (Amendment) Act, 1974, the purpose was achieved, but that is not so. The amended paragraph (b) only enabled the Central Board of Revenue to prescribe the “special previous year” in the manner stated elsewhere in the judgment, and, where a “special previous year” was prescribed, it became a part of the machinery provided for the enforcement of the liability which-came into motion only when the Finance Act determined the rate, or rates of tax on the total income for the previous year, and it is only the Finance Act, which could, by retrospective legislation, alter the quantum, extent or character of the existing liability i e. the rate, or, rates to be charged on the total income. There was no such legislation, and sub section (7) of section 3 of the Finance Act of 1973, which held the field; provided the rate, or rates of tax on the total income, which could not be split up by virtue of the retrospective operation of paragraph (b), or the Notification issued thereunder to legalise the calling of the return in respect of the separate income of rice export business only. Again, what has been emphasised in the judgment is the application of the rate, or, rates of tax on the total income of the previous year, which necessarily has to end before the commencement of the assessment year, which is not “the case as provided by clauses (a) and (b) of the Notification. In both the cases, the “special previous year” ends on 31st of December, 1973. While, in the case provided by clause (a), it is any period commencing from 1.1.1972, and, in the case of clause (b), it commences with the beginning of the assessment year 1972 and ends on 31st of December, 1973. in either case, it is one continuous period, and while it is true that the length of the “previous year” is not stated in the charging section, nonetheless it is an inescapable conclusion from what has been observed above in the Supreme Court case that it must end before the assessment year commences. Since the Central Board of Revenue had no legislative powers, therefore, it was beyond its competence to co-relate the “special previous year” with the assessment year of 1973. It is a misconception to assume that such power flowed from- paragraph (b) which is merely a defining clause, and, by itself, it does not affect the rights or liabilities according to the settled principle of interpretation. Therefore for the special previous year prescribed by clause (a) the
393 DEFINITION OF „INCOME YEAR‟
Section 2(26)
assessment year will be 1974-75 and not the assessment year 1973-74. As for the special previous year prescribed by clause (b) of the Notification, that too cannot be the previous year for the assessment year 1973, and, for this “special previous year” the assessment year will also be 1974-75. The assessee becomes subject to the liabilities and entitled to the benefits of the Income Tax Act on the day on which the Finance Act is promulgated, and, as such, the petitioner cannot be deprived of the benefit of set off of loss against income. Therefore, by calling the return of income of one source only the petitioner would not be able to take advantage of section 24 to which he is entitled on the basis of the return of total income, which is liable to be taxed. Cases referred to : Radhashayam Agarwala v. Commissioner of Income Tax, East Pakistan (PLD 1960 S.C. 187); (1960) 2-TAX (III-211) (S.C.); Nanak Chand Fateh Chand v. Commissioner of Income Tax (2 ITC 1617) and Esthuri Ashwathaiah v. Commissioner of Income Tax 60 ITR 411.
Miran Bux Karam Bux Ltd. v. Income Tax Officer, Company Circle 12, Karachi and 2 others – [1975] 31 TAX 125 (H.C.Kar.) 629.
Notification issued by Central Board of Revenue declaring previous year covering period of more than 12 months is ultra vires.
There can be no doubt that by virtue of the provisions made in clear language of section 2(11)(i)(b) of the Act the Central Board of Revenue has ample power to declare a “previous year” in respect of any separate source of income, profit or gains in the case of any person business of company and the previous year so declared may be different than what is provided for section 2(11)(i)(a). This position appears to be clear from the judgment of the Supreme Court of Pakistan reported as [PLD 1960 S.C. 187] upon which reliance was sought to be placed by the learned counsel for the petitioner. It. therefore, appears that the Central Board of Revenue could validly determine “previous year” in the case of persons who carried on the business of exporting rice. The question, however, is whether the impugned notification by the fact that it was given retrospective effect could validly vary the tax liabilities created by the Finance Act, 1973 so as to adversely affect an assessee. In this behalf there appears to be force in the argument that the entire concept of the Income Tax Act is that the enforcement of tax liabilities come into motion only when the Finance Act determines the rates or rates- of taxes on the total income of different classes of assessees for the “previous year”, and once these liabilities have been specified, they cannot be altered to the
394 Section 2(26)
Income Tax Digest.
disadvantage of an assessee except by direct retrospective legislation. This . is the import of the judgment of the Supreme Court referred to above There also appears to be force in the argument that the “special previous year” determined by the impugned notification for the business of export of rice extended beyond a period of 12 months and it is ultra vires for that very reason alone for the concept of the entire tax legislation is that the tax is payable for a period not extending 12 months. Case relied on : Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan (PLD 1960 SC 187) = [1960] 2-TAX (III-211) (SC).
Commissioner of Income Tax, East Pakistan v. Radhashyam Agarwala – [1960] 2-TAX (III-157) (H.C.Dacca) = 1960 PTD 253 = 1960 PLD 233 Central Board of Revenue is competent authority to alter by issue of notification normal previous year with retrospective operation.
630.
The assessee was carrying on jute business (started after 1st October, 1949). In view of the express directions contained in the notification, dated 24th August, 1951 issued by the Central Board of Revenue, the Income Tax Officer issued notice under section 34 to the assessee on 5th August, 1954 to file return of his income for the period relevant to the assessment year 1951-52. The assessee filed the return, under protest, in respect of the income accruing during the Rathajatra year 2007-2008, claiming that the assessment year for the said Rathajatra year was 1952-53 and not 1951-52, as in the case of all old jute businesses. The Income Tax Officer, however, made the assessment taking the period ending 30th June, 1951, as the previous year for 1951-52 assessment year. Assessee‟s appeal to the Appellate Assistant Commissioner failed. On further appeal, the Tribunal set aside the assessment holding that the notification could now be given retrospective effect. On a reference, it was held that the notification, dated 24th August, 1951 issued by the Central Board of Revenue was legally operative in making the assessment for the year 1951-52 in all jute cases which had not carried on any such business in East Pakistan before 1st October, 1949. Their Lordships further observed that(i)
a Legislature can Legislate or delegate to a competent authority to pass an enactment altering a normal previous assessment year in case of certain newly-set-up business
395 DEFINITION OF „INCOME YEAR‟
Section 2(26)
and providing an assessment year different from the normal financial year; (ii)
if the notification were not in the form as it is, that is to say, if it did not say that for the purposes of assessment the previous year will be the year of twelve months ending on the 30th of June 1951, it could have been very well urged that it should be construed as having prospective and not retrospective operation. But, on a reading of the notification, it will be found that in so many words it is stated the period of twelve months ending on the 30th of June is to be the previous year for the purposes of making the assessment in cases of parties who came into the jute business after the 1st of October, 1949; and
(iii)
vested rights can be affected by a new enactment operating retrospectively if it contains express words or exhibits a necessary intendment to that effect.
Judicial analyses : OVERRULED BY - The Supreme Court of Pakistan in Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan 1960 SCC 80 = [1960] 2-TAX (III-211) (S.C.Pak) = PLD 1960 S.C. 187 observing : “. . . . In the present case it cannot possibly be contended that the order by the Central Board of Revenue was an act of the legislature affecting rights or liabilities which had already come into existence by the passing of the Finance Act. “We hold that the High Court was wrong in the view it took.” The Honourable Supreme Court hold that the CBR is not competent to prescribe special income year under section 2(26)(c) of the Income Tax Ordinance, 1979 retrospectively i.e. once the assessee closed its accounts and the Finance Act determined the liability. Cases referred to: Commissioner of Income Tax, Bombay v. Sind Hindu Provident Funds Society [(1940) 8 ITR 467]; Chotturwn and others v. Commissioner of Income Tax, Bihar, (AIR 1947 F.C. 32); Income Tax Officer, Companies District I, Calcutta and another v. Calcutta Discount Co. (AIR 1953 Cal. 721); In re Mishrimal Gulabchand (AIR 1950 All. 270); Scindia Steam Navigation Co. Ltd., v. Commissioner of Income Tax, Bombay City, (AIR 1955 Bom. 230); Maharajah of Pithapuram v. Commissioner of Income Tax, Madras, (AIR 1945 P.C. 89); and Nirajanlal Ramballav v. Commissioner of Income Tax, Madhya Prudesh and Bhopal (AIR 1953 Nag. 185); Income Tax Officer, Companies District I, Calcutta and another v. Calcutta Discount Co. (AIR 1953 Cal. 721).
396 Section 2(26)
Income Tax Digest.
Melamal Shib Dayal v. Commissioner of Income Tax – [1936] 4 ITR 206 (Lahore) 631.
Different previous years in respect of different sources of income - Position prior to 01.07.1979.
There could conceivably be two dates of 31st March, within the same accounting year. _______________
MISCELLANEOUS
MeIa MaI Shiv Dayal v. Commissioner of Income Tax – 10 ITC 126 (Lahore) 632.
In case of branches.
Though an assessee is entitled to have two „previous years‟, one for the head office and one for the branches, he cannot incorporate two years‟ results of the branches in one year‟s account on the ground that the two years‟ result of the branches happens to come within one previous year of the head office.
397 DEFINITION OF „INSPECTING ADDITIONAL COMMISSIONER‟
Section 2(27)
Section 2(27)* Inspecting Additional Commissioner
PAGE NO
POWERS OF IAC
633.
*
Scope of powers of IAC explained. (H.C.Dacca) = 1960 PLD 713
Corresponding to section 2(6D) of the 1922 Act.
_
1960 PTD 1075 398
398 Section 2(27)
Income Tax Digest.
Section 2(27)* Inspecting Additional Commissioner
POWERS OF INSPECTING ADDITIONAL COMMISSIONER
Commissioner of Income Tax v. Satish Chandra Bhowmik – 1960 PTD 1075 (H.C.Dacca) = 1960 PLD 713 633.
Scope of powers of Inspecting Additional Commissioner explained.
Inspecting Assistant Commissioner is competent to disapprove or modify what is referred to him for approval.
approve,
Judicial review : The Honourable Supreme Court in Commissioner of Income Tax, Lahore Zone v. Mir Hassan Khan & Sons Lahore 1972 SCC 397 = [1974] 29 Tax 187 (S.C.Pak) overruled to the extent of approving order for penalty this holding that power to approval does not include power to enhance or reduce the proposed quantum of penalty.
*
Corresponding to section 2(6D) of the 1922 Act.
399 DEFINITION OF ‘INTEREST’ Section 2(29)
Section 2(29) Interest
PAGE NO
EXPRESSION “INTEREST” - SCOPE OF
634.
Interest awarded under section 28 of the Land Acquisition Act, 1894 being “interest” in form and substance was a “revenue receipt” and not a capital receipt and thus, liable to _ tax. [2001] 83 TAX 390 (H.C.Pesh.) = [2000] 82 TAX 426 (H.C.Pesh.) = 2000 PTD 2953
400
400 Section 2(29)
Income Tax Digest.
Section 2(29) Interest
EXPRESSION “INTEREST” - SCOPE OF
Commissioner of Income Tax, Peshawar v. Ghulam Siddique – [2001] 83 TAX 390 (H.C.Pesh.) = [2000] 82 TAX 426 (H.C.Pesh.) = 2000 PTD 2953 634.
Interest awarded under section 28 of the Land Acquisition Act, 1894 being “interest” in form and substance was a “revenue receipt” and not a capital receipt and thus, liable to tax.
The distinction between the interests under section 34 and section 28 of the Land Acquisition Act its that the former is mandatory to be paid by the Collector on the compensation awarded whereas the interest under section 28 is discretionary granted by the Court in a Reference under section 18 of the Act on the amount of compensation awarded in excess of that granted by the Collector. It is a recognized principle of law that though discretionary, interest under section 28 is ordinarily to be granted and refused for only good reasons. Such interest also becomes debt under section 2(29) once awarded by the Court. It is no longer left to the description of the Collector. This interest is only on the excess amount awarded by the Court in a Reference under section 18 and not on the entire compensation amount, whereas the interests on the original compensation amount is supposed to have been paid or are payable for the same period, namely, from dispossession till payment of compensation. Thus if the interest under section 34 is to be treated as revenue receipt there is no reason to hold interest under section 28 as compensation for loss of possession of the land. To conclude, the interest under section 28 of the Land Acquisition Act is interest in form and substance and, therefore, a revenue receipt and not a capital receipt. It is thus, liable to tax. Cases referred to: Nishat Sarhad Textile Mills Limited v. Sher Ahmad Khan (PLD 1962 SC 269), Ghulam Hussain v. Government of NWFP (1992 SCMR 2427).
401 DEFINITION OF „PERSON‟
Section 2(32)
Section 2(32)* Person
PAGE NO
DEFINITION OF “PERSON”
635.
636.
637.
Definition of “person” includes a dead man as alive for certain purposes and a human being as dead as in the case _ of bankruptcy or insolvency. [1980] 42 TAX 59 (H.C.Lah.)
409
Expressions individual, HUF, company, firm and other association of individuals used in section .3 of the 1922 Act _ are mutually exclusive. [1938] 6 ITR 494 (All.)
409
Whether assessable entity is liable for tax on would depend _ upon whether income belongs to him or not. [1937] 5 ITR 90 (PC)
409
STATUS OF “LOCAL AUTHORITY”
638. 639.
“Local authority” enjoys an independent status under the _ Ordinance. 1980 SCC 477 = [1980] 42 TAX 179 (S.C.Pak.)
410
Thal Development Authority is a local authority and exempt from tax. “local authority”, “local fund”, meaning _ under General Clauses Act (X of 1897) [1976] 33 TAX 176 (H.C.Lah.) = PLD 1976 Lah. 258
410
STATUS OF “INDIVIDUAL”
640. 641. 642. 643.
“Individual” means a natural person. [1977] 36 TAX 7 (S.C.Pak.)
_
1977 SCC 442 = _
“Individual” means a natural person. 1955 SCC 13 (Federal Court) [1960] 2-TAX (Supp.3) (S.C.Pak.) _ Hindu idol has juristic status. AIR 1925 PC 139 _ Others. [1934] 2 ITR 362 (Lahore)
410 411 411 412
STATUS OF “AOP”
644.
*
AOP is a separate and independent entity for income which _ was taxed in the hands of members. 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak.)
Corresponding to section 2(9) of the 1922 Act.
412
402 Section 2(32)
645. 646. 647. 648. 649. 650.
651.
Income Tax Digest.
Constituents of an AOP. 15 (S.C.Pak.)
_
PAGE NO
1965 SCC 220 = [1965] 12 TAX _
Involuntary nature of association - effect of. 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.) _ Allottees of cinema constitute an AOP. 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.) _ “Association of persons” is liable to tax. 1955 SCC 13 (Federal Court) = [1960] 2-TAX (Supp.3) (S.C.Pak.) _ Provincial Government is not an AOP. 1955 SCC 13 (Federal Court) = [1960] 2-TAX (Supp.3) (S.C.Pak.)
413 413 413 413 413
AOP is assessable as such or assessment can be made on _ members individually. 1955 SCC 13 (Federal Court) [1960] 2-TAX (Supp.3) (S.C.Pak.)
414
Group of three registered firms doing business jointly _ constitutes AOP. [1962] 5 TAX 147 (H.C.Kar.) = 1962 PTD 101 = 1962 PLD 136
414
WORD “ASSOCIATION” DOES NOT HAVE TECHNICAL MEANING
652.
The word “association” does not have technical meaning. _ 1955 SCC 13 (Federal Court) [1960] 2-TAX (Supp.3) (S.C.Pak.)
416
HINDUS - CONNOTATION OF
653.
Jains.
_
[1934] 2 ITR 463 (Nag.)
416
HINDU UNDIVIDED FAMILY - CONNOTATION OF
654. 655.
Question as to whether the status of the assessee is HUF, is _ a question of fact. [1943] 11 ITR 491 (Lahore)
416
A question of law would arise where the assessees‟ claim that they should be assessed as HUF was rejected and assessment was made in the status of an unregistered firm. _ 3 ITC 1 (Cal.)
416
HINDU UNDIVIDED FAMILY VS. HINDU COPARCENARY
656. 657. 658.
HUF does not mean a coparcenary; female can be member _ of HUF. [1937] 5 ITR 90 (PC)
417
A Hindu coparcenary is a much narrower body than the _ joint family. [1934] 2 ITR 288 (Mad.)
417
Because there is no coparcenary, it does not follow that there is no HUF; there is a sharp distinction between HUF _ and coparcenary. 8 ITC 239 (Bom.)
417
403 DEFINITION OF „PERSON‟
Section 2(32) PAGE NO
FAMILY - CONNOTATION OF
659.
Where the assessee‟s claim for being treated as a HUF, consequent on the birth of a son to him, was rejected, question as to whether there was evidence to justify that _ conclusion, was a referable question of law. [1935] 3 ITR 152 (Bom.)
418
WHO CAN BE MEMBERS
660.
Question as to whether a person is or is not a member of a _ HUF is primarily a question of fact. [1943] 11 ITR 235 (Oudh)
419
MALE MEMBER
661.
662.
663.
In the case of a joint Hindu family that is not possessed of any property there can be no coparcenary body for simple reason that family does not own joint or coparcenary property; there is no reason why disappearance of male member in case of such a family should cause disruption of family; even after disappearance of last surviving male member females may be joint in mess, residence, etc., and _ continue to remain undivided. [1945] 13 ITR 361 (All.)
419
HUF need not consist of two male members; it can comprise of single male member and widows of deceased coparceners. _ [1933] 1 ITR 70 (Mad.); [1934] 2 ITR 463 (Nag.); [1935] 3 ITR 367 (Bom.); [1940] 8 ITR 545 (Mad.); 7 ITC 129 (Nag.)
420
Where after the death of the sole surviving coparcener the property devolved on the widow; widow and her mother-in_ law would not constitute a HUF. [1943] 11 ITR 154 (Nag.)
420
JUNIOR MEMBER
664.
Even in an ordinary joint Hindu family governed by Mitakshara rights of junior members are somewhat limited, though having regard to his right to claim partition he can insist on enjoyment of joint family property to a far greater extent than a member of a joint Hindu family possessed of _ impartible properly. [1934] 2 ITR 186 (All.)
421
FEMALE MEMBERS
665. 666.
_ Female can be a member of HUF. [1937] 5 ITR 90 (PC)
421
Where Hindu widow was administratrix of her husband‟s _ will. 9 ITC 321 (Cal.)
421
404 Section 2(32)
Income Tax Digest. PAGE NO
667.
Relevance of fact that a widow recipient of maintenance _ allowance is living apart from the family. [1942] 10 ITR 229 (Pat.)
422
PARTITION OF HUF
668.
669. 670.
Where there is joint estate and the members at the family has become separate in estate, the Family ceases to be joint mere severance in toad and worship does not operate as a _ separation. 4 ITC 55 (Bengal) _ Relevance of separate residence / messing. [1934] 2 ITR 186 (All.) No question of law arose from finding of fact that what assessee got on partition of HUF was converted by him into stock-in-trade and thus profit on sale of such land was _ taxable. [1941] 9 ITR 244 (Lahore)
422 423
423
PROPERTY OF HUF
671.
There is no presumption that property standing in the _ name of Hindu wife belongs to her husband. [1936] 4 ITR 108 (Pat.)
423
ANCESTRAL PROPERTIES
672.
It would not be in consonance with ordinary notions or with a correct interpretation of the law of the Mitakshara, to hold that property which a man has obtained from his father belongs to a Hindu undivided family by reason of _ having a wife and daughters. [1937] 5 ITR 90 (PC)
424
SELF ACQUIRED PROPERTIES
673.
Where the property is self-acquired under a gift, it does not become HUF property, even if assessee has a son, _ unless thrown into common stock of HUF. [1937] 5 ITR 90 (PC)
425
PROPERTY OF HUF
674.
675.
If a member of HUF is not able to explain source of his individual acquisition, it does not mean that it is HUF _ properties. [1944] 12 ITR 296 (Lahore)
426
Where there was gift of money by lain widow to sons of adopted son and to his wife and businesses were started with such money, they were separate businesses and not _ joint family businesses. [1943] 11 ITR 352 (Mad.)
426
405 DEFINITION OF „PERSON‟
Section 2(32) PAGE NO
BUSINESS OF HUF
676.
677.
678.
679.
If there is no HUF nucleus and no evidence of throwing property into HUF, income from business need not be _ assessed as HUF income. [1942] 10 ITR 441 (Oudh)
427
Where a business is started by brothers to exclusion of their father, It need not necessarily be treated as HUF business. _ [1944] 12 ITR 296 (Lahore)
427
Where two brothers of a HUF comprising four brothers, carried on a separate business and acquired properties in their own name and source of investment was not _ explained. 5 ITC 118 (All.)
428
Where members of a Dayabhaga Hindu family started business three generations back and were living and messing separately by drawing moneys from the business and the business accounts did not contain any capital credit _ in the name of the families. 4 ITC 55 (Bengal)
428
THROWING OF SELF-ACQUIRED PROPERTY INTO FAMILY HOTCHPOT
680.
No public declaration is required to convert self-acquired _ property into HUF property. [1943] 11 ITR 491 (Lahore)
429
IMPARTIBLE ESTATE
681.
Customary impartible estate vs. Estate granted by the _ Crown subject to descent by primogeniture. [1937] 5 ITR 569 (Lahore)
429
REMUNERATION TO KARTA-PARTNER FROM FIRM
682.
683.
Directors‟ fees paid to members of HUF is their personal incomes even if they become directors because of HUF‟s _ shareholding. [1945] 13 ITR 419 (Pat.) _ Illustrations. [1947] 15 ITR 124 (Bom.)
429 430
BENEFITS OF CONTRACTS
684.
Where assessee-HUF entered into certain contracts, providing capital for them, but in general accounts as between family members receipts from contracts were credited to accounts of two contracting members of HUF. _ 7 ITC 156 (Rangoon)
430
406 Section 2(32)
Income Tax Digest. PAGE NO
HUF & FIRM
685.
Partnership between coparcener and karta. 35 (PC)
_
[1948] 16 ITR 430
ASSOCIATION OF PERSONS - BASIC PRINCIPLES
686. 687. 688.
_ Position under the 1922 Act. [1948] 16 ITR 412 (Mad.) _ Position under the 1922 Act. 10 ITC 26 (All.); [1936] 4 ITR 412 (All.) _ Position under the 1922 Act. [1940] 8 ITR 269 (Mad.)
430 431 431
HUF AND AOP
689.
An association of individuals resembling a HUF is an association of individuals contemplated by section 3 of the _ 1922 Act. [1940] 8 ITR 114 (Sind)
FIRM & AOP
690.
In case of partnership between firms and HUF. ITR 203 (Lahore)
_
431
[1936] 4 432
ASSOCIATION OF COMPANIES
691.
An association of companies is not chargeable _ „association of individuals‟. [1939] 7 ITR 369 (Bom.)
as 432
CO-OWNERS [POSITION UNDER THE 1922 ACT]
692. 693.
694.
695.
696.
Cooperative Society is not a “company” within the meaning _ of section 2(16)(b). [2000] 81 TAX 352 (H.C.Lah.)
432
An association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains falls within the words _ „other association of individuals‟. 10 ITC 414 (Bom.)
433
Persons associated for acquiring property and deriving _ profits from it are assessable as AOP. 10 ITC 414; 10 ITC 419 (Bom.)
433
Mere co-ownership is not sufficient to constitute an AOP if _ shares are definite or ascertainable. [1936] 4 ITR 412 (All.)
433
Joint owners holding property as tenants-in-common and executing power of attorney to one of them for joint management, are assessable as association of individuals. _ [1935] 3 ITR 408 (Cal.)
433
407 DEFINITION OF „PERSON‟
Section 2(32) PAGE NO
697. 698.
Where brothers jointly purchased and managed property, _ they were assessable as AOP. 10 ITC 445 (Bom.)
434
Relevance to appointment of a common rent collecting _ agent fry a body of co-owners of a market. 10 ITC 26 (All.)
434
CO-HEIRS
699.
700.
701. 702.
Where heirs inherited immovable property in equal shares under a will and were jointly managing it, they were _ assessable as AOP. [1937] 5 ITR 716 (Bom.)
434
Where heirs manage the property jointly and receive rents jointly, they may be assessed as association of individuals. _ [1942] 10 ITR 405 (Peshawar)
434
Joint collection and distribution of rent by co-heirs does not _ make them an AOP. [1943] 11 ITR 443 (Lahore)
435
Where two widows who were the wives of two Hindu brothers had income from capital invested jointly by them. _ [1942] 10 ITR 84 (Nag.)
435
CO-TRUSTEES
703.
Others.
_
5 ITC 8 (Lahore)
436
CO-EXECUTORS
704.
Where executors are acting only on behalf of the beneficiaries, they cannot be assessed as AOP only _ beneficiaries can be assessed. [1945] 13 ITR 500 (Lahore)
436
MUTUAL CONCERN - GENERAL TESTS
705.
Registration under section 26 of Indian Companies Act, _ 1913 is immaterial for purposes of exemption. [1936] 4 ITR 397 (All.)
436
TEST AS TO DISTRIBUTION OF SURPLUS 706.
Principle of mutuality will apply only if money is received back in the capacity of contributor and not in the capacity _ of shareholder. [1926] 11 Tax Cas 790
CLUBS
707.
Others.
708.
Others.
_ _
437
2 ITC 521 (Cal.)
438
5 ITC 201 (Nag.)
438
408 Section 2(32)
Income Tax Digest. PAGE NO
COMPANIES
709.
710.
711.
Company whose banking transactions were not confined to _ its own members is not a mutual benefit society. [1934] 2 ITR 427 (Mad.) Where membership fee of borrower-members was only nominal and prof its of the company were distributed to its real shareholders, company was not a mutual benefit _ society. [1937] 5 ITR 703 (Mad.) _ Others. [1939] 7 ITR 333 (Sind); [1939] 7 ITR 341 (Sind); [1939] 7 ITR 352 (Sind)
438
439 439
CO-OPERATIVE SOCIETY
712.
A co-operative society carrying on banking business with _ non-members also is not a mutual benefit society. [1940] 8 ITR 269 (Mad.)
440
MUTUAL INSURANCE COMPANY
_
713.
Taxability of premium.
714.
Taxability of premium.
715.
Question as to whether on the facts found an insurance _ society is a dividing society is a question of law. [1939] 7 ITR 352 (Sind)
441
Surplus of calls or premiums and further sums received fr? the company from its members over the expenditure of the _ year was not assessable as profits or gains of business. 6 ITC 7 (Bom.)
441
716.
_
5 ITC 238 (Bom.)
440
[1889] 2 Tax. Cas. 460 (HL)
440
409 DEFINITION OF „PERSON‟
Section 2(32)
Section 2(32)* Person
DEFINITION OF “PERSON”
Begum Nusrat Bhutto v. Income Tax Officer, Circle-V, Rawalpindi – [1980] 42 TAX 59 (H.C.Lah.) 635. Definition of “person” includes a dead man as alive for certain purposes and a human being as dead as in the case of bankruptcy or insolvency. The power of authority of the present day Legislature is not limited to the following of principles of jurisprudence and treat a dead man as a non-entity which in actual fact is; the Legislature can treat the dead man as alive as for certain purposes, it can treat a living human being as dead for example in cases of bankruptcy or insolvent. Jugal Kishore Mukat LaI, In re – [1938] 6 ITR 494 (All.) 636. Expressions individual, HUF, company, firm and other association of individuals used in section .3 of the 1922 Act are mutually exclusive. Section 3 of the 1922 Act [parallel to section 9 of the Income Tax Ordinance, 1979] speaks of an „individual, HUF, company, firm and other association of individuals‟ and it is clear that all these expressions are mutually exclusive. Note: section 9 of the Income Tax Ordinance, 1979 uses the expression „person‟ which is defined inclusively in section 2(32).
Kalyanji Vithaldas v. Commissioner of Income Tax – [1937] 5 ITR 90 (PC) Whether assessable entity is liable for tax on would depend upon whether income belongs to him or not. The phrase used in section 3 of the 1922 Act is „the total income of the previous year of any individual, Hindu undivided family, company, unregistered firm or other association of individuals not being a registered firm. „Income‟ in this phrase is not to be attributed to any one of the five classes of persons mentioned by any loose or extended interpretation of the words, but only where the application of the word 637.
*
Corresponding to section 2(9) of the 1922 Act.
410 Section 2(32)
Income Tax Digest.
is warranted by their ordinary legal meaning. Thus, whether an assessable entity is liable for tax on an income would depend upon whether income belongs to him as that assessable entity. Note: For the liability of assessable entities under Income Tax Ordinance, 1979, section 9 has to be read with the definition of „person‟ in section 2(32). _______________
STATUS OF “LOCAL AUTHORITY”
Commissioner of Income Tax, Lahore v. Chief Secretary, Government of Punjab, Lahore – 1980 SCC 477 = [1980] 42 TAX 179 (S.C.Pak.) 638. “Local authority” enjoys an independent status under the Ordinance. The Thal Development Authority, although a body corporate, has the status of “local authority”. In view of status of “local authority” the total income of this body is exempt under clause (98), Part I, of the Second Schedule. Chief Secretary, Government of The Punjab Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1976] 33 TAX 176 (H.C.Lah.) = PLD 1976 Lah. 258 639. Thal Development Authority is a local authority and exempt from tax. “local authority”, “local fund”, meaning under General Clauses Act (X of 1897). According to section 4(3)(iii) of the Income Tax Act income of the „local authority‟ except income from a trade or business carried on by the authority so far as that income is not income arising from the supply of commodity of service within its own jurisdiction shall not be included in the total income of the assessee for the purposes of computation of the tax.. . .The Thal Development Authority is a local authority as defined in section 3(28) of the General Clauses Act. . . . The Tribunal was, therefore, not justified in holding that the Thal Development Authority as not a local authority within the meaning of section 4(3)(iii) of the Income Tax Act. _______________
STATUS OF “INDIVIDUAL”
Jullundur Cooperative Transport Society Ltd. v. Income Tax Officer – 1977 SCC 442 = [1977] 36 TAX 7 (S.C.Pak.) 640. “Individual” means a natural person. The question raised in this appeal by Jullundur Co-operative Transport Society Ltd., Lyallpur, assessee, is whether it is liable to be
411 DEFINITION OF „PERSON‟
Section 2(32)
assessed to tax for the years 1956-57, 1957-58, 1958-59, and 1959-60 as an individual or an association of persons. The liability to assessment is otherwise not disputed. If the applicant‟s status is that of an individual within the purview of section 3 of the Income Tax Act, its member cannot be made personally liable for payment of tax. But in case the appellant is assessed as an association of persons then the liability falls on each and every member of the society. The purpose of this appeal, therefore, is to avoid the liability of the members of the appellant society to pay tax for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60. It is pointed out by Sh. Abdul Haq, learned counsel for the respondent that in The Punjab Province v. The Federation of Pakistan PLD 1956 F.C. 72 this Court has, on good authority and for cogent reasons held that after the amendment of section 3 in 1939 the term „individual‟ means a natural person and not a legal entity as is claimed by the appellant before us. After the citation of the aforementioned case, Mr. Hashmi, learned counsel for the appellant expressed the desire to withdraw the appeal. He is allowed to do so but before dismissing the appeal we would like to observe that we are in complete accord with the view expressed in The Punjab Province v. The Federation of Pakistan that the term „individual‟ in section 3 of the Income Tax Act means a natural person and not a legal entity such as a co-operative society. The society is, accordingly, to be assessed as an association of person and not as an individual. The appeal is dismissed with costs. The Punjab Province v. The Federation of Pakistan – 1955 SCC 13 (Federal Court) [1960] 2-TAX (Supp.3) (S.C.Pak.) 641.
“Individual” means a natural person.
There can be no doubt that the word “individual” can only mean a natural person i.e., a human being. While every individual must be a person, the converse is not true because an artificial juridical person or a legal person, whether it is a corporation aggregate or a corporation sole, is not an individual. Pramatha Nath Mullick v. Pradhyumna Kumar Mullick – AIR 1925 PC 139 642.
Hindu idol has juristic status.
A Hindu idol is, according to long established authority, founded upon the religious customs of the Hindus and the recognition thereof by courts of law, a juristic entity”. It has a juridical status with the power
412 Section 2(32)
Income Tax Digest.
of suing and being sued. Its interests are attended to by the person who has the deity in his charge, and who is in law its manager with all the powers which would, in such circumstances on analogy, be given to the manager of the estate of an infant heir. It is unnecessary to quote the authorities; for this doctrine, thus simply stated, is firmly established. Lahore Ice Factories Association v. Commissioner of Income Tax – [1934] 2 ITR 362 (Lahore) 643.
Others.
The question whether a „pool‟ consisting of four individuals, an unregistered firm, a registered firm and a company is an assessee under section 3 of the 1922 Act and whether the assessment should be made individually or collectively, are questions of law. _______________
STATUS OF “AOP”
M.Rehman, Income Tax Officer, and others v. Narayanganj Company (Pvt.) Ltd. – 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak.) 644.
AOP is a separate and independent entity for income which was taxed in the hands of members.
The concern of the income tax authorities, however, was that the Association of Persons as a separate entity had escaped assessment. In that the Income Tax Officers were worthy of blame. As soon as they came to know in each individual case that some income was derived by the assessee from a venture carried out jointly with others they should have excluded that income from the account year and issued notice to each associate under section 65 directing them to file a return of the income derives from the joint venture. Having failed to do so on account of their negligence they cannot be permitted to turn round and issue a fresh notice under section 65 to the same assessee as members of an association in respect of the income which had already been charged to tax in their hands. It was also anomalous to maintain that already been taxed has „escaped assessment‟ or has been taxed at too low rate etc. The position which emerges out therefore is that the income derive from the joint venture by the three associates having been charged to tax in their respective hands and no step taken for annulment of their assessments the same income could not be taxed again in their hands as income of separate entity.
413 DEFINITION OF „PERSON‟
Section 2(32)
Commissioner of Income Tax, Karachi, v. Majestic Cinema, Karachi – 1965 SCC 220 = [1965] 12 TAX 15 (S.C.Pak.) 645.
Constituents of an AOP.
The view taken by the High Court that to constitute an association of persons within the meaning of the Income Tax Act what is necessary is that a number of individuals should be associated with each other in a joint enterprise for the purpose of profits and income, is, we say so with respect, entirely correct and consistent with precedent judicial decisions. 646.
Involuntary nature of association - effect of.
The involuntary nature of the association does not have any material effect upon the fact that it was an association. What the Rehabilitation Commissioner did was to constitute a consortium of these five groups for the purpose of operating the cinema and appropriating the income from it to themselves in stated proportions. Consortiums are of frequent occurrence in present day industrial activities. There is no room to conclude that because the five groups of the allottees were brought into association with each other by order of an executive authority, there was no partnership between them, or that they were within the meaning of an association of persons in the light of Income Tax Act. It is clear that the cinema was throughout run as a single business unit, and it was run for the making of profits or income. 647.
Allottees of cinema constitute an AOP.
The High Court was wrong in excluding Group 5 from the association and we accordingly allow the appeal and accepting the interpretation place upon by the High Court on the question referred to it, we return the following answer to the question viz., the Tribunal rightly held that groups Nos. 2, 3, 4 and 5 being allottees of the Majestic Cinema were to be assessed as an association of persons. The Punjab Province v. The Federation of Pakistan – 1955 SCC 13 (Federal Court) = [1960] 2-TAX (Suppl.-3) (S.C.Pak.) 648.
“Association of persons” is liable to tax.
An association is liable to tax even if its members are not individuals. Such members must, however, be persons, whether individuals or legal persons or both. The Punjab Province v. The Federation of Pakistan – 1955 SCC 13 (Federal Court) = [1960] 2-TAX (Suppl.-3) (S.C.Pak.) 649.
Provincial Government is not an AOP.
By no stretch of imagination the provincial government can be held to be an “association of persons”.
414 Section 2(32)
Income Tax Digest.
Case review : The provincial government under the Income Tax Ordinance, 1979 is defined as company [section 2(16)(d)] which brings it to chargeability as person defined in section 2(32) read with section 9 subject to exemption enjoyed by it under Article 165 of the Constitution of Pakistan. 650.
AOP is assessable as such or assessment can be made on members individually.
Determination of correct status is of vital importance because in the case of an AOP, the assessing officer has the discretion either to tax the association as such or the members of association individually. Haji, Muhammad Zakaria & Faruqui Flour Mills v. Commissioner of Income Tax, Karachi – [1962] 5 TAX 147 (H.C.Kar.) = 1962 PTD 101 = 1962 PLD 136 Group of three registered firms doing business jointly constitutes AOP. A group of three registered firms, consisting of 22 members, purchased 20,000 tons of gram from the Government at a cost of Rs.2 lacs, contributed by all the three firms. In terms of the agreement reached between the firms (i) each firm was to have one-third share in the goods, (ii) the accounts of all the transactions were to be maintained by one of these firms which originally had offered a tender to the Government and the sales were to be conducted by and in the name of that firm, and (iii) the expenses were to be met on a joint account and whatever surplus remained at any time it was to be distributed equally between the three firms. On the close of the transactions the accounts were finally settled and each of the three firms received Rs.1,40,000 by way of profits. Each of these three firms filed a separate return of income declaring therein its share of profits from the gram business along with its-other income derived from personal business. The Income Tax Officer who had no knowledge of the agreement reached between the parties made assessments of the three firms separately with the reservation that the inclusion of a particular income was “subject to revision under section 35 on receipt of information from the Income Tax Officer concerned”. In the meantime the Income Tax Officer who had with him the agreement construed it as an agreement of partnership but as the number of all the partners of the firms combined exceeded 23 he treated them as Association of persons and after issue of notice under section 34 on the ground that the income of the association had escaped assessment made the assessment accordingly. In the assessment order the Income Tax Officer expressly stated that the tax paid by the firm on the basis of previous assessment would either be adjusted or refunded. The assessee having failed before the appellate authorities went up to the High Court contending that (i) there existed 651.
415 DEFINITION OF „PERSON‟
Section 2(32)
a valid assessment of each of the three firms of their personal account and, therefore, it was not open to the Income Tax Officer to make another assessment in respect of the same income on the basis that the partners of the three firms who joined in this business constituted an association of persons ; (ii) the Income Tax Officer had no power to refund the tax which had been levied upon the three firms separately and that section 14(2)(b) had no application; and (iii) the notice under section 34 was not valid in law. Held, that: (i) upon the facts the elements of partnership are fully established. But apart from the question whether this combination did or did not amount to partnership there can be little doubt that this combination amounted to an Association of persons within the meaning of section 3 of the Act; (ii) this was not a case in which the same income had been charged repeatedly. The previous assessment of the three firms separately in respect of their shares of income in the gram business was in effect superseded by the subsequent assessment of that income in the hands of the association which was formed by the combination of the members of the three firms; (iii) upon the finding that the assessment should have been made on the basis of the association and not on individual basis the refund or adjustment of the tax realised on the same income in the hands of the individuals becomes consequential and incidental to the finding; and (iv) upon the finding that the 23 persons who were partners of the three firms did constitute an association of persons within the meaning of section 3 of the Act for the purpose of the charging of the tax it must follow that if the income of this association had not been taxed upon that basis then the case would clearly be covered by section 34 of the Act. The Income Tax Officer was entitled to issue a notice upon the ground that the income of the association had escaped assessment altogether. The notice under section 34, therefore, was clearly valid in law. Case relied upon: Punjab Province v. The Federation of Pakistan [1960] 2 TAX (Suppl.) 3. Cases distinguished: Joti Prasad Agarwal and others v. Income Tax Officer [1959] 1-TAX (III-188) and Commissioner of Income Tax v. Indra Balkrishna [1960] 2-TAX (III-437). _______________
416 Section 2(32)
Income Tax Digest.
WORD “ASSOCIATION” DOES NOT HAVE TECHNICAL MEANING
The Punjab Province v. The Federation of Pakistan – 1955 SCC 13 (Federal Court) [1960] 2-TAX (Supp.3) (S.C.Pak.) 652.
The word “association” does not have technical meaning.
The word “association” has no technical meaning and is wide enough to include all groups or aggregations of persons formed for the promotion of a joint enterprise, whether that enterprise is in the field of business or in the field of arts, literature, science, philanthropy or some other profession. _______________
HINDUS - CONNOTATION OF
Seth Nathusa Pasusa Lad v. Commissioner of Income Tax – 7 ITC 129; Nathu Sao v. Commissioner of Income Tax [1934] 2 ITR 463 (Nag.) 653.
Jains.
In the absence of proof of custom or usage to the contrary, the ordinary Hindu law applies to Jains. _______________
HINDU UNDIVIDED FAMILY - CONNOTATION OF
Lakshmi Narain Gadodla & Co., ln re – [1943] 11 ITR 491 (Lahore) 654.
Question as to whether the status of the assessee is HUF, is a question of fact.
The question as to whether the status of the assessee is HUF, is a question of fact. Gangasagar Ananda Mohan Saha v. Commissioner of Income Tax – 3 ITC 1 (Cal.) 655.
A question of law would arise where the assessees‟ claim that they should be assessed as HUF was rejected and assessment was made in the status of an unregistered firm.
Where the assessees‟ claim that they should be assessed as HUF was rejected and assessment was made in the status of an unregistered firm, it was held that a referable question of law would arise. _______________
417 DEFINITION OF „PERSON‟
Section 2(32)
HINDU UNDIVIDED FAMILY VS. HINDU COPARCENARY
Kalyanji Vithaldas v. Commissioner of Income Tax – [1937] 5 ITR 90 (PC) 656.
HUF does not mean a coparcenary; female can be member of HUF.
The phrase „Hindu undivided family‟ is used in the statute with reference, not only to one school of Hindu law, but to all schools; and one must not begin by pasting over the wider phrase of the Act the words „Hindu coparcenary. „Hindu undivided family‟ in the Income Tax Act does not mean a coparcenary. Thus, it cannot be said that no female can be a member of a HUF. Case review : Decision of the Calcutta High Court in Moolji Sicka, In re [1935] 3 ITR 123 affirmed. Commissioner of Income Tax v. Narayana Gajapati Raju Bahadur Garu [1934] 2 ITR 288 (Mad.) 657.
A Hindu coparcenary is a much narrower body than the joint family.
It is true that the Hindu male cannot constitute a coparcenary with his wife and unmarried daughter but under the Income Tax Act a HUF, not a coparcenary, is a taxable unit. A Hindu coparcenary is a much narrower body than the joint family. It includes only those persons who acquire by birth an interest in the joint or coparcenary property and these are the sons, grandsons and great grandsons of the holder of the joint property for the time being, that is to say, the three generations next to the holder in unbroken male descent. Since under the Mitakshara law, the right to joint family property by birth is vested in the male issue only, females who come in only as heirs to obstructed heritage (sapratibandhadaya) cannot be coparceners. Gomedalli Laxminarayan v. Commissioner of Income Tax – 8 ITC 239 (Bom.) 658.
Because there is no coparcenary, it does not follow that there is no HUF; there is a sharp distinction between HUF and coparcenary.
Now under the Hindu law undoubtedly the sole surviving coparcener has wider powers to deal with property which he takes by survivorship. But these powers are subject to well recognised rights of the female members of the family. Thus the widow of a deceased
418 Section 2(32)
Income Tax Digest.
coparcener has a right to be maintained out of the family property and a right to a due provision for her residence. An unmarried daughter has a right to maintenance and residence and to marriage expenses. Similarly, the disqualified heirs, such as the blind, the deaf, etc., have similar rights. If the rights of these persons are threatened, or if the holder of the estate is dealing with the property in a manner inconsistent with or so as to endanger the rights of these persons, he may be restrained by a proper action from acting in that manner. Similarly, the widow of a deceased coparcener may adopt a son to her deceased husband and he would therefore become a coparcener with the sole surviving coparcener. Then the expenses of religious ceremonies such as the Shradha relating to deceased coparceners have also to come out of the property. One need not refer to the other restrictions on the power of the sole surviving coparcener. Therefore because there is no coparcenary, it does not come to an end merely because for the time being there is only one member of the family who is in possession of the family property. It is clear, therefore, that there is a sharp distinction between what is understood in the Hindu law by the expressions „undivided Hindu family‟ and „coparcenary‟. _______________
FAMILY - CONNOTATION OF
VadiIaI Lallubhai Mehta v. Commissioner of Income Tax – [1935] 3 ITR 152 (Bom.) 659.
Where the assessee‟s claim for being treated as a HUF, consequent on the birth of a son to him, was rejected, question as to whether there was evidence to justify that conclusion, was a referable question of law.
Where the assessee‟s claim for being treated as a HUF, consequent on the birth of a son to him, was rejected on the ground that the documents retied upon by the assessee to prove ancestral nucleus to investments made by him in his business, were illusory, it was held that the question as to whether there was evidence to justify that conclusion was a referable question of law. _______________
419 DEFINITION OF „PERSON‟
Section 2(32)
WHO CAN BE MEMBERS
Rani Anand Kuuwar v. Commissioner of Income Tax – [1943] 11 ITR 235 (Oudh) 660.
Question as to whether a person is or is not a member of a HUF is primarily a question of fact.
The question as to whether a person is or in not a member of a HUF is primarily a question of fact. _______________
MALE MEMBER
Commissioner of Income Tax v. Sarwan Kumar – [1945] 13 ITR 361 (All.) 661.
In the case of a joint Hindu family that is not possessed of any property there can be no coparcenary body for simple reason that family does not own joint or coparcenary property; there is no reason why disappearance of male member in case of such a family should cause disruption of family; even after disappearance of last surviving male member females may be joint in mess, residence, etc., and continue to remain undivided.
It is well settled that the existence of a joint estate is not an essential requisite to constitute a joint Hindu family and there may be such a family without owning any property. In other words, a joint Hindu family may be possessed or may not be possessed of property. A Hindu coparcenary as compared to a HUF is a much narrower body and includes only those persons who acquire by birth an interest in the joint or coparcenary property. But in the case of joint Hindu family that is not possessed of any property there can be no coparcenary body for the simple reason that the family does not own joint or coparcenary property. In the case of a HUF that is not possessed of any property the jointness consists in mess, residence, worship, etc. In such a case a HUF can exist so long as there is a male member and some females constituting the family. There is no reason why the disappearance of the male member in the case of such a family should cause disruption of the family Even after the disappearance of the last surviving male member the females may be joint in mess, residence, etc., and continue to remain undivided. A family is an association of people. It is a natural as distinct from an artificial association. The members of an undivided Hindu family consist of both the males and females. In other words, females are and
420 Section 2(32)
Income Tax Digest.
can be component part of an undivided Hindu family. That being so, there can be an undivided Hindu family consisting of females only. Vedathannl v. Commissioner of Income Tax [1933] 1 ITR 70 (Mad.); Nathu Sao v. Commissioner of Income Tax [1934] 2 ITR 463 (Nag.); Commissioner of Income Tax v. Gotnedalli Lakshmi Narayan [1935] 3 ITR 367 (Bom.); Commissioner of Income Tax v. A.V.P.MR.M. Lakshmanan Chettiar [1940] 8 ITR 545 (Mad.); Seth Nathusa Pasusp Ltd. v. Commissioner of Income Tax – 7 ITC 129 (Nag.) 662.
HUF need not consist of two male members; it can comprise of single male member and widows of deceased coparceners.
Under section 3 of the 1922 Act [corresponding to section 9 of the Income Tax Ordinance, 1979], not a Hindu coparcenary but a HUF is one of the assessable entities. A Hindu joint family consists of all persons lineally descended from a common ancestor, and includes their wives and unmarried daughters. A Hindu coparcenary is a much narrower body than the joint family: it includes only those persons who acquire by birth an interest in the joint or coparcenary property, these being the sons, grandsons and great-grandsons of the holder of the joint property for the time being. Therefore, there may be a joint Hindu family consisting of a single male member and widows of deceased coparceners. The plea that there must be at least two male members to form a HUF as a taxable entity has no force. The expression „Hindu undivided family‟ in the Income Tax Act is used in the sense in which a Hindu joint family is understood under the personal law of Hindus. Under the Hindu system of law a joint family may consist of a single male member and widows of deceased male members, and apparently the Income Tax Act does not indicate that a HUF as an assessable entity must consist of at least two male members. Property of a joint family, therefore, does not cease to belong to the family merely because the family is represented by a single coparcener who possesses rights which an owner of property may possess. Case review: Commissioner of Income Tax v. Gomedalli Lakshminarayan [1935] 3 ITR 367 (Bom.) approved.
Mst.Pannabal v. Commissioner of Income Tax – [1943] 11 ITR 154 (Nag.) 663.
Where after the death of the sole surviving coparcener the property devolved on the widow; widow and her mother-in-law would not constitute a HUF.
Where after the death of the sole surviving coparcener the property devolved on the widow:
421 DEFINITION OF „PERSON‟
Section 2(32)
Held that the widow and her mother-in-law would not constitute a HUF. The widow was the sole owner of the property which devolved on her husband‟s death, notwithstanding the fact that the ownership was subject to the right of maintenance of her mother-in-law. _______________
JUNIOR MEMBER
Maharaj Kuinar of Vizianagaram, In re – [1934] 2 ITR 186 (All.) 664.
Even in an ordinary joint Hindu family governed by Mitakshara rights of junior members are somewhat limited, though having regard to his right to claim partition he can insist on enjoyment of joint family property to a far greater extent than a member of a joint Hindu family possessed of impartible properly.
Even in an ordinary joint Hindu family governed by Mitakshara the rights of junior members are somewhat limited, though having regard to his right to claim partition he can insist on enjoyment of the joint family property to a far greater extent than a member of a joint Hindu family possessed of impartible property. It cannot be disputed that since a younger son of the proprietor of an impartible Raj acquires an interest by birth he acquires the position of a member of an undivided family, even though his rights do not extend to a power to claim a partition. and to restrain the actions of the proprietor. He will cease to he a member of such an undivided family only if to use the words of their Lordships of the Privy Council, he „renounces his right of succession to the estate‟. _______________
FEMALE MEMBERS
Kalyanji Vithaldas v. Commissioner of Income Tax – [1937] 5 ITR 90 (PC) 665.
Female can be a member of HUF.
Female can be a member of joint Hindu family. Smt. Charushila Dassi v. Commissioner of Income Tax – 9 ITC 321 (Cal.) 666.
Where Hindu widow was administratrix of her husband‟s will.
Where one-third of the family expenses incurred by a Hindu widow as a administratrix under her husband‟s will was excluded from the
422 Section 2(32)
Income Tax Digest.
income of the estate, representing the widow‟s drawings for board, lodging, maintenance, etc., it was held that the amount so excluded was assessable as the income of the widow. Musammat Radha Kuer v. Commissioner of Income Tax – [1942] 10 ITR 229 (Pat.) 667.
Relevance of fact that a widow recipient of maintenance allowance is living apart from the family.
The fact that a widow recipient of maintenance allowance is living apart from the family does not affect her status as member of HUF. _______________
PARTITION OF HUF
Ganga Sagar Ananda Mohan Shaha v. Commissioner of Income Tax – 4 ITC 55 (Bengal) 668.
Where there is joint estate and the members at the family has become separate in estate, the Family ceases to be joint mere severance in toad and worship does not operate as a separation.
Every Hindu family is presumed to be joint in food, worship and estate. Under the Dayabhaga law each coparcener takes a defined share. The essence of a coparcenary under the Mitakshara law is unity of ownership, whereas under the Dayabhaga law the essence of the coparcenary is unit in possession. So long as there is unity of possession, no coparcener can say that a particular share of the property belongs to him. That he can say only after a partition. Partition then, according to the Dayabhaga law, consists in splitting up joint possession and assigning specific portions of the property to the several coparceners. But there is no presumption that a family, because it is joint, possesses joint property or any property. Where there is joint estate and the members of the family become separate in estate, the family ceases to be joint. Mere severance in food and worship does not operate as a separation. Cessor in commensality is an element which may properly be considered in determining the question whether there has been a partition, but it is not conclusive. If, however, after cessor in commensality any member of the family is in possession of any portion of the property separately, the presumption referred to above is considerably weakened. No doubt it is true that the mere fact that a property is purchased in the name of a member of the family and that there are receipts in his name respecting it, does not render the property by itself, his separate
423 DEFINITION OF „PERSON‟
Section 2(32)
property; but if in addition to the fact that certain property stands in the name of one of the members, there be these further facts, namely, that some other members of the family have properties standing in their separate names and are found to deal with the same as their own without reference to the rest of the family and that the members of the family are allowed to appear to the world to be the sole owners of the said separate properties, the presumption that the properties are joint is almost gone and the burden of proving that the properties are still joint will lie on those who allege that they are joint. Maharaj Kumar of Vizianagaram, In re – [1934] 2 ITR 186 (All.) 669.
Relevance of separate residence / messing.
Separate residence and separate messing may be some of the indicia by which the joint character or otherwise of a family may be ascertained but in case of members of wealthy families they are not only inconclusive but of little evidential value. Seth Mathra Parshad v. Commissioner of Income Tax – [1941] 9 ITR 244 (Lahore) 670.
No question of law arose from finding of fact that what assessee got on partition of HUF was converted by him into stock-intrade and thus profit on sale of such land was taxable.
No question of law arose from finding of fact that what the assessee got on partition of HUF was converted by him into stock-in-trade and thus profit on sale of such land was taxable. _______________
PROPERTY OF HUF
Ramklnkar Banerji v. Commissioner of Income Tax – [1936] 4 ITR 108 (Pat.) 671.
There is no presumption that property standing in the name of Hindu wife belongs to her husband.
There is no presumption that property standing in the name of Hindu wife belongs to her husband. _______________
424 Section 2(32)
Income Tax Digest.
ANCESTRAL PROPERTIES‟
Kalyanji Vithaldas v. Commissioner of Income Tax – [1937] 5 ITR 90 (PC) 672.
It would not be in consonance with ordinary notions or with a correct interpretation of the law of the Mitakshara, to hold that property which a man has obtained from his father belongs to a Hindu undivided family by reason of having a wife and daughters.
In an extra legal sense, and even for some purposes of legal theory, ancestral property may perhaps be described, and usefully described, as family property; but it does not follow that in the eye of the Hindu law it belongs, save in certain circumstances, to the family as distinct from the individual. By reason of its origin a man‟s property may be liable to be divested wholly or in part on the happening of a particular event, or may be answerable for particular obligations, or may pass at his death in a particular way; but if, in spite of all such facts, his personal law regards him as the owner, the property as his property and the income therefrom as his income, it is chargeable to Income Tax as his, i.e., as the income of an individual. It would not be in consonance with ordinary notions or with a correct interpretation of the law of the Mitakshara, to hold that property which a man has obtained from his father belongs to a Hindu undivided family by reason of having a wife and daughters. A man‟s wife and daughters are entitled to be maintained by him out of his separate property as well as out of property in which he has a coparcenary interest, hut the mere existence of a wife or daughter does not make ancestral property joint. „Interest‟ is a word of wide and vague significance, and no doubt it might be used for a wife‟s or daughter‟s right to he maintained, which right accrues in the daughter‟s case on birth: but If the father‟s obligations are increased, his ownership is not divested, divided or impaired by marriage or the birth of a daughter. This is equally true of ancestral property belonging to himself alone as of self-acquired property. Two brothers Kand Shad become partners in a firm by virtue of gifts from their father, which were made out of father‟s self-acquired property. K had a wife and daughter and S only a wife; neither had a son. The question was whether the income from the firm was the HUF income or their individual income. Held that it was the individual income of K and S and not of their HUFs.
425 DEFINITION OF „PERSON‟
Section 2(32)
Case review: Decision of the Calcutta High Court in Moolji Side, In re [1935] 3 ITR 123 affirmed. _______________
SELF ACQUIRED PROPERTIES
Kalyanji Vithaldas v. Commissioner of Income Tax – [1937] 5 ITR 90 (PC) 673.
Where the property is self-acquired under a gift, it does not become HUF property, even if assessee has a son, unless thrown into common stock of HUF.
Income from a separate and self-acquired property of a Hindu, which has not been thrown into the common stock, is assessable to tax as income of an individual and not as the income of a HUF, irrespective of the fact that he has sons from whom he is not divided inasmuch as the sons have no interest in such income: M, K and P were partners in a firm and had employed their separate and self-acquired property in the business of the firm, which property they had not thrown into the common stock of their HUF‟s. They were heads of families and had sons. C, also a partner m the firm, had acquired his interest in the firm by virtue of a gift from his brother; his family consisted of himself, wife and daughters. The question was whether share income from the firm could be assessed as income of respective HUF‟s or in individual hands of partners. Held that share income from the firm was clearly the separate and self-acquired property of the partners and as it had not been thrown into the common stock, it could not be regarded as income of the respective families. It was the income of an individual. In neither case would the fact that the man had a wife and daughter (or more than one) affect the result. The existence of a son does not make his father‟s self-acquired property family property or joint property. That the existence of a wife or daughter would do so would be untenable. Case review: Decision of the Calcutta High Court in Moolji Sickca, In re [1935] 3 ITR 123 affirmed. Judicial analysis: EXPLAINED IN - Surjit Lad Chhabda v. Commissioner of Income Tax [1975] 101 ITR 776 (SC) with the following observations: The crucial facts in Kalyanji Vithaldas v. Commissioner of Income Tax [1937] 5 ITR 90 (PC) on which the ultimate decision rested are these:
426 Section 2(32)
Income Tax Digest.
(i)
In regard to three partners. [M.P. and K] though each of them was the head of his joint family which included in every case a son or sons, the income which each received from the firm was his separate and self-acquired property which was not thrown into the common stock.
(ii)
In regard to [C], though he had no son, that fact was irrelevant because his interest in the firm was his self-acquired or separate property in which the son could have taken no interest by birth. ...
...
. . .The mere existence of a son or sons in a joint Hindu family does not make the father‟s separate or self-acquired property joint family property.... ...
...
. . .If the mere fact that M, P and K had each a son or sons did not make their separate property joint family property, the mere existence of a wife or daughter could not bring about that result in C‟s case. (pp. 787-788) _______________
PROPERTY OF HUF
Jitumal Chamanlal v. Commissioner of Income Tax – [1944] 12 ITR 296 (Lahore) 674.
If a member of HUF is not able to explain source of his individual acquisition, it does not mean that it is HUF properties.
Where C, a member of HUF had acquired a property in his individual capacity but had not produced any evidence to explain his acquisition: Held that it did not mean that the HUF was liable for income arising therefrom. The HUF was a different entity from C and if the acquisition had been made by him in his individual capacity the assessee could not be penatised for his inability to prove the source of the money invested by him. Commissioner of Income Tax v. Mobanmal Chordia – [1943] 11 ITR 352 (Mad.) 675.
Where there was gift of money by lain widow to sons of adopted son and to his wife and businesses were started with such money, they were separate businesses and not joint family businesses.
A Jain widow, who inherited a business on the death of her husband, later adopted a son. She held all along treated the business as her
427 DEFINITION OF „PERSON‟
Section 2(32)
own and even the adopted son had so accepted it as such. She made gifts to her grandsons and daughter-in-law with which they started three separate businesses. On her death the son inherited the business of widow. Forty-five years later, the Income Tax department took the view (i) that by adopting a son she was no longer the owner of the business which thereafter became HUF business, and (ii) that the gifts were, therefore, invalid and hence the business started with them should continue to be HUF property. Accordingly, the department treated the income from all businesses as the HUFs income. Held that if members of the family accepted the gifts as valid transactions and binding it was not for the Income Tax department to challenge their validity. The income from the businesses was to be assessed separately. _______________
BUSINESS OF HUF
Sardar Saheb Sardar Singar Singh & Son v. Commissioner of Income Tax – [1942] 10 ITR 441 (Oudh). 676.
If there is no HUF nucleus and no evidence of throwing property into HUF, income from business need not be assessed as HUF income.
Merely because a business is in the joint names of father and son, no irrebuttable presumption arises that the business should be assessed as a joint family business. Where the Commissioner found that there was no nucleus from which the property could have been acquired and that there was no evidence that it had been thrown into the common stock, it was held that he was justified in taking the assessee‟s income as individual income. Jitumal Chamanlal v. Commissioner of Income Tax – [1944] 12 ITR 296 (Lahore) 677.
Where a business is started by brothers to exclusion of their father, It need not necessarily be treated as HUF business.
There is no presumption that a business carried on by a member of a joint family is joint family business, nor is there any presumption that a business carried on by such a member in partnership with a stranger is joint family business. Similarly there is no presumption
428 Section 2(32)
Income Tax Digest.
that a business started even „by a manager is joint family business. If however the joint family funds are utilized in opening a new branch, then the new branch will be regarded as part of the old business. Where during the lifetime of their father, four brothers started a business of their own to the exclusion of their father: Held that it could not be said that any income derived from that business was a joint family income and that the property owned by them could form a nucleus for further acquisitions. Even if the business had been assessed as HUF in the past they could claim in later assessments that it was not HUF income. Bhajan Lal Sanwal Das v. Commissioner of Income Tax – 5 ITC 118 (All.) 678.
Where two brothers of a HUF comprising four brothers, carried on a separate business and acquired properties in their own name and source of investment was not explained.
Where two brothers of a HUF comprising four brothers, carded on a separate business and acquired properties in their own name and the source of investment of these were not explained as having come out of their own resources and there was no partition but an understanding to-treat the business and the properties as the own properties of the two brothers in the event of partition and the family will have nothing to do with it, it was held that the family should be treated as HUF and income from the business as well as the properties was assessable as part of the family income. Ganga Sagar Ananda Mohan Shaha v. Commissioner of Income Tax – 4 ITC 55 (Bengal) 679.
Where members of a Dayabhaga Hindu family started business three generations back and were living and messing separately by drawing moneys from the business and the business accounts did not contain any capital credit in the name of the families.
Where members of a Dayabhaga Hindu family started business three generations back and were living and messing separately by drawing moneys from the business and the business accounts did not contain any capital credit in the name of the families, it was held that the members were not assessable as a HUF qua the business income. _______________
429 DEFINITION OF „PERSON‟
Section 2(32)
THROWING OF SELF-ACQUIRED PROPERTY INTO FAMILY HOTCHPOT
Laksbmi Naraln Gadodia & Co., In re – [1943] 11 ITR 491 (Lahore) 680.
No public declaration is required to convert self-acquired property into HUF property.
After the induction of his adopted son in his self-acquired business, the assessee, who was- previously assessed as an individual, claimed the status of HUF qua business income and filed an affidavit to the effect that all the property of the business was the property of a HUF, consisting of himself and his adopted son. The departments view was that the affidavit was a confidential document being part of Income Tax record, and had no evidentiary value. Held that there was clear intention to waive separate rights and business income was to be assessed as HUF income. No public declaration was required for this purpose. _______________
IMPARTIBLE ESTATE
Kunwar Kartar Singh v. Commissioner of Income Tax – [1937] 5 ITR 569 (Lahore) 681.
Customary impartible estate vs. Estate granted by the Crown subject to descent by primogeniture.
There is a distinction between customary impartible estate and an estate granted by the Crown subject to descent by primogeniture. The former is HUFs property. _______________
REMUNERATION TO KARTA-PARTNER FROM FIRM
Commissioner of Income Tax v. Darsanram – [1945] 13 ITR 419 (Pat.) 682.
Directors‟ fees paid to members of HUF is their personal incomes even if they become directors because of HUF‟s shareholding.
Where two HUFs represented by their kartas owned a company and the kartas were paid directors‟ fees by the company, it was held that the fees paid to the directors were their personal earnings since the joint family property had not been spent in earning the remuneration of the directors but the dividends that were earned on the shares and were the income of the HUFs.
430 Section 2(32)
Income Tax Digest.
Harldas Purshottam, In re – [1947] 15 ITR 124 (Bom.) 683. Illustrations. Where the karta of the assessee-HUF was partner in a firm, owning a mill, in his representative capacity and subsequently the firm promoted a company which took over the mill and which appointed firm as its managing agent Held that since the opportunity of becoming and of being actually appointed managing agents, arose directly from the asset which was sold to the company, viz., the mills, which, in part was joint family‟ property, the income from managing agency was HUFs income. _______________
BENEFITS OF CONTRACTS
A.A. Thevar Bros. v. Commissioner of Income Tax 7 ITC 156 (Rangoon) 684. Where assessee-HUF entered into certain contracts, providing capital for them, but in general accounts as between family members receipts from contracts were credited to accounts of two contracting members of HUF. Where the assessee-HUF entered into certain contracts, providing the capital for them, but in general accounts as between the family members the receipts from the contracts were credited to the accounts of the two contracting members of the HUF, it was held that it could not be said that the contracts were taken on behalf of and for the benefit of the HUF; in fact, the contracts were taken on behalf of two separate members as a partnership and the receipts from the contracts could not be assessed as the income of the HUF. _______________
HUF & FIRM
Lachhman Das v. Commissioner of Income Tax [1948] 16 ITR 35 (PC) 685. Partnership between coparcener and karta. Coparcener of a HUF in his individual capacity can enter into partnership with HUF represented by its karta. _______________
ASSOCIATION OF PERSONS - BASIC PRINCIPLES
K.K.G.B.U.G.M.S.S.A. Mohammad Abdul Kareem & Co. v. Commissioner of Income Tax – [1948] 16 ITR 412 (Mad.) 686. Position under the 1922 Act. The words „other association of persons‟ in section 3 of the 1922 Act, have to be construed in their plain ordinary meaning and not ejusdem
431 DEFINITION OF „PERSON‟
Section 2(32)
generis with the word „firm‟ immediately preceding or the other words going before that word. Mufti Mohammad Aslam Khalifa Mandi v. Commissioner of Income Tax 10 ITC 26 (All.); Mohammad Aslam v. Commissioner of Income Tax – [1936] 4 ITR 412 (All.) 687.
Position under the 1922 Act.
Before there can be an association of individuals it must first be shown that the association has at least some of the attributes of a firm or partnership. Commissioner of Income Tax v. Salem District Urban Bank Ltd. – [1940] 8 ITR 269 (Mad.) 688.
Position under the 1922 Act.
„Association of individuals‟ includes an association of corporate bodies. _______________
HUF AND AOP
Commissioner of Income Tax v. Chhotalal Mohanlal – [1940] 8 ITR 114 (Sind) 689.
An association of individuals resembling a HUF is an association of individuals contemplated by section 3 of the 1922 Act.
The question whether the assessee formed association of individuals within the meaning of section 3 of the 1922 Act is a question which must depend upon the particular facts and circumstances of each case. An association of individuals resembling a HUF is an association of individuals contemplated by section 3. The assessees were a father, four sons and the wives of two sons. In 1928 the father separated from his sons by a partition deed, which partition was modified later by another deed executed in the year 1930. In the year 1933 the property which was still jointly held by the members of the Hindu family was sold and a plot of land was purchased in the names of the seven assessees. A building was constructed thereon and this building was managed jointly for the purpose of earning an income which, the assessees alleged, they divided among themselves, but for the division of which the Income Tax Officer found no evidence in the accounts produced. Held that the assessees formed an AOP. _______________
432 Section 2(32)
Income Tax Digest.
FIRM & AOP
Mian Channu Factories Union v. Commissioner of Income Tax – [1936] 4 ITR 203 (Lahore) 690.
In case of partnership between firms and HUF.
Partnership between firms and HUF cannot be registered and is assessable as an AOP. _______________
ASSOCIATION OF COMPANIES
Commissioner of Income Tax v. Ahmedabad Millowners‟ Association – [1939] 7 ITR 369 (Bom.) 691.
An association of companies is not chargeable as „association of individuals‟.
„Individual‟ in section 3 of the 1922 Act must mean human being, because it is used as something distinct from a joint family, firm and company. One cannot give to the word „individuals in the expression „association of individuals a different meaning from that which the word „individuals‟ bears. where it appears in the same phrase. Therefore, an association of companies cannot be charged as an „association of individuals‟. _______________
CO-OWNERS [POSITION UNDER THE 1922 ACT]
Laxmidas Devidas & Vannji Ruttonsey v. Commissioner of Income Tax – 10 ITC 414 (Bom.) 692.
An association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains falls within the words „other association of individuals‟.
An association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains fall within the words „other association of individuals‟.
433 DEFINITION OF „PERSON‟
Section 2(32)
Laxmidas Devidas & Vasanjl Ruttonsey v. Commissioner of Income Tax – 10 ITC 414; Kheraj Obbeya v. Commissioner of Income Tax – 10 ITC 419 (Bom.) 693.
Persons associated for acquiring property and deriving profits from it are assessable as AOP.
Where the assessees in the year of assessment joined together in purchasing certain immovable properties in Bombay, contributing the purchase moneys in equal shares, and the properties were managed by or on behalf of the owners, and such management resulted in certain profits or gains, it was held that these individuals were associated together for the purpose of acquiring the property and deriving profits from it, and thus they were assessable as an association of individuals. Mobammad Aslam v. Commissioner of Income Tax – [1936] 4 ITR 412 (MI.) 694.
Mere co-ownership is not sufficient to constitute an AOP if shares are definite or ascertainable.
Co-owners having specified but undivided share in property cannot be treated as an AOP for taxation purposes, merely because they have appointed a common collecting agent of rents. B.N. Elias, In re – [1935] 3 ITR 408 (Cal.) 695.
Joint owners holding property as tenants-in-common and executing power of attorney to one of them for joint management, are assessable as association of individuals.
Four individuals jointly purchased a property, and the sale deed indicated their individual shares in the property and in addition specified that they would hold the properties as tenants-in-common. However, three of them gave a power of attorney to the fourth to manage the property. Held that they were assessable as an AOP. Note: The principle of this decision was approved by the Indian Supreme Court in Commissioner of Income Tax v. Indira Bakrishna [1960] 39 ITR 546.
Kantisen Mohanji Ganjawalla & Bros. v. Commissioner of Income Tax – 10 ITC 445 (Bom.) 696.
Where brothers jointly purchased and managed property, they were assessable as AOP.
Where four brothers purchased properties jointly, and were also, beneficiaries in certain trust properties, and all the properties were managed jointly, each brother taking the income and bearing the
434 Section 2(32)
Income Tax Digest.
expenses, it was held that the brothers constituted an AOP qua income from house properties. Mufti Mohammad Aslam Khalifa Mandi v. Commissioner of Income Tax – 10 ITC 26 (All.) 697.
Relevance to appointment of a common rent collecting agent fry a body of co-owners of a market.
The mere appointment of a common rent collecting agent by a body of co-owners of a market, would not constitute them as an AOP. _______________
CO-HEIRS
Dwarakanath Harishandra Pitale, In re – [1937] 5 ITR 716 (Bom.) 698.
Where heirs inherited immovable property in equal shares under a will and were jointly managing it, they were assessable as AOP.
Where two brothers received certain house properties as tenants-incommon in equal shares under a will, and they elected to manage the properties as joint owners, it was held that they were assessable as an AOP and not as co-owners‟ qua income from those properties. Note: The principle of this decision was approved by the Indian Supreme Court in Commissioner of Income Tax v. Indira Ralkrishna [1960] 39 ITR 546.
Haji Ghulam Hussain v. Commissioner of Income Tax – [1942] 10 ITR 405 (Peshawar) 699.
Where heirs manage the property jointly and receive rents jointly, they may be assessed as association of individuals.
Where after the death of their father, the sons had not divided the assets in the proportion of their respective shares but continued to have a joint management of the properties and the money-lending business, it was held that the assessment of the brothers as an AOP‟ was justified. Nizam-ud-Din Amir-ud-Din of Lahore, In re – [1943] 11 ITR 443 (Lahore) 700.
Joint collection and distribution of rent by co-heirs does not make them an AOP.
The mere fact that the co-heirs, after inheriting their shares of property, did not choose to partition does not indicate that the co-heirs
435 DEFINITION OF „PERSON‟
Section 2(32)
have formed any combination for the promotion of a joint enterprise or for mutual profit such as is implied in the expression association of individuals‟. Where the assessees, co-heirs of a Mohammedan. were managing the inherited property jointly and distributing the rental income in accordance with their shares, it was held that they did not form an AOP. Commissioner of Income Tax v. Mohanlal Hargovind – [1942] 10 ITR 84 (Nag.) 701.
Where two widows who were the wives of two Hindu brothers had income from capital invested jointly by them.
Where two widows who were the wives of two Hindu brothers had income from capital invested jointly by them, it was held that they were assessable in respect of such income as an AOP. _______________
CO-TRUSTEES
Hotz Trust of Simla v. Commissioner of Income Tax – 5 ITC 8 (Lahore) 702.
Others.
Under a testamentary trust deed a trust was created to run the hotel business of the testator. The trustees were empowered to open new hotels or rebuild existing ones and could borrow money, as they thought fit, on the security of the properties. No beneficiary had the power to hypothecate his or her interest or part thereof to any one for the purpose of a loan, while no beneficiary could sell his or her share to any outsider but must offer it equally to all the other beneficiaries, who must purchase it in the manner provided for in the case of a loan and its repayment. Lastly, certain periodical payments had to be made by the trustees to various persons named in the trust deed. The question arose as to whether the trustees could be held to be „an association of individuals‟ within the meaning of section 3 of the 1922 Act. Held that from the trust deed itself it was apparent that the trustees were a business association with full powers to carry on the business, extend it, accumulate income and borrow capital. Thus, by this trust deed a very effective business association had been created, and certainly quite as effective as a firm or private company, if not more so. Accordingly, the trustees were to be assessed in the status of an AOP. _______________
436 Section 2(32)
Income Tax Digest.
CO-EXECUTORS
Executors of the Estate of Lain Shankar Shah v. Commissioner of Income Tax – [1945] 13 ITR 500 (Lahore) 703.
Where executors are acting only on behalf of the beneficiaries, they cannot be assessed as AOP only beneficiaries can be assessed.
A testator bequeathed certain properties to his minor son, and minor grandsons, and appointed executors to manage the property on behalf of the beneficiaries. Under the will the beneficiaries were given definite share in property and in the business which was to be convened into cash. On the question whether executors could be assessed as an AOP: Held that since the executors were merely managing the property on behalf of the beneficiaries, they could not be assessed as an AOP. In fact the executors could not be held really to perform any such functions as would bring them under the category of an association of individuals. It was the beneficiaries under the will and not the executors who could be charged with tax on account of this estate. _______________
MUTUAL CONCERN - GENERAL TESTS
Chamber of Commerce v. Commissioner of Income Tax – [1936] 4 ITR 397 (All.) 704.
Registration under section 26 of Indian Companies Act, 1913 is immaterial for purposes of exemption.
There is no provision in the Act whereby an association incorporated under section 26 of the Indian Companies Act is exempted as such from being assessed to Income Tax. Registration under section 26 of the Indian Companies Act, 1913 is immaterial for purposes of exemption. _______________
TEST AS TO DISTRIBUTION OF SURPLUS
Thomas v. Richard Evans & Co. Ltd. – [1926] 11 Tax Cas 790 705.
Principle of mutuality will apply only if money is received back in the capacity of contributor and not in the capacity of shareholder.
A company can make a profit out of its members as customers, although its range of Customers is limited to its shareholders. If a
437 DEFINITION OF „PERSON‟
Section 2(32)
railway company makes a profit by carrying its shareholders, or if a trading company, by trading with its shareholders - even if it is limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them quash are holders. It does not come back to them as purchasers or customers. It comes back to them as shareholders upon their shares. Where all that a company does is to collect money from a certain number of people - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company but as the people who subscribed it, then there is no profit. If people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who paid it. If profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. _______________
CLUBS
Dibrugarh District Club Ltd. v. Commissioner of Income Tax – 2 ITC 521 (Cal.) 706.
Others.
The object of the assessee, a club registered as a company, was to maintain and conduct a club for the benefit of such persons as may become its members. Under its articles of association, no shareholder was entitled to use the club‟s premises or enjoy the accommodation provided by it unless he was duly elected as a member of the club. One could become a member without being shareholder in the company. The number of members of the club was apparently 289 of whom 220 were not shareholders of the company and 69 held shares. The assessee made profit out of various charges made to the members and claimed that its profits were exempt on the ground that it did no business with and made no profit on dealings with non-members. Held that the assessee was not a mere mutual trading society making „quasi profits‟ by trading with its own members and returning such „profits‟ to the members. Hence, its profits were not exempt.
438 Section 2(32)
Income Tax Digest.
Maharaj Bag Club Ltd. v. Commissioner of Income Tax – 5 ITC 201 (Nag.) 707.
Others.
The assessee-club, registered as a company, was started for the promotion of the physical, intellectual and social well-being of respectable residents in India. The members were required to pay monthly subscriptions and the club was managed by three trustees and four members appointed from among the shareholders. All the properties vested in and exclusively belonged to the shareholders. The articles of association gave full powers to dispose of the income in any manner whatsoever, and income had till then been applied only on increasing the amenities in the club. The club accumulated income every year without declaring any dividend and claimed that its income was exempt. Held that the club not being a mere mutual society, its surplus income, whether from business or otherwise, was clearly chargeable as income from other sources. _______________
COMPANIES
Commissioner of Income Tax v. Madhwa Siddhantha Onnahini Nidhi Ltd. – [1934] 2 ITR 427 (Mad.) 708.
Company whose banking transactions were not confined to its own members is not a mutual benefit society.
A company, whose main object was to carry on banking business by receiving deposits from and ranting loans to the public could not be considered to be a mutual benefit society since its banking transactions were not confined to its own members. Trichinopoly Tennore Hindu Permanent Fund Ltd. Commissioner of Income Tax – [1937] 5 ITR 703 (Mad.) 709.
v.
Where membership fee of borrower-members was only nominal and prof its of the company were distributed to its real shareholders, company was not a mutual benefit society.
The assessee-company was formed to enable persons to save money and to enable persons to secure loans at favourable rates of interest on sufficient securities. It made profits by advancing loans to outsiders and it Was held by the High Court that it was not a mutual society. It, thereupon, altered its constitution by substituting the word „members‟ for „persons‟ thus providing that „members‟ also could
439 DEFINITION OF „PERSON‟
Section 2(32)
borrow money vide the above mentioned object clauses. A new class of shares called „ordinary shares‟ was created and issued to persons who under the former scheme would have been non-member borrowers. The share money on these shares was withdrawable after two years. On the question whether by this change it became a mutual benefit society: Held that the company obtained considerable income from loans to non-members. No doubt it now only gave loan to persons who become „members‟ but it was said that the membership fee was in many cases merely nominal and that the company carried on in reality the same business as it did before the memorandum and the articles of association were altered. Therefore, the company was not, even after the alteration of its constitution, a mutual benefit society. Commissioner of Income Tax v. Sind Central Provident Funds Society Ltd. [1939] 7 ITR 333 (Sind); Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. [1939] 7 ITR 341 (Sind); Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. (No. 2) [1939] 7 ITR 352 (Sind) 710.
Others.
Where the assessee was a company registered under the Indian Companies Act and had a share capital and shareholders distinct and separate from the premia of policyholder, and the policyholders themselves, it was held that the assessee clearly fell within the ruling in Last‟s case 2 TC 100 and not within the ruling in Styles‟ case 2 TC 460 and it was not a mutual society. _______________
CO-OPERATIVE SOCIETY
National Cooperative Supply Corporation Ltd. through Mr. Islam Madni, General Manager v. Federation of Pakistan through Secretary Finance, Islamabad – [2000] 81 TAX 352 (H.C.Lah.) 711.
Cooperative Society is not a “company” within the meaning of section 2(16)(b).
A Cooperative Society has been separately defined in the Income Tax Ordinance, 1979. This clearly shows that the law itself has treated a Company as different and distinct from Cooperative Society as otherwise there was no occasion for a separate definition. In these circumstances, the respondents could not change the status from “Cooperative Society” to a “Private Limited Company”.
440 Section 2(32)
Income Tax Digest.
Commissioner of Income Tax v. Salem District Urban Bank Ltd. – [1940] 8 ITR 269 (Mad.) 712.
A co-operative society carrying on banking business with nonmembers also is not a mutual benefit society.
A co-operative society carrying on ordinary banking business with non-members also cannot maintain the claim to be a mutual benefit society. _______________
MUTUAL INSURANCE COMPANY
National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax – 5 ITC 238 (Bom.) 713.
Taxability of premium.
The principle which the House of Lords laid down in Styles „case was this, that where you are dealing with a mutual insurance company the premiums paid by the policyholders who are to share in the whole of the profits of the company do not amount to profits or gains of the company which are liable to tax. The principle at the bottom of the decision is that a man cannot make a profit out of himself; if a number of persons contribute to a common fund which immediately or later is to come back to the subscribers then there is no profit which can be liable to tax. Thus, where the assessee was a mutual Life insurance company limited by guarantee having no share capital and every participating policyholder was deemed a member, it was held that any premiums paid by those entitled to participate in policies who become thereby the members of the company were not profits of the company; instead the company ought to have been charged upon its income derived from investments and on profits from non-participating policies or any other sources except the contributions from the participating policyholders. New York Life Insurance Co. v. Styles (Surveyor of Taxes) – [1889] 2 Tax. Cas. 460 (HL) 714.
Taxability of premium.
The appellant was an incorporated company. The company issued life policies of two kinds, namely, participating and nonparticipating. There were no shares or shareholders in the ordinary sense of the term but each and every holder of a participating policy became ipso facto a member of the company and as such became
441 DEFINITION OF „PERSON‟
Section 2(32)
entitled to a share in the assets and liable for a share in the losses. A calculation was made by the company of the probable death rate among the members and the probable expenses and liabilities, and calls in the shape of premia were made on the members accordingly. An account used to be taken annually and the greater part of the surplus of such premia over the expenditure referable to such policies was returned to the members, i.e., (holders of participating policies) and the balance was carried forward as fund in hand to the credit of the general body of members. The question was whether the surplus returned to the members was liable to be assessed to Income Tax as profits or gains. Held that the impugned surplus was not assessable to Income Tax as profits and gains of the members. Judicial analysis: EXPLAINED IN - English & Scottish Joint Co-operative Wholesale Society Ltd. v. CAIT [1948] 16 ITR 270 (PC), as follows: “From the grounds of the decision in Styles‟ case it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) and treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expanded or returned to themselves.”
Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. (No. 1) [1939] 7 ITR 341 (Sind); Commissioner of Income Tax v. Indian Relief & Benefit Insurance Co. Ltd. (No. 2) [1939] 7 ITR 352 (Sind) 715.
Question as to whether on the facts found an insurance society is a dividing society is a question of law.
Question as to whether on the facts found an insurance society is a dividing society is a question of law. Millowners Mutual Insurance Association Ltd. v. Commissioner of Income Tax – 6 ITC 7 (Bom.) 716.
Surplus of calls or premiums and further sums received fr? the company from its members over the expenditure of the year was not assessable as profits or gains of business.
The assessee, a mutual insurance company, was constituted for insuring its members and its articles of association provided for ascertainment of profits and their distribution among the members only. However, these profits were not distributed and the question was
442 Section 2(32)
Income Tax Digest.
whether the surplus of calls or premiums and further sums received by the company from its members over the expenditure of the year was assessable as profits or gains of business. Held that the said profits were not taxable since the assessee was a mutual concern on the payers unless they paid an additional sum and became members,, did not confer any mutual benefit and was taxable as income of the society.
443 DEFINITION OF „PRINCIPAL OFFICER‟
Section 2(34)
Section 2(34) * Principal Officer
PAGE NO
ILLUSTRATIONS
717.
*
Liquidator.
_
[1934] 2 ITR 79 (All.)
Corresponding to section 2(12) of the 1922.
444
444 Section 2(34)
Income Tax Digest.
Section 2(34) * Principal Officer
ILLUSTRATIONS
Commissioner of Income Tax v. Official Liquidator of the Agra Spg. & Wvg. Mills Co. Ltd. – [1934] 2 ITR 79 (All.) 717.
Liquidator.
The word „manager‟ in section 2(12) of the 1922 Act includes liquidators of a company.
*
Corresponding to section 2(12) of the 1922.
445 DEFINITION OF „RESIDENT‟
Section 2(40)
Section 2(40)* Resident
PAGE NO
SIGNIFICANCE OF RESIDENTIAL STATUS
718. 719.
720.
721.
722. 723. 724. 725. 726.
727. 728. 729.
*
Charge of tax is determined according to residential status _ of a person. 1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak.)
448
Resident of taxable territories is liable to tax for his total world income including any income from non-taxable _ territories. 1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak.)
448
The legislative authority to tax non-residents is limited to income accruing or arising in its geographical boundaries. _ 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak.)
449
Resident and ordinarily resident is liable to tax for his total _ world income. [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266 _ Constitutional validity. [1943] 11 ITR 559 (Bom.) _ Word „resident‟ indicates a personal quality. [1949] 17 ITR 568 (Sind) _ „British India‟ - Meaning of. [1942] 10 ITR 349 (Mad.) Question as to whether a person was or was not resident, is _ a question of fact. [1945] 13 ITR 245 (Bom.) Question as to whether a partner exercises control over the business may, in some cases, be a mixed question of law and _ fact. [1946] 14 ITR 334 (Bom.) _ Jurisdiction of civil court. [1936] 4 ITR 341 (Mad.) _ „Year‟ in definition clause refers to „income year‟. [1961] 4 TAX 143 (H.C.Lah.) = 1961 PTD 713 “In that year”, does not refer to “wholly in that year”. _ [1960] 2-TAX (Suppl.-79) (H.C.West Pakistan, Karachi) = 1960 PTD 747 = 1957 PLD 300
450 450 450 450 451
451 451 451
452
Corresponding to section 4A(i), (ii), (iii), 4B of the 1922 Act with Article 223 of the 1962 Constitution.
446 Section 2(40)
Income Tax Digest. PAGE NO
INDIVIDUAL
730.
731.
„Year‟ means period of twelve months preceding the relevant previous year, and not period of twelve months ending on _ 31st December. [1946] 14 ITR 185 (Mad)
454
If, during preceding seven years‟ a person was in British India for mare than two years, he is not included in category of „not ordinarily resident; irrespective of period, during those seven years, in which he had been outside British _ India. [1947] 15 ITR 418 (Mad.)
454
TEST FOR “NOT-ORDINARILY RESIDENT”
732.
Test for “not-ordinarily resident”. (H.C.Dacca)
_
[1966] 13 TAX 141 455
FIRM - GENERAL
733. 734.
735. 736.
There is nothing in law to prevent a firm from having two _ places of residence [1945] 13 ITR 245 (Bom.)
456
Management and control of a firm would ordinarily be _ at the principal place of business. [1945] 13 ITR 245 (Bom.)
457
In case of a firm relevant factor is not who has power to _ control, but who in fact controls. [1946] 14 ITR 334 (Bom.)
457
Where one of the partners is resident in India and manages a branch there, control is not wholly situated outside India. _ [1942] 10 ITR 484 (Mad.)
458
COMPANY
737. 738.
739.
Company resides where the central management and control _ exists. [1906] 5 Tax Cas. 198 = [1906] AC 455 (HL)
458
Control and management of company is where its real _ business is carried on. [1906] 5 Tax Cas. 198 = [1906] AC 455 (HL)
459
Derivation of major part of income will establish territorial nexus so as to treat company as resident - Position under _ 1922 Act. [1948] 16 ITR 240 (PC)
459
CONTROL AND MANAGEMENT - MEANING OF
740.
If control and management rests outside Pakistan, company _ cannot be “resident” or “ordinary resident”. [1960] 2-TAX (III-454)(H.C.Dacca) = 1960 PTD768 = 1960 PLD 621
459
447 DEFINITION OF „RESIDENT‟
Section 2(40) PAGE NO
741.
742.
743.
744.
745.
It is effective existence of control that is relevant and not _ merely right to control and manage. [1945] 13 ITR 124 (Bom.)
460
Mere presence of karta of HUF in India does not mean that _ he is exercising control from India. [1945] 13 UK 269 (Mad.)
460
A HUF cannot be treated as resident only because the karta normally residing outside British India paid a visit _ to taxable territories for few days. [1945] 13 ITR 20 (Mad.)
461
Where the manager of the HUF which was residing outside British India, visited India for supervising its business and stayed at one of the places in the business premises owned by _ family. 6 ITC 96 (Mad.)
461
Where there is change in karta, residential status of The _ previous karta is also to be taken into account. [1945] 13 ITR 186 (Mad.)
461
448 Section 2(40)
Income Tax Digest.
Section 2(40)* Resident
SIGNIFICANCE OF RESIDENTIAL STATUS
Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West) Karachi – 1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak.) 718.
Charge of tax is determined according to residential status of a person.
Section 2(40), 9 and 11 are interlinked and have to be read together. The charge created by virtue of section 9 on the total income of a person is notional in character; it materialises when in pursuance of section 2(40) residential status is determined, and stands quantified on assessment made under the machinery provisions of the Ordinance. Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax (West) Karachi – 1992 SCC 991 = [1992] 66 TAX 275 (S.C.Pak.) 719.
Resident of taxable territories is liable to tax for his total world income including any income from non-taxable territories.
If a person is “resident” in any income year in taxable territories then he is liable to tax for his total world income including income accruing or arising in non-taxable territories where by virtue of Constitution of Pakistan Income Tax Law is not extended. Case review : In the repealed Income Tax Act of 1922, the term “resident” was defined in section 4A (which was inserted by Act 7 of 1939). The heading of the said section was “Residence in taxable territories” which was subsequently amended as “residence in Pakistan” by Act 1 of 1962. The test of “residential status” contained in the said section vis-a-vis the expression “Pakistan” was confined to “taxable territories”, i.e. excluding areas of Pakistan where Income Tax Law was not applicable. In the Income Tax Ordinance, 1979 the position is different. The term “resident” defined in section 2(40) does not make any distinction between residential status in “taxable territories” or “non-taxable territories” in the light of Article 247 and 248 of the 1973 Constitution. The expression “Pakistan” is defined in Article 1(2) of the 1973 Constitution comprising the following:
*
Corresponding to section 4A(i), (ii), (iii), 4B of the 1922 Act with Article 223 of the 1962 Constitution.
449 DEFINITION OF „RESIDENT‟
Section 2(40)
(a)
The Provinces of Baluchistan, the North-Western Frontier Province, the Punjab and Sindh;
(b)
The Islamabad Capital Territory, hereinafter referred to as The Federal Capital;
(c)
The Federally Administered Tribal Areas; and
(d)
Such states and territories as are or may be included in Pakistan, whether by accession or otherwise.”
As evident from above the expression “Pakistan” as used in section 2(40) cannot be restricted to “taxable territories” alone. If the Legislation had this intention in mind, it would have used the words “resident in taxable territories” as was the case in the repealed Income Tax Act, 1922 till 1962. The above decision lays down that if a person is resident in “taxable territories” he is liable to tax for total world income including income from non-taxable territories and there is no constitutional bar. The drafting of section 2(40) does not convey this meaning. Additionally, it is impossible to give a categorical finding that a particular person physically stayed in nontaxable territories for more than 182 days during an income year. There is no law of restricting movement between taxable and non-taxable territories. There can be no documentary evidence to refute a person‟s claim that in a particular income year he stayed in non-taxable territories for more than 182 days. There are no border controls within taxable and non-taxable territories for Pakistanis. Since the non-taxable territories are part of expression “Pakistan” as used in clause (40) of section 2, it is obvious that a person living in a non-taxable territory is also resident. In the light of this judgement, he is liable to tax for his income from all sources including those exclusively lie in non-taxable territories. This will negate Article 247(3) of the Constitution of Pakistan. A serious thinking is required to remove this lacuna in the Income Tax Ordinance, 1979. An Explanation should be added that, irrespective of residential status of a person, the incomes arising from sources exclusively lying in non-taxable territories as defined in Article 24 of the constitution will remain exempt from tax.
The Imperial Tobacco Co. of India Ltd. v. Commissioner of Income Tax, South Zone, Karachi – 1958 SCC 37 = [1960] 2-TAX (Suppl.-308) (S.C.Pak.) = PLD 1959 S.C. 125 720.
The legislative authority to tax non-residents is limited to income accruing or arising in its geographical boundaries.
This construction is consistent with the words and the sense of the definition of “British India” as well as with the principle observed in section 4 of the Income Tax Act, and the rule of International Law that a legislature has authority to tax its citizens wherever they be, and to tax the foreigners only if they earn or receive income in the country for which that legislature has the authority to make laws. The
450 Section 2(40)
Income Tax Digest.
interpretation adopted by the departmental authorities and by the High Court, is opposed to these principles and leads to this absurdity that the Pakistan Income Tax authorities may tax the foreign income of a company even if that company had its registered office for only a day during the previous year in Pakistan. For the reasons given above, we allow this appeal and held that the assessee company was not resident within the meaning of section 4A(c) of the Income Tax Act as to be taxed by the Pakistan Income Tax authorities under section 4(1)(b)(ii). The Department must pay the appellant‟s costs. Book referred: Crales on Statute Law (1952 edition) p. 346.
Haji Ibrahim Ishaq Johri v. Commissioner of Income Tax – [1982] 45 TAX 263 (H.C.Kar.) = 1982 PTD 46 = 1990 PTCL 954 = 1982 PLD 266 721.
Resident and ordinarily resident is liable to tax for his total world income.
Assessee‟s wife was maintaining a dwelling place in Pakistan where telephone, in the name of assessee, was installed. A part of the house reserved as a dwelling place for assessee giving him right to live in Pakistan, therefore, conditions envisaged in section 2(40) fulfilled; assessee was resident and ordinarily resident in Pakistan. Once he is resident, income occurring or arising in Pakistan or outside Pakistan (Sawat State) is liable to tax in Pakistan. Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax – [1943] 11 ITR 559 (Bom.) 722.
Constitutional validity.
Section 4A(c) of the 1922 Act [parellel to section 2(40) of the Income Tax Ordinance, 1979] was not ultra vires the Indian Legislature. Commissioner of Income Tax v. Dhanomal Kewalram Aswani – [1949] 17 ITR 568 (Sind) 723.
Word „resident‟ indicates a personal quality.
The word „resident‟ indicates a personal quality and is not descriptive of a person‟s property. Commissioner of Income Tax v. Papammal – [1942] 10 ITR 349 (Mad.) 724.
„British India‟ - Meaning of.
For the purpose of a residential status, „British India‟ is to be construed as defined in General Clauses Act.
451 DEFINITION OF „RESIDENT‟
Section 2(40)
Sarupchand Hukamchand, In re – [1945] 13 ITR 245 (Bom.) 725.
Question as to whether a person was or was not resident, is a question of fact.
Ordinarily, a question as to whether a person is or is not a resident, is a question of fact. Bhimji R. Naik v. Commissioner of Income Tax – [1946] 14 ITR 334 (Bom.) 726.
Question as to whether a partner exercises control over the business may, in some cases, be a mixed question of law and fact.
Question as to whether or not a man exercises control over a particular business may be a mixed question of law and fact, for example, suppose that the dormant partner has given a mandate to the bank to honour the cheques drawn by the active partners, it could be argued that every time a cheque is drawn, the powers of the dormant partner are being invoked. Whether that is so or not, must be a question of law. Secretary of State for India v. V.M. Meyyappa Chettiar – [1936] 4 ITR 341 (Mad.) 727.
Jurisdiction of civil court.
The question whether the assessee is resident in British India can be determined by the assessing authorities and where they have found after due enquiry that the assessee was resident of British India, the civil court has no jurisdiction to entertain the suit. _______________
„YEAR‟ AS IN „INCOME YEAR‟
A.C. Macnab, Retired Financial Commissioner, Punjab, In re. – [1961] 4 TAX 143 (H.C.Lah.) = 1961 PTD 713 728.
„Year‟ in definition clause refers to „income year‟.
The assessee, a Government servant, left British India after retirement for United Kingdom on the 26th December, 1946, for good. While making the assessment for the charge year 1947-48 the Income Tax Officer assigned the status of „resident and, ordinarily resident‟ and added to his salary income a sum of Rs.36,277 being foreign income arising in the United Kingdom, on the ground that he was resident in British India in the relevant account year 1946-47 where
452 Section 2(40)
Income Tax Digest.
he also maintained a dwelling place. Dissatisfied with the inclusion of the foreign income in the total income the assessee appealed unsuccessfully to the Appellate Assistant Commissioner and the Tribunal. His contention was that his foreign income was not accessible in his hands because it was never received in British India and that he could not be deemed to be resident in British India under section 4A of the Income Tax Act as he was not resident in the assessment year, to which year the provision of the section applied. On a reference Held, that: (i)
the assessee was resident in British India up to the 26th of December, 1946 during the accounting year 1946-47 and as he also maintained a dwelling place therein, he was resident in British India as defined in section 4A(a)(b) and (ii) and consequently under section 4(1) of the Income Tax Act his total income during 1946-47 is to include income, profits and gains from whatever source derived including those which accrued to him without British India during such year; and
(ii)
the words „that year” in clauses (I) and (ii) of section 4A refer to “any year” in its clause (a), which in turn relate to the “previous year” mentioned in sections 3 and 4 of the Income Tax Act. If the words “is in British India in that year” are read along with clause (a) and sections 3 and 4 of the Act, there is no difficulty in concluding that residence has reference to the accounting year and not to the assessment year.
Cases referred to: Radhashyam Agarwala v. Commissioner of Income Tax, East Pakistan (Central Secretariat) Dacca [(1960) 2 TAX 211],
Income Tax Appellate Tribunal, Pakistan v. Imperial Tobacco Co. of India Ltd. – [1960] 2-TAX (Suppl.-79) (H.C.West Pakistan, Karachi) = 1960 PTD 747 = 1957 PLD 300 729.
“In that year”, does not refer to “wholly in that year”.
During the assessment year 1948-49 (accounting year 1.4.1947 to 31.3.1948) the assessee, a limited company, had its head office in Calcutta and the control and management of its affairs was situated. wholly at that place. During the assessment proceedings before the Income Tax authorities in Pakistan the assessee contended that after 14.8.1947 Company‟s head office, control and management situated wholly outside British India (taxable territories) and as such the Company could not be treated as “resident and ordinary resident” in
453 DEFINITION OF „RESIDENT‟
Section 2(40)
Pakistan within the meaning of section 4A(c)(a). The Income Tax authorities, however, assessed the Company in the status of “resident and ordinary resident.” Assessee‟s argument that the word “in that year” in section 4A(c)(a) meant throughout that year” was overruled by the Tribunal who observed that these words meant “any time within that year” and the assessee was correctly treated as “resident and ordinary resident”. On a reference it was held (Constantine, J. dissenting) that the assessee was liable to be taxed as resident. In the course of the judgment their Lordships observed: Per CONSTANTINE, J.-In Sub-section (b) of section 4A(c) the words “in that year” clearly cannot mean “at any time in that year”; otherwise we should get the remarkable result that if during a short period, for example three weeks in May, a company‟s income inside British India exceeded its income arising outside British India for that period, though the balance of income for the whole of the year was in the other direction, yet the company would be considered to be resident in British India. Again in section 4A(a) the legislature at three places inserted the words “for any time” before the - words “in that year” so as to make the meaning clear. Per WAHIDUDDIN, J.-The duration of the business of a corporation in a particular country is immaterial: and what is to be seen is that in a particular year, to as a whole or during that year or in any particular part of the year; the assessee company‟s business affairs (management) are wholly situated in British India or in Pakistan or in the alternative its income in the whole of the year or during any part of the year in Pakistan exceeds its income without Pakistan. If the ease of the assessee is covered by it, then it is to be treated as resident for the purpose of Income Tax. If it does not fall, then the case will not be governed by the provisions of section 4A(c).. Per LARI, J.-The words “in that year” do imply all the 365 days of the year but refer only to a point of time which must fall within those 365 days. OVERRULED BY: The Supreme Court overruled the judgement [1959] 1 TAX (III-284) (S.C.Pak) = 1958 SCC 37. Judicial review : The apex court held that a legislature has the authority to tax Pakistan citizens wherever they be, and to tax the foreigner only if they
454 Section 2(40)
Income Tax Digest.
earn or receive in the country for which that legislature has the authority to make laws. The interpretation adopted by the Departmental authorities and by the High Court, held by apex court, was opposed to these principles and lead to absurdity that the Pakistan Income Tax Authorities tax the foreign income of a company even if that company had its registered office for only a during the previous year in Pakistan. The apex court upheld the view of Constantine J. whose judgement was differed by Wahiduddin J., and on the difference of opinion, Lari J., expressed agreement with Mr. Justice Wahiduddin. Cases referred to : St. Aubun v. Attorney-General [(1951) 2 A.E.R. 473, p. 483]; Oriental Bank v. Wright [(1880) 5 A.C. 842]; Michlethwait. In re: [(1855) 11 Ex 452, 456]; Partington v. Attorney-General [(1869) L.R. 4 H.L. 100,122]; Canadan Eagle Oil Co. v. R. [(1946) A.C. 119, p. 140]; Attorney General v. Cariton Bank [(1899) 2 Q.B. 158. P. 164]; Cooper v. Cadwalader (5 T.C. 101); Colquhoun v. Brooks (14 A.C. 493. p. 503 and 511); and U.R.N.M. Subbayya Chettiar v. Commissioner of Income Tax, Madras [(1951) S.C. 201]. _______________
INDIVIDUAL
Commissioner of Income Tax v. V.E.K.R. Savurniarnurthy – [1946] 14 ITR 185 (Mad) 730.
„Year‟ means period of twelve months preceding the relevant previous year, and not period of twelve months ending on 31st December.
The expression „seven years‟ in section 4A of the 1922 Act should be taken as referring to the period of seven years of twelve calendar months each immediately preceding the commencement of the relevant previous year for a source of income and not to the period of seven years ending on 31st December preceding the commencement of such year. Note:
The position under the Income Tax Ordinance, 1979 is different. The words “four years preceding that year” in section 2(40)(a)(ii) will mean 4 income years as the determination of a resident status is strictly in relation to an income year as provided in the opening line of the definition clause.
K.M.N.N. Swarninathan Chettiar v. Commissioner of Income Tax – [1947] 15 ITR 418 (Mad.) 731.
If, during preceding seven years a person was in British India for more than two years, he is not included in category of „not ordinarily resident; irrespective of period, during those seven years, in which he had been outside British India.
The test is one of presence in, and not absence from British India, and the length of time of presence will determine when an individual is
455 DEFINITION OF „RESIDENT‟
Section 2(40)
„not ordinarily resident‟. A person is „not ordinarily resident‟ so long as he is not present in India for an aggregated period of more than two years during the preceding seven years. It is immaterial to consider the length of time, in the preceding seven years, during which the individual is outside British India. A person is not ordinarily resident unless he has, within the preceding seven years, actually been in British India for a period aggregating to more than two years. If, during the preceding seven years, an individual is in British India for more than two years, he is riot included in the category of „not ordinarily resident‟, irrespective of the period during those seven years, in which he has been outside the country. When an individual has been a resident for nine out of ten preceding years, then in order to escape tax on his foreign income, he must not have been in British India for more than an aggregate period of two years during the preceding seven years. _______________
TEST FOR “NOT-ORDINARILY RESIDENT”
Mujibar Rahman, Prop. Shamim & Co., Dacca v. Commissioner of Income Tax, East Pakistan, Dacca – [1966] 13 TAX 141 (H.C.Dacca) Test for “not-ordinarily resident”.
732.
The assessee, who was resident in Pakistan since 1948, filed return of income for the charge year 1956-57 showing his status as “resident”. The Income Tax Officer rejected the assessee‟s plea and treated him as “resident and ordinarily resident”. The assessee‟s appeals against the order of the Income Tax Officer failed both before the Appellate Assistant Commissioner and the Appellate Tribunal. When the matter went up to the High Court there was no dispute that the assessee was resident in the taxable territories since 1948 but the only dispute was whether he was “ordinarily resident” in the taxable territories. Held, that: (i)
according to the definition of section 413, clause (a), an individual is “not ordinarily resident” if he is not resident in nine out of ten years or in more than, two years out of seven yeast in the taxable territories; in other words he must be absent for at least 9 years out of ten years or for a period of 5 years or more or for period amounting in all to more than two years from the taxable territories;
456 Section 2(40)
Income Tax Digest.
(ii)
conversely an individual is “ordinarily resident” under the Act if he is resident for more than one year out of 10 years or for two years or more out of 7 years in the taxable territories. The assessee cannot claim relief under the second part of the definition as admittedly he was resident in the taxable territories for more then 8 years since 1948;
(iii)
as already found, in order to be “not ordinarily resident” as defined in the first part of the definition one shall have to prove that one has not been resident for 9 years out of 10 years preceding that year or in other words one has not been resident in the taxable territories for more than one year. In the instant case, the assessee admittedly has been in Pakistan since 1948 which is more than the statutory period; and
(iv)
departmental direction has nothing to do with the interpretation of the provisions of the Statutes.
Cases distinguished: Imperial Tobacco Co., of India Ltd., v. Commissioner of Income Tax, South Zone, Karachi and another [1959] 1 TAX 284 (S.C.); Sayeedur Rahman v. Commissioner of Income Tax, Dacca [1962] 6 TAX 25 and In re. Union Fute Company Ltd., 27 ITR 138. Cases relied on: K.M.N.N. Swaminathan Chettiar v. Commissioner of Income Tax [1947] ITR 27. Cases referred to: Wallace Brothers & Co., Ltd., v. Commissioner of Income Tax [1948] PLD 27 (P.C.) and A. C. Macnab In re. [1961] 4 TAX 143. _______________
FIRM - GENERAL
Sarupchand Hukarnchand, In re – [1945] 13 ITR 245 (Bom.) 733.
There is nothing in law to prevent a firm from having two places of residence
If a firm has two principal places of business, it may be resident in two places.
457 DEFINITION OF „RESIDENT‟
Section 2(40)
Sarupchand Hukarnchand, In re – [1945] 13 ITR 245 (Bom.) 734.
Management and control of a firm would ordinarily be at the principal place of business.
Where in the registration certificate of the firm the principal place of business was shown as Bombay, and the firm later contended that its principal place of business was in Indore (outside British India): Held that the registration certificate was a material piece of evidence and it would be impossible to contend that if the principal place of business of the assessees was in Bombay the central management and control of that firm did not abide in Bombay or that the firm did not keep house and do business in Bombay; even assuming that business was carried on at Indore and control was exercised from there, still, as the authorities clearly show, just as in the case of an individual, there might be a dual residence of a firm. Bhimji K. Naik v. Commissioner of Income Tax – [1946] 14 ITR 334 (Bom.) 735.
In case of a firm relevant factor is not who has power to control, but who in fact controls.
A liberal meaning is to be given to the words „wholly situated‟. It must be ascertained in every case where in fact the control and management of the business is situated, apart from the temporary journeys of the active partners or the residence of the dormant ones. The mere fact that under the deed of partnership a partner has the power of control, whilst it is a relevant consideration, is no evidence by itself of any act of control or management and it is the acts and not the powers which are relevant. Some assistance is to be gained by comparing the language of clause (b) with that of clause (c) of section 4A of the 1922 Act which deals with companies. A company has a registered office and its directors hold their board meetings and its members their annual general meetings at a particular place. These are indications which must assist in any consideration of the situation of the control and management of a company, and free it from some of the difficulties which arise in the case of a firm. However, in the case of a firm, the problem ought to be approached from the same angle. Thus, in case of a firm relevant factor is not who has power to control, but who in fact controls. B, carrying on business in Africa, returned to India, leaving his business in the hands of three managers. Later 3 took into partnership the managers who used to be his previous employees. No capital was introduced by the three partners. They were entitled
458 Section 2(40)
Income Tax Digest.
to a certain share in the profits. However, B had retained to himself the full control of the business and even „the right to dismiss any of the partners‟. B, however, stated in an affidavit that he had not at any time controlled and managed the affairs of the business in Africa. The partners also filed affidavits stating (i) that the said business and its affairs were solely and wholly controlled and managed by the partners residing in South Africa; (ii) that they had been carrying on the business of the firm without receiving any instructions from B, and firm had never referred to B about any matters of firm in general and for the execution of the orders and for the payments received from customers, in particular; B had also never interfered in any matters of the firm. A summary of the correspondence made by the examiner of the Income Tax Department stated that B had left the control and management in the hands of the partners and that he only kept himself in touch just to caution them, while they informed him about the general condition of trade prevailing there. Held that the firm was not resident in British India. S.V.M.Moharned Jamaluddeen & Bros. v. Commissioner of Income Tax – [1942] 10 ITR 484 (Mad.) 736.
Where one of the partners is resident in India and manages a branch there, control is not wholly situated outside India.
Where a firm carrying on business in Colombo opened a branch in British India which was managed by a partner of the firm who resided in British India, it was held that the control and management of the firm did not situate wholly without British India and, therefore, the firm was resident in British India within the meaning of section 4A(b) of the 1922 Act. _______________
COMPANY
De Beers Consolidated Mines Ltd. v. Howe – [1906] 5 Tax Cas. 198 = [1906] AC 455 (HL) 737.
Company resides where the central management and control exists.
A company resides for purposes of Income Tax where its real business is carried on, and such real business is carried on where the central management and control actually abides. This is a pure question of fact to be determined, not according to the construction of this or that
459 DEFINITION OF „RESIDENT‟
Section 2(40)
regulation or bye-law, but upon a scrutiny of the course of business and trading. De Beers Consolidated Mines Ltd. v. Howe – [1906] 5 Tax Cas. 198 = [1906] AC 455 (HL) 738.
Control and management of company is where its real business is carried on.
A company cannot eat or sleep, but it can keep house and do business. It has therefore to be where it really keeps house and does business . . . The decision of Chief Baron Kelly and Baron Huddleston in Calcutta Jute Mills v. Nicholson [l876] 1 Ex. D. 437/1 Tax. Cas. 83 and Cesna Sulphur Company v. Nicholson [1876] 1 Ex. D. 428/1 Tax. Cas. 38 now thirty years ago, involved the principle that a company resides, for purposes of Income Tax, where its real business is carried on. Those decisions have been acted upon ever since. That must be regarded as the true rule; and the real business is carried on where the central management and control actually abides. Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax – [1948] 16 ITR 240 (PC) 739.
Derivation of major part of income will establish territorial nexus so as to treat company as resident - Position under 1922 Act.
The derivation from British India of the major part of its income for a year gives to a company as respects that year a territorial connection sufficient to justify the company being treated as at home in British India for all purposes relating to taxation on its income for that year from whatever source that income may be derived. Case review: Decision of the Federal High Court in Wallace Bros. & Co. Ltd v. Commissioner of Income Tax [1945] 13 ITR 39 affirmed. _______________
CONTROL AND MANAGEMENT - MEANING OF
United Bank of India Ltd., v. Commissioner of Income Tax, Dacca [1960] 2-TAX (III-454) (H.C.Dacca) = 1960 PTD 768 = 1960 PLD 621 740.
If control and management rests outside Pakistan, company cannot be “resident” or “ordinarily resident”.
The headoffice of both the banks was situated in India and it would appear that the control and management was from Calcutta and income to the branches in India exceeded the income arising from
460 Section 2(40)
Income Tax Digest.
branches in Pakistan during the accounting year. As such it must be held that the assessee was not a resident or ordinary resident in Pakistan during the relevant year. Case followed: Imperial Tobacco Company of India Ltd., v. Commissioner of Income Tax, South Zone, Karachi [(1960) 2-TAX (Supple-308) = PLD 1959 S.C. 125]. Cases referred to: Gurmukh Singh v. Commissioner of Income Tax, Lahore [AIR 1944 Lah. 353 (FB)] and New Jehangir Vakil Mills Ltd., v. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra [(1959) 1-TAX (III-477)].
B.R. Naik v. Commissioner of Income Tax – [1945] 13 ITR 124 (Bom.) 741.
It is effective existence of control that is relevant and not merely right to control and manage
No doubt the existence of an overriding power of control and management is a very relevant consideration; but who, or what, actually controls and manages the affairs of the firm is the relevant consideration. Only then can it be considered where such control and management is situated. While the word „situated‟ involves an idea of some sort of permanency, it also involves an idea of the present existence, that is, effective existence of such control in the relevant year. It does not contemplate merely the right to control and manage. There is nothing in section 6 which compels its interpretation as including the power or capacity to control and manage as well as the actual control and management, and the two are not mutually exclusive. Commissioner of Income Tax v. PR.PL. Palmuiappa Chettlar – [1945] 13 UK 269 (Mmd.) 742.
Mere presence of karta of HUF in India does not mean that he is exercising control from India
The word „control‟ must be given its ordinary meaning. The mere fact that the manager of a joint Hindu family happens to be within British India for part of the account year does not necessarily imply that during that period he has exercised control over the management of the business abroad. Karta, who was not ordinarily resident, returned to India from Malaya where the HUF had business and stayed there for part of the year. He left his son in management of the business there, who sent him copies of the day book.
461 DEFINITION OF „RESIDENT‟
Section 2(40)
Held that mere receipt by the karta of copies of the day-books would not be sufficient to justify a finding that the control had been exercised by him from India, especially when he had left his eldest son in management of the business there. Thus, the HUF was not resident in India. Commissioner of Income Tax v. Gangabishan Mohanlal – [1945] 13 ITR 20 (Mad.) 743.
A HUF cannot be treated as resident only because the karta normally residing outside British India paid a visit to taxable territories for few days.
The mere visit of the manager of the family to taxable territories and his stay there for two days cannot amount to the exercise of control and management of the affairs of the family from taxable territories in the absence of anything to show that during such stay he actually exercised any act of control or management. V.S.K.S. Somasundaram Chettiar v. Commissioner of Income Tax – 6 ITC 96 (Mad.) 744.
Where the manager of the HUF which was residing outside British India, visited India for supervising its business and stayed at one of the places in the business premises owned by family.
Where the manager of the HUF, who was residing outside British India, visited India periodically for the purpose of supervising the businesses and during such visits he resided in the business premises of the HUF which were provided with a kitchen and other conveniences of a residential house. It was here/that there was legal evidence in support of the finding of the Income Tax Officer that the joint family had its residence within British India. S.Marimuthu Pillai v. Commissioner of Income Tax – [1945] 13 ITR 186 (Mad.) 745.
Where there is change in karta, residential status of the previous karta is also to be taken into account.
There is nothing in section 4B of the 1922 Act to indicate that the periods of residence and stay in British India of the successive managers of a HUF during its continued existence should not count for purposes of this section. The karta of the assessee-HUF died in 1937 and his son became karta. The father was resident in taxable territories, but the son was not resident till 1937 and came to India only after the death of his father. The question was whether for determining whether the assessee-HUF,
462 Section 2(40)
Income Tax Digest.
for assessment year 1940-41, was not ordinarily resident the residential status of the deceased karta was also to be taken into account.
463 DEFINITION OF „TAX‟
Section 2(43)
Section 2(43)* Tax
PAGE NO
“PENALTY” OR “INTEREST” ON TAX DUE
746.
*
Additional tax cannot be termed as “penalty” or “interest” on _ tax due. [1969] 20 TAX 44 (H.C.Dacca)
Corresponding to section 2(14) of the 1922 Act.
464
464 Section 2(43)
Income Tax Digest.
Section 2(43)* Tax
“PENALTY” OR “INTEREST” ON TAX DUE
Zeenat Textile Mills (East Pakistan) Ltd. v. Commissioner of Income Tax, Dacca Zone and another – [1969] 20 TAX 44 (H.C.Dacca) 746.
Additional tax cannot be termed as “penalty” or “interest” on tax due.
For the charge year 1960-61 the Income Tax Officer levied additional tax under section 45A of the Income Tax Act for assessee‟s failure to pay Income Tax and super tax in time. Against the order passed by the Income Tax Officer the assessee filed revision petition before the Commissioner of Income Tax under section 33A(2) of the Act, contending that (a) section 45A of the Act having been enforced in 1963 could not be made applicable retrospectively to tax dues for the assessment year 1960-61; (b) the Income Tax Officer should have indicated in the order the period or periods and the amount or amounts of default for which the additional tax was levied and (c) the provisions of section 45A being of penal nature the Income Tax Officer should have given show cause notice before levying the additional tax. The Commissioner of Income Tax set aside the order only on the ground that the calculation of additional tax was absolutely wrong and directed the Income Tax Officer to issue a fresh order showing correct and proper calculation. The other contentions raised by the assessee were rejected. The Income Tax Officer issued a fresh demand notice after calculating the demand for additional tax. Against the order the assessee filed writ petition in the High Court challenging the legality of levying additional tax. Before the High Court the assessee‟s counsel contended that the provisions of section 45A for levying “an additional amount of tax equal to 6 per cent of the amount of tax due” from the assessee was totally outside the scope of the charging sections 3 and 55 and as such was illegal. On behalf of the department it was argued that the additional tax was not a tax but a sort of penalty imposed on the defaulting assessee. *
Corresponding to section 2(14) of the 1922 Act.
465 DEFINITION OF „TAX‟
Section 2(43)
Held, that (i)
the definition clause 2(14) is of no assistance to interpret the provisions of section 45A “an additional amount of tax equal to 6 per cent of the amount of tax due” to mean either a penalty or an interest payable by a defaulting assessee on the tax due ; and
(ii)
the “additional amount of tax equal to six per cent, per annum of the amount of tax due” is a tax which is sought to be levied on the already computed tax due from the assessee on his total income for the assessment year without any support from the authorising sections 3 and 55. On the language used in section 45A the additional amount of tax levied on the tax due from the petitioner for the assessment year 1960-61 is without any lawful authority or any legal basis.
466 Section 2(44)
Income Tax Digest.
Section 2(44)* Total Income
PAGE NO
MEANING OF “TOTAL INCOME”
747. 748.
*
Scope of expression “total Income”. (H.C.Kar.)
_
[1987] 55 TAX 157
In the absence of source receipt cannot come within _ the ambit of “total income”. [1973] 28 TAX 115 (H.C.Lah.)
Corresponding to section 2(15) of the 1922 Act.
467 468
467 DEFINITION OF „TOTAL INCOME‟
Section 2(44)
Section 2(44)* Total Income
MEANING OF “TOTAL INCOME”
Commissioner of Income Tax v. Mushtaq Muhammad Ali – [1987] 55 TAX 157 (H.C.Kar.) 747.
Scope of expression “total Income”.
No doubt, the term “total income” in its ordinary literary meaning would indicate that it covers income from every quarter without any deductions, but the term “total income” has been defined in the Income Tax Act and as such the said definition is to be followed and not the ordinary meaning of the term total income. Exempt income is part of “total income” when law specifically so requires. As observed earlier according to section 2(15) of the Income Tax Act, 1922, total income means total income, profits and gains computed in the manner laid down in the Income Tax Act. The definition of total income did not end at “total amount of income, profits and gain?‟ but it goes further and provides that “total income” is total amount of income computed in the manner laid down in the Act. Computation of total income under the Act is provided in section 16 of the Act and at the relevant time section 15-H was not referred to in that provision whereas other provisions of Income Tax Act relating to exemption were specifically referred to. Then in the Finance Act, 1976, section 16(1) was amended and one effect of such amendment was that section 15-H was specifically inserted in section 16(1). From this, it follows that with effect from enforcement of the Finance Act, 1976, for purposes of computation of the total income of an assessee, the amount exempted under section 15-H was also to be included and not excluded. it also follows that prior to the coming into force of the Finance, Act, 1976, for purposes of computation of the total income of an assessee under section 16(1), the amount exempted under section 15-H was to be excluded. This is also apparent from the fact that in section 16(1) as it stood at the relevant time, other sections under *
Corresponding to section 2(15) of the 1922 Act.
468 Section 2(44)
Income Tax Digest.
which various exemptions are granted to the assessee, were specifically mentioned but section 15-H was significantly not mentioned. In the circumstances, in spite of the fact that in “Explanation (b)”, section 15-H is specifically referred to, we are of the view that at the relevant time when section 15-H was not mentioned in section 16(1) of the Income Tax Act, 1922, for computation of taxable income of a nonresident assessee, from the total income the amount exempted under section 15-H was to be excluded. In our view therefore, the Tribunal has taken correct view in these cases and we answer the questions referred to in these cases in the affirmative. Pakistan Cement Pipe Construction Company v. Commissioner of Income Tax – [1973] 28 TAX 115 (H.C.Lah.) 748.
In the absence of source receipt cannot come within the ambit of “total income”.
The receipt in question is not assessable to tax as profits and gains under section 10 of the Income Tax Act, firstly, because the receipt is not in the nature of profits or gains from a continuing business, but is the outstanding of a business which has been discontinued, and was not at all carried on during the accounting year in Which it was received and made chargeable to tax, that is, the source to which it is attributable was extinct during the whole of the accounting year ; and, secondly, the receipt of the amount of the award, and the necessary efforts put in by the assessee in this, connection cannot be said to constitute business or trade, as this receipt was merely realisation of the assets of a discontinued business and the efforts put in for this purpose merely constituted a process to realise these assets. There can be no dispute with the proposition that, to charge the profits and gains of the business, profession or vocation, to Income Tax during any particular accounting year the business, procession or vocation must atleast have been carried on during some part of the accounting year, though not necessarily throughout the year. The continued existence of the source of profits during the accounting year is necessary, and a business which is non-existence during the whole of an accounting year is an extinct business and cannot be taxed. The provision of section 4(1) of the Act which provides that subject to the provisions of the Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived. Section 6 enumerates the sources of income into six. categories. This of necessity requires that, when the receipt comes, this source should be in existence. If the source is one of the sources
469 DEFINITION OF „TOTAL INCOME‟
Section 2(44)
enumerated in section 6 and the receipt has the attributes of such source, but the source itself is not in, existence, then the receipt cannot come within the “total income.” Cases referred to: The Commissioner of Income Tax, Madras v. P.R.A.L. Mutho Karuppan Chettlyar [1935] 3 ITR 208; O. Rm. Om. Rm. Pl Muthukaruppan Chettiar and others v. Commissioner of Income Tax Madras [1943] 11 ITR 540; In re. B. M. Kamdar [1946] 14 ITR 10; The Commissioner of Inland Revenue v. The Oban Distillery Co. Ltd. 13 Tax Cas. 33; [1964] 10 TAX (Trib.) 26; Probhat Chandra Barua v. The King-Emperor (1929-30) 57 LRIA 228; The Commissioner of Income Tax, Bengal v. Shaw Wallace & Co. (AIR 1932 P.C. 138); Gopal Siran Narain Singh v. Commissioner of Income Tax [1935] 3 ITR 237; Kamakshya Narain Singh v. Commissioner of Income Tax [1943] 11 ITR 513; Asher v. London Film Production Ltd. [1944] K.B 133; Bennett v. Ogston (1928-31) 15 Tax Cas. 374; Purchase (H. M. Inspector of Taxes) v. Stainer‟s Executors (Leslie Howard‟s Case) (1950-52) 32 Tax Cas. 367; D. & G. R. Rankine v. Commissioner of Inland Revenue (1950-52) 32 Tax Cas. 520; South Indian Industries Ltd. v. Commissioner of Income Tax, Madras [1935] 3 ITR 11; B.C.G.A. (Punjab), Ltd. v. Commissioner of Income Tax, Punjab [1937] 5 ITR 279; The Commissioner of Income Tax v. Philips Holzman A.G. Ameejee Valeejee & Sons, Karachi [1968] 17 TAX 67; The Commissioner of Inland Revenue v. The “Old Bushmills” Distillery Co. Ltd. [1928] 12 Tax Cas. 1148; I.R. Commissioner v. Oban Distillery Co. Ltd. [1933] 18 Tax Cas. 33; The Commissioner of Income Tax v. Chunilal B. Mehta [1938] 6 ITR 521 and Salisbury House Estate Ltd., v. Fry [1930] 15 Tax Cas. 266.
470 Section 3
Income Tax Digest.
Section 3* Income Tax Authorities
PAGE NO
POWER OF CBR
749.
Validity of reconstitution of Central Board of Revenue afresh _ in Pakistan held legal. [1976] 34 TAX 54 (H.C.Lah.)
INCOME TAX OFFICER WHETHER A COURT
750.
*
Income Tax Officer is not a revenue court. 159 (Sind)
Corresponding to section 5(1) of the 1922 Act.
_
471
[1940] 8 ITR 474
471 INCOME TAX AUTHORITIES
Section 3
Section 3* Income Tax Authorities
POWER OF CBR
Crown Bus Service Ltd., Lahore v. Central Board of Revenue and others – [1976] 34 TAX 54 (H.C.Lah.) 749.
Validity of reconstitution of Central Board of Revenue afresh in Pakistan held legal.
In Act IV of 1924 no particular mode of constituting a Central Board of Revenue has been mentioned except, perhaps, by making appointments of its members and we are doubtful as to whether any such plea in his context can be successfully advanced by the petitioner. The objection of the learned counsel for the petitioner is based on the assumption that under section 2 of Act IV of 1924 two formalities viz. (a) constitution of Central Board of Revenue and (b) appointments of its members, had to be independently performed and if, for instance, certain person or persons are straightaway appointed as members of the Central Board of Revenue that probably is not enough. We do not agree, because, there is nothing to lead to such a corollary in the wording of section 2 of Act IV of 1924. Confining ourselves to the notification dated 29.8.1947 we may observe as a matter of principle, all that the courts of law are required to examine while considering a document or an instrument is the intention and not merely the form of any order or direction continued therein depending upon the facts, circumstances and the context of each case. Acting on that principle we hold that if the intention of making appointments of certain officer or officers as members of the Central Board of Revenue is for example with a view to establish the Central Board of Revenue and similarly if the appointments cannot be made except when it implies a creation of the Central Board of Revenue, then on the facts and overall circumstances in such situations, it can be safely held that the aforesaid appointment inter alia implied the constitution of the Central Board of Revenue as well and a specific and independent recital regarding the creation of the Central Board of Revenue is not to be considered as a must, especially when as already *
Corresponding to section 5(1) of the 1922 Act.
472 Section 3
Income Tax Digest.
pointed out, in Act IV of 1924 no particular form and procedure for constituting a Central Board of Revenue had been laid down. The notification is signed by the Secretary, Ministry of Finance, and proceeding on the principle that official acts are presumed to have been regularly done no material has been placed before us to rebut that presumption. The objection regarding the appointment of Mr. Sherer was being raised for the purpose of advancing a plea that after creation of Pakistan there was not constituted and there did not come into being any Central Board of Revenue, inasmuch as, even uptil now no specific order/notification so reciting specifically has been issued and that more appointments of various members from time to time was not enough on the subject. Mr. Mumtaz Hussain, Advocate who appeared in some of the cases took up an extreme stand on the subject in hand and submitted that every time a member of the Central Board of Revenue was a simultaneously therewith there should have been issued an independent and specific order under section 2 of Act IV of 1924 indicating that the Central Board of Revenue was also being thus constituted or created with that member. We have already repelled the principle on which the objection is founded but if the argument of Mr. Mumtaz Hussain is to be taken seriously then each appointment on the view we have adopted can very well be taken to be a constitution of the Central Board of Revenue with the induction of the concerned appointee. Facing this situation learned counsel in some of the cases started questioning appointments of various members which had taken place at the time relevant to their cases. In the face of this finding the objection that no adaptation in Pakistan on the subject in hand been made loss all ground on factual plan, with the result that the argument of the learned counsel that unless a new formal notification creating or constituting a Central Board of Revenue was issued afresh after creation of Pakistan, the old notification dated 29.3.1924 constituting the Central Board of Revenue had lost efficacy and force, has no merit and cannot be endorsed. Central Board of Revenue was a legal functionary or a central official body which once created and established was to retain its legal status and character though incumbents of that office or authority may keep on changing from time to time. The aforesaid central official body stood notionally split up into two bodies one for each Dominion the moment the two Dominions came into existence. It was not necessary, therefore, to re-constitute a Central Board of Revenue afresh in Pakistan as she had already inherited one from the preceding political Order. Moreover Article 9 of the Pakistan
473 INCOME TAX AUTHORITIES
Section 3
(Adaptation of Existing Pakistan Laws) Order 1947 is neither mandatory nor directory in nature at least insofar as the constitution of the authority and appointments of officers etc. are concerned. It is simply an enabling provision and does not in any manner destroy the continuation with necessary adaptation of old laws, rules, notifications, authorities, forums or officers etc. The view of our government has also been the same. This will bear out the deductions which we have made from Governor-General‟s Orders Nos. 2 and 12 of 1947 hereinbefore referred to. The first was issued by Lord Mountbatten and the letter by the Quaid-i-Azam Muhammad Ali Jinnah in their capacities as Governor-General of their respective countries. These two Orders implied that the Central Board of Revenue constituted as a legal entity in 1924 continued with necessary adaptation for each Dominion and it was on that assumption that without staging its recreation or re-constitution various powers, functions and directions were given or assigned to it, because, otherwise there was no justification to quote or make mention of Central Board of Revenue for Pakistan and Central Board of Revenue for India in those two Orders when no such Boards as alleged by the petitioner existed then and thereafter. We were told that neither in India nor in Pakistan there was staged any re-creation or re-constitution of the Central Board of Revenue afresh and that both the countries acted on the premises that the Central Board of Revenue constituted in 1924 was a legal entity which had duly come into being in that year and later on only appointments of its members were to be made whenever necessary. It was on that construction of the relevant law that both the countries uptil now worked. The Central Board of Revenue is referred to in (i) Income Tax Act XL of 1922 (ii) Central Board of Revenue Act VI of 1924; (iii) Excess Profits Tax Act XV of 1940; (iv) Business Profits Tax Act XXI of 1947; (v) Central Excise and Salt Tax Act I of 1944; (vi) Sea Customs Act VII of 1888; and (vii) Land Customs Act XIX of 1924. If the contention of the learned counsel for the petitioner is accepted it will mean that almost whole of the revenue financial laws of the country came to a stand still due to non-creation of the Central Board of Revenue as alleged. Obviously we cannot endorse such a plea. If the contention as suggested by the learned counsel for the petitioner is accepted that will create complications and confusions for all concerned leading to a great deal of chaos in the country and will throw open all the actions taken, functions performed, orders passed and directions issued by the Central Board of Revenue after 1947 up to-date or, as a matter of fact, onward from 1924. On the other hand, the view taken by us will not lead to any destructive results. It is well settled that courts should
474 Section 3
Income Tax Digest.
follow that construction of law which does not lead to startling results or destructive ends. In the alternative we have already held and found that the notification dated 29.8.1947 on the facts and peculiar circumstances of the case can safely be held to constitute the Central Board of Revenue in Pakistan along with its Secretariat. Looked at from whatever angle we cannot endorse the plea that there was or is no validly constituted Central Board of Revenue in this country. Case referred to: Abdur Rashid v. Special Judge Central (W.P. No. 1396/73, decided on 6.1.1976). _______________
INCOME TAX OFFICER, WHETHER A COURT
Commissioner of Income Tax v. Khernchand Rarndus – [1940] 8 ITR 159 (Sind) 750.
Income Tax Officer is not a revenue court.
Though proceedings before the Income Tax Officer for the registration of a firm under section 26A of the 1922 Act [corresponding to section 158 of the Income Tax Ordinance, 1979] are judicial proceedings in a Court and section 195(1)(b) of the Code of Criminal Procedure, 1898, applies, the Income Tax Officer cannot be treated as a revenue Court.
475 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
Section 4* Appointment of Income Tax Authorities etc.
PAGE NO
AUTHORITY
751.
752. 753. 754.
Public Service Commission has no authority to certify _ promotion retrospectively. 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.) _ Rule making power of CBR has statutory mandate. 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.) In judicial and quasi judicial matters orders must appear in _ the hand. 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.) _ Comparison with Indian law. 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.)
476 476 477 477
COMPARISON WITH INDIAN LAW
755. 756.
Special Officer is not disqualified as assessing officer. _ [1983] 47 TAX 50 (H.C.Kar.)
480
Reconsititution of Central Board of Revenue afresh in _ Pakistan after partition was not necessary. [1976] 34 TAX 199 (H.C.Lah.)
481
JURISDICTION
757.
Transfer of jurisdiction is not necessary. (H.C.Lah.)
_
[1976] 34 TAX 54 484
REMOVAL
758.
*
An order of a Commissioner dismissing an Income Tax Officer is not invalid merely because it was not made with _ previous approval of local Government. [1937] 5 ITR 424 (Mad.)
Corresponding to section 5(1A) of the 1922 Act.
485
476 Section 4
Income Tax Digest.
Section 4* Appointment of Income Tax Authorities etc.
AUTHORITY
Muhammad Naseem Ahmad and 18 others v. Miss Azra Feroz Bakht and 58 others; Maqsudal Hossain v. Government of Pakistan; Ali Davar Khan and 19 others v. Government of Pakistan and 54 others; Sher Muhammad and 2 others v. Miss Azra Feroz Bakht and 80 others & Muhammad Jameel Khan v. Miss Azra Feroz Bakht and 78 others 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.) 751.
Public Service Commission has no authority to certify promotion retrospectively.
The Public Service Commission has no authority to certify seniority with retrospective effect. So far as the direct recruits are concerned, it is for the Government to first fix the dates with effect from which they are to be confirmed and after this has been done their seniority vis-avis the promotees of that year is to be fixed in accordance with the above principle. Confirmation is in the executive discretion of the Government. It is for the Government, therefore, to declare as to whether it will confirm them, if so from which date. Income Tax Officer (Investigation) Circle III, Karachi and Another v. Sheikh Nasim Anwar Dacca – 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.) 752.
Rule making power of CBR has statutory mandate.
Section 3 of the Central Board of Revenue (Act IV of 1924) provides that the Federal Government may make rules for the purposes of regulating the transaction of business by the CBR. Rules framed for transaction of business by the CBR provide that the orders and decisions of the Board may be issued or notified over the signature of members of the Board or of the Secretary to the Board. The important feature of these rules is that they have a statutory force. The present *
Corresponding to section 5(1A) of the 1922 Act.
477 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
order for change of jurisdiction was signed by an officer working as Section Officer which makes the order illegal as it should have been signed by the Member or the Secretary. 753.
In judicial and quasi judicial matters orders must appear in the hand.
It is feasible that an order passed verbally by competent officer is recorded by his subordinate, but in order to bear evidence of the order having being made by him the file is put up to him for signature. In matters which are judicial or quasi-judicial in nature the order must, however, appear in the hand and under the signature of the office who has made it. Eastern Federal Union Insurance Co. Ltd. v. Central Board of Revenue and Muhammad Fareed – [1983] 47 TAX 50 (H.C.Kar.) 754.
Special Officer is not disqualified as assessing officer.
The Central Board of Revenue through a notification dated 23rd April 1981, issued in exercise of powers conferred by section 4 of the Income Tax Ordinance, 1979, (hereinafter referred to as the Ordinance,) appointed Muhammad Fareed as Special Officer. It further seems that the Commissioner of Income Tax Central Zone, „A‟ Karachi, through his notification dated 25th April, 1981 in exercise of powers conferred by clause (c) of sub-section (1) of section 5 of the Income Tax Ordinance, 1979 (XXXI of 1979), and in pursuance of, CBR‟s aforesaid notification dated 23.4.1981, assigned jurisdiction in respect of the four insurance companies mentioned in the Schedule, namely, Premier Insurance Company Limited, Alam Insurance Company Ltd., Eastern Federal Union Insurance Co. Ltd., and New Jubilee Insurance Co. Ltd., to the Special Officer, Central Zone, „A‟ Karachi. It further seems that after the issuance of the above notifications, Muhammad Fareed had issued notices to the petitioners for production of the accounts books for the purpose of assessing the income tax i.e. to Premier Insurance for the year 1978-79 and to Eastern Federal for the year 1979-80). It also seems that the petitioners after the receipt of the above notices made representations to the Central Board of Revenue pointing out therein that as Muhammad Fareed had in fact instituted the cases before the Insurance Appellate Tribunal against the companies under section 22 of the Order and as he was prosecuting the same inasmuch as he appeared in some of the cases as the sole witness, it was not just and fair to appoint him as the assessing authority. But it seems that the Central Board of Revenue turned down the above representations. Thereupon, Muhammad Fareed issued further notices to the
478 Section 4
Income Tax Digest.
petitioners for the production of accounts books of the relevant year and appearance. It also seems that after the receipt of the above notices, the petitioners have filed the present petitions in which both the petitioners have claimed more or less identical reliefs in substance except that Premier Insurance in their writ petition also prayed for setting aside the aforesaid notification dated 25.4.1981 issued by the Commissioner of Income Tax empowering Muhammad Fareed to exercise the jurisdiction of the assessing authority for the purpose of the aforesaid insurance companies. The contention of the learned counsel for the petitioners that Muhammad Fareed has rendered himself disqualified on account of instituting the cases under section 22 of the Order before the Insurance Appellate Tribunal inasmuch as he signed the pleadings and also appeared as a sole witness in some of the cases, it may be observed that it is an admitted position that the above proceedings relate to the period 15 years prior to 1972 and not in respect of the period for which the assessments are being made and that the said proceedings relate to life insurance business, whereas the present assessments relate to general insurance business, and therefore, it cannot be said that the subject-matters before the Insurance Appellate Tribunal are the same, which are the subject-matters before Muhammad Fareed for making assessment for the year 1978-79 onwards. However, it was urged by Mr. Mohammad Ali Syeed that the disqualification which was canvassed before me does not relate to a particular period or the subject matter, but it is relatable to the person of Muhammad Fareed. In other words the precise contention of the learned counsel for the petitioners was that for all times to come Muhammad Fareed has rendered himself disqualified to deal with any matter pertaining to the petitioners companies which involve adjudication upon any petitioner‟s right/liability. In this regard, it may be pertinent to observe that the petitioners have not been able to bring on record any material to indicate that Muhammad Fareed has any personal reason to be hostile to the petitioners. On the contrary the learned counsel for the petitioners have candidly submitted that Muhammad Fareed is among those officers, whose integrity is beyond any question of doubt. However, at the same time they have submitted as pointed out hereinabove, that Muhammad Fareed while instituting the aforesaid cases before the Insurance Appellate Tribunal has made serious allegations against the working of the petitioners companies including about the maintenance of the account and, therefore, inspite of the fact that he is a man of integrity, he will not be above to diffuse
479 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
adverse impression which he has formed while instituting and conducting the above cause. It may be mentioned that there is no material before us to conclude even tentatively that the cases instituted by Muhammad Fareed on behalf of the Corporation before the Insurance Appellate Tribunal are frivolous or that the same could have been filed by prejudiced or biased person. Muhammad Fareed has instituted the above cases in his official capacity and not in his private capacity. He has no personal stake involved in the above cases but as an honest officer he might be conducting the above cases efficiently. We cannot also overlook the fact that the decision on merits of the above cases is to be given by the Insurance Appellate Tribunal and not by Muhammad Fareed. If we were to accept the above contention of Mr. Muhammad Ali Sayeed, it would mean that if an Income Tax Officer while making assessment of particular year rejected the accounts books of an assessee on the ground that the same were fake and were not genuine accounts, he should not act as the assessing authority for the said assessee for all times to come. This result will lead to absurdity. The petitioner‟s case is in fact on the lower pedestal than the hypothesis referred to hereinabove as it is an admitted position that Muhammad Fareed has not expressed any opinion in respect of the account books for the year 1978-79 onwards nor he has expressed any opinion in respect of the general insurance business for the years in question. We are inclined to hold that if real likelihood of bias is established, the person/authority concerned renders himself/itself disqualified from proceeding with the adjudication of a matter brought before him/it, and the court may in such a case pass an order in the nature of a writ of certiorari for quashment. However, in the instant cases we are of the view that the petitioners have failed to establish a real likelihood of bias. The averment of Muhammad Fareed in his affidavit in support of the application for vacation of the stay order and the counteraffidavits to the petitions to the effect that large government revenue are involved in the instant cases is a general statement of fact. From it, it cannot be inferred that he has pre-determined mind on the question of the petitioners income tax liability. It may also be observed that if Muhammad Fareed is a man of integrity as was conceded by the learned counsel for the petitioners, it is expected of him that he will act fairly without any bias or prejudice in order to dispel the petitioner‟s apprehensions. It was also contended by the learned counsel for the petitioners that the keen personal interest taken by Muhammad Fareed in opposing
480 Section 4
Income Tax Digest.
the above petitions inasmuch as he has appeared in person manifests partisan attitude. It will suffice to observe that in the above cases Mr. Fazle Ghani Khan, Advocate at the initial stage was appearing for Muhammad Fareed, but it is not known, as to why he discontinued to appear. Be that as it may, putting in personal appearance by an official simplicitor in a case will not establish partisan attitude. As regards Mr. Mansoorul Arfin‟s contention that Muhammad Fareed cannot act as the assessing authority while still on deputation with the State Life Insurance Corporation as it involves violation of section 4(4) of the Ordinance, it may be observed that sub-section (4) of section 4 of the Ordinance provides that all appointments under the Ordinance shall be subject to rules and orders of the Federal Government regulating the terms and conditions of service of persons in public service and posts. In our view there is no violation involved in the instant case as Muhammad Fareed is still in public service of Pakistan and his terms and conditions of service are regulated by the rules and orders of the Federal Government and not by the rules and regulations framed by the Corporation. In this view of the matter this contention also fails. Cases referred to: 1926 AC 586; 1969 1 Q.B. 577; PLD 1973 SC 327; Sheikh Akhtar Ali v. Federation of Pakistan and 4 others [1982] 42 Tax 47; Commissioner of Income Tax, Bombay III v. Raj Kumar Ashok Pal Singhji [1978] 37 Tax 52; [1944] 12 ITR 393; PLD 1979 SC 38. _______________
COMPARISON WITH INDIAN LAW
Muhammad Naseem Ahmad and 18 others v. Miss Azra Feroz Bakht and 58 others; Maqsudal Hossain v. Government of Pakistan; Ali Davar Khan and 19 others v. Government of Pakistan and 54 others; Sher Muhammad and 2 others v. Miss Azra Feroz Bakht and 80 others & Muhammad Jameel Khan v. Miss Azra Feroz Bakht and 78 others – 1967 SCC 295 = [1968] 17 TAX 1 (S.C.Pak.) 755.
Comparison with Indian law.
Before parting with this case it might be mentioned here that after this judgment had been prepared and circulated Mr. Brohi, the learned counsel appearing for the appellants in Civil Appeal No. 46 of 1967 forwarded a copy of a decision of the Indian Supreme Court in the case of S.G. Jaisinghani v. Union of India and others [(1967) 65 ITR India p.34]. In that case, it appears, the Supreme Court of India has held that since the Government of India had in October,
481 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
1951, predetermined the quota by modifying the 80:20 ratio in exercise of the powers given to it by rule 4 of the Recruitment Rules of 1945, “it is now to the Government of India to say that it is not incumbent upon it to follow the quota for each year and it is open to it to alter the quota on account of the particular situation.” It may be pertinent to point out that no such specific directive has been issued by the Government of Pakistan nor has any formal modification been made of the circular issued on the 29th September, 1944. Therefore, this decision of the Indian Supreme Court does not advance the case of the direct recruits. Abdul Rashid (c/o Union Traders GoIe Cloth, LyalIpur) v. Special Judge (Central), Lahore and another – [1976] 34 TAX 199 (H.C.Lah.) 756.
Reconsititution of Central Board of Revenue afresh in Pakistan after partition was not necessary.
The petitioner in these circumstances has by his conduct disentitled himself to any relief. I agree with the argument of Mr. Ilyas Khan on merits that after the original constitution in India of the Central Board of Revenue in 1924. The power to constitute a Central Board of Revenue under the Central Board of Revenue Act, 1924 was exhausted and was not necessary to be re-exercised since the Central Board of Revenue existed thereafter as a Department of the Government of India. It may be noted that section 18(3) of the Indian Independence Act continued the existing laws so far as applicable and with the necessary adaptations until other provisions were made by the legislature of the Dominions section 9 of the Act authorised the Governor-General to make such provisions as appeared to him to be necessary or expedient for inter alia bringing the provisions of the Act into effective operation: (2) for dividing between the two Dominions powers, rights, properties duties and liabilities of Governor-General in Council; (3) for making omissions from, addition to, and adaptation and modifications of the Government of India Act, 1935, and the orders in Council, rules and other instruments made thereunder, in their application the separate new Dominions; (4) for removing difficulties in connection with the transaction to the provisions of the Act; (5) for authorising the carrying on the business of the Governor-General in Council between the passing of the Act and the appointed day (15.8.1947) otherwise than in accordance with the provisions in that behalf of the Ninth Schedule to the Government of India Act; (6) for enabling agreements to be entered into, and other acts done, on behalf of either of the new Dominions before the appointed day; (7) for authorizing the continued carrying
482 Section 4
Income Tax Digest.
on for the time being on behalf of the new Dominions of services and activities previously carried on behalf of British India (8) for regulating the monetary system and any matters pertaining to the reserve Bank of India; and (9) for varying the constitution, powers or jurisdiction of any legislature, Court etc. It will be clear from section 9 that the British Parliament set in motion from the date of enforcement of the Indian Independence Act the machinery for setting up the two independent Dominions w.e.f. 15.8.1947 and made provisions for a smooth transition from a United British India to two independent countries. The first this direction was taken on the 19th July, 1947 when the Governor-General-inCouncil issued the Executive Council Provisional Order 1947 (G.G.O.I). A Department corresponding with each existing department and Bearing the same designation with the addition of the word „Pakistan‟ was created for handling cases exclusively or predominantly concerning the future Dominion of Pakistan. Another relevant Order is GGO.12 known as The Indian. Independence Income Tax Proceedings Order 1947 which was enforced on the 12th of August, 1947. It recognized the same Tax Authorities under section 5 of the Income Tax Act for both the Dominions. The expression „Tax Authority‟ was defined as meaning inter alia “The Income Tax Authorities mentioned in section 5 of the Independence Act” Clause (3) of this Order made provision for cases where “after the appointed day the case of an assessee is transferred from one Dominion to the other by agreement between the Central Board of Revenue of the two Dominions GGO.12 thus recognized the Central Board of Revenue to have been constituted and to be a Tax Authority under the Income Tax Act in both the Dominions. This is a necessary consequence of the creation of Departments for the Dominion of Pakistan corresponding with the existing Departments. Clause (9) of GGO-20 known as the Pakistan, (Adaptation of Existing Pakistan Laws) order 1947 which provided that any reference in, an existing law to a tribunal or authority, officer or official body whose jurisdiction, or authority immediately before 15.8.1947 extended to the whole of British India or over parts of British India which on the said day fell partly within the Dominion of India and partly within the Dominion of Pakistan shall be construed as references to such tribunal, authority, officer, or official body as the appropriate Government may by Notification in the official Gazette constitute or appoint in that behalf. Can at must he said to have envisaged two alternatives, one of constituting an authority or tribunal and the other of appointment of that tribunal or authority. Where the constitution of an authority is recognized, what could be required was only to make appointment to it. Mr. Javed
483 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
Hashmi did not dispute the proposition that in case of existing departments only appointment was required to be made. I am, therefore in full agreement with the argument of Mr. Ilyas Khan that the constitution of a Central Board of Revenue for Pakistan was not necessary. This also appears to be the departmental interpretation since 1947 since the Government appointed Mr. Sherer as the Member of the Central Board of Revenue and made thereafter successive appointments and additions of members to that authority during the last more than 28 years. The same also appears to be the legislative interpretation. As stated above by Ordinance XXXI of 1962 the Legislature stepped in to confer powers upon the Central Board of Revenue to appoint the other authorities mentioned in section 5 of the Income Tax Act. By the same Ordinance sub-clause (aa) was inserted in section 2 of the Central Excise and Salt Act in order to define the expression „Central Board of Revenue‟ as meaning the Central Board of Revenue constituted under the Central Board of Revenue Act, 1924. Certain consequential changes were made in other sections of that enactment. It is not necessary to make detailed reference to all the provisions. It may be sufficient to state that the powers heretofore exercised by the Central Government under various sections of the Act were conferred upon the Central Board of Revenue by substitution of the expression „Central Board of Revenue‟ for „Central Government‟ (see for illustrations sake sections 2 and 8). The Central Board of Revenue was made the Chief Customs Authority under the Sea G Customs Act by the same Ordinance XXXI of 1962. Powers were conferred upon this authority to make appointments of officers of Custom under section 6 of the Act. The Estate Duty Act, 1950 was published in the Gazette of Pakistan on the 23rd January, 1950. It recognised under sub-section (3) of its section 2 the Central Board of Revenue as constituted under the Central Board of Revenue Act, 1924. It is the first authority under the Act vide its section 3 (a) and by Ordinance XXXI of 1962 it was given the power to appoint Controllers of Estate Duty. Another important legislation is the Gift Tax Act, 1963 whereby the Central Board of Revenue as constituted under the Act, 1924, was recognised as the Board. In consonance with the principles enunciated and laid down in Ordinance XXXI of 1962, the Board by sections 8 to 10 of this Act was empowered to confer powers exercisable under the Act upon various authorities. These legislations have the effect of an implied declaration of the legislative intent in section 9 of Governor-General‟s Order XX of 1947. They recognise that the Board already stood constituted as required by the Act of 1924 and that any further formal constitution of the same in 1947 was
484 Section 4
Income Tax Digest.
unnecessary. The judicial interpretation given by me is, therefore, in accord with the legislative as well as the administrative or executive interpretation. In these circumstances even if I had come to the conclusion that the constitution of the Central Board of Revenue was necessary under GGO.20. I would construe the notification about the first appointment of a member, Board of Revenue in Pakistan w.e.f. 15.8.1947 as a notification not only of appointment but also of constitution. The dictionary meaning of the word „constitute‟ is not only to establish, to form or make up but also to appoint. See Chambers Twentieth Century Dictionary. To constitute and to appoint are therefore, synonymous terms. Appointment of one member of the Central Board of Revenue is a constitution of a one member Board. Cases referred to: Chairman East Pakistan Railway Board v. Abdul Majid Sardar (PLD 1966 S.C. 725) and Lahore Improvement Trust v. Custodian of Evacuee Property (PLD 1971 S.C. 833). _______________
JURISDICTION
Crown Bus Service Ltd., Lahore v. Central Board of Revenue and others – [1976] 34 TAX 54 (H.C.Lah.) 757.
Transfer of jurisdiction is not necessary.
It was then argued that under sub-section (6) of section 5 of the Income Tax Act the orders transferring assigning cases had to be passed by a notification and as no notification was issued in his cases, therefore, the relevant orders of the Central Board of Revenue impugned were without lawful authority. This argument he was raising on the principle that where legislature had indicated that a thing should be done in a particular manner it should be done in that and that manner alone. For this proposition he referred to Nazir Ahmad v. King-Emperor (AIR 1936 Privy Council 253); Mian Akbar Husain v. West Punjab Government (PLD 1954 Lahore 188); Qadar and others v. Sultan Bibi and The Crown (PLD 1956 Federal Court 129); West Pakistan Province v. Jamshed Miran (PLD 1965 (W.P.) Lahore 729). The principle advanced is quite sound but it has no application to the facts and circumstances of the present case, because, the orders impugned here were passed by the Central Board of Revenue under sub-section. (2) and not sub-section (6) of section 5 of the Laconic Tax Act. For passing orders or issuing directions under sub-section (2) the requirement of acting through a notification does
485 APPOINTMENT OF INCOME TAX AUTHORITIES ETC.
Section 4
not exist anywhere. The learned counsel at this stage argued that the impugned orders though quoted sub-section (2) of section 5 but they really fell within the compass of sub-section (6) and as such should have been preformed by a notification. The contention has no merit. Sub-section (2) deals with appointment of Commissioners of Income Tax which may be made area wise or without reference to area i.e. otherwise. Then a Commissioner of Income Tax is appointed not areawise but otherwise then he can be assigned any case or class of cases by the Central Board of Revenue. The Central Board of Revenue purported to act in these case under this provision of law and assigned the cases of the present petitioners to a Commissioner of Income Tax who had not been appointed area-wise. The said Commissioner of Income Tax then exercised the power of a Commissioner of Income Tax under sub-section (5) of section 5 and directed the Income Tax Officer concerned in these cases to perform functions in respect of the present petitioners and their cases. These orders, therefore, squarely fell within the scope of sub-sections (2) and (5) and cannot be taken exception to on the plea under examination. We do not find any justification to substitute a different provision of law than the one quoted by the author of the impugned orders himself as the authority under which he acted. According to rule 2(d) Secretary means the person appointed Central Government to perform the function of Secretary Board and includes any other officer of the Board authorised Central Government to perform all or any of the function Secretary.
by to by of
the the the the
Cases referred to: Nazir Ahmad v. King Emperor (AIR 1936 P.C. 253); Mian Akbar Hussain v. West Punjab Government (PLD 1951 Lah. 188); Qadar and others v. Sultan Bibi and Crown (PLD 1956 F.C. 129); West Pakistan Province v. Jamshed Miran (PLD 1965 Lah. 729); Khalil Ahmad v. The State (1975 SCMR 145). _______________
REMOVAL
Neelarnegham Pillai v. Secretary of State for India – [1937] 5 ITR 424 (Mad.) 758.
An order of a Commissioner dismissing an Income Tax Officer is not invalid merely because it was not made with previous approval of local Government.
Where it was contended that the Commissioner is subject to the control of the local Government as much in the matter of dismissing
486 Section 4
Income Tax Digest.
an Income Tax Officer as in the matter of appointing one, and where the dismissal of the Income Tax Officer had not been made with the previous approval of the local Government, the dismissal was void in law, it was held that the language of section 5 of the 1922 Act as well as the language of the Devolution Rules is consistent only with the view that the Commissioner is the appointing authority, though his powers in that connection may be interfered with by higher authority on various grounds; as regards dismissal, there is no specific section or rule providing for dismissal but, the rule which gives a right of appeal against orders of dismissal formerly to the Governor in Council and now to the Governor-General-in-Council proceeds on the assumption that the dismissal of an Income Tax Officer is to be by the Commissioner. Accordingly, the contention was to be rejected.
487 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
Section 5 read with article 199 of the 1973 Constitution* Jurisdiction of Income Tax Authorities etc.
PAGE NO
JURISDICTION
759. 760.
761.
762.
Validity of notification upheld. TAX 208 (S.C.Pak.)
_
1972 SCC 400 = [1974] 29 491
On point of jurisdiction where adequate remedy is available _ writ is not maintainable. 1968 SCC 315 = [1968] 17 TAX 207 (S.C.Pak.)
491
Order of jurisdiction having procedural defects is without _ any lawful authority. 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.)
492
Order assigning jurisdiction to Commissioner, signed by section Officer on behalf of Member (Taxation), Central _ Board of Revenue held in valid in law. [1973] 28 TAX 66 (H.C.Lah.)
492
TRANSFER OF JURISDICTION
763.
764.
765.
766.
*
Coram non judice functions performed by such a person would not qualify for validation under the de facto doctrine. _ [1994] 69 TAX 109 (S.C.Pak.)
494
Jurisdiction can be transferred without prior notice or _ intimation to the assessee. 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak.)
495
Board‟s jurisdictional orders are not open to challenge in _ any Court, except representation. [1979] 39 TAX 53 (H.C.Lah.)
496
Transfer of case from one Income Tax Officer to another includes completed and pending assessments; word „case‟, _ meaning of. [1976] 34 TAX 199 (H.C.Lah.)
496
Corresponding to section 5 and 64(3) of 1922 Act read with article 98 of the 1973 Constitution.
488 Section 5
Income Tax Digest. PAGE NO
767. 768.
769.
770.
771.
772.
773.
No show-cause notice is required for transfer of jurisdiction. _ [1976] 34 TAX 54 (H.C.Lah.)
497
Jurisdiction of Central Board of Revenue and Commissioner of Income Tax in the matter of jurisdiction is concurrent. _ [1974] 29 TAX 125 (H.C.Kar.)
498
Limited company hiring registered office in Lahore Zone in the absence of any specific order by authority transferring jurisdiction over the case from Lahore Zone to Rawalpindi _ Zone could not be taxed in Rawalpindi Zone. [1973] 28 TAX 13 (H.C.Lah.)
499
Agreement of the assessee does not confer jurisdiction on Income Tax Authority who otherwise is not vested with the _ jurisdiction according to law. [1968] 18 TAX 105 (H.C.Lah.)
500
Transfer of a case on point of jurisdiction cannot be challenged on the touchstone of principles of natural justice. _ [1967] 15 TAX 235 (H.C.Kar.)
501
Person-wise transference of cases under sections 5(2) and _ 5(7A) was held unlawful. [1963] 7 TAX 358 (H.C.Dacca) = 1967 PTD 774 = 1964 PLD 304
503
Provisions regarding transfer of case are not discriminatory. _ [l960] 2-TAX (Suppl.-114) (H.C.West Pakistan, Karachi Bench) = 1959 PTD 119 = 1958 PLD 220
505
TRIBUNAL WAS NOT LEGALLY JUSTIFIED IN ANNULLING THE ASSESSMENT ON THE POINT OF JURISDICTION
774. 775.
“Principal place of business”, “Territorial jurisdiction” etc. _ 1985 SCC 630 = [1986] 53 TAX 67 (S.C.Pak.)
506
Appellant‟s principal place of business was at Karachi; assumption of jurisdiction by Income Tax Officer, Lahore _ held unlawful. [1993] 67 TAX 398 (H.C.Lah.)
507
JURIDICTION IN GENERAL
776.
777.
No assessment can be made unless the assessing officer has _ valid jurisdiction over the case of assessee. [1993] 68 TAX 149 (H.C.Dacca)
508
Income Tax Officer could not pass assessment order unless specifically authorised to assess the return filed by the _ assessee. [1987] 56 TAX 35 (H.C.Kar.)
509
489 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5 PAGE NO
778.
779. 780.
Erroneous decision by the Income Tax Officer in the exercise of his jurisdiction cannot be called an act totally lacking in _ jurisdiction. [1981] 43 TAX 92 (H.C.Kar.) = 1981 PTD 53
509
An order passed under section 64(3) of the 1922 Act has not _ been made appealable. [1941] 9 ITR 25 (All.)
510
Section 64(3) of 1922 Act does not apply when a case is _ transferred at assessee‟s own request. [1946] 14 ITR 319 (Cal.)
510
JURISDICTION OF ASSESSING OFFICER
781.
782.
783. 784.
785.
786.
787. 788.
789.
Mere fact that an Income Tax Officer has incorrectly designated himself will not divest him of jurisdiction which _ he genuinely possesses. [1937] 5 ITR 739 (All.)
511
Income Tax Act does not determine place of assessment, what it does is to determine officer who is to have power to assess and in some cases it does so by reference to locality. _ [1943] 11 ITR 67 (Bom.)
511
As far as practicable an assessee should be assessed locally. _ [1940] 8 ITR 139 (Bom.)
511
Where an assessee carries on business in more places than one, he shall be assessed by the Income Tax Officer of the _ area in which his principal place of business is situate. 7 ITC 74 (All.)
511
Income Tax Officer of area in which firm is carrying on business has jurisdiction to make the assessment of the _ partner under section 64(1) of 1922 Act. [1943] 11 ITR 559 (Bom.)
512
Income Tax Officer assessing head office of assessee can call upon assessee to file return of income of all places of _ business besides head office. [1933] 1 ITR 126 (All.) _ In case of contacts. [1942] 10 ITR 103 (All.)
512
In case of concurrent jurisdiction, if one Income Tax Officer has issued notice, other Income Tax Officer may process case _ without issuing another notice. [1942] 10 ITR 103 (All.) _ Additional Income Tax Officer. 6 ITC 240 (All.)
512
512
512
OBJECTION AS TO INCOME TAX OFFICER‟S JURISDICTION
790.
Objection as to Income Tax Officer‟s jurisdiction cannot be raised for first time in appeal against assessment after _ assessment has been made. [1937] 5 ITR 739 (All.)
513
490 Section 5
Income Tax Digest. PAGE NO
791. 792.
Objection to place of assessment must be raised before _ assessing authority. [1947] 15 ITR 455 (Pat.)
513
Where the principal place of business of an assessee is determined under section 64(3) of the 1922 Act, it is final, _ and cannot be interfered with in reference. 2 ITC 304 (All.)
513
OPPORTUNITY OF HEARING
793.
Assessee is to be given an opportunity of representing his views but it is not necessary that he should be heard. _ [1941] 9 ITR 25 (All.)
513
SCOPE AND APPLICATION OF PROVISION
794. 795.
Case cannot be transferred where assessment has been _ completed. [1940] 8 ITR 139 (Bom.)
514
Transfer of case can be effected even when no proceedings are pending it will be for proceedings to be instituted in _ future. [1942] 10 ITR 103 (All.)
514
491 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
Section 5 read with article 199 of the 1973 Constitution* Jurisdiction of Income Tax Authorities etc.
JURISDICTION
Raja Habib Ahmad Khan v. Income Tax Officer 1972 SCC 400 = [1974] 29 TAX 208 (S.C.Pak.) 759. Validity of notification upheld. Reliance was sought to be placed on a decision of this Court in the case of Income Tax Officer (Investigation Circle) v. Sheikh Nasim Anwar [PLD 1966 S.C. 276]. The High Court took the view that, since subsection (2) of section 5 of the Act, which authorised the Board of Revenue to appoint Commissioners of Income Tax for specified areas, did not provide that such appointments could only be made by a notification or a notified order, the notification was not necessary and, therefore, the question as to who issued the notification was immaterial. We are of the view that the validity of the notification was not open to question merely because of the fact that it had been issued under the signature of a “Second Secretary”. There is nothing in the Act or in any one of the rules to show that a “Second Secretary” does not come within the description of “the Secretary to the Board” mentioned in the relevant rule. The decision relied upon is of no assistance, because, the notification was issued under the signature of a Section Officer who is not a Secretary. In the present case, the notification in question has been issued over the signature of a “Second Secretary” presumably to the Board of Revenue and therefore, the requirements of the rule have been complied with. Bashir & Co., Lyallpur v. Income Tax Officer, B-Ward, Lyallpur & Another – 1968 SCC 315 = [1968] 17 TAX 207 (S.C.Pak.) 760. On point of jurisdiction where adequate remedy is available writ is not maintainable.
*
Corresponding to section 5 and 64(3) of 1922 Act read with article 98 of the 1973 Constitution.
492 Section 5
Income Tax Digest.
We are in agreement with the learned judges that on the proper interpretation of the notifications relevant in the case it was plain that the examining officer „A‟ Ward, Lyallpur, was competent to assess the petitioner‟s income for 1963-64 and may add that as the petitioner had not availed of the special remedy provided in the Income Tax Act under section 66(1), he was not entitled to move the High Court in writ jurisdiction. Such a course not only amounts to by-passing the jurisdiction vested by law in the special Tribunal, but also fails to comply with the requirement of Article 98 as it cannot be said that no other adequate remedy was available to the petitioner. Income Tax Officer (Investigation) Circle III, Karachi and Another v. Sheikh Nasim Anwar Dacca – 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.) 761.
Order of jurisdiction having procedural defects is without any lawful authority.
The order of transferring ordinary jurisdiction to the jurisdiction of the Commissioner of Income Tax (Investigation) due to procedural defects was without lawful authority and of no legal effect. Rule making powers of CBR has statutory mandate and signing of order by an authorised person made the order illegal. In matters which are judicial or quasi-judicial in nature, the order must appear in the hand and under the signature of the officer who made it. Commissioner of Income Tax (Investigation), Karachi v. Pakistan Transport Co. Ltd., Jhang – [1973] 28 TAX 66 (H.C.Lah.) 762.
Order assigning jurisdiction to Commissioner, signed by section Officer on behalf of Member (Taxation), Central Board of Revenue held invalid in law.
Whereas the Income Tax Officer, Investigation Circle IV, Lahore, had made assessment of the case in pursuance of the jurisdiction order issued under the signature of a section officer of the Central Board of Revenue the question for determination was whether the jurisdiction order in question was valid in law. If not, whether the fresh jurisdiction order by the Central Board of Revenue validating the defective order validated the assessment order. Held, that the transfer order issued by the Section Officer was without any lawful authority. The right already to the assessee could not be taken away by subsequent order of transfer. The assessment was made without jurisdiction and as such was void ab initio.
493 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
In fact, it had to be conceded by him (counsel for the department) as an inescapable position that as a result of the discussion between Mr. H. U. Baig, Section Office, Mr. Yaruddin, O.S.D., and the Member (Taxation), it was decided to consult the Commissioner Income Tax in writing, and the file bad to be again put up of which there is no indication available on the record in the form of the signature of the Member Board of Revenue who could, of course, sitting singly act on behalf of the Board itself. As such the matter stands finally concluded by the Supreme Court judgment, wherein the transfer order issued by Mr. H. U. Baig in compliance with the so-called verbal direction of the Member (Taxation) was considered to have been issued by the former in his personal capacity and as such without lawful authority. The position as it finally emerges as a result of the above discussion therefore is that the assessment order was made without jurisdiction and as such was void ab initio. Learned counsel for the Department tried to contend that subsequently on 11.7.1963 during the pendency of the appeal, the Central Board of Revenue made fresh transfer order validating the earlier defective order and as such the order of assessment ipso facto stood validated. It was argued that the pendency of the appeal had the effect of merely suspending and not obliterating the assessment order which very much remained in existence and stood rightly validated. The argument is obviously misconceived inasmuch as once it is conceded that the transfer order which alone could confer jurisdiction on the Income Tax Officer (Investigation), Circle IV, Lahore, was invalid, the assessment order made by him would be at-once rendered null and void for want of jurisdiction. It is well settled as held in Yousaf Ali v. Muhammad Aslam Zia and two others [PLD (1958) S.C. 104] that under section 33 of the Income Tax Act, the Tribunal cannot substitute its own assessment; Once the basis is demolished, the entire super-structure collapses. The learned counsel was at pains to have us believe that the validation of the transfer order by subsequent order of transfer by the Board of Revenue had ipso facto resulted in the validation of the assessment order. The argument is clearly fallacious as it is inconceivable that once the structure is demolished simply with the reconstruction of fresh foundation the entire superstructure would also reappear. The matter could also be considered from another point of view. How could the legal defect in the transfer of the case be made good by a subsequent transfer order when the case was no longer pending before the authority which received it on transfer by means of a defective order having
494 Section 5
Income Tax Digest.
already washed its hands of the case. Again if the appeal0020against the assessment is deemed to be pending, the Department has to concede in the first instance before seeking its validation that it is ab initio void. It is inconceivable that the validation of the series of orders passed in different stages of a case would have the effect of validation all of them by virtue of the deeming clause with qualification of retrospectivity. We are not familiar with any such construction of the deeming clause which appears alien to all concepts of retrospectivity. We are, thus, clearly of the view that rights already accrued to the respondents could not be taken away by subsequent order of transfer. Case relied on: Sheikh Naseem Anwar v. Income Tax Officer [1966] 14 TAX 1 and Yousaf Ali v. Muhammad Aslam Zia and two others PLD (1958) S.C. 104. Case referred to: Sheikh Naseem Anwar v. Income Tax Officer [1963] 7 TAX 358. _______________
TRANSFER OF JURISDICTION
Income Tax Officer, Mirpur and 2 others v. Ch. Muhammad Bashir Tax – [1994] 69 TAX 109 (S.C.AJK.) 763.
Coram non judice functions performed by such a person would not qualify for validation under the de facto doctrine.
It is thus clear that Commissioner of Income Tax did not have the power to appoint an Income Tax Officer or to authorise an Inspector of Income Tax to perform the functions of the Income Tax Officer. Even otherwise in his order the Collector, Excise and Taxation (Annex „A‟) only advised the Income Tax Officer to hand over the charge to the Inspector and did not order that the functions of the Income Tax Officer shall be performed by the Inspector or that he will exercise the powers of Income Tax Officer, It follows that the Inspector was not appointed as Income Tax Officer. The de facto doctrine which is to the effect that if an appointment order is found to be defective the acts performed by a functionary are not invalidated. However, it has been clearly laid down in the judgment that this doctrine has no application to a person who has not been appointed to a post and starts functioning without any order, valid or invalid. Coram non judice functions performed by such a person would not qualify for validation under the de facto doctrine.
495 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
In the present case we have already noticed that the Inspector of Income Tax was only ordered to take over the charge of the post of Income Tax Officer and he was not appointed as Income Tax Officer. We may also note that while handing over the charge to the new Income Tax Officer on 2nd of August Naseer Ahmad Malik signed as Inspector of Income Tax and not as Income Tax Officer (Annexure „C‟ refers). The de facto doctrine is, therefore, found to be inapplicable. It is well-settled that in a writ petition the public functionary whose order or action is challenged must be impleaded as a party. That is the reason why the Income Tax Officer was impleaded as a party. The show-cause notices issued by the Income Tax Officer have been quashed he is the person aggrieved and it is only on his appeal that this Court can, if a case is made out, revive the notices. Since there is no valid appeal on Income Tax Officer‟s behalf the question of reviving the show-cause notices does not arise. No order or action of the Commissioner of Income Tax has been quashed by the High Court. So far as Inspecting Assistant Commissioner is concerned he gave permission for re-opening the case under section 65 of the Income Tax Ordinance for one of the years. Even if that permission is found to be valid it will not in itself bring to life the show-cause notices issued by the Income Tax Officer which have been quashed by the High Court. Thus, it crystalises that the appeal filed by the Inspecting Assistant Commissioner cannot proceed in absence of the necessary party, namely, the Income Tax Officer. Case referred to: Federation of Pakistan v. Muhammad Khan PLD 1991 SC (AJ&K) 33.
Karachi Industrial Corporation and 3 others v. Commissioner of Income Tax – 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak.) 764.
Jurisdiction can be transferred without prior notice or intimation to the assessee.
There is no provision in the law for issuance of a notice before a case is transferred from one office to another. It is urged that the rule of natural justice requires that before an order adverse to a party is passed he shall be heard. There is little force in the contention. The transfer of jurisdiction in this case was to facilitate assessments at one place. Per se such an order does not result in any prejudice to the assessee. If the petitioners have any specific grievance against the Income Tax Officer, they should bring it to notice of the Inspecting Additional Commissioner.
496 Section 5
Income Tax Digest.
Crown Bus Service Ltd. v. Commissioner of Income Tax, Lahore – [1979] 39 TAX 53 (H.C.Lah.) 765.
Board‟s jurisdictional order are not open to challenge in any Court, except representation.
It is thus clear that order dated 9th October, 1971, of the Central Board of Revenue appointing Mr. Noel in the leave vacancy for Circle II (Investigation) was valid and effective and no order of an authority subordinate to the Central Board of Revenue was needed to give its validity. Similarly no order by the Commissioner of Income Tax was necessary to make effective the order dated 9th December, 1971. Two of the impugned orders passed by Mr. Noel Were dated 30th December, 1971 while the third was passed on 22nd October, 1971. The order appointing Mr. Noel as Income Tax Officer II Circle (Investigation) was dated 9th of October, 1971. No question of retrospective application arose in these cases. Section 5(7C) in any case protected the action of the Central Board of Revenue from challenge. The petitioner could only make a representation against such order under section (7-D). In this view of the matter, this application cannot be allowed. Abdul Rashid (c/o Union Traders GoIe Cloth, LyalIpur) v. Special Judge (Central), Lahore and another – [1976] 34 TAX 199 (H.C.Lah.) 766.
Transfer of case from one Income Tax Officer to another includes completed and pending assessments; word „case‟, meaning of.
The word „case‟ in section 5 of the Act has recorded statutory interpretation in the explanation to sub-section (7-A) of section 5 in the following manner: “In this section. the word „case‟ in relation to any person whose name is specified in an order-or any direction issued thereunder, means all or any proceedings under this Act in respect of any year which may be pending on the date of such order or direction or which may have been completed on or before such date, and includes all proceedings under this Act which may be commenced after the date of such order or direction in respect of any year.” The words underlined by me clarify that the word „case‟ for the purpose of distribution of allocation of business as well as transfer from one Income Tax Officer to another, includes even a case which has been completed. In view of this interpretation clause added to
497 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
section 5, the authorities referred to by the learned council are not at all relevant. This finding disposes of writ petitions No. 1396/1973 and 2139/1973. Cases referred to: Dayaldas Khushiram v. Commissioner of Income Tax (AIR 1940 Bom. 234); Manordas Kalidas v. G.R. Desai and others (1959) 37 ITR 302); Bidi Supply Co. v. Union of India and others (1956) 29 ITR 717.
Crown Bus Service Ltd., Lahore v. Central Board of Revenue and others – [1976] 34 TAX 54 (H.C.Lah.) 767.
No show-cause notice is required for transfer of jurisdiction.
Rule 4(1) laid down that the orders and decisions of the Board may be issued or notified over the signature of a Member or the Secretary. Sub-rule 4(2) laid down that “any order or decision of the Board issued or notified before the making of these rules over the signature of any officer of the Board other than the Secretary shall be deemed to have been issued or notified over the signature of the Secretary and shall have and be deemed always to have had effect accordingly”. In Rule 5 it was laid down that “all acts done or orders made by and proceedings of the Board or any of its Members or officers before the making of these rules which, if done, made or taken after the commencement of these rules, would not be inconsistent therewith, shall be, and shall be deemed always to have been valid and shall have and shall be deemed always to have had effect accordingly”. These rules, as is obvious, were retrospective and validated the orders passed, instructions issued and proceedings taken by the Central Board of Revenue. In the face of these rules the previous orders of the Central Board of Revenue passed prior to 1967 stand validated and from that point of view no exception can now be taken to the same. When faced with this situation learned counsel for the petitioner half-heartedly argued that the rules could not be framed with a retrospective effect. It was then argued that while transferring jurisdiction or transferring their cases the assessee concerned were not issued any show cause notice and were not beard, and as such, the impugned orders from that point of view were violative of the principle of natural justice and were void or invalid. The objection has no substance as in Khalil Ahmad v. The State (1975 SCMR 145) it has been clearly laid down that no show cause notice in such matters is necessary. Case followed: Baja Habib Ahmad Khan v. ITO 1972 SCMR 556. Case distinguished: Income Tax Officer (Investigation) v. Shaikh Nasim Anwar (PLD 1966 SC 276); (1966) 14 TAX 1 (S.C.).
498 Section 5
Income Tax Digest.
Cases referred to: Modi Food Products Ltd. v. Commissioner of Sales tax (AIR 1956 All. 35); M.L. Bagga v. Murhar Rao (AIR 1956 Hyd. 35); CalicutWynad Motor Service (Pvt.) Ltd. v. State of Kerala (AIR 1959 Kar.347); Indian Sugars and Refineries Ltd. v. State of Mysore and others (AIR 1960 Mys. 326) and Commissioner of Income Tax v. Admaji Sons (PLD 1967 Kar. 184).
Mustafa R.C.C. Pipe Works, Karachi v. Commissioner of Income Tax, Karachi – [1974] 29 TAX 125 (H.C.Kar.) 768.
Jurisdiction of Central Board of Revenue and Commissioner of Income Tax in the matter of jurisdiction is concurrent.
. . . . . both the Central Board of Revenue as well as the Commissioner of Income Tax have concurrent jurisdiction with regard to transfer of cases from one Income Tax Officer to another Income Tax Officer. This provision of concurrent jurisdiction for transfer of cases is similar to section 24 of the Civil Procedure Code, 1908 (and the corresponding provisions in the preceding Civil Procedure Codes), under which concurrent jurisdiction is conferred on the High Court and the District Court, with regard to transfer of any suit, appeal or other proceedings pending in any court subordinate to the High Court or the District Court. Thus, there being concurrent jurisdiction both in the Central Board of Revenue and the Commissioner of Income Tax with regard to transfer of Income Tax assessment cases from the file of one Income Tax Officer to the file of another Income Tax Officer no valid objection is maintainable in the present case to the order of the Commissioner of Income Tax (Investigation). Karachi, made on 21st September, 1963 by which the case of the assessee had been transferred from the Income Tax Officer (Investigation) Circle II to the Income Tax Officer (Investigation) Circle VI. Karachi, even though there was an earlier order made by the Central Board of Revenue on 25th May. 1963 transferring the case to the Income Tax Officer (Investigation), Circle II, Karachi. Exercise of jurisdiction under sub-section (7A) of section 5 of the lncome Tax Act, 1922, whether by the Central Board of Revenue or by the Commissioner of Income Tax, must be for cogent and proper reasons and any order of transfer foreign to the purposes of the Income Tax Act, 1922, may be difficult to maintain. The Central Board of Revenue and the Commissioner of Income Tax having concurrent jurisdiction with regard to transfer of cases should interfere as little as possible with each other‟s jurisdiction.
499 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
Sub-section (8) of section 5 of the Income Tax Act, 1922 provides that all officers and persons employed in execution of the Income Tax Act shall observe and follow the orders of the Central Board of Revenue. But this provision does not stand in isolation and must be read with the other provisions of the Income Tax Act, including sub-section (7A) of section 5 of the Act, which confers concurrent jurisdiction on the Central Board of Revenue and the Commissioner of Income Tax with regard to transfer of cases from one Income Tax Officer to another Income tax Officer. In the present case there has been no order of the Central Board of Revenue prohibiting the Commissioner of Income Tax from transferring the case from the Income Tax Officer (Investigation) Circle II, Karachi to the Income Tax Officer (Investigation) Circle VI, Karachi. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Malik Abdul Karim Transport Co. Ltd., Gujrat – [1973] 28 TAX 13 (H.C.Lah.) 769.
Limited company having registered office in Lahore Zone in the absence of any specific order by authority transferring jurisdiction over the case from Lahore Zone to Rawalpindi Zone could not be taxed in Rawalpindi Zone.
The registered office of the assessee company, a private limited company, was situated in Lahore. The return of income was filed with the Income- tax Officer, Companies Circle III. Lahore. In December, 1965, the North Zone was bifurcated by the Central Board of Revenue into two separate zones, namely, Lahore Zone and Rawalpindi Zone. After bifurcation, Lahore left in the charge of Commissioner of Income Tax, Lahore Zone and Gujrat in the charge of the Commissioner of Income Tax, Rawalpindi Zone. The Income Tax Officer, Companies Circle, Gujranwala, completed assessment proceedings against the assessee on the ground that in return of income filed before the Income Tax Officer, Companies Circle III, Lahore. the address was shown as “Railway Road, Gujrat”. The Income Tax Officer finalised the assessment ignoring the assessee‟s repeated objections that the records were wrongly transferred from Lahore to Gujrat and that the jurisdiction over the case vested with the Income Tax Officer, Companies Circle In, Lahore. On appeal the Appellate Tribunal annulled the assessment holding that “the jurisdiction and place of assessment was repeatedly disputed and this being so, it was the duty of the Income Tax Officer to refer the case to the Commissioner of Income Tax for a decision in this behalf in terms of sub-section (3) of section 64 of the Act.” Dismissing the reference application under section 66(1) of the Income Tax Act in liminie the High Court
500 Section 5
Income Tax Digest.
Held,
that the order passed by the Tribunal is unexceptionable. This position of law under section 64(3) of the Act does not admit of any doubt and there can be no two opinions on it.
The Tribunal permitted the respondent to raise this objection before it as to the jurisdiction of the Income Tax Officer for the first time by way of an additional plea and exercised its discretion in the matter in favour of the respondent. This court cannot sit in appeal against the discretion thus exercised by it. Sheikh Mohammad Amin, Lyallpur v. Income Tax Officer, Jhang and another – [1968] 18 TAX 105 (H.C.Lah.) 770.
Agreement of the assessee does not confer jurisdiction on Income Tax Authority who otherwise is not vested with the jurisdiction according to law.
Messrs. Mohammad Amin Maqsood Ahmad, Lyallpur, were assessed to tax by the Income Tax Officer, Lyallpur, who had territorial jurisdiction over the case, since the assessment year 1946-47. The assessment for the charge year 1950-51 was made by the Income Tax Officer, Lyallpur on the 27th July, 1954, on an income of Rs.9,778/-. Subsequently, the case file was transferred to the Income Tax Officer, Jhang, at the request of the authorised representative of the assessee on the ground that the assessee was residing at Jhang. The Income Tax Officer, Jhang, for default of notices made ex-parte assessment for the year 1950-51 on the 19th February, 1955, on a total income of Rs.27,260/-. Against the latter assessment the assessee filed revision petition under section 33A(2) of the Income Tax Act, before the Commissioner of Income Tax, contending that the Income Tax Officer, Jhang had no jurisdiction to make the assessment for the year 195051 which had already been completed by the Income Tax Officer, Lyallpur, before transfer of the records to Jhang. The Commissioner, in exercise of his suo motu powers under section 33A(1) set aside the assessment for the year 1950-51, which was made by the Income Tax Officer, Lyallpur. The revision petition filed by the assessee was rejected. Both these orders were passed without affording any opportunity of hearing to the assessee. Against the order passed by the Income Tax Officer, Jhang and the orders passed by the Commissioner, the assessee filed writ petitions in the High Court contending that the (i) Income Tax Officer, Jhang was not competent to make the assessment for the year 1950-51 and (ii) the Commissioner could not annul the assessment made by the Income Tax Officer, Lyallpur for the year 1950-51 to legalise the creation of a larger demand made by the Income Tax Officer, Jhang.
501 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
Held, that: (i)
the Income Tax Officer, Jhang had no jurisdiction in the matter and the order passed by him being without jurisdiction is a nullity and void in the eye of law;
(ii)
everything else apart, both the impugned orders of the Commissioner of Income Tax offend the principle of natural justice. The order setting aside the assessment order passed by the Income Tax Officer, Lyallpur is prejudicial to the interests of the petitioner inasumch as the assessment which made him liable to a lesser amount was set aside;
(iii)
since the Commissioner of Income Tax has confirmed the order of the Income Tax Officer, which was passed ex-parte it was his duty to have given the petitioner an opportunity of being heard. It is also doubtful that the Commissioner could pass the above mentioned two orders in respect of the order of the Income Tax Officers which were apparently passed more than one year before he intervened with them; and
(iv)
agreement of a party cannot confer jurisdiction on a Tribunal which it does not otherwise possesses according to law.
Case distinguished : Commissioner of Income Tax v. Tribune Trust, Lahore (AIR 1948 P.C. 102); [1960] 2-TAX (Suppl.-250) (P.C.).
Abdul Aziz and another v. Income Tax Officer And Another – [1967] 15 TAX 235 (H.C.Kar.) 771.
Transfer of a case on point of jurisdiction cannot be challenged on the touchstone of principles of natural justice.
The Central Board of Revenue by its order dated the 23rd May 1963, transferred the case of the assessee under section 5(2) of the Income Tax Act to the charge of the Commissioner of Investigation, Karachi. On this very date another order was passed by the Board transferring the case under section 5(7A) of the Act from the Income Tax Officer, Central Circle LV, Karachi, to the Income Tax Officer, Investigation Circle V, Karachi. The Commissioner of Income Tax, Investigation, Karachi, under his order dated the 15th October 1963, transferred the case from Income Tax Officer (Investigation) Circle V. Karachi to the Income Tax Officer (Investigation) Circle II, Karachi. This was followed by another dated the 15th, October 1964, where under the Commissioner transferred the case from Circle II to Circle 1, Karachi.
502 Section 5
Income Tax Digest.
Again on the 26th May 1966, he transferred the case from Circle I, Karachi to the Income Tax Officer (investigation) Circle 111, Dacca. This order, as well as all the previous orders by the Central Board of Revenue and the Commissioner of Income Tax, Investigation, Karachi, were challenged by the assessee before the High Court on the ground that (i) person-wise transfer of the case was not valid in law; (ii) the orders by the Central Board of Revenue and the Commissioner were conflicting and that the Commissioner could not revise the order of the Board; (iii) the assessee was entitled to claim that he should be assessed by the Income Tax Officer of the area in which he had his business or he resided; and (iv) there had been a contravention of the rule of natural justice inasmuch as the assessee was not allowed any opportunity to make representation before the impugned transfers were made. Held, that: (i)
the amended Explanation (in 1963) gives a clear indication of the fact that sub-section 5(7A) of section 5 contemplates transfer of all the proceedings in respect of specified person, past, present and future. Case under sub-section (7A) is not a „case‟ under the other sub-sections of section 5 but it has a special meaning assigned to it by the Explanation . . . . The history of the Legislation on this point also shows that the Legislature intended to remedy the defect that was disclosed by the decision of cases, namely, that sub-section (7A) does not contemplate transfer of a case person-wise
(ii)
there is no conflict of jurisdiction brought about by the Board‟s order dated the 23rd May 1963 and the Commissioner‟s order dated the 26th May 1966;
(iii)
the contention that the petitioners were entitled to claim that they should be assessed by the Income Tax Officer of the area in which they had their business or they resided is not available having regard to sub-section (5) of section 64 of the Act; and
(iv)
although transfers of the cases were made and continued to be made since 1963 the petitioners never felt aggrieved because of the contravention of the rule of natural justice. It is only in May 1966 that the petitioners have come for the first time to challenge the legality of the various orders transferring the case of the petitioners for assessment under the Income Tax from one Income Tax Officer to
503 JURISDICTION OF INCOME TAX AUTHORITIES
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another. Therefore, on the ground of delay also these petitions are liable to be dismissed in limine. Cases referred to: Sheikh Naseem Anwar v. Income Tax Officer (Investigation) Circle III, Dacca and another [1964] 7 TAX 158.
Shaikh Naseem Anwar v. Income Tax Officer (Investigation), Circle III, Dacca and another – [1963] 7 TAX 358 (H.C.Dacca) = 1967 PTD 774 = 1964 PLD 304 772.
Person-wise transference of cases under sections 5(2) and 5(7A) was held unlawful.
The assessee owned a tannery and carried on business of import and export under the name and style of “Messrs. Fazal Ellahi and Dilkusha Tanneries”. The Central Board of Revenue by its order dated 12.12.1961 transferred the jurisdiction over the case of Messrs. Fazal Ellahi (Prop. S. Naseem Anwar) from the Commissioner of Income Tax, (East Pakistan, Dacca to the Commissioner of Investigation, Karachi, under section 5(2) of the Income Tax Act. The Commissioner of Income Tax, Investigation, Karachi, in his own turn, acting under section 5(5) of the Act, assigned the case, in the same name and style in which it was allotted to him by the Central Board of Revenue, to the Income Tax Officer (Investigation) Circle I, Dacca. This order was passed on 16th December, 1961. Subsequently, on 18th April 1962, the Commissioner of Income Tax Investigation, Karachi transferred the case to the Income Tax Officer (Investigation), Circle III, Dacca, under section 5(7A) of the Act. When the Income Tax Officer (Investigation) Circle III, Dacca, initiated proceedings of assessment for the charge years 1958-59 to 1960-61 the assessee filed an application made in the High Court under Article 98 of the Constitution of the Republic of Pakistan, challenging the validity of the order of the Central Board of Revenue and the two subsequent orders passed by the Commissioner of Income Tax (Investigation), Karachi, on the ground the jurisdiction orders under sections 5(2) and 5(7A) of the Act having been passed person-wise and not case-wise were not legally valid and thus the notices issued by the last named officer were void. Held, that the orders dated the 12th December, 1961, the 16th December, 1961 and the 18th April, 1962 are without lawful authority and of no legal validity. The notices served on the petitioner for assessment years from 1958-59 to 1960-61 are without lawful authority and of no legal validity. In the course of the judgment Murshed, J. observed as under:
504 Section 5
Income Tax Digest.
From the examination of the relevant sub-sections of section 5 of the Act the most patent characteristic which strikes one in the face is, that under the various sub-sections the distribution of work has to be done in several manners, namely, person-wise, case-wise, income-wise and area-wise. This is the distinctive feature of the scheme of the Income Tax Act as is evident from the said section 5 of the Act. In this context, if we turn back to sub-section (2) of section 5 it will appear that the second part of the sub-section contemplates the appointment of a special type of commissioner to deal with specified cases or classes, of cases. It is also clear that the said sub-section does not contemplate such appointment as a permanent feature; it merely authorises the Central Government to make such appointment and limits the maximum number to which such appointment can be made. The requirement to assign work to them case-wise is also very important in this background. We hold that sub-section (2) of section 5 does not contemplate a person-wise assignment of cases to the said “special” Commissioner. It is imperative that such an assignment must be case-wise. The order, dated 12th December 1961 under section 5(2) of the Act (passed by the Central Board of Revenue) is a typical instance of distribution of work person-wise, a course unwarranted by the terms of section 5(2) of the Act. The order dated the 16th December 1961, which is dependent upon the order dated the 12th December 1961 is also without any lawful authority. Sub-section (7A) of section 5 of the Act does not contemplate transference of cases person-wise, notwithstanding the explanation which has been subsequently added to the said sub-section (7A) by way of amendment. The order dated the 18th April 1962 [passed by the Commissioner of Income Tax (Investigation), Karachi, is also without any legal validity]. It is an elementary principle of natural justice to give a hearing (i.e., a chance to make a representation) before any decision is taken which adversely affects the assessee with regard to the forum where his Income Tax would be assessed. [No decision was given on the question whether a document signed by somebody on behalf of the Secretary, Central Board of Revenue, can be treated as an order of the Board of Revenue]
505 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
Cases referred to: Lachiram Basanalal Nathoni (33 C.W.N. 1206) and Dayaldas Khushiram v. Commissioner of Income Tax (1940) AIR 234 Born. Judicial review : CONFIRMED BY - The Supreme Court observed that the High Court did not express any opinion on the question whether a document signed by somebody on behalf of the Secretary of CBR can be treated as a proper order. The appeal filed by Income Tax Officer against this judgement was dismissed by the apex Court vide Income Tax Officer (Investigation) Circle III, Karachi and Another v. Sheikh Nasim Anwar Dacca 1966 SCC 276 = [1966] 14 TAX 1 (S.C.Pak.) vide order dated 10.05.1966. The Honourable apex Court held that: 1)
The order of transferring ordinary jurisdiction to the jurisdiction to the jurisdiction of Commissioner of Income Tax (Investigation) due to procedural defects was an act without lawful authority and of no legal effect.
2)
Rule making powers of CBR has statutory mandate and signing of order by an authorised person made the order illegal.
3)
In matters which are judicial or quasi-judicial in nature, the order must appear in the hand and under the signature of the officer who made it.
(1) Reyaz-o-Khalid & Co. v. Pakistan & others; (2) Abdul Sattar v. Commissioner of Income Tax, Karachi; (3) Firdaus Trading Corporation v. Commissioner of Income Tax, Karachi and others [l960] 2-TAX (Suppl.-114) (H.C.West Pakistan, Karachi Bench) = 1959 PTD 119 = 1958 PLD 220 Provisions regarding transfer of case are not discriminatory.
773.
The Commissioner of Income Tax transferred the assessment files, under section 5(7A), of the Income Tax Act, from one circle to another. Against these transfers the assessee filed writ petitions contending that (i) section 5(7A) of the Income Tax Act was void being repugnant to Article 170 of the Constitution, and (ii) there was denial of natural justice as the Income Tax Commissioner did not give an opportunity to the petitioners to show cause why these may not be transferred. Held that: (i)
The assessees were not entitled to any relief under Article 170 of the Constitution. The provisions contained in section 5(7A) of the Income Tax Act is not discriminatory, being an administrative provision. Order of transfer can be challenged in a writ petition if it had been actuated by malice. In these writ petitions no malice has been urged
506 Section 5
Income Tax Digest.
against - the Income Tax Commissioner, at least none has been proved; and (ii)
absence of notice to show cause would not amount to denial of natural justice. No useful purpose could have been served even if such a notice had been given. It was the Commissioner alone who was the best judge whether for administrative reasons the cases of these petitioners should be transferred or not. The principle of natural justice usually comes into operation when the right of the person is materially affected. Some inconvenience caused to the petitioners consequent on transfer of their cases did not mean that their rights had been materially affected.
Judicial analyses : The Honourable Supreme Court in Karachi Industrial Corporation & 3 others v. Commissioner of Income Tax 1974 SCC 424 = [1975] 32 TAX 170 (S.C.Pak) confirmed the same point of view. Cases referred to : Pannalal Binjraj v. Union of Jndia and others (AIR 1957 S.C. 397) and Bishan Lal Kuthiala v. The Income Tax officer, Ambala (AIR 1957 Punjab 26.) _______________
TRIBUNAL WAS NOT LEGALLY JUSTIFIED IN ANNULLING THE ASSESSMENT ON THE POINT OF JURISDICTION
Commissioner of Income Tax, Rawalpindi, now Gujranwala Zone v. Abdul Karim Transport Company Ltd. Gujrat – 1985 SCC 630 = [1986] 53 TAX 67 (S.C.Pak.) 774.
“Principal place of business”, “Territorial jurisdiction” etc.
Certain facts are established from the record. The first is that the assessee while filing the return under section 22 of the Income Tax Act had shown its address and the place of business as „Railway Road, Gujrat‟. It had not in its return indicated any other place, as principal place of business or as seat of its registered office. Secondly, when the return was filed Companies Circle Lahore happened to be in the Northern Circle and had jurisdiction over Gujrat cases. Thirdly, on bifurcation, the Northern Circle was divided into Rawalpindi Circle and creation of an income tax Circle at Gujranwala, Gujrat was allocated to Gujranwala income tax circle. Further, it is also established that having raised an objection with regard to the transfer of its case from Lahore Circle to Rawalpindi Circle and after its rejection, the respondent had not agitated the question further though the case had at one stage been remanded by
507 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
the Assistant Commissioner. He revived it finally before the Income Tax Tribunal. In this factual background the second proviso to section 64(3) of the Income Tax Act, is attracted rather than the third proviso. The second proviso contains the following provision with regard to such an objection: “provided further that the place of assessment shall not be called in question by an assessee if he has made a return under sub-section (1) of section 22 and has stated therein the principal place wherein he carried on his business, profession or vocation, or if he has not made such a return shall not be called in question after the expiry of the time allowed by the notice under sub-section (2) of section 22 or under section 34 for the making of a return.” On the strength of this proviso the assessee having itself disclosed its principal place of business as Railway Road, Gujrat, was precluded from objecting to the territorial jurisdiction of the Income Tax Officer, Gujranwala within whose territorial jurisdiction of cases Gujrat fell. This provision being a special provision as compared to third proviso fully governed the respondent assessee as he could not derive benefit from third proviso. Besides, after having once unsuccessfully agitated and having not subsequently pressed his objection to the territorial jurisdiction, he could not have revived the same at a later stage of the proceedings with a view to avoid the assessment. In the circumstances and for the reasons recorded, this appeal is accepted, the judgment of the High Court is set aside and answer is returned that the Tribunal was not legally justified in annulling this assessment on the point of jurisdiction. Bombay Cloth House, Lahore v. Income Tax Officer, Circle-I, Zone-A, Lahore and others – [1993] 67 TAX 398 (H.C.Lah.) 775.
Appellant‟s principal place of business was at Karachi; assumption of jurisdiction by Income Tax Officer, Lahore held unlawful.
Both the learned counsel have drawn our attention to sub-section (4) of section 5 of the Income Tax Ordinance, 1979 which provides that in the event of dispute arising as to the principal place of business of assessee, the same has to be referred to the Regional Commissioner / Central Board of Revenue as the case may be. This aspect of the matter may also be agitated in the appeal. _______________
508 Section 5
Income Tax Digest.
JURISDICTION IN GENERAL
Philips Electrical Co. Ltd. v. Commissioner of Taxes (South) Zone, Dacca – [1993] 68 TAX 149 (H.C.Dacca) 776.
No assessment can be made unless the assessing officer has valid jurisdiction over the case of assessee.
In view of the provisions of sections 10(9) and 2(14AA) we agree with the view of the Tribunal that the assessee is a person and was a resident in the taxable territories for the previous year ending on 31.12.1970 as the control and management of the affairs of the assessee-company was situated wholly in Pakistan, which according to definition given in the Act is taxable territory as the previous year ended before March 26, 1971 on which date Bangladesh emerged as an independent State. We also agree with the view of the Tribunal that under section 4(1) of the Act the assessee is liable to he taxed for the income of the previous year which ended on 31.12.1970 as the total income of the assessee includes all income, profit and gains from whatsoever source derived and the income accrued in Pakistan for the previous year was deemed to be income by fiction of law accrued in the taxable territory and was assessable for the assessment year 1971-72. Although the assessee company is a resident in the taxable territory and income earned is subject to taxation as enjoined under section 4(1) of the Act, 1922, yet we hold that the Tribunal is not correct in holding that the DCT was justified in making the assessment on the income of the assessee of the previous year ending on 31.12.1970 for the reasons to be recorded presently. The assessee in the present case had already been taxed for the income of the previous year ending on 31st December, 1970 in Pakistan. Therefore we are of the opinion that where an income of an assessee had already been taxed, the same income again cannot be taxed in the taxable territory on the ground that the assessee is resident in the taxable territory meaning, here, Bangladesh. From persual of the Circular we do not find any reference to any law on the strength of which it was made. Conspicuous absence of reference in the circular about the authority on the strength of which the circular is issued leads us to hold that this circular cannot be equated with statutory law as it was not made by the Parliament or by a competent law-making authority and in the light of the observation made in the case of Commissioner of Income Tax v. Pakistan Match Co. Ltd. [1978] 6 BTD 130 we hold that circular is no substitute for legislation by which tax can be levied. From the circular
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we also do not find that it authorises assessment on the income accruing during the previous year ending on 31.12.1970 to an assessee in Bangladesh even though the same income had already suffered tax in Pakistan. As we hold that the same income cannot be taxed twice contrary to the principle of Taxation, we are not inclined to consider the arguments on tax on the successor. Moreover, the question of succession does not attract the present case as the tax has not been assessed on the Philips Bangladesh Limited, a company incorporated in Bangladesh on July 1, 1973, rather it has been taxed on the assessee Philips Electric Co. Ltd. Cases referred to: Imperial Tobacco Co. of India Ltd. v. Commissioner of Income Tax (PLD 1958 SC 125); Commissioner of Income Tax v. Express Newspapers Ltd. 40 ITR 38; RKB Motors and Timber (P) Ltd. v. Commissioner of Income Tax [1968] ITR 794 and Commissioner of Income Tax v. Pakistan Match Co. Ltd. [1978] 6 BTD 130.
Kishandas Sakuio v. Commissioner of Income Tax, & others – [1987] 56 TAX 35 (H.C.Kar.) 777.
Income Tax Officer could not pass assessment order unless specifically authorised to assess the return filed by the assessee.
“. . . . . the Income Tax Officers are conferred jurisdiction by the respective Commissioners of Income Tax. Since the Income Tax Officer, Central Reporting Agency, Karachi exercised his jurisdiction under the Commissioner of Income Tax, Central, Karachi, he ceased to have jurisdiction over Civil Division of Hyderabad as soon as that Division was taken. out from the jurisdiction of the Commissioner of Income Tax, Central. Karachi, by Notification dated 29.9.1967 and he did not have jurisdiction to have passed the assessment order on 29.9.1968, unless it were shown that he was specially authorised to assess the returns filed by the applicants.” Julian Hoshang Dinshaw Trust v. Income Tax Officer, CircleXVIII, South Zone, Karachi and two others – [1981] 43 TAX 92 (H.C.Kar.) = 1981 PTD 53 778.
Erroneous decision by the Income Tax Officer in the exercise of his jurisdiction cannot be called an act totally lacking in jurisdiction.
“Under sub-section (6) of section 5 of the Income Tax Ordinance, 1979, every Income Tax Officer has all the powers conferred by or under the Ordinance on an Income Tax Officer in respect of any income accruing or arising or received or deemed, under any provision of the
510 Section 5
Income Tax Digest.
Ordinance, to accrue or arise or be received within the area assigned to him. Whether a particular item of income of an assessee who has filed a return of his income is chargeable to tax under section 9 of the said Ordinance is a matter within the jurisdiction of the Income Tax Officer before whom a Return is filed. Therefore, merely because on a proper interpretation of the relevant provisions of the Income Tax Ordinance and particular amount received as income by the assessee is not computable as income or chargeable to tax, cannot deprive the Income Tax Officer of his jurisdiction to determine the question. A decision by an Income Tax Officer wrongly including a particular item of receipts as taxable income is clearly, therefore, an erroneous decision in the exercise of his jurisdiction and cannot be called an act totally lacking in jurisdiction.” Case referred to : Muhammad Hussain v. Sikander (PLD 1974 S.C. 139).
Seth Kanhaiya Lal Goenka, In re – [1941] 9 ITR 25 (All.) 779.
An order passed under section 64(3) of the 1922 Act has not been made appealable.
Under section 30 of the 1922 Act an assessee has been given the right to appeal to the Assistant Commissioner against the Income Tax Officer‟s decision on certain points only and those points do not cover a decision under section 64. The wisdom of the Legislature in not allowing an appeal under section 64 is obvious because it could not be expected that a subordinate officer should have the right to question the decisions of his superior officer. Tarak Nath Bagchi v. Commissioner of Income Tax – [1946] 14 ITR 319 (Cal.) 780.
Section 64(3) of 1922 Act does not apply when a case is transferred at assessee‟s own request.
Section 64(3) of 1922 Act [section 124(4) of 1961 Act] refers to a position when a context exists as to the correct assessment area; it does not apply when there is an express request for the assessee‟s own convenience that a particular Income Tax Officer should take charge of the matter of Income Tax assessment. Where a case was transferred at the assessee‟s own request to another ward, and later the assessee questioned this Income Tax Officer‟s jurisdiction to issue notice of reassessment, it was held that the objection was devoid of merit. _______________
511 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
JURISDICTION OF ASSESSING OFFICER
Seth Kanhaiyalal v. Commissioner of Income Tax – [1937] 5 ITR 739 (All.) 781.
Mere fact that an Income Tax Officer has incorrectly designated himself will not divest him of jurisdiction which he genuinely possesses.
The mere fact that the official in question has incorrectly or inadvertently designated himself as the Income Tax Officer instead of the Additional Income Tax Officer cannot divest him of his jurisdiction. Dayaldas Khushiram v. Commissioner of Income Tax – [1943] 11 ITR 67 (Bom.) 782.
Income Tax Act does not determine place of assessment, what it does is to determine officer who is to have power to assess and in some cases it does so by reference to locality.
The Income Tax Act does not determine place of assessment, what it does is to determine the officer who is to have power to assess and in some cases it does so by reference to locality. Dayaldas Kushirarn v. Commissioner of Income Tax – [1940] 8 ITR 139 (Bom.) 783.
As far as practicable an assessee should be assessed locally.
Section 64 was intended to ensure that as far as practicable an assessee should be assessed locally, and the area to which an Income Tax Officer is appointed must, so far as the exigencies of tax collection allow, bear some reasonable relation to the place where the assessee carries on business or resides. Bisheshar Prasad Parshotam Das v. Commissioner of Income Tax – 7 ITC 74 (All.) 784.
Where an assessee carries on business in more places than one, he shall be assessed by the Income Tax Officer of the area in which his principal place of business is situate.
Where an assessee carries on business in more places than one, he shall be assessed by the Income Tax Officer of the area in which his principal place of business is situate. However, an Income Tax Officer within whose jurisdiction any income, profits or gains accrued to a person, is competent to issue a notice under section 22(2) pending the determination by the Commissioner under section 64(3), of the question of jurisdiction.
512 Section 5
Income Tax Digest.
Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax – [1943] 11 ITR 559 (Bom.) 785.
Income Tax Officer of area in which firm is carrying on business has jurisdiction to make the assessment of the partner under section 64(1) of 1922 Act.
The Income Tax Officer of the area in which the firm was carrying on business had jurisdiction to make the assessment of the partner under section 64(1) of the 1922 Act. Abhey Rarn Chunni Lal, In re – [1933] 1 ITR 126 (All.) 786.
Income Tax Officer assessing head office of assessee can call upon assessee to file return of income of all places of business besides head office.
The Income Tax Officer assessing the head office of the assessee has jurisdiction to call for return of the assessee‟s total income where the assessee is carrying on business at several places. Bisheshwar Nath & Co., In re – [1942] 10 ITR 103 (All.) 787.
In case of contacts.
In case of contracts the Income Tax Officer of place where contract is accepted has jurisdiction to pass an assessment order. Bisheshwar Nath and Co., In re – [1942] 10 ITR 103 (All.) 788.
In case of concurrent jurisdiction, if one Income Tax Officer has issued notice, other Income Tax Officer may process case without issuing another notice.
Where two or more Income Tax Officers have jurisdiction in respect of the same income, they exercise concurrent jurisdiction in the matter of issuing notices to the assessee and where notices have been issued by one officer it is unnecessary for the other officer to issue the same notices again. Haji Taj Mohammad Haji Abdul Rahman Commissioner of Income Tax – 6 ITC 240 (All.) 789.
&
Co.
v.
Additional Income Tax Officer.
An Addl. Income Tax Officer having within his local jurisdiction the situation of the assessee‟s business, can issue a notice under section 34 of the 1922 Act in connection with a case which has been formerly dealt with by the Income Tax Officer. _______________
513 JURISDICTION OF INCOME TAX AUTHORITIES
Section 5
OBJECTION AS TO INCOME TAX OFFICER‟S JURISDICTION
Seth Kanhaiyalal v. Commissioner of Income Tax – [1937] 5 ITR 739 (All.) 790. Objection as to Income Tax Officer‟s jurisdiction cannot be raised for first time in appeal against assessment after assessment has been made. Under section 64(3) of the 1922 Act the question of determination as to the place of assessment only arises if an objection is taken by the assessee and the Income Tax Officer has any doubts as to the matter. But the determination is to be by the Commissioner or the Central Board of Revenue. The Act does not contemplate any other authority. Thus, the objection as to the Income Tax Officer‟s jurisdiction cannot be raised for the first time in appeal against the assessment after the assessment has been made. Talchar Sabai Grass Trading Co. Ltd. v. Commissioner of Income Tax – [1947] 15 ITR 455 (Pat.) 791. Objection to place of assessment must be raised before assessing authority. The second proviso introduced to section 64(3) by the Act of 1939 makes it clear that the assessee is not entitled to raise the question as to the place of assessment if he has not raised it in the return filed by him in response to the notice under section 22(1) or if he has not made any return. Dma Nath Hernraj of Cawnpore v. Commissioner of Income Tax – 2 ITC 304 (All.) 792. Where the principal place of business of an assessee is determined under section 64(3) of the 1922 Act, it is final, and cannot be interfered with in reference. Where the principal place of business of an assessee is determined under section 64(3) of the 1922 Act, it is final, and cannot be interfered with in reference. _______________
OPPORTUNITY OF HEARING
Seth Kanhaiya LaI Goenka, In re – [1941] 9 ITR 25 (All.) 793.
Assessee is to be given an opportunity of representing his views but it is not necessary that he should be heard.
The words occurring in the proviso to section 64(3) are that the assessee should have had an opportunity of representing his views
514 Section 5
Income Tax Digest.
and not that the assessee should have been formally heard on his objection. _______________
SCOPE AND APPLICATION OF PROVISION
Dayaldas Kushirarn v. Commissioner of Income Tax – [1940] 8 ITR 139 (Bom.) 794.
Case cannot be transferred where assessment has been completed.
The right to transfer cases or classes of cases under section 5(2) covers pending assessments, but does not cover a case in which an assessment has been completed. Bisheshwar Nath & Co., In re – [1942] 10 ITR 103 (All.) 795.
Transfer of case can be effected even when no proceedings are pending it will be for proceedings to be instituted in future.
Where two Income Tax Officers (Delhi and Kanpur) had jurisdiction over the assessee and the assessment was completed by the Income Tax Officer, Kanpur to whom the case was transferred after the issue of notice by the Income Tax Officer, Delhi, and neither the assessee nor either of the Income Tax Officers raised any question about jurisdiction: Held that the Income Tax Officer, Delhi had acted legally in transferring the case to Income Tax Officer, Kanpur without the question of jurisdiction having been decided by the Commissioner. It was wrong to think that such transfer could only have been made after the place of assessment had been determined by the Commissioner.
515 GUIDANCE TO DEPUTY COMMISSIONERS
Section 7
Section 7* Guidance to Deputy Commissioners
PAGE NO
GUIDANCE TO ASSESSING OFFICERS
796.
797.
798. 799.
800.
801.
802.
*
Deputy Commissioner of Income Tax can be guided by _ higher authorities. 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.) Deputy Commissioner of Income Tax is not subordinate to _ Appellate Assistant Commissioner. 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.) _ Section 7 is to be interpreted in restricted manner. 1992 SCC 950 = [1992] 66 TAX 147 (S.C.Pak.) = 1992 PTD 167
516
516 516
Guidance does not mean interference in judicial work. _ 1992 SCC 950 = [1992] 66 TAX 147 (S.C.Pak.) = 1992 PTD 167
517
Issuance of notice on instructions of the IAC alone is invalid _ 1992 SCC 950 = [1992] 66 TAX 147 (S.C.Pak.) = 1992 PTD 167
517
Guidance cannot be construed to allow interference in quasi_ judicial work of assessments officer. [1991] 63 TAX 113 (H.C.Kar.) = 1991 PTD 217 = 1991 PTD 217
517
Central Board of Revenue‟s circular No. 21 of 1941 restricting provisions for keeping aside certain portion of premium income for an unexpired risk is not based on any provision of the Act or rules made thereunder, hence has no _ binding force on the assessee. [1982] 46 TAX 125 (H.C.Kar.) = 1982 PLD 684
518
Corresponding to section 5(7B) of the 1922 Act.
516 Section 7
Income Tax Digest.
Section 7* Guidance to Deputy Commissioners
GUIDANCE TO ASSESSING OFFICERS
H.M. Abdullah v. Income Tax Officer, Circle V, Karachi & 2 others – 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak.) 796.
Deputy Commissioner (Income Tax) can be guided by higher authorities.
As a general rule an authority in whom discretion is vested under provisions of statute cannot bargain away or fetter its powers. The position under the Income Tax Ordinance is, however, different wherein in section 7 such fetters are authorised by the statute itself. 797.
Deputy Commissioner of Income Tax is not subordinate to Appellate Assistant Commissioner.
The D.C. (Income Tax) is not subordinate to the Appellate Additional Commissioner as he does not hold any administrative control over him; such control is exercised only by the Inspecting Additional Commissioner and the other higher authorities on the administrative side. Under the law only the Inspecting Additional Commissioner and other higher authorities, i.e., Commissioner of Income Tax, Commissioner of Income Tax and CBR are empowered to render assistance and guidance to the Deputy Commissioner of Income Tax or issue instructions to him and there is no room for exercise of such powers by the Appellate or Revisional authorities. Al-Ahram Builders (Pvt.) Ltd. v. Income Tax Appellate Tribunal 1992 SCC 950 = [1992] 66 TAX 147 (S.C.Pak.) = 1992 PTD 167 798.
Section 7 is to be interpreted in restricted manner.
The assessment proceedings are quasi-judicial in nature and on important matters like issuance of notice under section 65, the assessing officer has to apply his own mind rather than acting merely on the instructions of his superiors.
*
Corresponding to section 5(7B) of the 1922 Act.
517 GUIDANCE TO DEPUTY COMMISSIONERS
799.
Section 7
Guidance does not mean interference in judicial work.
In no circumstances, the interpretation of section 7 can be extended to include interference in judicial work. Administrative instructions if amount to interference in judicial exercise of powers vested in the Deputy Commissioner of Income Tax, then any resort to section 7 would be illegal. 800.
Issuance of notice on instructions of the Inspecting Additional Commissioner alone is invalid
If the Deputy Commissioner of Income Tax issues notice under section 65, without applying his own mind, on the instructions of his superior acting mechanically being subordinate to them, such a notice will be invalid. Judicial Analyses : In two judgments cited above, conflicting viewpoints appear to have been expressed by the learned judges of the Honourable Supreme Court. In the second case, the learned judge, while dealing with a different question, opined that while interpreting section 7 a wrong assumption was applied that assessing officers are subordinate to appellate authorities whereas the correct position is that administratively these authorities exercise no control over the assessing officers. The decisions of the appellate authorities are, however, binding on the assessing officers. The interference by the administrative authorities in quasi-judicial work of assessing officers is no doubt undesirable and against the principles of natural justice. Both the judgments must, therefore, be read in this context. Section 7 does provide powers to administrative authorities to guide subordinate authorities but “guidance” cannot be equated with “interference” in quasi-judicial work. As regards appellate authorities although they do not have administrative control over assessing officers yet their judgments are binding on the officers in the said cases where orders were made. On law point, the findings of Honourable High Courts and Supreme Court have binding force.
H.M. Abdullah v. Income Tax Officer, Circle-V, West Zone, Karachi – [1991] 63 TAX 113 (H.C.Kar.) = 1991 PTD 217 = 1991 PTD 217 801.
Guidance cannot be construed to allow interference in quasijudicial work of assessment officer.
The point for consideration is whether under section 7, Income Tax Officer could have sought guidance or instructions as he has done in the present case. Section 7 seems to be a general provision provided to seek guidance and instructions in cases of complicated nature where the Income Tax Officer is not able to understand or decide the case in proper manner. There may be cases in which the assessing officer may
518 Section 7
Income Tax Digest.
feel difficulty and to resolve that difficulty section 7 has been introduced which is a completely new section and did not find place in the Income Tax Act, 1922. The procedure provided in section 7 has to be exercised in a conscious manner. The authority should realise that the assessment proceeding is of quasi-judical in nature and it is possible that the Income Tax Officer may seek assistance or guidance from his superior who may be revisional or appellate authority and in such circumstances the very purity and sanctity of the hierarchy which provides for original and appellate jurisdiction is completely tarnished. If the Income Tax Officer before making the assessment seeks direction from his superior and on their direction passes the assessment order then in such circumstances the appellate and revisional jurisdiction will be completely meaningless, This could never be the intention of the legislature and that is why section 7 has to be interpreted in a restricted manner. It is only in difficult and complicated cases that guidance may be sought before any assessment order has been passed or before the Income Tax Officer has formed a definite opinion. Although he had sought approval for reopening the case there is no provision which provides for seeking approval while framing the assessment order. It is significant to note that under section 65(2) the approval of the Inspecting Assistant Commissioner is necessary but correspondingly obtaining his approval for the order proposed to be passed by the Income Tax Officer has not been provided. Therefore, it seems clear that the assessing officer having obtained the approval has to apply his mind independently . . . . . Therefore, in our view the assessment made in pursuance of such a direction was without lawful authority and of no legal effect. Cases referred to : (1990) 61 TAX 105 (S.C.Pak.) = (PLD 1990 SC 399); (PLD 1990 SC 338); (1988 PTD 1014); (1989 PTD 114) and (1991) 63 TAX 16 (H.C.Kar.) = (1990 PTD 873). Case Review : EXPLAINED by honourable apex court in 1993 SCC 1018 = [1993] 68 TAX 29 (S.C.Pak).
Commissioner of Income Tax (Central), Karachi v. New Jubilee Insurance Co. Ltd. – [1982] 46 TAX 125 (H.C.Kar.) = 1982 PLD 684 802.
Central Board of Revenue‟s circular No. 21 of 1941 restricting provisions for keeping aside certain portion of premium income for an unexpired risk is not based on any provision of the Act or rules made thereunder, hence has no binding force on the assessee.
519 GUIDANCE TO DEPUTY COMMISSIONERS
Section 7
Section 5(8) of the Act binds the Income tax Officer to follow the orders, instructions and directions of the Central Board of Revenue but such orders, instructions and directions cannot bind an assessee, if the same are not based or do not rest for their validity on some provision of the Act or the Rule framed thereunder. Since it is not shown that the Central Board of Revenue under any provisions of the Act or the Rules framed thereunder could restrict the provision for keeping aside certain portion of premium income for an unexpired risk to 40 per cent or in case of a greater risks to 50 per cent, therefore, such restrictions could not have any binding force on the assessee.
520 Section 8
Income Tax Digest.
Section 8* All officers to follow the orders of the Central Board of Revenue
PAGE NO
LEGALITY OF CBR‟S ORDERS, INSTRUCTIONS & DIRECTIONS
803.
804.
805. 806.
807. 808. 809. 810.
811.
CBR‟s interpretation of law cannot be termed as judicial _ interpretation. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.) CBR is not competent to issue instructions of judicial/quasi_ judicial nature 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.) _ Interpretation of statute is not CBR‟s domain. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.) Instructions of CBR are binding on the assessing officers. _ 1991 SCC 777 = [1992] 65 TAX 102 (S.C.Pak.) = 1992 SCMR 250 _ CBR‟s circular deviating from law is not valid. 1964 SCC 195 = [1964] 10 TAX 206 (S.C.Pak.) _ Departmental circulars have no legal force. 1965 SCC 240 = [1965] 12 TAX 57 (S.C.Pak.) _ CBR has no authority to interpret the law. [2000] 82 TAX 539 (H.C.Lah.) = 2000 PTD 3351
522
522 522
523 523 524 524
Transfer of case or class of cases constitutes administrative _ matter and could not be challenged. [1996] 74 TAX 89 (H.C.Lah.)
525
Central Board of Revenue‟s cannot interpret a particular _ provision of enactment or notification. [1984] 50 TAX 1 (H.C.Kar.)
525
POWERS OF CBR TO GIVE DIRECTION TO ITO
812.
*
Assessing officer‟s judicial discretion cannot be controlled by _ the Board. [1942] 10 ITR 152 (All.)
Corresponding to section 5(8) of the 1922 Act.
526
521 ALL OFFICERS TO FOLLOW THE ORDERS OF THE CBR
Section 8 PAGE NO
BINDING FORCE OF CIRCULARS
813.
Circulars contrary to statutory provisions are nevertheless _ binding on department. [1937] 5 ITR 329 (Lahore)
526
522 Section 8
Income Tax Digest.
Section 8* All officers to follow the orders of the Central Board of Revenue
LEGALITY OF CBR‟S ORDERS, INSTRUCTIONS & DIRECTIONS
Central Insurance Co. & other, v. CBR, Islamabad etc. – 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.) 803.
CBR‟s interpretation of law cannot be termed as judicial interpretation.
The Central Board of Revenue does not figure in the hierarchy of the forums provided under the Ordinance for adjudication of assessee‟s liability as to tax. In view of the matter, any interpretation placed by the CBR on a statutory provision cannot be treated as pronouncement by a forum competent to adjudicate such an acquisition judicially or quasi-judicially. Any interpretation of legal provision by the CBR can be merely treated as administrative interpretation and not judicial interpretation. 804.
CBR is not competent to issue instructions of judicial/quasijudicial nature
We may point out that the Central Board of Revenue cannot issue any administrative direction in the nature which may interfere with the judicial or quasi-judicial function entrusted to the various functionaries under the Statute. 805.
Interpretation of statute is not CBR‟s domain.
The interpretation of any provisions of the Ordinance can be rendered judicially by the hierarchy of the forums provided for under various sections of the Ordinance, namely, the Income Tax Officer, Appellate Assistant Commissioner, Appellate Tribunal, High Court and this Court and not by the CBR. Therefore, interpretation of statutes is not CBR‟s domain.
*
Corresponding to section 5(8) of the 1922 Act.
523 ALL OFFICERS TO FOLLOW THE ORDERS OF THE CBR
Section 8
Julian Hoshang Dinshaw Trust and Others v. Income Tax Officer, Circle XVIII, South Zone, Karachi & others 1991 SCC 777 = [1992] 65 TAX 102 (S.C.Pak.) = 1992 SCMR 250 806.
Instructions of CBR are binding on the assessing officers.
The orders, instructions and directions of the Central Board of Revenue (CBR) are binding on all the officers entrusted with the execution of the statute. In the presence of instructions issued by the CBR in the favour of the assessees it would not be possible for the assessing officers to render an independent judgment. Commissioner of Income Tax, East Pakistan, Dacca v. Noor Hussain – 1964 SCC 195 = [1964] 10 TAX 206 (S.C.Pak.) 807.
CBR‟s circular deviating from law is not valid.
“In my view, if there is a departure from the law involved in the provision for relaxation contained in the circular, then that circular is to the extent of the deviation, invalid and ineffective, and power thereunder is illegally exercised. The impression of such a departure conveyed by the following passage in the circular, viz:“On a strict interpretation of a law, a firm can be registered only from the date on which the partnership deed has been executed. Since this would create hardship, the Board is disposed to agree to the benefit of registration being allowed for the full previous year, provided of course, the other condition laid down for the registration of the firms under section 26A are fulfilled.” The Board‟s view as to the interpretation of law did not have the force of law, and the expectation would be, particularly where a fiscal statute is involved which should be implemented with strict impartiality, that reference to inclination towards relaxation or otherwise would have been avoided. There having been change made in the law, so that the creation of a firm was required to be by written instrument of known date, and it was no longer possible to refer such creation to some parent instrument, under which firms might claim to have been constituted on dates which might well become the subject of controversy, the question whether the law did not have room to accommodate instruments creating a firm or recording the creation of a firm, from a date anterior to that of the instrument itself, was one on which two views, might well be held. To retain, in this respect, the less strike interpretation available from the earlier use of the words “constituted under”, until corrected by some authoritative pronouncement by a court, would therefore have been unexceptionable. On the other hand, to refer expressly to inclination
524 Section 8
Income Tax Digest.
or disposition the guiding factor, while admitting the compulsive effect, as to the extent of words newly used, is calculated to give an unfortunate impression, as to the extent of the Board‟s conception of its own power to evade the obligations of the law. There is, of course no such power”. United Netherlands Navigation Co. Ltd. v. Commissioner of Income Tax, South Zone (West Pakistan), Karachi – 1965 SCC 240 = [1965] 12 TAX 57 (S.C.Pak.) 808.
Departmental circulars have no legal force.
The circulars/instructions issued by the Department have no legal force. However, they do furnish interpretation which the Department itself has been following and accepting. Kohinoor Raiwind Mills Limited and others v. Central Board of Revenue through Member, Income Tax, Government of Pakistan, Islamabad and 2 others – [2000] 82 TAX 539 (H.C.Lah.) = 2000 PTD 3351 809.
CBR has no authority to interpret the law.
The other contention of the learned counsel is equally well-founded. Although under section 3(a) of the Income Tax Ordinance, 1979 the Central Board of Revenue has the power to administer the law but it certainly has no jurisdiction, power or authority to issue a circular in respect of a contentious issue which would tantamount to whittling down the discretion vesting in the adjudicating officers and authorities under the Income Tax Ordinance. This question was examined by the Supreme court of Pakistan in the case of Messrs Central Insurance Co. v. The Central Board of Revenue, Islamabad and others (1993 SCMR 1232).... The judgement was cited with approval in the subsequent case of the Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited Lahore (1999 SCMR 1442) in which it was observed:It seems to be well-settled proposition of law that the Central Board of Revenue, or for that matter even the Federal Government, cannot control or curtail judicial adjudication power vested in the forums provided under the relevant law by giving a particular interpretation to a particular provision of the relevant law or by issuing Notification/S.R.O. for that purpose.
525 ALL OFFICERS TO FOLLOW THE ORDERS OF THE CBR
Section 8
National Electric Co. (Pvt.) Ltd., Gujranwala v. Commissioner of Income Tax, Gujranwala Zone, Gujranwala – [1996] 74 TAX 89 (H.C.Lah.) 810.
Transfer of case or class of cases constitutes administrative matter and could not be challenged.
Learned counsel for the petitioner has argued that the Tribunal was not justified in holding that the Central Board of Revenue had exercised its authority with law by assigning the cases to the Inspecting Assistant Commissioner of Central Zone, Lahore. This argument needs not be averted to as almost on the similar ground the petitioner had challenged the order of the Central Board of Revenue by filing Writ Petition No. 1168/82 which was dismissed on 15.5.1982 with the following observations: “I do not think I can accept the contention of the learned counsel. Apportionment or distribution or work among the various officers of the income Tax Department is essentially an administrative matter and is to be regulated by considerations mainly of convenience. The Central Board of Revenue stands at the apex in the hierarchy of Income Tax Authorities. Under section 8 of the‟ income Tax Ordinance it can give binding directions to all other Income Tax Authorities. It is, therefore, difficult to accept the contention of the learned counsel that in exercise of its powers under section 8, it cannot transfer a case or a class of cases from one authority to another. The cases cited by the learned counsel are easily distinguishable for these deal with mallies which are not entirely of administrative nature, but on the other adversely affected the rights of interests of citizens. The learned counsel has not been able to point out how the petitioner would stand to suffer in case the proceedings are conducted by respondent No. 1, instead of by the Income Tax Officer who originally dealt with this matter.” The order passed by this Court was upheld by the Supreme Court. The petitioner cannot, therefore, be allowed to reagitate the same matter again. International Beverages Ltd. v. Commissioner of Income Tax, Karachi – [1984] 50 TAX 1 (H.C.Kar.) 811.
Central Board of Revenue‟s cannot interpret a particular provision of enactment or notification.
We are inclined to agree with Mr. Khalid Anwar that a letter from the Deputy Director of Inspection (Taxes) could not have reduced the
526 Section 8
Income Tax Digest.
period of tax holiday if it was under the section or under a notification a longer period was provided. We are also inclined to agree with him that the jurisdiction to interpret a particular provision of enactment or a notification is within the competency of a Tribunal before which it is canvassed. _______________
POWERS OF CBR TO GIVE DIRECTION TO ITO
Hon’ble Mr. Justice Iqbal Ahmad, In re – [1942] 10 ITR 152 (All.) 812.
Assessing officer‟s judicial discretion cannot be controlled by the Board.
A Commissioner has no option but to obey departmental orders of the Central Board of Revenue, but it cannot possibly be said that his discretion can be „legally‟ controlled inasmuch as the discretion is vested in him by statute and there is no statutory control qua such discretion. A court or an official functioning as a Court must exercise its discretion judicially; but that is the only form of control which is known to the law. Thus, where the Commissioner had sought instructions from the Board whether he should exercise his power of revision, it was held that his discretion under section 33 of the 1922 Act could not be legally controlled by the Board. _______________
BINDING FORCE OF CIRCULARS
MeIa Mal Shiv Dayal v. Commissioner of Income Tax – [1937] 5 ITR 329 (Lahore) 813.
Circulars contrary to statutory provisions are nevertheless binding on department.
The Board of Revenue is competent to issue circulars under section 8 of the Ordinance [Parallel to section 5(8) of the 1922 Act]. The circulars so issued have got the force of law. All officers of the Department are bound by the said circulars. The benevolent circulars issued by the Board are in the nature of administrative relief. They really „supplant‟ the law. The circular can afford administrative relief even beyond the relevant terms of the statute. It can deviate from the provisions of the Act. Such circulars are binding on the officers of the Department. It is not open to the Department to contend, even in cases where the circular goes beyond the terms of the section, that the
527 ALL OFFICERS TO FOLLOW THE ORDERS OF THE CBR
Section 8
circular has no legal effect or should not be given effect to. The circulars would go to the assistance of the assessees. It is settled law that the circulars cannot impose any burden on the taxpayer. But, by the issue of a circular, the rigour of the law can be relaxed by giving administrative relief. Apart from the fact that such circulars are binding on the officers of the Department, even if the circulars are relied on for the first time in the High Court during the course of hearing, the assessee will be entitled to the benefit afforded by the circular. The court is bound to take note of the circular.
528 Section 9 & 10
Income Tax Digest.
Section 9 & 10* Charge of Income Tax, Super Tax etc.
PAGE NO
CHARGE OF INCOME TAX, SUPER TAX AND SURCHARGE
814.
815.
816. 817.
818. 819. 820. 821.
Charging section and claim of exemptions - How to be _ applied. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ Super tax is chargeable in addition to income tax. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
545
545
Effects of entries in the books of accounts on chargeability. _ 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.)
545
Chargeability and expenditure outside _ territories. 1960 SCC 87 = [1960] 2-TAX (S.C.Pak.)
545
taxable (III-538)
Surcharge leviable on the amount of taxes is a valid charge. _ [1992] 65 TAX 138 (H.C.Kar.) _ Surcharge is different from levy of income tax. [1983] 47 TAX 158 (H.C.Kar.)
546 547
Section 55 of 1922 Act is the charging section for super tax. _ [1977] 36 TAX 216 (H.C.Lah.)
547
Service charges for payment to employees is not income of a _ hotel, though the same is posted in accounts. [1973] 28 TAX 96 (H.C.Kar.)
547
SCOPE OF ARTICLE 165 VIS-A-VIS CHANGEABILITY IN THE CASE OF PROVINCIAL GOVERNMENTS
822.
*
Income Tax Law does not extend to bodies owned by provincial governments [Position prior to insertion of Article _ 165A in the 1973 Constitution]. 1984 SCC 604 = [1986] 53 TAX 47 (S.C.Pak.)
548
The charging section 9 has to be read in conjunction with Articles 165, 165A of the Constitution of Pakistan; corresponding to sections 3, 3B, 55, 56 and 58 of the 1922 Act read with sections 155 and 204 of Government of India Act 1935.
529 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10
_
PAGE NO
823.
Exemption to Provincial governments - Scope of. 1955 SCC 13 (FC) [1960] 2-TAX (Suppl.-3) (S.C.Pak.) = PLD 1956 F.C. 72
552
824.
A statutory corporation of a provincial government is a separate and distinct entity and is not entitled for _ exemption. [1995] 71 TAX 221 (H.C.Lah.)
552
825.
Exemption from tax under Article 165 of the Constitution is not available to corporations owned by a provincial _ government. [1980] 41 TAX 44 (H.C.Kar.)
553
826.
Goods manufactured by the Provincial Government and exported outside the province through selling and commission agents are not exempt from income tax in the _ hands of the Provincial Government. [1976] 34 TAX 71 (H.C.Lah.)
555
827.
Sind Industrial Trading Estate Limited, a department of the Provincial Government; is not immune from taxation. _ [1975] 31 TAX 114 (H.C.Kar.)
556
828.
Road Transport Board performing functions for the Provincial Government under its directions is not a taxable _ entity. [1974] 29 TAX 53 (H.C.Lah.)
558
LIABILITY TO TAX WHEN ARISES
829.
830. 831. 832.
Liability under the Income Tax gets crystalised on the first day of the assessment year with the passage of the Finance _ Act/ Ordinance. 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) _ Time of accrual of income, meaning of. [1983] 48 TAX 145 (H.C.Kar.) _ „The thing to be taxed‟ is the amount of profits or gains. 5 ITC 363 (PC) Liability to tax arises only under charging section, and that too after close of previous year, though its quantification is _ made later. [1948] 16 ITR 240 (PC)
CONCEPT OF INCOME
833. 834.
Scope of „Income‟ (S.C.Pak.)
_
559 560 561
561
1980 SCC 527 = [1981] 43 TAX 18
Income from undisclosed source cannot be termed as casual _ or non-recurring. 1980 SCC 527 = [1981] 43 TAX 18 (S.C.Pak.)
561
562
530 Section 9 & 10
835. 836. 837.
838.
839. 840. 841.
842. 843.
844.
845.
Income Tax Digest.
_
Burden to prove exemption is on assessee. 1980 SCC 527 = [1981] 43 TAX 18 (S.C.Pak.) _ Income cannot be taxed twice. 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak.) Insurance Company is required to file return as one unit and not under different heads prescribed in section 6 of 1922 _ Act [corresponding to Section 15 of the Ordinance]. [1975] 32 TAX 232 (H.C.Kar.) The Central Government made good the losses sustained by the Corporation within three years of its incorporation _ amount paid held to be “income” of the PIAC. [1975] 32 TAX 225 (H.C.Kar.) _ Word „income‟ is of elastic ambit. [1938] 6 ITR 157 (All.) _ Word „income‟ has to be given its ordinary meaning. [1946] 14 ITR 561 (All.) Income connotes a periodical monetary return „coming in‟ with some sort of regularity or expected regularity _ from definite sources. 6 ITC 178 (PC); [1940] 8 ITR 550 (Pat.) _ „Income‟ need not be recurrent. [1943] 11 ITR 513 (PC)
PAGE NO
562 562
563
564 565 566
566 567
The concept of „income‟ is not limited by the words „profits‟ _ and „gains‟. [1938] 6 ITR 157 (A1l.); [1946] 14 ITR 561 (All.)
567
Meaning of the word „income‟ in „income, profits and gains‟ _ is not limited by „profits and gains‟. [1935] 3 ITR 23 (PC)
568
Question whether a receipt is taxable may in certain cases _ depend upon the nature of business. [1935] 3 ITR 305 (PC)
568
SCOPE OF PROTECTION UNDER THE ECONOMIC REFORMS PROTECTION ACT OF 1992
846. 847. 848.
Scope of protection under the Economic Reforms Protection _ Act of 1992. 2000 PTD 303
569
Scope of Protection of Economic Reforms Act, 1992 vis-a-vis _ other laws. 1998 PTD 370 (H.C.Lah.)
570
Provisions of Economic Reforms Act, 1992 overrides Income Tax Law to the extent protections are provided in the former _ enactment. [1997] 76 TAX 302 (H.C.Lah.)
571
531 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
CHARGE ON BENAMI TRANSACTIONS
849.
Charge on benami transactions. (H.C.Lah.)
_
[1980] 42 TAX 33 572
TESTS TO DETERMINE WHETHER A RECEIPT IS A REVENUE OR CAPITAL RECEIPT
850. 851. 852.
853.
854.
855.
856.
857. 858.
859. 860. 861.
Nature of receipt is determined with reference to the facts of _ each individual case. [1984] 51 TAX 55 (H.C.Kar.) _ Share income in advance rent is capital receipt. [1967] 16 TAX 65 (H.C.Kar.)
574 575
Where Memorandum of Association authorising sale and purchase of shares, profits from sale of shares is revenue _ receipt. [1967] 15 TAX 212 (H.C.Kar.)
576
If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent Income Tax Officer or appellate authority from inferring that a receipt _ evidenced by a credit entry is a revenue receipt. [1947] 15 ITR 393 (All.)
577
Interest decreed on debts or damages, whether under a _ statute or otherwise, is a revenue receipt. [1947] 28 Tax Cas. 159 (HL)
577
Where on abandonment of mining a lease payment was received by lessor as compensation for royalty and rent for the remaining period of mining lease it is capital receipt. _ [1946] 14 ITR 377 (Cal.)
578
Compensation received for refraining from competing in _ same business is a capital receipt. [1942] 25 Tax Cas. 33 (HL) _ Capital payment in instalments. [1941] 9 ITR 642 (Sind) Merely because the sum is the consideration of a contract, it is not necessarily what may be called a capital receipt, and _ cannot be income. [1941] 9 ITR 642 (Sind) In case of damages awarded for wrongful detention of _ assessee‟s movable properties. [1940] 8 ITR 25 (Pat.) _ General tests. [1937] 5 ITR 307 (Lahore) The question whether a receipt is taxable may in certain _ cases depend upon the nature of business. [1935] 3 ITR 305 (PC)
578 579
579 579 579
580
532 Section 9 & 10
Income Tax Digest. PAGE NO
862.
Damages received for pre mature termination of agreement which was an integral part of the profit-making apparatus _ are capital receipts. [1935] 3 ITR 17 (HL)
580
863.
Nomenclature given by parties to the receipt is not determinative of whether it is capital or revenue receipt. _ [1933] 1 ITR 299 (PC)
581
864.
Receipt must be judged from the point of view of the receiver, _ and not necessarily from that of the payer. [1924] 9 Tax Cas. 48
582
865.
Interest charged to account of borrower is includible as _ income of assessee. 7 ITC 184 (Nag.) _ Interest on security furnished under a decree. 3 ITC 274 (Oudh)
866. 867. 868.
583 583
Questions relating to capital or income, are questions of law. _ 2 ITC 69 (Nag.)
583
Compensation received for sterilisation of profit-yielding _ assets is a capital receipt. [1922] 12 TC 427 (HL)
583
PROFIT AND LOSS APPROPRIATION ACCOUNT
869.
Amount representing unclaimed balance consisting of the value of unutilized tickets are trading receipts of the year in which these were transferred to the profit and loss appropriation account even if accounts are maintained on _ mercantile system. [1978] 37 TAX 130 (H.C.Kar.)
584
OVERRIDING TITLE VS. APPLICATION OF INCOME
870.
Overriding title vs. application of income. 205 (H.C.Kar.)
_
[1967] 15 TAX 585
DEVALUATION GAIN
871.
872.
Assessee was importing goods from India out of his own capital blocked up in India. Goods revalued after devaluation _ of Indian rupee held justified. [1966] 14 TAX 203 (H.C.Kar.)
586
Where there is no prior conversion of currency, transactions of borrowing and lending cannot give rise to any income or capital loss merely due to difference in rates of exchange. _ 57 TC 219 (HL)
587
“MERCANTILE” AND “CASH SYSTEM”
873.
„Mercantile system‟ and „cash system‟ - Distinction between „Accrue‟, „arise‟, „received‟ and „deemed to be received‟, _ meaning of. [1966] 13 TAX 188 (H.C.Lah.)
588
533 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
APPLICABILITY OF 1922 ACT TO DIFFERENT PROVINCES/STATES
874. 875. 876.
Applicability of 1922 Act to Mysore. _ Mewar estates. 7 ITC 100 (Bom.)
_
8 ITC 126 (Mad.)
Income accruing or arising in British India in the previous year is assessable under the Indian Income Tax Act though the place of accrual ceased to be part of British India in the _ year of assessment. [1945] 13 ITR 311 (Mad.)
590 590
591
APPLICABILITY OF ACT TO RULERS OF ERSTWHILE INDIAN STATES
877.
In case of Maharaja of Benares.
_
[1942] 10 ITR 322 (All.)
591
CHARGING SECTION - GENERAL
878. 879. 880.
Subject caanot be taxed unless he comes within the letter of _ the law. [1896] 4 HL 100 _ Subject cannot be taxed by analogy or inference. [1939] A.C.1; 19 Tax Cas. 490 _ Others. [1938] 6 ITR 632 (PC)
591 592 592
CHARGE IS IN RESPECT OF INCOME OF PREVIOUS YEARS
881.
882.
Charge is on income of previous year and not income of _ assessment year. [1945] 13 ITR 221 (PC); [1948] 16 ITR 240 (PC)
592
Object of the Act is to tax the assessee in the year of assessment upon the income received by him in the previous _ year. [1934] 2 ITR 1 (PC)
592
EXEMPTION FROM TAX
883. 884.
Unless specifically exempt, anything which can be properly _ described as income is taxable. [1938] 6 ITR 157 (All.)
593
The sovereign legislative authority has power to tax on subjects despite an earlier engagement to the contrary. _ [1937] 5 ITR 111 (Pat.)
593
DOUBLE TAXATION
885.
886. 887.
_ Double taxation is prerogative of legislature. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ Illustrations. 6 ITC 88 (Mad.) _ Illustrations. 2 ITC 208 (Mad.)
593 594 594
534 Section 9 & 10
Income Tax Digest. PAGE NO
FINANCE ACTS - RELAVANCE OF
888.
889. 890.
Quality of chargeability of any income is independent of passing of Finance Act but until Finance Act is passed no _ tax can be actually levied. [1938] 6 ITR 720 (Mad.)
594
Income is not taxable if Finance Act of the relevant year is _ not made applicable. [1946] 14 ITR 683 (Pat.)
594
Income Tax Act has no operative effect except so far as _ rendered applicable by Finance Act. [1945] 13 ITR 221 (PC)
595
TAX AVOIDANCE / TAX PLANNING
891.
892.
There is nothing immoral or fraudulent in lawfully _ transferring one‟s property to detriment of revenue. 10 ITC 292 (All.)
595
How assessee, for purposes of his accounts, keeps his books is not a test by which liability to tax is concluded; substance _ of transaction is to be seen. [1946] 14 ITR 1 (All.)
595
ENGLISH CASES
893.
Principles dealing with concept of tax planning. 377/25 TC 107 (HL)
_
[1943] AC 596
GUIDING PRINCIPLES
894. 895. 896.
897. 898.
899. 900.
Income may be realised in cash or kind but the essence is _ that there must be realisable profit. [1933] 1 ITR 113 (PC)
596
Income for tax purposes must be money or money‟s worth. _ [1940] 8 ITR 307 (Mad.)
596
Income may be in kind; but before it is so treated it must be shown that it is money‟s worth - a debtor‟s own pronote is _ not money‟s worth. [1933] 1 ITR 94 (PC)
597
Receipts from capital which is exhausted in process of _ realization is income. [1945] 13 ITR 74 (Oudh)
598
In income of the previous year, assessee is not bound to include something to which he became entitled after _ termination of that year. [1936] 4 ITR 233 (Bom.) _ A man cannot make a profit out of himself. [1946] 14 ITR 1 (All.) Mere fact that source of income is a wasting asset is not _ relevant. [1943] 11 ITR 513 (PC)
598 598 598
535 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
BURDEN OF PROOF
901.
Onus to prove that income qualifies for exemption is on _ assessee. [1946] 14 ITR 362 (Cal.)
OTHER FACTORS
902. 903.
Relevance of nature of transaction. (Sind)
_
599
[1941] 9 ITR 642
Relevance of fact that receipt does not fall within _ cornerstones of section 15. [1946] 14 ITR 561 (All.)
599 599
ALLOCATION OF PAYMENT BETWEEN INTEREST AND PRINCIPAL SUM DUE
904. 905.
906. 907.
908.
909.
910.
Principle for allocation between interest and capital in case _ of composite receipt against loan. [1933] 1 ITR 94 (PC)
599
Principle for allocation between interest and principal sum when claim is realised by auction sale of decree, or when a _ claim is satisfied by executing a fresh mortgage. [1933] 1 ITR 113 (PC)
601
When a creditor receives a sum in satisfaction of half of _ decretal amount. [1942] 10 ITR 344 (Pat.)
604
Appropriation of payments towards interest and principal is _ to be made as stipulated in mortgage deed. [1936] 4 ITR 157 (Cal.)
605
In money-lending business, unless there are specific intimations from debtor, creditor may appropriate receipts _ towards principal or interest. [1941] 9 ITR 627 (All.)
605
In case of two mortgages on same property amount recovered in a suit is to be appropriated first towards the earlier _ mortgage. [1941] 9 ITR 278 (Mad.)
606
Illustration showing allocation between interests and _ capital. [1945] 13 ITR 457 (Lahore)
606
ILLUSTRATIONS
911.
912.
Interest received for belated payment of share in firm is not damages for wrongful detention of money, and is taxable. _ [1943] 11 ITR 470 (Mad.)
607
Interest received by vendor of securities from vendee is assessable in vendor‟s hands, even though entire interest _ would be assessable in vendee‟s hands. [1938] 6 ITR 355 (Lahore)
607
536 Section 9 & 10
913. 914.
Income Tax Digest.
Where fresh 'hundies' were issued for interest. (Nag.)
_
PAGE NO
9 ITC 173
Where assessee purchases mortgaged property in satisfaction of a decree, extent to which purchase price exceeds principal _ sum, is interest realised. [1942] 10 ITR 186 (All.)
607
608
COMMISSION
915.
Where a major debenture-holder who had brought the property to auction, was allowed to act as auctioneer, the commission received was not his income, if the assets sold _ were for a price far below the decretal amount. [1938] 6 ITR 434 (All.)
608
PENSION / ANNUITY
_
916.
General.
[1948] 30 TC 11
917.
Annuities receivable in exchange for capital assets are _ income and not capital receipt. [1935] 3 ITR 237 (PC)
RENT
918. 919. 920.
Rent, where held not taxable as income. (PC)
609
_
609
[1948] 16 ITR 325 610
Where royalty was paid on basis of minerals obtained, _ royalty was revenue in nature. [1943] 11 ITR 513 (PC)
611
Rent and royalty received from brick-makers to erect brick _ kilns on assessee‟s land. 5 ITC 42 (Pat.)
611
SALAMI
921.
922. 923.
924.
It is impossible to lay down any general rule that payments in the nature of salami or nazrana must be regarded as _ payments of rent and, therefore, income. [1940] 8 ITR 550 (Pat.)
611
Salami which is not in the nature of advance rent is not a _ revenue receipt. [1946] 14 ITR 738 (Pat.)
611
Question as to whether salami received by assessee while letting out plots is income or capital receipt is a question of _ fact. [1947] 15 ITR 137 (All.)
612
Question as to whether salami in a particular case is in reality payment of rent in advance, or is a lump sum payment for transfer of some interest in the property, is a _ question of fact. [1946] 14 ITR 738 (Pat.)
612
537 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
ILLUSTRATION
925. 926.
_ Salami for granting permanent lease. [1939] 7 ITR 536 (Pat.) _ Salami received under mining lease. [1943] 11 ITR 513 (PC)
SUBSIDY / INCENTIVES
927.
Subsidy received by electricity company. (Bom.)
_
612 613
[1946] 14 ITR 622 614
GIFTS / VOLUNTARY PAYMENTS
928.
929.
Voluntary payments, in order to be taxable in the hands of the recipient as income must have an origin which a practical man would regard as real source of income. _ [1946] 14 ITR 561 (All)
614
A habitual receipt under a custom which is not legally enforceable but is in nature of a bounty is not income. _ [1946] 14 ITR 561 (All.)
615
SHARE IN BUSINESS PROFITS
930.
A share in business profits is revenue receipt. ITR 600 (Sind)
_
[1946] 14 615
TECHNICAL KNOW-HOW
931.
Lump sum receipt for supply of technical know-how is not a _ capital receipt but is a trading receipt. 40 TC 443 (HL)
616
PATENT / TRADE MARK / COPYRIGHT
932.
Where there is outright sale of patent, receipt of price even _ though in instalments would be capital in nature. [1937] 5 ITR 511 (Lahore)
617
MINING RIGHTS
933.
Where the assessee carried on prospecting operations and after a few years, obtained a mining licence, which he never worked himself, but instead parted with it by selling the _ right to mine 5 ITC 451 (Rangoon)
617
BONUS SHARES
934.
Bonus shares issued by a company are not dividend or _ income taxable in the recipient‟s hands. [1921] 8 T.C. 101 (HL)
618
538 Section 9 & 10
Income Tax Digest. PAGE NO
BONUS DEBENTURES
935.
Bonus debentures are not income, but capital receipt in the _ shareholders‟ hands. [1936] 4 ITR 239 (PC)
619
SALE PROCEEDS OF TREES
936.
937.
The net receipt from the sale of forest trees are income liable to income tax even though the forest would be gradually _ exhausted by feelings. [1945] 13 ITR 14 (Oudh)
619
Effect of fact that sale of the forest trees must necessarily _ result in the diminution of the value of the estate. [1946] 14 ITR 673 (Pat)
620
SALE PROCEEDS OF ASSETS OF MONEY-LENDER
938.
939.
Profit sale of properties which are treated as assets of _ money-lending business as revenue receipt. [1946] 14 ITR 61 (Mad.)
620
Where the assessee-company acquired the property of its debtor in discharge of his loan, and sold the property for a _ profit. [1937] 5 ITR 307 (Lahore)
620
RECEIPTS BY PARTNERS FROM FIRM
940.
On dissolution of firm interest received by a partner on his _ capital is not capital but revenue receipt. [1935] 3 ITR 208 (PC)
OTHERS
_
941.
Green coffee itself is not income.
942.
Income derived from lands in permanently settled estates is _ liable to assessment to Income Tax. 5 ITC I (PC)
622
Amount embezzled, if allowed as loss in assessment, is _ taxable as revenue income when recovered. [1942] 10 ITR 21 (Bom.)
622
A lump sum received from provident fund on retirement on account of the employer‟s contribution to the fund and the accumulated interests on the total contributions thereto is _ not taxable. [1940] 8 ITR 85 (Bom.)
622
Where the assessee financed a litigation on condition that in _ event of success the litigant was to pay a certain sum. 8 ITC 64 (All.)
623
943.
944.
945.
[1939] 7 ITR 48 (PC)
621 621
539 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
APPLICATION OF INCOME
946.
A payment conditional upon profits being made cannot be _ described as a payment to earn profits. 5 ITC 363 (PC)
623
ILLUSTRATIONS
947. 948.
Profits paid by assessee to third party under an agreement _ will not be deductible. [1935] 3 ITR 459 (Bom.)
624
Profits distribution to policy holder by assessee-insurance _ company is an application of income. [1934] 2 ITR 63 (PC)
624
MAINTENANCE ALLOWANCE
949.
950.
951.
952. 953.
Where certain amounts were paid by assessee to his stepmother under a decree for her maintenance and maintenance was a charge on ancestral estate in hands of assessee, amounts so paid by assessee to his step-mother were not his income as it had been diverted to his mother at source. _ _ [1933] 1 ITR 135 (PC); [1945] 13 ITR 512 (Lahore); _ [1942] 10 ITR 249 (Pat.)
624
Amount payable to karta‟s mother as maintenance after _ partition is not taxable in his hands. [1946] 14 ITR 66 (Lahore)
626
Maintenance allowance paid to widow of a deceased _ coparcener is not diversion of income. [1937] 5 ITR 539 (Bom.)
626
Amount received by widow out a/her late husband‟s estate for _ maintenance is taxable in her hands. [1937] 5 ITR 1 (Cal.)
627
Allowance paid to settlor‟s widow under settlement deed is to _ be excluded from descendant‟s assessable income. [1938] 6 ITR 315 (Cal.)
627
ROYALTIES
954.
Where debtor leased mine to creditor and the creditor applied royalty for liquidation of debt, royalty was debtor‟s _ income and it was a case of application of income. [1934] 2 ITR 100 (Pat.)
627
PAYMENTS BY EXECUTOR TO BENEFICIARIES UNDER TESTATOR‟S WILL / TRUST
955.
Periodic payments by executors to beneficiaries under testator‟s will out of income of property are not allowable from income of estate as it is merely application of income. _ [1940] 8 ITR 236 (Cal.)
628
540 Section 9 & 10
Income Tax Digest. PAGE NO
956.
Where payments are as per directions in will bequeathing _ property, it is a case of diversion at source. [1945] 13 ITR 500 (Labore)
628
957.
Where will at testator directed executor to pay out at income of his property charges for obtaining probate, and also to pay up to Rs. 10,000 for performance of his shradh, these amounts were not deductible out of executor‟s income. _ [1938] 6 ITR 206 (PC)
628
ACCRUAL OF INCOME - CONNOTATION OF
958.
959.
Three words „accruing‟, „arising‟ and „received‟ used in _ section cannot have one and the same meaning. 5 ITC 454 (All.)
629
Double expression „accruing and arising‟ connotes the source _ from which the right to obtain money springs. 3 ITC 237 (Rangoon)
630
TIME OF ACCRUAL OF INCOME - BASIC PRINCIPLES
960. 961.
Profit though earned by one entity could accrue to other. _ [1944] 12 ITR 226 (Mad.)
630
A man cannot escape liability to Income Tax on income received, because he may incur loss in a future year on the same account on which he had received that income in the _ year under assessment. 5 ITC 371 (Nag.)
630
RECEIPT/DEEMED RECEIPT - CONNOTATION OF
962.
Actual or deemed receipt is not sole test for levy of tax. _ [1945] 13 ITR 224 (All.)
631
TIME OF ACCRUAL OF INCOME - ILLUSTRATIONS
963.
Every year is a self-contained period and profits earned or loss sustained either before or after that year are not at all relevant for purpose of an assessment relating to a _ particular year. [1938] 6 ITR 733 (Cal.)
631
964.
In respect of property acquired by moneylender in lieu of _ debt, income arises when sale deed is executed. [1941] 9 ITR 358 (All.)
632
965.
Where speculative builder sells houses on leasehold basis far premium-cum-ground rent payments retaining reversionary interest, capitalised value of ground rents could not be taxed _ as profits accruing on the date of transaction. [1940] 8 ITR (Suppl.) 57 (HL)
632
541 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
INTERESTS
966.
967. 968.
969.
970.
Under mercantile system of accounting interest accrued is taxable, even If the assessee has not taken credit for it on _ account of possible irrecoverability. [1937] 5 ITR 279 (Lahore)
633
Interest credited in debtor‟s account and realisable at will is _ interest received. [1935] 3 ITR 120 (Nag.)
634
Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, Income Tax Officer would be justified in treating _ such interest as accrued income. [1935] 3 ITR 158 (Rangoon); [1934] 2 ITR 369 (Lahore)
634
Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, Income Tax Officer would be justified in treating _ such interest as accrued income. [1935] 3 ITR 193 (Rangoon); 8 ITC 171 (Rangoon); 8 ITC 182 (Rangoon)
634
Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, Income Tax Officer would be justified in treating _ such interest as accrued income. 8 ITC 217 (Mad.)
635
COMMISSION
971.
In mercantile system of accounting, commission earned _ though not received in the year, is income. [1937] 5 ITR 261 (Bom.)
635
UNDERWRITING COMMISSION
972.
Underwriting commission is taxable in the year in which risk is undertaken, and not in the year in which accounts _ are later made up. [1947] 29 Tax Cas. 69 (HL)
636
PROFITS OF MORTGAGE SALE
973.
In case of a mortgage sale profits arise on date of _ confirmation of sale. [1933] 1 ITR 113 (PC)
637
CONCEPT OF REAL INCOME
974.
Where the assessee claimed that no interest was charged in respect of certain specific debt as the debtor firm had closed _ the business in the accounting year. 7 ITC 135 (Lahore)
637
542 Section 9 & 10
Income Tax Digest. PAGE NO
DISPUTED CLAIMS
975.
Where assessee-money-lender had filed a suit for the recovery of debt and pending final decision he had been receiving some amounts which he did not offer for tax on the plea that till the litigation was over, decree executed and _ realised, no amount could be taken as profit. [1941] 9 ITR 56 (Mad.)
INCOME FORGONE
976. 977.
Where lease rent was credited to suspense account. 10 ITR 177 (Pat.)
_
638
[1942]
Where the assessee-firm took in its name certain contracts _ and also furnished the security deposits for the contracts. 7 ITC 156 (Rangoon)
638
638
PLACE OF RECEIPT / ACCRUAL OF INCOME - GENERAL
978.
979.
980.
Place where income accrues or arises is by no means necessarily the place where source from which it secures or _ arises is situated. [1937] 5 ITR 118 (Cal.)
639
What is relevant is income received in previous year in British India and not income so received in assessment year. _ [1938] 6 ITR 720 (Mad.)
639
Income accruing or arising in British India in the previous year is assessable under the Indian Income Tax Act though the place of a accrual ceased to be part of British India in _ the year of assessment. [1945] 13 ITR 311 (Mad.)
639
ACCRUING OR ARISING IN PAKISTAN - MEANING OF
981.
„Profits accruing or arising in British India‟ are words which in their ordinary meaning seem to require a place to be assigned as that at which the result of trading operation comes, whether gradually or suddenly, into existence. _ [1938] 6 ITR 521 (PC)
640
ILLUSTRATIONS : IN CASE OF BUYING AND SELLING OF GOODS
982.
983.
Profit arises only at the place of sale in case of animals intended for human consumption which are bought from _ one place and sold in another place. [1940] 8 ITR 619 (Mad.)
640
If a non-resident sells goods in India and receives profits in India, entire profits without apportionment are taxable in _ India. [1946] 14 ITR 417 (All.)
641
543 CHARGE OF INCOME TAX, super tax etc.
Section 9 & 10 PAGE NO
984.
If sale is effected in British India of goods sent by assessees branch in a native State and assessee‟s head office was in _ British India, entire income arises in British India. [1946] 14 ITR 1 (All.)
641
985.
Where mainly goods were purchased in India and sold _ outside India. 4 ITC 40 (Lahore)(FB)
642
986.
Where the assessee-company, incorporated in London, carried on large business operations in British India, and _ exported and sold the materials to London. 2 ITC 119 (Rangoon)
642
987.
Where orders are accepted in India and business is carried on in India, but supplies are made from outside taxable _ territories. [1942] 10 ITR 13 (Pat.)
642
ILLUSTRATIONS : RELEVANCE OF PLACE FROM WHERE DIRECTIONS ARE ISSUED FOR TRANSACTIONS/WHERE CONTRACT IS CONCLUDED
988.
989. 990.
Profits do not necessarily arise at the place from where _ directions are issued for certain transactions. [1938] 6 ITR 521 (PC)
643
Income from contracts arises at place where contract is _ accepted. [1942] 10 ITR 103 (All.)
645
If contracts were made in taxable territories and payment was also received there, income arose in taxable territories _ [1938] 6 ITR 584 (Bom.)
645
ILLUSTRATIONS : IN CASE OF AGENTS
991.
992.
Where Indian agent of assessee-non-resident derived profits from railway lines in India on behalf of assessee and credited gross receipts in Indian Government treasury and from there transferred profits to non-resident assessee, _ profits did accrue in India. 5 ITC 363 (PC) _ Others. [1938] 6 ITR 675 (All.)
645 646
ILLUSTRATIONS: WHERE PAYMENT IS MADE BY POSTING OF CHEQUE
993.
Question as to whether cheque was sent to bank for _ collection or was discounted, is a question of fact. [1950] 18 ITR 998 (Punj.)
646
544 Section 9 & 10
Income Tax Digest. PAGE NO
ILLUSTRATIONS : COMMISSION
994.
Income from sales commission on sale, arises at place where _ sales take place. 5 ITC 108 (Bom.)
647
ILLUSTRATIONS : INTEREST
995.
996.
Interest on foreign securities not remitted to British India, is not assessable in British India even if it is included in _ balance sheet. [1938] 6 ITR 603 (Bom.)
647
Interest received by English Company from Secretary of State for India accrued in India though received in _ England. [1940] 8 ITR 280 (Mad.)
647
545 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
Section 9 & 10* Charge of Income Tax, Super Tax etc.
CHARGE OF INCOME TAX, SUPER TAX AND SURCHARGE
Pakistan Industrial Development Corporation v. Pakistan – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 814.
Charging section and claim of exemptions - How to be applied.
Once a finding is recorded that the amount in question could be treated as income within the meaning of the charging section, section 9 of the Income Tax Ordinance, the burden of proving that the income qualified for exemption under any of the clauses of Second Schedule of the Ordinance is on the assessee. 815.
Super tax is chargeable in addition to income tax.
Section 10 clearly provides that super tax will be in addition to the income tax on the total income. Octavius Steel & Co. Ltd, v. Commissioner of Income Tax, Dacca – 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.) 816.
Effects of entries in the books of accounts on chargeability.
We are perfectly clear in our minds that through the ascertainment by the managing agents of their own remuneration, and the entry of the ascertained sums in the balance sheet, which they signed, and which was also signed on behalf of the managed company, sufficient evidence is furnished of a debt created in favour of the managing agents. Commissioner of Income Tax, East Pakistan, Dacca v. Luxmi Narayan Cotton Mills Ltd., Dacca – 1960 SCC 87 = [1960] 2-TAX (III-538) (S.C.Pak.) 817.
*
Chargeability and expenditure outside taxable territories
The charging section 9 has to be read in conjunction with Articles 165, 165A of the Constitution of Pakistan; corresponding to sections 3, 3B, 55, 56 and 58 of the 1922 Act read with sections 155 and 204 of Government of India Act 1935.
546 Section 9 & 10
Income Tax Digest.
As to the circumstance that the expenditure has been incurred outside the taxable territories, it does not appear to us that the point is one of materiality. The Company, as already stated, was incorporated outside the taxable territories and all the capital is held outside. Its principal business is the manufacture for sale and profits of textiles, and just as there could be no bar to the Company setting up another textile mill within the taxable territories in which case the expenditure would clearly be relatable to capital, so there can be no possible objection to the Company setting up another textile mill in the country of its incorporation, Mr. Bose appearing for the Company has shown us a copy of the amended Memorandum of Association of the Company, drawn up, it seems clearly, after the year 1956, when the Companies Act was extensively amended in India. One of the aims numbered (f)(1) reads as follows:“To start one or more cotton, spinning and weaving mils in India, Pakistan and elsewhere, and for the purposes thereof acquire land, buildings, plants, machineries either by purchase or otherwise.” The setting up of a new mill is strictly within this particular aim. Applying the canons which have been outlined in the foregoing portions of this judgment, the setting up of a cotton mill is a “once for all” expenditure incurred for the purpose of bringing into existence an asset or advantage for the continuing benefit of the trade, and for setting up another unit of the “very concern” which is the principal aim of the Company. It is immaterial, within the terms of the Act where such expenditure is incurred, and this is the more so in a case of a non-resident Company. The view accepted by the Income Tax Appellate Tribunal maintains the tax on the same basis as before, and we are entirely agreed that by incurring this expenditure in India, the Company has not rendered itself liable to be taxed more heavily than before, upon the profits which it earns in Pakistan. Commissioner of Income Tax, Central Zone ‘A’, Karachi v. Pakistan Oxygen Ltd. – [1992] 65 TAX 138 (H.C.Kar.) 818.
Surcharge leviable on the amount of taxes is a valid charge.
The aforesaid question was considered by a Division Bench of this Court in the case of Commissioner Income Tax v. Pakistan Tobacco Co. Ltd. etc. (1988) 57 Tax 118 and was answered in affirmative and after considering authorities on the subject it was held that the provision for taxation is retained income as requirement of working capital and is not liable for surcharge.
547 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
Case followed: Commissioner of Income Tax v. Pakistan Tobacco Co. Ltd. (1988) 57 TAX 118.
Souvenir Tobacco Co. Ltd. v. Income Tax Officer, Companies Circle XIII, Karachi And Another – [1983] 47 TAX 158 (H.C.Kar.) 819.
Surcharge is different from levy of income tax.
As regards the merits of the case, it may be pertinent to observe that section 3-A of the Act provides levy of refundable surcharge which cannot be equated with a levy of Income Tax. An Income Tax amount legally charged, is not refundable, whereas refundable surcharge provided under section 3-A was refundable after the expiry of the bond period. The very fact that section 3-A itself describes this levy as a refundable surcharge indicates that the levy in this section is different from a levy of Income Tax. The right to recover/collect refundable surcharge under section 3-A of the Act in the manner in which an Income Tax amount is recoverable by virtue of sub-section (2) of section 3-A of the Act would not entitle respondent No. 1 to levy penalty provided in section 45-A of the Act in the absence of an express provision applying the provisions of above section 45-A. Cases referred to: Commissioner of Income Tax, Lahore v. Azizuddin [1976] 33 TAX 258 and Commissioner of Income Tax, Rawalpindi v. Mst. Mahmooda Sultana, Lyallpur (1978 PTD 131) = [1978] 37 TAX 209.
Malik Muhammad Akram Khan & Co. v. Income Tax Officer, Jhelum – [1977] 36 TAX 216 (H.C.Lah.) 820.
Section 55 of 1922 Act is the charging section for super tax.
Section 55 is the charging section for super tax. This tax is leviable on the total income of previous year which is computed under section 13. Section 58 also makes applicable section 13 and the computation made under section 13 forms the basis for levy of super tax. Hotel Metropole Ltd., Karachi v. Commissioner of Income Tax (Central), Karachi – [1973] 28 TAX 96 (H.C.Kar.) 821.
Service charges for payment to employees is not income of a hotel, though the same is posted in accounts.
With a view to discourage the practice of “tipping” the assessee introduced the practice of collecting “service charges” from the boarders and lodgers for payment to the employees. The money which was received or which had accrued under the head “service charges” did not have any profit making quality about it. In respect of the
548 Section 9 & 10
Income Tax Digest.
assessment year 1959-60 the Income Tax Officer found in the account books of the assessee a sum of Rs.89,634.00 posted under the head “general account”. He held that this posting charged the very nature of the amount which ceased to be the property of the employees and, therefore, became a surplus falling in the hands of the assessee and consequently subject to tax. This finding was upheld by the Income Tax Appellate Tribunal. On a reference: Held,
that the quality and nature of amount is fixed at the time either of its receipt or its accrual, notwithstanding subsequent change in the nature of the posting of the amount in the assessee‟s books. The money which was received or which accrued under the head “service charges” did not have any profit making quality about it. It was the money which belonged to the employees for which the assessee was liable to account to them. If the disputed amount was not income at the time of its receipt or its accrual, then subsequent change in the head of the account, under which the disputed amount is posted, would not make the amount income of the assessee.
This decision would not apply to cases where there is a finding, based on evidence, that practice of recovery of service charges is resorted to by an assessee for the purpose of making tax-free income. Such a finding would make it necessary to ascertain whether any moneys under the title “service charges” had actually been received and remained undisbursed for such length of time as to raise the inference that the whole practice was a colourable procedure to enable the assessee to make tax-free income. Case relied on: Tattersall (1935-39) 22 Tax Cas., 51. _______________
SCOPE OF ARTICLE 165 VIS-A-VIS CHANGEABILITY IN THE CASE OF PROVINCIAL GOVERNMENTS
CBR & Another v. Sindh Industrial Trading Estate Limited – 1984 SCC 604 = [1986] 53 TAX 47 (S.C.Pak.) 822.
Income Tax Law does not extend to bodies owned by provincial governments [position prior to insertion of Article 165A in the 1973 Constitution].
This corporation is a company registered under the Companies Act, 1913, and is limited by guarantee. The Company was incorporated on
549 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
29th November, 1947 under a resolution of the Government of Sindh, dated 16th May, 1947, with a view to promote industrial development of the province of Sindh, and, for this purpose, to establish Industrial and Trading Estates at Karachi, Hyderabad and Sukkur. The Company, after its incorporation, derived income from the rent of the lands allotted for leased out to industrialists, fees on transfer of lands, premium received on allotment and leases of lands and water charges. After making reference to the relevant constitutional provisions in the field from time to time, the High Court concluded that the Industrial Development and trade/business connected therewith was within the legislative and executive competence of province; and further that the Sindh Government Resolution under which the respondent company was formed also its aims and objects being the same, are within provincial field. This had not been disputed in this appeal, though it has been vehemently argued that the respondent Company is an independent juristic person and its functions are independent of Government functions in the field of Industrial Development. In this behalf the High Court held that veil or cloud of incorporation could lawfully be lifted so as to discover a corporate body‟s real nature and existence apart from the clock of the juristic person. Although the power of the Court to lift the veil as held by the court in Reference NO. 3 of 1970, PLD 1971 S.C. 585 at P. 6161/617 is not disputed but it was argued by the learned counsel for the appellant that this exercise will not make any difference in the facts and circumstances of this case. At this stage it is necessary to reproduce the Constitutional provisions in Pakistan on this subject. They in Government of Indian Act 1935 as amended in Pakistan, in 1956, 1962 and 1973 Constitutions are as follow:Section 155 (1935 Act): Exemption of Provincial government and rulers of Federated States in respect of Federal taxation, (1) Subject as hereinafter provided, the government of Province shall not be liable to Federal taxation in respect of lands or buildings situate in Pakistan or income accruing, arising or received in Pakistan:(a)
Where a trade or business of any kind is carried on by or on behalf of the government of province in any part of Pakistan outside that Province nothing in this sub-section shall exempt that government from any federal taxation in respect of that trade or business, or any operations connected therewith, or any property occupied for the purposes thereof;
550 Section 9 & 10
(b)
Income Tax Digest.
Nothing in this Act affects any exemption from taxation enjoyed as of right at the passing of this Act by the Ruler of an Indian State in respect of any Indian Government securities issued before that date. Article 112 (1956 Constitution):- The government of a province shall not be liable to taxation under any Act of Parliament in respect of land or buildings situated in Pakistan, or income accruing, arising or received in Pakistan. Provided that where a trade or business of any kind is carried on by or on behalf of the government of a province outside that province, nothing in this Article shall exempt that government from any federal taxation in respect of that trade or business, or any operation connected therewith, or any income arising in connection therewith, or any property occupied for the purposes thereof.
(2)
Property vested in the Federal Government shall, save in so far as an Act of Parliament may otherwise provide, be exempt from all taxes imposed by, or by any authority within a province.
(3)
Nothing in this Article shall prevent the imposition of fees for services rendered. Article 137 (1962 Constitution). (1) The Central Government shall not, in respect of its property or income, be liable to taxation under any provincial law, and, subject to clause (2) of this Article, a provincial Government shall not, in respect of its property or income, be liable to taxation under a Central Law or under a Provincial Law of the other Province.
(2)
If a trade or business of any kind is carried on by or on behalf of the government of a Province outside that Province, that Government may in respect of any property used in connection with that trade or business or any income arising from that trade or business be taxed under a Central Law or under a Provincial Law of the other Province.
(3)
Nothing in this Article shall prevent the imposition of fees for services rendered. Article 165 (1973 Constitution). - Exemption of Certain Public Property from Taxation. - (1) The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of Provincial Assembly and, subject to clause (2), a Provincial Government shall not, in respect of its property or income, be liable to taxation under Act of Parliament or under Act of the Provincial Assembly of any other Province.
551 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
(2)
If a trade or Business of any kind is carried on by or on behalf of the government of a province outside that Province, that government may, in respect of any property used in connection with that trade or business or any income arising from that trade or business be taxed under Act of Parliament or under Act of the Provincial Assembly of the Province in which that trade or business is carried on.
(3)
Nothing in this Article shall prevent the imposition of fees for services rendered.
There are some common features in all these provisions. Apart from the property of Provincial Government its income from trade or business has been exempt from Federal Taxation provided it is within the concerned Province. Where, however, the trade or business is out of the province, then the income was liable to tax some times by taking away the exemption in the provision itself (as in Proviso to section 155 of the 1935 Act), or by making it possible for the Federation or the other Province to tax such income (sub-Article 2 of 1973 Constitution). But as stated earlier the facts found by the High Court and its conclusion on the questions raised by learned counsel are unexceptionable. The respondent company was carrying on the function of Industrial Development and the trade and business connected therewith for and on behalf of the government. The truth is that the lifting of veil has revealed that for the relevant purposes in this case it was doing so just like a department of the government, notwithstanding the incorporation, which as explained earlier will not make any difference regarding the relevant Constitutional Provision on exemption from Federal Taxation. Learned counsel also tried to argue that the West Pakistan Government at one time gave up the claim to exemption and relied on a letter dated 5.7.1966; but it does not support her. She also pointed out that the Central Government has not claimed exemption regarding its income through similar corporation. Learned counsel for the respondent explained that it was only a question of policy and not that of constitutional interpretation. She also tried to argue the point regarding other remedy, but leave to appeal not having been granted on this question, she could not press it any further. In the light of the foregoing discussion, this appeal fails and is dismissed. Case review : This case was decided before the insertion of Article 165A in Constitution of Pakistan. The said Article rendered this decision ineffective. Article 165A read as under:
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“For the removal of doubt, it is hereby declared that Majlis-eShoora (Parliament) has, and shall be deemed always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a corporation, company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income.”
The Punjab Province v. The Federation of Pakistan – 1955 SCC 13 (Federal Court) – [1960] 2-TAX (Suppl.-3) (S.C.Pak.) = PLD 1956 F.C. 72 823.
Exemption to provincial governments – Scope of.
The principle recognised in article 165(1) is that the Government of a province is not liable to taxation in respect of income accruing, arising or received in Pakistan. The principle, however, is qualified by clause (2) of Article 165 that if a trade or business of any kind is carried on by or on behalf of the Government of a province in any part of Pakistan outside that province clause (1) of Article 165 in that case shall not have the effect of exempting that Government from any Federal taxation in respect of that trade or business or any operation connected therewith or any income arising in connection therewith. Clause (2) is merely an exempting provision and recognises the liability of a Provincial Government to be taxed in respect of the profit of a trade or business which is carried on outside the Province. But clause (2) does not itself create any liability; it merely recognises such liability provided it is created by some other Act. The principle underlying article 184 of the Constitution of Pakistan is that all disputes whether of law or of fact are to be determined by Supreme Court of Pakistan if the parties to dispute happen to be the Federal Government on the one side and any one or more of the provinces on the other or if two or more provinces are arrayed against one another. The machinery provided for appeals/revisions in the Income Tax Ordinance, 1979 is not relevant in such disputes. Punjab Small Industries Ltd. v. Deputy Commissioner of Income Tax, Lahore – [1995] 71 TAX 221 (H.C.Lah.) 824.
A statutory corporation of a provincial government is a separate and distinct entity and is not entitled for exemption.
It follows from cumulative reading of various provisions of the Act, that the petitioner is an entity having a corporate status separate and distinct from the Provincial Government and is not a part of it. Even if
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the contention of the learned counsel for the petitioner that the corporation is invested with power to carry out certain functions which Government itself can also perform is accepted, it would hardly advance his case, for there is no warrant for the assumption that performance of these functions would turn a statutory Corporation into a Department of the Government. In the constitution as originally framed, Article 165 ordains that no tax can be levied by the Federal Government on any property or income of the Provincial Government. However, later on doubts arose as to whether the income of a corporation owned and controlled by the Government or set up by it under Act of Legislature can be deemed to be the income of the Government within the teaming of Article 165 of the Constitution. In order to remove these doubts, the Constitution was amended by Constitution (Amendment) Ordinance (P.O. 11) 1985 and Article 165-A was added which reads as under? 165A
Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain corporations, etc (1) For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed always to have had, the power to make a Law to provide for the levy and recovery of a tax on the income of a corporation, company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income.”
Cases referred to: Pakistan through the Secretary, Ministry of Defence v. Province of Punjab and others (PLD 1975 SC 37) and Lahore Development Authority and others v. Abdul Shafiq and others (1992 PLC 1214).
Pakistan Industrial Development Corporation, Karachi v. Commissioner of Income Tax – [1980] 41 TAX 44 (H.C.Kar.) 825.
Exemption from tax under Article 165 of the Constitution is not available to corporations owned by a provincial government.
The main question, which is one of fact, is whether the business of the Corporation was being carried on by or on behalf of the Central Government as a Department or as its agent or instrumentality. Now, it is well settled that in certain exceptional cases, including for tax
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purposes, the Court is entitled to lift the veil of incorporation and pay regard to the substance and reality behind the legal fiction. On the examination of the provisions of the Pakistan Development Corporation Act, under which the Corporation was set up, we have reached the conclusion that there is no force in the contention that the Corporation was functioning as a Department of Government or as its agent or instrumentality. Despite the fact that the capital was wholly owned by the Government and its management controlled through its appointed directors, the Corporation retained an appreciable decree of independence and freedom of action within the controlled sphere. Section 5 of the P.I.D.C. Act vests in the Board of Directors wide discretionary power of management and is required to act on commercial considerations. Section 14 of the Act gives the Corporation wide discretion in the matter of framing schemes for establishment of industries. The property which the Corporation acquires is its own property. Its directors are paid out of the Corporation‟s revenues and are not Government servants as held in a number of cases. It sues and is sued by its own name. It has power to borrow moneys required for development of industries under section 49 of the said Act. The absence of a specific provision in the P.I.D.C. Act exempting it from income tax and other taxes is significant, as in the cases of the State Bank of Pakistan, which has been granted specific exemption from income tax and other taxes by section 49 of the State Bank Act, 1936 and in the case of the Agricultural Development Bank of Pakistan by section 27-A of the Agriculture Development Bank Ordinance, 1961, as amended by Ordinance No. 45 of 1978. To treat the Corporation as if it were a Department of the Government, would defeat the real object of incorporating statutory corporations for undertaking government functions relating to industrial and commercial development, by freeing it from the redtapism or inflexibility for which Government department are notorious. Cases distinguished : West Pakistan Road Transport Board v. Commissioner of Income Tax (P.L.J. 1973 Lah. 503) = (1974) 29 TAX 53 and Sind Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and others (P.L.D. 1975 Kar. 128) = (l975) 31 TAX 114. Cases referred to : Salahuddin v. Frontier Sugar Mills & Distillery Ltd. (PLD 1975 S.C. 244); Punjab Province v. Federation of Pakistan (PLD 1956 F.C. 72) = (1960) 2-TAX (Suppl.-3); Tamlin v. Hannaford (1950 K.B. 18); Andhra Pradesh State Road Transport Corporation v. Income Tax Officer (1964) 52 ITR 524 = (l964) 10 TAX 1; President v. Mr. Justice
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Shaukat Ali (PLD 1971 S.C. 585) and A Soloman v. Soloman & Co. Ltd. [(1897) A.C. 22]. Case relied on : Commissioner of Income Tax v. Gamman (Pak) Ltd., Karachi [1968 PTD 622].
Commissioner of Income Tax, Lahore v. Government Jallo Rosin and Turpentine Factory, Lahore – [1976] 34 TAX 71 (H.C.Lah.) 826.
Goods manufactured by the Provincial Government and exported outside the province through selling and commission agents are not exempt from income tax in the hands of the Provincial Government.
Article 137(2) of the Constitution of Pakistan, 1962, expressly lays down that if a trade or business of any kind is carried on “by and on behalf” of the Government of a province outside that province that Government may, in respect of any income arising from that trade or business, be taxed by a Central Law. In the Instant case the goods manufactured by the respondent-assessee were exported to East Pakistan and abroad through their selling and commission agents, namely, Messrs. Sadiq Traders Ltd., Karachi, and from the terms and conditions of their agency agreement reproduced above, it cannot be doubted that they were carrying on the export business as agents, for and no behalf of the provincial Government. For this reason, therefore, the business thus carried on through them was not exempt from Income Tax under the Central Law. The Tribunal was not justified in holding that the income derived by the respondent from exports to East Pakistan and abroad through Messrs Sadiq Traders Ltd., Karachi, as their sole selling and commission agents, was not liable to income tax. On the merits the additional objection raised before us has considerable force. In this connection Article 185(1) of the 1973. Constitution lays down that the Supreme Court shall, to the exclusion of every other Court, have original jurisdiction in any dispute between any two or more Governments. In the 1962-Constitution there was a corresponding provision in the form of Article 57. It may be mentioned here that a some what similar provision also existed in section 204 of the Government of India Act, 1935. Under it a trade or business of any kind carried on by or on behalf of the Government of a Province in ay part of Pakistan outside that Province was not exempt from Federal taxation. In 1952 a similar dispute was taken to Federal Court under section 204 of the Government of India Act. The dispute arose between the Federation of Pakistan and the Province of Punjab in regard to the
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liability of the latter to income tax, on income derived from the Jallo Rosin and Turpentine Factory run by the Province. The Income Tax Officer served a notice under section 34 of the Income Tax Act, on the managing agents of the factory requiring them to furnish a return for income from the factory for the assessment year 1942-43 and completed for the assessment against the Province of the Punjab. On this the Punjab Province filed the suit against the Federation of Pakistan in the Federal Court under section 204 of the Government of India Act, 1935 and questioned the jurisdiction of the Income Tax Officer to complete the assessment. The Federal Court held that he assessment against the Province of Punjab was ab initio void and without jurisdiction. In our respectful opinion this authority goes a long way in interpreting Article 57 of the 1962 Constitution. It can therefore, be safely held that the exclusive jurisdiction to settle this dispute between the Central and the Provincial Government vested in the Supreme Court. Therefore, not only that the impugned order passed by the Tribunal was bad but the assessment completed by the Income Tax Officer from its very inception was ab initio void and without jurisdiction. Cases referred to : Goswami Shri 108 Shri Girdhnriji Shri Govindratji Shri Govindraiji Maharaj v. Shri Govern Dhanlalji Girdhariji Moharaj [(1893) 21 I.A. 13]; Sulley v. Attorney-General (157 E.R. 1364); Erichsen v. Last [(1881) 8 Q.B.D. 414]; Baillie v. Goodwin & Co. [(1886) 33 Ch. D. 604]; The Commissioner of Income tax, Bombay Presidency and Aden v. Chunilal B. Mehta of Bombay [176 I.C. 15 (P.C)]; The Firm Haranand Murti Dhar v. Gurmukh Rai Radhakishen (AIR 1923 Lah. 427); Hasi v. The Industrial & Prudential Assurance Co. (AIR 1937 Sind 17) and Messrs Fleming Shaw & Co. v. Messrs K.J. Bahadur & Co. (AIR 1936 Sind 121). Case relied on: Punjab Province v. Federation of Pakistan (PLD 1956 F.C. 72); (1960) 2 TAX (Suppl.) 3 (F.C.).
Sind Industrial Trading Estate Ltd., Karachi v. Central Board of Revenue and 3 others – [1975] 31 TAX 114 (H.C.Kar.) 827.
Sind Industrial Trading Estate Limited, a department of the Provincial Government; is not immune from taxation.
The Sind Government‟s resolution floating the Sind Industrial Trading Estate Ltd. was passed under the Constitutional powers conferred on the Province by the Government of India Act, 1935. with regard to the development of industries and trade which powers the Province continued or continue to have under the Constitution of 1956, 1962 and 1973. The Sind Government, instead of discharging its
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Constitutional functions for the development of Industries in the Province, resorted to the device of formation of a Corporation or a Company under the Companies Act, 1913, instead of discharging these functions directly through a department of the Government. Thus, the Government of Sind clothed the activities entrusted to it under the Constitution for the development of trade and industries in the Province with a corporate personality, or, to use the expression which had found favour with their Lordships of the Supreme Court threw a veil of corporate personality over its functions as the Government of the Province of Sind. Nevertheless, it is the substance of these governmental activities which should be looked at and not the veil of juristic personality thrown over it. Thus, the Sind Industrial Trading Estate Ltd., being nothing more than a department of the Provincial Government, though clothed with juristic personality, performs the essential functions entrusted to the Province with regard to the development of trade and industries. Of necessity, therefore, the income of this body corporate is the income of the Provincial Government, and, under the various constitutional provisions referred to above, this income is not assessable to tax under the Income Tax Act, 1922. A Company limited by guarantee is generally a non-profit making association and such a Company is an alternative to a Company limited by shares. Under the scheme of the Companies Act, 1913, a Company cannot be created in which the members are free from any liability whatsoever. Therefore, ordinarily a Company created under the Companies Act is limited by shares, that is, the member of the Company are made liable is contributories to the extent of the shares they have taken or they have agreed to take in the Company. But such a Company is not suitable for non-profit making association, and therefore as an alternative to such a Company, the Companies Act permits the incorporation of a Company limited by guarantee. that is, a Company in which the members agree that, in the event of liquidation of the Company they will subscribe an agreed amount. In effect, such members are guarantor of the Company‟s debts up to the agreed amount. As regards the working capital of such a Company, it generally comes from other sources, that is, endowments grants, fees, subscriptions, etc. Cases referred to: The West Pakistan Road Transport Board v. Commissioner of Income Tax (PLD 1974 Note 9) = (1974) 29 TAX 53; The President v. Mr. Justice Shaukat Ali (PLD 1971 SC 585); Commissioner of Income Tax v. E V.H. Miller (PLD 1959 S.C. (Pak) 219) = (1959) 1 TAX I (S.C.) and Bacus S.R.L. v. Servicia Nacional Del Trigo [(1957) 1 Q.B. 438].
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West Pakistan Road Transport Board, Lahore v. Commissioner of Income Tax, Lahore – [1974] 29 TAX 53 (H.C.Lah.) 828.
Road Transport Board performing functions for the Provincial Government under its directions is not a taxable entity.
The assessee, the West Pakistan Road Transport Board, was created by the Provincial Government, under the Motor Vehicles Act, 1939, as amended by the Motor Vehicles (Amendment) Act, 1951, to operate transport services on its own behalf. Out of the seven members, constituting the Board, four members were appointed by the Provincial Government and the remaining by the Central Government. The share capital was contributed by the Central and the Provincial Governments in the ratio of 25: 75 per cent, respectively. In its assessments for the charge years 1957-58 to 196364 the Board claimed that having been functioning as an instrument of the Provincial Government it was not a taxable entity and that the profits earned by the Board being the profits of the Provincial Government the same was not liable to tax under the Income Tax Act. The Income. tax Officer repelled the contentions and charged to tax the profits of the Board. When the matter reached the Appellate Tribunal it upheld the orders of assessment with the modification that the Board could not be assessed as a company or an individual but as an Association of persons. Reversing the order of the Tribunal, the High Court: Held,
that the Road Transport Corporation is not a taxable entity and its profits are the income of the Provincial Government and thus exempt from tax.
The Road Transport is a statutory Corporation performing functions of the Government and under its direct control. It would not be out of place to equate it with the Government itself as one of its Departments, its income would, therefore, be immune from taxation under the Federal Law. The profits of the Board are divided between the Provincial Government and the Central Government and it is those that are proposed to be taxed. The Federal and the Provincial Governments are exempt from Income Tax and, therefore, even according to this analysis the Road Transport Corporation is not a taxable entity. Cases review : This judgement is no more valid in view of Article 165A of the 1973 Constitution of Pakistan, which reads as under: “For the removal of doubt, it is hereby declared that Majlis-eShoora (Parliament) has, and shall be deemed always to have
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had, the power to make a law to provide for the levy and recovery of a tax on the income of a corporation, company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income.” Cases referred to: Punjab Province v. The Federation of Pakistan (PLD 1956 F.C. 72) = [1960] 2 TAX (Suppl.) 3; Wali Muhammad v. General Manager, Electricity, WAPDA, Lahore (PLD 1964 Pesh. 167); Abdul Razzak Malik v. The Water and Power Development Authority, etc., (PLD 1973 Lah. 186); Bacus S.R.L. v. Servicio National Del Trogo (1957) 1 Q.B. 438; Dailmer Co. Ltd., v. Continental Tyre & Rubber Co. (Great Britain) Ltd., [1961] 2 A.C. 307; William Cory & Sons Ltd. v. Dorman Long & Co. Ltd. [1936] 2 All E.R. 396 and Commissioner of Income Tax v. E.V. Miller (PLD 1959 219 (S.C.) = [1959] 1 TAX 1 (S.C.). _______________
LIABILITY TO TAX WHEN ARISES
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) 829.
Liability under the Income Tax gets crystalised on the first day of the assessment year with the passage of the Finance Act / Ordinance.
It is by now a well settled principle that the liability to pay tax is created by the Income Tax Act but the payability and the quantification of tax depend on the passing and application of Annual Finance Act. In this regard, reference may be made to the case of Wallace Brothers and Co. Ltd., v. Commissioner of Income Tax, Bombay City and Bombay Suburban District [1948] 16 ITR 240 and the case Chatturam Horilram Ltd. v. Commissioner of Income Tax, Bihar and Orissa [1955] 27 ITR 709. In the above first case the Privy Council and in the second case the Indian Supreme Court has dilated upon the above aspect succinctly. Agents are not liable to deduct tax under section 50(3) The payability and the quantification of taxes were to be determined under the relevant Finance Acts upon their enactment. But this was not done in the present case. Instead of framing assessment orders of the relevant assessment years in the name of the appellant as the agent of the foreign supplier, the assessment orders were made in the name of the foreign supplier, but the appellant were penalised under sub-section
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(7) of section 18 of the Act for having failed to deduct the taxes under subsection (3-B) of above section 18 at the time of making payments to the foreign supplier. Since the appellant were liable to pay taxes as an agent for the foreign supplier, they were not obliged to deduct taxes under the above provision and, therefore, subsection (7) of section 18 of the Act for imposing penal interest upon the appellant could not have been pressed into service as was rightly held by the Income Tax Appellate Tribunal. The High Court fell into error of law by taking a different view. When they are liable to tax themselves on behalf of non-residents. Commissioner of Wealth Tax (Central), Karachi v. Paracha Textile Mills Ltd., Karachi – [1983] 48 TAX 145 (H.C.Kar.) 830.
Time of accrual of income, meaning of.
The liability of Income Tax is relatable to sections 3 and 4 of the Income Tax Act and it comes into existence as soon as the previous year expires though there may not be quantification of the amount by the competent authority till the passing of an assessment order in pursuance of section 22 of the Income Tax Act. A person becomes liable to pay Income Tax if he earns an amount exceeding the amount exempted from the payment of income tax notwithstanding that he is not an assessee or that he has not filed an Income Tax return. He is debtor to the Federal Government. In the instant case the respondent company made a provision of Rs.10,09.000/- being the Income Tax liability. It was open to the Wealth Tax Officer to ascertain, whether prima facie the above amount was worked out on the basis of the Income Tax Schedule on the income declared by the respondent company. It is true that an assessee cannot claim adjustment of an income tax amount at random, however he can claim adjustment of an amount calculated in accordance with the Schedule of the Income Tax on the income declared by him. Since this aspect has not been adverted to by the Wealth Tax Officer or by the Appellate Assistant Commissioner for Wealth Tax or by the Appellate Income Tax Tribunal, we cannot go into the question as to whether the above figure of Rs.10,09,000/- was a figure arrived at on the basis of the Schedule of Income Tax then in force on the declared income. Cases referred to: Kohinoor Chemical Ltd. v. Sind Employee‟s Social Security Institution (PLJ 1977 SC 331-336); Chatturam and others v. Commissioner of Income Tax, Bihar (1947) 15 ITR 302.
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Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax – 5 ITC 363 (PC) 831.
„The thing to be taxed‟ is the amount of profits or gains.
„The thing to be taxed,‟ is the amount of profits or gains. The word „profits‟ is to be understood in its natural and proper sense – in a sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realized and the meaning is rendered plain by the words „payable out of profits‟. Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax – [1948] 16 ITR 240 (PC) 832.
Liability to tax arises only under charging section, and that too after close of previous year, though its quantification is made later.
The charge for tax at the rate fixed for the year of assessment is a charge in respect of the income of the „previous year‟, not a charge in respect of the income of the year of assessment as measured by the income of the previous year. The rate of tax for the year of assessment may be fixed after the close of the previous year and the assessment will necessarily be made after the close of that year. But the liability to tax arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though quantification of the amount payable is postponed. _______________
CONCEPT OF INCOME
Mrs. Samina Ayub Khan v. Commissioner of Income Tax, Rawalpindi – 1980 SCC 527 = [1981] 43 TAX 18 (S.C.Pak.) 833.
Scope of „Income‟.
It will be seen that the term „income‟, as used in the Income Tax Act is, indeed, a term of wide significance, and general and ordinarily it connotes a periodical monetary return, coming in with some sort of regularity, or expected regularity from a definite source; but, as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumeration; and income need not necessarily be the recurrent return from a definite source, though it is generally of that character. It may consist of a series of separate receipts, as for
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instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend upon its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee, facts which are generally within his particular knowledge, the Income Tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source. 834.
Income from undisclosed source cannot be termed as casual or non-recurring.
It does not need much reasoning to see that if the source of income is not disclosed or satisfactorily explained, then it is not possible to hold that the income was not from business or from the exercise of a profession, vocation or occupation; or that it was of a casual and nonrecurring nature. All these factors and attributes can be ascertained only if the assessee places all the relevant facts before the Income Tax authorities, for otherwise the nature of the income and its source are clearly left in the realm of speculation. Not a single case was cited at the bar to show that the exemption granted by clause (vii) of subsection (3) of section 4 of the Act would be available in the case of income from an undisclosed source. The stringent requirements spelt out in this clause can only be satisfied by the disclosure of all the relevant facts, and not otherwise. In the circumstances, the High Court appears to us to be right in taking the view that the appellant had failed to make out a case for the grant of exemption under this clause. 835.
Burden to prove exemption is on assessee.
Once, a finding is recorded that the amounts in question could be treated as income within the meaning of the charging section, the burden of proving that the income qualified for exemption under any of the provisions of the law rests with the assessee. M. Rehman, Income Tax Officer, and others, v. Narayanganj Company (Pvt.) Ltd. – 1970 SCC 370 = [1971] 23 TAX 223 (S.C.Pak.) 836.
Income cannot be taxed twice.
The learned judges in the High Court relied on the following remarks of the Indian Supreme Court in the case of Commissioner of Income Tax, U.P. v. Kanpur Coal Syndication [(1964) 10 TAX 175]: “Section 3 imposes a tax upon a person in respect of his total income. The persons on whom such tax can be
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imposed are particularised therein, namely, Hindu undivided family, company, local authority, firm, association of persons, partners of firm or members of association individually. The section, therefore, does not in term confer any power on any particular officer to assess one of the persons described therein, but is only a charging section imposing the levy of tax on the total income of an assessable entity described therein. The section expressly treats as association of persons and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either or the said two entities according to the provisions of the Act.” The rule issued in the case was in this view made absolute by the Division Bench of the High Court and the impugned notice under section 65 set aside, from which leave to appeal was generated to consider whether it was a case of double assessment or a case of rectification of assessment wrongly made upon individual partners in respect of the income of an unregistered firm. Commissioner of Income Tax v. Habib Insurance Co. Ltd., – [1975] 32 TAX 232 (H.C.Kar.) 837.
Insurance Company is required to file return as one unit and not under different heads prescribed in section 6 of 1922 Act [corresponding to Section 15 of the Ordinance].
Section 3 of the 1922 Act makes the total income of the previous year of 4 an assessee chargeable, and section 6 lays down the several heads of income, profits or gains which shall be so chargeable to income tax. The method of computation of the income under different heads set-out in section 6 is embodied in sections 7, 8, 9, 10 and 12 of the Act. But in view of section 10(7) of the Act those have no application to the case of insurance companies, the computation of the profits and gains of which is to be done according to the mode prescribed in the First Schedule to the Act. An insurance company has, therefore, not to submit its returns under different heads, but as one unit of income on the basis of national income prescribed under the Schedule. Section 4 which defines the range of the total income is subject to the provisions of the Act and, therefore, in the case of insurance companies it is this notional income which shall be chargeable as provided in section 3 of the Act. Even if the various sources of this total income be ascertainable then too the same shall have to be
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treated as a single unit and could be subject only to the provisions of section 3 which is the charging section. Pakistan International Airlines Corporation v. Commissioner of Income Tax – [1975] 32 TAX 225 (H.C.Kar.) 838.
The Central Government made good the losses sustained by the Corporation within three years of its incorporation amount paid held to be “income” of the PIAC.
The Pakistan International Airlines Corporation, Karachi, the assessee in the present case, was created by the Pakistan International Airlines Corporation Ordinance (Ordinance I of 1955) which was subsequently replaced by the Pakistan International Airlines Corporation Act (Act No. 19 of 1956). Under section 26 of the said Act, the Central Government undertook to make good any losses sustained by the Corporation during the three years next after 30th September, 1963. In the account period relevant to charge years 195657 the Central Government paid a sum of Rs.1,05,13,609.00 in terms of the said section 26 of the P.I.A.C. Act, 1956. The assessee claimed this payment as a replenishment of its capital which, according to the assessee, stood reduced to the extent of the amount received by the assessee from the Central Government. This plea of the assessee was rejected by the Income Tax Officer, who treated the receipt of the said amount as a revenue amount and brought it to tax. The assessee filed direct appeal before the Tribunal against the decision of the Income Tax Officer and the Tribunal upheld the order of the Income Tax Officer. Mr. Ali Athar, the learned Counsel for the applicant/assessee, contended that as on a plain reading of this section, the replenishment of the losses could take place only after the loss had actually accrued, and been determined as such, the capital of the assessee by that time had already diminished. According to him, a loss always results in diminishing the capital, and Corporation, while running its business at a loss, could incur expenditure only by utilising its capital. He contended that making good of a loss was even different from the subsidy, which in the case of the P.I.A.C. also was being paid by the Central Government at that time, every ticket for Karachi to Dacca at Rs.50/- and for Lahore to Dacca at Rs.75/-. The whole object of the Government, according to the learned Counsel. was that as the Corporation was expected to run at a loss in the initial stage, the object of the section was that the capital of the Corporation should not be diminished and that it should be kept intact, and a guarantee to make good the losses, already accrued,
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was in effect, to make the payment towards reduction of capital that took place during the three years. In his submission the working expenses of the Corporation were more than the receipts earned, and the Corporation had of necessity to depend on its capital and in effect the Government by making good the losses only supplemented the deficiency in capital. On the other hand Mr. S.A. Nusrat, learned Counsel for the Department contends that the amount in question was paid by the Central Government to the assessee in order to offset the trading losses of the assessee and, thus,.......the receipts are in the nature of revenue receipts and, therefore, liable to be considered for tax purposes. Held, that the view canvassed by the learned Counsel for the assessee cannot be sustained upon consideration of the facts of this case and the interpretation of section 26 of the P.I.A.C. Act and in the result, the amount of Rs.1.05,13,609 paid by the Government to the assessee for making good the loss sustained by the asses-see is found to be in the nature of income receipts liable to tax under the Income Tax Act, 1922. Cases referred to : Seaham Harbour Dock Co. v. Crook (16 TAX Cases 333); Nizam‟s Guaranteed Railway v. Wyatt (2 T.C. 538); Blake v. Imperial Brazijian Railway Co. (2 T.C. 58); Pretoria-Pletersburg Railway Company v. Elwood (6 T.C. 508); Smart v. Lincolashir Sugar Co. Ltd (20 Tax Cases page 543): Ahmadpur Katwa Railway Co. Ltd., in re. (1935) 3 M.R. 277; Higgs v. Wrightson (26 Tax Cases73); Commissioner of Income Tax, Madras v. Madras and Southern Mahratta Railway Company Limited (1940) 8 ITR 280 and Commissioner of Income Tax v. The Madras and Southern Mahratras Railway Company Limited (1943) 9 ITR 380.
Kedar Narain Singh v. Commissioner of Income Tax – [1938] 6 ITR 157 (All.) 839.
Word „income‟ is of elastic ambit.
It is clear that the word „income‟ is an expression of elastic ambit, and Courts when considering whether any particular sum can be said be the income of an assessee have attempted either to bring it in, or to exclude it from a certain description which they have chosen to give to the word „income‟ but they have always qualified the said description by saying that it is not exhaustive. It is, however, clear that the words „income, profits and gains‟ used in the Act are used in a disjunctive sense, and the word incomes is not limited by the words „profits and gains‟.
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Rani Amrit Kunwar v. Commissioner of Income Tax – [1946] 14 ITR 561 (All.) 840.
Word „income‟ has to be given its ordinary meaning.
There is nothing in the Indian Income Tax Act to warrant any general conclusion that it is only in a case in which, if the payment is discontinued, the recipient will have an immediate right of action against the payer, that it will be income in his hands in the Indian Income Tax sense. That is to put too limited a construction on the word „incomes. If the payments are such as to come within the category of payments which are casual and non-recurring then it is to be observed that the Act itself has taken them out of the category of „income‟. The very fact that the framers of the Indian Income Tax Act found it necessary by a special clause to exempt casual and nonrecurring receipts from the category of income, profits or gains is itself, an indication that, but for that exemption, they are to be regarded as capable of falling within the class of income, profits or gains under the charging section. If it is to be assumed that ex hypothesi a casual and non-recurring payment could never be income, then the statutory exception of it would be otiose and unnecessary. In construing the word „income‟ in the Indian Income Tax Act, one has to ask oneself whether, having regard to all the circumstances surrounding the particular payments and receipts in question, what is received is of the character of income according to the ordinary meaning of that word in the English language or whether it is merely a casual receipt or a mere windfall. Commissioner of Income Tax v. Shaw, Wallace & Company – 6 ITC 178 (PC); Rani Bhubneshwari Kuar v. Commissioner of Income Tax – [1940] 8 ITR 550 (Pat.) 841.
Income connotes a periodical monetary return „coming in‟ with some sort of regularity or expected regularity from definite sources.
The object of the Act is to tax „income‟, a term which it does not define. It is expanded, no doubt, into „income, profits and gains‟, but the expansion is more a matter of words than of substance. Income in this Act connotes a periodical monetary return „coming in‟ with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Thus, income has been likened pictorially to the fruit of a tree or the crop of a field. It is
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essentially the produce of something, which is often loosely spoken of as „capital‟. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 842.
„Income‟ need not be recurrent.
It is not correct to regard as an essential element in any of the definitions of income a reference to the analogy of fruit, or increase or sowing or reaping or periodical harvests. But it is clear that such picturesque similes cannot be used to limit the true character of income in general. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which „income‟ may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price. Kedar Narain Singh v. Commissioner of Income Tax – [1938] 6 ITR 157 (A1l.); Rani Amrit Kunwar v. Commissioner of Income Tax – [1946] 14 ITR 561 (All.) 843.
The concept of „income‟ is not limited by the words „profits‟ and „gains‟.
The word „income‟ as it is used in the Income Tax Act has often been characterised by judicial decisions as formidably wide and vague in its scope. It is a word of elastic import and its extent and sweep are not controlled or limited by the use of the words „profit and gains‟. As has been observed by Sir George Lowndes in Commissioner of Income Tax v. Shaw Wallace & Co. [1932] 2 Comp. Cas. 276 (PC) “the object of the Indian Income Tax Act is to tax „income‟, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words than of substance. Anything which can properly be described as income is taxable under the Act unless expressly exempted”. The diverse forms which income may assume cannot exhaustively be enumerated, and so in each case the decision of the question as to whether any particular receipt is
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income or not must depend upon the nature of the receipt and the true scope and effect of the relevant taxing provision. The receipt may be an income for the purpose of taxation though it may not amount to profit. Maharajkumar Gopai Saran Narain Singh v. Commissioner of Income Tax [1935] 3 ITR 23 (PC) 844.
Meaning of the word „income‟ in „income, profits and gains‟ is not limited by „profits and gains‟.
The meaning of the word „income‟ in „income, profits and gains‟, as occurring in section 3 of the 1922 Act [corresponding to section 9 of the 1979 Ordinance], is not limited by „profits and gains‟. Anything which can properly be described as „income‟, is taxable under the Act unless expressly exempted. The assessee, who owned vast estates, conveyed them to R in consideration for (a) R‟s undertaking to pay his debts totalling approximately Rs.10 lakhs; (b) Rs.4.73 lakhs in cash; and (c) an annuity of Rs.2.40 lakhs per annum for life. The question was whether annuity was capital receipt being part of the price, or a taxable income. The assessee claimed that there was no „profits and gains‟ to him considering the expectancy of his life, and since the word „income‟ should be interpreted in a limited sense in association with the „profits and gains‟, the income was not taxable. Held that the assessee‟s contention was not sustainable. The impugned income was taxable under the Income Tax Act even though the annuity did not constitute or provide a profit or gain to the assessee. Note: The words „profits and gains‟ now occur in section 2(24) of the Income Tax Ordinance, 1979.
Commissioner of Income Tax v. Sir Kameshwar Singh – [1935] 3 ITR 305 (PC) 845.
Question whether a receipt is taxable may in certain cases depend upon the nature of business.
There are no doubt cases where the question whether a particular item of receipt is taxable or not depends upon the nature of the recipient‟s business. Thus, the profit made on the realisation of an investment is a taxable income receipt in the hands of an investment company which engages in the business of buying and selling investments but is a non-taxable capital receipt in the hands of an ordinary investor who is not engaged in that business. _______________
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SCOPE OF PROTECTION UNDER THE ECONOMIC REFORMS PROTECTION ACT OF 1992
Zahur Textile Mills Limited v. CBR through Chairman, Government of Pakistan, Islamabad and 2 others – [2000] 82 TAX 275 (H.C.Lah.) = 2000 PTD 303 846.
Scope of protection under the Economic Reforms Protection Act of 1992.
From a perusal of various provisions of Act, 1992 it becomes clear that it provides protection to the various economic measures taken on or after 7.11.1990. Although it is true that section 6 of the Act, 1992 does not use the words “economic reforms” but it is to be seen that this word does not appear anywhere except in the preamble and the definition clause. In case of doubt about interpretation of this statutory provision preamble can validly be referred to. It reads as under:Whereas it is necessary to create a liberal environment for savings and investments and other matters relating thereto; And whereas a number of economic reforms have been introduced and are in the process of being introduced to achieve the aforesaid objectives; And whereas it is necessary to provide legal protection to these reforms in order to create confidence in the establishment and continuity of the liberal economic environment created thereby. The definition of “economic reforms” in the Protection of Economic Reforms Act, 1992 is contained in section 2(b) which reads as under:– 2(b)
„economic reforms‟ means economic policies and programmes, laws and regulations announced, promulgated or implemented by the Government on and after the seventh day of November, 1990, relating to privatization of public sector, enterprises, and nationalized banks, promotion of savings and investments, introduction of fiscal incentives for industrialization and deregulation of investment, banking, finance, exchange and payment systems, holding and transfer of currencies; and;
A cumulative reading of section 2(b) and the preamble would who that the saving clause apply only to the economic measures taken after 5th November, 1990 pursuant to the economic policy of the Government
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which granted the incentives. The Intention of the Legislature becomes manifest from a perusal of the Schedule. If the argument of the learned counsel is correct that section 6 applies to all the notifications issued before the promulgation of the Act, then there was no necessity of specifically mentioning two notifications in the Schedule. It is thus obvious that what section 6 says is the measures taken by the Government after 5th November, 1990 which was the date on which the then Government came into power. Arshad Mahmood v. Government of Pakistan Secretary, Ministry of Interior and Narcotics Islamabad and another – 1998 PTD 370 (H.C.Lah.)
through Control,
Scope of Protection of Economic Reforms Act, 1992 vis-a-vis other laws.
847.
Suffice it to say that before the enforcement of Protection of Economic Reforms Act, 1992, Drugs Act and Anti-Narcotics Task Force Ordinance and other Narcotics Laws were already enforced. If the answer is yes, which is factually true then in that case they cannot be taken away out of the hitting scope of section 3 of the Protection of Economic Reforms Act, 1992, in which “override any other law for the time being in force” is mentioned. In view of the above and in spite of my best efforts to protect the socalled legal and genuine interest of the State, I find no way out. As far as the present case is concerned, I am of the considered view:(i)
that the petitioner has legal protection. Foreign Exchange Currency was brought to Pakistan through different banks and the National Bank of Pakistan cannot be ordered to freeze the account;
(ii)
that the order of freezing the Account No. FC-941 is wholly without jurisdiction; and
(iii)
that the petitioner/account holder is not liable to be proceeded against. As far as this matter is concerned, it is alarming that the inquiry was pending for the last about three years and the authorities could not come to a definite conclusion. No criminal case was ever registered, hence there is a smell of mala fide and some ulterior motives.
In view of the above findings the writ petition is accepted. Order dated 13.7.1993 freezing the account and all the other proceedings pertaining to that are quashed being without jurisdiction. The account holder is at liberty to operate his account. Bank Manager is present
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before the Court. Keeping in view his submissions, it will be improper to obstruct the smooth working of the bank. Hence it is further directed that the total amount of foreign exchange currency be released to the petitioner on his request but in two instalments. The first instalment shall be paid with immediate effect if the petitioner so requires. As far as the remaining amount/currency with interest, if any, is concerned, releasing date shall be fixed by this Court in submission of an application by the petitioner. Hudabiya Engineering (Pvt.) Ltd., Lahore v. Pakistan through Secretary, Ministry of Interior, Government of Pakistan, Islamabad – [1997] 76 TAX 302 (H.C.Lah.) 848.
Provisions of Economic Reforms Act, 1992 overrides Income Tax Law to the extent protections are provided in the former enactment.
In our opinion on its plain reading, section 5 not only grants full immunity to the holders of foreign currency accounts but also provides that complete secrecy be maintained in respect to the transactions in these accounts. We are also of the view that section 5 and 9 of the Act have different scope and operate in different fields and are, therefore, not complementary to each other. While section 5 of the Act in itself provides complete code so far as foreign currency accounts are concerned, section 9 applies to transactions other than those in foreign currency. There may be no cavil with the principle of interpretation relied upon by the learned single Judge that various provisions in the Act must be read together and the Act should be construed as a whole but that principle has no application in the present case. Be that as it may, all principles of interpretation of Statutes are nothing but tools which the Courts employ to find true legislative intent which cannot be defeated by relying upon some abstract principle. It will be seen from the above that Protection of Economic Reforms Act, 1992 was promulgated pursuant to the Policy of the Federal Government to protect various economic reforms undertaken by it in order to provide incentives to investors and to encourage inflow of foreign currency into Pakistan. While interpreting such a law relating to economic matters the Courts should so far as possible adopt that interpretation which furthers the object for which the same has been promulgated. The grant of immunity to the foreign exchange accounts is not something new or unique. In the past, the Government time and again introduced various schemes with a view to attract investment particularly in foreign currency in the country. These include the
572 Section 9 & 10
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issuance of foreign exchange bearer certificates, foreign currency bearer certificates and foreign deposit bearer certificates. All these measures are part of fiscal policies which a Government is entitled to lay down keeping in view the national and economic interest. It is also to be seen that as section 4 and 5 of the Act, both deal with foreign currency, while interpreting section 5, section 4 of the Act cannot be lost sight of. It provides complete freedom to all citizens of Pakistan and all other persons to bring, hold, sell and take out foreign currency in any form. It specifically provides that no person shall be required to make any foreign currency declared at any stage and also ordains that no one shall be questioned in regard to the same. This clearly brings out the legislative intent that no question can be asked from the person holding any foreign currency in respect of the same. That being so, no inquiry either into the source or the holding of the foreign currency can be initiated or made by any agency especially when non-obstinate the clause in section 3 of the Act provides that the Act shall over-ride all other laws. On consideration of various provisions of the Protection of Economic Reforms Act, 1992, we have reach the conclusion that so far as foreign currency accounts are concerned, the holders thereof, have complete immunity from inquiry and scrutiny and complete secrecy must be maintained in respect of those accounts which cannot be violated by any Agency or functionary. That being so, neither the Income Tax Authorities nor Federal Investigation Agency had any jurisdiction to hold any inquiry in respect of the transactions in the foreign currency accounts nor could the same be made basis of criminal prosecution. _______________
CHARGE ON BENAMI TRANSACTIONS
Maulvi Brothers, Lyallpur v. Commissioner of Income Tax, Rawalpindi – [1980] 42 TAX 33 (H.C.Lah.) 849.
Charge on benami transactions.
There are certain admitted facts, namely, that the yarn and the spare parts were purchased and consumed jointly by all the factories. Similarly, the production and sales were also recorded jointly and a combined set of books of accounts maintained by the assessee for the five units, Mr. Javed Hashmi was quite fair in conceding that these factors march with the hypothesis that the five concerns constituted a joint business.
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His objection, however, was that despite the existence of these facts, some other cogent evidence was needed to positively establish the benami character of the business and that it was for the departmental authorities to have mustered such evidence, but they failed to do so. In his submission, in the absence of such evidence, the inferences drawn by the Tribunal cannot be sustained. We are unable to agree with the learned counsel. It was not refused that the four power looms were exempt from the payment of excise duty and sales tax. After appreciation of all learned counsel. It was not refuted that four power looms were exempt the relevant material the tribunal took the view that the assessee ran an economic unit of 20 looms but in order to avoid the levy, he adopted the device of showing 4 power looms in the names of each of the two partners, and the remaining 12 looms were claimed to be owned by 3 other factories. In the „benami‟ transactions, the ostensible is cautiously painted as real and the arrangement is so notoriously designed and carefully carried out that it becomes very difficult to unveil the truth. Particularly in a case where the „benamidar‟ is in collusion with the principal it is too much to expect the department to adduce direct and express evidence to unravel the assessee‟s arrangements. In such like cases the soundness of the findings given by the tribunal must be determined by appreciation of the accumulative effect of various bits of evidence collected by the department, in the light of the surrounding circumstances. The entries in the assessee‟s books of account, installation of the five units in the same premises, his control over the entire business from the stage of procurement of raw material till the disposal of manufactured cloth and realization of profits, coupled with exemption of four power looms from the excise duty and sale tax, constitute sufficient evidence, to support the findings of the Tribunal that Haneef Weaving Factory, Ishfaq Weaving Factory and Azhar Weaving Factory were „benamidar‟ for the assessee. We do not find any merit in the contention that the Revenue had failed to prove that the capital investment for the units was made by the assessee. In our opinion, in the face of overwhelming evidence of jointness of business, strict proof of initial investment of the three units, is not necessary. We do not think that in the instant case, the onus of proof was placed on the assessee. In any case it is quite clear to us that on consideration of entire material a positive finding of fact has been given by the tribunal. In such circumstances the question of burden of proof becomes immaterial. It is not disputed that the assessee was given
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sufficient opportunity by the Income Tax Officer to adduce proof in support of this stand. Cases distinguished : Narayan Chandra Baldia v Commissioner of Income Tax [1951] 20 ITR 287; S.N. Ganguly v. Commissioner of Income Tax (1953) 24 ITR 16; Sovaram Jokhiram v. Commissioner of Income Tax (1944) ITR 110; Ramkinker Banerji v. Commissioner of Income Tax (1936) 4 ITR 108 (Pat.); Madura Knitting Co. v. Commissioner of Income Tax (1956) 30 ITR 764 and Para Ram and another [109 I.C. 1928, 361]. Cases referred to : Shree Meenakshi Mills Ltd. v. Commissioner of Income Tax (AIR 1957 SC 49); Gangadara Ayyar and others v. Subramania Sastrigal and others (AIR 1949 F.C. 88); Muhammad Anwarullah Mazumdar v. Tamina Bibi and others (1971) SCMR 94; Robins v. National Trust Co. Ltd. (1927) A.C. 515 and Edwards (Inspector of taxes) v. Baistow (1955) 28 ITR 597. _______________
TESTS TO DETERMINE WHETHER A RECEIPT IS A REVENUE OR CAPITAL RECEIPT
Indus Valley Construction Co. v. Commissioner of Income Tax (East), Karachi – [1984] 51 TAX 55 (H.C.Kar.) 850.
Nature of receipt is determined with reference to the facts of each individual case.
In the present case the agreement in question can be termed as a profit making apparatus. The applicant and the foreign firm were to act as a joint venture for the purpose of earning profits. This was not one of the agreements entered into in ordinary course of business and, therefore, the two cases of Indian Supreme Court relied upon by the Tribunal factually have no application to the present ease. Whereas the above thus cases relied upon by Mr. Ali Athar on all fours are applicable to the present case. The basic question in issue, is in what form the above amount of Rs.4 lacs was received by the applicant. This was a credit amount in favour of the foreign firm. The question, whether it could have been appropriated by the applicant towards the alleged losses suffered by them, is debatable, as their entitlement to any amount of damages was not adjudicated upon by any competent forum. Therefore, the applicant‟s above act of appropriation cannot change the nature of the above amount. The nature of an amount is determined with reference to the time of receipt and/or the time of accrual. Any subsequent posting in the account by the recipient
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unilaterally not backed by consent of the payer or by an order of a competent Court/forum cannot alter the nature of such amount. We are of the view that the Income Tax Officer, as well as the Tribunal were not justified in treating the above, sum as a trading profit; for the purpose of Income Tax. Our answer to the above first question is, therefore, in the negative. In view of the above answer, the second question has become redundant. Cases relied on: Morlay (H.M. Inspector of Taxes) v. Tattersall (22 Tax Cas. 51); Hotel Metropole Ltd. Karachi v. Commissioner of Income Tax (1973 PTD 371) = (1973) 28 TAX 96; Van Den Verghs, Ltd. v. Clark (H.M. Inspector of Taxes) (19 Tax Cas. 390) and Hari Kailash & Co. v. Commissioner of Income Tax (1952) ITR 195. Cases distinguished : Commissioner of Income Tax v. South Indian Pictures Limited [1956] 29 ITR 910 and Commissioner of Income Tax v. Rai Bahadur Jai Ram Valji and other [1959] 35 ITR 148.
Commissioner of Income Tax v. Usman Bhai – [1967] 16 TAX 65 (H.C.Kar.) 851.
Share income in advance rent is capital receipt.
The assessee was an allottee of Krishna Flour Mills of Sukkur, an evacuee property, under an allotment order made by the Rehabilitation Commissioner, Sind. During the accounting years, relevant to the assessment years 1956-57 and 1957-58 the assessee received a sum of Rs.3,600 as his share income from the evacuee property. This income was at first declared by the assessee in his return of income but subsequently through a revised return this amount was claimed as exempt from the tax on the ground that this was “public dues” within the meaning of section 2(10) of the Displaced Persons (Compensation and Rehabilitation) Act, 1958. The Income Tax Officer rejecting the assessee‟s contention added the amount to the total assessable income. The Appellate Assistant Commissioner reversed the order of the Income Tax Officer holding that the receipt in question was of a capital nature. The Appellate Tribunal affirming the order of the Appellate Assistant Commissioner held that in view of section 2(10)(a) and (b) of the Displaced Persons (Compensation and Rehabilitation Act, 1958, the amount received by the assessee was of a capital nature. On a reference: Held,
that the Appellate Tribunal was perfectly justified in coming to the conclusion that the amount received by the assessee cannot be construed as revenue receipt but receipts of a capital nature. Once it is found that any advance was received by an allottee from the evacuee
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property of the nature described above it has to be accounted for later on after his claim is verified and he is liable to get its adjustment towards the verified claim or pay back the excess received by him. The position in law would be that the receipt of such an amount is not in the nature of an income assessable to Income Tax. Habib Bank Safe Deposit Vault v. Commissioner of Income Tax – [1967] 15 TAX 212 (H.C.Kar.) Where Memorandum of Association authorising sale and purchase of shares, profits from sale of shares is revenue receipt.
852.
The assessee, a public limited company, was incorporated for setting up safe deposit vaults. Besides, the objects of the company contained in the Memorandum of Association indicated that the purchase and sale of shares was one of the businesses of the assessee. In its return of income the assessee declared surplus arising out of sale of shares but claimed exemption on the ground that the amount of the surplus was capital gain. The Income Tax Officer rejected the assessee‟s plea and treated the amount as revenue receipt. This treatment was affirmed, on appeals by the assessee, by both the Appellate Assistant Commissioner and the Appellate Tribunal. On. a reference the assessee‟s counsel contended before the High Court that the business of the assessee was not to purchase or sell shares but was to have safe deposit vaults only and that the sales of the shares made in the relevant year was with a view to preserve the capital and not with a view to do business and earn profit on it. The profit from sale of shares was, therefore, a capital gain. The High Court affirming the order of the Tribunal: Held, that: (i)
the objects of the company (as indicated in the Memorandum of Association) clearly indicate that the purchase and sale of shares was one of the businesses of the assessee. The multiplicity of the transaction and the intervals within which they were made also indicate that they were entered into not for the purpose of preserving its capital but for the purpose of doing business and snaking profit on it; and
(ii)
the conduct of the assessee as reflected from the record of the previous years indicates that the assessee themselves had treated the transactions entered into by them as transaction entered into for carrying on and carrying out the business.
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Referring to the judgment in the case of Commissioner of Income Tax v. Habib Bank Executors [(1967) 15 TAX 127], Their Lordships of the High Court observed as under: “We once again reiterate that the determination of the question whether a particular income is revenue receipt or capital gain is dependent upon the fact whether the money earned has been through transactions which have been entered into by the parties for the purpose of carrying out the business. The decision of the question whether transaction had been entered into for carrying on or carrying out the business depends upon the facts of each case.” Case distinguished: Commissioner of Income Tax v. Habib Bank Executors [1967] 15 TAX 127.
Mahabir Prasad Munna Lal v. Commissioner of Income Tax – [1947] 15 ITR 393 (All.) 853.
If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent Income Tax Officer or appellate authority from inferring that a receipt evidenced by a credit entry is a revenue receipt.
If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent the Income Tax Officer or the appellate authority from inferring that the receipt evidenced by the credit entry is a revenue receipt. In each case it would be a question of fact and the answer must, in every case, depend on the finding whether the inference is a reasonable inference from the assessee‟s failure to prove his case. Westminster Bank Ltd. v. Riches – [1947] 28 Tax Cas. 159 (HL) 854.
Interest decreed on debts or damages, whether under a statute or otherwise, is a revenue receipt.
The question for consideration was whether where in an action for recovery of any debt or damages, the Court exercised its discretionary power under a statute and ordered that there should be included in the decree, interest on the debt or damages, such interest was taxable in the hands of the creditor as „interest on money‟. Held that the general idea was that the creditor was entitled to compensation for the deprivation; from that point of view, it would seem immaterial whether the money was due to him under a contract, express or implied, or a statute, or whether the money was due for any
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other reason in law. In either case the money was due to him and was not paid or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, or was unliquidated and claimable under the Act as in the present case. The essential quality of the clam for compensation was the same and the compensation was properly described as interest. Judicial analysis: This passage indicates that interest, whether it is statutory or contractual, represents the profit the creditor might have made if he had the use of the money or the loss he suffered because he had not that use. It is something in addition to the capital amount, though it arises out of it.
Cossimbazar Raj Wards Estate v. Commissioner of Income Tax – [1946] 14 ITR 377 (Cal.) 855.
Where on abandonment of mining a lease payment was received by lessor as compensation for royalty and rent for the remaining period of mining lease it is capital receipt.
Under the agreement the lessee company could hold the lease of coal bearing land so long as any coal remained workable. It could however abandon the land at any time but if there was then any coal remaining unworked, royalty thereof would be payable to the lessor in the same manner as if the coal had been worked. On the lessee abandoning the lease and making a lump sum payment to the lessor: Held that the amount received by the lessor was a revenue receipt. It could not be said to be a casual or non-recurring receipt because the payment was expressly provided for in the lease and, therefore, it was foreseen, known, anticipated and provided for. Beak, Inspector of Taxes v. Robson – [1942] 25 Tax Cas. 33 (HL) 856.
Compensation received for refraining from competing in same business is a capital receipt.
Under a service agreement, the respondent covenanted in consideration of a payment to him of £ 7000 on the execution of the agreement, that if the agreement were determined by notice given to him or by his breach of its provisions he would not compete directly or indirectly with the employer-company within a radius of fifty miles of its place of business until the five years had expired. The question was whether the payment so received was a capital receipt which was not taxable as the respondent‟s income.
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Held that the said amount was a payment for giving up a right wholly unconnected with the respondent‟s office and operative only after he ceased to hold that office, and was hence a capital receipt which was not taxable. Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 857.
Capital payment in instalments.
A capital payment is nontheless a capital payment even if it is to be paid in equal instalments over a period of years. Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 858.
Merely because the sum is the consideration of a contract, it is not necessarily what may be called a capital receipt, and cannot be income.
Merely because the sum is the consideration of a contract, it is not necessarily what may be called a capital receipt, and cannot be income. The consideration of a contract may be capital payment or it may be the payment of an income. Commissioner of Income Tax v. Raid Prayag Krnnarl Debt – [1940] 8 ITR 25 (Pat.) 859.
In case of damages awarded for wrongful detention of assessee‟s movable properties.
Where the amount was received by the assessee as damages for wrongful withholding of possession of the movable properties and not under any contract to pay interest between the parties, it was held that it was not income. Amritsar Produce Exchange Ltd., In re – [1937] 5 ITR 307 (Lahore) 860.
General tests.
The controversy existing between „capital‟ and „revenue‟ has defied solution so far and it is difficult, therefore, to lay down any general considerations which would conclusively determine whether a certain income falls under one head or the other. If it can be found that an investment has been made for the purpose of permanently excluding a certain sum from the floating capital of a concern, it may be permissible to hold that that sum is intended to serve as a reserve or, in other words, as fixed capital having no concern with the stock-intrade. If, on the other hand, the facts relating to that investment unequivocally point to the conclusion that the investment is to all
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intents and purposes a part of the business and that the sum so invested is intended to serve as stock-in-trade, the profits arising therefrom will form part of the income of the concern. Commissioner of Income Tax v. Sir Kameshwar Singh – [1935] 3 ITR 305 (PC) 861.
The question whether a receipt is taxable may in certain cases depend upon the nature of business.
There are no doubt cases where the question whether a particular item of receipt is taxable or not depends upon the nature of the recipient‟s business. Thus, the profit made on the realisation of an investment is a taxable income receipt in the hands of an investment company which engages in the business of buying and selling investments but is a non-taxable capital receipt in the hands of an ordinary investor who is not engaged in that business. Van den Berghs Ltd. v. Clark – [1935] 3 ITR 17 (HL) 862.
Damages received for pre mature termination of agreement which was an integral part of the profit-making apparatus are capital receipts.
The assessee-company and a Dutch company had been engaged in the business of manufacturing and dealing in margarine and similar products. Sometime in the year 1908, they had entered into pooling arrangements under which they bound themselves to work in friendly alliance and to share their profits of their respective business in margarine in specified proportions. This basic agreement of 1908 was being added to and varied from time to time, particularly in the years 1913 and 1920, and the agreement was to subsist until the year 1940. In 1922, the assessee made a claim against the Dutch company for an amount of 450,000 pounds as the amount due to it from the Dutch company under the above-mentioned agreements. Though the Dutch company initially repudiated the claim, a settlement was arrived at in the year 1927 whereby in consideration of the payment of 450,000 pounds by the Dutch company to the assessee as damages, the agreements were determined as at 31.12.1927, and each party released the other from all claims thereunder. The question was whether this sum of 450,000 pounds was a revenue receipt, on which Income Tax could be levied against the assessee. Held that the assessee gave up its whole rights under the agreements for thirteen years ahead. To call the agreements “pooling agreement” was a very inadequate description of them, for they did
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much more than merely embody a system of pooling and sharing profits. If the assessee was merely receiving in one sum the aggregate profits which it would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if a payment was measured by annual receipts, it was not necessarily an item of income. The agreements which the assessee consented to cancel were not ordinary commercial contracts made in the course of carrying on its trade. They were not contracts for the disposal of its products or for the engagement of agents or other employees necessary for the conduct of its business. Nor were they merely agreements as to how its trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the assessee‟s profit-making apparatus. They regulated the assessee‟s activities, defined what it might and what it might not do, and affected the whole conduct of its business. It was difficult to see how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader‟s activities could be regarded as an income disbursement or an income receipt. Though the magnitude of a transaction was not an irrelevant consideration, it was not the largeness of the sum that was important in the present case but the nature of the asset that was surrendered. That asset, the congeries of rights which the assessee enjoyed under the agreements and which for a price it surrendered, was a capital asset. The assessee could not be said to have turned over the asset which the agreements in question constituted. The agreements formed the fixed framework within which its circulating capital operated, and they were not incidental to the working of its profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. Therefore, the impugned sum of 450,000 pounds was clearly a capital receipt. Minister of National Revenue v. Catherine Spooner – [1933] 1 ITR 299 (PC) 863.
Nomenclature given by parties to the receipt is determinative of whether it is capital or revenue receipt.
not
The question whether a particular sum received is of the nature of an annual profit or gain or is of a capital nature does not depend upon the language in which the parties have chosen to describe it. It is necessary in each case to examine the circumstances and see what the sum really is, bearing in mind the presumption that „it cannot be
582 Section 9 & 10
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taken that the Legislature meant to impose a duty on that which is not profit derived from property but the price of it‟. The assessee entered into an agreement with a company engaged in drilling production and vending of oil under which she sold to the company all her rights, title and interest in 20 acres of land owned by her. In consideration of the said sale, the company agreed to pay her 5000 dollars in cash, and to issue her 25,000 fully paid-up shares in the company. In addition the company agreed to pay her „royalty‟ in the form of „10 per cent of all the petroleum, natural gas and oil produced and saved from the said land free of costs‟. During the relevant year the company paid her 9570 dollars, being the sale proceeds of 10 per cent of the oil produced during the year. On the question whether this amount represented profits or was a capital receipt, the Supreme Court of Canada held that it was a capital receipt, since the assessee had merely converted the land (a capital asset) into money, shares and 10 per cent of the stipulated minerals, and that there was no question of profit or gain „unless it be as to whether she has made an advantageous sale of her property‟. Held that it was for the Minister (Department) to displace the view taken by the Supreme Court as being manifestly wrong, and he had failed to do so. Therefore, the view taken by the Supreme Court that the amount was a capital receipt must be affirmed. Chibbett v. Joseph Robinson & Sons – [1924] 9 Tax Cas. 48 864.
Receipt must be judged from the point of view of the receiver, and not necessarily from that of the payer.
In order to determine whether a receipt is capital or revenue in nature, one must not look at the point of view of the person who pays and see whether he is compellable to pay or not. One has to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an office, and in respect of his trade, if it is a question of trade, and so on. One has to look at his point of view to see whether he receives it in respect of those considerations. This is perfectly true. But when one looks at that question from what is described as the point of view of the recipient, that sends one back again, looking, for that purpose to the point of view of the payer, not from the point of view of compellability or liability, but from the point of view of a person inquiring as to what is this payment for; and one has to see whether the maker of the payment makes it for the services and the receiver receives it for the services.
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Bhikamchand Laxmichand v. Commissioner of Income Tax – 7 ITC 184 (Nag.) 865.
Interest charged to account of borrower is includible as income of assessee.
Interest credited to the account of a creditor in the firm‟s account which is liable to be paid to him if he has demanded it, it is chargeable to tax as interest received in the creditor‟s hands. Lal Jagmohandas Rastogi v. Commissioner of Income Tax – 3 ITC 274 (Oudh) 866.
Interest on security furnished under a decree.
Where a decree holder received interest under Court‟s order granting stay of execution of the decree on the judgment-debtor furnishing security for a specific amount and paying interest thereon, interest is taxable under section 4 and is not exempt under section 10(3). Pandit Pandurang v. Commissioner of Income Tax – 2 ITC 69 (Nag.) 867.
Questions relating to capital or income, are questions of law.
Questions between capital and income, trading profit or non-trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts. Glenboig Union Fireclay Co. Ltd. v. Commissioner of Inland Revenue – [1922] 12 TC 427 (HL) 868.
Compensation received for sterilisation of profit-yielding assets is a capital receipt.
The assessee was carrying on the business of manufacture of fireclay goods. It had taken a fireclay field on lease, over part of which ran the lines of a railway. The railway administration prohibited the assessee from excavating the field within a certain distance of the rails, and paid compensation therefor in accordance with a statutory provision. The question for consideration was whether the compensation so received by the assessee was capital or revenue receipt. Held that since the compensation was really the price paid for sterilising the assets from which otherwise profit might have been received, it was a capital receipt in the assessee‟s hands. _______________
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PROFIT AND LOSS APPROPRIATION ACCOUNT
Pakistan International Airlines Corporation v. Commissioner of Income Tax, Karachi – [1978] 37 TAX 130 (H.C.Kar.) 869.
Amount representing unclaimed balance consisting of the value of unutilized tickets are trading receipts of the year in which these were transferred to the profit and loss appropriation account even if accounts are maintained on mercantile system.
A ticket is issued to an intending passenger for a price, a completed contract of sale takes place between him and the airline. He acquires an immediate right in the ticket, it being, however, a term of the contract that tin case the ticket is not utilised, the purchaser would be entitled to obtain a refund of the purchase price. The contract of carriage is not contingent or dependent on the happening of any uncertain future event, namely the choice of the passenger whether to travel or not and the price paid by him cannot be considered as a deposit until the ticket is utilised. The nature an character of the amounts received or receivable by the applicant from the sale of the tickets, leave us in no doubt that they are essentially trading receipts. The moneys are received by the applicant in the course of its business, the very nature of which was that of issuing tickets to intending passengers. They were moneys of the applicant when received, notwithstanding that there was superimposed a condition of the contract of sale that the price would be refundable in full or in part, if the ticket remains unutilised. Other provisions of the Act relating to income escaped assessment. But where the assessee adopts the mercantile system of accounting or a hybrid system, whereby the assessee himself chooses to allocate and treat as income portions of the receipts, not in the year of their receipt or accrual, but in later years, according to the particular system adopted by him, as in the instant case, by transferring the „unclaimed transportation receipts‟ to the Profit and Loss Appropriation Account, there is high authority for the view that the income may be said to arise when he chooses to so treat it. For the foregoing reasons, we would answer the question referred to us in the affirmative. In our opinion, the Tribunal was right in holding that the sum of Rs.6,95,171/- representing unclaimed balances consisting of the value of unutilised tickets which was transferred to the Profit and Loss Appropriation Account was taxable income of the applicant. CONFIRMED BY Supreme Court in 1988 SCC 658.
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Cases referred to : Punjab Steel Scrap Merchants Association Ltd. v. Commissioner of Income Tax, Punjab (1961) 43 ITR 164; Lakshmanier & Sons v. Commissioner of Income Tax (1953) 23 ITR 202 (SC); Punjab Distilling Industries Ltd. v. Commissioner of Income Tax (1959) 35 ITR 519 (SC); Ratanchand Lallumal, In re. (1936) 4 ITR 189; Commissioner of Income Tax v. Maharaja Dhiraja Kameshwar Singh of Darbhania (1933) 1 ITR 94; Morley v. Tatterslial (22 Tax Cases 51); Hotel Metropole Ltd. Karachi v. Commissioner of Income Tax, Central, Karachi (1973) 28 TAX 96 and Commissioner of Income Tax v. E. V. Miller and others (PLD 1959 SC 219); (1959) 1 TAX 1 (S.C.). _______________
OVERRIDING TITLE VS. APPLICATION OF INCOME
Commissioner of Income Tax v. A. F. Ferguson And Company – [1967] 15 TAX 205 (H.C.Kar.) 870.
Overriding title vs. application of income.
The assessee-firm was carrying on the professional business of accountants. In terms of clause 15(c) of the partnership deed executed on the 31st October 1952 an specified sum was payable to the widow of a deceased partner. In 1953 the partners entered into another agreement dated the 29th April 1953, which provided that all new partners in the firm shall be accepted on condition that such other partners shall agree in the liability for all payments to be made under the original partnership agreement dated the 31st October 1952. In its assessment for the charge year 1959-60 the assessee-firm claimed exclusion from its total income under section 10(2)(xvi) of the Income Tax Act a sum of Rs.25,337 paid to the widow of a deceased partner. The claim was rejected by the Income Tax Officer on the ground that the payment was more in the nature of help or discharge of moral obligation towards a widow and it could not be correlated with the business. The claim of the partners for the exclusion of this amount from their income was also rejected by the Income Tax Officer on the ground that no overriding title or legal enforceable charge existed and the amount in question, being purely an ex-gratia payment, was not admissible deduction. The Appellate Tribunal confirmed the order of assessment in respect of the firm but in respect of the assessment of the partners, under appeal, the Tribunal held that only so much of their respective income could be assessed which actually reached their hands. It further held that the partners got their share of income from the firm after deduction of the amount payable to the widow in view of the clear stipulations in the various agreements which were in the
586 Section 9 & 10
Income Tax Digest.
nature of overriding title created for the widow. Affirming the order of the Tribunal the High Court: Held, that: (i)
the abovementioned clauses in the partnership agreement are in the nature of overriding title. This clearly is a case in which the income of the partners is diverted before it reached them and the assessee partners were entitled to claim deduction of the above amount from the income of the assessee-firm divisible between them; and
(ii)
the firm was not entitled to a deduction of Rs.25,337 paid to the widow as it is not possible to hold that the amount in question is in the nature of an expenditure wholly for the benefit of the business.
Cases referred to: K. A. Ramachar and another v. Commissioner of Income Tax [1961] 4 TAX 25 (S.C.); Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax [1933] 1 ITR 135; Commissioner of Income Tax v. Sitaldas Tirathdas [1961] 3 TAX 201 (S.C.) and Mackintosh (Mrs. V. O.) v. Commissioners of Inland Revenue (14 Tax Cases 15). _______________
DEVALUATION GAIN
Seth Adam Haji Peer Mohammad v. Commissioner of Income Tax – [1966] 14 TAX 203 (H.C.Kar.) 871.
Assessee was importing goods from India out of his own capital blocked up in India. Goods revalued after devaluation of Indian rupee held justified.
The assessee, a dealer in Karyana and cloth, imported some goods from India and the price was paid by him in Indian currency out of his capital blocked up in India. In the account books in Pakistan the assessee debited the price of these goods in Pakistani currency at a par value, although the official exchange rate then prevailing was Rs.100 Pakistani = 144 Indian rupees. He determined his profits also on that basis. The Income Tax Officer in making the assessments for the charge years 1951-52 and 1952-53 calculated the value of the imported goods at the Official rate of exchange and added to the total income the difference in the official exchange rate between Indian and Pakistani currencies. When the matter went up to the Appellate Tribunal it came to the conclusion that the conversion on the basis of 100 Pakistani rupees equal to 125 Indian rupees was a fair ratio for
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the assessment year 1951-52 and that the official exchange rate adopted by the Income Tax Officer in respect of the assessment year 1952-53 was proper. In doing so the Tribunal held that the official exchange rate could not be rigidly applied to all cases unless it was proved by some data that Indian currency was available to private parties in the open market at the official rate and that the Pakistani currency was at a premium in the assessment year 1951-52 but not to the extent of the official rate while there was no data to show that the official exchange rate in the year 1952-53 was at a discount in the Indian market. The High Court, affirming the order of the Tribunal: Held, that: (i)
the taxing authorities had to assess the profits on a factual basis and the Income Tax Appellate Tribunal was perfectly justified on its own best judgment in debiting the cost of the goods according to the rate of exchange prevailing in the trading market during the relevant period; and
(ii)
what, the market rate really was and what was a fair basis of computation in the ease of the assessee are essentially questions of fact.
Pettison (H.M. Inspector of Taxes) v. Marine Midland Ltd. – 57 TC 219 (HL) 872.
Where there is no prior conversion of currency, transactions of borrowing and lending cannot give rise to any income or capital loss merely due to difference in rates of exchange.
The assessee-company, which carried on the business of international commercial banking, borrowed 15 million U.S. Dollars on 12.10.1971. At the then prevailing rate of exchange, the loan was equal to 6,024,096 sterling pounds. The company used this loan for lending to its customers in U.S. Dollars itself. The company received back the entire loan given to its customers by 15.6.1976 in U.S. Dollars, and by that date, the company redeemed the loan stock by repaying the loan in U.S. Dollars. At the rate of exchange prevailing on 15.6.1976, the amount of 15 million U.S. Dollars was worth 8,465,011 sterling pounds. The revenue took the view that the difference of 2,440,915 sterling pounds arising out of the loan repayment was a capital loss which was not deductible, and that the difference of an identical amount arising out of the repayments made by the assessee‟s customers was an income/profit to the assessee which was liable to tax.
588 Section 9 & 10
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Held that the Crown‟s argument that the assessee made a capital loss on its unsecured loan stock and an income/profit on its customers‟ borrowing was misconceived. There never was any loss or profit from the lending and borrowing and there never was any exchange profit because the assessee did not make any relevant currency conversions. Between 12.10.1971 and 15.6.1976, the assessee made a profit which consisted of the difference between the interest paid to the loan stock holders and the interest received by the assessee from its customers. This profit was brought into account in the computation of the profits upon which the company paid corporation tax. As between the assessee and the holders of the unsecured loan stock and as between the assessee and its customers, there was and never could be any profit and loss to lenders or borrowers except for interest paid and received. _______________
“MERCANTILE” AND “CASH SYSTEM”
Ali Roberts (Bahawalpur) Limited v. Commissioner of Income Tax – [1966] 13 TAX 188 (H.C.Lah.) 873.
„Mercantile system‟ and „cash system‟ - Distinction between „Accrue‟, „arise‟, „received‟ and „deemed to be received‟, meaning of.
The assessee, a limited company, was appointed as managing agent of a public limited company by an agreement dated the 26th February 1947. The methods of accounting of both the companies were mercantile with the accounting year ending on the 31st March each year. The assessee-company was originally assessed for the assessment year 1954-55, which resulted in a loss of Rs.3,131. For the next two assessment years the assessee-company filed returns declaring losses to the tune of Rs.64,546 and Rs.23,276, respectively. The profits and loss account which accompanied the returns for the years 1955-56 and 1956-57 included Rs.1,08,693 and Rs.15,960, respectively, on account of managing agency commission received from the managed company. While the assessments for these two years were pending the Income Tax Officer proceeded to make the assessment of the managed company for the assessment year 1954-55 and found that the managed company had credited the aforementioned amounts of commissions, namely Rs.1,08,633 and Rs.15,960 in the assessment years 1954-55 and 1955-56. Thereupon, the Income Tax Officer re-opened the assessment made on the assessee company for the charge year 1954-55 and brought to tax the
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commission of Rs.1,08,693 which had accrued to the assessee in the relevant accounting year but was not shown in the return of income. Similarly, Rs.15,960 was assessed to tax in the assessment year 195556. When the matter went up to the Appellate Tribunal it upheld the order of assessment holding that the managing agency commission accrued to the assessee-company in the year in which it was credited in the accounts of the managed company. Before the High Court the assessee‟s main contention was that it was its system of accounting that the commission earned from the managed company in the relevant charge year was debited in the succeeding year, the same could, for the purpose of income tax, be included in its total income of the succeeding year and not in the year it was credited in the accounts of the managed company. Affirming the order of the Appellate Tribunal the High Court: Held, that income, profits and gains accrue when they first come into existence. When the statute requires that income, profits and gains should accrue, arise or be received in the previous year, all that can be taxed in a given year are the profits and gains which are not only received but have also arisen or accrued in the „previous year‟, and it follows from that, that the tax in such a case can be on the accruals and not on the actual receipt. The commission was duly credited to the account of the agents in the relevant charge years in which it was shown against their names in the books of accounts of the managed company and in the absence of any evidence to the contrary the Tribunal rightly considered it as income which had accrued or arisen to the assessee in the year under consideration. Two methods of accountancy maintained by the business community which are kept for the income, profits and gains of a business are on the case basis and the mercantile basis. According to the former a record is kept of actual receipts and actual payments, entry is being made only when money is actually collected or disbursed, and if the profits of the business are accounted for in this way, the tax is payable on the difference between the receipts and the disbursements of the period in system of accountancy or the double entry book-keeping system. Under this system profit and loss account is maintained and at the end of the financial year the assets and liabilities are valued and entered in the accounts and difference between the two is the profit upon which the tax is paid. Under this system the net profit or loss is calculated after taking into accounts all the income and all the expenditures relating to the period whether such income has been
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actually received or not and whether such expenditure has been actually paid or not. In fact the profit computed under this system is the profit actually earned though not necessarily realised in cash. What distinguishes mercantile system with the profit computed under this system is the profit actually earned though not necessarily realised in cash. What distinguishes mercantile system with the cash system is that it brings into credit what is due immediately and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. What has in fact „accrued‟ or „arisen‟ as an income to an assessee in a previous year has to be included in his total income for that year and not in the year in which he chooses to include it for the purpose of his assessment. The old principle that for income tax purposes „receivability‟ without „receipt‟ is nothing, has no application to the cases under the Income Tax Act, 1922 because section 4 expressly provides to bring to charge not only the income which has been actually received or deemed to have been received but also the income which has accrued or arisen. Cases referred to : Back (Inspector of Taxes) v. Whitlock [1932] 1 K.B. 747; Fry v. Burma Corporation [1930] A.C. 321 and Spence v. Commissioner of Inland Revenue (24 T.C. 1941-42, 311). _______________
APPLICABILITY OF 1922 ACT TO DIFFERENT PROVINCES/STATES
Chinnaswamy Mudaliar v. Commissioner of Income Tax – 8 ITC 126 (Mad.) 874.
Applicability of 1922 Act to Mysore.
Even in the absence of the extension of the Indian Finance Acts in the Bangalore Civil and Military Station, whose residents continued to be subjects of Mysore State, the Government could levy Income Tax at the particular rate and surcharge as specified in the Finance Acts since the Indian Income Tax Act was in force there. Sobhagmal Nemicband v. Commissioner of Income Tax – 7 ITC 100 (Bom.) 875.
Mewar estates.
The 1922 Act applied to the whole of British India, including the scheduled district of Mewar Estates and no notification under section
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3 of the Scheduled Districts Act was required for the application of the Act to Mewar Estates. E.M.V. Muthappa Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 311 (Mad.) 876.
Income accruing or arising in British India in the previous year is assessable under the Indian Income Tax Act though the place of accrual ceased to be part of British India in the year of assessment.
Income that accrued or arose in British India in the previous year, was assessable under the Indian Income Tax Act even though the place of accrual ceased to be part of British India in the year of assessment. Where income arose in Burma in the previous year ending 12.4.1937 (assessment year 1937-38), which was part of British India and was separated from 1.4.1937, it was held that it was taxable under the Indian Income Tax Act. _______________
APPLICABILITY OF ACT TO RULERS OF ERSTWHILE INDIAN STATES
Kunwar Bishwanath Singh v. Commissioner of Income Tax – [1942] 10 ITR 322 (All.) 877.
In case of Maharaja of Benares.
The Maharaja of Benares not being an independent sovereign ruler was not exempt from taxation under the Income Tax Act in respect of income from property owned by him in British India. _______________
CHARGING SECTION - GENERAL
Partington v. Attorney-General – [1896] 4 HL 100 878.
Subject caanot be taxed unless he comes within the letter of the law.
The principle of all fiscal legislation is that if the person to be taxed comes within the letter of the law, he must be taxed however great the hardship may appear to be to the judicial mind. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.
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Inland Revenue Commissioners v. Duke of Westminster – [1939] A.C.1; 19 Tax Cas. 490 879.
Subject cannot be taxed by analogy or inference.
One should disfavour the doctrine that in taxation cases the subject is to be taxed in accordance with a Court‟s view of what it considers the substance of the transaction, i.e., the Court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case. Bengal Coal Co. Ltd. v. Sri Janardan Kishore Lal Singh Deo – [1938] 6 ITR 632 (PC) 880.
Others.
Income Tax is not a tax imposed „upon the mines or part thereof‟ in any sense relevant to the lessee‟s covenants in a mining lease. Even express words making the lessee liable for all public demands imposed upon the proprietors in respect of the mine would not bring Income Tax within the covenant. CASE REVIEW: Decision of the Calcutta High Court in Bengal Coal Co. Ltd v. Janardan Kishore Lal Singh Deo [1936] 4 ITR 392 affirmed. _______________
CHARGE IS IN RESPECT OF INCOME OF PREVIOUS YEARS
Mabarajah of Plthapuram v. Commissioner of Income Tax [1945] 13 ITR 221 (PC) and Wallace Bros. & Co. Ltd. v. Commissioner of Income Tax [1948] 16 ITR 240 (PC) 881.
Charge is on income of previous year and not income of assessment year.
The assessment is a charge in respect of the income of the previous year and not a charge in respect of the income of the year of assessment as measured by the income of the previous year. Commissioner of Income Tax v. Tehri-Garhwal State [1934] 2 ITR 1 (PC) 882.
Object of the Act is to tax the assessee in the year of assessment upon the income received by him in the previous year.
The intention of section 3 of the 1922 Act is not to treat the income of the previous year merely as a measure of the unascertained income of the year of assessment, but to tax the assessee in the year
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of assessment upon the income received by him in the previous year. _______________
EXEMPTION FROM TAX
Kedar Narain Singh v. Commissioner of Income Tax – [1938] 6 ITR 157 (All.) 883.
Unless specifically exempt, anything which can be properly described as income is taxable.
The definition of „income‟ in section 2(24) is an inclusive definition. It adds several artificial categories to the concept of income but on that account the expression „income‟ does not lose its natural connotation. Indeed, it is repeatedly said that it is difficult to define the expression „income‟ in precise terms. Anything which can properly be described as income is taxable under the Act unless, of course, it is exempted under one or the other provisions of the Act. Anything which can properly be described as income is taxable under the Act unless expressly exempted. Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax – [1937] 5 ITR 111 (Pat.) 884.
The sovereign legislative authority has power to tax on subjects despite an earlier engagement to the contrary.
The sovereign legislative authority has power to tax on subjects despite an earlier engagement to the contrary. _______________
DOUBLE TAXATION
Pakistan Industrial Development Corporation v. Pakistan – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 885.
Double taxation is prerogative of legislature.
Unless there is any prohibition or restriction imposed on the power of legislature to impose a tax twice on the same subject matter, double taxation though a heavy burden and seemingly oppressive and inequitable cannot be declared to be void or beyond the powers of the legislature. It may, however, be noted that double taxation can be imposed by clear and specific language to that effect. Where the language is not clear or specific by implication such levy cannot be permitted.
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S.V.K.L. Somasundaram Chettyar v. Commissioner of Income Tax – 6 ITC 88 (Mad.) 886. Illustrations. The salary paid by firm to one of its partners was not allowed as deduction. There were, however, other claims which resulted in the profits earned by the firm being reduced to nil and consequently the assessment which had been made was cancelled. Subsequently the Income Tax Officer assessed the partner on the sum which had been received by him as salary. The partner objected to the same on the ground that there had been a sort of a notional double taxation. Held that although the salary was not allowed as a deduction and was included in the profits of the business, there having been no profits in the business, the business was not assessed and Income Tax was not charged under the head of „Business‟. It followed that there had been no double taxation in this case. The partner was, therefore, liable to pay Income Tax upon it. Commissioner of Income Tax v. Mutha Sarvarayudu – 2 ITC 208 (Mad.) 887. Illustrations. If a man has been taxed in respect of book debts owing to him in one year which he has not actually received, he cannot again be taxed on the same sums of money when they are actually received in cash in a later year of assessment. _______________
FINANCE ACTS
_
RELEVANCE OF
Commissioner of Income Tax v. Valliammal Achi – [1938] 6 ITR 720 (Mad.) 888. Quality of chargeability of any income is independent of passing of Finance Act but until Finance Act is passed no tax can be actually levied. Though the Income Tax Act cannot be applied in any year until the Finance Act has been passed, it cannot be treated as a statute which is passed annually. Commissioner of Income Tax v. Abdul Rauf – [1944] 12 ITR 76 (Pat.); Raja Bahadur Kamakshya Naraln Singh v. Commissioner of Income Tax – [1946] 14 ITR 683 (Pat.) 889. Income is not taxable if Finance Act of the relevant year is not made applicable. Where the Income Tax Act was made applicable to an area hitherto excluded, but the Finance Act of the relevant year was not made applicable, it was held that no tax could be levied on income.
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Maharajah of Pithapuram v. Commissioner of Income Tax – [1945] 13 ITR 221 (PC) 890.
Income Tax Act has no operative effect except so far as rendered applicable by Finance Act.
The Indian Income Tax Act, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act. _______________
TAX AVOIDANCE / TAX PLANNING
Ram Narain Lal v. Commissioner of Income Tax – 10 ITC 292 (All.) 891.
There is nothing immoral or fraudulent in lawfully transferring one‟s property to detriment of revenue.
It is perfectly legitimate for a Hindu to transfer his property to his undivided family and, for the matter of that, for anyone else to distribute his property among his expectant heirs, in order to avoid payment of higher tax or super tax, so long as he really intends to make the transfer and gives effect to his intention. The case is different where he enters into a fictitious transaction trying to make out that he has parted with his interest, though in fact he has not and is in full enjoyment thereof. But where he has in reality parted with his rights, the fact that his object was to evade payment of higher tax or super tax will not affect the validity of the transaction. There is nothing immoral or fraudulent in lawfully transferring one‟s property to the determent of the Income Tax Department. In doing so, it should be borne in mind, that the transferor also acts to his own detriment by depriving himself of the whole or part of what belongs to him. Ram Lal Bechairam v. Commissioner of Income Tax – [1946] 14 ITR 1 (All.) 892.
How assessee, for purposes of his accounts, keeps his books is not a test by which liability to tax is concluded; substance of transaction is to be seen.
How the assessee, for the purposes of his accounts, keeps his books is not the test by which the liability to tax is concluded. Substance of the transaction is to be seen. _______________
596 Section 9 & 10
Income Tax Digest.
ENGLISH CASES
Latilla v. IRC – [1943] AC 377/25 TC 107 (HL) 893.
Principles dealing with concept of tax planning.
Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are „entitled‟ to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase pro tan to the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how to adopt these maneuvers. _______________
GUIDING PRINCIPLES
Raja Raghunandan Prasad Singh v. Commissioner of Income Tax – [1933] 1 ITR 113 (PC) 894.
Income may be realised in cash or kind but the essence is that there must be realisable profit.
Income may be received in kind as well as in cash and the receipt of an equivalent of cash may be a receipt of income. The essence of the matter is that there must be an actually realized or realisable profit or loss. Receipt of a new and substituted security is not enough. Commissioner of Income Tax v. Harveys Ltd. – [1940] 8 ITR 307 (Mad.) 895.
Income for tax purposes must be money or money‟s worth.
The assessee-company was allotted 20,000 shares in another company A, the market value of which was Rs.7 lakhs. In return, it allotted its own shares to company A, the market value of which was Rs.1 lakh. Under an agreement it agreed to gin cotton for A for 10 years at a rate which was less than the market rate. The Income Tax Officer treated the difference of Rs.6 lakhs in the exchange value of shares as lump
597 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
sum consideration for ginning cotton at concessional rates for 10 years and taxed it as income. Held that the Income Tax Officer was justified in holding that instead of getting a probable income of Rs.6 lakhs spread over ten years the assessee had obtained a lump sum payment in one year. The fact that this gain was not in money but in money‟s worth, namely, shares, made no difference. Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) Income may be in kind; but before it is so treated it must be shown that it is money‟s worth - a debtor‟s own pronote is not money‟s worth
896.
There is no doubt that a liability to pay interest, like a liability to make any other payment, may be satisfied by a transference of assets other than cash and that a receipt in kind may be taxable income. But for this to be so it is essential that what is received in kind should be the equivalent of cash, or, in other words, should be money‟s worth. A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attributes. In cases where money‟s worth is received, income arises in the year when the instrument of transfer is executed and title passes. In the relevant accounting year, the amount due to the assessee from a borrower was Rs.32 lakhs (principal) and Rs.6,09,569 (interest). This was satisfied as under: 1.
2. 3. 4. 5.
Assets taken over (a) Colliery (b) Shares and bills receivable Transfer of loan to a company Decree Pronotes of third parties Handnote of the borrower
Rs. 7,37,339 1,42,934 10,00,000 1,42,594 52,106 17,34,596
The question was whether interest of Rs.6,09,569 could be treated as having been received. Held that the first five items, amounting to Rs.20,74,973, may perhaps reasonably enough be regarded as the equivalent of cash, but the seventh item of Rs.17,34,596, consisting of the debtor‟s own promissory notes, was clearly not the equivalent of cash. As the amount of Rs.20,74,973 did not cover even the principal and the assessee could appropriate the entire amount towards principal, he
598 Section 9 & 10
Income Tax Digest.
did not receive payment of any taxable income from his debtor. Moreover, with the arrangement affecting the whole indebtedness whereby certain assets were accepted in part satisfaction and promissory notes were taken for the balances, the basis of the presumption that it is to the creditor‟s advantage to attribute payments to interest in the first place, leaving the interest-bearing capital outstanding, was gone. Maharaja of Kapurthala v. Commissioner of Income Tax – [1945] 13 ITR 74 (Oudh) 897.
Receipts from capital which is exhausted in process of realization is income.
Receipts from capital which is exhausted in the process of realization may be nonetheless income. Commissioner of Income Tax v. Abubakar Abdul Rahman – [1936] 4 ITR 233 (Bom.) 898.
In income of the previous year, assessee is not bound to include something to which he became entitled after termination of that year.
In the income of the previous year, the assessee is not bound to include something to which he became entitled after the termination of that year. Ram Lal Bechairam v. Commissioner of Income Tax – [1946] 14 ITR 1 (All.) 899.
A man cannot make a profit out of himself.
A man cannot make a profit out of himself. Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 900.
Mere fact that source of income is a wasting asset is not relevant.
If the receipts are income, it is not material for tax purposes that for which they are paid comes from a wasting property. If the payment ceases because the source ceases, so does the tax. Once it is established that the royalties are income within the meaning of the Act it is not material that the mines are in course of being exhausted unless there is provided in the Act that there should be a deduction from the income on that particular ground. But there is under the Act no provision for allowance for amortisation in respect of the minerals being exhausted. Thus, mere fact that source of income is a wasting asset is not relevant. _______________
599 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
BURDEN OF PROOF
Smt. Chanu Sila Dassi, In re – [1946] 14 ITR 362 (Cal.) 901. Onus to prove that income qualifies for exemption is on assessee. It is settled law that the burden is on the revenue to show that the income is liable to tax under the statute. However, the onus of showing that a particular class of income is exempt from taxation lies on the assessee. To earn the exemption, the assessee has to establish that his case clearly and squarely falls within the ambit of the said provisions of the Act. _______________
OTHER FACTORS
Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 902. Relevance of nature of transaction. Income is a periodical monetary return from a definite source. In order to ascertain whether the object of a transaction was the production of a definite return, it is necessary to look to the nature of the particular transaction. Rani Amrit Kunwar v. Commissioner of Income Tax [1946] 14 ITR 561 (All.) 903. Relevance of fact that receipt does not fall within cornerstones of section 15. It is impossible to accept so large find general a proposition that nothing can in India be the „income‟ of a recipient of money which cannot be traced to one of the first four sources set out in section 6 of the 1922 Act [corresponding to section 15 of the Income Tax Ordinance, 1979] or to some other source involving either the product of some outlay by, or some binding and irrevocable obligation to pay to, the recipient. _______________
ALLOCATION OF PAYMENT BETWEEN INTEREST AND PRINCIPAL SUM DUE
Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC) 904. Principle for allocation between interest and capital in case of composite receipt against loan. Where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation
600 Section 9 & 10
Income Tax Digest.
of the payment as between capital and interest, by either debtor or creditor, the presumption is that the payment is attributable to interest. But in a question with the revenue the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself. The total interest due in 1926-27 on a loan was Rs.2,71,190. The borrower had been making payments from time to time but all payments made by him had been taken against principal and nothing was adjusted against interest. In 1926-27 the lender received Rs.2,78,000. The question was how much of it was on account of interest. In another case against a total amount of Rs.38,09,569 (Rs.32 lakh principal and Rs.6,09,569 interest) the assessee received assets and other satisfaction in money‟s worth, to the extent of Rs.20,74,973. The question was whether Rs.6,09,569 out of this could be taken as payment of interest. Held that,
(a)
Though the presumption was operative primarily in question between debtor and creditor, the Income Tax Officer finding that the assessee received a payment from his debtor of Rs.2,78,000 in the year and that the assessee had not until then credited himself with having received any interest or disclosed or accounted for any interest receipts to the revenue authorities, was entitled in the circumstances to treat this sum of Rs.2, 78,000 as applicable to the outstanding interest to the extent of Rs.2,71,190, and, accordingly, to treat the payment to that extent as income of the assessee in the year of payment.
(b)
The presumption made above did not apply. The assessee was entitled to say that he had accepted the impugned sum in discharge pro tanto of his debtor‟s capital liability and that the capital debt stood discharged to that extent. No part of the sum of Rs.20,74,973, accordingly, was received by the assessee as taxable income in the year of computation.
Judicial Analysis : The Privy Council [in Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh [1933] 1 ITR 94] has laid down a firm rule that whenever an assessee receives a payment and does not appropriate the same either towards the principal or interest, he must be deemed to have appropriated the same towards the principal. The decision in... does not lay down the rule that, whenever any amount is received by a creditor which he
601 CHARGE OF INCOME TAX, SUPER TAX ETC.
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has not specifically appropriated either towards the principal or the interest due to him, the taxing authority should proceed on the basis of the presumption that it has been appropriated towards the principal. APPLIED IN - Commissioner of Income Tax v. C.P.L.E. Chettiyar Firm [1934] 2 ITR 201 (Rangoon), Lachhman Das Brijballabh Das, In re. [1942] 10 ITR 186 (All.).
Raja Raghunandan Prasad Singh v. Commissioner of Income Tax – [1933] 1 ITR 113 (PC) Principle for allocation between interest and principal sum when claim is realised by auction sale of decree, or when a claim is satisfied by executing a fresh mortgage.
905.
While allocating a realisation between interest and principal when claim is realised by auction sale of decree, or when a claim is satisfied by executing a fresh mortgage, the following principles are relevant: (a)
To give security for a debt is not to pay a debt; execution of a fresh mortgage does not pay a debt.
(b)
The excess of realisation over the principal sum is to be allocated towards interest.
(c)
The income represented by interest arises when the sale is confirmed.
(d)
Payment made to a prior mortgagee by the auction purchaser or to a claimant is not deductible; if the purchaser was aware of the claims, he would have taken it into account when he made a bid.
(e)
Expenses incurred in completing the title, and entering into possession after the sales had become absolute are not deductible as the assessees in bidding for the property must have had in view that they would incur these expenses if they were the successful purchasers and doubtless estimated accordingly the price which they thought it worthwhile to bid.
The value of property to be taken into account is the amount of bid offered and not the value put on it by the Court when inviting bids. The assessee had taken loan against mortgage of property in 1894. In 1904 the amount due was Rs.4.33 lakhs (Rs.2 lakhs as principal and Rs.2.33 lakhs as interest). The borrower took a further loan of Rs.3 lakhs and executed a fresh mortgage for Rs.7.33 lakhs. There was still a further loan of Rs.3 lakhs in 1912. In 1917 decrees of Rs.27.13 lakhs
602 Section 9 & 10
Income Tax Digest.
were passed in favour of the assessee on these mortgages. The property was sold in court auction and the assessee himself purchased it for Rs.25.65 lakhs in 1924. The sale was confirmed in 1925. Before the decree was executed, a minor son of the mortgagor raised a dispute about his share and the Court directed the assessee to make a deposit of Rs.3.20 lakhs in the Court, pending decision in the dispute. A decree was later passed in favour of the minor son in 1927. Also, it later transpired that there was a prior mortgage in respect of this property in favour of another party and the assessee had to pay off Rs.1.50 lakhs to the prior mortgagee. The assessee was aware of this claim when he bid for the property in Court auction. Further, the assessee had to incur expenditure to complete his title and enter into possession. The questions were: (a)
whether the interest of Rs.2.33 lakhs due in 1904 was paid off in 1904 when a fresh mortgage was executed, so that no part-of interest was realised in 1924 against that mortgage of 1904;
(b)
whether the purchase by the mortgagee himself was a capital transaction so that no part of Rs.25.65 lakhs was taxable as interest income; if not, the extent of interest element which was taxable;
(c)
whether the interest income arose on the date of decree, the date of sale, the date of confirmation of sale, or the date of delivery of possession;
(d)
whether the expenditure on completing title was deductible from the amount of interest; and
(e)
whether the realisation to be taken was Rs.17.13 lakhs as fixed by the Court at the time of auction or Rs.25.63 lakhs.
Held that, (a)
When the assessees received the new mortgage for Rs.7,33,135 which included the principal and interest of the original mortgage, they did not thereby receive payment, the equivalent of payment of the principal and interest of the original mortgage. If the assessee had received payment in kind of the amount outstanding on the original mortgage, in the shape, say, of realizable shares or bonds, the case would have been different. This sum of arrears of interest (though after 1904 secured by the new mortgage) continued to retain its character and remained due to the assessees down to the time of the judicial sales of November 1924 and January 1925.
603 CHARGE OF INCOME TAX, SUPER TAX ETC.
(b)
Section 9 & 10
When a mortgagee decree-holder, with the permission of the Court, bids for and purchases the mortgaged property at a judicial sale, Order XXI, Rule 72(2) of the Civil Procedure Code provides that the purchase money and the amount due on the decree ... may be set off against one another and the Court executing the decree shall enter up satisfaction of the decree in whole or in part accordingly. The decree-holder thus in effect receives a transfer of the property at the value of the purchase price in satisfaction pro tan to of the liability of the mortgagors for principal and interest. So far as the purchase price exceeds the principal sum due under the mortgage the excess is applicable to any arrears of interest. To the extent, therefore, that the purchase price exceeded the principal sum due there was a realisation of interest, that is, a payment of interest. The interest is paid in the form of a credit in account and is reinvested in the purchase of the property. In this case the principal sum due under the mortgages of 18.7.1904, and 7.11.1912, on the estate when it was judicially sold amounted to Rs.7,33,135 plus Rs.3,00,000 Rs.10,33,135. The price paid was Rs.25,65,100, or Rs.15,31,965 in excess of the principal sums due. This excess was plainly available to be set off against the arrears of interest, costs and expenses. Therefore, when the assessees as a result of the judicial sales received payment in account of the sum of Rs.7,33,135 due under the mortgage of 18.7.1904, they then received payment for the first time of the arrears of interest to the extent of Rs.2,33,135, and, consequently, this sum represented an income receipt and must be brought into computation as such by the assessees for tax purposes.
(c)
The decree was only a step towards realisation, and the date of the decree was, therefore, plainly not the date of realisation. Nor on the date of the sale does the purchaser obtain an indefeasible right, for under Order XXI, Rules 89,90 and 91, the sale may be set aside on various grounds. It is only where no application is made under these rules or where such application is made and disallowed that the Court under Order XXI, Rule 92, makes an order confirming the sale, whereupon „the sale shall become absolute‟. It is then that the process of realisation is completed and any profit or income is
604 Section 9 & 10
Income Tax Digest.
realised by the decree-holder. This is so whether the property is purchased by the decree-holder himself or by a third party, for the right of set-off conferred on the purchasing decree-holder must also be dependent on the sale being rendered absolute by confirmation. No doubt section 65 of the Code provides that „where immovable property is sold in execution of a decree and such sale has become absolute, the property shall be deemed to have vested in the purchaser from the time when the property is sold and not from the time when the sale becomes absolute‟, but this provision does not come into operation unless and until the sale has become absolute. The actual date of realisation is not affected by this retrospective vesting of the property. Profit, therefore, in this case arose in 1925 when the sale was confirmed. (d)
The deductions were not admissible, because when the assessee bid for the property, he was aware of the risk. Had it not been for this risk he would have presumably offered more. Further, the first suit was decreed in 1927, and the second in 1926. The expenditure was not incurred in the year in which interest income arose, and was not deductible. Nor were expenses in completing the title deductible. The assessees in bidding for the property must have had in view that they would incur these expenses if they were the successful purchasers and doubtless estimated accordingly the price which they thought it worth their while to bid the price which the assessee bid for the property at the public sale and must be taken to be its market value.
Sidheshwar Prasad Narayan Singh v. Commissioner of Income Tax – [1942] 10 ITR 344 (Pat.) 906.
When a creditor receives a sum in satisfaction of half of decretal amount.
Where the assessee obtained a decree for principal, interest and costs against two brothers and later, under a compromise with one brother received a sum in satisfaction of half of the decretal amount but did not appropriate the sum in his books in any particular manner, it was held that the judgment debtor paid the amount to discharge his liability, i.e., half the costs, half the principal and half the interest, and the interest portion was, thus, taxable.
605 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
Gopiram Gobindram, In re – [1936] 4 ITR 157 (Cal.) 907.
Appropriation of payments towards interest and principal is to be made as stipulated in mortgage deed.
The borrower was making payments to the lender under a mortgage deed at the rate of something over Rs.7,500 per month. The mortgage deed stipulated that the rate of interest on the loan was to be ten per cent per month, that such interest was to be paid monthly, that in the event of simple interest for any consecutive period of 12 months remaining unpaid the borrower would have to pay compound interest at the rate of ten annas per cent for each month, that the borrower was to make payments at the rate of Rs.7,500 per month, that such payments were to be credited in the first instance towards interest and the balance set off against the principal due and that in default of this payment the assessee-creditor was to enter into possession of the property and while in possession to realise and receive the rents, etc., and to apply the net rents, etc., remaining after paying and discharging all costs of realization, firstly, in paying himself the monthly instalments of interest and secondly, in applying the residue in and towards the reduction of the principal monies. The assessee took possession of the property in March 1932. The question was whether it was open to a mortgagee notwithstanding a stipulation in the mortgage deed to apply payments, or in case when the mortgagee had taken possession, the net realisations of the mortgaged property towards interest, to appropriate such payments or realisations with or without the consent of the mortgagor towards principal? Held that what the mortgagee must do here was to apply the money received in accordance with the provisions of the mortgage deed. The Income Tax authorities were certainly entitled to assume that he was doing it. Khairati Lal Babu Lal, In re – [1941] 9 ITR 627 (All.) 908.
In money-lending business, unless there are specific intimations from debtor, creditor may appropriate receipts towards principal or interest.
The assessee had received certain amounts towards the satisfaction of a mortgage decree sustained by him. The debtor had in his accounts shown the payments as payment of interest. In the absence of instructions from the debtor whether the amount was to be appropriated as interest or principal, the assessee had taken them as payment of principal.
606 Section 9 & 10
Income Tax Digest.
Held that since it was not established that the debtor had sent any instructions, it was not correct to treat the payment as interest on the basis of entries in the debtor‟s books. S.S.S. Chockalingam Chettiar & Sons v. Commissioner of Income Tax – [1941] 9 ITR 278 (Mad.) 909.
In case of two mortgages on same property amount recovered in a suit is to be appropriated first towards the earlier mortgage.
Where an assessee holds two mortgages on the same property then he is entitled to appropriate the amount recovered in execution of a decree in the first place to the principal and interest due on the first mortgage. Only if they were sufficient to discharge both the principal and interest due on the first mortgage could there be any appropriation towards the second mortgage. Multan Electric Supply Co. Ltd., In re – [1945] 13 ITR 457 (Lahore) 910.
illustration showing allocation between interests and capital.
The assessee-company appointed a HUF, carrying on banking business, as one of its bankers but because of the precarious financial position of the HUF in later years, the HUF ceased to be the assessee‟s banker. The HUF also owed Rs.1,31,949 to the assessee (Rs.47,051 as principal and balance as interest). The assessee had issued certain shares to the HUF and received Rs.50,108 as call money. For the HUF‟s failure to pay the balance of call money, the shares were forfeited by the assessee and allotted to other shareholders. Later, under a Court‟s award relating to disputes between the assessee and the HUF, the assessee credited Rs.50,108 to the HUF‟s account by adjustment against debt. The question was whether this sum of Rs.50,108 was a capital receipt in the assessee‟s hands. Held that the principal debt owed was Rs.47,051. The crediting of the amount of Rs.50,108 was made in settlement of the family debt, in consequence of the arbitrator‟s award. It should reasonably be assumed therefore that Rs.47,051 was appropriated towards the principal, and the rest as interest. Of the amount received by the forfeiture of the shares, viz., Rs.50,108, there could be no question but that this was originally a capital receipt. Insofar as this amount was appropriated to the payment of the principal portion of the debtor‟s loans, it continued to be in the nature of a „capital receipt‟ and not income; but insofar as the amount credited towards payment of the interest was concerned, it was obviously revenue and assessable, as
607 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
such to tax. Thus, the sum of Rs.47,051 should be regarded as a capital receipt while the balance of Rs.3,057, must be regarded as the income of the company. _______________
ILLUSTRATIONS
Commissioner of Income Tax v. CT. RM. N. Narayanan Chettiar – [1943] 11 ITR 470 (Mad.) 911.
Interest received for belated payment of share in firm is not damages for wrongful detention of money, and is taxable.
On the death of the assessee‟s father who was a partner in a firm, the value of his share was determined but payment to the assessee was not made for ten years. Later, as per decision of the panchayat interest was paid on the amount. Held that the sum received by the assessee was a revenue receipt and not damages for wrongful determination of money. Judicial analysis: The correctness of the decision in Behari Lal Bhargava v. Commissioner of Income Tax [1941] 9 ITR 9 (All.) is open to doubt.
Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax – [1938] 6 ITR 355 (Lahore) 912.
Interest received by vendor of securities from vendee is assessable in vendor‟s hands, even though entire interest would be assessable in vendee‟s hands.
Interest received by a vendor of securities from the vendee on the de die in diem basis is taxable in his hands. The fact that the full interest on securities will be taxed in the hands of the vendee does not help the assessee-vendor at all, because the theory of double taxation does not apply in all cases. Chunnilal Nathmal v. Commissioner of Income Tax – 9 ITC 173 (Nag.) 913.
Where fresh „hundies‟ were issued for interest.
Where the assessees money-lenders had received hundies from their debtors and the latter instead of making cash payments for interest passed hundies for the amount representing interest due to the assessees after adjustment of accounts, it was held that the Income Tax authorities were not justified in assessing the assessee in the present case on the sums stated in the questions under reference on
608 Section 9 & 10
Income Tax Digest.
the ground that the said amounts were either received by the assessee or were realisable by him in the assessment years. Lachhman Das Brijballabh Das, In re – [1942] 10 ITR 186 (All.) 914.
Where assessee purchases mortgaged property in satisfaction of a decree, extent to which purchase price exceeds principal sum, is interest realised.
When property is purchased in satisfaction of a debt the assessee receives a transfer of the property at the value of the purchase price in satisfaction pro tanto of the liability of the mortgagors for principal and interest and to the extent therefor that the purchase price exceeds the principal sum due, there is a realisation of interest, that is, a payment of interest. _______________
COMMISSION
Major A.U. Johit, In re – [1938] 6 ITR 434 (All.) 915.
Where a major debenture-holder who had brought the property to auction, was allowed to act as auctioneer, the commission received was not his income, if the assets sold were for a price far below the decretal amount.
The assessee, holding major portion of debentures in a company, was permitted to act as an auctioneer when the assets-of the company were sold in execution of a decree obtained on the debentures. As decree-holders the debenture-holders were required to pay 6-1/4 per cent of sale price as poundage to the Government, out of which 5 per cent was paid as commission to auctioneer. The Court permitted the assessee to pay 11/4 per cent only as poundage and kept the remaining 5 per cent. The question was whether the 5 per cent commission was the assessee‟s taxable income. Held that the commission was not „income‟ within the meaning of the Income Tax Act as the assets sold were far below the decretal amount. Judicial analysis: The Privy Council view in Commissioner of Income Tax v. Shaw Wallace & Co. AIR 1932 PC 138 is undoubtedly in general terms not intended to be confined to the particular Facts and circumstances of the case which the judges were considering. It appears that the Privy Council intended to indicate that the element of periodical receipt, regularity or expected regularity of monetary return is an essential ingredient of „income‟ under the Indian Income Tax Act.
609 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
The view in Gayaprasad & Chotey Lal, In re [1935] 3 ITR 177 (All.) confining the decision of the Privy Council to the facts of the case was dissented from. _______________
PENSION / ANNUITY
Commissioner, Inland Revenue v. Assurance Society – [1948] 30 TC 11 916.
Wesleyan
&
General
General.
It may be well to repeat two propositions which are well established in the application of the law relating to Income Tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan, if it is really an annuity, does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction, which, on its true construction, is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. As the Master of the Rolls said in the present case „In dealing with Income Tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable... The net result from the financial point of view, is precisely the same in each case, but one method of achieving it attracts tax and the other method does not. There have been cases in the past where what has been called the substance of the transaction has been thought to enable the court to construe a document in such a way as to attract tax. The particular doctrine of substance, as distinct from form, was finally exploded by the decision of the House of Lords in the case of Duke of Westminster v. Commissioners of Inland Revenue [1935] 19 TC 490. Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income Tax – [1935] 3 ITR 237 (PC) 917.
Annuities receivable in exchange for capital assets are income and not capital receipt.
The assessee, who owned vast estates, conveyed them to R in consideration for (a) R‟s undertaking to pay his debts totalling approximately Rs.10 lakhs; (b) Rs.4.73 lakhs in cash; and (c) an
610 Section 9 & 10
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annuity of Rs.2.40 lakhs per annum for life. The question was whether annuity was a capital receipt being part of the price or a taxable income. Held that to say that annuity was part of „the price‟ of the sale did not make it necessarily a capital payment. It was only to say that it was part of the consideration for the transfer of the property, and that consideration may well take the form of annual stuns which would be income in the hands of the payee. This was clearly no ordinary bargain and sale by a vendor and purchaser at annas length for the money consideration bore no relation to the actual value of the property. The amount ultimately payable by the purchaser depended upon the life of the vendor. It was clearly a case where the owner of the estate had exchanged a capital asset (inter alia) for a life annuity which was income in his hands. It was not a case in which he had exchanged his estate for a capital sum payable in instalments. Thus, the impugned receipt of annuity was an „income‟. Case review: Decision of the Patna High Court in Commissioner of Income Tax v. Gopal Sharan Narain Singh [1934] 2 ITR 264 affirmed. FOLLOWED IN - Commissioner of Income Tax v. Lal Suresh Singh [1935] 3 ITR 356 (Oudh), Commissioner of Income Tax v. K.H. Katrak [1937] STIR 527 (Sind). _______________
RENT
Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh – [1948] 16 ITR 325 (PC) 918.
Rent, where held not taxable as income.
Where the holder of the patni rights under an estate was unable to pay the patni rent due to the estate for several years with the result that the rent and interest on arrears of rent amounted to a certain sum and the holder of the rights thereupon executed a usufructuary bond in favour of the assessee under which the assessee was put in possession of certain agricultural property for the purpose of realising the sum due to the assessee, it was held that the bond was merely a security for the debt and no taxable income accrued to the assessee. Case review: Decision of the Patna High Court in Zainuddin Hussain Mirza v. Commissioner of Income Tax [1944] 12 ITR 428 affirmed. Srimati Lakshmi Daiji v. Commissioner of Income Tax – [1944] 12 ITR 309 (Pat.) approved.
611 CHARGE OF INCOME TAX, SUPER TAX ETC.
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Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 919.
Where royalty was paid on basis of minerals obtained, royalty was revenue in nature.
Where the lessee of mine had paid to lessor royalty, which was calculated on the basis of minerals obtained, the royalty was a revenue receipt in the lessor‟s hands. Maharani Janki Kuer v. Commissioner of Income Tax – 5 ITC 42 (Pat.) 920.
Rent and royalty received from brick-makers to erect brick kilns on assessee‟s land.
Where the assessee-landlord has received rent and royalties for granting licences to brick-makers to erect brick kilns on his land and to take away earth for manufacturing bricks, such rent and royalties are income chargeable to tax and are not agricultural in nature. _______________
SALAMI
Rani Bhubneshwarl Kuar v. Commissioner of Income Tax – [1940] 8 ITR 550 (Pat.) 921.
It is impossible to lay down any general rule that payments in the nature of salami or nazrana must be regarded as payments of rent and, therefore, income.
It is impossible to lay down any general rule that payments in the nature of salami or nazrana must be regarded as payments of rent and, therefore, income. In some cases it might be payment of rent in advance, and in other cases it might well be a lump sum payment for the transfer of the leasehold interest. Whether the payment of salami is a capital receipt or income must depend on the particular facts of the case. Commissioner of Income Tax v. Raja Bahadur Kamakshya Naraln Singh – [1946] 14 ITR 738 (Pat.) 922.
Salami which is not in the nature of advance rent is not a revenue receipt.
The question if salami in a particular case is in reality payment of rent in advance, or is a lump sum payment for transfer of some interest in the property, is a question of fact which can only be determined after a full investigation of all facts relating to the settlement by which the salami or nazrana was paid.
612 Section 9 & 10
Income Tax Digest.
Where the lessor wanted the lessees to vacate the coal bearing lands on the grounds that the leases granted by the court of wards were invalid, and ultimately, the leases were renewed on payment by the lessees of a lump sum salami amount: Held that the salami was a capital receipt. The salami was received not on account of any rent due to the assessee but for the settlement of his claim which he had put forward. Similarly, lump sum amount paid as reimbursement of amounts paid by the lessor by way of cess, which was actually the liability of the lessees, was not revenue income. Mst. Sarju Bai v. Commissioner of Income Tax – [1947] 15 ITR 137 (All.) 923.
Question as to whether salami received by assessee while letting out plots is income or capital receipt is a question of fact.
Where an assessee let out plots of land on building leases for a small rent and charged on each occasion a nazrana or salami: Held that the question whether the salami received by the assessee was income or capital was a question of fact. Commissioner of Income Tax v. Raja Bahadur Kamakshya Narain Singh – [1946] 14 ITR 738 (Pat.) 924.
Question as to whether salami in a particular case is in reality payment of rent in advance, or is a lump sum payment for transfer of some interest in the property, is a question of fact.
Question if salami in a particular case is in reality payment of rent in advance, or is a lump sum payment for transfer of some interest in the property, is a question of fact. _______________
ILLUSTRATION
Commissioner of Income Tax v. Visweshwar Singh – [1939] 7 ITR 536 (Pat.) 925.
Salami for granting permanent lease.
It would be impossible to lay down a hard and fast rule that a salami can in no case be taxable but that the question would depend upon the facts and circumstances of each case. Premium (salami) for granting permanent lease is not income. Where the assessee received salami in connection with the indefinite lease of a land belonging to it in addition to the yearly lease rent, it was
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held that the lease was a permanent one and the salami received by the assessee being price for parting with the land, was a capital receipt. Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 926.
Salami received under mining lease.
The assessee leased out his coal mines for a term of 999 years, and the covenants provided for payment of salami or premium as well as for payment of royalty annually based on the quantity of coal/coke extracted. The lease provided for payment of a minimum royalty at the end of any year in which royalties on coal raised and despatched should be less than a certain amount. It also contained usual covenants and in particular the lessee undertook to deliver up the mines in goad order. and condition at the end or sooner determination of the term. It included a covenant by the lessor for quiet enjoyment and the lessees were granted liberty to determine the lease on certain terms. The lessors were further entitled to enter upon the demised premises and to determine the tease on specified conditions if the royalties were not duly paid. The question for consideration was whether the salami and royalties could be treated as capital receipts. Held that the salami was a capital receipt, since it was a single payment made for the acquisition of the right of the lessor. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. The minimum royalty was only payable if in any year the royalties on coal raised and despatched were less than the sum fixed as the minimum royalty. This amounted to a species of annual guarantee it did not correspond to any coal in fact extracted and taken away: it was simply „income‟ flowing from the covenants in the lease, contingently on the lessees‟ failure to take the minimum quantity of coal. It would be payable if in any year the lessees took no coal at all, or if the coal in the mine was completely exhausted before the termination of the lease. The minimum royalty was „income‟ and in no sense a payment on capital account. The royalties were clearly income and not capital. They were periodical payments for the continuous enjoyment of the various benefits under the leases. The actual acquisition of the property in a particular ton of coal at the moment when the lessees had cut and taken away the coal was only the final stage. Case review: Decision of the Patna High Court in Commissioner of Income Tax v. Kumar Kamaksha Narain Singh [1940] 8 ITR 563 affirmed. Judicial analysis: DISTINGUISHED ON FACTS IN -
614 Section 9 & 10
Income Tax Digest.
Sardar Bahadur Sardar Singar Singh & Sons v. Commissioner of Income Tax [1944] 12 ITR 504 (Oudh), on the ground that the Privy Council decision could not be applied to the case on hand, since it is a well known principle that what is capital in the hands of one man may be income when paid to another. (p.510) Commissioner of Income Tax v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545 (Bom.), on the ground that the Privy Council looked at the matter from the point of view of the vendor and not from the point of view of the purchaser, while in the case on hand the court was concerned with the nature of payment when the purchaser paid to the vendor a commission which might be likened to a royalty. (p. 559) _______________
SUBSIDY / INCENTIVES
Commissioner of Income Tax v. Poona Electric Supply Co. Ltd. – [1946] 14 ITR 622 (Bom.) 927.
Subsidy received by electricity company.
Subsidy received from the Government by an electric supply company for constructing new lines is a capital receipt in the company‟s hands. _______________
GIFTS / VOLUNTARY PAYMENTS
Rani Amrit Kunwar v. Commissioner of Income Tax – [1946] 14 ITR 561 (All) 928.
Voluntary payments, in order to be taxable in the hands of the recipient as income must have an origin which a practical man would regard as real source of income.
The definition of „income‟ in clause (2) of section 2 is not exhaustive. It is inclusive and fictionally covers things which this clause declares to include, but includes also such things as the word signifies according to its natural import. This clause merely brings in artificial categories to the natural connotation of „income‟. The object of the Act is to tax „income‟, a term of formidably wide and vague import. The word „income is an expression of elastic ambit. The word „income‟ is a more general term than „profits‟ or „gains‟. A receipt may be taxable as income, although it may contain no element of profit or gain. Profits or „gains‟ means something which is in the nature of interest or fruit, as opposed to the principal or tree. „Gains‟ is really the equivalent of
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„profits‟. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. The tax is upon income, profits or gains; it is not a tax on the gross receipts. The expression „profits‟ or „gains‟ is not limited to business only, but is used in the Act with reference to other sources of income as well. The income need not necessarily arise from any business activity, investment or outlay, or any enforceable obligation to pay. Voluntary payments, in order to be taxable in the hands of the recipient as income, must have an origin which a practical man would regard as real source of income. Rani Amrit Kunwar v. Commissioner of Income Tax – [1946] 14 ITR 561 (All.) 929. A habitual receipt under a custom which is not legally enforceable but is in nature of a bounty is not income. The sister of a ruler of an Indian State was being paid regularly for a period of twenty years an allowance by the ruler. The amount was regularly budgeted for in the State budget. On the question whether the receipt constituted income of the sister of the ruler: Held that there could be no doubt that the payments had recurred with both actual and expected regularity for the better part of twenty years. The sanction for the payment appeared in the annual budget of the State. Therefore, they had become „customary‟ payments in the limited sense; at least that they were „habitual‟ payments. However, they were not „customary‟ payments in the legal significance of that term denoting something that had become legally enforceable by custom. There were a series of payments made over a period long enough to entitle them to be described as habitual, originating in nothing more than the bounty of the ruler. Therefore, the impugned payments were not assessable in the hands of the sister of the ruler. _______________
SHARE IN BUSINESS PROFITS
Commissioner of Income Tax v. Bai Nindhi Bai – [1946] 14 ITR 600 (Sind) 930.
A share in business profits is revenue receipt.
Capital may be exchanged for capital; capital may be exchanged for income as in the case where a person buys an annuity and discards the pleasures, burdens and risks of capital for what is believed to be an assured income only. As capital of one kind may be exchanged for capital of another kind, so an intangible asset can become a tangible asset or can be valued and become capital.
616 Section 9 & 10
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There was a provision in the will that successor to the testators business shall pay a certain share in profits for one year to the testator‟s wife, the assessee, and thereafter the successor will pay to the wife what he deemed fit. Subsequently, a compromise was entered into whereby the widow was paid a fixed sum every year instead of share in profits. Held that either in the will or in the compromise it was not at all contemplated that these payments to widow be regarded as capital payments being the sale price of the goodwill of the business, in fact the payment received by the assessee was not capital payment received in exchange for the goodwill of the business but a share in the income of the business and was assessable to Income Tax. _______________
TECHNICAL KNOW-HOW
Jeffrey (H.M. Inspector of Taxes) v. Rolls-Royce Ltd./Commissioner of Inland Revenue v. Rolls-Royce Ltd. – 40 TC 443 (HL 931.
Lump sum receipt for supply of technical know-how is not a capital receipt but is a trading receipt.
The assessee-company had an immense fund of technical knowledge and experience with regard to the design and manufacture of aircraft engines. Certain countries were unwilling to buy engines from it but wished to manufacture similar engines themselves with the aid of technical know-how supplied by the assessee. Agreements were entered into with certain countries by the assessee for granting licences‟, and for supply of drawings and such other technical information by the assessee. The assessee received both lump sum payments and royalty under these agreements. The assessee claimed that the lump sum amounts were capital receipts in its hands, since they were related to the sale of the „technical know-how‟ which was a capital asset. Held that the contention that by each of the agreements the assessee sold a part of any capital asset and received a price for it, was unacceptable. There was nothing in the case to indicate that that capital asset was in any way diminished by carrying out these agreements. The whole of its knowledge and experience remained available to the assessee for manufacturing and further research and development, and there was nothing to show that its value was in any way diminished. The assessee had not even given up a market which had been open to it. It could not sell its engines in these countries whether it made these agreements or not. If it had not
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made these agreements, it would have got nothing from these countries; by making the agreements it was able to exploit its capital asset by receiving large sums for its use there. In essence, what it did was to teach the „licensees‟ how to make use of the „licences‟ which it granted. The assessee‟s alternative contention that these receipts did not arise out of the trade of manufacturing and selling aircraft engines and motor cars, could not also be agreed to. It was for each trader to determine the scope of his own trade. No doubt a trader could carry on two separate trade simultaneously. But the facts of this case clearly indicated that this course of granting „licences‟ was merely an extension of the assessee s existing trade devised to meet the difficulty that it would not sell its engines in the countries of the „licensees‟. It was merely another method of deriving profit from the use of its technical knowledge, experience and ability. The lump sum payments were thus clearly trading receipts assessable to tax, and not capital receipts. _______________
PATENT / TRADE MARK / COPYRIGHT
Anant Ram Khem Chand v. Commissioner of Income Tax – [1937] 5 ITR 511 (Lahore) 932.
Where there is outright sale of patent, receipt of price even though in instalments would be capital in nature.
Where there is an outright sale of the patent by the patentee for a definite price, receipt of price even though payable in instalments would be capital in nature. If on the other hand, when the patentee has merely granted a „working licence‟ for an annual payment, for a number of years, payment so received would be „income‟ and as such taxable. _______________
MINING RIGHTS
S.Warwick Smith v. Commissioner of Income Tax – 5 ITC 451 (Rangoon) 933.
Where the assessee carried on prospecting operations and after a few years, obtained a mining licence, which he never worked himself, but instead parted with it by selling the right to mine
Where the assessee carried on prospecting operations and after a few years, obtained a mining licence, which he never worked himself, but
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instead parted with it by selling the right to mine, it was held that receipts were taxable. _______________
BONUS SHARES
Commissioners of Inland Revenue v. John Blott – [1921] 8 T.C. 101 (HL) 934.
Bonus shares issued by a company are not dividend or income taxable in the recipient‟s hands.
The question was whether bonus shares issued by a company in exercise of the power under the articles of association could be treated as dividend and taxed as the income of the recipient. Held that it was as a matter of principle within the power of an ordinary joint stock company with articles such as those in this case to determine conclusively against the whole world whether it would withhold profits it had accumulated from distribution to its shareholders as income, and as an alternative, not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this was done, the money so applied was capital and never became profit in the hands of the shareholder at all. What the latter got was no doubt a valuable thing. But it was a thing in the nature of an extra share certificate in the company. His new shares did not give him an immediate right to a larger amount of the existing assets. The transaction took nothing out of the company‟s coffers, and put nothing into the shareholder‟s pockets. The only result was that the company which, before the resolution could have distributed the profit by way of dividend, or carried it temporarily to reserve, came henceforth under an obligation to retain it permanently as capital. Therefore, bonus shares could not be treated as dividend or profits and taxed as the income of the recipient. Note:
Section 2(24) of the Income Tax Ordinance, 1979 prior to 01-072000 specifically provided that this shall not be income in the hands of shareholders and section 12(9) deems that it shall be the income accruing to the company. The position after 01-07-2000 is that it has specially been defined as dividend in the hands of the shareholder. _______________
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BONUS DEBENTURES
Commissioner of Income Tax v. Mercantile Bank of India – [1936] 4 ITR 239 (PC) 935.
Bonus debentures are not income, but capital receipt in the shareholders‟ hands.
As held in Commissioner of Inland Revenue v. Fischer‟s Executors [1926] AC 395, it is as a matter of principle, within the power of an ordinary joint stock company, to determine conclusively against the whole world whether it will withhold profits it has accumulated, from distribution to its shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profits in the hands of the shareholders at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. The case of bonus debentures is indistinguishable, from that of bonus shares. Thus distribution of accumulated profit as bonus debentures is not income. Note: Though it was held that the bonus debentures were indistinguishable from bonus shares, the issue of bonus debentures is now treated as dividend [vide section 2(20)(b) of the Income Tax Ordinance, 1979 and 2(22)(b) of the Indian 1961 Act]. Case review: Judgment of the Calcutta High Court in Sir David Yule is Estate, In re [1935] 3 ITR 163 affirmed. Judicial analysis: APPLIED IN - Commissioner of Income Tax v. P.Ramaswamy Chettiar [1941] 9 ITR 656 (Mad.). _______________
SALE PROCEEDS OF TREES
Maharaja of Kapurthala v. Commissioner of Income Tax – [1945] 13 ITR 14 (Oudh) 936.
The net receipt from the sale of forest trees are income liable to income tax even though the forest would be gradually exhausted by feelings.
Receipts from capital which is exhausted in the process of realization may be nonetheless income. The net receipts from the sale of forest trees are income liable to income tax even though the forest would be gradually exhausted by feelings.
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Raja Bahadur Kamakshya Naraln Singh v. Commissioner of Income Tax – [1946] 14 ITR 673 (Pat) 937.
Effect of fact that sale of the forest trees must necessarily result in the diminution of the value of the estate.
Where the contention was that the sale of the forest trees must necessarily result in the diminution of the value of the estate of assessee and, therefore, the amount realised should be treated as a capital receipt, it was held that the income was not capital receipt. _______________
SALE PROCEEDS OF ASSETS OF MONEY-LENDER
K.AR.S.T. Arunachalam Chettlar v. Commissioner of Income Tax – [1946] 14 ITR 61 (Mad.) 938.
Profit sale of properties which are treated as assets of moneylending business as revenue receipt.
The assessee, a member of HUF, was allotted certain properties on partition of the HUF. He entered their value in his books of account of money-lending business. They were treated as being part of the capital of the money-lending business. In these accounts the expenses of running/maintaining the properties were debited and the profits accruing therefrom were entered as profits of the money-lending business. In the year of account the assessee sold a portion of the properties so allotted and entered the sale proceeds in the accounts of his business The sale showed a profit. The question in this case was whether this profit was liable to Income Tax. Held that the profit on sale was liable to income tax since the properties so allotted formed part of the capital of the assessee‟s money-lending business and the profits therefrom were included in the profits of the business. Amritsar Produce Exchange Ltd., In re – [1937] 5 ITR 307 (Lahore) 939.
Where the assessee-company acquired the property of its debtor in discharge of his loan, and sold the property for a profit.
Where the assessee-company acquired the property of its debtor in discharge of his loan, and sold the property for a profit and the assessee had failed to establish that the object of acquisition was primarily not for realising any surplus, it was held that the profit was income assessable to tax. _______________
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RECEIPTS BY PARTNERS FROM FIRM
Commissioner of Income Tax v. P.R.A.L. Muthu Karuppan Chettiyar [1935] 3 ITR 208 (PC) 940.
On dissolution of firm interest received by a partner on his capital is not capital but revenue receipt.
On dissolution of a partnership an outgoing partner has the right to receive as in the case of shareholder in winding up of a company, not only a share of the assets, but also to receive payment of his profits, profits which were his before dissolution and did not cease to be his on dissolution. The assessee, who was a partner in a firm, retired from the firm. Account was taken of the amounts due to him till retirement by way of capital, share of profits and interest. Interest on capital amounting to Rs.38,305 together with a greater part of the capital sum due was paid to him. The question arose whether the impugned sum received by the assessee as interest on capital was a capital receipt or income assessable to tax. Held that sums stated above being profits of the assessee up to the date of retirement they did not alter their character by dissolution. The account taken on dissolution ascertained what was due to the partners as profits, and what was due as capital It could hardly be suggested that the partners share according to their capital proportions in the whole assets of the partnership. The interest due for undrawn profits was and remained a sum due by the partners to each partner and necessarily ranked first before the sums due for capital could be distributed. Therefore, it was taxable as income. Note: It was, however, made clear that this decision would not cover cases where undrawn profits have, with the consent of all parties, been invested in the business so as to increase the capital account. Case review: Decision of the Madras High Court in Commissioner of Income Tax v. P.R.A.L.M. Muthukaruppan Chettiar [1934] 2 ITR 406 reversed. _______________
OTHERS
Commissioner of Income Tax v. Diwan Bahadur S.L. Mathlas – [1939] 7 ITR 48 (PC) 941.
Green coffee itself is not income.
A resident-assessee was running a business of growing coffee. Coffee was grown outside British India and there being no market
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Income Tax Digest.
for raw coffee there it was brought into British India for curing and sale. The question was whether income from coffee was received in India, or whether income-in-kind (green coffee) was received outside India. Held that the green coffee itself could not be regarded as income, profits or gains within the meaning of the Act; it was grown for purposes of sale and in order that profit may be earned. The business operations could not be arbitrarily cut into two portions but must be regarded as a whole. Thus, the income from coffee was received in India and it could not be said that income-in-kind (green-coffee) was received outside India. Raja Probhat Chandra Barua v. Commissioner of Income Tax – 5 ITC I (PC) 942.
Income derived from lands in permanently settled estates is liable to assessment to Income Tax.
The income derived from lands in permanently settled estates is liable to assessment to income tax subject to the exemption provided in the Income Tax Act. Union Bank of Bijapur & Sholapur Ltd., In re – [1942] 10 ITR 21 (Bom.) 943.
Amount embezzled, if allowed as loss in assessment, is taxable as revenue income when recovered.
Where the assessee-bank was allowed deduction on account of loss due to embezzlement by an employee and subsequently it recovered part of the embezzled amount from the heirs of the employee, it was held that the amount so recovered was taxable as a revenue gain in the assessment year relevant to the accounting year in which it was recovered, and was not a capital receipt. Note: Now such receipts have been made taxable through express words under section 25(a) of the Income Tax Ordinance, 1979.
A.R. Hattiangadi, In re – [1940] 8 ITR 85 (Bom.) 944.
A lump sum received from provident fund on retirement on account of the employer‟s contribution to the fund and the accumulated interests on the total contributions thereto is not taxable.
A lump sum from a provident fund on the assessee‟s retirement on account of the employer‟s contribution to the fund and the accumulated interests on the total contributions thereto was not in the
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nature of deferred salary but a payment in the nature of a capital bonus and the assessee was not, therefore, liable to be taxed in respect of it. Gaya Prasad Chhotey Lal v. Commissioner of Income Tax – 8 ITC 64 (All.) 945.
Where the assessee financed a litigation on condition that in event of success the litigant was to pay a certain sum.
The assessee under a contract to finance one K in the prosecution of a case pending in the High Court stipulated for payment, in the event of success, of a sum of Rs. 21,000 in addition to the litigation expenses to be advanced by him, but nothing if K lost his case, and on K winning his case received the sum of Rs. 15,000 in addition to the sums actually advanced by him. On an assessment of this sum less Rs. 440 on account of interest paid by him. HELD, that the transaction being a speculative loan advanced in the expectation of considerable pecuniary profit amounted to business within the meaning of the Income Tax Act and the sum assessed was a receipt of income, profit or gains arising from business excluded from the exemption conferred by section 4(3)(vii) of the Act. _______________
APPLICATION OF INCOME
Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax – 5 ITC 363 (PC) 946.
A payment conditional upon profits being made cannot be described as a payment to earn profits.
A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits. _______________
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ILLUSTRATIONS
Commissioner of Income Tax v. C. Macdonald & Co. – [1935] 3 ITR 459 (Bom.) 947.
Profits paid by assessee to third party under an agreement will not be deductible.
The assessee was the agent of K company and in respect of the year of assessment it received as such agent a certain sum out of which it paid away to third parties certain amounts as per agreement and the question was whether the assessee was entitled to deduction in respect of the said payment. Held that the assessed was not entitled to have this sum deducted. Whether the obligation to pay was based on the gross income or on the net profits could not affect the question. Bharat Insurance Co. Ltd. v. Commissioner of Income Tax – [1934] 2 ITR 63 (PC) 948.
Profits distribution to policy holder by assessee-insurance company is an application of income.
Where under their contracts the participating policy-holders were entitled to share in the profits of the assessee-insurance company, the profits so distributed did not cease to be the profits of the assesseeinsurance company for purposes of levying tax. The profits so paid were only application of the profits, and were hence not deductible for purposes of arriving at the taxable profits. _______________
MAINTENANCE ALLOWANCE
Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax – [1933] 1 ITR 135 (PC) 949.
Where certain amounts were paid by assessee to his step-mother under a decree for her maintenance and maintenance was a charge on ancestral estate in hands of assessee, amounts so paid by assessee to his step-mot her were not his income as it had been diverted to his mother at source.
When the 1922 Act by section 3 [corresponding to section 9 of the Income Tax Ordinance, 1979] subjects to charge „all income‟ of an individual, it is what reaches the individual as income which it is intended to charge.
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There was litigation between the assessee who had succeeded to the estate of his father, and his step-mother, and the litigation ultimately resulted in a decree in favour of the step-mother. By the decree a maintenance allowance of Rs.1,100 per month was awarded to her which was a legal liability of the assessee and was payable out of the estate and was a charge on the ancestral estate in the hands of the assessee. The question was whether it was a case of diversion of income at source or application of income. Held that by the decree the assessee‟s step-mother had a charge not only on the property, but on all sources of income. Liability to his stepmother was not of the same kind as his liability to provide for his wives and daughters, but the position was the same as if the assessee „had received his various properties, securities and business under a bequest from his father upon the terms that these assets was charged with an annuity for the maintenance of the widow‟. The case was not one of „a charge created by the assessee for the payment of debts which he had voluntarily incurred‟. The decree of the Court by charging the appellant‟s whole resources with a specific payment to his stepmother; to that extent what he received for her was not his income. It was not a case of the application by the assessee of a part of his income in a particular way, it was rather the allocation of a sum out of his revenue before it became income in his hands. Case review : Decision of the Calcutta High Court reversed. Per Court : While their Lordships are disinclined to entertain any argument from the one system to the other, they would infer, if any inference were permissible, that the omission from the Indian Act of any such provision points rather to an intention to tax, in Lord Davey‟s phrase, only „the real income‟ of the tax payer, than to an intention to impose, without right of reimbursement, tax on what is a charge upon his income.
L.Hira Lal, In re – [1945] 13 ITR 512 (Lahore)
Under an arbitration award in connection with the partition of a HUF, two widows, who were also members of the family, on their own request, were granted maintenance allowance in lieu of their share in the family property and the payment of the allowance was made a charge on the property of the assessee, who was also one of the members of the family. ON the question whether it was a diversion at source and hence excludible from the income of the assessee: Held that as the payments were obligatory and subject to an overriding charge, they were to be excluded from the income of the assessee.
626 Section 9 & 10
Income Tax Digest.
Raja Shiva Prasad Singh v. Commissioner of Income Tax – [1942] 10 ITR 249 (Pat.)
Where maintenance allowance was paid to the widow of the deceased holder of an impartible estate under a decree of the Court and the maintenance allowance was made a charge on the estate, it was held that the maintenance allowance so paid out of the estate was an allocation out of the revenue of the estate before it became income of the assessee who succeeded to the estate and the assessee was not liable to pay tax on the amount paid as maintenance allowance. R.S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax – [1946] 14 ITR 66 (Lahore) 950.
Amount payable to karta‟s mother as maintenance after partition is not taxable in his hands.
Where karta of the assessee-HUF partitioned family estate under a partition award and under the award it was provided that his brothers would pay a certain amount monthly as maintenance to their widowed mother and step-mother and the award also made the amount of maintenance allowance a charge on some property, payment so made by karta qua his share of liability must be excluded from his assessable income. Commissioner of Income Tax v. Makanji Lalji – [1937] 5 ITR 539 (Bom.) 951.
Maintenance allowance paid to widow of a deceased coparcener is not diversion of income.
Where the widow of a deceased coparcener applied to the Court for maintenance at the rate of Rs.165 per mensem, and the question was whether the sum could be deducted from the assessable income: Held that inasmuch as the assessee was the HUF which included the widow, no deduction could be allowed in respect of a share of the income going to one of the members of the joint family; there was no ground for the contention that the decree which fixed the amount of the maintenance altered the character of the sum which the widow received, which was still maintenance paid to her as a widow in a joint family, although the amount was fixed by the decree. Case review: In Commissioner of Income Tax v. Sitaldas Tirathdas [I961] 4l ITR 367 (SC), the Indian Supreme Court expressed doubts about the correctness of this decision.
627 CHARGE OF INCOME TAX, SUPER TAX ETC.
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Smt. Charushlla Dassi, In re – [1937] 5 ITR 1 (Cal.) 952.
Amount received by widow out a/her late husband‟s estate for maintenance is taxable in her hands.
Where one-third of the family expenses incurred by a Hindu widow as administratrix under her husband‟s will was excluded from the income of the estate, representing the widow‟s drawings for board, lodging, maintenance, etc., it was held that the amount so excluded was assessable as the income of the widow. Madan Mohan Muflick & Bros., In re – [1938] 6 ITR 315 (Cal.) 953.
Allowance paid to settlor‟s widow under settlement deed is to be excluded from descendant‟s assessable income.
Allowances paid to the settlor‟s widow in terms of a settlement deed, is to be excluded while computing income of the estate in the hands of the settlor‟s descendants. _______________
ROYALTIES
Commissioner of Income Tax v. Manager of Katras Encumbered Estate – [1934] 2 ITR 100 (Pat.) 954.
Where debtor leased mine to creditor and the creditor applied royalty for liquidation of debt, royalty was debtor‟s income and it was a case of application of income.
Where the assessee-debtor had leased his mines to his creditor and the royalty from lease was to be applied towards liquidation of the debt: Held that inasmuch as the assessee owed a sum of money to the lessee he stipulated that the lessee instead of paying the whole of the royalties direct to him should use a part of the royalties in discharging the debt which was owed by the assessee to the lessee. The whole of the income was, thus, the income of the assessee. The position did not in the least differ from what it would have been had the provision been that the lessee was to pay the whole of the royalty direct to the assessee arid then the assessee was to pay back a portion of the royalty to discharge his debt to the lessee. _______________
628 Section 9 & 10
Income Tax Digest.
PAYMENTS BY EXECUTOR TO BENEFICIARIES UNDER TESTATOR‟S WILL / TRUST
P.C. MaIlick & D.C. Aich, In re – [1940] 8 ITR 236 (Cal.) 955.
Periodic payments by executors to beneficiaries under testator‟s will out of income of property are not allowable from income of estate as it is merely application of income.
Periodic payments to beneficiaries out of the income of the estate in compliance with the obligatory directions of the testator cannot be excluded in computing the executor‟s chargeable income of the estate, for it is merely a case of application of income. Executors of the Estate of LaIa Shankar Shah v. Commissioner of Income Tax – [1945] 13 ITR 500 (Labore) 956.
Where payments are as per directions in will bequeathing property, it is a case of diversion at source.
If the payment is voluntary, it must be included in the income of the assessee, but if the charge is obligatory with which the beneficiary cannot interfere in any manner, the sum so charged must be excluded from his income. Where the testator had bequeathed certain properties and directed certain payments to be made to his daughters and relatives, it was held that the payments were diverted at source. P.C. MulIick v. Commissioner of Income Tax – [1938] 6 ITR 206 (PC) 957.
Where will at testator directed executor to pay out at income of his property charges for obtaining probate, and also to pay up to Rs.10,000 for performance of his shradh, these amounts were not deductible out of executor‟s income.
The will of the testator directed the executors, to pay out of the income of his property, the charges for obtaining probate, and also to pay up to Rs.10,000 for the performance of his shradh. The question was whether these amounts were deductible out of the income assessable in the hands of executors. Held that the payments made for the shradh expenses and the costs of probate could not be excluded in computing the chargeable income. These were payments made out of the income of the estate coming to the hands of the assessee as executors and in pursuance of obligation imposed by the testator. It was not a case in which a portion of the income was by an overriding title diverted from the person who would
629 CHARGE OF INCOME TAX, SUPER TAX ETC.
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otherwise have received it, but a case in which the executors having received the whole income applied a portion of it in a particular way. Case review: Decision of the Calcutta High Court in P.C Mullick and D.C Aich, In re [1936] 4 ITR 369 affirmed. Judicial analysis: The assessee in P.C. Mullick v. Commissioner of Income Tax [1938] 6 ITR 206 (PC) holds the estate and receives the income as the representative of the deceased. The income is received by him and not by or on behalf of the beneficiaries under the will. When he applies the income for the purposes of the will, he applies the income received by him and not by the beneficiaries. The Privy Council decision in Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax [1933] 1 ITR 135 was a case where there was an antecedent obligation attaching to the estate. Therefore, what the assessee in that case inherited from his ancestor was the asset, less this liability. At the moment when the estate passed to him, this liability was not quantified and when it was so done by the decree of the court the entirety of the estate became, so to speak, charged with it and that portion of the income payable to the stepmother had to be treated as the income of the step-mother and not of the assessee. The decision in P.C. Mullick v. Commissioner of Income Tax [1938] 6 ITR 206 (PC) is an instance of the application of the income, that is, expenses incurred by the assessee out of the income which has come to him. The distinction is between a case where the transfer is in pursuance of an antecedent obligation of the taxpayer, that is, where obligation exists de hors the will of the transferor, and a case where the assessee has obliged himself by a voluntary act on his part to render certain income of his the income of another. The former class of cases would be treated as diversion, as flowing from an overriding previous title, sufficient to divest the assessee of the character of the recipient of that income. On the other hand, where the disposition arose out of a voluntary act on the part of the assessee, the fact that he created a binding obligation on himself to make the payment is held insufficient to alter its character as the income of the transferor, and the transaction is treated as an expenditure or an application of income, with the result that the disposition would be disregarded in computing the total income of the assessee,...” (pp. 89-90) _______________
ACCRUAL OF INCOME - CONNOTATION OF
C.J.G. Saunders v. Commissioner of Income Tax – 5 ITC 454 (All.) 958.
Three words „accruing‟, „arising‟ and „received‟ used in section cannot have one and the same meaning.
The three words „accruing‟, „arising‟ and „received‟ used in the section cannot have one and the same meaning. They must have been used in
630 Section 9 & 10
Income Tax Digest.
denoting different ideas. The word „arise‟ according to Webster‟s International Dictionary means „spring up‟, come into action, being or notice. The income is there in England, but it springs up or comes into action in India. But for the fact that the assessee holds a position in India, the income would not have come into action, would have laid dormant, and would not have been available to the assessee. The word „accrues‟ according to Murray‟s English Dictionary, means „to come by way of addition, increase, accession, or advantage‟. Phra Pbraison Salarak v. Commissioner of Income Tax – 3 ITC 237 (Rangoon) 959.
Double expression „accruing and arising‟ connotes the source from which the right to obtain money springs.
The double expression „accruing and arising connotes the source from which the right to obtain money springs. _______________
TIME OF ACCRUAL OF INCOME - BASIC PRINCIPLES
Commissioner of Income Tax v. S.N.A.S.A. Annamalai Chettiar – [1944] 12 ITR 226 (Mad.) 960.
Profit though earned by one entity could accrue to other.
Profit though earned by one entity could accrue to other. Dewan Bahadur Ballbhdas & Son v. Commissioner of Income Tax – 5 ITC 371 (Nag.) 961.
A man cannot escape liability to Income Tax on income received, because he may incur loss in a future year on the same account on which he had received that income in the year under assessment.
A man cannot escape liability to Income Tax on income received, because he may incur loss in a future year on the same account on which he had received that income in the year under assessment. If he incurred loss in the ensuing year, that, of course, would be taken into account when the income for that year is assessed, but he cannot escape liability for the income actually received during any one year, simply because he may incur loss on the same account in the following year. Where the assessee received payments every fortnight, according to the bye-laws of the association of which he was a member, in respect of forward or hedge contracts and the assessee contended that though
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he received excess amounts in an accounting year, there were still further adjustments to be made till the contracts were finally settled in the following year and thus in the ensuing year he might incur loss on these contracts and might have to make payments instead of receiving payments and therefore, the income therefrom could not be ascertained in the account year: Held that the assessee‟s claim could not be upheld. _______________
RECEIPT/DEEMED RECEIPT - CONNOTATION OF
Commissioner of Income Tax v. Smt. Singari Bai – [1945] 13 ITR 224 (All.) 962.
Actual or deemed receipt is not sole test for levy of tax.
Actual or „deemed‟ receipt of income, profit, or gain is not the sole test for the levy of tax and that income, profits or gains that have accrued‟ or „arisen‟ or are deemed‟ to have accrued or arisen are also liable to the charge of Income Tax. _______________
TIME OF ACCRUAL OF INCOME - ILLUSTRATIONS
Chouthmal Golapchand, In re. – [1938] 6 ITR 733 (Cal.) 963.
Every year is a self-contained period and profits earned or loss sustained either before or after that year are not at all relevant for purpose of an assessment relating to a particular year.
Every tax year is a self-contained period and the profits earned or the loss sustained either before that year or after that year are not at all relevant for the purpose of an assessment relating to a particular year. The assessee-firm which carried on a business in shares, acquired shares in question some years before the relevant accounting year and they had been carried forward from year to year at the cost price. In the relevant accounting year those shares, on dissolution of firm, were divided among the partners at market price valuation and the difference between cost price shown in books and the market price was claimed as a loss in the relevant assessment year. Held that as there was nothing to show that loss had occurred in the year of account the set-off could not be allowed.
632 Section 9 & 10
Income Tax Digest.
Kunjamal & Sons, In re – [1941] 9 ITR 358 (All.) 964.
In respect of property acquired by moneylender in lieu of debt, income arises when sale deed is executed.
In 1922, the assessee had advanced a certain sum of money to a person. A decree on the basis of that mortgage was passed by the High Court on 26.11.1934 when effect was given to a compromise between the parties. Under this decree the assessee or his predecessor agreed to give up a sum of Rs.8,000 and accept a decree for Rs.30,000 only instead of Rs.38,000, but it was stipulated in the compromise that a sale deed for the Hughes v. Utting (B.G.) & Co. Ltd. – [1940] 8 ITR (Suppl.) 57 (HL) 965.
Where speculative builder sells houses on leasehold basis far premium-cum-ground rent payments retaining reversionary interest, capitalised value of ground rents could not be taxed as profits accruing on the date of transaction.
The respondent company carried on the business of developers of building estates or, of speculative builders. In the course of its trade the company dealt with some of the houses which it had built by granting a lease for ninety-nine years. A ground rent of £ 9 or £ 10 was received by the company and a premium was paid to the company by the lessee. The company retained the reversionary estate, and sought to bring into the computation of the profits and gains of the company for the year of assessment in respect of the houses their cost only (or market value if less than cost) until the sale of the reversion. The question for consideration was whether the capitalised or realisable value of the ground rent must also be brought into the company‟s profit and loss account as trading receipt. Held that the speculative builder created by his expenditure certain assets, including completed houses. So long as the houses were not sold or otherwise disposed of, they went into his accounts at cost or market value, whichever was lower. When the freehold was completely disposed of, the sums realized took the place of the house and showed a profit or a loss, as the case may be. But when, instead of the house being sold, it was let on a long-term lease at the ground rent, there was not a complete but a partial realization. An interest was carved out of the freehold. The residue of the complete freehold estate was not disposed of but was retained by the builder. That interest was the freehold reversion, which normally included the right to the ground rent, the right to enforce the restrictive
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covenants in the lease, the right of re-entry for breach of covenants, and the right to resume possessions at the end of the term. That was an estate which, in the case envisaged, was not traded away by the speculative builder. It was not correctly described as a new asset, but was a residue of the original asset. The house must now be represented in the accounts by the premiums and the freehold reversion, in practice often described as „the ground rents‟ and entered at cost or market value, whichever was lower. The speculative builder might find that this method of disposing of the houses was in certain cases more convenient or profitable to him. He might keep the „ground rents‟ in hand until he decided to dispose of them. Until he did dispose of them, he could not be taxed on a profit on the footing that it had been realized in the year of charge when it had never been realized and might never be realized at all. He could not in such a case be taxed on a notional profit. When he did „sell the ground rents‟, the proceeds would then be brought into charge in the appropriate year. The value of the reversion, though no doubt directly related to the rent reserved by the lease, might vary from time to time; and the company had full power under its memorandum of association to retain the reversion unsold and to collect the rent. Until it sold the reversion (and the Commissioners found that the company had not yet sold any reversions) the company had not ceased to be interested in the plot, and its profit on the realization of the plot had not been finally ascertained. _______________
INTERESTS
B.C.G.A (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore) 966.
Under mercantile system of accounting interest accrued is taxable, even If the assessee has not taken credit for it on account of possible irrecoverability.
The assessee had adopted the mercantile system. An amount of interest though debited to the debtor‟s account was taken to the suspense account instead of interest account, on the ground that the amount was not under his control in such a way as to be convertible to cash. Held that the assessee was liable to be assessed to Income Tax qua interest as under the system of accounting the assessee could be said to have received the interest though had not actually realised.
634 Section 9 & 10
Income Tax Digest.
Bhikamchand Laxmichand v. Commissioner of Income Tax – [1935] 3 ITR 120 (Nag.) 967. Interest credited in debtor‟s account and realisable at will is interest received. The assessee B, a firm, had a deposit with N who had shops at Calcutta and Bombay and had accounts with the assessee. This deposit carried interest and interest for the account year was credited to the assessee in the book of N. The assessee at first denied that he had been informed that interest had been credited to him, but this question of fact was decided against him. He then argued that, even if interest was credited in his favour in the books of N, it could not be said that he had received such interest and that therefore he was not taxable thereon. He had never pleaded that this interest would not have been paid if he had demanded it, and it must therefore be assumed that it was realisable by the assessee at his will. Held that this interest which was realisable by the assessee at will, was liable to be charged to Income Tax. Commissioner of Income Tax v. V.S.U.R. Firm – [1935] 3 ITR 158 (Rangoon); Ahmad Din Allah Ditta v. Commissioner of Income Tax – [1934] 2 ITR 369 (Lahore) 968. Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, ITO would be justified in treating such interest as accrued income. Where the assessee, a money-lending firm, was adopting a regular system of accounting under which it received interest due on original loans as having been received on the execution and delivery of fresh promissory notes by the debtor including the amount of interest, and had in the past not objected to treating such interest as income accrued, it was held that the Income Tax Officer would be justified in continuing to treat such interest as accrued income. Commissioner of Income Tax v. M.A.L. Chettiyar Firm – [1935] 3 ITR 193 (Rangoon); V.S.A.R. Firm v. Commissioner of Income Tax – 8 ITC 171 (Rangoon); M.A.L. Chettyar Firm v. Commissioner of Income Tax – 8 ITC 182 (Rangoon) 969. Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, ITO would be justified in treating such interest as accrued income. Where, consequent on the debtor executing a fresh promissory note for interest that had accrued on debts, the assessee-creditor had shown
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interest in its account as having been received, it was held that the said interest had accrued to the assessee in the year of execution of the promissory note. Jupudi Kesava Rao v. Commissioner of Income Tax – 8 ITC 217 (Mad.) 970.
Where money-lender treated the interest due under the original loans as having been received and paid on the execution and delivery of fresh promissory notes by the debtor, ITO would be justified in treating such interest as accrued income.
Where, according to the method followed by the assessee, he had uniformly taken credit in his accounts for interest capitalised when loan documents were renewed and thus he had dealt with it in his accounts as if the interest kid been received in cash and re-lent, it was held that the interest so included could be treated as income realised for the purposes of assessment to Income Tax. _______________
COMMISSION
Ramkumar Kedarnath v. Commissioner of Income Tax – [1937] 5 ITR 261 (Bom.) 971.
In mercantile system of accounting, commission earned though not received in the year, is income.
Though an unpaid debt is not an income, it may be profits or gains if it is treated as profits or gains in the system of accounting adopted by the assessee. The assessee was following the mercantile system of accounting and used to show commission earned during the year as income, though not received in that very year. In the relevant accounting year it did not show commission for a part of the accounting year on the ground that the company had gone into financial difficulties, and that the assessee apprehended that the commission would not be paid at all. His contention was that only debt had accrued and debt accrued was not income accrued. On the question whether the commission thus left out was includible in his income: Held that under the system of accounting followed by him, the assessee was bound in include such commission. If he was doubtful of the commission being received, he could have simultaneously shown it as bad debt. _______________
636 Section 9 & 10
Income Tax Digest.
UNDERWRITING COMMISSION
IRC v. Gardner Mountain & D’Ambrumenil Ltd. – [1947] 29 Tax Cas. 69 (HL) 972.
Underwriting commission is taxable in the year in which risk is undertaken, and not in the year in which accounts are later made up.
The assessee carried on the business of underwriting agents, and entered into agreements with certain underwriters at Lloyds under which it was entitled to receive as remuneration for its services in conducting the agency and commission on the net profits of each year‟s underwriting. The agreements provided that accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the company shall be calculated and paid thereon. The accounts for the underwriting done in the calendar year 1936 were made up at the end of the calendar year 1938. The assessee contended that the contracts into which it entered were executory contracts under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account, and that hence the profit in the form of commission was not ascertainable or earned, and did not arise, until that time. The assessee therefore pleaded that the assessment must be made only in the year in which the accounts were made up, and not in the year in which the policies were underwritten. Held that, on a true construction of the agreements, the commission in question was earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly. The right to the commission was treated as a vested right which had accrued at the time when the risk was underwritten. It had then been earned though the profits resulting from the insurance could not be then ascertained and, in practice, were not ascertained until the end of two years beyond the date of Underwriting. The right was vested, though its valuation was postponed - and was not merely postponed but depended on all the contingencies which were inevitable in any insurance risk. All these had to be brought into account according to ordinary commercial practice and understanding. But the delays and
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difficulties which there might be in any particular case, however much they might affect the profit, did not affect the right for what it eventually proved to he worth. The commission was wholly earned in first year in respect of the profits of that year‟s underwriting, and consequently, it was not arguable that the commission did not accrue for Income Tax purposes in that same year, though it was not ascertainable until later. _______________
PROFITS OF MORTGAGE SALE
Raja Raghunandan Prasad Singh v. Commissioner of Income Tax – [1933] 1 ITR 113 (PC) 973.
In case of a mortgage sale profits arise on date of confirmation of sale.
Where a mortgagee purchases the mortgaged property in Court sale and thus realised the amount due, the profits must be deemed to have arisen on the date of confirmation of the sale, and not on the date of decree or date of actual sale. _______________
CONCEPT OF REAL INCOME
Narain Das Bhagwan Das v. Commissioner of Income Tax – 7 ITC 135 (Lahore) 974.
Where the assessee claimed that no interest was charged in respect of certain specific debt as the debtor firm had closed the business in the accounting year.
Where the assessee claimed that no interest was charged in respect of certain specific debt as the debtor firm had closed the business in the accounting year, the mere fact that debtor‟s account could not be produced when they were called for under section 37 of the 1922 Act could not give rise to the presumption that the assessee had realised interest on the said debt. _______________
638 Section 9 & 10
Income Tax Digest.
DISPUTED CLAIMS
AL.VR. ST. Veerappa Chettiar v. Commissioner of Income Tax – [1941] 9 ITR 56 (Mad.) 975.
Where assessee-money-lender had filed a suit for the recovery of debt and pending final decision he had been receiving some amounts which he did not offer for tax on the plea that till the litigation was over, decree executed and realised, no amount could be taken as profit.
The assessee-money-lender had filed a suit for the recovery of debt. Pending final decision he had been receiving some amounts which he did not offer for tax on the plea that till the litigation was over, decree executed and realised, no amount could be taken as profit. When the case was finally decided, the assessee contended that the amount had been received in the past and was not assessable in the year of receipt. Held that on the assessee‟s own showing this transaction did not close until the High Court had given its decision. Therefore, the amount received by the assessee was assessable in the year of decision. _______________
INCOME FORGONE
Maharaja Kainakhya Narain Singh v. Commissioner of Income Tax – [1942] 10 ITR 177 (Pat.) 976.
Where lease rent was credited to suspense account.
Where a payment was made to the credit of the lessor‟s account in the bank by the lessee at the request of the lessor‟s agent and tough the lessor disputed the quantum of the amount due and repudiated the lease, it was found that he actually operated upon the sum so deposited in the bank, though in his own books he had shown it in „suspense‟ account, it was held that the payment by the lessee was a receipt of income by the lessor who was liable to pay income tax on it. A.A. Thevar Bros. v. Commissioner of Income Tax – 7 ITC 156 (Rangoon) 977.
Where the assessee-firm took in its name certain contracts and also furnished the security deposits for the contracts.
The assessee-firm took in its name certain contracts and also furnished the security deposits for the contracts. But in the accounts relating to those contracts there were entries showing that the amount of the receipts which were entered as having been received by
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the assessee were allocated to certain contractors who were not members of the assessee. The question was whether the income from these contracts was the assessee‟s income. Held that if in the accounts there was no reference to the payments made in respect of these contracts to the sub-contractors, it could not be doubted that prima facie the profits accruing from these contracts would be assessable to Income Tax in the hands of the firm; but in the present case the true position was disclosed by the accounts, which showed that the prima facie the assessee-firm did not enjoy any profit in respect of these contracts. Accordingly, the receipts from the said contracts were not the profits of the assessee. _______________
PLACE OF RECEIPT / ACCRUAL OF INCOME - GENERAL
Mobanpura Tea Co. Ltd., In re – [1937] 5 ITR 118 (Cal.) 978.
Place where income accrues or arises is by no means necessarily the place where source from which it secures or arises is situated.
The place where the income accrues or arises is by no means necessarily the place where the source from which it secures or arises is situated. Commissioner of Income Tax v. VaIliammal Achi – [1938] 6 ITR 720 (Mad.) 979.
What is relevant is income received in previous year in British India and not income so received in assessment year.
Income received in „British India‟ means income received in the territory defined as British India in the previous year and not in the assessment year. E.M.V. Muthappa Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 311 (Mad.) 980.
Income accruing or arising in British India in the previous year is assessable under the Indian Income Tax Act though the place of a accrual ceased to be part of British India in the year of assessment.
Income that accrued or arose in British India in the previous year, was assessable under the Indian Income Tax Act even though the place of accrual ceased to be part of British India in the year of assessment.
640 Section 9 & 10
Income Tax Digest.
Where income arose in Burma in the previous year ending 12.4.1937 (assessment year 1937-38), which was part of British India and was separated from 1.4.1937, it was held that it was taxable under the Indian Income Tax Act. _______________
ACCRUING OR ARISING IN PAKISTAN - MEANING OF
Commissioner of Income Tax v. CbuniIaI B. Mehta – [1938] 6 ITR 521 (PC) 981.
„Profits accruing or arising in British India‟ are words which in their ordinary meaning seem to require a place to be assigned as that at which the result of trading operation comes, whether gradually or suddenly, into existence.
Profits are frequently, if not ordinarily, regarded as arising from many transactions each of which has a result-not as if the profits need to be disintegrated with difficulty but as if they were an aggregate of the particular results. The words „accruing or arising in British India‟ may be taken provisionally and in that first place, as an ordinary English phrase which derives no special meaning from the Act. The alternative accruing or arising in‟ and the antithesis between these words and the words „received in‟ or „brought into‟ afford no safe inference of any special meaning. „Profits accruing or arising in British India‟ are words which in their ordinary meaning seem to require a place to be assigned as that at which the result of trading operation comes, whether gradually or suddenly, into existence. Though the division is only between British India and the rest of the world, the notion may be difficult to apply to a particular transaction, debits and credits being intangible and not occupying space. _______________
ILLUSTRATIONS : IN CASE OF BUYING AND SELLING OF GOODS
Sudalaimani Nadar v. Commissioner of Income Tax – [1940] 8 ITR 619 (Mad.) 982.
Profit arises only at the place of sale in case of animals intended for human consumption which are bought from one place and sold in another place.
Profits derived from the sale in a foreign country of animals for human consumption (goats) purchased in India does not accrue or arise in India but in the foreign country where they are sold.
641 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
Hira Mills Ltd. v. Income Tax Officer – [1946] 14 ITR 417 (All.) 983.
If a non-resident sells goods in India and receives profits in India, entire profits without apportionment are taxable in India.
Where a company in Ujjain, a native State (Gwalior State), sold registered goods in Kanpur, through a salesman employed by it and received the proceeds in British India: Held that such profits and gains derived from sales made at Kanpur by the assessee‟s salesman of the goods manufactured by the assessee at Ujjain must be calculated without allowing any apportionment of that profit as between the period prior to the moment of export from Gwalior and the moment subsequent to that export. There is no authority that the profits and gains of one continuous process between manufacture and sale can be apportioned so as to give rise to two processes, one, up to the point of export of the manufactured article, and the other, from that point onwards until final sale. Thus, the profits were taxable in India. Ram LaI Bechairam v. Commissioner of Income Tax – [1946] 14 ITR 1 (All.) 984.
If sale is effected in British India of goods sent by assessee's branch in a native State and assessee‟s head office was in British India, entire income arises in British India.
The assessee resident in British India had a branch B outside British India. Branch B sent goods to head office for sale in British India. The invoice issued by branch B was for Rs.65,203 which included the profit that the branch would have derived if it had sold the goods to the head office and also raised a debit of this amount against the head office. On the question whether the entire profit could be treated as arising in British India: Held that the entire profit (i.e., total sale price realised in British India minus total cost incurred by branch B) and not merely the sale price minus Rs.65,203, was income arising in India under section 4( I) of the 1922 Act. The substance of the transaction was that both the shops belonged to the assessee and branch B could not make a profit from the head office. A man cannot make a profit out of himself. There was no legal liability on the head office to pay the amount to branch B. How the assessee, for the purposes of his accounts, keeps his books is not the test by which the liability to tax is concluded. The substance of the transaction is to be seen.
642 Section 9 & 10
Income Tax Digest.
Bhagat Jiwan Das v. Commissioner of Income Tax – 4 ITC 40 (Lahore)(FB) 985.
Where mainly goods were purchased in India and sold outside India.
Where a person, who resides and carries on business in British India, purchases goods in British India and sends them for sale to his shop in Kashmir, a country outside British India: Held that no part of the profits realised by the sale of goods in the foreign country was assessable for two reasons, namely, (0 no portion of profit was received or brought into British India, and (it) the mere purchase of goods in British India had too remote a connection to justify the conclusion that a part of the profits should be held to have accrued in British India within the meaning of section 4(1) of the 1922 Act. Commissioner of Income Tax v. Steel Bros. & Co. Ltd. – 2 ITC 119 (Rangoon) 986.
Where the assessee-company, incorporated in London, carried on large business operations in British India, and exported and sold the materials to London.
Where the assessee-company, incorporated in London, carried on large business operations in British India, and exported and sold the materials in London, it was held that the fact of the sale of the produce in London and the receipt of money there did not prevent profits or gains accruing or arising in British India from being taxable. Sri Hardeo Bengal Salt Co. v. Commissioner of Income Tax – [1942] 10 ITR 13 (Pat.) 987.
Where orders are accepted in India and business is carried on in India, but supplies are made from outside taxable territories.
Where the assessee-firm had its head office in a native State and a branch in British India and the branch was accepting orders and sending them to head office for execution and the payments were made to the head office, it was held that the assessee had been carrying on business in British India and was liable to be taxed under the Indian Income Tax Act. _______________
643 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
ILLUSTRATIONS : RELEVANCE OF PLACE FROM WHERE DIRECTIONS ARE ISSUED FOR TRANSACTIONS/WHERE CONTRACT IS CONCLUDED
Commissioner of Income Tax v. Chunilal B. Mehta – [1938] 6 ITR 521 (PC) 988.
Profits do not necessarily arise at the place from where directions are issued for certain transactions.
Profits of the business do not necessarily arise only at the place of central control of the business. Sections 4,6 and 10 of the 1922 Act do not lead to any such conclusion. These sections do not mean that the situation of the source of the profits should determine the place where the profits arise. The profits of each particular business are to be computed wherever and by whomsoever business is carried on, but only on condition that they are profits accruing, arising or received in British India or deemed to be such. The sections lay no stress on the place at which the business is carded on, and do not lay down that the profits necessarily accrue or arise at the place where the business is carried on. Under the Indian Act a person resident in British India carrying on business there and controlling transactions abroad in the course of such business is not by these mere facts liable to tax on the profits of such transactions. If such profits have not been received in or brought into British India it becomes or may become necessary to consider the facts of the case where they accrued or arose. The mere fact that profits arising under contracts made abroad depend on the exercise in British India of knowledge, skill and judgment on the part of the assessee and upon instructions emanating from British India does not imply that the profits arose or accrued in British India. It makes no difference whether the transactions are dealings in goods or dealings in differences. The assessee was carrying on speculation business in Bombay. He gave instructions to brokers in New York and deals were entered into and settled by payment of differences. No delivery of goods was taken or given. The contention of the revenue was that income accrued in British India because of the exercise of skill and judgment in Bombay by giving directions from Bombay. Held that it could hardly be maintained that whatever a man decided upon in Bombay and whatever may be done abroad in pursuance thereof, the profit must necessarily arise in Bombay. One must look at the transaction to see what happened in British India and what happened elsewhere. The intermediate links may be all important.
644 Section 9 & 10
Income Tax Digest.
Here the profit was the difference between a sale and a purchase both affected in New York and then set off and so far carried out in New York that a New York broker had money in his hands or under his control which, as between himself and the assessee, belonged to the assessee. To determine the place at which impugned profit arose not by reference to the transactions or to any feature of the transactions but by reference to a place in India at which the instructions therefor were determined on and cabled to New York, was to proceed in manner which could be supported if the transactions were to be looked at separately and the profits of each transaction considered by themselves. There was a distinct paradox in the contention that the profits resulting from an order placed in New York would have accrued or arisen in the same place (Bombay) had the order been sent to Liverpool with a like result, but that had the assessee decided on and directed the same New York transaction when in Hyderabad (not in British India) the same profits would have arisen in a different place (Hyderabad). It made no difference to the result whether the transactions he regarded as dealings in goods or as dealings in differences. In the instant case the contracts were neither framed nor carried out in British India; the profits, therefore, accrued or arose outside British India. Note:
The Judicial Committee however made it clear that they were not laying down any rule of general application to all classes of foreign transactions, or even with respect to the sale of goods. To do so would be nearly impossible and wholly unwise.
Case review: Decision of the Bombay High Court in Commissioner of Income Tax v. Chunnilal B. Mehta [1935] 3 ITR 376 affirmed. Judicial analysis: The decision [Commissioner of Income Tax v. Chunnilal B. Mehta [1938] 6 ITR 521 (PC)] has no relevance to the place of accrual of remuneration for services assessable under section 12 of the 1922 Act. The Privy Council did not purport to lay down any general rule or principle regarding the situs of accrual of profits of a business which depends upon the skill and judgment on the part of the assessee. On the contrary, Sir George Rankin, speaking for the Judicial Committee, remarked that it would be nearly impossible and wholly unwise to lay down any general test in such cases. The main feature noticeable in this case [in Commissioner of Income Tax v. ChunnilaI B. Mehta [1938] 6 ITR 521 (PC)] is that both the execution of contracts and the performance thereof were outside British India.
645 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
Bisheshwar Nath & Co., In re – [1942] 10 ITR 103 (All.) 989.
Income from contracts arises at place where contract is accepted.
The income from contract accrues or arises by virtue of the contract and the place where contracts are accepted is really the place where the income from these contracts arises notwithstanding the fact that everything done to fulfil the contract may be done elsewhere. Commissioner of Income Tax v. Govindrarn Seksaria – [1938] 6 ITR 584 (Bom.) 990.
If contracts were made in taxable territories and payment was also received there, income arose in taxable territories
The assessee-firm, trading in Bombay as brokers, instructed another Bombay-based firm to place orders with brokers in New York for purchase of cotton on its behalf and also on behalf of others, and also gave instructions to sell the cotton. The profits were payable to the assessee at Bombay by the other firm, and if there were losses the assessee had to recoup it at Bombay. There was no privity of contract between the assessee and the New York brokers. Held that the assessee‟s profits were derived from contract and as the contract was made in Bombay, profits arose at Bombay. _______________
ILLUSTRATIONS : IN CASE OF AGENTS
Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax – 5 ITC 363 (PC) 991.
Where Indian agent of assessee-non-resident derived profits from railway lines in India on behalf of assessee and credited gross receipts in Indian Government treasury and from there transferred profits to non-resident assessee, profits did accrue in India.
The assessee, a railway company incorporated in England and having its registered office there, constructed a railway line under a concession from the French Colonial Government on the condition that one-half of the net annual profits derived from working the line would be paid to them. The assessee entered into an agreement with an Indian Railway Company, for working, managing and maintaining the railway line with their own staff, rolling stock, plant, etc., as an integral part of their undertaking. This company was to pay over to the assessee in British India, the profits of the line arrived at in a
646 Section 9 & 10
Income Tax Digest.
certain manner once in six months. The gross receipts from the line were from time to time paid to the Government treasuries in British India and treated as part of the Indian Railway Company‟s income. The agent of the Indian Railway Company as agent of the assessee kept the accounts of the assessee in India and after remitting the share of profits to the French Colonial Government, remitted the balance due under the agreement to the assessee in London. The question for consideration was whether the income was assessable to tax in India. Held that the assessee carried on a business in British India within the meaning of section 4(1) of the 1922 Act from which income arose and the income derived from working the line was assessable to tax in British India. Kanwalnen Hamir Singh v. Commissioner of Income Tax – [1938] 6 ITR 675 (All.) 992.
Others.
The assessee had his head office in British India, and branches in the native States. Under the mercantile system of accounting followed by him, he was crediting the head office account in the books of the branches with income in the branches without showing a corresponding receipts in the head office books. He had been assessed in the past on the basis that the credits/debits to head office account in the books of branches accounts were income/loss of the head office. In the relevant assessment year he objected to inclusion of branch income in the head office income. Held that amounts credited in the books of branches should be treated as having been received in British India, as per the method of accounting followed by him. _______________
ILLUSTRATIONS: WHERE PAYMENT IS MADE BY POSTING OF CHEQUE
Sir Sobha Singh v. Commissioner of Income Tax – [1950] 18 ITR 998 (Punj.) 993.
Question as to whether cheque was sent to bank for collection or was discounted, is a question of fact.
The question as to whether cheque was sent to bank for collection or was discounted, is a question of fact. _______________
647 CHARGE OF INCOME TAX, SUPER TAX ETC.
Section 9 & 10
ILLUSTRATIONS : COMMISSION
Sir Sarupchand Hukamcband v. Commissioner of Income Tax – 5 ITC 108 (Bom.) 994.
Income from sales commission on sale, arises at place where sales take place.
The assessee was appointed under agreement as agent of a mill situated in Indore (then a non-taxable territory) on commission basis. It maintained a shop at Bombay at mills expense for sale of the mill‟s goods, but sale proceeds were sent to Indore, where the commission was paid. The assessee claimed that the commission had arisen in a non-taxable territory and was, hence, not taxable. Held that this income being commission upon sales made in Bombay did accrue or arise in British India. _______________
ILLUSTRATIONS : INTEREST
Commissioner of Income Tax v. New India Assurance Co. Ltd. – [1938] 6 ITR 603 (Bom.) 995.
Interest on foreign securities not remitted to British India, is not assessable in British India even if it is included in balance sheet.
Interest on foreign securities not remitted to British India, is not assessable in British India even if it is included in balance sheet. Commissioner of Income Tax v. Madras & Southern Mahratta Railway Co. Ltd. – [1940] 8 ITR 280 (Mad.) 996.
Interest received by English Company from Secretary of State for India accrued in India though received in England.
Interest received by English company from Secretary of State for India accrued in India though received in England.
648 Section 11
Income Tax Digest.
Section 11* Scope of Total Income
PAGE NO
SCOPE OF “TOTAL INCOME”
997.
_ Scope of “total income” in relation to “free reserves”. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562
651
“ACCRUE” AND “ARISE”, MEANING OF
_ “Accrue” and “arise” - Meaning of. 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak.) = (PLD 1969 S.C. 318) _ 999. “Recovery” is not the sole criterion for taxability. 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak.) = (PLD 1969 S.C. 318) _ 1000. Words “accrue or arise”, meaning of [1984] 49 TAX 91 _ (H.C.Kar.); [1973] 28 TAX 143 (H.C.Kar.) 998.
651 652 652
CHARGEABILITY VIS-A-VIS DEEMING PROVISIONS
_ 1001. Assessee when chargeable to tax for deemed incomes. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ 1002. Deeming provisions - How to be understood. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 1003. Income is chargeable to tax only once in the hands of same _ person. 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 _ 1004. Chargeability vis-a-vis deeming provisions. 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.) 1005. Assessee constructed apartments for sale - Advance received _ from the purchaser is held not chargeable to tax. [1989] 59 TAX 104 (H.C.Kar.)
*
Corresponding to section 4(1) of the 1922 Act.
656
656
656 656
657
649 SCOPE OF TOTAL INCOME
Section 11 PAGE NO
1006. Income of a non-resident is chargeable on accrual basis if _ income comes within the ambit of chargeability. [1976] 33 TAX 189 (H.C.Lah.)
657
1007. Income accrues in taxable territories but receivable outside taxable territories is assessable in taxable territories. _ [1960] 2-TAX (III-451) (H.C.Dacca) = 1960 PTD 765 = 1960 PLD 584
660
1008. Company‟s head office outside Pakistan from where businesses in Pakistan were controlled and managed. Income accrued in Pakistan received outside taxable _ territories held to be assessable in Pakistan. [1960] 2-TAX (III-88) (H.C.Dacca) = 1960 PTD 1 = 1959 PLD 907
661
1009. Contract for supply of goods was made in taxable territories where account of sales maintained. Sale proceeds received and commission and interest deducted therefrom in taxable territories, held that profits accrued or arose in taxable _ territories. [1960] 2-TAX (Suppl.-14) (H.C.Kar) = 1960 PTD 786 = 1957 PLD 68
662
1010. Dividend income accrued outside taxable territory, but was set off by book transfer against debt to a foreign company, held that dividend income received in taxable territory. _ [1960] 2-TAX (Suppl.-41) (Judicial Commissioner, Peshawar) = 1952 PLD 28
664
1011. Foreign Company extracting timber and manufacturing shooks outside taxable territories and selling shooks through agents in taxable territories where payment was made, held that entire income relating to this activity is taxable in _ taxable territories. [1960] 2-TAX (Suppl.-90) (H.C.Lah) = 1960 PTD 1235 = 1951 PLD 413
665
RELEVANT DATE FOR ACCRUAL OF INCOME
1012. Relevant date for accrual of income. (H.C.Kar) RECEIPT AND ACCRUAL OF INCOME
1013. “Receipt and accrual of income”. 63 TAX 149 (S.C.Pak.)
_
_
[1965] 11 TAX 216 666
1991 SCC 784 = [1991]
1014. Place of “accrual and receipt” of income. [1977] 35 TAX 1 (S.C.Pak.)
_
668 1976 SCC 430 =
1015. Surrender of income after its accrual is subjected to tax. _ [1990] 62 TAX 111 (H.C.Lah.)
669 669
650 Section 11
Income Tax Digest.
AMOUNT IS „RECEIVED‟ WHEN INCOME ACCRUING OUTSIDE IS „SET OFF‟ AGAINST LIABILITY IN PAKISTAN
1016. Amount is „received‟ when income accruing outside is „set off‟ _ against liability in Pakistan. 1955 SCC 1 (F.C.) = [1960] 2-TAX (Suppl.-29) (F.C.) = 1960 PTD 994 = 1955 PLD 418
670
TRANSMISSION OF FUNDS IS ALWAYS BILATERAL
_ 1017. Transmission of funds is always bilateral. 1955 SCC 1 (F.C.) = [1960] 2-TAX (Suppl.-29) (F.C.) = 1960 PTD 994 = 1955 PLD 418
671
BOOK ENTRIES
_ 1018. Book entries constitute receipt of money. 1955 SCC 1 (F.C.) = [1960] 2-TAX (Suppl.-29) (F.C.Pak) = 1960 PTD 994 = 1955 PLD 418
671
RETROSPECTIVE OPERATION
1019. Interest on loans advanced prior to the assessment year 1976-77. Provision were amended through Finance Act, 1976 which came into force on 1.7.1976. Income Tax Officer applied the embodied provision retrospectively. Tribunal was justified in holding that interest on loans advanced prior to the assessment year 1976-77 could not be subjected _ to tax in the assessment year 1975-76. [1995] 71 TAX 48 (H.C.Kar.)
671
UNEXPLAINED INCOME
1020. Burden to prove source of unexplained income lies with _ assessee. [1978] 38 TAX 71 (H.C.Lah.)
672
LIABILITY
1021. Liability incurred in the accounting year should be related back to the relevant accounting year and allowed against _ profits of that year. [1967] 15 TAX 73 (H.C.Kar.)
673
1022. Liability ascertainable in accounting year should be entered in books of account of the relevant year under the mercantile _ system of accounting. [1965] 12 TAX 8 (H.C.Lah.)
674
651 SCOPE OF TOTAL INCOME
Section 11
Section 11* Scope of Total Income
SCOPE OF “TOTAL INCOME”
Pakistan Industrial Development Corporation v. Pakistan – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 997.
Scope of “total income” in relation to “free reserves”.
Section 11 makes the Ordinance applicable to the total income of the assessee received or deemed to be received in Pakistan during the previous year by or on behalf of the assessee or accrues or arises or deemed to accrue or arise in Pakistan during the previous year if he is a resident or accrues or arises to such person outside Pakistan. The fact remains that free reserves is a part of total income which has been assessed to Income Tax. Free reserves is that part of total income which represents profit earned by the appellant but not distributed among the shareholders. Such income has been made subject to a further tax mainly for the reason to discourage the practice to accumulate profit without distributing it among the shareholders. _______________
“ACCRUE” AND “ARISE”, MEANING OF
Cement Agencies Ltd. v. Income Tax Officer, Central Circle II, Karachi & Another – 1969 SCC 322 = [1969] 20 TAX 33 (S.C.Pak.) = (PLD 1969 S.C. 318) 998.
“Accrue” and “arise” - Meaning of.
The policy of the Ordinance is to make the amount of income taxable when it is received either actually or constructively. So far as the words “accrue” and “arise” are concerned, we are to take the ordinary dictionary meanings of these words. Since both the words have been used in the provision in question they must be taken to have distinct meanings. “Accrues” conveys the sense of growing up by way of additional or increase or as accession or advantage; while the word *
Corresponding to section 4(1) of the 1922 Act.
652 Section 11
Income Tax Digest.
“arises” connotes comes into existence or notice or presents itself. It is, however, to be noticed that these two words have been used in contradistinction to the word “received” indicating a right to receive. The words “accrues” and “arises” represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. 999.
“Recovery” is not the sole criterion for taxability.
The statute does not require that income in order to be taxable is always recoverable. It speaks of accruing and arising and it has long been settled that the aspect of accrual or arising is to be understood in contradistinction to the act of receiving, which ordinarily follows and may often follow long after the accrual or arising of the income. Hamdard Thread House, Karachi v. Commissioner of Income Tax (East), Karachi – [1984] 49 TAX 91 (H.C.Kar.) 1000.
Words “accrue or arise”, meaning of
From the record the facts which emerge are that the Assessee had paid sales tax during the assessment year 1963-64, 1964-65 and 196566. It had also applied for the refund which was granted on 29.6.1966 and 15.12.1967. The assessee‟s contention was that income with regard to the refund had accrued to it during the respective assessment years to which the refund pertained and should have been included in the income pertaining to the said assessment years. Station 4 of the Income Tax Act provides that subject to the provisions of the Act, the total income of any previous year of any person “includes all income profits and gains from whatever source derived which accrue or arise or deemed to accrue or arise to him in Pakistan during such year.” Therefore, the total income of an assessee is chargeable to tax which is received or deemed to be received or which may arise or accrue or deemed to arise or accrue to him during the previous year. This implies that if the income has accrued or deemed to accrue but has not been received then it can be charged to tax. In mercantile system of accounting receivability is not the only test of accrual of income. An income which may have arisen, accrued or deemed to accrue without receiving it shall be included in the total income of the assessee and charged to tax. It is pertinent to note that accrual of income does not depend upon entry in the books of account. In this back ground it has to be considered whether the refund amount shall be deemed to accrue (i) when the order the refund was passed or (ii) when it was received by the assessee or (iii) on the date when the assessee became entitled to the refund.
653 SCOPE OF TOTAL INCOME
Section 11
The rule seems to be that the debit or credit which exists in a particular year, on their maturity in a subsequent year will relate back to the years in which they accrued, or “historically belong”. Therefore, if the right to get refund existed in an accounting year but order for its refund is passed or refund is made in a subsequent year then such credit shall be deemed to have accrued in the account year when the assessee became entitled to such credit. Having considered the relevant provision of law and the manner in which account is to be maintained we have now to consider whether in the present case where the assessee was employing mercantile system of accounting the refund made under the sales tax Act, shall be deemed to have accrued to it when the Order for refund was made or when it became entitled to the refund. In this regard reference may be made to section 27 of the Sales Tax Act under which refund has been claimed. Under section 27 where partly manufactured goods are purchased by a licensed manufacturer and tax has been paid on these goods on importation or any previous sale, a refund of the amount of the tax so paid shall be made to the licensed manufacturer. The criteria for entitlement to claim refund as laid down under section 27 of the Sales Tax Act is that the claimant should be a licensed manufacturer, he purchased partly manufactured goods and tax has been paid on those goods on importation or on previous sale. If these conditions are satisfied he will become entitled to refund. The satisfaction of the Sales Tax Officer is merely a procedural requirement and if the aforestated conditions are fulfilled, it will pot affect the entitlement of the assessee to the refund. There is nothing on record to show that the conditions required by section 27 have not been satisfied by the assessee nor there is any dispute that the sale tax paid by the assessee was not paid by it in the assessment year in respect of which it is claiming addition in its income. With these facts on record only question that arises is that as the assessee has not been crediting these amounts in the account books for the relevant years will it be entitled to relate back to the proper years or should it be taken in to consideration in the year when the refund was made. The objection of the learned counsel for the Department is that the assessee employed mercantile system of accountancy and as such any claim in respect of the amounts not entered in the account books daring the relevant period cannot be entertained. The entitlement for refund arose in the relevant year when sales tax was paid as the conditions laid down by section 27 were satisfied within the same year and therefore, irrespective of the date of order for refund or actual
654 Section 11
Income Tax Digest.
refund or non-inclusion in the accounts maintained under the mercantile system, the amount of refund shall relate back “historically” to the year when the assessee became entitled to its refund. The case would have been completely different if the assessee would not have been entitled to claim refund in the year when it was paid but in the next year or thereafter. On the facts and circumstances of the ease, the assessee was entitled to relate back the refunds of sales tax to the years in which it became entitled to the refund. If a different view is taken it may create most embarrassing and inequitable situation for the assessee. If the Department‟s view that the refund should relate to the year in which the order for refund was passed is accepted then it will clearly imply that if the Sales Tax Officer passes a consolidated order for refund of sales tax paid in the past years, then this consolidated amount should be treated as income during the year order was passed. This will cause serious prejudice and hardship for the assessee. In such a situation the interpretation which is more equitable and just has to be adopted. Cases referred to: Cement Agency Ltd. v. Income Tax Officer, Central Circle-II, Karachi and another (PLD 1969 S.C. 318) = [1969] 20 Tax 33 (S.C.); Ali & Roberts (Bahawalpur) Ltd. v. Commissioner of Income Tax [1966] 13 TAX 188; Octavious Steel & Co. Ltd. v. Commissioner of Income Tax Dadu (PLD 1960 S.C. (Pak.) 37l) = [1961] 4 TAX 1 (S.C.); Karachi Steam Navigation Co. Ltd. v. Commissioner of Income Tax [1967] 15 TAX 73 : Commissioner of Inland Revenue v. Newcastle Breweries Ltd. [1927] 12 Tax Case 927; Bernhard v. Gahan, 13 Income Tax Cases, 723; Isaac Holden Sons Ltd. v. Commissioner of Inland Revenue [1942] 12 Income Tax Cases 768; Serverne (H.M. Inspector of Taxes) v. Dadawell 3S Tax cases 649.
Commissioner of Income Tax (Investigation), Karachi v. Vali Bhai Kamruddin (Sind) Limited – [1973] 28 TAX 143 (H.C.Kar.)
The assessee, a private limited company, was appointed as managing agents for two limited companies under separate managing agency agreements. In terms of the agreements the assessee was to receive commission at certain percentage of the annual net profits of the managed companies as well as a fixed monthly amount as office allowance. It is common ground that while office allowance was payable every month, the commission on the annual net profits was payable to the assessee by the two managed companies at the end of the relevant accounting year. However, the assessee‟s Board of Directors, with a view to stabilise the managed companies, passed
655 SCOPE OF TOTAL INCOME
Section 11
resolutions, before the close of the relevant accounting year, foregoing the right to recover the managing agency commission as well as the monthly office allowance from the managed companies. Neither the amount of commission nor the office allowance was entered in the assessee‟s books of account, The managed companies which accepted the resolutions also neither paid any amount to the assessee nor made any credit in their books in favour of the assessee for the said managing agency commission and office allowance. On these facts the question for determination before the High Court was whether the managing agency commission and/or the office allowance from the two managed companies accrued as income liable to tax within the meaning of section 4(b)(i) of the Income Tax Act: Held,
that the managing agency commission from the managed companies did not accrue as income liable to tax but the office allowance did accrue as income and is accordingly liable to tax.
It has been found by the Income Tax Appellate Tribunal that, under the managing commission agreements, the managing agency commission was payable to the assessee only at the end of each relevant accounting year. Therefore, as far as the managing agency commission is concerned, it cannot be said to have accrued until the end of the accounting year in question. But for each such accounting year the assessee passed resolution foregoing the commission receivable by them, which resolutions were accepted by the managed companies. Therefore, no income whatsoever resulted to the assessee with regard to these commissions which cannot be said to have accrued due to them at all far any of the accounting or the assessment years in dispute. A regards the question of office allowance, its waiver may be held justifiable, and accordingly deductible as expenditure under certain circumstances. One such circumstance is commercial expediency. But the office allowance accrued to the assessee from both the managed companies from month to month, that is, at the end of every month. In the case of office allowance, therefore, the assessee‟s claim that this allowance should be treated as deductible expenditure was sustainable only from the date when resolution waiving such allowance was passed for each of the assessment years. Cases referred to: Colquroun v. Brooks [1888] 21 Q.B.D. 52 and Douchty v. Commissioner of Taxes (1927) A.C. 336. _______________
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Income Tax Digest.
CHARGEABILITY VIS-A-VIS DEEMING PROVISIONS
Pakistan Industrial Development Corporation v. Pakistan – 1991 SCC 857 = [1992] 65 TAX 84 (S.C.Pak.) = 1992 PTD 576 = PLD 1992 SC 562 1001.
Assessee when chargeable to tax for deemed incomes.
It is only if the income is received, arises or accrues or is deemed to receive, arise or accrue when an assessee is subjected to tax. The deeming provision presupposes accrual of income to the assessee but by fiction of law shifts the „locale of accrual of the income‟. A deeming clause makes a thing to be as provided by statute though in reality it is not so. 1002.
Deeming provisions - How to be understood.
The deeming provision in section 11 of the Ordinance relates to the possibilities in relation to receipt or accrual of income. By this provision anything which is not income cannot be treated as income. It, therefore, follows that receipt is not the sole test of chargeability. Any income may not have been actually received but if it is deemed to arise, accrue or receive, then it is chargeable to „tax‟. 1003.
Income is chargeable to tax only once in the hands of same person.
Broadly stated the principle of Income Tax Law is to charge all income with tax but in the hands of the same person only once. General Bank of Netherlands Ltd. and 2 Others v. Commissioner of Income Tax, Central, Karachi – 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.) 1004.
Chargeability vis-a-vis deeming provisions.
The consensus of the judicial view seems to be that in order to bring a case under the head of „business connection‟, it is necessary that there should be some activity in the taxable territories which contributes directly or indirectly to the earnings of those profits or gains which are to be taxed. It postulates an element of continuity between the business of non-resident and the activity in the taxable territories but a stray or isolated transaction is normally not to be regarded as a business connection. Furthermore, there also seems to be consensus of judicial view that in each case the question, whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and the circumstances of the case. Interest on securities in question cannot be said to be profits or gains accruing or arising from any
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business connection in Pakistan. However, the above amount of interest is profits and gains accruing or arising directly or indirectly through or from assets in Pakistan. Karachi Sind Development Corporation v. Commissioner of Income Tax, West Zone, Karachi – [1989] 59 TAX 104 (H.C.Kar.) 1005.
Assessee constructed apartments for sale - Advance received from the purchaser is held not chargeable to tax.
The applicant is a firm of Builders which has acquired the land and constructed apartments for sale. During the calendar year ending 31.12.1973 the applicant received advances against booking aggregating to Rs.5,56,770 from the purchasers of the apartments. The apartments were to be built according to specification as laid down by the Karachi Development Authority and were offered for sale at a price fixed by KDA. The purchasers had the option to withdraw at any time and obtain the refund of the advances after deduction of the establishment / service charges. The applicant maintained the account on cash basis. It filed return for assessment year 1974-75 originally declaring loss of Rs.74,969. Subsequently a revised return declaring loss of Rs.32,254 was filed. The applicant had calculated gross profit @ 10% of the receipts after deducting the cost of land. The Income Tax Officer determined the method of accounting employed by the appellant as mercantile but proceeded to apply cash receipt basis. He calculated gross profit at Rs.6,20,706 less expenses. This principle will apply where initially the amount has been paid as deposit and not as a price of the goods sold or for adjustment towards the sale prince. In the present case the amount was not deposited as a security but was paid towards the sale price and the balance was to be paid later. It was only on happening of certain events subsequently that refund could be claimed. The nature of receipt is to be ascertained not with reference to the subsequent changes but is “to be gathered as at the inception of the receipt”. Cases followed: Morley (Inspector Taxes) v. Tettersall [1938] 3 ALL E R 296.
Booz Allen & Hamilton International (P.R.) Inc. U.S.A. v. Commissioner of Income Tax, Lahore – [1976] 33 TAX 189 (H.C.Lah.) 1006.
Income of a non-resident is chargeable on accrual basis if income comes within the ambit of chargeability.
The Tribunal was not justified in assuming that the income of the assessee was assessable under section 4(1)(a). On the facts and in the circumstances of the case the income was chargeable to tax of the
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income of the non-resident assessee accruing or arising or deemed to accrue or arise in Pakistan during the previous year in question under section 4(1)(c) and not section 4(1)(a) of the Act. A fortiori the Tribunal was not justified in observing that section 42 of the Act was not attracted to the facts and circumstances of this case. Inspite of these fallacies in the order under reference the Tribunal in substance proceeded on the basis that the taxable income had accrued and arose to the non-resident assessee in Pakistan and the share of the expenses relatable to the Pakistan projects could be suitably apportioned and were ascertainable. It was for these reasons that the Tribunal did not rely on the provisions contained in Rule 40 for the purposes of computation of the taxable income of the assessee. Inspite of these fallacies in the order under reference, in substance the Tribunal was justified on the facts and in the circumstances of the case in refusing to invoke the provisions contained in Rule 40 of the Income Tax Rules for the purposes of computation of the taxable income of the assessee in Pakistan. According to this section the incidence of tax depends upon and is determined by the fact of the residence of the assessee in Pakistan. On the face of it clause (a) of sub-section (1) of section 4 is applicable to the residents and non-residents alike, while clause (b) above is confined in its application to the residents in Pakistan and clause (c) to the non-residents in Pakistan during the relevant previous years. Under clause (a) income “received or deemed to be received” by the assessee in Pakistan is chargeable to tax. In contrast to this under clause (c), in the case of a non-resident, income, profits or gains which accrue, or arise or are deemed to accrue or arise to him in Pakistan are brought to tax. This sub-section distinguishes between “income received or deemed to be received” and income which “accrue or arise or deemed to accrue or arise” to an assessee in Pakistan. On a plain reading of section 4(l)(a) the incidence of the tax is on the income, profits or gains received or deemed to be received in Pakistan, irrespective of their place of accrual. The income, profits and gains may arise or deem to arise out side Pakistan but the liability to tax under this clause depends on their receipts in Pakistan. If the income is received or deemed to be received in Pakistan, the amount is chargeable to tax in the hands of the residents and non-residents alike and there is no question of apportionment of the amount even though all the related business operations may not have been carried on in Pakistan. This is because the chargeability to tax is attracted on the actual or notional receipts in Pakistan.
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In accordance with sections 4(l)(b) and (c) income, profits and gains which accrue or arise or are deemed to accrue or arise to a resident or a non-resident in Pakistan are chargeable to tax. In conjunction with this section 42 lays down as to when can income be deemed to accrue or arise within Pakistan. Sub-section (1) of this section lays down that all income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through or from any asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or arising within Pakistan and where the person entitled to the income, profits or gains is not resident in Pakistan shall be chargeable to income tax either in his name or in the name of his agent. In particular sub-section (3) of this section further lays down that in case of a business of which all the operations are not carried out in Pakistan the profits and gains of the business deemed under this section to accrue or arise in Pakistan, shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in Pakistan. On the face of it section 42(1) is not applicable to a case where income is received or deemed to be received by the assessee in Pakistan under section 4(1)(a) of the Act. It comes into play in cases where the income is deemed to accrue or arise within the taxable territories. In this connection the Tribunal observed that there was ample authority of the Supreme Court of Pakistan reported as [(1961) 4 TAX 1 and P.L.D. (1969) S.C. 527] to the effect that section 42 of the Act is not applicable to the income assessable under section 4(l)(a) of the Act and for the same reason sub-section (3) of section 42 does not come into play in a case falling under section 4(l)(a) of the Act. There is no quarrel with this proposition as far as it goes. But as already stated above, the Tribunal has laboured under the erroneous belief that the income of the assessee was assessable under section 4(1)(a) and that consequently the Tribunal was not justified in holding that section 42(3) of the Act was not attracted to the facts and circumstances of the case. Rule 40 can be invoked and comes into play only if the Income Tax Officer is of the opinion that the actual amount of the income, profits or gains securing or arising to any person residing out of the taxable territory, whether directly or indirectly through or from any business connection in the taxable territory cannot be ascertained. But in the instant case, the Tribunal affirmed the finding by the Income Tax
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Officer on appeal and held (as already discussed above) that the taxable income of the assessee could be ascertained without much difficulty and high Costs. Indeed in this connection it was eventually admitted on behalf of the assessee before the Tribunal that given more time and opportunity it was possible to apportion the expenses in dispute and work out the taxable income of the assessee in Pakistan. This finding by the Tribunal is based on the material on the record. The finding of fact thus recorded by the Tribunal is binding in this reference before us. On this finding, therefore, there is hardly any room left for resorting to the provisions contained in Rule 40 in computing the taxable income of the assessee. Moreover even under Rule 40 the discretion rested with the Income Tax Officer to adopt any one of the three modes laid down therein for computing the taxable income. His discretion was not fettered and he could not be compelled to calculate the amount of the taxable income in proportion to the Pakistan receipts as compared to the world receipts, at the behest of the assessee. Under this rule also it was open to the Income Tax Officer to adopt such other manner in computing the taxable income as he may deem suitable. Cases referred to : Qctavious Steel Co. Ltd. v. Commissioner of Income Tax (1961) 4 TAX 1 (S.C.); Macneill & Barry Ltd. v. Commissioner of Income Tax (PLD 1969 S.C. 527); (1970) 21 TAX 8 (S.C.).
Bengal-Burma Steam Navigation Co. Ltd. v. Commissioner of Income Tax, East Pakistan, Dacca – [1960] 2-TAX (III-451) (H.C.Dacca) = 1960 PTD 765 = 1960 PLD 584 1007.
Income accruing in taxable territories but receivable outside taxable territories is assessable in taxable territories.
The assessee, a shipping company, plied its vessels between Chittagong, Cox‟s Bazar and Rangoon. Its registered office was outside the taxable territories. The Income Tax authorities holding that most of the earnings originated from Chittagong assessed to tax half of the total profits which arose in Pakistan waters. As respects the other half of the total profits arising in Burma waters tax was levied in proportion of 50 : 50 in accordance with the Agreement for the Avoidance of Double Taxation of income between. Pakistan and India. On a reference Their Lordships of the High Court affirmed the order of the Tribunal. In the course of the judgment Their Lordships observed that: (i)
the first part of sub-section (1) of section 42 makes no distinction between a resident and a non-resident;
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(ii)
even indirect accrual of income from sources in taxable territories, that is, income which accrues in Pakistan but is receivable outside the taxable territories for the purpose of taxation is just the same as that which accrues and is receivable in Pakistan;
(iii)
the aid of section 42 has to be invoked only in the case of income which actually accrues in Pakistan but is receivable outside Pakistan; and
(iv)
if there is an actual receipt of profits in Pakistan by or on behalf of a non-resident section 4(1)(a) would apply.
Case referred to: Messrs Octavious Steel Co. Ltd. Calcutta v. Commissioner of Income Tax, Dacca [1960] 2-TAX (III-88) (H.C.Dacca) = 1960 PTD 1 = 1959 PLD 907.
Messrs Octavious Steel & Company Ltd. v. Commissioner of Income Tax, Dacca – [1960] 2-TAX (III-88) (H.C.Dacca) = 1960 PTD 1 = 1959 PLD 907 1008.
Company‟s head office outside Pakistan from where businesses in Pakistan were controlled and managed. Income accrued in Pakistan received outside taxable territories held to be assessable in Pakistan.
The assessee Company was the Managing Agents of five Tea Companies in Pakistan and also of the Dacca Electric Supply Company Ltd Some of these managed companies were managed from London and in the case of others commissions were credited in the books of accounts in Calcutta but no amount was received in Calcutta, as the amounts were not transferred, so far as the Indian Rupee was concerned. The Company contended that their managing agency commissions and allowances received from several managed companies in Pakistan were not assessable as income in Pakistan, for all these concerns were controlled and managed from their office in Calcutta where. these commissions and allowances were receivable and the accounts were maintained. Held
that, the assessee Company could not escape payment of the tax on the income which had accrued in Pakistan, and that the fact that the head office of the Company was in Calcutta or that it was wholly controlled and managed from there was of no help.
Judicial analyses : CONFIRMED BY - The Supreme Court of Pakistan Octavius Steel & Co. Ltd, v. Commissioner of Income Tax, Dacca 1960 SCC 93 = 1961 4 TAX 1 (S.C.Pak) with the comments:
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“. . . The answer to the reference by the High Court is correct except in so far as it goes beyond the necessities of the case in referring to receivability outside Pakistan, and the rendering of services from outside Pakistan . . . . .” In this judgement we have attempted to clarify the real questions which arises in the case, on the basis of facts admitted by Mr. Suhrawardy, and such as appear from authentic instruments produced by him without such clarification, the real issue remains clouded in uncertainty. That issue was whether the income had accrued to the appellant company in Pakistan, and in eliminating from the question referred to the High Court, the two erroneous assumptions of facts indicated above, we consider we have done more than to resettle and re-frame the question, to extract the real issue and thus to facilitate its solution. Case distinguished: Imperial Tobacco Co. of India, Ltd., v. Commissioner of Income Tax, South Zone, Karachi, and another [(1959) 1 TAX 284]. Cases referred: St. Lucia Usines and Estates Company, Limited v. Colonial Treasurer of St. Lucia L.R. (1924 App Cas. 508); Raghunandan Prasad Singh and another v. Commissioner of Income Tax, Bihar and Orissa (AIR 1933 P.C. 101); Dewar v. Commissioners of Inland Revenue (1933-35) 19 T.C. 561; Commissioner of Income Tax, Bombay v. C. Parakh & Co. (India) Ltd., (29 ITR 661 S.C.); Woodhouse v. Commissioner of Inland Revenue (1933-37) 20 T.C. 673; Anglo-French Textile Company, Ltd., v. Commissioner of Income Tax, Madras (25 ITR 27); Commissioner of Income Tax/Excess Profits, Bombay City v. Bhogilal Laherchand (1954) S.C. Appeals 1172-25 ITR 50; Sutlej Cotton Mills, Ltd., v. Commissioner of Income Tax, West Bengal (AIR 1950 Cal. 551-18 ITR 112); Commissioner of Income Tax, Excess Profits Tax, Madras v. Parasram Jethanand, Madras (AIR 1950 Mad 631-18 ITR 302); Commissioner of Income Tax, Bombay v. Western India Life Insurance Co., Ltd. (1945) 18 ITR 405-AIR 1946 Bom. 185 and Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay (AIR 1950 S.C. 135).
Pokardas Dwarkadas, Karachi v. Commissioner of Income Tax, Sind and Baluchistan – [1960] 2-TAX (Suppl.-14) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 786 = 1957 PLD 68 1009.
Contract for supply of goods was made in taxable territories where account of sales maintained. Sale proceeds received and commission and interest deducted therefrom in taxable territories, held that profits accrued or arose in taxable territories.
The assessees, residents in British India (hereinafter called taxable territories) were the selling Agent of the Cambay State Mills The State Mills were leased out to one „B‟ who approached the assessee for
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financial help. Under two agreements entered into between B and the assessees, the assessees agreed to advance on loan such sums as might be required by „B‟ from time to time not exceeding at any time the sum of Rs 2 lakhs. In return thereof the assessees were appointed sole agents of the goods manufactured by Cambay State Mills. and were to receive interest and commission at a fixed rate on the amount advanced. The relevant facts obtaining in the case were that (i) the assessee had no shop in the State, (ii) all the contracts for the supply of goods were made in taxable territories, (iii) the sale-proceeds were received in taxable territories and (iv) the commission and interest was deducted in taxable territories from the sale-proceeds. The Income Tax authorities included the amounts of interest and commission received by the assessee in the assessment, holding that these accrued and were received in taxable territories. Assessee‟s reference application under section 66(1) of the Income Tax Act was refused by the Tribunal holding that the alleged questions of law were actually questions of facts. One question of law in E.P.T. assessment was, however, referred by the Tribunal to the High Court, namely:– “Whether on the facts stated above, did the income of the assessee, in the chargeable accounting period, from interest and commission accrue or arise in British India (taxable territories) or outside ?” Being dissatisfied with the Tribunal‟s orders the assessees filed application under section 66(2) in the High Court praying that the Tribunal be directed to state the case and refer all the questions of law formulated by them. With reference to the application under section 66(2) their Lordships held that the alleged questions were either questions of facts or not raised before the Tribunal and as such could not be allowed to be referred to the High Court. In regard to the case referred by the Tribunal under section 66(1) it was held that the income of the assessees from interest and commission accrued or arose in (British India taxable territories). Their Lordships further observed that: “In the present case there is no difficulty in interpreting the words “received” or “deemed to be received”. The contention of the learned counsel that the amount of commission and interest were actually not received in British India is not correct. According to the terms of the agreement the sale
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price of the goods supplied to the purchasers, was to be received by the petitioners and they were to pay these amounts to the lessees within the due date. This is an admitted fact that the petitioners before giving sale price to their principals used to deduct the. amount due to them as commission and interest. They had complete control over the sale proceeds and by deducting such amounts they were not merely making book entries but actually received the amounts. Even if it be assumed for the sake of argument that these were only book entries‟ then also the amounts in question will be considered as „received‟. Cases referred to : Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax, Lahore [[1960] 2-TAX (Suppl.-29) (F.C.Pak.)]; Hiralal Kalyammal v. Commissioner of Income Tax, Bombay (AIR 1943 Bomb. 98); Commissioner of Income Tax, Bombay v. Sarupchand Hukamchand (AIR 1931 Bomb. 236); Commissioner of Income Tax, Bombay v. Bansilal Motilal (AIR 1930 Bom. 381) and Commissioner of Income Tax v. Melbourne Trust Ltd. (AIR 1914 P.C. 230).
Ramkola Sugar Mills & Co. Ltd., Nawanshahr v. Commissioner of Income Tax, Punjab N.W.F.P., Province – [1960] 2-TAX (Suppl.-41) (Judicial Commissioner, Peshawar) = 1952 PLD 28 1010.
Dividend income accrued outside taxable territory, but was set off by book transfer against debt to a foreign company, held that dividend income received in taxable territory.
The assessee, a joint-stock company, at Hamira, in Kapurthala State had its registered office at Nawanshahr in Hazara District (taxable territory). The assessee held certain shares in another joint-stock company (Mahalaxmi Sugar Mills Ltd) which had its registered office at Hamira in Kapurthala State. The later company (foreign) declared its dividend on the shares and a sum of Rs.75,000/- became payable to the assessee on that account. Under an agreement between the assessee and the foreign company the amount of dividend (Rs.75.000) was set off against the debt owed by the assessee to the foreign company (Rs.78,897) resulting in a final credit balance of Rs.3,897/- in favour of the foreign Company. Admittedly the three directors of the two companies were the same persons, who managed the business of the said companies. At the assessment stage the assessee contended that the sum of Rs.75,000/- was not liable to tax under section 4(1) read with section 14(2)(c) of the Income Tax Act. The Income Tax Officer repelled the
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contention and assessed to tax the amount in question. The appeals before the Appellate Assistant Commissioner and the Tribunal were unsuccessful. On a reference it was held that the dividend income was received by the assessee in taxable territory within the meaning of section 4(1), read with section 14(2)(c) Of the Income Tax Act. CONFIRMED BY the Federal Court of Pakistan in [1960] 2 TAX (Suppl.-29). FOLLOWED BY: 8 ITR 95; [1902] AC 287; 23 ITR 230; [1945] ILR Bombay 228; [1945] AC 1; ILR 44 Mad. 65 p.91; [1873] LR 8 Ch.407,414; 3 ITR 346; 4 ITR 369; 5 ITR 534; 19 TC 342; 6 TC 34; 2 TC 165; [1930] 58 CAL. 999; 8 ITR 297; 25 ITR 1; AIR 1940 PC 36; LR 1930 AC 161 & 1938 40 Bombay LR 803.
Sir William Roberts Timber Co. Ltd., Baramula v. Commissioner of Income Tax, Punjab and N.W.F. Provinces, Lahore – [1960] 2-TAX (Suppl.-90) (H.C.Lah.) = 1960 PTD 1235 = 1951 PLD 413 1011.
Foreign Company extracting timber and manufacturing shooks outside taxable territories and selling shooks through agents in taxable territories where payment was made, held that entire income relating to this activity is taxable in taxable territories.
The business activities of the assessee, a private limited Company incorporated in Kashmir, consisted in (1) the extraction of timber, (2) the manufacture of shooks, and (3) the sale of shooks. The first two activities were carried on outside British India (hereinafter called taxable territories but the third activity qua the transaction in question was confined to taxable territories, through its agents in Lahore. The assessee contended that the entire profits on sale of shooks affected in taxable territories accrued or arose outside taxable territories and the provisions of the Income Tax Act or the Excess Profits Tax Act were not applicable to his case. The Department, on the other hand, contended that the entire profits on the sale of shooks in taxable territories were received in taxable territories and were liable to the Income Tax. As respects its liability to Excess Profits Tax Act the department contended that in spite of the fact that part of the business was carried on in Indian State it was not a “separate business” within the meaning of the third proviso to section 5 of the Excess Profits Tax Act so as to exclude it entirely from the levy of tax under the said Act. On a reference, the High Court sent back the case to the Tribunal for a supplementary statement. On its receipts their Lordships held that:
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(i)
the entire profits on the sale of shooks were received in taxable territories and hence were liable to tax under the Income Tax Act; and
(ii)
the case was governed by the second part of third proviso to section 5 of the Excess Profits Tax Act and that only the profits attributable to sales in taxable territories were liable to Excess Profits Tax.
Cases referred to : Commissioner of Income Tax, Bombay v. Umarbhai & Co., Bombay [(1950) 18 ITR 472]; Hera Mills Ltd, Cawnpur v. Income Tax Officer, Cawnpur [(1946) 141 ITR 417] and Pondicherry Railway Company Ltd. v. Commissioner of Income Tax, Madras (AIR 1932 P.C. 165]. _______________
RELEVANT DATE FOR ACCRUAL OF INCOME
Cement Agencies Limited v. Income Tax Officer, Central Circle II, Karachi and another – [1965] 11 TAX 216 (H.C.Kar.) 1012.
Relevant date for accrual of income.
The assessees were the managing agents of Associated Cement Co. Ltd., Bombay, who owned two cement factories in Pakistan; one at Rohri and the other at Wah. In terms of an agreement commission on the annual net profit of the managed company was payable to the assessees on the 31st March every year, immediately after the annual accounts of the company had been passed by the shareholders. In the account year, relevant to the assessment year 1948-49 the assessees commission became ascertained and payable on the 5th December 1947, the date on which the auditors submitted their report in the shape of balance sheet countersigned by the directors of both the managed and the managing companies. Since no return for the period in question had been filed by the assessees the Income Tax Officer issued notice under section 34(2A) of the Income Tax Act on the 11th December 1962 and finally completed the assessment on the 31st October 1963. He further levied penal interest under section 18A(8) of the Act. The assessees challenged the order of assessment before the Appellate Assistant Commissioner. During the pendency of the said appeal the asses-sees filed writ petition in the High Court challenging the jurisdiction of the Income Tax Officer on the ground that (i) although under the managing agency agreement the managing agency commission became due to them on the 31st March every year, yet according to the practice of the managed company the accounts were finalized on the 31st July of each year since its incorporation and as such for the accounting year 1946-47 the accounts of the managed
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company were finalized on the 31st July 1947 and in the balanced sheet of the managed company the commission was shown due to the assessees on the 31st July 1947. The case was, therefore, hit by the proviso to section 34(2A) of the Act and as such the notice issued under section 34(1), read with section 34(2A) of the Act was not valid in law, (ii) the assessees being not a person “not hitherto assessed in Pakistan” within the meaning of section 18A(3) and the assessment made under section 34 being not a regular assessment within the meaning of section 18A(8) no penal interest was leviable; and (iii) subsection (2A) of section 34 was (introduced by the Finance Ordinance, 1959) had prospective not retrospective effect. On behalf of the department the writ petition was opposed on the ground that the impugned order was not without jurisdiction or in excess of jurisdiction and as such the assessees before they could be entitled to invoke the writ jurisdiction of the High Court under Article 98(2) of the Constitution of Pakistan, 1962, ought to have exhausted the remedy by way of appeal filed by them before the Appellate Assistant Commissioner and, if necessary, to the Appellate Tribunal. Held, that: (i)
the department‟s contention cannot be accepted because on the view taken by Their Lordships of the Supreme Court in the case reported as Nagina Silk Mill, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and another [(1963) 7 TAX 442] we are bound to hold that the relief in Income Tax cases cannot be invoked with as much facility and convenience as by recourse to the writ jurisdiction of the High Court;
(ii)
the department had not exceeded its jurisdiction in assessing the petitioners for the assessment year 1948-49. The conclusion reached by the department that the income in question accrued to the petitioners after the target date (the 14th August 1947) cannot be said to be erroneous or based on irrelevant consideration;
(iii)
the department was perfectly justified in treating the petitioners for the assessment year 1948-49 as a “person not hitherto assessed” within the meaning of section 18A(3) of the Income Tax Act;
(iv)
the contention that an assessment under section 34(2A) cannot be considered to be a regular assessment and as such no penal interest can be imposed under section 18A(8) is not tenable. If a notice under section 34(1) is deemed to be a notice under section 22(2), any return filed in response
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to it would be nothing else but a return under it. In such circumstances on the terms of the said provision of law all the other provisions of the Act, so far as may be, would become applicable. Section 18A is also a provision of the Act and was rightly applied to the petitioner‟s case; and (v)
the impugned provision of law (sub-section (2A) of section 34) is in such wide terms that it cannot be helped but to hold that it has retrospective operation.
Case followed : Nagina Silk Mill, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and another (1963) 7 TAX 442. Case distinguished : Octavius Steel Co. Ltd. v. Commissioner of Income Tax [1961] 4 TAX 1 (S.C.India). _______________
RECEIPT AND ACCRUAL OF INCOME
General Bank of Netherlands Ltd. and 2 Others v. Commissioner of Income Tax, Central, Karachi – 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.) 1013. “Receipt and accrual of income”. It is the admitted position in these cases that appellants earned income from the securities deposited outside Pakistan and further that the interest income from the securities accrued to the appellants as the owners of the securities in their own right. The interest income on securities also accrued outside Pakistan and was also received outside Pakistan. The fact that the securities themselves were required to be transferred to Pakistan by the appellants as capital assets has no bearing to the fact of accrual of interest income which took place outside Pakistan and was the income of the appellants which accrued to them outside Pakistan. The receipt of the “income” refers to the first occasion when the recipient obtains the money under his own control. Once an amount is received as “income”, any remittance thereof to another place does not result in the receipt of “income” in his hand at another place. It is well-settled that the income, profits or gains having once received by the assessee outside Pakistan would not be chargeable to tax by reason of the moneys having been brought into Pakistan because what is chargeable is the first receipt of the moneys and not a subsequent dealing by this assessee with the said amount. In that event they are brought by the assessee as his own moneys which he had already received and had control over and they cease to enjoy the character of income, profits or gains. Note: See also case no. 1025.
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Income Tax Officer, Mardan v. Sanaullah Khan & Co. – 1976 SCC 430 = [1977] 35 TAX 1 (S.C.Pak.) 1014.
Place of “accrual and receipt” of income.
No other argument was advanced in support of the contention that the respondent had received payment in Wah through his agent, the local post office, and in the circumstances discussed, I would hold that although cheques had been posted to the respondent at his request in Wah, this did not amount to a payment to the respondent in Wah because the post office was not his agent. Note: See also case no. 1026.
Commissioner of Income Tax, Lahore Zone, Lahore v. Mian Muhammad and Sons – [1990] 62 TAX 111 (H.C.Lah.) 1015.
Surrender of income after its accrual is subjected to tax.
The respondent assessee acted as Managing Agent of Punjab Vegetable Ghee and General Mills Ltd. According to the Managing Agency agreement, the petitioner was entitled to Rs.36,000 per annum as office allowance, 15 per cent, commission on the profits earned and further 1 per cent commission on the total sales and purchases made by the Managing Company. It may be added that as the Managed Company had suffered losses, there was no question of payment of commission or profits. The Return filed by the respondent for the assessment year 1964-65 disclosed only receipt of office allowance of Its. 36,000 and did not declare receipt of any commission regarding sales and purchases, In the return for the succeeding year, apart from office allowance, as against a sum of Rs.1,20,049 payable as commission on the sales and purchases of the Managing Company, only an amount of Rs.22,368 was disclosed as commission. The income Tax Officer issued notices to the respondent to explain as to why for the assessment year 1963-64 receipt of commission was not declared and for the succeeding year full amount of commission was not shown. In reply the respondent stated that it had voluntarily surrendered the commission payable to it to minimise the deficit of the Managed Company, which suffered losses. It is on the record that for the two assessment years the managed company‟s accounting period closed on 31.3.1962 and 31.3.1963 and that of the Managing Agent on 31.7.1962 and 31.7.1963 respectively. The commission became payable to the petitioner on 1.8.1962 and 1.8.1963. It is noteworthy that the managed company in its books of accounts had actually credited the amount of the commission to the petitioner. The income thus, had accrued to it and was surrender after its accrual. The resolution is also post accrual, Had the surrender
670 Section 11
Income Tax Digest.
taken place, before the income accrued, it could not be taxed because in such an eventuality the accrual was prevented by act of surrender. The argument that because of non-receipt of income the chargeability averted, has no merit. The scheme of the Income Tax Act is different from that of the English Statute. Under section 4(1)(a) and (b)(i) of the Act the income of an assessee includes the income received or deemed to have been received and also the income accrued or arisen or deemed. to have accrued or arisen. Again under section 7, tax is payable on salary as soon as it falls due irrespective of the fact whether or not it is paid. Tax on interest on securities is leviable under section 8 on interest receivable. Section 9 makes assessable the bona fide annual value of the property. It is thus,. obvious that mere accrual and receivability, without actual receipt, can be brought under charge under the provisions of the Income Tax Act, 1922. In the instant case the income, had already become the property of the assessee. Its actual receipt was not sine qua non for its chargeability. The view taken by the Income Tax Office is well-grounded and the Tribunal fell in error in invoking the principle of surrender for the purposes of commercial expediency. Indeed the opinion expressed by us is fully supported by a judgment of the Supreme Court of India in the case of Messrs Mont Industries Ltd. v. Commissioner of Income Tax (Central) (AIR 1971 Supreme Court 2396), wherein surrender after the accrual of income was not accepted and the income was subjected to charge in the hands of the managing agent, with which we entirely agree. In this view of the matter these reference applications are accepted and the questions referred to this Court are answered in favour of the department. Case followed : Atorvt Industries Ltd. v. Commissioner of Income Tax (AIR 1971 S.C. 2396). _______________
AMOUNT IS „RECEIVED‟ WHEN INCOME ACCRUING OUTSIDE IS „SET OFF‟ AGAINST LIABILITY IN PAKISTAN
Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax, Punjab and NWFP, Lahore. – 1955 SCC 1 (Federal Court) = [1960] 2-TAX (Suppl.-29) (Federal Court of Pakistan) = 1960 PTD 994 = 1955 PLD 418 1016.
Amount is „received‟ when income accruing outside is „set off‟ against liability in Pakistan.
Amount of dividend accruing outside taxable territories to a company in taxable territory and set off with agreement of both companies
671 SCOPE OF TOTAL INCOME
Section 11
against a debt owed by the company in taxable territory is amount “received” in taxable territories. _______________
TRANSMISSION OF FUNDS IS ALWAYS BILATERAL
Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax, Punjab and NWFP, Lahore. – 1955 SCC 1 (Federal Court) = [1960] 2-TAX (Suppl.-29) (Federal Court of Pakistan) = 1960 PTD 994 = 1955 PLD 418 1017.
Transmission of funds is always bilateral.
Transmission involves, indeed, an intermediate space, but does not depend on the extent of the space. Each party receives payment from the other. Each party having received payment in this way makes in his turn the corresponding payment to the other. The transaction is necessarily bilateral. _______________
BOOK ENTRIES
Ramkola Sugar Mills Ltd. v. Commissioner of Income Tax, Punjab and NWFP, Lahore. – 1955 SCC 1 (F.C.) = [1960] 2-TAX (Suppl.-29) (F.C.Pak) = 1960 PTD 994 = 1955 PLD 418 1018.
Book entries constitute receipt of money.
Even when accounts are settled through book entries there is receipt of money as income accrued was settled against debt owed. _______________
RETROSPECTIVE OPERATION
Evershine Paints v. Commissioner of Income Tax – [1995] 71 TAX 48 (H.C.Kar.) 1019.
Interest on loans advanced prior to the assessment year 197677. Provision were amended through Finance Act, 1976 which came into force on 1.7.1976. Income Tax Officer applied the embodied provision retrospectively. Tribunal was justified in holding that interest on loans advanced prior to the assessment year 1976-77 could not be subjected to tax in the assessment year 1975-76.
In no case, it can be said that the amendment in question which has introduced on the 1st day of July, 1976 could not be given effect to by
672 Section 11
Income Tax Digest.
the Income Tax Officer while he was assessing income of the assessees for the year ending 30th June, 1976. This by no stretch of imagination would amount to giving retrospective operation to the said amendment. However, while referring to the contentions raised by Mr. Shaikh Haider, notwithstanding the use bf the words “has made any loan” in Explanation 8, as the said Explanation creates a new liability, nothing further can be spelt out therefrom to indicate that the Legislature intended to give it a retrospective operation. The observations made by the Supreme Court in the case of Sulaiman Bhai Jiwa [1970] 21 TAX 62 (S.C.Pak.) = (PLD 1970 SC 80), in our view, are not germane to the facts of the present case. The intention of the Legislature is to be gathered not merely by use of the words in a statute but also by the over all consequences which may follow the legislation. It is a rule of interpretation, now so well established that! while dealing with a fiscal statute if two interpretations are possible, the one favouring the tax payer must be accepted. Therefore, in the present case, it is hard for us to agree with Mr. Shaikh Haider that the amendment in question operates retrospectively. In the result, we hold that Explanation 8 would apply only on loans advanced during the assessment year 1976-77 or thereafter, but the same would not be applicable in respect of such loans advanced before such period. Cases referred to: Income Tax Officer (Investigation) Circle-I v. Sulaiman Shah Jiwa (1970) 21 TAX 82 (SC. Pak.) = (PLD 1970 SC 80); (1986) 54 TAX 44 (Trib.) = (1986 PTD 805); Rehman Corporation Hyderabad v. Income Tax Officer Mirpurkhas and another (1985) 52 TAX 169 (H.C.Kar.) = (1985 PLD 787); Muhammad Younus v. Chairman, Municipal Committee, Sahiwal and others; Naveed Textile Mills Ltd. v. Assistant Collector (Appraising) (PLD 1985 SC 92) and Mercantile Fire and General Insurance Company of Pakistan Ltd. v. Income Tax Officer (1989 PTD 221). _______________
UNEXPLAINED INCOME
Islam Jewellers, Gujranwala v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi – [1978] 38 TAX 71 (H.C.Lah.) 1020.
Burden to prove source of unexplained income lies with assessee.
There is, in this case, no material other than the one already considered by the tax authorities. There has been no grievance that any material or evidence had been omitted from consideration. The finding of fact arrived at by all the tax authorities that the assessee
673 SCOPE OF TOTAL INCOME
Section 11
failed to prove the source of the disputed amount, therefore, is unexceptionable. As the assessee himself disclosed being in possession of that amount, it was his duty to have explained how it came to him. The revenue is not obliged in such a situation, to locate the exact source Therefore, there was no illegality in the view taken by the Tribunal. The next question to be considered is if the sum in question could have been assessed in the “previous year” or the “financial year”. Here again we agree with the learned judges of the Indian High Courts and hold that the disputed amount could be taken to be receipt for the relevant “financial year” and not the “previous year”. However, we believe that 3rd March, 1964, when the disputed amount was entered as investment in the books of account of the assessee, falls within the same financial and previous years. The orders passed by the tax authorities are, therefore, quite valid. Cases referred to : Commissioner of Income Tax v. Durya Prasad More (1974 PTD 180); and Rajput Metal Works Ltd. v. Commissioner of Income Tax (PTD 1976 Lahore 223); (1976) 33 TAX 1 (H.C.Lah.); Edwards (Inspector of Taxes) v. Painstow and another (1955) 28 ITR 579; Mithoo Lal Tek Chand v. Commissioner of Income Tax (1953) 23 ITR 494; Commissioner of Income Tax v. Ganapathi Mudaliar [1964] 53 ITR 623. Cases referred to : Sushil Chandra Ghose v. Income Tax Officer (1959) 35 ITR 379; Commissioner of Income Tax v. Sheolal Ramlal (1958) 33 ITR 47; Commissioner of Income Tax v. Darolia & Sons (1955) 27 ITR 515; L.B. Balamkar v. Commissioner of Income Tax (1971 PTD 929); Raja Sharda Narain Singh v. Commissioner of Income Tax (1968) ITR 209; Baladin Rain v. Commissioner of Income Tax (1969) 71 ITR 427 and Mst Khatija Bai v. Commissioner of Income Tax (PTD 1978 Kar. 395); [1978] 37 TAX 351 (H.C.Kar.) _______________
LIABILITY
Karachi Steam Navigation Co., Ltd., v. Commissioner of Income Tax – [1967] 15 TAX 73 (H.C.Kar.) 1021.
Liability incurred in the accounting year should be related back to the relevant accounting year and allowed against profits of that year.
If the assessee had to be assessed on the sale of steamer during the assessment year 1953-54, all the allowance payable to him on this item had necessarily to be related to the same assessment year,
674 Section 11
Income Tax Digest.
although the expenditure was incurred by him at a later date in the subsequent assessment years. Premier Sugar Mills and Distillery Co. Ltd., Mardan – In re. [1965] 12 TAX 8 (H.C.Lah.) 1022.
Liability ascertainable in accounting year should be entered in books of account of the relevant year under the mercantile system of accounting.
The assessee, a sugar factory, was provided with a railway siding by North Western Railway under an agreement dated the 20th October 1950. Under clause 8 of the said agreement the maintenance charges for this siding were to be paid annually by the assessee, from the date on which the siding was opened for traffic at the rate of three per cent on the total outlay incurred by the Railway Administration on its own behalf and on behalf of the firm for all purposes (including cost of acquisition of land) in the construction of the whole siding and all works in connection therewith. The assessee maintained its accounts on the mercantile system, yet it did not make “any provision for the payment. of maintenance charges in respect of the assessment years prior to the year ending the 31st October 1956. Nor any bill was received from the Railway authorities during that period. In the assessment year 1957-58 the assessee paid a total sum of Rs.32,567 for the period beginning the 30th October 1941 and ending the 31st October 1956. Since the claim related to a number of preceding years, the Income Tax Officer allowed proportionate amount of Rs.4,000 attributable to the assessment year 1957-58 and disallowed the balance of Rs.28,566 in respect of the earlier years. Similarly a sum of Rs.67,321 was disallowed in respect of the assessment year 1958-59. On appeal the Appellate Tribunal confirmed the orders of the Income Tax Officer. Before the High Court the assessee contended that (1) the allowance in question was admissible during the assessment year in which the bill was received from the Railway administration and payment made by the assessee and (2) as long as the bill was not received from the Railway, the assessee was not in a position to know as to what charges had been incurred on account of maintenance of the siding and accordingly no provision could be made in that behalf, even though the assessee had adopted the mercantile system of accounting. Held, that
(i)
the Tribunal was justified in confirming the disallowance of Rs. 28,566 in respect of the assessment year 1957-58 and Rs.67,321 in respect of the assessment year 1958-59 on
675 SCOPE OF TOTAL INCOME
Section 11
account of maintenance charges of railway siding which amounts admittedly related to earlier account years; and (ii)
the sum payable for maintenance could easily be ascertained as it was a fixed percentage of the outlay. Under the mercantile system of accounting it was the duty of the assessee to show the amount of maintenance charges as an expenditure allowable under clause (xvi) of subsection (2) of section 10 of the Act. By its failure to do so the assessee clearly forfeited this allowance.
Cases relied on : Commissioner of Income Tax v. Shewbux Jahurilal (1963) 7 TAX 62 and Kanpur Tannery Ltd. v. Commissioner of Income Tax (34 ITR 863).
676 Section 12(1)
Income Tax Digest.
Section 12(1)* „Salary‟ when deemed to accrue or arise in Pakistan
PAGE NO
RECEIVING SALARIES FROM STATE EXCHEQUER IS TAXABLE NO MATTER WHERE PAID
1023. Assessee, a government employee was posted at Provincially Administered Tribal Area, claimed exemption from payment of income tax, held that every government employee receiving his salary from State exchequer is liable to pay tax on his income irrespective of any bar of locality, place of _ service or nature of duties. [1995] 71 TAX 45 (H.C.Quetta) POSITION UNDER 1922 ACT
1024. Position under 1922 Act. 4 ITR 317 (Lahore)
*
_
[1937] 5 ITR 216 (Cal.);
Corresponding to section 42 of the 1922 Act.
_
677
[1936] 678
677 „SALARY‟ WHEN DEEMED TO ACCRUE OR ARISE IN PAKISTAN
Section 12(1)
Section 12(1)* „Salary‟ when deemed to accrue or arise in Pakistan
RECEIVING SALARIES FROM STATE EXCHEQUER IS TAXABLE NO MATTER WHERE PAID
Sanaullah Khan, etc. v. Province of Balochistan, etc. – [1995] 71 TAX 45 (H.C.Quetta) 1023.
Assessee, a government employee was posted at Provincially Administered Tribal Area, claimed exemption from payment of income tax, held that every government employee receiving his salary from State exchequer is liable to pay tax on his income irrespective of any bar of locality, place of service or nature of duties.
Perusal of above provision [section 12(1) of the 1979 Ordinance] manifestly discloses that every Government employee, receiving salary from Federal Government, Provincial Government or any local authority of Pakistan is bound to pay income tax at prescribed rate irrespective of his status of residence, place of posting or nature of work. The question about applicability of Income Tax Ordinance, 1979, in the tribal areas has absolutely no relevancy because income tax deductions are based upon entitlement of persons for receiving salaries from State exchequer. Therefore, we are inclined to respectfully observe that reference to above quoted judgment or bar under Article 247 of the Constitution while considering liability of Government employees regarding payment of Income Tax has no nexus with the proposition under consideration. We therefore, feel no difficulty in concluding that once Government employee is receiving his salary from State exchequer, he automatically becomes liable to pay tax on his income, without any bar of locality, place of service or nature of duties unless specially exempted. Cases referred to: 1992 SCMR 250 and 1990 MLD 1960. _______________
*
Corresponding to section 42 of the 1922 Act.
678 Section 12(1)
Income Tax Digest.
POSITION UNDER 1922 ACT
V.G. Every, In re – [1937] 5 ITR 216 (Cal.) 1024.
Position under 1922 Act.
Salary received in England for work done in India accrued in India. Diwan Bahadur Sir T. Vijayaraghavacharya v. Commissioner of Income Tax – [1936] 4 ITR 317 (Lahore)
Pension received in England is not assessable in India.
679 BUSINESS CONNECTION
Section 12(2)
Section 12(2)* “Business connection”
PAGE NO
BUSINESS CONNECTION - CONNOTATION OF
1025. „Business Connection‟ - How to be construed. 784 = [1991] 63 TAX 149 (S.C.Pak.)
_
1991 SCC 682
1026. No evidence that the assessee had fiduciary relationship or business connection with the non-resident, held that notice issued by assessing officer treating the assessee as an agent _ of non-resident. [1981] 43 TAX 158 (H.C.Lah.) _ 1027. „Business connection‟ - Scope of. 1976 SCC 430 = [1977] 35 TAX 1 (S.C.Pak.)
682
1028. Where control and management vests in the assessee _ company „business connection‟ exists. 1969 SCC 340 = [1970] 21 TAX 8 (S.C.Pak.) _ 1029. „Business connection‟ - Meaning of. 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.)
684
1030. Mere lending of money does not amount to „business _ connection‟. 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) _ 1031. Effect of pooling of money. 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) 1032. True construction of language and intention of legislature _ must be ascertained. 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) _ 1033. “Business connection” - When exists. 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.) _ 1034. “Real issue” - Vis-a-vis duty of the Court. 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.) 1035. Raw material was purchased in Pakistan and manufactured in India, held that profits attributable to the purchases were assessable in Pakistan having “business _ connection”. [1960] 2-TAX (Suppl.-265) (H.C.Dacca) = 1960 PTD 1036 *
Corresponding to section 42 of the 1922 Act.
683
684 685 685
685 686 686
686
680 Section 12(2)
Income Tax Digest. PAGE NO
1036. „Business connection‟ - Factors relevant for determination. _ [1960] 2-TAX (Suppl.-104) (H.C.Lah) = 1960 PTD 1225 = 1954 PLD 157 _ 1037. Elements of continuity is a pre-requisite. [1939] 7 ITR 176 (Bom.)
687
1038. It must be established that the two persons have some sort of association in a business, that is to say, in a profit-making _ occupation or activity in British India. [1939] 1 ITR 452 (All.) _ 1039. „Business connection‟ is different from business. [1935] 3 ITR 395 (PC)
689
689
689
ILLUSTRATIONS OF BUSINESS CONNECTION
1040. Managing agent was in full control and supervision of business of managed company in Pakistan, held that it amounts to _ business connection in Pakistan. [1970] 22 TAX 61 (H.C.Dacca) 1041. Managing agency having registered office outside Pakistan where accounts were maintained was controlling business of managed company in Pakistan, held that commission on profits attributable to operation carried out in Pakistan and _ accrued or arose in Pakistan. [1961] 4 TAX 147 (H.C.Dacca) _ 1042. „Business connection‟ - Rule of apportionment. [1960] 2-TAX (Suppl.-90) (H.C.Lah) = 1960 PTD 1235 = 1951 PLD 413
690
691 693
1043. Direct sale by a non-resident to customers in India does not establish a business connection even if orders were _ canvassed by brokers. [1946] 14 ITR 417 (All.)
693
1044. Where a branch of a foreign company was opened in India by company‟s nonresident managing agent, who received _ commission on sales effected in India. [1939] 7 ITR 452 (All.)
693
1045. Where non-resident company gave rights to exhibit pictures in India to another company carrying on business in India, _ there was a business connection between the two. [1939] 7 ITR 176 (Bom.)
694
1046. Where a company in India and a company outside India are both controlled by the same persons and there is flow of business between the two, there is „business connection‟ although the transactions between them may be finalised _ outside India. [1940] 8 ITR 522 (PC)
694
681 BUSINESS CONNECTION
1047. Others.
_
Section 12(2) PAGE NO
10 ITC 330 (Rangoon)
695
SOURCE / PROPERTY
1048. „Property‟ in section 42(1) of 1922 Act means tangible property though it is not confined to immovable property. _ [1935] 3 ITR 395 (PC)
696
BUSINESS OPERATIONS
1049. Section 42(3) of 1922 Act does not apply to profits and gains _ which actually accrued or arose in British India. [1946] 14 ITR 411 (AlI.) _ 1050. Position under the 1922 Act. [1935] 3 ITR 395 (PC)
696 697
682 Section 12(2)
Income Tax Digest.
Section 12(2)* “Business connection”
BUSINESS CONNECTION – CONNOTATION OF
General Bank of Netherlands Ltd. and 2 Others v. Commissioner of Income Tax, Central, Karachi – 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.) 1025.
„Business Connection‟ - How to be construed.
After survey of case law, learned Judges in the High Court correctly took the view that in order to bring a case under the head of “business connection”, it is necessary that there should be some activity in the taxable territory which contributes, directly or indirectly, to the earnings of those profits or gains which are to be taxed. Their Lordships also agreed with the view canvassed by the appellant that “the interest earned on the securities in question cannot be said to be profits or gains accruing or arising from any business connection in Pakistan”. However their Lordships agreed with the view of the Income Tax Tribunal that in terms of section 13(3)(4) read with the above-quoted Rules, “the securities are the assets transferred by the applicants (appellants) assessees as capital assets to Pakistan”. According to learned Judges “the factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the above securities which in fact stand transferred in favour of the State Bank of Pakistan in terms of subrule (4) of Rule 5. Abdur Rehman v. Income Tax Officer – [1981] 43 TAX 158 (H.C.Lah.) 1026.
No evidence that the assessee had fiduciary relationship or business connection with the non-resident, held that notice issued by assessing officer treating the assessee as an agent of non-resident was not maintainable.
Before a person could be served with a notice under the provisions of section 43 it must be shown that (a) such person is employed by or on *
Corresponding to section 42 of the 1922 Act.
683 BUSINESS CONNECTION
Section 12(2)
behalf of the non-resident; or (b) is a person having business connection with the non-resident; or (c) is a person through whom a non-resident is in receipt of income, profits or gains. I regret my inability to agree with the learned counsel for the respondent that the liability as an agent could be founded only on the mere possibility of existence of business relation between the petitioner and non-resident company without there being any evidence upon which it could be open to the Income Tax Officer to reasonably draw the conclusion that the non-resident company had in point of fact business connection with the petitioner. The respondent appears to have chosen to declare the petitioner as an agent of Ingenieurburo Oskar Von Miller Gmb H., West Germany, in an attempt to assess and recover the Income Tax liability of the company from the petitioner. I have no doubt that before the respondent could do so he was obliged to show that the petitioner falls in any of the three category of persons against whom proceedings could be taken under section 43 of the Act. I am equally clear that section 43 which operates to impose a burden shall have to be strictly construed and even if two interpretations were possible, the interpretation favourable to the subject shall have to be adopted. The impugned notice dated 4-2- 1979 shows that the foreign company had been operating in Pakistan possibly during the previous years relevant to the assessment for 1976-77, 1977-78 and 1978-79 but left Pakistan thereafter. The learned counsel for the respondent is unable to satisfy me that the provisions of section 43 will entire to the. benefit of the respondent even after the business connection has ceased to exist as in the present case. There being nothing on record to show that the fiduciary relationship or business connection between the petitioner and the aforesaid West Germany Company ever existed, the action of the respondent treating the petitioner as agent was arbitrary and wholly without any material basis. Income Tax Officer, Mardan v. Sanaullah Khan & Co. – 1976 SCC 430 = [1977] 35 TAX 1 (S.C.Pak.) 1027.
„Business connection‟ - Scope of.
The fact that the contract was signed in the taxable territories and performed over a period of one year, is not sufficient to spell out a business connection within the meaning of 12(2). Therefore, the appellant has failed to show that the profits of the contract have accrued or must be deemed to have accrued to the respondent through or from any business connection in Wah.
684 Section 12(2)
Income Tax Digest.
Macneill & Barry Limited v. Commissioner of Income Tax, East Pakistan, Dacca – 1969 SCC 340 = [1970] 21 TAX 8 (S.C.Pak.) 1028.
Where control and management vests in the assessee company „business connection‟ exists.
The perusal of the agreement of agents and managers dated the 28th May, 1951, reproduced in the beginning of this order leaves no manner of doubt that the managed company with its principal office in London is concerned only with profit and loss accruing to it as result of the business transaction on its behalf by the assessee-company in India and Pakistan. The contention that the assessee company controls and supervises the business of the managed co., from its head office in Calcutta, is therefore, factually incorrect. Indeed full control of business operations of the managed company is in their hands and for this purpose it is provided in clause 3 of the agreement that they have the power to do every thing in India and Pakistan which the board or one more of the directors of the managed co., could do. Similarly, the assessee company keeps the accounts in India and Pakistan at their Calcutta office and to cause the same to be balanced, audited and settled there every six calendar months and transmit the account of the balances, profit and loss to the managed company, in England whenever required so audited. Thus, whereas in the case of Octavius Steel Company Limited the managing agents carried on business under the general control and supervision of the directors of the managed co., in the present case the totality of control and supervision vests in the assessee company. Howrah Trading Co. (Pvt.) Ltd. v. Commissioner of Income Tax, East Pakistan – 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) 1029.
„Business connection‟ - Meaning of.
He places his final decision upon the principle that the mere bringing of borrowed money from abroad into the taxable territories and there making it a source of income establishes such a nexus or connection with the taxable territories as will make any one of several lenders, in a series of loan transactions, affecting the sum eventually loaned and whether or not such sum has retained its separate identity in passing through such transactions, liable to Pakistan Income Tax on the interest it derives, in relation to such sum. In my view that proposition possesses a breadth that the words of section 12(2)(a), which apply the tax, will not bear. In order to make income arising within the taxable territories out of borrowed money which has brought into the taxable territories,
685 BUSINESS CONNECTION
Section 12(2)
chargeable to Income Tax, that it should be the very money which is lent, that is brought into the taxable territories. The words “money lent and brought” cannot be construed to cover more than one transaction of loan in respect of the same money, taking place outside Pakistan, followed by a bringing into Pakistan. 1030.
Mere lending of money does not amount to „business connection‟.
Where extraterritorial operation is to be allowed to a law, it must be matter of clear expression or necessary intendment, and in the present case, the words “money lent and brought” appear to me to be incapable of being understood as covering a transaction such as that of the passing of interest between a borrower and a lender, both being nonresident foreigners, and the transaction of loan as well as the payment of interest taking place outside Pakistan into which country the money is, eventually brought at third or fourth hand. What the words say is also plain, namely that income earned by money in Pakistan, which was brought in by a borrower from outside Pakistan, shall not reach the lender untaxed. 1031.
Effect of pooling of money.
The funds which the Howrah Trading Co. uses granting loans happen to be, in whole or in part, composed of borrowed money, but there can be no doubt that the sum of money borrowed from each individual creditor, becomes merged in the said funds and loses its identity, so that the money which reached Pakistan cannot be traced back, in any direct manner, to one or another of such creditors. 1032.
True construction of language and intention of legislature must be ascertained.
After the process of lending, there is only one transaction which can be effected in relation to the money which will not take it out of the section, viz, its transformation into goods for import into Pakistan. The concept of nexus is, now out of date, and the full and proper implementation of the provision is to be based upon a true construction of the language of the taxing provision. The High Court has expressed the opinion that a nexus or connection is established between the taxable territory and the person who lent the money at interest, the reason of the fact simpliciter that the source of income is in the taxable territories. This proposition is too widely stated. Such a view, if adopted, would bring within the purview of the Pakistan tax laws, income pertaining to a series of transaction that proceeded the actual advance to borrower who brings money for investment into Pakistan. Every such previous transaction need not necessarily within
686 Section 12(2)
Income Tax Digest.
the taxing provisions and such an inference would not probably be in conformity with the intention of the legislature. Octavius Steel & Co. Ltd., v. Commissioner of Income Tax, Dacca – 1960 SCC 93 = [1961] 4 TAX 1 (S.C.Pak.) 1033.
“Business connection” – When exists.
The income shown in the present case as being the managing agency remuneration from the six managed companies was clearly taxable income within Pakistan. The answer to the Reference by the High Court is correct, except in so far as it goes beyond the necessities of the case in referring to receivability outside Pakistan, and the rendering of services from outside Pakistan. 1034.
“Real issue” – vis-à-vis duty of the Court.
In this judgment, we have attempted to clarify the real questions which arise in the case, on the basis of facts admitted by Mr. Suhrawardy, and such as appear from authentic instruments produced by him. Without such clarification, the real issue remains clouded in uncertainty. That issue was whether the income had accrued to the appellant Company in Pakistan, and is emanating from the question referred to the High Court, the two erroneous assumptions of fact indicated above, we consider we have done no more than to resettle and reframe the question, to extract the real issue and thus to facilitate its solution. Union Jute Company Ltd, Narayanganj, In re. – [1960] 2-TAX (Suppl.-265) (H.C.Dacca) = 1960 PTD 1036 1035.
Raw material was purchased in Pakistan and manufactured in India, held that profits attributable to the purchases were assessable in Pakistan having “business connection”.
The assessee, a public limited Company, owned and worked several jute mills in India. It maintained „a regular jute purchasing agency in Pakistan which purchased jutes in Pakistan and sent them to the assessee in India where goods were manufactured and sold. The Income Tax Officer initiated proceedings under section 34 and assessed to tax the income attributable to the act of purchase of jute in Pakistan The Appellate Assistant Commissioner confirmed the assessment. Before the Tribunal the assessee contented that (i) as the process of manufacture and sale took place in India mere purchase of raw material in Pakistan could not give rise to any profit in Pakistan, (ii) in determining the place of accrual of profit the element of purchase should not come into picture at all, and (iii) in any case clause 7(a) of the Schedule to the Inter-Dominion. Agreement should
687 BUSINESS CONNECTION
Section 12(2)
be applied to this case. The Tribunal overruled all the grounds and confirmed the assessment, giving certain relief in the quantum On a reference it was held that (i)
as the assessment was of income which escaped assessment in British India, when it was in existence, and as Pakistan was a successor Government to British India in relation to that part of the country now comprised in Pakistan, it was competent to assess the income;
(ii)
the purchase of raw materials was one of the processes or stages which ultimately led to the profits on the sale of the finished products and the purchase was therefore a part of the business operation within the meaning of section 42(3)
(iii)
clause 7 (a) of the Schedule to the Inter-Dominion Agreement for the avoidance of double taxation, of income applied only to cases of goods purchased in one dominion and sold in the other in the same condition without any manufacturing process and that as in the present case the jute was sold after being subjected to a manufacturing process, clause 7(a) of the Schedule did not apply.
Cases followed: Chas J. Webbsons & Co. Inc., Philadelphia v. Commissioner of Income Tax, East Punjab [(1950) 18 ITR 33)]; and Anglo-French Textile Company Ltd. v. Commissioner of Income, tax, Madras [(1953) 23 ITR 101]. Cases referred to: Anglo-French Textile Company Ltd. v. Commissioner of Income Tax, Madras [(1953) 23 ITR 101]; Chas J. Webb Sons & Co. Inc., Philadelphia v. Commissioner of Income Tax, Eat Punjab [(1950) 18 ITR 33); (51 PLR 366); (AIR 1951 Punj. 347)]; Gopaldas Choudhury v. Commissioner of Agricultural Income Tax, East Bengal [(Ref. No 7 of 1953] and Krishna Kumar and Mahendra Kumar Ghosh, In re. [(1931) ILR 58 Cal. 906]. Case Review: In this case, their Lordships also considered clause 7(a) to the Schedule to the Inter Dominion Agreement for the Avoidance of Double Taxation. They held that the said clause applies only to cases of goods purchased in one Dominion and sold in other in the same condition without any manufacturing process. Since in the present case jute was sold after being subjected to a manufacturing process, their Lordship said the benefit of the said clause was not available to the assessee.
Baramula Saw Mills Ltd., Baramula v. Commissioner of Income, Punjab and N.W.F.P. – [1960] 2-TAX (Suppl.-104) (H.C.Lah.) = 1960 PTD 1225 = 1954 PLD 157 1036.
„Business connection‟ - Factors relevant for determination.
The, Shahdara Company incorporated in British India (now taxable territory) secured a contract for the supply of boxes in shooks to the
688 Section 12(2)
Income Tax Digest.
Government. With the object of executing the contract the said company entered into an agreement with a foreign company known as Baramula Saw Mills. According to the agreement the foreign company was to make the delivery of goods and was to receive the price of the goods so supplied outside the taxable territory. The goods supplied were, however, subject to be accepted or rejected in taxable territory The Income Tax authorities held the foreign Company had business connection in taxable territory where the delivery of the goods was to be made. On apportionment of profits under section 42(3) greater part of the income was found to have accrued in taxable territory and as such the foreign Company was held to be a resident company under section 4A and taxed as such on the whole income The Tribunal also found that the two concerns were controlled by the same family and the flow of business to the foreign company was due to the identity of control of the two Companies. On a reference the High Court upheld the order of the Tribunal, observing that though there was no complete identity of control the flow of business was certainly affected by the control. Their Lordships further observed- that the words „business connection‟ are wide words. No hard and fast rule can be laid down and it will have to be determined in each case whether the facts constitute a business connection. The fact that the foreign company which has dealings with a British India company is a separate legal entity does not exclude the existence of a business connection in respect of continued dealing between the two companies and the identity of control is a relevant matter. Judicial analyses : The criterion applied by their Lordships appears to be that the flow of the business affected by the control of two companies although there was no complete identity of control. In two companies involved namely Shahdara Company and Baramula Sair Mills Ltd. (Petitioner) shares were not held by the same person(s), but their Lordships observed that the Baramula Company was established for executing a contract of the Shahdara Company thus clearing establishing a „business connection‟. Cases referred to : Commissioner of Income Tax Bombay Presidency and Aden v. Currimbhoy & Sons Ltd. [AIR 1936 P.C. 1]; Commissioner of Income Tax, Bombay, v. Bombay Trust Corporation [1 LR 52 Bom. 702]; Commissioner of Income Tax, Burma v. P.V.R.M. Visalakshi Achi [AIR 1937 Rang. 258]; Commissioner of Income Tax, Bombay v. Metro-Goldwyn-Mayer (India) Ltd. [AIR 1939 Bom. 257]; Bank of Chettinad Ltd. v. Commissioner of Income Tax, Madras [AIR 1940 P.C. 183]; and Commissioner of Income Tax,
689 BUSINESS CONNECTION
Section 12(2)
Bombay v. Remington Typewriter Company (Bombay) Limited [AIR 1931 P.C. 42].
Commissioner of Income Tax v. Metro Goldwyn Mayer (India) Ltd. – [1939] 7 ITR 176 (Bom.) 1037.
Elements of continuity is a pre-requisite.
The words „business connection‟ denote some element of continuity in the relationship between the person in India who makes the profits and the non-resident who receives them. Single transaction would not fall within the section. If a manufacturer of a motor car in England or America sells it to a customer in India, there is no doubt a business connection in relation to that sale between the manufacturer and the purchaser, and the manufacturer probably makes a profit, but nobody would suggest that in respect of the profit on that single transaction he is liable to pay British Indian Income Tax. There must be some element of continuity in the relationship between the parties, and in every case one has to look at the particular facts of the case to see whether it falls within section 42 of the 1922 Act. Nandlal Bhandari Mills Ltd., In re – [1939] 1 ITR 452 (All.) 1038.
It must be established that the two persons have some sort of association in a business, that is to say, in a profit-making occupation or activity in British India.
In order to show tat a non-resident has a business connection with a resident of British India, it must be established that the two persons have some sort of association in a business, that is to say, in a profitmaking occupation or activity in British India. Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. – [1935] 3 ITR 395 (PC) 1039.
„Business connection‟ is different from business.
The phrase „business connection‟ is different from, though doubtless not unrelated to, the word „business‟ of which there is a definition in the 1922 Act. _______________
690 Section 12(2)
Income Tax Digest.
ILLUSTRATIONS OF BUSINESS CONNECTION
Jardine Henderson Ltd., Calcutta v. Commissioner of Income Tax, Dacca – [1970] 22 TAX 61 (H.C.Dacca) 1040.
Managing agent was in full control and supervision of business of managed company in Pakistan, held that it amounts to business connection in Pakistan.
The assessee was the managing agent of a managed company whose registered office was in India. In terms of an agreement with the managed company the assessee was, vested with the powers of general management of the property of the company including its business transactions in Pakistan. In return for the services rendered by the assessee it received a commission of 2 per cent on the gross profits arising to the managed company from the sale of goods produced in India and any other goods sold by the said company and also an office allowance of Rs.200 per mensem. At the assessment stage the assessee claimed that the commission received by it was not assessable in Pakistan on the ground that the managed company had no business in Pakistan and the commission was to be calculated on the basis of the sale of goods which were manufactured and sold in India. The Income Tax Officer rejecting the assessee‟s claim subjected to tax the commission as well as the office allowance received by the assessee. This treatment was confirmed both by the Appellate Assistant Commissioner and the Appellate Tribunal. On reference the question for decision before the High Court was whether (i) commission could be deemed to have accrued or arisen to the assessee in Pakistan and (ii) the commission received by the assessee on the goods sold by the managed company in India was liable to tax in Pakistan. The High Court answering the questions in the affirmative : Held, that (i)
the assessee has a business connection in Pakistan within the meaning of the expression “business connection” occurring in sub-section (1) of section 42 of the Income Tax Act : and
(ii)
the income has accrued as a result of the services rendered in Pakistan, although it was receivable in India on the basis of sale of goods which were not manufactured or sold in Pakistan.
691 BUSINESS CONNECTION
Section 12(2)
Case followed: Octavious Steel & Co. Ltd., v. Commissioner of Income Tax (1961) 4 TAX 1 (S.C.) and Macneill & Barry Ltd. v. Commissioner of Income Tax, East Pakistan, Dacca (1970) 21 TAX 8 (S.C.). Macneill & Barry Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca [1961] 4 TAX 147 (H.C.Dacca) 1041.
Managing agency having registered office outside Pakistan where accounts were maintained was controlling business of managed company in Pakistan, held that commission on profits attributable to operation carried out in Pakistan and accrued or arose in Pakistan.
The assessee, a company incorporated in India, became sole agent and manager of another company which carried on its business both in India and Pakistan. The assessee company controlled, supervised and managed the business of the managed company from Calcutta (India) on remuneration of commission at six per cent on the turnover of total amount of the business in India and Pakistan. The Tribunal held that though the assessee company had no office in Pakistan staffed by their own men, it had the control, supervision and management of the business of the managed company from Calcutta by issuing directions from time to time and the assessee company‟s receipts described as agency commission were of the nature of profits arising from their continuous services and activities requiring the labour organisation in the nature of a business and, therefore, section 42(1) of the Income Tax Act was attracted and the source of income was situated in Pakistan. On a reference, the assessee‟s counsel contended before the High Court that the assessee had no income accruing or arising in Pakistan because (i) company‟s business operation was limited to Calcutta and it had no such business operation in Pakistan, (ii) even if the income derived by the assessee company was dependent upon the business of the managed company in Pakistan the assessee‟s income was not dependent upon that business, because whether there was business or no business, it was entitled to remuneration for services rendered, (iii) “the course of deal” between the assessee company and the managed company was not such as to establish a business connection within the meaning of section 42 of the Act, and (iv) there is a difference between the income or profits „arising or accruing‟ and the income or profits „shall be deemed to have accrued.‟ Held, that: (i)
a portion of the income of the assessee company by way of commission arose out of the business of the managed
692 Section 12(2)
Income Tax Digest.
company in Pakistan and the commission of the assessee company being a percentage of the business that took place in Pakistan that percentage accrued out of the profits in Pakistan; (ii)
it may be that the accounting was done outside Pakistan, but it is not the accounting that earned profits. It is immaterial whether that profit was received at Calcutta or in Pakistan. Section 42 of the Act speaks of accrual or arising of the income. The act of receiving the same follows the accrual and it may even follow long after the accrual of the income. It is not correct to say that whatever profits or income accrued to the assessee company it accrued at Calcutta;
(iii)
the profits by way of commission accrued out of the business managed by the company, whether that management was from Calcutta or from Pakistan was not very much material. It was a profit arising out of the business in Pakistan and shall be deemed to have accrued to the assessee company in Pakistan within the meaning of section 42(1) of the Income Tax Act read with sub-section (3) of that section;
(iv)
the commission paid to the assessee company is dependent upon and affected by the business done in Pakistan. It is not correct to say that whether business or no business was entitled to remuneration by way of commission;
(v)
a business connection may exist even without any regular agency or branch established in Pakistan. To derive profits by managing agency is itself a business and deriving profits from any other business by way of commission is nothing but business connection. The dealing between the assessee company and the managed company in Pakistan is such as to establish a business connection within the meaning of section 42(1) of the Act; and
(vi)
the difference between the income and profits arising or accruing and the income or profits shall be deemed to have accrued is a difference without any distinction. The difference is not between the income accruing or arising and the income which shall be deemed to have accrued but it is in the source of the income and emphasis is to be given to the words “from any business connection.”
693 BUSINESS CONNECTION
Section 12(2)
Judicial analyses : CONFIRMED BY - The Supreme Court of Pakistan in Macneill & Barry Limited v. Commissioner of Income Tax, East Pakistan, Dacca 1969 SCC 340 = [1970] 21 TAX 8 (S.C.Pak.). Their Lordships observed: “. . . . . If fact as seem above, the entire business operation of the Managed Company in Pakistan are in the full and complete control of the assessee-company.” Cases referred to: Jethabhai Javerbhai v. Commissioner of Income Tax, C. P. and Berar (1951) AIR Nag. 351; Bangalore Woollen, Cotton and Silk Mills Co. Ltd., v. Commissioner of Income Tax, Madras (1951) AIR Mad 361; Octavious Steel & Company Ltd., v. Commissioner of Income Tax, Dacca [1961] 4 TAX 1.
Sir William Roberts Timber Co. Ltd., Baramula v. Commissioner of Income Tax, Punjab and N.W.F. Provinces, Lahore [1960] 2-TAX (Suppl.-90) (H.C.Lah.) = 1960 PTD 1235 = 1951 PLD 413 1042.
„Business connection‟ - Rule of apportionment.
Goods manufactured by assessee outside British India and were sold in British India through another firm. Profits, it was held, did not arise or accrue exclusively in British India and, therefore, profits to be apportioned in terms of sub-section (3) of section 42. Hira Mills Ltd. v. Income Tax Officer – [1946] 14 ITR 417 (All.) 1043.
Direct sale by a non-resident to customers in India does not establish a business connection even if orders were canvassed by brokers.
A company registered in Ujjain (native State) sold goods in - British India through brokers. The brokers were not retained by it, but they acted independently and not as its agents. The company had no branch, agency or establishment of its own in British India. Held that the company had no business connection in India. The fact that the assessee may have paid the brokers a commission and certain out of pocket expenses, if and when they brought an offer which the assessee accepted, did not, alter the circumstances. The sales were to customers who happened to be in British India. Nandlal Bhandari Mills Ltd., In re – [1939] 7 ITR 452 (All.) 1044.
Where a branch of a foreign company was opened in India by company‟s nonresident managing agent, who received commission on sales effected in India.
Where a branch of foreign company was opened in British India by the company‟s nonresident managing agent who received commission on the sales effected in British India:
694 Section 12(2)
Income Tax Digest.
Held that there was business connection between managing agent and the foreign company‟s branch in British India inasmuch as the right of the managing agents to the commission accrued upon the sales effected in British India; the Indian branch was, therefore, an agent of the non-resident managing agent for the purpose of assessment of income accruing to the managing agent in British India. Commissioner of Income Tax v. Metro Goldwyn Mayer (India) Ltd. – [1939] 7 ITR 176 (Bom.) 1045.
Where non-resident company gave rights to exhibit pictures in India to another company carrying on business in India, there was a business connection between the two.
Where the non-resident film company transferred the rights to exhibit pictures in India to another company carrying on business in India and received a share of profits from the resident company, it was held that the arrangement between the parties was not a partnership; it was something in the nature of a licence and certainly not, a sale out and out; taking the document as a whole, it seemed perfectly plain that there was a business connection between these two companies. Bank of Chettinad Ltd. v. Commissioner of Income Tax – [1940] 8 ITR 522 (PC) 1046.
Where a company in India and a company outside India are both controlled by the same persons and there is flow of business between the two, there is „business connection‟ although the transactions between them may be finalised outside India.
R was a non-resident money-lender, having extensive business in Malaya, Burma and Ceylon. In 1929, he floated two banks K, with headquarters in British India, and P with headquarters outside British India, to which banks the entire business of money-lending was transferred. Both these banks were fully controlled by R. In 1932 bank P made a loan of Rs.1.32 crores to bank K and this transaction was carried out through the branches of K and P located outside India. The question was whether this amounted to a business connection between P and K. Held that in view of the fact that both banks were completely controlled by R which ensured flow of business between the two banks, there was no doubt that P had a business connection‟ with K in British India and income accrued to P. directly or indirectly, through this connection and K was the agent of P within the meaning of section 43
695 BUSINESS CONNECTION
Section 12(2)
of the 1922 Act. The fact that the transactions were negotiated through the branches of the banks did not affect the position; the branches were not separate entities, but were parts of the two respective banks, and it was obvious that the business so transacted by the two branches was the business of the two banks. Case review: Decision of the Madras High Court in Commissioner of Income Tax v. Bank of Chettinad Ltd. [1939] 7 ITR I affirmed. Judicial analysis: The expression „business connection‟ is of very wide import. The Legislature has refrained from giving a precise definition of the words „business connection‟. In the absence of a definition by the Legislature itself, it is not possible to lay down any principle of universal application as to what is covered by the words business connection‟. The decisions of the Privy Council in Bank of Chettinad Ltd. v. Commissioner of Income Tax [1940] 8 ITR 522 only serve to illustrate whether an inference of business connection ought to be drawn or not according to the particular facts of the case under consideration. Thus, whereas in Commissioner of Income Tax v. Bombay Trust Corpn. Ltd. [1936] 4 ITR 323 (PC) or the Bank of Chettinad‟s case (supra) the resident and the non-resident work in close concert with a view to producing profit it is not difficult to draw inference. Where, however, as in Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons. Ltd. [1935] 3 ITR 395 (PC) the non-resident has no interest, direct or indirect, in the resident company and there is only a single transaction between the nonresident and resident resulting in gain to the former, without any further evidence of a course of dealing between the parties, the inference of business connection cannot be drawn.
Hajee Mohamed Hajee Oosman v. Commissioner of Income Tax – 10 ITC 330 (Rangoon) 1047.
Others.
The assessee, a resident of Kathiawar, outside British India, carried on a business in rice in Burma and Ceylon. The rice was purchased in Rangoon and exported to Colombo where it was sold. The assessee maintained an office in Rangoon where accounts were kept for the transactions effected there and another office at Colombo which kept accounts for the transactions effected there and for the business as a whole. Part of the rice so sold in his business in Colombo was purchased by him or by his agent at an office kept on his behalf at Rangoon where purchases of rice from time to time were made and the rice exported to Colombo for the purpose of re-sale. Held that the appellant maintained a business connection in British India, and profits made in Ceylon on the sale of rice purchased in Burma were assessable under section 42(1) of the 1922 Act _______________
696 Section 12(2)
Income Tax Digest.
SOURCE / PROPERTY
Commissioner of Income Tax v. Currimbboy Ebrahim & Sons Ltd. – [1935] 3 ITR 395 (PC) 1048.
„Property‟ in section 42(1) of 1922 Act means tangible property though it is not confined to immovable property.
The word „property‟ when used in section 6 of the 1922 Act to describe ahead of income, is not defined by the statute, but by section 9 of the 1922 Act, it is provided that under this head tax shall be payable in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto. The word „property‟ as it occurs in sub-section (1) of section 42 of the 1922 Act cannot be given so special a colour, but is used as an ordinary English word to be taken in its usual signification subject to the context provided by the rest of the sub-section. There is nothing in the sub-section to exclude from its scope any of the six classes of income mentioned in section 6 of the 1922 Act. The word „property‟ used in sub-section (1) of section 42 means something tangible; though it is not confined to immovable property or to buildings or lands appurtenant thereto. The phrase to be construed is „property in British India‟ and it seems that the plain implication is that the property is to be situated in British India. No doubt for purposes of administration or succession, or for purposes of jurisdiction to attach a debt, a chose-in action is treated notionally as situated in particular country or district. The statute, however, does not intent to import questions of this character as the test whether income which does not accrue within British India shall be deemed so to accrue. The phrase is to be taken literally and simply. It is applicable, for example, in a case where furniture situated in British India has been hired under an agreement whereby the hire is payable outside British India. Case review: Decision of the Bombay High Court in Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. [1933] I ITR 341 affirmed. _______________
BUSINESS OPERATIONS
Hira Mills Ltd. v. Income Tax Officer – [1946] 14 ITR 411 (AlI.) 1049.
Section 42(3) of 1922 Act does not apply to profits and gains which actually accrued or arose in British India.
Section 42(3) of the 1922 Act applies only to profits and gains which are deemed under the section to accrue or arise in British India and
697 BUSINESS CONNECTION
Section 12(2)
not to profits and gains which actually accrued or arose in British India. Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. – [1935] 3 ITR 395 (PC) 1050.
Position under the 1922 Act.
An isolated transaction does not mean a „business connection‟ a solitary loan transaction between resident and non-resident does not constitute a business connection‟ between them, irrespective of fact that loan and interest were to be paid over a period of five years. Case review: Decision of the Bombay High Court in Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. [1933] 1 ITR 341 affirmed.
698 Section 12(3)
Income Tax Digest.
Section 12(3) Interest when deemed to accrue or arise in Pakistan
PAGE NO
INTEREST
1051. Interest paid on money utilised in Pakistan business is _ taxable. [1960] 2-TAX (Suppl.-139) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 758 = 1957 PLD 167 _ 1052. Position under the 1922 Act. [1949] 17 ITR 63 (PC); _ _ _ [1937] 5 ITR 448 (Rangoon); 10 ITC 141 (Sind); [1940] _ 8 IIYR 280 (Mad.); [1945] 13 ITR 272 (Bom.)
699
699
699 INTEREST WHEN DEEMED TO ACCRUE OR ARISE IN PAKISTAN
Section 12(3)
Section 12(3) Interest when deemed to accrue or arise in Pakistan
INTEREST
Commissioner of Income Tax, Karachi, Sind and Baluchistan v. The Netherlands Trading Society, Karachi – [1960] 2-TAX (Suppl.-139) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 758 = 1957 PLD 167 1051.
Interest paid on money utilised in Pakistan business is taxable.
If the money lent by a foreigner and brought into British India earns profit in Pakistan, then there is sufficient connection between Pakistan and that foreigner upon with income tax is properly to be extended. A.H.Wadia v. Commissioner of Income Tax – [1949] 17 ITR 63 (PC) 1052.
Position under the 1922 Act.
Provision in section 42(1) of 1922 Act which brings within charging section interest earned out of money lent outside, but brought into British India, is not ultra vires the Indian Legislature. Case review: Decision of the Bombay High Court in Commissioner of Income Tax v. All. Wadia [1947] 15 ITR 367 affirmed.
Commissioner of Income Tax v. P.V.R.M. Visalakshi Achi – [1937] 5 ITR 448 (Rangoon)
Loan made by a non-resident money-lender to a resident in British India does not necessarily emanate from a business connection with borrower. Ghulam Hyder Bundally v. Commissioner of Income Tax – 10 ITC 141 (Sind)
Where assessee-resident a merchant was consigning goods to nonresident and the latter had advanced interest bearing advances to the
700 Section 12(3)
Income Tax Digest.
assessee, assessee could be treated as agent of non-resident under section 43 of the 1922 Act and interest earned by the non-resident could be deemed to be income accruing or arising within British India and as such chargeable to Income Tax in the name of the assessee as agent of the non-resident under section 42(1). Commissioner of Income Tax v. Madras & Southern Mahratta Railway Co. Ltd. – [1940] 8 ITR 280 (Mad.)
Interest received by English company from Secretary of State for India accrued in India though received in England. Motor Union Insurance Co. Ltd. v. Commissioner of Income Tax – [1945] 13 ITR 272 (Bom.)
Where the non-resident assessee-company had earned interest income from the amount of premia collected in India, but invested it abroad: Held that the interest income had accrued directly or indirectly through the business connection in British India and out of the assets in British India and, therefore, section 42(1) of the 1922 Act applied.
701 LOAN WHEN DEEMED AS INCOME
Section 12(7)
Section 12(7)* Loan when deemed as income
PAGE NO
SCOPE OF DEEMED INCOME
1053. Assessee advanced loan to a firm in which his wife and sons were partners and did not declare the notional income, required to be declared. Notional income added by the _ Income Tax Officer held to be justified. [1994] 69 TAX 38 (H.C.Kar.)
*
Corresponding to section 4(1)Ex. 6 Rev. of the 1922 Act.
702
702 Section 12(7)
Income Tax Digest.
Section 12(7)* Loan when deemed as income
SCOPE OF DEEMED INCOME
Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad – [1994] 69 TAX 38 (H.C.Kar.) 1053.
Assessee advanced loan to a firm in which his wife and sons were partners and did not declare the notional income, required to be declared. Notional income added by the Income Tax Officer held to be justified.
A bare reading of the above provisions shows that where an assessee has made any loan or advanced to any person on which no interest has been charged or the rate at which interest has been charged, is less than the rate arrived at by adding two percent 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. Section 12(7) envisages “deemed interest income where an assessee makes any loan or advance to any person which is either interest free or on which interest at a nominal rate is charged. We are of the view that in such a situation, interest worked out at the rate of two percent above the bank rate as reduced by the interest, if any, charged by the assessee shall be deemed to be interest income of the lender.
*
Corresponding to section 4(1)Ex. 6 Rev. of the 1922 Act.
703 PAID ABROAD
Section 12(9)
Section 12(9)* Dividend paid abroad
PAGE NO
DIVIDEND PAID BY A PAKISTANI COMPANY OUTSIDE PAKISTAN
1054. Position under 1922 Act.
*
_
[1947] 15 ITR 332 (PC)
Corresponding to section 4(1)(c) Expl. 3 & 4 of the 1922 Act.
704
704 Section 12(9)
Income Tax Digest.
Section 12(9)* Dividend paid abroad
DIVIDEND PAID BY A PAKISTANI COMPANY OUTSIDE PAKISTAN
Raleigh Investment Co. Ltd. Governor-General in Council [1947] 15 ITR 332 (PC) 1054.
Position under 1922 Act.
Section 4(l)(c), Explanation 3, of the 1922 Act is constitutionally valid. Dividend paid abroad by an Indian company out of profits which have been assessed to tax in India are deemed to be income accruing in India. Hence, even a non-resident shareholder who receives such dividend outside India is liable to tax qua them under section 4(1)(c) of the 1922 Act. Case review: Judgment of the Federal Court of India in Governor-General in Council v. Raleigh Investment Co. Ltd. [1944] 12 ITR 265 affirmed.
*
Corresponding to section 4(1)(c) Expl. 3 & 4 of the 1922 Act.
705 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
Section 12(9A) Undistributed profit when taxable
PAGE NO
ADDITIONAL INCOME TAX ON UNDISTRIBUTED PROFITS – APPLICATION OF PROVISION
1055. Taxation of “undistributed profit” does not amount to double _ taxation. [2001] 83 TAX 40 (H.C.Lah.) 1056. Conditions necessary for taxing undistributed profits _ explained. [1985] 52 TAX 25 (H.C.Kar.) _ _ 1057. Application of provision. [1935] 3 ITR 183 (All.); [1933] 1 _ ITR 330 (Rangoon); [1950] 18 ITR 984 (Lahore) “FREE RESERVE”, MEANING OF
1058. “Free reserve”, meaning of. 1990 PTD 829
_
707 707 708
[1990] 62 TAX 31 (H.C.Kar.) = 708
1059. Free reserves of the company taxed by the Income Tax Officer w.e.f. the last day of the previous year, held that assessee‟s contention that its income subjected to tax w.e.f. _ the date of filing of return was not justified. [1988] 57 TAX 155 (H.C.Kar.)
709
1060. Assessee purchased a hotel for a sum of Rs.1,21,00,000/and amount was paid through compensation books and saved Rs.64,23,811/- which was transferred to capital reserve. Income Tax Officer treated the same taxable free reserve. Tribunal‟s finding that difference of the face and purchase price could not be formed a part of free reserve _ held to be justified. [1988] 57 TAX 150 (H.C.Kar.)
710
1061. Free reserve is in the nature of a reserve which is allocated or taken out of profit of the company, held that Tribunal was not justified in holding that unapportioned profits of the assessee for the assessment year 1967-68 were free _ reserve and as such liable to super-tax. [1987] 56 TAX 30 (H.C.Kar.)
711
706 Section 12(9A)
Income Tax Digest.
GRATUITY IS AN ASCERTAINED LIABILITY
1062. Amounts set apart far gratuity cannot be construed as a free reserve gratuity is an ascertained liability and constitutes a _ proper charge on profit and loss account. [1985] 51 TAX 137 (H.C.Kar.) = 1985 PTD 413
712
DEFINITION “FREE RESERVE” AND SUPER TAX
1063. Unapportioned profits of the company prior to the introduction of the definition cannot be termed as “free _ reserve” and are not subjected to super-tax. [1983] 47 TAX 155 (H.C.Kar.)
714
SMALLNESS OF PROFITS - TESTS FOR DETERMINATION
1064. Tests for determination. GENERAL
1065. Public-Connotation of.
_
_
[1935] 3 ITR 311 (Mad.)
[1946] 14 ITR 748 (Bom.) _ 1066. Free transferability of shares. [1946] 14 ITR 653 (Bom.)
714
715 715
707 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
Section 12(9A) Undistributed profit when taxable
ADDITIONAL INCOME TAX ON UNDISTRIBUTED PROFITS APPLICATION OF PROVISION
Naseer Mughis Ltd. v. Commissioner of Income Tax, Lahore – [2001] 83 TAX 40 (H.C.Lah.) 1055.
Taxation of “undistributed profit” does not amount to double taxation.
The provisions of section 23-A of the Income Tax Act were neither charging provisions nor these were required to be so. Also that there was absolutely no question of double taxation inasmuch as it was only one income earned till the end of the previous year which was assumed though while calculating the tax liability a certain portion of income equal to undistributed profits was subjected to a higher rate of tax. It is certainly correct that provisions in question neither created a new levy nor deemed any sum to be income of the assessee which otherwise did not fall within its purview. Learned counsel for the revenue is also correct in pointing out that section 23A does not create any fictional income inasmuch as sub-section (1) only defines as to what will be deemed to be undistributed income of a company for previous year while sub-section (2) proceeds to show as to how that undistributed income it is to be calculated. In the case of the present assessee the income accrued in the previous year and in the process of assessment of the profits already earned were found liable to a higher rate by reference to expiry of certain period stated in the provision. No income or receipt accruing to the petitioner after the end of the previous year was ever brought into the circle of total income or subjected to tax. Commissioner of Income Tax (Central Zone), Karachi v. Petroleum Institute of Pakistan Ltd., Karachi – [1985] 52 TAX 25 (H.C.Kar.) 1056.
Conditions necessary for taxing undistributed profits explained.
708 Section 12(9A)
Income Tax Digest.
The brief facts leading to the filing of the above Income Tax Reference are that the Income Tax Officer while assessing the above assessment year included the income for the years 1971-72 under section 23A of the Income Tax Act (herein after referred to as the Act) on the ground that the above income remained undistributed among the shares holders in terms of the above section. The respondent being aggrieved by the above assessment order filed ITA No. 13426 of 1971-72 before the learned Income Tax Appellate Tribunal Karachi Bench, Karachi, which allowed the appeal and held that section 23A of the Act was not applicable. The applicant has therefore, filed the present Income tax Reference. In order to press into service the above section it is pre-requisite that there should be share holders in a company and the company must have been distributing dividends in the past. In the present case it is an admitted position that there are no share-holders, and the respondent had not distributed any dividend in the past, but is a company limited by the guarantee having no share capital and, therefore, we are of the view that the order of the learned Tribunal seems to be in consonance with law. Rarnratan Das and Madan Gopal, In re – [1935] 3 ITR 183 (All.) 1057.
Application of provision.
Individual in proviso to section 55 of 1922 Act includes HUF. C.T.A.C.T. Nachiappa Chettiar v. Secretary of State – [1933] 1 ITR 330 (Rangoon)
Registration in manner prescribed under the Act is a condition precedent to the right of Income Tax Officer to proceed under section 55. Lakshmi Insurance Co. Ltd. v. Commissioner of Income Tax – [1950] 18 ITR 984 (Lahore)
Interest received by insurance company on tax-free securities of Central Government are subject to super tax. _______________
“FREE RESERVE”, MEANING OF
Commissioner of Income Tax, Central Zone, Karachi v. United Liner Agencies, Karachi – [1990] 62 TAX 31 (H.C.Kar.) = 1990 PTD 829 1058.
“Free reserve”, meaning of.
709 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
In the assessment year 1967-68 the Income Tax Officer treated Rs.2,18,719.00 being a credit balance of profit and loss account as free reserve and charged to tax holding it as an income of the respondent within the meaning of Explanation 5 to sub-section (1) of section 4 of Income Tax Act. The respondents had contended that unappropriated balance of the profit and loss account does not constitute a reserve and therefore it can not be charged to tax. The respondents filed appeal before the Tribunal where it was held that Income Tax Officer has acted illegally and without jurisdiction to treat the amount of Rs.2,18.790.00 as part of free reserve and accordingly it was deleted. The word „reserve‟ in its ordinary sense means keeping apart some thing with a view to utilise it on a future date for a particular or specific purpose. Therefore any amount which has been kept apart with reference to its particular use at a future time will be called a reserve. But if there is an unappropriated amount in the profit and loss account without specifically keeping it apart for utilizing for any purpose in future, it will not be deemed to be a reserve. Therefore in 1968 it was for the first time provided that unappropriated profits of a company will be treated as „free reserve‟. The amendment supports the contention that till that date the unappropriated profits could not be treated as a free reserve. Cases relied on: Commissioner of Income Tax v. Bank of Bihar Ltd. (1953) 24 ITR 499. Cases referred to: Commissioner of Income Tax v. Century Spinning and Manufacturing Company Ltd. [1953] 24 ITR 499.
United Liner Agencies, Ltd., Karachi v. Commissioner of Income Tax, Karachi – [1988] 57 TAX 155 (H.C.Kar.) 1059.
Free reserves of the company taxed by the Income Tax Officer w.e.f. the last day of the previous year, held that assessee‟s contention that its income subjected to tax w.e.f. the date of filing of return was not justified.
The grievance of the assessee which appears to have been pressed before the learned Appellate Tribunal is that the tax levied upon it exceeds its taxable income. Mr. Naseem Ahmad Khan has contended that no part of the income exempted from Income Tax and super tax under the Income Tax Act can be brought to tax by the Finance Ordinance. His submission is that on the whole of the amount by which the sum of the free reserves of any company exceeds the paid up ordinary share capital of the company as on the last date of the
710 Section 12(9A)
Income Tax Digest.
assessment year subjects to taxation but the Finance Ordinance, 1969 subjects as on the date of filing return for the relevant assessment year. We are unable to accept this contention. Under the charging provisions the entire fictional income as computed under section 2(6C) was liable to tax as a result of cumulative operations of section 2(6C), Explanation 5 of section 4 and section 3 and the rate mentioned in that clause on the whole of the amount by which the sum the free reserves of any company exceeds the paid-up ordinary share capital of the company as on the date of filing return for the relevant assessment year. Thus the date is different from those of Income Tax Act in certain cases a concession has been given by the Finance Ordinance and the chargeability of the notional income has been restricted only to that part of the fictional income as may be arrived at with reference to the date of the filing of the return and not with reference to the last date of the accruing year. In our view the Tribunal is right in holding that in view of the clear wordings of the Ordinances the tax on free reserves amounting to Rs.1,93,457/- was correct. In the circumstances, we are unable to agree with the submission of Mr. Nasim Ahmed Khan that in terms of section 2(6) read with Explanation 5 of section 4 and section 3 of the Act, free reserves are to be taxable as on the last date of the previous year. For all these reasons our answer to question is in the affirmative and against the assessee. Commissioner of Income Tax (Central Zone), Karachi v. Beach Luxury Hotel Limited – [1988] 57 TAX 150 (H.C.Kar.) 1060.
Assessee purchased a hotel for a sum of Rs.1,21,00,000/- and amount was paid through compensation books and saved Rs.64,23,811/- which was transferred to capital reserve. Income Tax Officer treated the same taxable free reserve. Tribunal‟s finding that difference of the face and purchase price could not be formed a part of free reserve held to be justified.
The brief facts leading to the filing of the above references are that the respondent Assessee purchased for a sum of Rs. 1,21,00,000/erstwhile Nedus Hotel (hereinafter referred to as the Hotel), an evacuee property from the Settlement Department. Instead of making payment In cash it purchased the deferred amount to the extent of the above purchase price from various compensation books for a sum of Rs.56,76,189.00 and thus saved a sum of Rs.64,23,811.00, which was transferred to a capital reserve account. The Income Tax Officer treated the above sum as a free reserve, particularly on account of the
711 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
fact that in one of the years the respondent had declared bonus shares of the value of Rs.100,000/- out of the aforesaid reserve. The Income Tax Officer treating the above sum as a free-reserve, computed the available taxable free reserve for all the above years and brought the same to the charge of tax. We are also inclined to concur with the above reasoning of the learned Income Tax Appellate Tribunal that fiction cannot take the place of reality unless the law so provides expressly and that as the above difference was neither a profit nor any realised gain, therefore, it could not have been treated as a reserve or a free reserve. We are of the view that it was merely a book entry in the capital reserve account for the purpose of balancing the entry of the purchase price namely Rs.1,21,000,00. It may be observed that factually there was no material before the learned Income Tax Officer to conclude that if the price of the hotel was to be paid in cash and not through the compensation book which was permissible, the respondent would have purchased the hotel for the same price, nor was there any material to indicate that factually the hotel was of the value equivalent to the price. As observed hereinabove that transfer of the difference in the price in the capital reserve by making an entry was merely a fictional entry on paper and not in reality, it may be said that though the actual price of the hotel was Rs.56,76,189 and not Rs.1,21,000,00 but because of the debit entry of the above price the above entry was to be balanced by making the above entry in the capital reserve. The contention of Mr. Ali Athar that the instant case was under clause (3) of the above quoted SRO has force. Case referred to : Commissioner of Income Tax (Central) v. Beach Luxury Hotel Ltd. (1983) 48 Tax 1 (H.C.Kar.).
Commissioner of Income Tax v. Vali Bhai Kamruddin (Sind) Ltd. – [1987] 56 TAX 30 (H.C.Kar.) 1061.
Free reserve is in the nature of a reserve which is allocated or taken out of profit of the company, held that Tribunal was not justified in holding that unapportioned profits of the assessee for the assessment year 1967-68 were free reserve and as such liable to super tax.
Such profits, however, remain available for distribution, and for this reason it is often described as a “free reserve”. Therefore, “free reserve”, is in the nature of reserve which is allocated or taken out of the profit of the company. We have gone through the judgement
712 Section 12(9A)
Income Tax Digest.
quoted above and do not find any reason to distinguish or to disagree with it. Case relied on : Pakistan Gum Industries Ltd. v. Commissioner of Income Tax (East) Karachi (1982 PTD 370). _______________
GRATUITY IS AN ASCERTAINED LIABILITY
Commissioner of Income Tax (Central Zone), Karachi v. Pakistan Security Printing Corporation Ltd., Karachi – [1985] 51 TAX 137 (H.C.Kar.) = 1985 PTD 413 1062.
Amounts set apart far gratuity cannot be construed as a free reserve as gratuity is an ascertained liability and constitutes a proper charge on profit and loss account.
It may be pointed out that the respondents assessees‟ learned counsel had urged before the Income Tax Officer that the provision for the gratuity was in the nature of staff welfare fund and therefore was excluded from the definition of free reserve in the above quoted notification. This contention was repelled by the Income Tax Officer for the reasons that the nature of this account was different from welfare fund, the fund created continued to be the property of the company, the liability in respect of gratuity would arise only when the employee would retire and that it was profits set apart in reserve for eventually meeting the liability arising at the retirement or otherwise of the employees. Whereas the learned Income Tax Tribunal held that the provision for gratuity was not a free reserve but tied down by its very nature and was meant to_ fulfil certain definite obligations for ascertained liability. We may place on record that Mr. Shaikh Haider, learned- counsel for the appellant has fairly cited the cases which were in fact against the department, namely, the cases referred to hereinabove in para 5(a) (vii), (viii) and (ix) which are the decisions of the Madras High Court and which clearly lay down that the liability of gratuity ascertained each year is a proper charge against P & L accounts though the liability to pay may accrue subsequently, Reference may also be made to the House of Lord‟s case Owen (H.M. Inspector of Taxes) v. Southern Railway of Peru Ltd. (1953-56 Tax Cases, page 602) referred to hereinabove in para 5(b)(vi), in which it was held that provision for the payment of compensation to the assessees‟ employees upon termination of their services on the basis of length of service, rate of pay etc. is a proper charge on P & L upon the basis of proper principles of commercial accountancy from year to year. Further
713 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
reference may also be made to the ease of the Indian Supreme Court reported in 1969 (73) ITR 53 quoted hereinabove in para 5(b)(vii), in which it bas been held with reference to a scheme of gratuity that a liability already accrued though to be discharged at a future date would be a proper deduction while working out the profits and gains of business under the accepted principles of commercial practice and accountancy & that it is not necessary that the amount actually be expanded or paid. However, it was urged by Mr. Shaikh Haider that the contention of the respondent assessee before the Income Tax Officer was that provision for gratuity was in the nature of staff welfare fund excluded from the definition of free-reserve under the above quoted SRO in para 4 and, therefore, the respondent cannot take a different stand before this Court. It will suffice to observe that even before the Income Tax Officer the contention of the respondent assessee was that the provision for gratuity cannot be termed as reserve. This contention has been upheld by the learned Income Tax Tribunal. Even otherwise, there cannot be any estoppel against law as the question, whether a particular item can be treated as free-reserve or not is a question of law, In this regard reference may be made to the case of Treasurer of Charitable Endowments far Pakistan v. Central Board of Revenue Islamabad and others (PLD 1981 Karachi, 357), in which a Division Bench of this Court. to which one of us was a member (Ajmal Mian. J.) held that no estoppel can be pleaded against statute / law and that consent / acquiescence on the part of the party cannot make a thing valid if otherwise invalid. We are, therefore, inclined to hold that since the amounts set apart for gratuity, were intended to provide for ascertained liabilities which accrued in the financial years in question, the same were proper charge on the P & L account on the basis of the proper principles of commercial accountancy as held by the learned Income Tax Tribunal in the relevant years. Our answer to the above quoted questions referred to hereinabove in para I, is that the gratuity cannot be construed as a free reserve in terms of SRO No. 116(R)/68 but is an ascertained liability and therefore it is a proper charge on the P & L account for the assessment years in question on the basis of the proper principles of commercial accountancy. Cases relied on : Karachi Gas Company Ltd. v. Income Tax Officer (I.T.A. No. 136/A 63-64 CCI); Commissioner of Income Tax v. Sri Ranilakshmi Ginning, Spinning & Weaving Mills (P.) Ltd. (1982 PTD 277) = (1982) 46 TAX 15; Commissioner of Income Tax v. Seshasayee Bros. (P.) Ltd. (1983 PTD 435) = (1983) 48 TAX 111; David & Co. (P.) Ltd. v. Commissioner of Income Tax (1979) 118 ITR 261 (S.C.); Commissioner of Income Tax v. Sitalakshmi
714 Section 12(9A)
Income Tax Digest.
Mills Ltd. (1984 PTD 18) = (1983) 48 TAX 115; Owen (H.M. Inspector of Taxes) v. Southern Railway of Peru, Ltd. (1953-56 Tax Cases 602); and Metal Box Company of Indian Ltd. v. Their Workman (1969) 73 ITR 53. Cases referred to : Commissioner of Income Tax v. Indian Metal and Metallurgical Corporation (1964 PTD 194); Gordon Woodroffe Leather Manufacturing Company v. Commissioner of Income Tax (1962) 44 ITR 551; Commissioner of Income Tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 299; Commissioner of Income Tax v. The Lyallpur Cotton Mills, Ltd. Lyallpur (PLD 1960 S.C. 48) = [1960] 2 TAX 155 (S.C.Pak.); CWT (Central) Karachi v. Paracha Textile Mills Ltd., Karachi [1983] 48 TAX 145 and Treasurer of Charitable Endowments for Pakistan v. CBR, Islamabad and others (PLD 1981 Kar. 357). _______________
DEFINITION “FREE RESERVE” AND SUPER TAX
Pakistan Gum Industries Ltd. v. Commissioner of Income Tax (East), Karachi – [1983] 47 TAX 155 (H.C.Kar.) 1063.
Unapportioned profits of the company prior to the introduction of the definition cannot be termed as “free reserve” and are not subjected to super tax.
If the definition of free reserve introduced through the Finance Act, 1968, can be given retrospective effect, the unappropriated profits of the applicant/assessee would have amounted to a “free reserve” and subjected to super tax for the assessment year in question. However, we find from a reading of the Finance Act of 1968 that this provision has not been given retrospective effect, and, therefore, for the assessment year in question there is no statutory definition of “free reserve”, which term is to be given its ordinary dictionary meaning for the period in question. We have already observed that the ordinary dictionary meaning of the term “free reserve” will not include unappropriated profits of a company. Case relied on: Commissioner of Income Tax v. Lyallpur Cotton Mills (PLD 1960 SC 48) = (1960) 2 TAX 155 (S.C.) _______________
SMALLNESS OF PROFITS - TESTS FOR DETERMINATION
A.Harvey v. Commissioner of Income Tax – [1935] 3 ITR 311 (Mad.) 1064.
Tests for determination.
715 UNDISTRIBUTED PROFIT WHEN TAXABLE
Section 12(9A)
Assessment under section 23A(2) could not be held to be illegal for want of an express finding as to intention of assessee; such finding may be implied in finding that a sum was available with company for distribution. _______________
GENERAL
S.C.Cambatta v. Commissioner of Income Tax – [1946] 14 ITR 748 (Bom.) 1065.
Public-Connotation of.
If a share is registered in joint names, the joint holders are taxable as AOP. P.M. Hutheesingh & Sons Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 653 (Bom.) 1066.
Free transferability of shares.
The burden is on the assessee to show that the shares were the subject of dealings on stock exchange.
716 Section 12(11)
Income Tax Digest.
Section 12(11)* Dividend income – basis of chargeability
PAGE NO
WORD “PAY”, MEANING OF
1067. The word “pay” - Meaning of. TAX 188 (S.C.Pak.)
_
1972 SCC 395 = [1974] 29
CHANGE IN LAW
1068. The effective date of applicability. 29 TAX 188 (S.C.Pak.)
717 _
1972 SCC 395 = [1974] 717
YEAR OF TAXABILITY OF DIVIDEND INCOME
1069. Dividend, becomes income of the shareholders on the date of _ declaration. [1968] 18 TAX 13 (H.C.Dacca)
718
1070. Dividend declared at the extraordinary general meeting of the shareholders in the accounting year, relevant to the assessment year 1960-61 became income of the shareholders on the date of declaration and held to be _ assessable in assessment year 1960-61. [1968] 17 TAX 179 (H.C.Dacca)
719
1071. Accumulated dividend income of five years received by shareholder in one assessment year, held that dividend _ income is not assessable in assessment year. [1964] 9 TAX 278 (H.C.Kar.) _ 1072. Year of taxability of dividend income. [1964] 9 TAX 278 (H.C.Kar)
*
Corresponding to section 2(4) & 16(2) of the 1922 Act.
721 722
717 DIVIDEND INCOME - BASIS OF CHARGEABILITY
Section 12(11)
Section 12(11)* Dividend income – basis of chargeability
WORD “PAY”, MEANING OF
Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Mst. Wazirunnisa Begum – 1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.) 1067.
The word “pay” - Meaning of.
The word “pay” means to satisfy, to set at rest, to discharge, to require with what is due or deserved etc., and that it is obvious that the word “pay” means when the money is actually delivered and not when a decision is made to make the payment. We have no hesitation in affirming this view of the High Court. A mere declaration of the dividend at the annual general meeting of the company amounts only to a decision by the company to pay to the shareholders dividend at a certain rate. It creates a right in favour of the shareholders and a corresponding liability on the company to pay the amount but it does not at all mean actual payment. It is only when the warrant for payment is made out that the shareholder gets into the position to receive the actual payment. Since the dividend warrant in this case was issued on the 1st of June, 1956, it obviously pertained to the assessment year 1957-58, the previous account year having ended on the 31st of March 1956. _______________
CHANGE IN LAW
Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Mst. Wazirunnisa Begum – 1972 SCC 395 = [1974] 29 TAX 188 (S.C.Pak.) 1068.
The effective date of applicability.
It is further submitted by the learned counsel for the respondent that as a result of the amendment of section 16(2) of the Income Tax Act by *
Corresponding to section 2(4) & 16(2) of the 1922 Act.
718 Section 12(11)
Income Tax Digest.
the clause 9(b) of section 11 of the Finance Act, 1956, in sub-section (2) of section 16 and the proviso thereto, for the words and comas “paid, credited or distributed or deemed to have been paid, credited or distributed” wherever they appear, the word “paid” shall be substituted. The amended law, which was in force on the 1st day of the charge year in question, would obviously apply, and this being the case, it is difficult to sustain the appellant‟s point of view, as stressed in this appeal. Judicial analyses : The relevant provisions of law have undergone substantial changes since this decision. The amended position contained in section 12(11) of the Income Tax Ordinance, 1979 entails that divided declared or distributed shall be deemed to be income of the income year in which it is declared provided that where any dividend is declared with six weeks of the end of the income year, it shall deem to be income of the income year in which it is distributed. The above referred case is, therefore, no more relevant as the word “paid” is no longer appearing in section 12(11). _______________
YEAR OF TAXABILITY OF DIVIDEND INCOME
Mrs. Qudsia Begum, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca – [1968] 18 TAX 13 (H.C.Dacca) 1069.
Dividend becomes income of the shareholders on the date of declaration.
The Income Tax Officer made assessment for the charge year 1960-61, including in the total income a sum of rupees one lac on account of dividend income. The dividend was in the first instance declared at the meeting of the Board of Directors of the company on the 30th May, 1959 and dividend warrants issued to the shareholders on the 31st May, 1959, and credit entries were accordingly made in their accounts. An extraordinary general meeting of the shareholders held on the 4th July, 1959 accepted the recommendation of the Board of Directors declaring the dividend. Thereafter the resolution declaring the dividend was reversed on the 30th November, 1960 converting it to bonus shares which were allotted to the shareholders on the recommendation of the Board of Directors. The Income Tax Officer took the view that the dividend became the income of the shareholders soon after its declaration at the general meeting during the accounting year. relevant to the assessment year 1950-61. This treatment was confirmed by the Appellate Tribunal. On a reference: Held, that the Tribunal was justified in holding, in the facts and circumstances of‟ the case, that the sum of Rs.
719 DIVIDEND INCOME - BASIS OF CHARGEABILITY
Section 12(11)
One lakh which was made subject to tax amounted to dividend paid within the weaning of section 16(2) of the Income Tax Act. Case referred to: A. Salam A. Sailor, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca (1968) 17 TAX 179.
A.Salam, A.Sattar, Dacca v. Commissioner of Income Tax, East Pakistan Dacca – [1968] 17 TAX 179 (H.C.Dacca) 1070.
Dividend declared at the extraordinary general meeting of the shareholders in the accounting year relevant to the assessment year 1960-61 became income of the shareholders on the date of declaration and held to be assessable in assessment year 196061.
In making the assessment for the charge year 1960-61 the Income Tax Officer included in the total income of the assessee a sum of Rs.64,000 on account of dividend income. The dividend was recommended at a meeting of the Board of Directors held on the 30th May, 1959 and dividend warrants were issued to the shareholders on the 31st May, 1959. Subsequently, the extraordinary general meeting of the shareholders held on the 4th July, 1959, adopted the recommendation of the Board of Directors and the dividend so declared was credited to the accounts of the shareholders. The board of Directors changed its earlier decision and on the 25th June, 1960, recommended to the general body that the dividend declared on the 4th July, 1959, should be revoked and this recommendation was readily adopted at another extraordinary general meeting held on the 30th November, 1960. By this resolution the company issued bonus shares for the same amount to the assessee shareholder. The Income Tax Officer took the view that since the dividend was declared and credited to the account of the assessee in the accounting year, relevant to the assessment year 196061, the dividend income was exigible to tax in the assessment year 1960-61. Against the order of assessment the assessee went in appeal to the Appellate Assistant Commissioner contending that the company by its subsequent resolution dated the 30th November, 1960 had rescinded and revoked the declaration of dividend and converted it to bonus shares and as such nothing was received from the company so as to make the assessee liable to tax. It was urged that the dividend was utilised in purchasing the bonus shares which could not be treated as income of the individual under the provisions of the Income Tax Act. The Appellate Assistant Commissioner accepted the assessee‟s plea and held that dividend could not be included in the total income of the assessee-shareholder unless it was actually paid to
720 Section 12(11)
Income Tax Digest.
him. On further appeal the Appellate Tribunal reversing the order of the Appellate Assistant Commissioner held that the dividend income was assessable in the assessment year 1960-61. The Tribunal took the view that (i) the date of recommendation of dividend by the Board of Directors, namely, the 30th May, 1959 and the date on which dividend was credited to the dividend payable account, namely, the 31st May, 1959, were immaterial. The position after the 4th July, 1959, the date on which the general meeting of the shareholders confirmed the recommendations of the Board of Directors, was that the shareholders had a right to encash the dividend warrants issued. This meant that the amount covered by the dividend warrants for all intents and purposes were constructively paid to the shareholders; (ii) since the company declared a dividend and the dividend was effectively payable, company‟s subsequent effort by a resolution dated the 30th November, 1960, to change the character of the payment would be futile in law and represented an act of appropriation of assessee‟s dividend income; and (iii) no change of law was brought about by the amendments of section 16(2) and section 49(2)(c), in 1956. What was omitted from section 16(2) was incorporated under clause (iii) of section 49(2)(c). Affirming the Tribunal‟s order the High Court: Held, that: (i)
on the finding of facts recorded by the Tribunal, the dividend accrued and arose to the assessee as soon as the resolution of the 4th July, 1959, was passed in the general meeting of the company;
(ii)
the Tribunal has recorded its finding to the effect that the company unconditionally declared dividend, for, action of the Board of Directors was approved at a general meeting of the shareholders on the 4th July, 1959. Therefore, on the facts found by the Tribunal, the dividend was “paid” within the meaning, of section 16(2) read with sub-section (2) of section 49(c) of the Income Tax Act; and
(iii)
it is true that sub-section (2) of section 16 contained the words “paid, credited or distributed, or deemed to have been paid, credited or distributed” before the amendment of 1956. After amendment although these words were omitted therefrom but by insertion of the provisions of sub-section (2) of section 49(c), as they are now, the same purpose was achieved. . . . .We must, therefore, read the word “paid” in sub-section (2) of section 16 in relation, to the dividend as “paid, credited or distributed or deemed to have been paid,
721 DIVIDEND INCOME - BASIS OF CHARGEABILITY
Section 12(11)
credited or distributed.” The Appellate Tribunal was right in holding that the amendment of 1956 has not brought out any change in law. Cases referred to: J. Dalmia v. Commissioner of Income Tax [1964] 10 TAX 159 (S.C.); Kishinchand Chellarm and others v. Commissioner of Income Tax [1962] 6 TAX 273 (S.C.) and Ramesh R. Saraiya and others v. Income Tax Commissioner [1965] AIR (S.C.) 1963.
Commissioner of Income Tax v. Hussaini Fund – [1964] 9 TAX 278 (H.C.Kar.) 1071.
Accumulated dividend income of five years received by shareholder in one assessment year, held that dividend income is not assessable in assessment year.
The assessee, a trust, was charged to tax on the income of the trust property at the maximum rate on the ground that the quantum of shares of the beneficiaries were indeterminate and unknown and as such the provisions of section 41(1), first proviso of the Income Tax Act was attracted. Besides, assessee‟s dividend income from shares held in Indian companies, received after five years of its declaration, was assessed to tax in lump sum in the year of payment. The Appellate Tribunal relying on the judgment of the High Court of West Pakistan (Karachi Bench) in the case reported as Hooseni Fund v. Commissioner of Income Tax [(1961) 3-TAX 90] held that the shares of the beneficiaries were known and determinate and therefore, tax could be levied, if found liable, at the rates applicable to the individual shares of the beneficiaries. It was further held that the dividends declared in India in favour of the assessee became its property as soon as the dividends were declared and that the Income Tax authorities were wrong in treating the same as income of one year when the lump sum was received after a lapse of five years for reasons over which the assessee had no control. On a reference, at the instance of the department, the High Court affirming the order of the Tribunal Held, that: (i)
the assessable income of the trust property was not liable to tax at the maximum rate; and
(ii)
the dividend income of Rs.88,446 from 1949-50 to, 1954-55 which was received during the year 1957-58 was not assessable in 1957-58 but in the years in which the dividends were declared.
722 Section 12(11)
Income Tax Digest.
Case affirmed: Tribunal‟s order dated 13.1.1961 in ITA. Nos. 695,696 and 1256 of 1957-58 and 489, 772 of 1958-59 [1961] 4 TAX 88 (Trib). Cases relied on: Hooseni Fund (Wakf-ul-Aulad) v. Commissioner of Income Tax, Central, Karachi [1961] 3 TAX 90 and Commissioner of Income Tax v. Hussaini (Wakf-ul-Aulad) [1963] 8 TAX 34 (S.C.) Cases distinguished: John Vasica v. Janda Rubber Works Ltd. (1950) AIR 188 (E. Punj.) and Ebrahim Aboobaker v. Tek Chand Dalwani (1953) AIR 298 (S.C.). Commissioner of Income Tax v. Laxmidas Mulraj Khatau (1948) 16 ITR 248 and Simpson (H. M. Inspector of Taxes v. The Executor of Bonner Waurice as Executors of Edward Kay (1927-30) 14 Tax Gas. 589.
Commissioner of Income Tax v. Hussaini Fund – [1964] 9 TAX 278 (H.C.Kar.) 1072.
Year of taxability of dividend income.
Dividend declared by company in respective years and credited in the accounts of shareholders. Accumulated dividend income of five years was received by shareholder in an assessment year. It is held that entire dividend income was not assessable in year of receipt but in the years in which the dividends were declared. CASE RELIED ON - Hooseni Fund (Wakf-ul-Aulad) v. Commissioner of Income Tax, Central Karachi [1961] 3 TAX 90 and Commissioner of Income Tax v. Hussaini (Wakfu-ul-Aulad) [1963] 8 TAX 34 (S.C.Pak). CASES DISTINGUISHED - The Executor of Besme Waurie as Executor of Edward Kay [1927-30] 14 TAX Cas. 580 and Commissioner of Income Tax v. Laxmindas Mulraj Katan [1948] 16 ITR 248.
723 DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF STOCKS AND SHARES
Section 12(12)
Section 12(12)* Difference between the fair market value of stocks and shares
PAGE NO
DEDUCTION OF LIABILITY TOWARDS THE FOREIGN LOANS
1073. Assessee obtained loans from foreign lenders for purchasing capital assets, held that liabilities of assessee towards foreign lenders reduced due to devaluation of foreign currency and this was an accretion to assessees fixed assets. _ [1985] 52 TAX 90 (H.C.Kar.)
*
Corresponding to section 2(4A) of the 1922 Act.
724
724 Section 12(12)
Income Tax Digest.
Section 12(12)* Difference between the fair market value of stocks and shares
DEDUCTION OF LIABILITY TOWARDS THE FOREIGN LOANS
Pakistan International Airlines Corporation v. Commissioner of Income Tax (Central Zone), Karachi – [1985] 52 TAX 90 (H.C.Kar.) 1073.
Assessee obtained loans from foreign lenders for purchasing capital assets, held that liabilities of assessee towards foreign lenders reduced due to devaluation of foreign currency and this was an accretion to assessees fixed assets.
Briefly stated the relevant facts are that applicant / assessee is a statutory corporation carrying on the business of operating airlines from Pakistan and makes up its accounts on 20th of June, every year. During the account year ending 30th June, 1968 the applicant owed huge sums of money to foreign lenders. These loans were obtained for purchasing capital assets. During the year in question Pound Sterling was devalued as a result of which the liability of the applicant towards the loans was reduced by Rs.1,21,90,740. The Income Tax Officer who made the assessment for assessment year 1968-69 held that the reduction of liability on account of the devaluation of‟ Pound Sterling was revenue receipt. In view of the case law discussed above, we hold that in the instant case sum of Rs.1,21,90,740 representing deduction of liability towards the foreign loans due to devaluation of Pound Sterling was an accretion to assessee‟s fixed capital and was not liable to tax. Secondly the finding of the Tribunal that loans were obtained for business activities and the necessary ingredients of which was not only the acquisition of aircraft but also other necessities which may be of revenue nature, is not supportable by documents and is conjectural in nature as is self-evident from the order.
*
Corresponding to section 2(4A) of the 1922 Act.
725 DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF STOCKS AND SHARES
Section 12(12)
Cases referred to: John Smith & Sons v. Moore (12 Tax Case 226); Davis (H.M. Inspector of Taxes) v. The Shell Company of China Limited (32 Tax Cas. 133); Van Den Berghs, Limited v. Clark (H.M. Inspector of Taxes) (19 Tax Cas. 390); Indus Valley Construction Company v. Commissioner of Income Tax, (East), Karachi, (1984 PTD 426) = (1985) 51 Tax 55; Commissioner of Income Tax v. Tata Locomotive and Engineering Co. Ltd. (1960-66 ITR 405); Commissioner of Income Tax v. Mehboob Production Pvt. Ltd. (1969) 74 ITR 676 and Commissioner of Income Tax (Central), Karachi v. Beach Luxury Hotel Ltd. (1983 PTD 178) = (1983) 48 TAX 1.
726 Section 12(18)
Income Tax Digest.
Section 12(18) Treatment of certain loans, advances and gifts as deemed income
PAGE NO
SHARE DEPOSIT MONEY IS NOT “LOAN”
1074. Share deposit money is not “loan”. (H.C.Lah.) = 2001 PTD 1180
_
[2001] 83 TAX 451 727
SECTION 12(18) VIS-A-VIS SECTION 66A
1075. Amendment in section 12(18) vis-a-vis application of section _ 66A held illegal. [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180
728
727 TREATMENT OF CERTAIN LOANS, ADVANCES AND GIFTS AS DEEMED INCOME
Section 12(18)
Section 12(18) Treatment of certain loans, advances and gifts as deemed income
SHARE DEPOSIT MONEY IS NOT “LOAN”
Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others – [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180 1074.
Share deposit money is not “loan”.
Share advance money indicated in the books of accounts/balance-sheet of the companies could by no imagination be treated as a loan. Irrespective of the factual position as to the extent of the authorized capitals of the assessee/companies the Revenue had no business to pick up faults with the intention and motive of a company to increase its capital and the reasons therefore. A joint stock company is at liberty to increase and subject to certain conditions prescribed by law, to decrease its paid-up capital. As for the increase in the authorized capital is concerned, for a private limited company, there is hardly any difficulty and in fact it is almost a declaration made to the Registrar of Companies subject to payment of certain fees. It is correct that an Assessing Officer can always probe, look into and judge the exact nature of a receipt or an entry in the books of accounts. Entries made by an assessee in books of accounts are not determinative of the question whether the amount was paid as capital asset or a stock in trade. However, it is equally correct that letter of law in taxing statute has to be interpreted in the sense it had been used and expressed. The provisions of section 12(18) of the Income Tax Ordinance, 1979 [as inserted by Finance Act, 1987] at the relevant time did not attract unless two conditions were answered. First that there was a “loan” received by an assessee and secondly that it was so claimed. Where any of the two requirements were not answered, the provisions were not attracted. Subsequent amendment in the year 1998 rather supports the case of the assessee/appellants that at the relevant time an advance, irrespective of its nature, could not be deemed as income
728 Section 12(18)
Income Tax Digest.
of the assessee. Share deposit money can never be or amount to a “loan” which is necessarily a sum to be returned after a certain or uncertain period with or without interest. _______________
SECTION 12(18) VIS-A-VIS SECTION 66A
Micropak (Pvt.) Ltd., Lahore v. Income Tax Appellate Tribunal, Lahore and 2 others – [2001] 83 TAX 451 (H.C.Lah.) = 2001 PTD 1180 1075.
Amendment in section 12(18) vis-a-vis application of section 66A held illegal.
Generally an amendment is brought to bring out a change in the state of law unless the amendment was clarificatory or declaratory in nature. In the present case there is nothing to show that the amendment in section 12(18) by Finance Act, 1998 was brought about to clarify the earlier provision and not to bring a change in it. All the more so when the amendment was not given retrospective effect which normally clarificatory or declaratory amendments are given. The principle that where two interpretations are equally possible then the one favourable to the subject is to be adopted is attracted in the present case. The principle can also at times be extended to factual situations warranting application of deeming provisions. It means where the transaction can equally be placed within or outside the dividing taxing line, the one falling outside should be preferred against the one falling inside. The provisions of section 12(18) of the Income Tax Ordinance, 1979 at the relevant time being not applicable the exercise of revisional jurisdiction as a consequence thereof is also found to be illegal as the original amendments were neither erroneous nor prejudicial to the interest of Revenue.
729 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(a)
Section 13(1)(a)* Unexplained investments, etc., deemed to be income – Cash credit
PAGE NO
UNLAWFUL ADDITIONS UNDER SECTION 13 ARE NOT SUSTAINABLE
1076. Unlawful additions under section 13 are not sustainable. _ [2001] 83 TAX 132 (H.C.Lah.)
731
ITAT HAS A DUTY TO CORRECTLY RECORD THE FACTS AND GIVE OBJECTIVE FINDINGS
1077. Tribunal had material on record to conclude that the amount of cash credit represented the assessee‟s undisclosed _ income. [1992] 65 TAX 323 (H.C.Kar.)
732
CASH CREDIT
1078. In the absence of claim that the cash credits had come from the intangible additions of the preceding years, the _ same cannot be allowed as such. [1992] 66 TAX 186 (H.C.Lah.) 1079. Unexplained cash credit is rightly held as concealed income. _ [1978] 37 TAX 204 (H.C.Kar.) _ 1080. Cash credit and intangible additions. [1978] 37 TAX 204 (H.C.Kar.) 1081. Cash credits in the name of sons of assessee, burden to prove satisfactorily the nature and source of entries on his _ assessee. [1973] 27 TAX 229 (H.C.Lah.) 1082. Accounts rejected and addition made to declared income on estimate. Further addition was made on account of unexplained cash credits. There was no finding that addition on account of cash credit represented income from a source unknown and unconnected with the known source
*
Corresponding to section 4(2A) of the 1922 Act.
732 733 733
734
730 Section 13(1)(a)
Income Tax Digest. PAGE NO
of income held that further addition was not sustainable. _ [1968] 17 TAX 78 (H.C.Dacca)
736
1083. Cash credits credited in the accounts of the firm in the relevant previous year are assessable in the assessment year. _ [1967] 15 TAX 261 (H.C.Kar.)
737
1084. Money was claimed to be brought from India. Explanations offered by assessee self-contradictory and not above suspicion held that amount was rightly treated as _ unexplained cash credits. [1967] 15 TAX 59 (H.C.Kar.)
739
1085. Circumstantial evidence suggest that cash credit was not revenue receipt held that cannot be treated as revenue receipt merely for assessee‟s failure to disclose name of _ depositor. [1963] 7 TAX 184 (H.C.Kar.) = 1963 PTD 401 = 1963 PLD 487 _ 1086. Unexplained cash credit is deemed income. 1963 PTD 395 (H.C.Kar.) = 1963 PLD 490
740 742
“INCOME FROM UNDISCLOSED SOURCES”, MEANING OF
_ 1087. “Income from undisclosed sources”, meaning of. [1963 7 TAX 1 (H.C.Dacca) = 1964 PTD 317 = 1964 PLD 433
742
NATURE OF RECEIPT
1088. Department need not to prove that cash credits are revenue _ receipts. [1947] 15 ITR 393 (All.)
744
FIRM / PARTNERS
1089. If assessee-firm is unable to explain deposits in partners‟ accounts, Income Tax Officer would be justified in treating _ them as firm s income from undisclosed sources. [1941] 9 ITR 610 (All.)
745
PROCEDURES FOLLOWED
1090. Burden of proof of investment is on the part of assessee. _ [1984] 50 TAX 168 (H.C.Kar.)
745
1091. Where the Income Tax Officer made addition towards estimated interest to the income of the assessee-moneylender, because he failed to produce one of the branch accounts, the legal basis for such addition would not give _ rise to any question of law. 5 ITC 361 (Nag.)
745
ILLUSTRATIONS
_ 1092. Where addition held justified. [1944] 12 ITR 110 (Pat.)
746
731
PAGE NO
732 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
Section 13(1)(a)* Unexplained investments, etc., deemed to be income – Cash credit
UNLAWFUL ADDITIONS UNDER SECTION 13 ARE NOT SUSTAINABLE
Syed Mahmood Shah v. Commissioner of Income Tax and another – [2001] 83 TAX 132 (H.C.Lah.) 1076.
Unlawful additions under section 13 are not sustainable.
The books wherefrom the alleged unexplained credit was picked up were not (his book of account) and therefore, sub-clause (a) of section 13(1) of the Income Tax Ordinance was not attracted to this case. The objection of the assessee in other words being that since his case was not covered by sub-clause (a) and the Assessing Officer could have treated the unexplained credit in any of the other sub-clauses including (aa) or even (b) which were subject to approval of the Inspecting Assistant Commissioner. There is hardly any doubt that books of accounts of the company of which the assessee was a director were not his own books of account and therefore sub-clause (a) of section 13 which empowered the Assessing Officer to treat the credit as unexplained income was not attracted. Rest of the clauses from (aa) to (e) visualize a number of situations and obviously in this case subclause (c) of the section was attracted. However to make an addition under that clause the Assessing Officer was required to seek approval of the Inspecting Additional Commissioner before making any addition. It will be seen that the approval of the Inspecting Additional Commissioner as contemplated in proviso to section 13 of the Income Tax Ordinance, 1979 is not procedural. It is a condition precedent for exercise of jurisdiction to make an addition under sub-clause (aa) to (e) of section 13. The absence of such approval clearly renders the addition to be illegal. That the addition of the aforesaid amount under *
Corresponding to section 4(2A) of the 1922 Act.
733 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
section 13(1)(a) of the Ordinance was not in accordance with law nor the Tribunal was justified in confirming the same. _______________
ITAT HAS A DUTY TO CORRECTLY RECORD THE FACTS AND GIVE OBJECTIVE FINDINGS
Paragon Silk Mills Limited v. Commissioner of Income Tax, Central Zone ‘C’, Karachi – [1992] 65 TAX 323 (H.C.Kar.) 1077.
Tribunal had material on record to conclude that the amount of cash credit represented the assessee‟s undisclosed income.
In the facts of this case, we find no merit in this contention. As observed, the applicant miserably failed to establish that the said amount represented deposits made by other parties for jobs to be done in the subsequent year and on the basis of the documents And evidence recorded the Assessing Officer came to the right conclusion that the said amount represented undisclosed income of the applicant. The aforesaid observation of the Assessing Officer that the amount could be reduced from receipts of subsequent year would not render the earlier finding of the Assessing Officer incorrect or invalid. The Tribunal was correct in restoring the finding of the Assessing Officer on the point. We also approve the view of the Tribunal that a correct finding of the Assessing Officer based on material on record and sound reasoning is not liable to be set aside on the basis of entries made in account books of the assessee in respect of subsequent years. _______________
CASH CREDIT
Commissioner of Income Tax, Lahore v. National Typewriter Co. – [1992] 66 TAX 186 (H.C.Lah.) 1078.
In the absence of claim that the cash credits had come from the intangible additions of the preceding years, the same cannot be allowed as such.
It is manifest from the record that before the Income Tax Officer as also before the Appellate Assistant Commissioner Income Tax the explanation about the cash credit amount was that it was a loan from various parties, which explanation was also found to be false. It was never the case of the assessee that the amount was the result of intangibles. The plea to the above effect raised before the learned
734 Section 13(1)(a)
Income Tax Digest.
Income Tax Appellate Tribunal, on the face of it, was an after thought and in utter contradiction of the earlier plea. This plea in the attending circumstances obviously could not be allowed to prevail. The view as formed by us finds support from the case cited on behalf of the petitioner. The answer to the referred question is in the negative, i.e., that on the facts and circumstances of the case the Tribunal was not justified in directing the Income Tax Officer to allow intangibles of the earlier years when such a plea was not taken by the assessee respondent at the two earlier stages of assessment and appeal. Malik Mir Hassan Khan v. Commissioner of Income Tax, Karachi – [1978] 37 TAX 204 (H.C.Kar.) 1079.
Unexplained cash credit is rightly held as concealed income.
It is now well-settled by a long line of authorities that the burden of proving the source of the cash credit standing in the account books of the assessee lies on him and, where he fails to prove satisfactorily the source and the nature of the cash credit, the Income Tax Officer is entitled to draw the inference that the amount of cash credit is concealed income of the assessee from an undisclosed source and treat it as income of the charge year of which the previous year was the financial year. Malik Mir Hassan Khan v. Commissioner of Income Tax, Karachi – [1978] 37 TAX 204 (H.C.Kar.) 1080.
Cash credit and intangible additions.
The Tribunal rejected the applicant‟s plea that his share income in the intangible additions made, in the assessment of the firm covered the addition, on the ground that the applicant failed to prove the availability to him of sufficient tangible assets or to produce to their notice any material from which the extent of such tangibles could be gauged. But Mr. Ali Athar‟s submission is that this statement of the Tribunal is misconceived. The Tribunal had the entire and complete file of the firm with them, as the firm‟s appeal was simultaneously decided by the Tribunal and the figure of the intangible additions were clearly available including the figure of applicant‟s share income thereof as partner which was mare than the amount of cash credit. The intangible additions must be treated as real income of the firm and having been so treated, the explanation of the applicant that the additions were the source from which he got the pertinent amount, which he was called upon to explain was plausible. The only question that the Tribunal had to decide was whether the applicant could have derived the amount of Rs 20,000/- from his share of profit income in
735 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
the intangible additions, and unless the Tribunal had other material for justifying that the amount of Rs.20,000/ could not be so available to the applicant, of which there was no evidence on record in this case, the availability of it to the applicant must be accepted as plausible. In S. Kuppuswami Mudaliar v. Commissioner of Income Tax Madras (1964) 51 ITR 757, the Income Tax Officer made an addition of Rs.25,230/- to the assessable income of the assessee, who carried on business as a tanner for the year 1947-48 and 1948-49. In the assessment years 1949-50 and 1950-51, the Income Tax Officer added Rs.40,000/- said to have been advanced by the assessee as loan in August 1948 and Rs.15,000/- and Rs.10,000/- which sums were advances contributed by his wife and daughter to the firm in February 1950 as undisclosed income of the assessee. The assessee‟s contention was that the investments were made out of the amount of Rs.52,230/which the Income Tar Officer had added to the income of 1947-48 and 1948-49 and on which tax was paid. The High Court hold that Tribunal was wrong in the treating the sum of Rs.40,000/- and Rs.12,230/- (making a total or Rs.52,230/-) as income the assessee from undisclosed sources, because the addition of Rs.52,230/- to his income in 1947-48 and 1948-49 must be treated as the real income of the assessee for those years in question. The addition may be described as „intangible‟ but nevertheless, having included this as income, it became the real income. Therefore, the explanation of the assessee that the additions were the available source from which the investments were made later, was plausible, which the Department could not controvert. For the foregoing reasons, we would answer the question referred to us in Reference 9 and 13 of 1969 in the negative. In our opinion the Tribunal was not justified in holding that the each credit of Rs.20,000/- could validly be included in the income of each of the applicants. Cases referred to: L. R. Brothers v. Commissioner of Income Tax (1957) 31 ITR 815 and S. Kuppaswami Mudaliar v. Commissioner of Income Tax (1964) 51 ITR 757.
Mohammad Din And Sons, Lahore v. Income Tax Appellate Tribunal (Pakistan), Lahore And Another – [1973] 27 TAX 229 (H.C.Lah.) 1081.
Cash credits in the name of sons of assessee, burden to prove satisfactorily the nature and source of entries lies on assessee.
736 Section 13(1)(a)
Income Tax Digest.
The Income Tax Officer found cash credits to the tune of Rs.98,000 in the name of assessee‟s sons in the accounts of another concern. Being not satisfied with the explanation tendered by the assessee the Income Tax Officer treated the amount in question as income from undisclosed sources and charged the amount to tax in the hands of the assessee. The Income Tax Appellate Tribunal, on appeal by the assessee, confirmed the order of assessment, holding that the explanation submitted by the assessee was unconvincing and the investments were really of the assessee although made nominally in the names of the sons who had no necessary wherewithal for any investment independently of their father, the assessee. It was further held that the onus to prove the source and nature of the investment lay on the appellant, which the assessee has failed to discharge. Having failed before the Tribunal under section 66(i) of the Income Tax Act the assessee went up before the High Court contesting that questions of law arose out of Tribunal‟s order on the issue of burden of proof and evidence for the finding that the investment represented income from undisclosed sources. Before the High Court it was urged for the first time that the money which was brought from India could not be brought to tax under Board‟s Cir. No.11 of 1950. as amended from time to time. Held,
that the order passed by the authorities is based on evidence and is not vitiated by any error of law. The assessee failed to establish to the satisfaction of the Income Tax authorities the source of the entries in question and no exception can be taken against the Tribunal‟s order. This reference is concluded by pure findings of fact and no question of law at all arises from the order of the Tribunal. The burden is undoubtedly on the petitioner to prove satisfactorily the nature and the source of those entries and to show that they do not constitute a part of his income liable to tax.
It must be mentioned that the petitioner did not rely on the alleged notification before any of the Income Tax authorities. This is a new question for the first time raised before us in this petition. This is a mixed question of law and facts and cannot be disposed of without recording further evidence. Therefore, this contention cannot be entertained now at this late stage in these proceedings for reference against the order passed by the Tribunal and it does not arise from it. Even otherwise we find that by virtue of this notification the Central Board of Revenue merely, directed that no attempt should be made to treat the monies brought into Pakistan under these circumstances as
737 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
taxable under section 4(1)(b)(iii) of the Act which was itself omitted from the statute by section 6 of Act 1 of 1962. Commissioner of Income Tax, Dacca Zone, Dacca v. Eastern Aluminum Agency, Dacca – [1968] 17 TAX 78 (H.C.Dacca) 1082.
Accounts rejected and addition made to declared income on estimate. Further addition was made on account of unexplained cash credits. There was no finding that addition on account of cash credit represented income from a source unknown and unconnected with the known source of income held that further addition was not sustainable.
The assessee, a registered firm, was doing business in aluminum and enamel wares and crockery. In respect of the assessment year 1960-61 the assessee filed return of income showing total sales at Rs.5,42,204 and gross profit at Rs.37,955, which yielded profit rate of 7 per cent. The Income Tax Officer, for low profit rate and other defects in the accounts, rejected the book version and estimated the total sales at Rs.5,80,000 and thus added back a sum of Rs.26,045 to the gross profit disclosed by the assessee. He further added to the total income a sum of Rs.15,000 treating it as income from undisclosed sources. The Appellate Assistant Commissioner, on appeal by the assessee, deleted the addition of Rs.15,000. This treatment was affirmed by the Appellate Tribunal on the ground that there was no finding that the amount in question was the income of the assessee from unknown sources. The Tribunal took the view, that (i) in such eases the onus rested upon the department to establish that the assessee had a source of income other than the known sources of his income and (ii) before the amount could be assessed it bad to be established firstly that this was an income of the assessee and secondly that the income was made during the year under consideration. On a reference, at the instance of the department Held,
that the Income Tax Officer was not justified in making further addition of the aforesaid sum of Rs.15,000 without having first arrived at a definite finding based on facts and circumstances that the said sum of Rs.15,000 was income of the assessee from a source unknown and unconnected with the known source of income of the assessee.
The facts of the case in Kale Khan Mohammad Hanif v. Commissioner of Income Tax [(1963) 8 TAXATION 383 (S.C.)] was different. There the credit entries in question had escaped the attention of the Income Tax Officer, and there was reassessment
738 Section 13(1)(a)
Income Tax Digest.
proceedings under section 34 of the Indian Income Tax Act in course of which the assessee‟s explanation that the said credit entries did not represent the income of the assessee was rejected and it was apparently held that the amount of the cash credit could be assessed to tax as income from undisclosed sources in addition to the business income computed by estimate. This decision, however, while recognising the distinction between “undisclosed income of a disclosed source” and an undisclosed income” from an altogether unknown source has held that in case of the former, the question of double taxation may legitimately be raised. It has been observed, “We concede that the question as to the source from which a particular income is derived is one which has to be decided on all the facts of the case. Hence the question whether income represented by an entry in the books of a business is income of that business or of another business would have to be decided on the facts which showed the business to which it belonged.” Case relied on: Auto Stores v. Commissioner of Income Tax, East Pakistan [1963] 7 TAX 1. Case distinguished: Kale Khan Mohammad Hanif v. Commissioner of Income Tax [1963] 8 TAX 363.
Morris Jacob And Company v. Commissioner of Income Tax, Karachi – [1967] 15 TAX 261 (H.C.Kar.) 1083.
Cash credits credited in the accounts of the firm in the relevant previous year are assessable in the assessment year.
The assessee firm, consisting of four partners was doing the business of ginning of cotton, etc. In the course of assessment proceedings for the charge year 1955-56, relevant to the accounting year 1st May 1953 to 30th April 1954, the Income Tax Officer came across two cash credits, one consisting of Rs.1,00,000 credited in the assessee‟s books of account on the 7th December 1953, equally in the names of all the four partners and the other consisting of Rs.1,29,000 (representing different amounts credited and different dates) credited in the account of one of the partners of the firm. The Income tax Officer rejecting the explanation of the assessee that these amounts were received from India out of the assets left there and were, therefore, capital investment, added these two sums to the total income of the assessee as income from undisclosed sources. The sum of Rs.99,226 alleged to be loss sustained in the speculation business of cotton seeds was also charged to tax by adding this amount to the total income of the assessee. The Appellate Tribunal, on appeal by the assessee, confirmed the order of the Income Tax Officer.
739 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
Thereafter, the assessee filed reference application under section 66(1) of the Income Tax Act contending that (i) the sum of Rs.1,01,000 stood credited in the bank account of one of the partners on the 10th January 1953 and as such even if it were to be treated as income of the assessee-firm it must have accrued before the beginning of the relevant accounting year, namely, 1st May 1953 to 30th April 1954, and, therefore, it could not be charged to tax in the assessment year 1955-56; (ii) the amount in question having been received from Dacca from the bank account of one of the partners it was received from a separate source of income and as such in view of the provisions of section 2(11)(a) it was outside the scope of assessment for the year 1955-56; (iii) the amount of Rs.1,00,000 could not be treated as income of the assessee-firm from undisclosed source as it came from the account of one of the partners; (iv) the amount of Rs.1,29,000 was credited in the accounts of the assessee-firm in the name of one of the partners on different dates and as such it could not be said to be the income of the assessee-firm; and (v) if the two sums amounting to Rs.2,29,000 could be treated as income of the assessee-firm from undisclosed sources, the loss of Rs.99,226 could not he brought to tax as it would be covered by additions so made. Held, that: (i)
the relevant date on which the amount of Rs.1,00,000 can be shown to be the income of the firm will not be the date on which the amount was credited in the bank account of the partner at Dacca but it will be the date on which the amount was credited in the accounts of the firm Karachi. Admittedly this amount was credited in the books of the assessee on the 7th December 1963. This amount can, therefore, be said to have accrued to the firm on the 7th December 1953. This date obviously is a date within the accounting period of the assessee;
(ii)
the question of applicability of section 2(11)(a) of the Income Tax Act was not even remotely raised before the Tribunal. It could not, therefore, have been considered by the Tribunal and as such a decision on such a question by this court will be barred;
(iii)
the question whether the amount of Rs.1,00,000 could be treated as income of the firm from undisclosed source though it came from the account of one of the partners is a question of fact;
740 Section 13(1)(a)
Income Tax Digest.
(iv)
the argument that the amount of Rs.1,29,000 was the income of the individual partner was not put forward before the Income Tax authorities but that it was the capital investment of the firm, the amount having been received from India out of the assets of the firm left there. Such an inconsistent plea cannot be canvassed much less considered at this belated stage; and
(v)
No argument was raised before the Income Tax authorities praying for the loss of Rs.99,22 shown by the assessee to be considered as having been covered by the amount of Rs.2,29,000 brought to tax as income from undisclosed source. The case cannot be considered at this stage as put forward by the assessee.
Case relied on: Mohammad Idrees Barry & Co., v. Commissioner of Income Tax [1959] 1-TAX (III-14) (S.C.). Case not approved: Commissioner of Income Tax v. Scindia Steam Navigation Co. Ltd., [1961] 4 TAX 103 (S.C.). Cases distinguished: Haroon Textile Mills Ltd., v. Commissioner of Income Tax [1966] 14 TAX 169 and Auto Stores v. Commissioner of Income Tax [1963] 7 TAX 1.
Sarfraz Khan, Karachi v. Commissioner of Income Tax – [1967] 15 TAX 59 (H.C.Kar.) 1084.
Money was claimed to be brought from India. Explanations offered by assessee self-contradictory and not above suspicion held that amount was rightly treated as unexplained cash credits.
In making assessment for the charge year 1954-55 the Income Tax Officer came across two amounts in the total wealth statement filed by the assessee under section 22(4A) of the Income Tax Act. In this statement Rs.4,000 was shown as cash in hand and Rs.30,000 as cash having been transferred to assessee‟s wife and children during the relevant period. In reply to a notice issued by the Income Tax Officer calling upon the assessee to prove the exact nature and source of the two items, the assessee explained that the amount representing the transfer made to the wife and children came out of Rs.56,627 brought over from India in the course of an earlier assessment year 1951-52. This was followed by another explanation in which the assessee stated that by an oversight he had submitted a wrong explanation and explained that the two items were really monies received by the assessee after close of the charge year 1951-52, from India, where he had left considerable assets in the shape of movable and immovable
741 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
property. The Income Tax Officer rejected the two explanations as self-contradictory and treated the two items as secreted profits. The Appellate Assistant Commissioner upheld the treatment meted but by the Income Tax Officer but reduced the quantum of addition by Rs.10,000 on the ground that in the previous assessment years a sum of Rs.10,000 was shown in the name of assessee‟s wife. On further appeal by the assessee the Appellate Tribunal agreed with the officers below that the unexplained cash credits of Rs.24,000 was not properly proved to be capital receipt of the year in question. On a reference the. assessee‟s counsel contended before the High Court that there was no onus an the assessee to prove. that in fact he brought the money from India after 1951. In support of his contention he relied on Circular No. 11 of 1950, issued by the Central Board of Revenue, which was to the effect that in view of the peculiar circumstances no attempt should be made to assess moneys remitted or brought into Pakistan up to 31st March 1956. Held,
that the Tribunal was right in holding that the onus of proof was on the applicant that the amount of Rs.24,000 was brought from India after 1951.
This is not one of those cases in which the onus is involved. Ordinarily, onus in a case is on the person who makes an assertion in respect of certain facts. The assessee could only claim concession on the basis of departmental instructions, which were not rightly extended to his case because his explanation was not above suspicion. The departmental instruction cannot change the legal position The departmental instructions were in the nature of concessions to the refugees who came from India. But certainly it cannot be said that it would apply in all circumstances. In the present case the department was fully justified in suspecting the explanation given by the assessee and in calling upon the assessee to establish by reliable evidence that the amount in dispute was brought from India after 1951. Universal Engineering Co., Karachi (in the matter of) v. Commissioner of Income Tax – [1963] 7 TAX 184 (H.C.Kar.) = 1963 PTD 401 = 1963 PLD 487 1085.
Circumstantial evidence suggest that cash credit was not revenue receipt held that cannot be treated as revenue receipt merely for assessee‟s failure to disclose name of depositor.
742 Section 13(1)(a)
Income Tax Digest.
The Income Tax Officer discovered a cash credit entry of Rs.15,000 in the accounts of the assessee under the head “deposit account”. The explanation offered by the assessee was that the deposit in question represented cash received as an advance from a customer and the money was to be returned in case the transaction did not materialise. There was an entry in the same account showing that the said amount of Rs.15,000 was returned to the depositor after about a month. The Income Tax Officer disbelieved the explanation tendered by the assessee and treated the amount in question as income from undisclosed source. Having failed before the Appellate Assistant Commissioner the assessee went up to the Tribunal. On behalf of the Department it was stressed before the Tribunal that in view of the fact that the assessee had failed to disclose the name of the depositor it should have been held that the amount in question was suppressed profit from an undisclosed source and not a capital receipt. Repelling this contention the Tribunal held that there existed ample circumstantial evidence to the, effect that the amount in question was not an income from undisclosed source but a genuine deposit made by a customer. The Tribunal pointed out that it was true that when an entry of cash credit was, introduced in the books by the assessee it was a matter in his special knowledge and he should have explained it in a convincing manner but there can be circumstances in which a businessman may not like to disclose the particulars and from that it did not necessarily follow that the deposited sum could be treated as revenue receipt. The Department‟s Reference application under section 66(1) of the Act having been refused by the Tribunal on the ground that no question of law arose out of their order, it went up to the High Court under section 66(2) of the Act. The question posed by the Department was whether or not the amount of the cash deposit in an undisclosed name was income from revenue receipt and in the alternative whether there was material before the Tribunal to delete the add back of the cash credit. Dismissing the application the High Court: Held, that: (i)
the question really is one of fact and must be determined upon all circumstances of a particular case;
(ii)
the Tribunal took into consideration the relevant circumstances upon which they found the explanation of the assessee to be acceptable and it cannot be said that a question of law arose merely because the name of the person making the deposit had not been disclosed;
743 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
(iii)
it cannot be held that the explanation offered by the assessee in the circumstances of the case must invariably be rejected upon the sole ground of the non-disclosure of the name of the person making the deposit, whatever be the other circumstances of the case, and that from such a non-disclosure the sum must be treated as revenue receipt; and
(iv)
an onus is not something which is stationary and it cannot be laid down that it can be discharged only by a particular kind of evidence or information.
Ellahi and Company v. Commissioner of Income Tax – 1963 PTD 395 (H.C.Kar.) = 1963 PLD 490 1086.
Unexplained cash credit is deemed income.
Entry was detected in name of assessee‟ wife. Assessee‟s reply was found unsatisfactory and explanations show contradictory evidence to prove that amount belonged to her. Findings thereon material and upheld for holding amount as secreted profits liable to be taxed as deemed income. _______________
“INCOME FROM UNDISCLOSED SOURCES”, MEANING OF
Auto Stores, Dacca v. Commissioner of Income Tax, East Pakistan, Dacca – [1963 7 TAX 1 (H.C.Dacca) = 1964 PTD 317 = 1964 PLD 433 1087.
“Income from undisclosed sources”, meaning of.
The Income Tax Officer rejected the book version of the assessee, a dealer in motor parts, tyres and tubes, and made a total addition of Rs.11,100 to the gross, profit declared. Further he included in the total income a sum of Rs.24,000 shown in the accounts of the assessee as amanat jama from his father. The Income Tax Officer declined to accept the explanation of the assessee and his father and treated this amount as income from undisclosed source. On appeal the Appellate Assistant Commissioner deleted the amount from the total income on the ground that the explanation offered by the assessee and his father was plausible and that the Income Tax Officer should not have treated. the amount in question as income from undisclosed source. When the matter went up to the Tribunal it was contended on behalf of the assessee that this cash credit had already been considered by
744 Section 13(1)(a)
Income Tax Digest.
the Income Tax Officer by making additions to the declared version and further addition on this account, if any, should have been adjusted accordingly. The Tribunal overruled the contention holding that the Income Tax Officer had treated the sum of Rs.24,000 as income arising from undisclosed source and not as an undisclosed income of the known business; so no question of double taxation and adjustment could have arisen. The Tribunal, however, reduced the amount of the concealed income from Rs.24,000 to Rs.20,000. Before the High Court it was urged on behalf of the assessee that there was no material, no basis before the Income Tax Officer or the Appellate Tribunal, to treat it as an income derived from an undisclosed source, source other than the known source of business. On the other hand it was contended on behalf of the Department that when the assessee failed to explain the amount of Rs.24,000 shown in his account as amanat from his father or when the explanation tendered by the assessee and his father was not accepted the Income Tax Officer was quite entitled to treat the amount as an income derived from undisclosed sources, that is, sources other than the known source for which the assessee bad submitted an account for assessment. Held, that: (i)
the amount of Rs.20,000 was illegally added to the assessed income of the assessee. The income estimated by the Income Tax authority exceeded by Rs.11,100 in the income shown by the assessee in his books of accounts. To this extent, out of Rs.20,000 can be related to the estimated income of the assessee. Therefore, this Rs.11,100 is to be deducted from the sum of Rs.20,000 as covered by the income assessed by the Income Tax Officer and the balance may be treated as an income from undisclosed source, namely, source unconnected with the known source of income of the assessee;
(ii)
there is no doubt that the burden of proof lies on the assessee; if he failed to prove satisfactorily that it is not his money but the money of somebody else, the Income Tax Officer is entitled to presume that it is his income. To this extent there is no dispute. The dispute is whether the Income Tax authority can presume further that it is his income from an undisclosed source,‟ a source unconnected with the known source of income. There is no law or authority for such double presumption. The Income Tax
745 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
Officer or the authority cannot make any such presumption nor can they draw any such inference simply from the failure of the assessee to explain it, in the absence of circumstances or materials on record justifying it; and (iii)
if it is found that the cash credit cannot be attributed to or accommodated in the estimated amount of the income in part or in whole, then and then only the Income Tax Officer may perhaps consider it to be an income from other sources; unconnected with the known source of income of the assessee, because in that case the very fact that it cannot be attributed to or accommodated, in part or in whole, even in the estimated income of the known source of income of the assessee, will by itself be a circumstance for holding that the cash credit in part or in whole, as the case may be, is on account of business unconnected with the known source of the assessee. In that case it can be added, if at all, to the estimated gross profit of the assessee from the known source of business or there must be some materials or circumstances in the case which will justify the Income Tax Officer to consider it that it is an income derived from source unconnected with the known source of the income of the assessee.
Cases distinguished and explained: S. Kumaraswami Reddiar v. Commissioner of Income Tax [(1961) 3 TAX 75 and D.C. Auddy and Brothers v. Commissioner of Income Tax (1955) 28 ITR 713. _______________
NATURE OF RECEIPT
Mahabir Prasad Munna Lal v. Commissioner of Income Tax – [1947] 15 ITR 393 (All.) 1088.
Department need not to prove that cash credits are revenue receipts.
If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent the Income Tax Officer or the appellate authority from inferring that the receipt evidenced by the credit entry is a revenue receipt. In each case it would be a question of fact and the answer must, in every case, depend on the finding whether the inference is a reasonable inference from the assessee s failure to prove his case. There is nothing in law to prevent an inference that a particular receipt is a revenue receipt, provided that, that is a reasonable inference and the
746 Section 13(1)(a)
Income Tax Digest.
assessee fails to satisfy the Income Tax Officer or the appellate authority about the source from which the money came. _______________
FIRM / PARTNERS
Mohammad Ayub Mohammad Jamil of Cawnpore, In re – [1941] 9 ITR 610 (All.) 1089. If assessee-firm is unable to explain deposits in partners‟ accounts, Income Tax Officer would be justified in treating them as firm s income from undisclosed sources. Where the Income Tax Officer noticed certain deposits in the personal accounts of the partners of the assessee-firm and since the assesseefirm was unable to produce any sort of account to support its contention that the excess deposits represented capital privately held by the partners, made additions towards profits from undisclosed sources, it was held that the addition, being based on relevant material, was justifiable. _______________
PROCEDURES FOLLOWED
Kaiser Jehan Begum v. Commissioner of Income Tax, (East), Karachi – [1984] 50 TAX 168 (H.C.Kar.) 1090.
Burden of proof of investment is on the part of assessee.
In the instant case, the applicant disclosed to the Income Tax Authority that the funds invested by her were diverted from the sale proceeds of jewellery and she furnished evidence of the jewellery worth about Rs.95,000/- and she was not taxed there for. She could not give account of investment of the sum of Rs.1,55,000/-. In such circumstances, the burden of proving the nature of the income lay upon the applicant. Cases referred to: AIR 1965 S.C. 1905.
Chunilal Nathmal v. Commissioner of Income Tax – 5 ITC 361 (Nag.) 1091.
Where the Income Tax Officer made addition towards estimated interest to the income of the assessee-money-lender, because he failed to produce one of the branch accounts, the legal basis for such addition would not give rise to any question of law.
Where the Income Tax Officer made addition towards estimated interest to the income of the assessee-money-lender, because he failed
747 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME - CASH CREDIT
Section 13(1)(a)
to produce one of the branch accounts, it was held that the legal basis for such addition would not give rise to any question of law. _______________
ILLUSTRATIONS
Sovaram Jokhiram v. Commissioner of Income Tax – [1944] 12 ITR 110 (Pat.) 1092.
Where addition held justified.
A book entry may in certain circumstances be used as evidence against the assessee. It cannot be used as an evidence in his favour. Certain amounts were standing to the credit of the karta‟s wife in the HUF books. The Income Tax Officer added the interest, credited to the account to the HUF income on the ground that the source for them was not proved. The assessee merely relied on the book entries and did not produce any affidavit from the lady. Held that the addition of the interest amount was in order. In the absence of any evidence on the record the Income Tax authorities had full jurisdiction to determine whether they should believe the mere statement in the books of the assessee that he was a debtor to the lady. If the assessee had produced an affidavit from the lady it would have been for the Income Tax department to find out on evidence whether these documents were or were not true.
748 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(aa)
Section 13(1)(aa) Unexplained investments, etc., deemed to be income – Proof of income from other source
PAGE NO
PROOF OF INCOME FROM OTHER SOURCE
1093. Addition made in assessee‟s income on the basis of incorrect report of Mukhtiarkar which was not relevant for the year of assessment held that in circumstances of the case Tribunal _ was justified in deleting the addition. [1986] 53 TAX 46 (H.C.Kar.)
748
1094. Burden of proof is on the Department to prove that assessee was owner of amounts despite the fact that credits were in the name of different known parties and department had _ power to make such parties appear before it. [1985] 52 TAX 77 (H.C.Kar.)
748
1095. Addition not supported by material or evidence on record _ are not sustainable. [1984] 50 Tax 226 (H.C.Kar.)
750
749 Section 13(1)(aa)
Income Tax Digest.
Section 13(1)(aa) Unexplained investments, etc., deemed to be income – Proof of income from other source
PROOF OF INCOME FROM OTHER SOURCE
Commissioner of Income Tax (Central Zone), Karachi v. Zamiruddin Ahmad – [1986] 53 TAX 46 (H.C.Kar.) 1093. Addition made in assessee‟s income on the basis of incorrect report of Mukhtiarkar which was not relevant for the year of assessment held that in circumstances of the case Tribunal was justified in deleting the addition. The assessee an individual, who had claimed income from a farm run I in partnership with his wife for the year 1971-72. The income that was claimed was 20,000, as 1/4th share of the assessee out of the total income of Rs.80,000. The Income Tax Officer not allow the said claim on the basis of Mukhtiarkar‟s report that the total income of the farm did not exceed Rs.14,264. Treating the balance of total income from the farm as Rs.65,736 as non-agricultural income, 3/4th share in the hand of assessee was considered as unexplained accretion. Only 1/4th income was considered to be in the hands of the assessee‟s wife. The decision of the Appellate Tribunal is essentially a decision arrived at after appreciating the facts of the case and it is not a decision which could be called perverse or arbitrary in any sense. Moreover the decision of the Appellate Tribunal hardly involves any question of law. The counsel for the Department has not been able to show us any defect in the reasoning of the Tribunal and we, therefore, answer the question in affirmative. Dhanrajmal Manumal & Sons v. Commissioner of Income Tax (West), Karachi – [1985] 52 TAX 77 (H.C.Kar.) 1094. Burden of proof is on the Department to prove that assessee was owner of amounts despite the fact that credits were in the name of different known parties and department had power to make such parties appear before it.
750 Section 13(1)(aa)
Income Tax Digest.
The question raised by the assessee in the case before us is not whether the Income Tax Officer is entitled to draw the inference that the cash credits are income of the year in which they were found with the assessee on his failure to explain their source, but whether there is material to reject the assessee‟s explanation and draw such an inference on the facts of this case. Now as stated in the passage quoted in the earlier part of this judgment, the question whether a receipt is to be treated as income or not must depend very largely on the facts and circumstances of each case. It is not the law that when once the explanation is rejected, it automatically follows that the receipts are income. Whether an explanation is acceptable, and if not, whether it should be inferred that the receipts constitute income or not has to be decided on a consideration of all the relevant facts and circumstances of the case. It is quite legitimate in the case of an assessee who is known to be carrying on several activities of an income earning character or who can reasonably be found to be involved in such activities, to draw the inference that the amounts found with him constitute income from undisclosed sources, in the absence of satisfactory explanation regarding their source. Such an inference should not be readily made in the case of a person, who has no known business or other source of income or who cannot even be reasonably suspected as engaged in any income earning activities. In the latter case there must be more substantial reasons to reject the assessee‟s explanation, and draw the inference that the amounts found with him constitute income. We think that the questions on which the reference has been made impugned the findings and validity of the Tribunal‟s conclusion that Rs.1,68,000, Rs.2,52,000 and Rs.81,000 were not an income from undisclosed sources, but the sums standing to the credits of various parties. In our view, this Court has always the jurisdiction to intervene if it appears that either the Tribunal has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence on contradictory of it, or it has acted on material partly relevant and partly irrelevant or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. As it was the department which claimed that the amounts belonged to the applicant even though they are standing in the names of various parties, the burden lay on the department to prove that the applicant was the owner of the amounts despite the fact that the credits were in
751 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(aa)
names of various parties. A simple way of discharging the onus and resolving the controversy was to trace the source and origins of the amount and find out its ultimate destination. So far as the source is concerned, there is no material on the record to show that the amounts came from the coffers of the applicant. As regards the destination of the amounts it has already been mentioned that there is nothing to show that it went to the coffers of the applicant. On the contrary there is positive evidence that the amounts were received by the parties. It would thus follow that both as regards the source as well as destination of the amounts the material on the record gives no support to the claim of the department. We are of the opinion that under these circumstances neither the Income Tax Officer nor the Tribunal were justified in fastening the blame at the door of the applicant and disbelieving its version that the amount of Rs.1,68,000, Rs.2,52,960 and Rs.81,000 entered in its account books were the short time deposits made and were duly repaid to the said parties on the ground that the former has failed to produce the said parties. The applicant took all steps that lay in his power to secure the presence of those parties who do not ordinarily reside in the same place of the applicant. Even the learned representative sought extension of time for production of those parties which was not allowed. In these circumstances it appears to us that the Tribunal wrongly took into consideration the circumstances that, these parties had not been produced on the material on record there is nothing to refute the allegation of the applicant that these sums of Rs.1,68,000, Rs.2,52,960 and Rs.81,000 are the deposits of said parties with the applicant. It seems that the Tribunal did not deal with the objection with regard to no opportunity being afforded to the applicant. The Tribunal had before it no legal material on which it could come to a contrary conclusion. Cases referred to: Universal Engineering Co., Karachi (PLD 1963 Kar. 487); Munnilal Murlidhar v. Commissioner of Income Tax (1973) 27 TAX 209.
Hussain Ebrahim Agencies Ltd., Karachi v. Commissioner of Income Tax (Central), Karachi – [1984] 50 Tax 226 (H.C.Kar.) 1095.
Addition not supported by material or evidence on record are not sustainable.
There is nothing in the order of the learned Tribunal to show that the account presented by the assessee/applicant was defective,
752 Section 13(1)(aa)
Income Tax Digest.
unverifiable and proper profits and gains could not be deduced from it. Mr. Ali Athar, the learned counsel for the applicant has contended that the income has been added on presumption and without rejecting the account books maintained properly. Under M.L.R. 32 any person who had filed return of his income under the Income Tax Act for the assessment year 1960-61 or in assessment year thereof up to assessment year 1968-69 had reason to believe that the return so flied was not correct was permitted to file a revised return of his Income. It was provided that no action of any kind whatsoever, shall be taken for having submitted an incorrect return originally. It also provided the method of charging to tax on excess income declared under it. M.L.R. 32 is a self-contained code to levy the tax on the excess income declared under it. Such declaration could be made for the period covered by assessment year 1960-61 to assessment year 1968-69. Such declaration was subject to scrutiny under M.L.R. 32. It was, therefore, open for the authorities under M.L.R. 32 to question whether the income declared for part of the period required any scrutiny or not. The applicant had declared excess income under M.L.R. 32 up to the year ending 30th September, 1967. The learned Tribunal while endorsing the view expressed by the Assessing Officer wanted to know why the assessee had not earned or declared excess income for the period 1.10.1968 to 30.9.1969 and merely on the basis of this nondeclaration have proceeded to add income from the undisclosed sources. The question why the assessee had not declared excess income under M.L.R. 32 for period 1.10.1968 to 30.9.1969 can hardly be within the ambit of enquiry made by the Assessing Officer or the learned Tribunal. This question could have been enquired by the proper authorities under proper Regulation. Whether such nondeclaration could be made for adding income is open to serious challenge. It is well established that the Assessing Officer while exercising his power under section 13 can reject the account books which are not properly maintained and from which the profits and gains cannot be properly deduced and then proceed to assess under the proviso of that section. Exercise of power under the proviso is dependent upon such facts. In the present case from the order of the learned Tribunal it is not clear that the accounts maintained by the assessee were not proper and unverifiable or that they were rejected on some cogent and reasonable cannot be sustained. What the Income Tax officer has done is that he has accepted the book version, but taking the previous declaration into consideration presumed that excess income would have been earned during the assessment year and not declared by the assessee in his returns. M.L.R. 32 does not
753 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(aa)
permit that if a declaration has not been made for part of the period the Assessing Officer will be entitled to raise any presumption from it. In fact M.L.R. No. 32 while requiring the persons to declare excess income seems to give some sort of immunity and unless Assessing Officer was specifically authorised to draw presumptions from such non-declaration he cannot be allowed to do so. This will only amount to vesting power in Assessing Officer on mere presumption, conjectures and surmises. Such powers are not vested in the Assessing Officer who is controlled by clear provisions of the Income Tax Act. We are, therefore, of the view that the order of the Assessing Officer that in the facts and circumstances of the case the addition of the aforestated amounts was arbitrary and not supported by material or evidence on record. We, therefore, answer the question No. 2 in the affirmative.
754 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(b)
Section 13(1)(b)* Unexplained investments, etc. deemed to be income
PAGE NO
EXCESS STOCK DECLARED WITH BANKS IS DEEMED INCOME
1096. Excess stock added under section 13 without deducting the _ purchase prices is justified. 1990 SCC 753 = [1990] 62 TAX 57 (S.C.Pak.) = 1990 PLD 990 (SC)
754
1097. Treating the value of entire stock not disclosed by the _ assessee as deemed income is not arbitrary. 1990 SCC 753 = [1990] 62 TAX 57 (S.C.Pak.) = 1990 PLD 990 (SC)
754
*
Corresponding to section 4(2B) of the 1922 Act.
755 Section 13(1)(b)
Income Tax Digest.
Section 13(1)(b)* Unexplained investments, etc. deemed to be income
EXCESS STOCK DECLARED WITH BANKS IS DEEMED INCOME
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Haji Maula Bux Corporation Ltd. Sargodha – 1990 SCC 753 = [1990] 62 TAX 57 (S.C.Pak.) = 1990 PLD 990 (SC) 1096.
Excess stock added under section 13 without deducting the purchase prices is justified.
The assessee was given an opportunity to explain the excess stock pledged with the bank which was not incorporated in the books of account. The assessee in his reply explained that the position of stock was overstated to the bank in order to secure greater credit facility. The officer disbelieved the assessee that he overstated stock to the extent of almost 400 per cent. He, therefore, rightly rejected the explanation of the assessee and treated the entire value of stock as income from undisclosed source. The claim of the assessee is not acceptable as hypothecation with bank is a reliable public document. Secondly, in the case of deemed income under section 13 there is no concept of allowing deduction or in the present case the non-existent purchase price. 1097.
Treating the value of entire stock not disclosed by the assessee as deemed income is not arbitrary
Section 13 does not allow any adjustment of purchase price. Once the assessee had failed to explain the source of investment, the entire amount would be deemed to be his income under section 13 and such an action could not be termed as arbitrary or perverse. Once a stand is taken and rejected by the assessing officer, it cannot be claimed that further opportunity was not given. The stand of the assessee that actually no amount was expended to acquire undisclosed stock and figures were artificially overstated to banks to get benefit from them was rejected as such as a plea against the public morality, there was no need or requirement or demand to give further opportunity to the assessee to explain the source of money invested in the excess stock. *
Corresponding to section 4(2B) of the 1922 Act.
756 Section 13(1)(b)
Income Tax Digest.
755 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(c)
Section 13(1)(c)* Unexplained investments, etc. deemed to be income
PAGE NO
GENERAL
1098. Overstated assets with banks are liable to be treated as _ deemed income under section 13. [2001] 83 TAX 487 (H.C.Lah.) = 2001 PTD 1437
756
1099. Every amount cannot be termed unexplained unless proved _ by evidence. [1989] 59 TAX 112 (H.C.Lah.)
757
*
Corresponding to section 4(2D) of the 1922 Act.
756 Section 13(1)(c)
Income Tax Digest.
Section 13(1)(c)* Unexplained investments, etc. deemed to be income
GENERAL
Commissioner of Income Tax, Multan Zone, Multan v. AlMakhdoom Industries, Multan – [2001] 83 TAX 487 (H.C.Lah.) = 2001 PTD 1437 1098.
Overstated assets with banks are liable to be treated as deemed income under section 13.
Learned counsel for the revenue in support of the submissions that the Tribunal wrongly maintained the deletion of addition earlier made by the Assessing Officer relies upon the ratio settled by the Hon‟ble Supreme Court of Pakistan in re: Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Messrs Haji Maula Bux Corporation Limited, Sargodha (PLD 1990 SC 990). In that case the apex Court maintained the opinion expressed by this Court in T.R. No. 70 of 1993 while answering an identical question. This Court had observed that “in these circumstances we find no hesitation in holding that the Tribunal was justified in relying on the material supplied by the Bank and the findings by the Tribunal that the assessee had 64,491 maunds, 14 seers of grams in excess of the declared closing stock of 21,653 maunds, 26 seers in based on cogent and relevant evidence adduced on the record. The Tribunal in agreement with the Income Tax Officer was justified in rejecting the accounts produced by the assessee. The addition on the account of difference between the declared and the stock reported by the Bank was, therefore, maintained. The Hon‟ble Supreme Court of Pakistan on the petition of the revenue, rather disapproved the findings of this Court in which the assessee was found entitled to the deduction of purchase price of the grams from the impugned addition. The issue having been considered at length in the aforesaid tax reference and the view adopted by this Court having been approved in the aforesaid judgement of the Hon‟ble Supreme *
Corresponding to section 4(2D) of the 1922 Act.
757 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(c)
Court of Pakistan the answer to the question has to be in the affirmative. The Assessing Officer is found legally justified in making the aforesaid addition under section 13(1)(c) of the Income Tax Ordinance, 1979 on account of variance between the quantities of cotton purchased and recorded in the banks and those shown in the pledge statement provided by the Bank. Case referred to: Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Haji Maula Bux Corporation Limited Sargodha [1990] 62 TAX 57 (S.C.Pak) = PLD 1990 SC 990.
Commissioner of Income Tax v. General Steel Industries – [1989] 59 TAX 112 (H.C.Lah.) 1099. Every amount cannot be termed unexplained unless proved by evidence. During the course of a raid on the assessee‟s premises, the Department took in their possession, a loose document captioned as Wajabul Wasool (i.e. receivables), showing amount to the extent of Rs.48,01,566/- receivable by the assessee. As this amount did not find mention in the assessee‟s account books, the Income Tax Officer proceeded under section 13 and made an addition of Rs.48,01,566/- in his total income. The Tribunal rightly maintained that document has to be read as a whole and if “payable” exceeded “receivable”, there was no occasion to treat the amount payable as unexplained investment and add the same to the total income of the assessee. Such a treatment of the case hardly gives rise to the question of law framed by the department. In this behalf we entirely agree with the Tribunal that the finding recorded by it is a finding of fact, based on appraisal of material on the record.
758 Section 13(1)(d)
Income Tax Digest.
Section 13(1)(d)* Unexplained investments, etc., deemed to be income
PAGE NO
VALUATION OF LAND
1100. Estimation of house does not give rise to a question of law. _ [2000] 81 TAX 341 (H.C.Lah.) = 2000 PTD 374
759
1101. In order to hold that the property is worth more than the price fetched at the public sale, the department must have in _ its possession some tangible evidence. [1941] 9 ITR 474 (Pat.)
759
VALUATION OF ASSETS - PROPERTY
1102. Others.
*
_
[1934] 2 ITR 417 (Rangoon)
Corresponding to section 4(2D) of the 1922 Act.
760
759 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(d)
Section 13(1)(d)* Unexplained investments, etc., deemed to be income
VALUATION OF LAND
Commissioner of Income Tax/Wealth Tax, Companies Zone II, Lawrence Road, Lahore v. Sarfaraz Ali Sheikh – [2000] 81 TAX 341 (H.C.Lah.) = 2000 PTD 374 1100. Estimation of house does not give rise to a question of law. For the Revenue it is contended that following question of law has arisen out of the said order of the Tribunal dated 14.4.1999:Whether on facts and in the circumstances of the case, the learned appellate authorities below were justified to reduce / delete the addition made by the Assessing Officer under section 13(1)(d) of the Income Tax Ordinance, 1979 by accepting the appeal of the respondent-assessee. As observed earlier, the estimation of value of the house in question does not give rise to a question of law. In re: Gulbai Jehangir Sukhia v. Controller of Estate Duty 1967 PTD 200, determination of valuation of a house was challenged before the Karachi High Court. The learned Division Bench found that the determination of valuation by the Tribunal on the basis of annual rent fixed by the Assessing Authority did not give rise to a question of law. In the present case the Tribunal directed acceptance of the declared value which was in accordance with the rates prescribed by the Revenue/District Collector for the purpose of levy of stamp duty under section 28A of the Stamp Act, 1899. Rule 207A of the Income Tax Rules, 1982 supports the adoption of such basis. The aforesaid question as framed, therefore, can not by any stretch be described as one of law or raising a legal controversy. Bishwanath Singh Sharma v. Commissioner of Income Tax – [1941] 9 ITR 474 (Pat.) 1101.
*
In order to hold that the property is worth more than the price fetched at the public sale, the department must have in its possession some tangible evidence.
Corresponding to section 4(2D) of the 1922 Act.
760 Section 13(1)(d)
Income Tax Digest.
The price which the assessee bids for the property at the public sale must ordinarily be taken to be its market value, but is open to the Income Tax Department, if there is anything before it, to hold that the property was worth more or less than the price which the assessee bid for it. In order, however, to hold that the property is worth more than the price fetched at the public sale the department must have in its possession some tangible evidence. Thus, where the assessee-decree holder himself purchases a property in execution of a mortgage decree against a debtor, the price which the assessee bids for the property at the public sale must ordinarily be taken to be its market value. _______________
VALUATION OF ASSETS - PROPERTY
Commissioner of Income Tax v. P.L.S.M. Concern – [1934] 2 ITR 417 (Rangoon) 1102.
Others.
Where lands are taken over in satisfaction of debt, their value for the purpose of computing profits and gains is not the amount of debt, but is estimated value of land.
761 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(1)(e)
Section 13(1)(e)* Unexplained investments, etc., deemed to be income
PAGE NO EXPLAINED SOURCE OF EXPENDITURE
1103. Additions made twice held unjustified. (H.C.Kar.)
_
[1987] 56 TAX 72
1104. Assessee was unable to explain the source of expenditure incurred held that the same can be treated as part of his _ income. [1983] 47 TAX 16 (H.C.Lah.)
*
Corresponding to section 4(2E) of the 1922 Act.
762
762
762 Section 13(1)(e)
Income Tax Digest.
Section 13(1)(e)* Unexplained investments, etc., deemed to be income
EXPLAINED SOURCE OF EXPENDITURE
A.M. Qureshi v. Commissioner of Income Tax – [1987] 56 TAX 72 (H.C.Kar.) 1103.
Additions made twice held unjustified.
Once the Income Tax Officer and the learned Tribunal accepted the total wealth inclusive of remuneration as such they cannot make further addition as the Act does not envisage addition of the same twice over. We are, therefore, of the opinion that the Income Tax Officer and the Appellate Tribunal erred in holding that Rs.30,000 was for personal expenditure. The Tribunal also acted erroneously in confirming addition of Rs.14,000 to the income of the assessee. Muhammad Bashir v. Income Tax Officer, Lahore [1983] 47 TAX 16 (H.C.Lah.) 1104.
Assessee was unable to explain the source of expenditure incurred held that the same can be treated as part of his income.
From the statement made by the petitioner before the Income Tax Officer it appears that he had constructed the building during the assessment year in question. If he is unable to satisfactorily account for the source from which he had raised the money it can be treated as expenditure incurred within the meaning of section 13(1)(e) of the Income Tax Ordinance (corresponding to section 4(2-E) of the Income Tax Act) and thus treated as part of his income.
*
Corresponding to section 4(2E) of the 1922 Act.
763 UNEXPLAINED INVESTMENTS, ETC., DEEMED TO BE INCOME
Section 13(2)
Section 13(2)* Unexplained investments, etc., deemed to be income
PAGE NO
STATUS OF LAW
1105. Tribunal held was not justified in cancelling assessment for not obtaining the prior approval as on the material time no _ such requirement of law was on statute. [1992] 65 TAX 204 (H.C.Lah.)
*
Corresponding to section 4(2F) of the 1922 Act.
764
764 Section 13(2)
Income Tax Digest.
Section 13(2)* Unexplained investments, etc., deemed to be income
STATUS OF LAW
Commissioner of Income Tax, Lahore v. Abdus Salam of Sialkot – [1992] 65 TAX 204 (H.C.Lah.) 1105.
Tribunal held was not justified in cancelling assessment for not obtaining the prior approval as on the material time no such requirement of law was on statute.
We find that section 4(2-F) was introduced in statute book w.e.f. 1.7.1972 by Finance Ordinance (XXI) of 1972. The order of the Income Tax Officer, (A-Circle) Sialkot out of which the present reference has ultimately arisen was passed on 19.2.1972. That being so, there could possibly be no effect of section 4(2-F) ibid and the same could not be pressed for the purposes of the assessment which was made on 19.2.1972 i.e. almost five months before the provision came into existence.
*
Corresponding to section 4(2F) of the 1922 Act.
765 EXEMPTIONS
Section 14
Section 14* Exemptions
PAGE NO
EXEMPT INCOME, MEANING OF
1106. Exempt income forms part of total income though not taxed. _ [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
767
1107. All kinds of income, including exempt income form part of total income and, therefore, assessable under the Income Tax Ordinance, 1979 even though tax liability to whole or a _ part of it may never arise. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
767
“ASSESSABLE” AND “TAXABLE” CONTAIN DIFFERENT MEANINGS AND APPLICATIONS
1108. “Assessable” and “taxable” contain different meanings and applications - All kinds of income above a certain limit were “assessable” under the Income Tax Ordinance, 1979 though _ some or part of some of them may not be “taxable” [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
767
1109. Declaration of income, the claim qua exemption and its acceptance by the Assessing Officer was an “assessment”. _ [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
768
EXEMPT INCOMES VIS-A-VIS CHARGE OF WORKERS WELFARE FUND
1110. Non-mentioning of section 48 of the Income Tax Ordinance, 1979 in Section 4(1) of the Workers Welfare Fund _ Ordinance, 1971 is of no significance at all. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
768
1111. Charge of workers welfare fund through sections 3 & 4 of the Workers Welfare Fund Ordinance, 1971 in no way stands relinquished in view of an exemption granted under the Income Tax Ordinance, 1979 for any consideration _ whatsoever. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
768
*
Corresponding to section 4(3) of the 1922 Act.
766 Section 14
Income Tax Digest.
1112. Exemptions provided under Second Schedule to the Income Tax Ordinance, 1979 were not extendable so as to grant a similar exemption from the Workers Welfare Fund as chargeable under the provisions of Workers Welfare Fund Ordinance, 1971 and Income-tax Department acted only as _ a collecting agent. [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958
768
1113. Workers welfare fund was not leviable to tax in case of an industrial establishment whose income was exempt from _ tax. [2000] 82 TAX 61 (H.C.Pesh.)
769
767 EXEMPTIONS
Section 14
Section 14* Exemptions
EXEMPT INCOME, MEANING OF
Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 1106.
Exempt income forms part of total income though not taxed.
It is that the income so exempted will form part of the total income though it shall not be taxed. 1107.
All kinds of income, including exempt income form part of total income and, therefore, assessable under the Income Tax Ordinance, 1979 even though tax liability to whole or a part of it may never arise.
As observed above all kinds of incomes, including exempt income will form part of total income and, therefore, assessable under the Ordinance even though a tax liability to whole or a part of it may never arise. _______________
“ASSESSABLE” AND “TAXABLE” CONTAIN DIFFERENT MEANINGS AND APPLICATIONS
Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 1108.
*
“Assessable” and “taxable” contain different meanings and applications - All kinds of income above a certain limit were “assessable” under the Income Tax Ordinance, 1979 though some or part of some of them may not be “taxable”
Corresponding to section 4(3) of the 1922 Act.
768 Section 14
Income Tax Digest.
The interpretation of the Tribunal in fact has resulted in interchanging the words “assessable” with the words “taxable”. Both words are certainly different with different meanings and implications. All kinds of incomes above a certain limit are “assessable” under Ordinance though some or part of some of them may not be taxable. 1109.
Declaration of income, the claim qua exemption and its acceptance by the Assessing Officer was an “assessment”.
The declaration of an income, the claim qua its exemption and its acceptance by the Assessing Officer is an “assessment”. _______________
EXEMPT INCOMES VIS-A-VIS CHARGE OF WORKERS WELFARE FUND
Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Allah Yar Cotton Ginning & Pressing Mills (Pvt.) Limited, Multan Road, Vehari – [2000] 82 TAX 433 (H.C.Lah.) = 2000 PTD 2958 1110.
Non-mentioning of section 48 of the Income Tax Ordinance, 1979 in Section 4(1) of the Workers Welfare Fund Ordinance, 1971 is of no significance at all.
Since all incomes are now assessable under the Ordinance including an income exempted with reference to section 14(1) of the Ordinance, the non-mentioning of the provisions with section 48 of the Ordinance in section 4(1) of the Workers Welfare Fund Ordinance is, therefore, of no significance at all. 1111.
Charge of workers welfare fund through sections 3 & 4 of the Workers Welfare Fund Ordinance, 1971 in no way stands relinquished in view of an exemption granted under the Income Tax Ordinance, 1979 for any consideration whatsoever.
However, the fact that income under any provision of Income Tax Ordinance or any other law for the time being in force stands exempted from the levy of income tax will not be itself derogate from the fact that the person had earned income and that it was assessable under the Ordinance. The Charge of the fund through section 3 and 4 of the Workers Welfare Fund Ordinance in no way stands relinquished in view of an exemption granted under the Ordinance for any consideration whatsoever. 1112.
Exemptions provided under Second Schedule to the Income Tax Ordinance, 1979 were not extendable so as to grant a
769 EXEMPTIONS
Section 14
similar exemption from the Workers Welfare Fund as chargeable under the provisions of Workers Welfare Fund Ordinance, 1971 and Income tax Department acted only as a collecting agent. Therefore, in our view all industrial establishments whose income in an accounting year is not less than Rs.1 lac are liable to pay Workers Welfare Fund Ordinance at the prescribed rate even though they enjoy exemption under any one or more of the provisions of Income Tax Ordinance. Once an industrial establishment returns an income which is “assessable” under the Ordinance though no tax is leviable for the reason of an exemption, shall remain subject to the levy of the Fund. The word “assessable” cannot be allowed to be read as “taxable”. If the legislature intended to forego the levy of the Fund in cases of exempt income then nothing was more easy to say so. The levy of the Fund could have easily been co-related with income tax and not the assessable income. Accordingly it is the returned income irrespective of any exemption which is to be made basis for the payment of the Fund as reference to the “income so assessed” in subsection (4) of section 4 of the Workers Welfare Fund Ordinance cannot be read and interpreted as “income so taxed”. Accordingly our answer to all the three questions as reproduced above is in the negative. The learned Tribunal was not justified in deleting the Worker‟s Welfare Fund charged under section 3 and 4 (1) of the Workers Welfare Fund Ordinance; that the exemption provided under Second Schedule to the Income Tax Ordinance were not extendable so as to grant a similar exemption from the Fund as chargeable under the said provisions of Workers Welfare Fund Ordinance and that income tax department acts only as a collecting agent. Commissioner of Income Tax v. Al-Karam Lamps (Pvt.) Ltd. Peshawar and others – [2000] 82 TAX 61 (H.C.Pesh.) 1113.
Workers welfare fund was not leviable to tax in case of an industrial establishment whose income was exempt from tax.
The phase “so much of total income as is assessable” appears to be more relevant. The income for the purpose of income tax is to be ascertained when Returns are filed and after considering the total income of the industrial establishment, its tax liability is determined. But, due to respondents being exempt from payment of income tax or in view of their income being not assessable due to exemption granted to them under section 14 or any other exempting provisions other than section 48 of the Ordinance, their total income is not assessable. Therefore, since the words “total income” have been used to which
770 Section 14
Income Tax Digest.
there stands extended exemption, as such, levy of/deduction of Workers Welfare Fund appears to be not in consonance with the concept of exemption. The respondents are not availing exemption under second schedule of the Income Tax Ordinance, what is disputed is that notwithstanding such exemptions. The respondents “total income” if it is more than one lakh rupees for the concerned year, 2% are deductible towards the Workers Welfare Fund. This appears to be illogical because on one hand under the special law dealing with taxation in income, has exempted the industrial establishments and on the other hand through different enactments, such exemptions cannot be frustrated when the special enactment i.e. WWFO in section 4 itself has used the language “total income assessable” and also that such income would have been so assessable but for the mode of section 48 of the Ordinance, would mean that “except the condition of income to be less than one lakh rupees, it would include such industries which were granted exemption from the payment of income tax under section 48 of the Ordinance. If the intention of the Legislature was to include all other exempted industries, it would have so included by express reference made in section 4 itself. In absence of any such reference, the only necessary corollary that follows is that all other industries who are enjoying exemption from the payment of income tax other than under section 48 have intentionally been included to be covered within the mischief of section 4 towards their liability to pay WWF. Our conclusion of the matter is that so much of total income of an industrial establishment which is not open to assessment or is exempted establishment which is exempted under section 48, are not liable to the charge of WWF. Therefore, appeals and references and the question formulated therein is answered in the terms that on facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified and was correct in holding that WWF is not leviable as long the total income of an industrial establishment is not less than one lakh rupees or which are exempted from payment of income tax under section 14 read with Second Schedule of the Ordinance or any other exempting clause of the Ordinance but other than industries which are exempted under section 48 of the Ordinance.
771 HEADS OF INCOME
Section 15
Section 15* Heads of income
PAGE NO
PRINCIPLES GOVERNING CLASSIFICATION OF INCOME
1114. Company were making investments in stocks, shares, etc. and receive dividend income which held to be profits and gains and business and chargeable under section 10 of 1922 _ Act. [1967] 15 TAX 89 (H.C.Kar.)
772
1115. List of heads is a list of sources not in sense of attributing income to one property rather than another, one business _ rather than another. [1938] 6 ITR 521 (PC)
773
1116. Each section which deals with one of first five „heads‟ contains specific provisions for necessary deductions and allowances to be made for purpose of arriving at taxable _ balance. 5 ITC 1 (PC)
774
1117. Relevance of fact that receipt does not fall within _ cornerstones of section 15 of the 1979 Ordinance. [1946] 14 ITR 561 (All.)
774
*
Corresponding to section 6 of the 1922 Act.
772 Section 15
Income Tax Digest.
Section 15* Heads of income
PRINCIPLES GOVERNING CLASSIFICATION OF INCOME
Asiatic Agencies Limited, Karachi v. Commissioner of Income Tax – [1967] 15 TAX 89 (H.C.Kar.) 1114.
Company were making investments in stocks, shares, etc. and receive dividend income which held to be profits and gains and business and chargeable under section 10 of 1922 Act.
The assessee, a private limited company, was engaged in making investments in stocks, shares, etc. and had also income from property. The assessee filed return of income disclosing income from rent, interest on stocks, interest on deposits from a company, interest on fixed deposit and gross dividend. The Income Tax Officer charged to tax the rental income under section 9 of the Income Tax Act and interest on securities under section 8 of the Act, but held that the other income of the assessee-company was income from “other sources” and not from “business”. On appeals, both the Appellate Assistant Commissioner and the Appellate Tribunal concurred in the view taken by the Income Tax Officer. The Appellate Tribunal took the view that the assessee was neither a dealer in shares nor an investment company but it was merely a case of an ordinary investor and that the 34 clauses in the objects of the Memorandum of Association of the assessee-company did not constitute the main object for forming the company but were inflated clauses many of which were never needed by the company. On a reference: Held,
*
that the evidence on the record conclusively establishes that the assessee-company was doing business of investing money in stocks, shares, etc. The view of the Tribunal, therefore, that the case of the company would be merely that of an ordinary investor is not borne out. The income of the company from dividend does not, therefore, fall under the head “other sources.” It would be income from
Corresponding to section 6 of the 1922 Act.
773 HEADS OF INCOME
Section 15
“business” and chargeable only under section 10 of the Income Tax Act. The objects of the company appearing in clause 3(1) of the Memorandum of Association indicate that the primary business of the company was to make investment in stocks, shares and also earn money by advance of loans and making fixed deposits. The case of the assessee-company also is that this is the only business which the company has been doing. There is no other business, according to them, whatever which they have done so far. There is also nothing on the record to indicate that the company had any other business except the business shown by them in their returns filed for the years 195758 and 1958-59. The learned counsel for department has also not been able to satisfy us whether the company was doing any business other than the business which they alleged they were doing. This being the state of evidence on record, it is difficult in the extreme to come to the conclusion that the income of the company would be income from “other sources” and not from its “business.” There is no doubt with regard to the general proposition laid down in United Commercial Bank Ltd., v. Commissioner of Income Tax [(1957) 32 ITR 688], that the income of the assessee is to be treated as one and the mode in which Income Tax is to be levied is laid down in sections 7 to 12. These sections are specific. The Income Tax charged on things falling under heads mentioned in section 6 will be charged in accordance with the corresponding sections 7 to 12. The income of the assessee can be treated as income from “other sources” only if it is not held to be income from “business” falling under section 6(iv) of the Act. In view of what we have said above the profits and gains of the assessee company would obviously be covered by section 6(iv) and not section 6(v) and, therefore, would be income from “business” and not from “other sources.” The income from dividend in this case being income from the “business” of the company can be charged only under section 10 of the Income Tax Act. Commissioner of Income Tax v. ChunniIaI B. Mehta – [1938] 6 ITR 521 (PC) 1115.
List of heads is a list of sources not in sense of attributing income to one property rather than another, one business rather than another.
The list of „heads‟ in section 6 of the 1922 Act [corresponding to section 15 of the Income Tax Ordinance, 1979] is a list of sources not in the sense of attributing the income to one property rather than another, one business rather than another, but only in the sense of attributing
774 Section 15
Income Tax Digest.
it to property as distinct from employment, or business as distinct from investment. Raja Probhat Chandra Barua v. Commissioner of Income Tax – 5 ITC 1 (PC) 1116.
Each section which deals with one of first five „heads‟ contains specific provisions for necessary deductions and allowances to be made for purpose of arriving at taxable balance.
The tax is upon „income, profits and gains‟. It is not a tax on gross receipts. Wit this fact in view, each section which deals with one of the first five „heads‟ specified in section 6 of the 1922 Act [corresponding to section 15 of the Income Tax Ordinance, 1979] contains, where proper, specific provisions for the necessary deductions and allowances to be made for the purpose of arriving at the taxable balance. In section 6, the words „other sources must mean sources other than those described earlier and, therefore, could not include any source which could properly be described as „property‟. Rani Amrit Kunwar v. Commissioner of Income Tax – [1946] 14 ITR 561 (All.) 1117.
Relevance of fact that receipt does not fall within cornerstones of section 15 of the 1979 Ordinance.
It is impossible to accept so large and general a proposition that nothing can in India be the „income‟ of a recipient of money which cannot be traced to one of the first four sources set out in section 6 of the 1922 Act [corresponding to section 15 of the Income Tax Ordinance, 1979] or to some other source involving either the product of some outlay by, or some binding and irrevocable obligation to pay to, the recipient.
775 SALARY
Section 16
Section 16* Salary
PAGE NO
COMPENSATION FOR LOSS OF SERVICE IS CAPITAL RECEIPT
1118. Assessee received an amount as separation allowance on cessation of business by the employer, held that compensation for loss of service is capital receipt and not _ liable to tax. [1984] 50 TAX 144 (H.C.Kar.)
779
MASTER SERVANT RELATIONSHIP
1119. Receipt of remuneration for holding an office does not necessarily give rise to a relationship of master and servant. _ [1947] 15 ITR 8 (Bom.)
780
COMPENSATION UNDER GOLDEN HANDSHAKE SCHEME
1120. CBR‘s circular holding compensation under Golden Handshake Scheme taxable declared unlawful for want of _ jurisdiction. [1998] 78 TAX 1 (H.C.Lah.) = 1998 PCLR 1382
781
SALARY V. PROFESSIONAL INCOME
1121. A foreign qualified doctor entered into an agreement with a company for rendering professional services, which the Income Tax Officer treated as salary held that Income Tax Officer‘s action was not justified, duties performed by the _ assessee were an integral part of the business. [1990] 62 TAX 44 (H.C.Kar.)
781
1122. A person working part time in several companies could not be considered as a whole time employee in one of the _ companies. [1989] 59 TAX 65 (H.C.Kar.)
783
SALRY VS. BUSINESS INCOME
1123. Others.
*
_
6 ITC 374 (Rangoon)
Corresponding to section 7 of the 1922 Act.
783
776 Section 16
Income Tax Digest. PAGE NO
CONTRIBUTIONS TO PENSION FUNDS
1124. Contributions to pension funds cannot be treated as part of salary of employee and eligible to tax under section 7(1) of _ the 1922 Act. [1984] 49 TAX 205 (H.C.Kar.)
784
1125. Amount paid to pension fund cannot be treated as ―due‖ or ―payable‖ or even as ―salary‖ during the relevant charge year _ for the purpose of charging tax. [1984] 49 TAX 198 (H.C.Kar.)
785
ACCRUAL OF SALARY
1126. Portion of salary set apart for discharging obligation under decree of the Court does not come under the ambit of section _ 50 of 1979 Ordinance. [1975] 31 TAX 156 (H.C.Lah.) _ 1127. Others. 10 ITC 461 (Lahore)
787 788
ILLUSTRATIONS OF SALARY
_ _ 1128. Gratuity. 3 ITR 461 (Mad.); [1934] 2 ITR 390 (Rangoon); _ [1947] 15 ITR 8 (Bom.) _ 1129. Commission. [1944] 12 ITR 193 (Lahore) _ 1130. Contribution to unrecognised provident fund. [1942] 10 ITR 259 (Pat.)
788 789 789
1131. Interest on employees contribution to unrecognised provident _ fund is not salary. [1933] 1 ITR 152 (Rangoon)
789
1132. Lump sum received from provident fund on retirement on account of the employer‘s contribution to the fund and the accumulated interest on the total contributions thereto is not _ taxable. [1940] 8 ITR 85 (Bom.)
790
1133. Christmas gift vouchers given to employees are part of _ taxable salary. 42 Tax Cas. 351 (HL)
790
1134. Sums received by employees on termination of profit-sharing _ scheme run by employer is assessable as salary. 51 Tax Cas. 583 (HL) _ 1135. Salary to partner. [1944] 12 ITR 351 (Pat.)
791 791
1136. Monthly sum received by agent for life on termination of _ agency. [1937] 5 ITR 527 (Sind)
791
1137. Amount paid periodically to a person whose business is taken over, to prevent him from carrying on a competitive _ business is not ‗salary‘ in his hands. [1941] 9 ITR 642 (Sind)
792
777 SALARY
Section 16 PAGE NO
1138. Amount paid by one co-owner to another to manage the _ estate. [1935] 3 ITR 404 (Lahore)
792
PERQUISITES - ALLOWANCES
1139. Residential telephone bill (perquisite) provided by employer to employee not exceeding the limit provided for it in clause (d) of sub-section (4) of section 10 of 1922 Act is not _ subjected to tax deduction. [1984] 50 TAX 88 (H.C.Kar.) _ 1140. Allowances paid for maintenance of children. [1942] 10 ITR 205 (All.)
792 793
CAR PERQUISITES
1141. Failure of assessee to prove that car was exclusively used by him, exemption claimed on this account reduced by assessing _ officer held justified. [1984] 49 TAX 198 (H.C.Kar.)
794
1142. Where employee avails car facility from employer opting br reduction in wages, there is a taxable perquisite - only gross _ wages and not reduced wages are taxable. 46 Tax Cas. 211 (HL)
794
SHARES ALLOTMENT TO EMPLOYEES
1143. Value of advantage arising out of acquisition of shares in parent company of employer-company is a taxable _ perquisite. 52 Tax Cas. 533 (HL)
795
POSITION UNDER THE 1979 ORDINANCE
1144. Compensation to director for refraining from resignation is _ taxable as profits in lieu of salary. [1940] 8 ITR (Suppl.) 75 (HL)
796
1145. Lump sum payment made after termination of service for restraining employee from competing in same business is not _ profit arising from office or employment. [1943] 11 ITR (Suppl.) 23 (HL)
797
POSITION UNDER 1922 ACT
1146. General. 1147. General.
_ _
[1945] 13 ITR 436 (Lahore)
798
[1937] 5 ITR 428 (PC)
798
MANAGING DIRECTOR/DIRECTOR
1148. Director in more than one company but receiving emoluments from one is entitled to concessions given in _ rules. [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497
799
778 Section 16
Income Tax Digest. PAGE NO
1149. Assessee claimed exemption in respect of entertainment allowance received from one of three companies as a whole time employee, Assessing Officer disallowed the same, held that Tribunal was not justified in holding that the Assessee was an employee of a company and liable to be taxed under _ section 7. [1988] 58 TAX 123 (H.C.Kar.)
799
POSITION PRIOR TO 1979
1150. Where powers of the managing director emanate from articles of association and are to be exercised within limits prescribed thereunder and subject to supervision and control of board of directors, he is an employee and not an agent of _ company. [1946] 14 ITR 606 (Bom.)
801
779 SALARY
Section 16
Section 16* Salary
COMPENSATION FOR LOSS OF SERVICE IS CAPITAL RECEIPT
Commissioner of Income Tax, (East), Karachi v. M. A. Toor – [1984] 50 TAX 144 (H.C.Kar.) 1118.
Assessee received an amount as separation allowance on cessation of business by the employer, held that compensation for loss of service is capital receipt and not liable to tax.
A perusal of the two letters extensively quoted by us herein before would show that the Corporation terminated the employment or their employees with effect from 31.3.1963, and paid them off in full and final settlement of their accounts, and they were offered fresh employment by the company provided they applied for the same and returned to work on 1.4.1963, when they were to be given application forms for employment which were required to be filled in and submitted to the concerned department, on the receipt whereof the individual appointment letter for a probationary period of three months were issued. It is, therefore, clear that they were to be, in the first instance, employed for a probationary period of three months and they might or might have been found suitable for the job in the company. Accordingly, we find that three was loss of employment in the circumstances of this case. The expression “Compensation for loss of employment” used in explanation 2 to section 7 of the Act, as has been held, in a number of cases refers to any payment made, whether under a legal liability or voluntarily, to compensate or act as a solarium for the loss of employment suffered by the employee. We may, however, refer to W.A. Guff v. Commissioner of Income Tax, Bombay City (1957) 31 ITR 826 wherein Chagla, C.J. who wrote the opinion of the court, following the decision of the Privy Council in Shaw Wallance & Co. v. Commissioner of Income Tax (1932) 2 Comp. Cas 276, 6 I.T.C. 178, AIR. 1932 Bom, and Chibbet v. Joseph Robinson & Sons (1924) 9 Tax *
Corresponding to section 7 of the 1922 Act.
780 Section 16
Income Tax Digest.
Cas. 48, opined that the expression “compensation for loss of employment” used in Explanation 2 to section 7 of the Act refers to any payment made, whether under a legal liability or voluntarily, to compensate or act as a solarium for the loss of employment suffered by the employee. Now, so far as the question that the amount paid was a remuneration for past service, it may be observed that the term „remuneration‟ for past service implies on appreciation of the satisfactory service of the employee by his employer, in recognition of which the remuneration is going to be given and in the present case, it has been found by the Tribunal that there is no evidence, whatever, that this payment of the allowance was made out of any appreciation of the employee‟s good work with the Corporation. On the contrary, it is stated by the Tribunal that what was given as separation allowance was by way of bargain or settlement of certain outstanding disputes under section 5(3) of the Industrial Disputes Ordinance, 1959, read with rule 57 of the Rules made thereunder as recited in the Memorandum of settlement between the Corporation and General Motor Employees Union, Karachi, dated 15.3.1963, signed by the representatives of both the employees and the employer. The short recital of the case quoted below will clearly speak for itself and show that the settlement was arrived at after certain negotiations between the representatives of the employees and the Corporation. Cases referred to: Shaw Wallace & Co. v. Commissioner of Income Tax [1932] 2 Comp. Cas 276; 6 I.T.C. 178; AIR 1932 Bom. 138; Chibbet v. Joseph Robinson & Sons [1924] 9 Tax Cas. 48; Commissioner of Income Tax v. E.D. Sheppard [1963] 7 Tax 383, Duff (H. M. Inspector of Taxes v. Barlow [1942] 10 ITR 157; P.D. Khosla [1945] 13 ITR 436 and I.T.A. No. 2190 of 1968-69 Cases distinguished: Henry (H.M. Inspector of Taxes v. Arthor Foster [1931] 16 Tax Cas. 605; Commissioner of Income Tax v. S.B. Jain (1965 PTD 767). _______________
MASTER SERVANT RELATIONSHIP
Commissioner of Income Tax v. Lady Navajbai R.J. Tata – [1947] 15 ITR 8 (Bom.) 1119.
Receipt of remuneration for holding an office does not necessarily give rise to a relationship of master and servant.
The fact that an assessee holds an office is not decisive of the question whether remuneration earned by him is as a servant. Receipt of remuneration for holding an office does not necessarily give rise to a
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relationship of master and servant between the holder of the office and the person who pays the remuneration. _______________
COMPENSATION UNDER GOLDEN HANDSHAKE SCHEME
Nasir Mahmood Dar, etc. v. Federation of Pakistan and Others – [1998] 78 TAX 1 (H.C.Lah.) = 1998 PCLR 1382 1120.
CBR‘s circular holding compensation under Golden Handshake Scheme taxable declared unlawful for want of jurisdiction.
The Central Board of Revenue has no jurisdiction to issue any circular as to curtail the discretion vesting in the Adjudication Authorities .................. the circular issued holding that the amounts received under the Golden Handshake Scheme were salaries is ultra vires the powers of the Central Board of Revenue. All these petitions are allowed and the circular issued by the Central Board of Revenue on 6.11.1997 is declared to be without any lawful authority and of no legal effect. The Adjudication Officer shall proceed to decide independently of the circular as to whether the amounts received by the petitioners are tantamount to salaries or not and are taxable. The amounts, if any, withheld by the Banks and the amounts disbursed to the Department under the impugned Circular, shall be refunded to the petitioners. Case referred to: Central Insurance Co. and other v. C.B.R. [1993] 68 TAX 86 (S.C.Pak.) = (1993 SCMR 1232). _______________
SALARY V. PROFESSIONAL INCOME
Dr. A. Razzak Kazi v. Commissioner of Income Tax – [1990] 62 TAX 44 (H.C.Kar.) 1121.
A foreign qualified doctor entered into an agreement with a company for rendering professional services, which the Income Tax Officer treated as salary held that Income Tax Officer‘s action was not justified, duties performed by the assessee were an integral part of the business.
The applicant filed his return for assessment years 1975-76 and 197677 declaring his income from profession and medical practice. He also claimed exemption from tax under notification SRO 26(K)/58 dated 19.12.1968. The Income Tax Officer did not accept the claim of exemption and treated the payments made to the applicant as income
782 Section 16
Income Tax Digest.
from salary and subjected the same to tax in both the years under section 7 of the Income Tax Act 1922. The question whether remuneration paid to person engaged to perform work is a salary or income from profession, vocation or business depends upon the facts of the case and the terms of employment. There is a thin line of distinction, which can be visibly drawn by scanning the contract. Such difficulty arises in cases of professionals like lawyers, chartered accountants, doctors, engineers, artists, director of a company and other categories of persons who lend their intellect specialised knowledge and expertise. Where assessee‟s employment is temporary and incidental to or dependent on profession without any intention to be engaged permanently and further that he is free to lend his services to others as well the income so accrued will not fall under the head salary. When a person joins service and surrenders his profession or „exchanges it for service‟ thereby permitting the employer to control the manner in which he must work, the remuneration paid to him will be classified as salary. But where there is some doubt in determining such control then if the work performed by the assessee is an integral part of the business or vocation of the employer the relationship of master and servant will be created. In the present case, we find that the contract did not provide for company‟s control on the manner the work was to be performed by the assessee. The duties performed by the assessee were not the integral part of the business of the company. The applicant was a foreign qualified doctor who had the professional expertise and knowledge to treat the patients. He was not required to seek any direction or instruction from the company for the manner in which patients were to be treated. It was left entirely to the sole discretion of the applicant to treat in any manner he liked with the help of the medical and paramedical staff employed and paid by him. He was rendering professional services in the clinic provided by the company. The setting up of practice and not clinic was a condition precedent for grant of exemption. Practice can be established independently in his own clinic or in the hospital or clinic established by any one else for the treatment of the patients. We are therefore, of the view that the applicant was not an employee of the company and the remuneration paid to him cannot be classified as salary. The payment was made as remuneration for professional duties discharged by him as a doctor. We therefore, held that the applicant was entitled to exemption under aforesaid notification and answer the question in the negative. Cases referred to: Dharnagadhra Chemical Works Ltd. v. State of Saurashtra and others AIR 1957 S.C. 264; Piyare Lal Admishwar Ltd. v.
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Commissioner of Income Tax (1960) 40 ITR 17; Commissioner of Income Tax v. Manmohan Das (1966) 59 ITR 699 Commissioner of Income Tax v. Durgakhote (1952) 21 ITR 22 and Davies v. Braithwaite (1931) 18 Tax Case 198.
Commissioner of Income Tax, Karachi v. Arshad Javed – [1989] 59 TAX 65 (H.C.Kar.) 1122.
A person working part time in several companies could not be considered as a whole time employee in one of the companies.
The respondent is a director of two companies namely Atlas Trade Agencies Limited and Atlas Rubber and Plastic Industries Limited. During the assessment year 1973-74 he received remuneration from these companies. In addition he also received conveyance allowance amounting to Rs.36,000. The Income Tax Officer assessed the respondent under section 12 of the Income Tax Act and conveyance allowance was also brought to charge of Tax. The respondent filed an appeal before the Tribunal contending that his income fell under section 7 and therefore he was entitled to exemption for perquisites as provided by Rule 39 of the Income Tax Rules. The appeal was allowed and the respondent was treated as an employee within the meaning of Rule 39. Case followed: Commissioner of Income Tax, Central Zone, „A‟ v. S. Mazhar Hussain [1988] 58 TAX 128 = (1988 PTD 563). Case referred to: Munshi Gulab Singh & Sons v. Commissioner of Income Tax [1946] ITR 66. _______________
SALARY VS. BUSINESS INCOME
Rangoon Electric Trarnway & Supply Co. Ltd. v. Commissioner of Income Tax – 6 ITC 374 (Rangoon) 1123.
Others.
Under a benefit scheme for its employees, the assessee-company decided to grant bonus to its employees in the form of dividend on its shares, and for this purpose, set aside a specified amount for purchase of its shares, and the shares so purchased in the joint names of the managing agent and the employee were transferred to the joint account of the managing agent and employee as trustees. The shares were to become the absolute property of the employee on the termination of his engagement with the essence. Dividends an the shares were paid to the employee as and when they arose. On the question whether the amount so set apart, was assessable as the employee‟s salary: Held that the effect of the scheme was that after the shares had been transferred into the joint names of the managing agent and the
784 Section 16
Income Tax Digest.
employee the company did not possess any legal or beneficial interest in the shares; it possessed no legal interest in the shares because the legal estate passed to the trustees on the registration of the transfer, and it possessed no beneficial interest in the shares because after the transfer to the trustees the shares thereafter were held by the trustees for the employee as the person entitled to the beneficial interest therein. When the trustees at the termination of his employment transferred to the employee the legal estate in the shares of which he already possessed the beneficial interest, it could not be maintained that the transfer of the shares amounted to the receipt by the employee of a perquisite or profit in addition to his salary paid by or on behalf of the company, because at the time when the transfer by the trustees to the employee was made the company had neither a legal nor a beneficial interest in the shares. The transfer of the shares to the employee on the termination of employment with the company was not a payment falling under the head „Salaries‟ as defined in section 7 of the 1922 Act. _______________
CONTRIBUTIONS TO PENSION FUNDS
Pakistan Tobacco Co. Ltd. v. Income Tax Officer Salary Circle and others, Karachi – [1984] 49 TAX 205 (H.C.Kar.) 1124.
Contributions to pension funds cannot be treated as part of salary of employee and eligible to tax under section 7(1) of the 1922 Act.
The applicant bad been regularly remitting to this Fund its contribution and on behalf of the employees as well, on 28.9.1983 the applicant received a letter from the Assessing Officer demanding payment of Rs.71,46,516/- being the arrears of tax payable, on the contribution made by the applicant to the Overseas Pension Fund on behalf of the employees. The Assessing Officer treated the Company‟s contribution to the Fund as income of the employees and as this amount was not included in the salary and tax was not deducted at source, the applicant Company was treated an assessee in default under section 18(7) of the Income Tax Act [Parallel to section 52 of the Income Tax Ordinance, 1979.] and was called upon to pay the arrears of tax amounting to Rs.71,46,516-3/8, Notices were also issued by the Income Tax Officer in respect of those demands of arrears in the case of 34 expatriate employees to which objections were filed, but rejected by the Income Tax Officer. The applicant had contended that contributions made by the applicant to the Overseas Pension Fund
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were not taxable as salaries under section 7 of the Income Tax Act and there was no failure in discharge of its obligation under section 18(2) of the Income Tax Act but it was rejected. The applicant, therefore filed an appeal before the Tribunal which held that the contribution made by the members of the Overseas Pension Fund on behalf of their employees constituted income in the hands of the employees during the years in which contributions were made and were covered by section 7(1) of the Income Tax Act. On the basis of these facts the Tribunal has referred the following questions:1. Whether on the facts and in the circumstances of the case, the contributions made by the applicant Company to the Overseas Pension Fund on behalf of the employees of the British American Tobacco Company were part of their salary and as such taxable under section 7(1) of the Income Tax Act? 2. Whether the applicants were rightly treated as assessee in default and made liable for payment of the demand of arrears? Mr.Mansoor Ahmed Khan, the learned counsel for the applicant has entirely relied on our judgment in A. J. Hartshorn v. Commissioner of Income Tax (West) Karachi [1984] 49 TAX 198 (H.C.Kar.), Edwards v. Robert [1935] 19 Tax Case 618 and L. W. Russels‘s case reported in [1964] 53 ITR 91. Question no. 1 was answered in the negative. So far question No. 2 is concerned the applicant has been treated as a defaulter mainly because it had failed to declare the amount of contribution in the salary of the employees and had deducted the tax at source. Mr. Mansoor Ahmed Khan the learned counsel has contended that as the applicant was not a defaulter the question of demanding arrears of tax does not arise. As the applicant was justified in not deducting the tax at source it cannot be treated as a defaulter and consequently the demand of arrears created against it cannot be recovered. We therefore answer the question in negative. Cese relied on: A. J. Hartshorn v. Commissioner of Income Tax [1984] 49 Tax 198 (H.C.Kar.) Page 198 anti. Case referred to: Edwards v. Robert [1935] 19 Tax Case 618.
A.J.Hartshorn v. Commissioner of Income Tax (West), Karachi – [1984] 49 TAX 198 (H.C.Kar.) 1125.
Amount paid to pension fund cannot be treated as ―due‖ or ―payable‖ or even as ―salary‖ during the relevant charge year for the purpose of charging tax.
786 Section 16
Income Tax Digest.
In Stroud‟s Judicial Dictionary IVth Edition meaning of the word “due” is “immediately payable” (it is common signification). The word “due” signifies a fixed and settled obligation or liability which has to be determined in each case from its own context and usually is neither contingent nor dependent on any happening. Keeping these meanings in mind it seems that under section 7 an assessee is liable to pay tax under the bead „salaries‟ in respect of any salary, wages, pension, annuity, gratuity, perquisites, fee benefits and profit if it is due to him whether paid or not. The main criterion is that all such amount which fall under the head „salaries‟ shall be subjected to tax provided they are due to the assessee. If the amount is not due to him tax is not payable under section 7. In the present case, the contribution paid by the employer company in the „pension funds‟ does not become due and payable to the applicant immediately on its payment by the employer company. It is the obligation of the employer company to pay regularly which is payable to the applicant only on the happening of certain contingencies may be retirement, termination of service or death. It is also possible in certain circumstances that although this amount has been paid by the employer company in the fund, it will not be payable to the applicant at all. As the payment of pension fund to the assessee is dependent on happening of certain contingencies or complying with certain conditions which have neither happened nor complied with during the charge year it cannot be termed as an amount due and payable and therefore cannot be included under the head „salaries‟ for the purpose of charging tax. The tax will be charged if it is due and payable during the charge year, though not paid or received by the assessee. In all these authorities the principle has been enunciated that where the benefit to the assessee under any scheme is only contingent and indeterminate and the right to recover/receive is dependent upon happening of certain event or on future date no vested interest in the sum is created and therefore the amount cannot be said to have accrued or become due to the assessee before happening of the contemplated contingency. An amount which is payable on the happening of certain contingency cannot be claimed by an assessee as a matter of right as it will become payable only when preconditions attached to it are fully satisfied. Applying the principle to the facts of the present case we find from the observations made by the learned Tribunal that the amount of contribution paid by the employer would be payable to the employee only in the event of completion of a specified period of service. This is not the case of the department that the amount included in the income of the applicant
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is payable in the accounting year in terms of the scheme under which the employer‟s contribution is made. In these circumstances, the contribution paid by the employer company in the pension fund could not be treated as a salary of the respondent under section 7 of the Income Tax Act. Cases referred to: Edwards (H.M. Inspector of Taxes) v. Roberts [1935] 19 Tax Cas, 618. _______________
ACCRUAL OF SALARY
M.H.Hogg v. Commissioner of Income Tax, North Zone, Lahore [1975] 31 TAX 156 (H.C.Lah.) 1126.
Portion of salary set apart for discharging obligation under decree of the Court does not come under the ambit of section 50 of the 1979 Ordinance.
In this case the maintenance decree by the High Court of Judicature Probate, Divorce & Admiralty Division, Great Britain passed against the assessee did not per se secure the payment due to the ex-wife and create any charge. on his estate in her favour. The obligation and the liability were personal only. The salary and emoluments earned by the assessee were his income. It was credited to the account of the assessee in his name in the National & Grindlays Bank Ltd. The maintenance allowance was then disbursed to the wife out of the income thus received by and creditor to the account of assessee. It was thus applied for the purposes of the assessee to meet his obligation towards his wife. In the circumstances of this case the Income Tax Appellate Tribunal was justified in holding that in computing the assessable income the assessee was not entitled to deduct Rs.12,000 set apart from his salary for payment to his ex-wife under the decree of the Court. Cases referred to : Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax, Bengal (1933) 1 ITR 135; In re: Hira Lal (1945) 13 ITR 319; Sitaldas Tirathdas v. Commissioner of Income Tax, Bombay City (1936) 33 ITR 390; Prince Khanderao Gookwar v. Commissioner of Income Tax (1948) 16 ITR 294; Commissioner of Income Tax, Bombay v. Sitaldas Tirathdas (1961) PTD 706; London County Council v. Attorney-General (1901) A.C. 26; Diwan Kishen Kishore v. Commissioner of Income Tax, Punjab (1933) 1 ITR 143; Gresham Life Assurance Society v. Styles (Surveyor of Taxes) (3 Tax Cas. 185); Executors of the Estate of J.K. Dubash v. Commissioner of Income Tax, Bombay City (1951) 19 ITR 182; The Commissioners of Inland Revenue v. The Forth Conservancy Board (16 Tax Cas. 103); Sowrey (Surveyor of Taxes)
788 Section 16
Income Tax Digest.
v. Harbour Mooring Commissioners of King‟s Lynn (2 Tax Cas 201); Nizam‟s Guaranteed State Railway Co. v. Wyatt (2 Tax Cas. 584); Paddington Burial Board v. Commissioner of Inland Revenue (2 Tax Cas 46); Perkins‟ Executor v. Commissioners of Inland Revenue (13 Tax Cas. 851); Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax, Madras (AIR 1931 P.C. 165); Smyth v. Stretton (5 Tax Cas 36); Perkins v. Warwich (25 Tax Cas. 419); Hunison v. Gribble (4 Tax Cas. 522); Executors of the Estate of Lala Shanker Shah v. Commissioner of Income Tax (1945 ITR 500); In re: L. Hire Lal (1945 ITR 512); P.C. Mullick and another v. Commissioner of Income Tax, Bengal (1938) 6 ITR 206 and Halsbury‟s Laws of England, Vol. 10, 2nd Edn., Para 1244 and 1251.
Bank Bihari LaI v. Commissioner of Income Tax – 10 ITC 461 (Lahore) 1127.
Others.
The assessee, a Government servant, opted to receive his salary for February on 1st April, though the amount was drawn by head of the office in March itself. Department took the view that head of the office kept the money only as the bailee or trustee of the assessee, and, hence, the salary, though not actually received, was taxable in the year ending March itself. Held that the obligation to pay a certain sum of money to the assessee could not make head of the office a bailee, for bailment can be of specific property only. He was clearly not acting as the assessee‟s agent in drawing the salary for February - for he had not been authorised by the assessee either to draw the February salary in March or to keep it on the assessee‟s behalf and if the view taken by the Income Tax authorities that the salary was in law paid when it was drawn be correct, he was acting in a manner prejudicial to the assessee. The salary for February was, therefore, not taxable in the relevant year. _______________
ILLUSTRATIONS OF SALARY
BaIaji Rao v. Commissioner of Income Tax – [1935] 3 ITR 461 (Mad.) 1128.
Gratuity.
Gratuity received whether in service or on retirement is assessable as salary.
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Commissioner of Income Tax v. R. Johnstone – [1934] 2 ITR 390 (Rangoon)
Gratuity received from third party on insolvency of employer, without any claim thereto, is not taxable. Commissioner of Income Tax v. Lady Navajbai R.J. Tata – [1947] 15 ITR 8 (Bom.)
Gratuity received by a director is taxable as income from other sources and not as salary. Comments: The law as in existence now deems that even a director deriving “salary” as office holder and not employee is charged to tax under section 16 of the repealed Income Tax Ordinance, 1979.
Bhagwati Shankar, In re – [1944] 12 ITR 193 (Lahore) 1129.
Commission.
Section 7 of the 1922 Act evidently applies to all commissions received by an official liquidator in the course of his employment. These commissions are in lieu of salary and can, therefore, neither be described as professional earnings nor can they be classified under „other sources‟. Further held that where a lawyer by reason of his being a lawyer is engaged in service, it will not convert his salary into professional earnings. S.R. Mittra, In re – [1942] 10 ITR 259 (Pat.) 1130.
Contribution to unrecognised provident fund.
Voluntary payment of employer‟s contribution to unrecognised provident fund is not taxable as salary of employee. Commissioner of Income Tax v. Bombay Burma Trading Corporation Ltd. – [1933] 1 ITR 152 (Rangoon) 1131.
Interest on employees contribution to unrecognised provident fund is not salary.
Under section 16, all receipts of profits in lieu of salary have to be considered as salary. However, section 16 specifically excludes any payments received by the assessee from a provident fund or any interest on such contributions from being treated as „profits in lieu of salary‟. Therefore, interest on employee‟s own contributions to an unrecognised provident fund could not be treated as „salary‟.
790 Section 16
Income Tax Digest.
A.R. Hattiangadi, In re – [1940] 8 ITR 85 (Bom.) 1132.
Lump sum received from provident fund on retirement on account of the employer‘s contribution to the fund and the accumulated interest on the total contributions thereto is not taxable.
A lump sum from a provident fund on the assessee‟s retirement on account of the employer‟s contribution to the fund and the accumulated interest on the total contributions thereto was not in the nature of deferred salary but a payment in the nature of a capital bonus and the assessee was not, therefore, liable to be taxed in respect of it. Laidler v. Perry (H.M. Inspector of Taxes); Morgan v. Perry (H.M. Inspector of Taxes) – 42 Tax Cas. 351 (HL) 1133.
Christmas gift vouchers given to employees are part of taxable salary.
The assessee-employee received a Christmas gift voucher for 10 pounds from his employer. It was the regular practice of the employer to send such gift vouchers, not only to the present employees, but also to a-employees, and about 2300 such vouchers were sent by the employer every year. The gift was enclosed in a letter from the chairman sending Christmas greetings and expressing the thanks of the board for past services and their confidence that good relations with the staff would continue. The question was whether the gift was assessable as part of emoluments of the assessee Held that the employment was the causa causans of the gift. Christmas gave the occasion for the distribution of the vouchers but on the facts as found the reasons for the distribution were to be found in the employer-employee relationship. The vouchers were not distributed on any individual or personal grounds nor were there any special or particular reasons, which were peculiar to any of- them. Though the impulses of generosity and of kindness and seasonal goodwill were not lacking, the facts as found showed that there was manifested that form of gratitude which had a lively sense of future favours‟. The directors were planning for good and loyal future service so that the company would prosper and be advantaged: In the result the vouchers were distributed by the employers in their capacity as employers and because they were employers; they were received by the employees in their capacity as employees and because they were employees. In these circumstances, the gift‟ vouchers were received from employment only, and were „hence assessable as part of emoluments of the assessee.
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Brumby (H.M. Inspector of Taxes) v. Mimer; Day (H.M. Inspector of Taxes) v. Quick – 51 Tax Cas. 583 (HL) 1134. Sums received by employees on termination of profit-sharing scheme run by employer is assessable as salary. The company in which the assessees were employees set up a profitsharing scheme for the benefit of its employees, tinder this scheme, the company provided a loan to trustees, who used it for the purchase of shares in the company to be held upon the trusts of the scheme. Dividends were utilised partly for repayment of loan and the balance was distributed to the employees. The amounts so distributed to the employees were assessed to tax as their salary income. Later, the company became a subsidiary of a holding company, and the holding company decided to wind up the profit-sharing scheme. The trustees then realised the trust assets, paid off the balance of the debt and, in accordance with the clause in the trust deed which provided for such a situation, they distributed the balance among the employees and pensioners. The question was whether the amounts so received by the assessees were assessable to tax as part of their salary Held that it could be agreed that the payment arose not from the assessee‟s employment but from the company‟s reluctant decision to wind up the profit-sharing scheme. Certainly, the money forming the payment became available in consequence of certain events and decisions connected with the structure of the company. But the sole reason for making the payment to the assessees was that they were employees and the payment arose from their employment. Therefore, the payment was assessable as part of their salary. E.C. Danby v. Commissioner of Income Tax – [1944] 12 ITR 351 (Pat.) 1135. Salary to partner. Salary of a partner is but an alias for the return, by way of profits, for the human capital - sweat, skill and toil are, in our socialist republic, productive investment - he has brought in for common benefit. The immediate reason for payment of salary was service contract but the causa causans is partnership. On principle, payment of salary to a partner represents a special share of the profits and is, therefore, part of the profit and taxable as such. Thus, the salary paid to partner cannot be taxed under section 15. Commissioner of Income Tax v. K.H. Katrak – [1937] 5 ITR 527 (Sind) 1136. Monthly sum received by agent for life on termination of agency. Where consequent on the termination of the agency business which the assessee commission agent had built up, the agent was paid by his
792 Section 16
Income Tax Digest.
principal a certain sum per month for his life and for further five years after his death to his son, provided he did not do any business in competition to the principal: Held that the said payment was gratuity for the services rendered and was accordingly income taxable under section 7. No doubt, he was paid for watering the tree during the continuance of the agency and when that agency was being terminated he and his son were permitted to enjoy a part of the fruits of the tree provided of course they did not try to destroy the tree by entering into a competitive business. The produce of this tree, which they were permitted to enjoy, was undoubtedly income assessable as such. Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 1137.
Amount paid periodically to a person whose business is taken over, to prevent him from carrying on a competitive business is not ‗salary‘ in his hands.
A restrictive covenant, whereby a person undertakes for consideration to abstain from doing a particular act or from following a particular course of conduct, is something quite outside an ordinary contract of employment and the word „salary‟ cannot be held to include the consideration of such a contract. Accordingly, an amount paid to the assessee whose business was taken over, for preventing him to carry on competitive business for a particular period, is not salary in the seller‟s hands. Major Conville v. Commissioner of Income Tax – [1935] 3 ITR 404 (Lahore) 1138.
Amount paid by one co-owner to another to manage the estate.
Where A and B were co-owners of an agricultural property and B was being paid a monthly allowance in addition to his share from the estate for residing permanently at the estate and managing it, the allowance so paid was held to be taxable in his hands as salary. _______________
PERQUISITES - ALLOWANCES
Commissioner of Income Tax, (Central Zone), Karachi v. Oxford University Press, Karachi – [1984] 50 TAX 88 (H.C.Kar.) 1139.
Residential telephone bill (perquisite) provided by employer to employee not exceeding the limit provided for it in clause (d) of
793 SALARY
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sub-section (4) of section 10 of 1922 Act is not subjected to tax deduction. It may be noticed that under above quoted clause (a) an employer cannot claim the adjustment of any allowance in respect of a payment which is chargeable under the head “Salaries” if tax has not been paid thereon or deducted therefrom under section 18* of the Act, whereas above quoted clause (d) provides the limit of the perquisites which a company can provide to its employee, namely 75% of his salary or Rs.30,000/- whichever is less. in other words, the company is liable to pay income tax on any amount spent by it on perquisite of its any employee beyond the limit prescribed under the above quoted clause (d), but if perquisites do not exceed the limit provided for in the above clause (d), the company is entitled to claim the same as revenue expenditure. The Income Tax Officer as well as the Income Tax Appellate Tribunal have proceeded on the assumption that the inclusion of the above telephone residential bills for the two assessment years in question would not exceed the limit provided in above clause (d) of sub-section (4) of section 10 of the Act. In this view of the matter the above two amounts could have been claimed by the respondent assessee as revenue expenditure and were not subject to the levy of any income tax. In our view, section 7 speaks of the liability of an employee to pay tax, whereas section 10 provides for the liability of an employer. The above sections are to be read in conjunction in order to give a reasonable meaning to the two provisions. Since the residential telephone bill is a perquisite provided for by the respondent company on which no tax was payable in view of clause (d) of sub-section (4) of section 10, in our view no tax was deductible from the above amount as rightly held by the Income Tax Appellate Tribunal. We may also mention that it is impracticable to deduct a telephone bill from the salary of the relevant month as it is a matter of common knowledge that telephone bills are received after one or two weeks in the following month and therefore, it is not even otherwise practicable to deduct income tax from the salary of an employee on account of residential telephone bill from the salary of the month preceding to the month in which bill is received. Income Tax Officer v. Rev. J.C. Manry – [1942] 10 ITR 205 (All.) 1140.
Allowances paid for maintenance of children.
Where allowances were paid to the assessee for maintenance and education of the children of the assessee who along with his wife was an employee of a foreign mission, it was held that the amounts so paid *
Parallel to section 24(i) of the Income Tax Ordinance, 1979.
794 Section 16
Income Tax Digest.
were entirely dependent on the assessee‟s service with the mission and, therefore, constituted „perquisites or profits‟ to the assessee within the meaning of section 7(1) of the 1922 Act. _______________
CAR PERQUISITES
A.J.Hartshorn v. Commissioner of Income Tax (West), Karachi – [1984] 49 TAX 198 (H.C.Kar.) 1141.
Failure of assessee to prove that car was exclusively used by him, exemption claimed on this account reduced by assessing officer held justified.
The Income Tax Officer has subjected to tax Rs.2,400/- being the value of free car or conveyance allowance as termed by the learned Tribunal. It was conversed before the Assessing Officer and the Tribunal that only Rs.1,200/- should have been taken each year for purpose of taxation as provided by Rule 39(4)(b)(i)(bb) of perquisite Rules because the conveyance was not exclusively used by the assessee. It was used by other members of the staff of the Company also. Mr. Ali Athar has contended that the Income Tax Officer and the Tribunal have wrongly placed the burden upon the applicant to establish that the car was not exclusively used by him. The applicant/assessee was seeking exemption on the aforestated ground. It was therefore the duty of assessee to prove the facts on the basis of which, he was seeking exemption. It is well settled that if an assessee wants to take benefit of any exemption then the burden is upon him to establish that he is entitled to it. It is true that burden is upon the Department to establish that the income is liable to tax under a statute but the onus of showing that a particular class or part of an income is exempt from taxation is upon the assessee. It has been found that the assessee was not able to establish that the car was also used by the staff members of the Company and was thus not exclusively used by him. On the facts and circumstances of the case the learned Tribunal has taken a correct view. Cases referred to: Commissioner of Income Tax v. Maharaj Viseweswar Singh [1935] ITR 216; Karon Kayemeth v. Income Tax (17 T.C. 27, 58).
Heaton (H.M. Inspector of Taxes) v. Bell 46 Tax. Cas. 211 (HL) 1142.
Where employee avails car facility from employer opting for reduction in wages, there is a taxable perquisite - only gross wages and not reduced wages are taxable.
The assessee‟s employers introduced a scheme under which they provided private cars for their employees at moderate cost to them.
795 SALARY
Section 16
An employee who took advantage of the scheme, which was optional, could use the car for official purposes as well as private purposes provided he drove the car himself. Under the conditions relevant to the scheme, the employees who opted for this scheme had to suffer a wage reduction, and the employees had the option to withdraw from the scheme after giving 14 days‟ notice, in which case the wage reduction would be restored. The question was whether, for tax purposes, the gross wages or the reduced wages should be treated as the assessable salary of the assessee who opted for the said scheme. Held that, on a true-interpretation of the contractual arrangements, the position was that the monetary wage to which the assessee was entitled remained unaltered. It was true that his right to use the ear could not be assigned, but the right could be convened into money by exercising the option to withdraw from the scheme. The fact that two weeks‟ notice of change of will was needed did not alter the fact. The perquisite represented money‟s worth. Throughout the year of assessment the assessee could, had he so wished, have had the money equivalent into which his perquisite was convertible. The right to use the car, on the one-hand, was alternative to and interchangeable with the right to the receipt if a definite sum of money, on the other Only for administrative convenience a notice period of 14 days had been fixed. Therefore, the assessee was liable to be taxed on his gross wages before deduction of any sum in respect of his right to participate in the car loan scheme. _______________
SHARES ALLOTMENT TO EMPLOYEES
Tyrer v. Smart (H.M. Inspector of Taxes) – 52 Tax. Cas. 533 (HL) 1143.
Value of advantage arising out of acquisition of shares in parent company of employer-company is a taxable perquisite.
The assessee was an employee in a company which was part of a group. The parent company of the group decided to go public, by offering its shares by tender. The public would have to tender for shares a price which was above the minimum fixed price, and based on the tendered prices, a „striking price would be determined by the parent company, and shares would be allotted to those who had tendered at or above this striking price. However, one-tenth of the shares were to be offered to the employees of the group at the fixed price of 2Os. per share. The assessee applied for the shares and purchased them at the above fixed price, while the striking price at
796 Section 16
Income Tax Digest.
which the shares were allotted to the public was eventually determined at 25s. per share. It was found as a fact that the company‟s purpose in making the shares available to employees was with a view to encouraging established employees of the companies within the group to become shareholders in the parent company, and „to achieve a better relationship with the employees so that they would become and continue to be loyal employees, having a sense of understanding and a sense of involvement in the affairs and fortunes‟ of the group. The question was whether the value of the advantage gained by the assessee -employee by obtaining the shares at a price, which was less than the price at which the public obtained them, was taxable as a perquisite. Held, that on the admitted facts, there was a clear finding that the offer was made as a reward for past and more particularly for future services and accordingly was made to the assessee in return for acting as or being an employee. The value of the advantage gained by the assessee arose out of his employment only, and was hence assessable to tax as part of his emolument. (Per Lord Salmon): “ . . . . the company‟s scheme was excellent. If generally adopted, it might well be of great advantage to industry and to the country‟s economy in general. It seems a pity to discourage employees from participating in such schemes by assessing them to Income Tax on the comparatively small profit they would gain on acquiring their shares-particularly as such a tax would produce only a derisively small sum of money in comparison with the substantial benefits which the public economy might well derive from such schemes. This policy consideration, however, can of course, carry no weight with the House sitting in its judicial capacity. It might, however, perhaps deserve examination in other quarters.” _______________
POSITION UNDER THE 1979 ORDINANCE
Cameron v. Prendergaat (Inspector of Taxes) – [1940] 8 ITR 75 (HL) 1144.
Compensation to director for refraining from resignation is taxable as profits in lieu of salary.
If a sum is paid by a company to a man who has long been and still is a director of the company and whose services are greatly valued, and if the consideration is that he will not resign but will continue
797 SALARY
Section 16
to act as a director, there can be no doubt that in such a case the sum is a profit of his office and that it is liable to tax, and nonetheless that the time during which he will continue to be a director is not fixed. The appellant had been for many years a director of a company on an agreed, monthly salary. Towards the end of the year 1934, he had intimated to his fellow directors his intention of resigning. The other directors then wrote to him a letter asking him in the interests of the company, not to serve such notice; and they said that, in consideration of his acceding to this request, the company would, within a certain time pay him the sum of £45,000 and would embody their undertaking to do so in a formal deed. The appellant agreed to this request, and the company paid him the aforesaid sum as per agreement; the question for consideration was whether this sum was a profit arising out of the appellant‟s directorship and was hence liable to be taxed. Held that his co-directors, acting for the company, to induce him to continue to serve the company as a director for at least a reasonable time, paid the sum of £ 45,000 to the appellant. That was not a byproduct of his undertaking not to serve the notice, but the real and plain meaning of the undertaking. An agreement by the appellant not to resign his office was, precisely similar to an agreement. to continue to act as a director. His co-directors must be presumed to be honest men making payment of a large sum in the interest of the company and its shareholders. The payment in question was a payment arising from the appellant‟s office. This was the inevitable result of giving effect to the precise form as well as to the substance of the documents on which the case depended. Beak (Inspector of Taxes) v. Robson – [1943] 11 ITR (Suppl.) 23 (HL) 1145.
Lump sum payment made after termination of service for restraining employee from competing in same business, is not profit arising from office or employment.
The assessee agreed to serve a company as manager and director for five years on an annual salary. There was a restrictive covenant in the contract on service under which the assessee was precluded from engaging himself in the business carried on by the company, after the termination of his services, and in consideration therefor, the assessee was entitled to a separate lump sum payment. The assessee received such a lump sum payment on the termination of his services, and the question for consideration was whether such payment was assessable as the profits of office of the directorship in the hands of the assessee.
798 Section 16
Income Tax Digest.
Held that the obligations flowing from the contract of service and the remuneration to be received by the assessee in respect of that service were entirely separate from the restrictive covenant and the consideration which was given for it. The lump sum payment was not made for anything done in performing the services, and it was given not during the period of employment but after its termination. To treat that sum as profit arising from the assessee‟s office would amount to ignoring the real nature of the transaction. The sum could not properly be treated as a profit arising from the assessee‟s office or employment. Note: Under the 1979 Ordinance and the Indian 1961 Act, any compensation received by an employee in connection with the termination of employment is included in the definition of „profits in lieu of salary‟ and is hence taxable wider the head „Salaries‟. _______________
POSITION UNDER 1922 ACT
PD. Khosla, In re – [1945] 13 ITR 436 (Lahore) 1146.
General.
Explanation 2 to sub-section (1) of section 7 of the 1922 Act deals with case of termination of employment, irrespective of causes governing termination. Commissioner of Income Tax v. B.J. Fletcher – [1937] 5 ITR 428 (PC) 1147.
General.
On his retirement the assessee-employee received certain sums from the „employees fund‟. The terms of the said fund were, inter alia, (i) that the sums to be allotted were entirely at the discretion of the employer; (ii) that the employer was not bound to make any allotment in any year; (iii) that it was not part of the employee‟s original contract of service that he should have the benefits of his fund; (iv) that unless the employer chose to put him on the list the employee would have no interest whatever in it; (v) that even when so listed he would have no right until he had served for six years; and (vi) that in no case could he make any claim upon the sums allotted to him until he retired. Held that the payment so received from the fund was a capital receipt and. accordingly, was not taxable. Case review: Commissioner of Income Tax v. B.J. Fletcher [1935] 3 IT 223 (Mad.) affirmed. _______________
799 SALARY
Section 16
MANAGING DIRECTOR/DIRECTOR
Commissioner of Income Tax/Wealth Tax, Companies Zone, Faisalabad v. Rana Asif Tauseef C/o Rana Hosiery & Textile Mills (Pvt.) Ltd., Faisalabad – [2000] 81 TAX 7 (H.C.Lah.) = 2000 PTD 497 1148.
Director in more than one company but receiving emoluments from one is entitled to concessions given in rules.
“. . . . . we have no difficulty in reaching the conclusion that the provisions pertaining to this exemption namely rule 3(2)(c) and rule 4 of [Income Tax] Rules, 1982 are to be liberally construed. We, thus, find that the rule enunciated by the Tribunal in 1998 PTD (Trib.) 3195 and 1990 PTD (Trib.) 321 is eminently correct, just and in consonance with the principle of construction of fiscal legislation noted above. For the aforesaid reasons, we have no difficulty in holding that a person who is director of more than one Company, if he receives rental allowance/perquisites from one company only and not from any other company is entitled to claim deductions/exemptions/reliefs under rule 3(2)(a)(b) and (c) and rule 4 of Rules, 1982. As a result of the above, we find no merit in these appeals which are accordingly dismissed in limine. The Registrar Lahore High Court, Lahore shall send the copy of this order/answer to Regional Commissioner Income Tax.” Commissioner of Income Tax, Central Zone ‘A’, Karachi v. S. Mazhar Hussain – [1988] 58 TAX 123 (H.C.Kar.) 1149.
Assessee claimed exemption in respect of entertainment allowance received from one of three companies as a whole time employee, Assessing Officer disallowed the same, held that Tribunal was not justified in holding that the Assessee was an employee of a company and liable to be taxed under section 7.
The respondent claimed exemption under rules 39 of the Income Tax Rules (hereinafter called the Rules) only in respect of payment of entertainment allowance made to him by Altas Rubber & Plastic Industries Ltd., Karachi. The Income Tax Assessment Officer was of the view that since the assessee was working for two companies, he was, therefore, not working on whole time basis for either of them and as such he was not an employee within the meaning of sub-rule (3)(b) of rule 39 of the Rules. The remuneration received by him, therefore, was taxed under section 12 of the Income Tax Act, 1922 by the Income Tax Officer.
800 Section 16
Income Tax Digest.
It is clear from the language of the rule that the definition of „employee‟ given in sub-rule (3) of rule 39 of the Rules includes a director of a company. But to get the benefit as an employee a director must fulfil two more conditions, (I) that he should work for one company and (2) whole time. it was contended by Mr. Shaikh Haider that the respondent worked at least for two companies, and therefore, he was not an employee within the meaning of sub-rule (3) of rule 39 of the Rules. On the other hand Mr. Iqbal Naeem Pasha submitted that the respondent was working whole time for Atlas Rubber & Plastic Company Limited in respect of which he claimed exemption for entertainment allowance. In our opinion, the stand of Mr. Shaikh Haider is right. A person may be director of several Companies. He may also work whole time in one company and part time in several companies of which he is a director. If a person does work part time in several companies then he cannot be said that he works whole time for one company, which is prima fade the requirement of rule 39. In our opinion, the benefit of the rules has to be given to a person who works whole time for one company and not part time. If a person works as a director for one hour only and does not work for another company be can still be considered to be working whole time for that company and if a person works whole day for one company and whole night for another company or for some days in a month for one company and for some other days in a month for other he cannot be said to be working for one company only, for, the word „whole time‟ used in rule 39(3)(b) in our opinion means entire time as the word „whole‟ has been used in the sense of „entire‟. To term the above observation particularly the opening sentence of the above paragraph as finding is not correct. There were only submissions of Mr. Iqbal Naeem Pasha before the Tribunal. For the reasons given above we answer the question referred to this Court in the negative. Cases referred to: Mukhlesur Rehman v. The Sub. Divisional Officer, Narayanganj (PLD 1962 Dacca 497) Commissioner of Income Tax v. L. Armstrong Smith (1946) 14 ITR 606; Commissioner of Income Tax v. Lakshmipati Singhania (1973) 92 ITR 598; Commissioner of Income Tax v. Lady Navajbai R.J. Tata (1947) 15 ITR and India Cement Ltd. v. Commissioner of Income Tax (1966) 40 ITR 52. _______________
801 SALARY
Section 16
POSITION PRIOR TO 1979
Commissioner of Income Tax v. L. Armstrong Smith – [1946] 14 ITR 606 (Bom.) 1150.
Where powers of the managing director emanate from articles of association and are to be exercised within limits prescribed thereunder and subject to supervision and control of board of directors, he is an employee and not an agent of company.
Where the articles of association of a company provided that the assessee, who held most of the company‟s shares, was to be the managing director of the company, his remuneration for the post was to be voted by the company at its annual general meeting and the assessee had to devote his whole time to manage the company‟s affairs, it was held that the managing director was an employee of the company and the remuneration received by him was taxable as salary. Case review: The position under the Income Tax Ordinance, 1979 is different. In terms of section 16(2)(c), all directors/managing director have been defined as “employees, even though they derive salary by virtue of their “office” and not under “employment”. The position under the Indian Income Tax Act, 1961 is different. The directors who derive salary by virtue of office are taxed under section 56 i.e. income from other sources. This case should be read in this background.
802 Section 17
Income Tax Digest.
Section 17* Interest on Securities
PAGE NO
PLACE OF ACCRUAL OF INCOME - INTEREST ON SECURITIES
1151. Interest on securities - The place of accrual of income. SCC 784 = [1991] 63 TAX 149 (S.C.Pak.)
_
1991 803
1152. Assessee a non-resident banking company deposited securities outside Pakistan, held that interest earned from _ securities is not liable to be taxed in Pakistan. [1992] 65 TAX 306 (H.C.Kar.)
803
1153. Assessee-company, engaged in banking business in Pakistan; deposited securities in NBP outside Pakistan held that interest earned on securities is not from business _ connection in Pakistan. [1985] 51 TAX 37 (H.C.Kar.)
804
PURVIEW OF CHARGEABILITY
1154. Tax-free Federal Government Securities fall outside the _ purview of charging section. [1960] 2-TAX (Suppl.-274) (H.C.Lah.)
806
INTEREST ON SECURITIES IS TAXABLE ON RECEIPT BASIS
_ 1155. Interest on securities is taxable on receipt basis. [1960] 2-TAX (Suppl.-121) (H.C.Lah.) = 1960 PTD 987 = 1954 PLD 439 IMPARTIBLE ESTATE
1156. Impartible estate.
_
[1941] 9 ITR 695 (PC)
807
808
DEDUCTIONS
_ _ 1157. In general cases. [1942] 10 ITR 490 (Mad.); [1936] 4 ITR _ 297 (Lahore); [1946] 14 ITR 479 (Nag.)
*
Corresponding to section 8 of the 1922 Act.
808
803 INTEREST ON SECURITIES
Section 17
Section 17* Interest on Securities
PLACE OF ACCRUAL OF INCOME - INTEREST ON SECURITIES
General Bank of Netherlands Ltd. and 2 Others v. Commissioner of Income Tax, Central, Karachi – 1991 SCC 784 = [1991] 63 TAX 149 (S.C.Pak.) 1151.
Interest on securities - the place of accrual of income.
The factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the above securities which in fact stand transferred in favour of the State Bank of Pakistan. The amount of interest accrued upon the above securities is to be credited in the National Bank of Pakistan or to be remitted to the State Bank of Pakistan. The receipt of the above amount of interest by National Bank of Pakistan in New York or London again is a receipt on behalf of the State Bank of Pakistan. The above securities are in fact part of the capital of the applicantsassessees operating in Pakistan. It may again be observed that under rule 6 the State Bank may substitute the securities by new scrip of securities of the same description and amount. It may again be observed that upon maturity of the securities the State Bank is to collect the amount on behalf of the applicantsassessees. Algemene Bank, Nederland N.V., Karachi v. Commissioner of Income, Central Zone ‘C’, Karachi – [1992] 65 TAX 306 (H.C.Kar.) 1152.
Assessee a non-resident banking company deposited securities outside Pakistan, held that interest earned from securities is not liable to be taxed in Pakistan.
The applicant, pointed ant that in a recent decision by the Supreme Court of Pakistan in the case of General Bank of Naderland Ltd. v. *
Corresponding to section 8 of the 1922 Act.
804 Section 17
Income Tax Digest.
Commissioner of Income Tax reported in [1991] 63 TAX 149 (S.C.Pak.) = (PLD 1991 S.C. 675), a similar question was considered and decided against the Department. Mr. Nasarullah Awan, learned counsel for the Department, concedes to this position. The matter stands concluded by the decision of the Supreme Court. Case followed : General Bank of Naderland Ltd. v. Commissioner of Income Tax [1991] 63 TAX 149 (S.C.Pak.) = (PLD 1991 S.C. 675).
National & Grindlays Bank Ltd. v. Commissioner of Income Tax (Central), Karachi – [1985] 51 TAX 37 (H.C.Kar.) 1153.
Assessee-company, engaged in banking business in Pakistan; deposited securities in NBP outside Pakistan held that interest earned on securities is not from business connection in Pakistan.
It may be noticed that under the above quoted sub-section (1) of section 42 of the Act, it has been provided that all income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through or from any asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind or through or from the same exchange or transfer of a capital asset in Pakistan, shall be deemed to be income accruing or arising within Pakistan. It may further be noticed that it also provides that where a person entitled to income profits or gains, is not resident in Pakistan shall be chargeable to income tax either in the name or in the name of his agent and in the latter case such agent shall be deemed to be, for all the purposes of the Act, the assessee in respect of such income. The consensus of the judicial view seems to be that in order to bring a case under the head of “business connection” it is necessary that there should be some activity in the taxable territories, which contributes directly or indirectly to the earnings of those profits, or gains which are to be taxed. It postulates an element of continuity between the business of non-resident and the activity in the taxable territories but a stray or isolated transaction is normally not to be regarded as a business connection. Further more, there also seems to be consensus of judicial view that in each case the question, whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and the circumstances of the case. We are inclined to agree with Mr. Ali Athar that the interest earned on the securities in question cannot be said to be profits or gains accruing or arising from
805 INTEREST ON SECURITIES
Section 17
any business connection in Pakistan. However, we are not agreeable to his contention that the above amount of interest cannot be considered as profits and gains accruing or arising directly or indirectly through or from assets in Pakistan. We are of the view that in terms of section 13(3)(4) read with the above quoted Rules the securities are the assets transferred by the applicants assessees as capital asset to Pakistan as held by the Income Tax Appellate Tribunal. The factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the State Bank of Pakistan for the safe custody of the above securities which in fact stand transferred in favour of the State Bank of Pakistan in terms of sub-rule (4) of Rule 5. The amount of interest accrued upon the above securities is to be credited in the National Bank of Pakistan or to be remitted to the State Bank of Pakistan as per above quoted Rule 9. The receipt of the above amount of interest by National Bank of Pakistan in New York or London again is a receipt on behalf of the State Bank of Pakistan. The above securities are in fact part of the capital of the applicants-assessee operating in Pakistan in terms of section 13 of the Ordinance. The above securities are to be utilised for meeting the liabilities of the applicants-assessee in case eventuality specified in sub-section (4) of section 13 happens. It may again be observed that under Rule 6 the State Bank may substitute the securities by new scrip of securities of the same description and amount. It may again be observed that upon maturity of the securities the State Bank is to collect the amount on behalf of the applicantsassessees. Cases referred to : Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. (1935) 3 ITR 395; Carborandum Company v. Commissioner of Income Tax [1977] 36 TAX 88 (S.C.); Commissioner of Income Tax v. Chunilal B. Mehta (1938) 6 ITR 521. Cast relied on : Baramula Saw Mills Ltd. v. Commissioner of Income Tax (PLD 1954 Lah. 157); Commissioner of Income Tax v. Remington Typewriter Company Ltd. (AIR 1931 P.C. 42); Macneill & Barry Ltd. v. Commissioner of Income Tax (PLD 1969 S.C. 527) = (1970) 21 TAX 270 (S.C ) and Jardine Henderson Ltd. v. Commissioner of Income Tax (PLD 1971 Dacca 185) = (1970) 22 TAX 61. _______________
806 Section 17
Income Tax Digest.
PURVIEW OF CHARGEABILITY
Lakhshmi Insurance Co. Ltd., Lahore v. Commissioner of Income Tax, Punjab and N.W.F.P. – [1960] 2-TAX (Suppl.-274) (H.C.Lah.) 1154.
Tax-free Federal Government Securities fall outside the purview of charging section.
The assessee, a life insurance company, received a sum of Rs.19,708/as interest on tax free securities of the Central Government. The Income Tax Authorities included this amount in the total income of the assessee and assessed it to super tax over-ruling his contention that the amount in question was exempt both from Income Tax and super tax. On a reference, it was held that the sum of Rs.19,708/- rightly assessed to super tax. In the course of the judgment Their Lordships observed (i)
In computing the total income of an insurance company the profits and gains of the business have to be calculated in accordance with the rules iii the Schedule but, besides the income from such business, the company has also to pay Income Tax On all other sources of income mentioned in section 6, whether such source be securities or property or some other source, though, if the interest accrues on securities of the Central Government, which are free from Income Tax no Income Tax is payable on it.
(ii)
Section 16 directs that in computing the total income of an assessee any sums exempted under the second proviso to section 8 shall be included. It is, therefore, evident that in computing the total income of an assessee, whether it be a company carrying on insurance business or not, the interest received on any security of the Central Government which is Income Tax free must be included; and since under section 55 super tax has to be levied on the total income, it is obvious that interest on securities of the Central Government which are free from Income Tax are subject to the incidence of super tax.
Judicial analyses : In the repealed Act 1922 in section 8 as well as in the Income Tax Ordinance, 1979 [section 17(2)] the exemption from chargeability under section 17 of tax free Federal Government Securities was restricted to “income tax” alone. In view of this statutory command even in case of such tax-free Federal Government Securities super tax, wherever applicable, was to be levied. In the Income Tax ordinance, 1979 by Finance Ordinance, 1980
807 INTEREST ON SECURITIES
Section 17
amendment was made in section 17(2) replacing the word “income tax” with “tax” thus enlarging the scope of exclusion from chargeability. In view of this charge in law, this case is to be read only relevant for the period prior to assessment year 1980-81. _______________
INTEREST ON SECURITIES IS TAXABLE ON RECEIPT BASIS
Central Exchange Bank Ltd., Lahore v. Commissioner of Income Tax, Lahore – [1960] 2-TAX (Suppl.-121) (H.C.Lah.) = 1960 PTD 987 = 1954 PLD 439 1155. Interest on securities is taxable on receipt basis. The assessee, a public limited company, held certain interest bearing securities of undivided Government of India. The Income Tax Officer included in the assessment a sum of Rs.16,200/- on account of interest from these securities which had accrued but not received, observing that “tax is payable under section 8 in respect of interest receivable” on any security of Central Provincial Government, On appeal the Appellate Assistant Commissioner deleted the amount in question from the assessment holding that in the circumstances of the case interest due was not receivable by the assessee on the dates prescribed for the payment of interest. On second appeal the Tribunal held that interest was assessable under section 8 as it had become due. On a reference: Held, assuming that the securities were of the Central Government of Pakistan and therefore came within the ambit of section 8, the interest on securities was not assessable. Their Lordships further observed that (i) The expression “Central Government” when used in any law of a particular country means the Central Government of that country and would, therefore, when used in the Pakistan Income Tax Act, means the Central Government of Pakistan. The intention of section 8 of the Pakistan Income Tax Act is to bring only the interest receivable on the securities of the country within its purview, and to exclude from it interest on the securities of foreign Governments which would fall under either section 10 or section 12 of the Act. Therefore, the interest on securities of the Central Government of India is not taxable in Pakistan under section 8 of the Pakistan Income Tax Act; and (ii) Section 8 is not a charging section. It is only a machinery section and is an explanation, or definition, of the second
808 Section 17
Income Tax Digest.
head of the charge of income set forth in section 6 of the Act. Before Income Tax is charged on any particular amount it must be shown to be income under section 4 of the Act. Case Review : Their Lordship clarified that the expression „Central Government‟ means the Federal Government of a particular country. The intention of section 17 is to bring to tax only that interest which is receivable from securities issued by the Federal or Provincial Governments and to exclude from its ambit interest on securities of foreign governments, which may fall under section 22 or 30, as the facts of case are. It was held that interest on securities of Indian Government was not taxable under section 8 of the Act after the partition. Their Lordship also clarified that the word „receivable‟ in section 8 of the Act does not mean „accrued‟. The basis of chargeability under this section is receipt. Cases referred to: Firm of Narayandas Kedarnath v. Commissioner of Income Tax, Central (1952) 22 ITR 18; (54 Bombay L.R. 580); (AIR 1952 Bombay 459). _______________
IMPARTIBLE ESTATE
Commissioner of Income Tax v. Dewan Bahadur Dewan Krishna Klshore – [1941] 9 ITR 695 (PC) 1156. Impartible estate. For the purposes of section 8 of the 1922 Act [corresponding to section 17 of the Income Tax Ordinance, 1979] it is the holder of the impartible estate and not the HUF, who is assessable to tax. Case review: Commissioner of Income Tax v. Diwan Bahadur Diwan Krishan Kishore [l939] 7 ITR 427 (Lahore) varied. _______________
DEDUCTIONS
Commissioner of Income Tax v. Madras Provincial Co-operative Bank Ltd. – [1942] 10 ITR 490 (Mad.) 1157. In general cases. Deduction of interest paid by assessee on moneys borrowed for investment in tax-free securities is not admissible. Havell Shah Sardari Lal v. Commissioner of Income Tax – [1936] 4 ITR 297 (Lahore)
Interest up to date of purchase paid to vendor of securities is part of purchase price and is not deductible in the hands of purchaser.
809 INTEREST ON SECURITIES
Section 17
Central Provinces & Berar Provincial Co-operative Bank Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 479 (Nag.)
Rule of apportionment is not for the purpose of taxation of composite income which is partly taxable and partly not.
810 Section 19
Income Tax Digest.
Section 19* Income from house property
PAGE NO
OWNERSHIP & CHARGEABILITY
1158. Lease property does not vest ownership right to the lessee. _ 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak.)
813
1159. Fiscal provisions are to be liberally construed in favour _ of assessees. 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak.)
813
1160. Assessee had been absolutely quaint and had not been able to establish that they at or showed any real and positive interest, desire or intention to re-start business of manufacturing artificial leather cloth. Tribunal was not justified in directing to assess rental income under section 22 and to allow expenses as admissible under section 23. _ [2001] 83 TAX 342 (H.C.Kar.)
813
1161. Lease to the sister by the assessee was held not bona fide. _ [1993] 68 TAX 124 (H.C.Lah.)
814
1162. House occupied by the parents was a property in the occupation of the owner for the purpose of his own residence. _ [1989] 59 TAX 20 (H.C.Kar.) _ 1163. ALV how to be determined. [1987] 56 TAX 75 (H.C.Kar) 1164. Property acquired and used as commercial asset was let out subsequently to another person for use temporarily as his business or trade, held that income is from business and assessable under section 10 of the 1922 Act and not house _ property. [1977] 35 TAX 74 (H.C.Lah.)=1977 PTD 13 1165. Owner of superstructure on land, even if he is not owner of _ land, is liable to tax. [1934] 2 ITR 209 (Mad.) _ 1166. In case of foreign properties. [1944] 12 ITR 254 (Mad.); _ [1933] 1 ITR 389 (Mad.)
814 816
817 818 819
APPLICABILITY OF EXPANATION WITH RETROSPECTIVE EFFECT
1167. Explanation to section 19 does not apply before assessment _ year 1996-97. 2001 PTD 795 *
Corresponding to section 9(1) of the 1922 Act.
819
811 INCOME FROM HOUSE PROPERTY
Section 19 PAGE NO
DISTINCTION BETWEEN “PROPERTY TAX” AND “INCOME TAX”
1168. Case remitted back for unlawful use of authority Distinction between ―property tax‖ and ―income tax‖. _ [2001] 83 TAX 158 (H.C.Lah.) = 2001 PTD 1474 OWNER
1169. The word ―owner includes persons holding lease‖. 65 TAX 223 (H.C.Kar.)
_
820
[1992] 820
1170. Wealth-tax paid on any asset or property owned by the assessee for the purposes of income is deductible expenses in _ computing the assessee‘s income. [1991] 64 TAX 110 (H.C.Kar.) = 1991 PTD 839
821
1171. Title to the property does not pass by mere executing an _ agreement to sell. [1989] 60 TAX 79 (H.C.Kar.)
822
1172. Property was not conveyed by a registered deed but purchaser were given possession of property and rights to enjoy rental income, held that were owner of property and _ liable to tax. [1967] 15 TAX 37 (H.C.Kar.) = 1967 PTD 170 = PLD 1067 Kar. 372
822
1173. In the absence of any evidence that wife and sons of assessee were Benamidars for assessee, such persons could be taken _ to be real owners. [1986] 53 TAX 80 (H.C.B.D.)
826
1174. Words ‗property of which he is the owner‘ in section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] cannot be read as meaning ‗of which annual value he is the _ owner‘. [1941] 9 ITR 695 (PC)
827
PROFITS AND GAINS OF BUSINESS OR PROFESSION VS. INCOME FROM HOUSE PROPERTY - LETTING OF PROPERTIES
1175. Accrual of notional income is liable to tax. 1 (H.C.Kar.)
_
[1986] 53 TAX 828
1176. Income from letting out of factories, is assessable under _ section 10 and not under section 12 of 1922 Act. [1977] 35 TAX 74 (H.C.Lah.)
829
1177. Where a company is owner of property, income from letting out is taxable under the head ‗House property‘ and not as ‗Business income‘, even if company‘s object was to take land _ on lease, construct stalls, and let them out. 3 ITC 23 (Cal.); [1946] 14 ITR 409 (Cal.)
830
812 Section 19
Income Tax Digest. PAGE NO
ANNUAL VALUE
_
GENERAL
1178. ―Annual value‖, meaning of (H.C.Kar.)
_
[1985] 51 TAX 5 831
1179. Lease deed stipulating annual value is not conclusive _ evidence of annual value. [1936] 4 ITR 148 (Cal.)
832
1180. ‗Residence‘ in proviso to section 9(2) of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] does not apply to _ company. [1935] 3 ITR 105 (Cal.)
832
LESSEE
1181. Lessee who constructs a building on leasehold land is owner _ and liable to tax. [1946] 14 ITR 409 (Cal.)
832
TRUSTEES
1182. Trustees are assessable under section 9 of the 1992 Act [section 19 of the Income Tax Ordinance, 1979], qua the _ trust property even. [1946] 14 ITR 298 (Bom.)
833
1183. Where property is held in trust for beneficiaries, _ beneficiaries are assessable. [1939] 7 ITR 139 (Bom.); [1940] 8 ITR 501 (Sind)
833
OFFICIAL ASSIGNEE
1184. Official assignee bencomes owner of property vesting in him _ on insolvency of owner. [1937] 5 ITR 233 (Cal.) CO-OPERATIVE SOCIETY
1185. In case of a co-operative society.
_
10 ITC 422 (Bom.)
833
834
IN CASE OF MONEY-LENDER
1186. Income from property taken over in money-lending business _ is assessable as income from house property. [1945] 13 ITR 184 (Mad.)
834
ZAMINDARI
1187. Zamindari income is not chargeable under section 22 [section _ 19 of the Income Tax Ordinance, 1979]. 5 ITC 1 (Cal.)
834
PROPERTY USED FOR BUSINESS
1188. Question as to whether the assessee was occupying any part of a building for the purposes of business carried on by him _ is a question of law. [1947] 15 ITR 263 (All.)
835
813 INCOME FROM HOUSE PROPERTY
Section 19
Section 19* Income from house property
OWNERSHIP & CHARGEABILITY
Mehran Associates Ltd. v. Commissioner of Income Tax, Karachi – 1992 SCC 980 = [1992] 66 TAX 246 (S.C.Pak.) 1158.
Lease property does not vest ownership right to the lessee.
The word “owner” used in section 19 and section 12(13) cannot be extended to include lessee who holds property in terms of a lease agreement. 1159.
Fiscal provisions are to be liberally construed in favour of assessees.
A fiscal provision of a statute is to construed liberally in favour of the tax payer and in case of any substantial doubt, the same is to be resolved in favour of the citizen. Keeping in view the above interpretation we cannot hold that the appellant is the owner of the building though under the terms of lease agreement the same stood vested in the owner of the land. The word “being” might have advanced the respondent‟s case if the building would have been vested in Auqaf Department (lessor) and the appellant, being lessee, could have been treated as “being the owner of the building” in terms of subsection (13) of section 12 of the Ordinance by virtue of the fact that they had raised the building. Commissioner of Income Tax v. Valika Art Fabrics Ltd. – [2001] 83 TAX 342 (H.C.Kar.) 1160.
Assessee had been absolutely quiet and had not been able to establish that they at or showed any real and positive interest, desire or intention to re-start business of manufacturing artificial leather cloth. Tribunal was not justified in directing to assess rental income under section 22 and to allow expenses as admissible under section 23.
The respondent/assessee had been absolutely quiet and had not been able to establish that they at any time during the period that has *
Corresponding to section 9(1) of the 1922 Act.
814 Section 19
Income Tax Digest.
lapsed since closure of the manufacturing business, reflected or showed any real and positive interest, desire or intention to re-start the business of manufacturing artificial leather cloth. In the circumstances, we are of the view that both the Income Tax Commissioner (Appeals) and the Income Tax Appellate Tribunal had fallen in error in holding that the income of the respondent/assessee relative to the aforesaid two assessment years derived from leasing out the godowns and part of the factory premises was incidental to or connected with the process of manufacturing business and was to be construed as income liable to be assessed under section 22 of the Income Tax Ordinance. Cases referred to: Commissioner of Income Tax, Lahore Zone, Lahore v. Muhammad Allah Bux [1977] 35 TAX 74 (H.C.Lah.) = 1977 PTD 13.
Miss. Babra Sharif v. Commissioner of Income Tax – [1993] 68 TAX 124 (H.C.Lah.) 1161.
Lease to the sister by the assessee was held not bona fide.
We are of the view that the contentions raised on behalf of the petitioner do not have any force. The question which calls for determination is as to whether the lease to the sister by the assessee was bona fide and whether the subsequent lease was made for the benefit of the assessee. The peculiar circumstances existing on the record as pointed out by the learned counsel for the Department do tend to show that it could very legitimately be inferred that the agreement of lease between the sister of the assessee and tenant was a subterfuge to evade the due incidence of taxation It cannot therefore be said that there was no evidence available on the record to reach the conclusions concurrently arrived at by all the three forums below. Commissioner of Income Tax, Central Zone, Karachi v. Mushtaq Ahmed – [1989] 59 TAX 20 (H.C.Kar.) 1162.
House occupied by the parents was a property in the occupation of the owner for the purpose of his own residence.
The respondent is an employee Director in a Company known as Manstock Engineering Company Ltd., Karachi. He owns a residential house in Lahore but his posting is at Karachi where he has been provided rent free furnished accommodation by his employer. While framing assessment for the years 1972-73 and 1973-74 the Income Tax officer assumed the annual value of the house property owned by the respondent in Lahore and computed the income under section 9 of the Income Tax Act for inclusion in the total income. The respondent had not shown the income of the house in his return, therefore, he was
815 INCOME FROM HOUSE PROPERTY
Section 19
asked to explain why the income from the property has not been included. He replied that the house has not been rented out. In the house his parents who are dependent on him are staying and that whenever he visits Lahore, he stays in the house instead of staying in the hotel. The Income Tax Officer did not accept this plea and included the income of the house in his total income. The respondent then filed an appeal against the assessment order before the Tribunal. The Department did not challenge the fact that the house was not letout on rent and that the respondent‟s parents were occupying the residential house and that the parents were dependent on the assessee. On these undisputed facts the Tribunal decided in favour of the respondent. A man cannot be expected to live in seclusion detached from his social, moral, legal and religious obligations nor can he be expected to completely exclude his family members from the enjoyment of his property particularly when he is legally bound to maintain, provide shelter and abode to them. While interpreting the provision under consideration one cannot close his eyes to the realities of life and human and social aspect of our day-to-day life. Considering from this aspect one would be reluctant to give a limited and restricted interpretation to the term “his own residence” to exclude husband, wife, children, parents and dependent blood relations living with the assessee. The meaning of the term “his own residence” has also to be considered in the social, moral, legal and religious obligations nor can he be expected to completely exclude his family members from the enjoyment of his property particularly when he is legally bound to maintain, provide shelter and abode to them. While interpreting the provision under consideration one cannot close his eyes to the realities of life and human and social aspect of our day to day life. Considering from this aspect one would be reluctant to give a limited and restricted interpretation to the term “his own residence” to exclude husband, wife, children, parents and dependent blood relations living with the assessee. The meaning of the term “his own residence” has also to be considered in the social, economic and religious back ground of the assessee. This is an era of renaissance of Islam and we would be failing in our duty if the question relating to personal and family life of a muslim is not interpreted in the light of injunctions of Islam. Keeping this principle in view while interpreting the term “his own residence” and „family members‟ the legal, social and religious obligations of the assessee have to be given due weight. It is now
816 Section 19
Income Tax Digest.
settled that the words „own residence‟ will include the family members of the owner as well. Therefore, it has to be seen whether as in the present case the parents can be called family members and their residence in the house owned by their son can be treated as his own residence. The assessee is a muslim and, therefore, the obligations which are enjoined upon him under the injunctions of Holy Quran should be obeyed and followed by him. In this regard it may be mentioned that the Holy Quran enjoins a muslim to be kind and respectful to his parents and also to maintain them. This is a message of universal application irrespective of cast, creed or religion. It is the duty of the son to provide shelter, abode, maintenance and confront to his parents. They are member of his family and cannot be separated as a separate and distinct family unit. The rule propounded by Islamic Law for maintenance of the parents may equally apply not only to Muslims but to the entire Universe as it is a rule of justice and affords security to the old parents mostly those who may be dependent. In view of the above discussion we are of the view that the term “his own residence” will include the residence and occupation of the house by the parents. Cases referred to: Calcutta Stock Exchange Limited [1935] ITR 105 and Muhammad Nawaz and four others v. Altaf Rasool and others (PLD 1985 Karachi 353).
Commissioner of Income Tax, East Zone, Karachi v. Sind Club, Victoria Road, Karachi – [1987] 56 TAX 75 (H.C.Kar.) 1163.
ALV how to be determined.
We find that section 9(2) of the Income Tax Act defines the expression annual value to mean a sum for which the property might reasonably be expected to let from year to year. Admittedly, the respondent‟s income from the disputed property was assessed in the previous years on the basis of the annul letting value of the said property assessed by the Excise and Taxation Authorities, but in the year under review the Income Tax Officer proceeded to change that practice and decided to arrive at the figure of actual income from the chambers and be adopted a particular method in reaching the same. The Income Tax Officer did not give any particular reasons as to why he was departing from the usual practice, but the underlying idea seems to be that the actual gross receipts appear to be much more than the annual letting value and, therefore, he departed from the practice.
817 INCOME FROM HOUSE PROPERTY
Section 19
This was not regarded as a sufficient reason by the Tribunal from departing from the usual practice and in our opinion, it was open to the Tribunal in appeal to take a view different from the Income Tax authorities as to whether the reasons for departure were sufficient or not. And, therefore, there was hardly any point of law involved in this reference. Moreover, the Tribunal was further of the view that sufficient evidence had not been brought on record by the Income Tax authorities to justify his own estimate of the annual letting value. This finding is essentially based on facts and this again does not require any decision on a point, of law. Mr. Iqbal Naeem Pasha had referred to us 15 TAX 1967 168 (170) where it was held in a case of Estate Duty Act it was open to the Income Tax Appellate Tribunal to assess the value of the property on the basis of the net annual rental value assessed for the purposes of municipal assessment. Case referred to : [1967] 15 TAX 168 (170).
Commissioner of Income Tax, Lahore Zone, Lahore v. Muhammad Allah Bux – [1977] 35 TAX 74 (H.C.Lah.) = 1977 PTD 13 1164.
Property acquired and used as commercial asset was let out subsequently to another person for use temporarily as his business or trade, held that income is from business and assessable under section 10 of the 1922 Act and not house property.
The principle that emerges from the above judgments is that it is the nature of the property and the intention of the owner that will spell out the nature of the income in any given case. We agree that no hard and fast rule can be laid down for its determination. If the property was let out just after making it, the intention of the owner will be clear that it was not a commercial asset and would be governed by section 9. If the owner makes the property to be used as a commercial asset, the subsequent letting out will not bring it under section 9 unless it was clear that the assessee had abandoned his intention to use it as commercial asset. But it cannot be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The past and present business of the assessee seen in the light of the lease deed can also be of great help together that intention. The accrual of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the
818 Section 19
Income Tax Digest.
owner of the business. He is entitled to exploit it to the best advance and he may do so either by using it himself personally or by letting it out to somebody else. The term „business‟ has been defined in section 2(4) of the Act. Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It has been repeatedly observed that „business‟ with the aid of meaning given in dictionaries be deprecated. Judicial pronouncements on the meaning and import of the words “business” and „trade”, statements of principles contained in the judgment and the manner in which these principles have been applied to concrete instances are the only safe-guides to the interpretation of the definition. Case referred to : C.P. Pictuis Ltd. v. Commissioner of Income Tax [1963] 7 TAX 37; Commissioner of Income Tax v. National Storage Private Ltd. (1965) ITR 577; Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad (1954) 25 ITR 449 (SC); Karanpura Development Co. Ltd. v. Commissioner of Income Tax (1967) 44 ITR 362; Fast India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax (1961) 42 ITR 49 (S.C.); Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. (1951) 21 ITR 451 (S.C.); Commissioner of Income Tax v. S. B. Ranjit Singh (1955) 28 ITR 14; Sultan Brothers Private Ltd. v. Commissioner of Income Tax (1964) 9 TAX 207; Shree Lakshmi Silk Mills v. Commissioner of Income Tax (1948) 16 ITR 98; Mazagaon Dock Ltd. v. Commissioner of Income Tax (1958) 34 ITR 368 (S.C.); Narain Swadeshi Weaving Mill (1954) 26 ITR 765 and Commissioner of Income Tax v. Shaw Wallace & Co. (AIR 1932 P.C. 138).
Commissioner of Income Tax v. Madras Cricket Club – [1934] 2 ITR 209 (Mad.) 1165.
Owner of superstructure on land, even if he is not owner of land, is liable to tax.
The rule in India which is different from that in England, is that a person who builds a superstructure upon the land of another man remains the owner of the superstructure and can at the end of his term remove that superstructure from the land, whereas in England a person who erects a building on the land of another cannot do so as the building at the end of the lease becomes the property of the lessor. In India, in order to come within the provisions of section 9 of the 1922 Act the person who owns the building need not also be the owner of the land upon which it stands.
819 INCOME FROM HOUSE PROPERTY
Section 19
Where the assessee-club had taken a land on long lease from the Government and had erected a building thereon and was entitled under the terms of the said lease to remove the building within a stipulated period on the termination of the said lease, it was held that it was assessable in respect of the annual value of the building under section 9 of 1922 Act [section 19 of the Income Tax Ordinance, 1979]. S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income Tax – [1944] 12 ITR 254 (Mad.) 1166.
In case of foreign properties.
Income of a person ordinarily resident in British India from house property situated outside British India is taxable under section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979]. A.S.P.L.V.R. Ramaswami Chettiar v. Commissioner of Income Tax – [1933] 1 ITR 389 (Mad.)
Section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] relates to buildings or lands appurtenant thereto and does not apply to income derived from ground rent. _______________
APPLICABILITY OF EXPLANATION WITH RETROSPECTIVE EFFECT
Muhammad Hanif and 21 others v. Government of Pakistan and 4 others – 2001 PTD 795 1167.
Explanation to section 19 does not apply before assessment year 1996-97.
The learned counsel appearing on behalf of the petitioners has seriously attacked the Notification No. C-1/167-1/ITP/86, Government of Pakistan, C.B.R. Islamabad, dated 16th July, 1996, and has made reference to the explanation added to section 19 of the Income Tax Ordinance, 1979 by Finance Act, 1996. The Explanation reads as follows:“For the purpose of this section, any property, the owner of which is in receipt of any rent, whether in cash or otherwise, whether from employer or otherwise, shall not be taken to be in the occupation of such owner for the purposes of his own residence.” The Explanation is very clear and does not speak about its applicability with retrospective effect.
820 Section 19
Income Tax Digest.
In view of the clear cut submission of the learned counsel for the respondents, accept all the three writ petitions and declare the imposition of the tax prior into coming to force of the explanation by way of amendment through Finance Act, 1996 as without lawful authority and of no legal effect. However, in view of the legal position, the tax shall be payable after 30th June, 1996. _______________
DISTINCTION BETWEEN ―PROPERTY TAX‖ AND ―INCOME TAX‖
Muhammad Jameel and another v. Commissioner of Income Tax, Zone-B, Lahore – [2001] 83 TAX 158 (H.C.Lah.) = 2001 PTD 1474 1168.
Case remitted back for unlawful use of authority - Distinction between ―property tax‖ and ―income tax‖.
Having heard the learned counsel for the parties at length and perused the relevant record it becomes evident that the orders passed by the authorities below cannot be sustained. Admittedly, property tax is a tax on the value of the property and has to be paid irrespective of the occupation of the property by anyone. On the other hand income tax is a tax on the income from the property and unless some income is generated from the property no tax can be levied merely on the ground that it was valuable property and property tax is being paid. In view of the above, this petition is accepted the orders of the authorities below are declared to be without lawful authority and of no legal effect and the case is remitted back to the Deputy Commissioner of Income Tax Zone-B Lahore for decision afresh. On the request of the Learned counsel for the respondents it is clarified that it shall be open to the respondents to determine as to whether or not the property was on rent and further as to what income was being generated by it. _______________
OWNER
Commissioner of Income Tax v. Mehran Associates Limited – [1992] 65 TAX 223 (H.C.Kar.) 1169.
The word ―owner includes persons holding lease‖.
In our view, the lessee was the owner of the structures and was accountable under section 12(13) as owner of the property for any advances received thereby from the tenants over and above the rent
821 INCOME FROM HOUSE PROPERTY
Section 19
payable for the said tenements till such time as the possession thereof was retained by it. No doubt, as it has been pointed out earlier, reference in sub-section (13) of section 12 of the Income Tax Ordinance is clearly to the owner of a building, but under the peculiar circumstances enumerated by us, the respondent would be deemed to be the owner of the building during the agreed or extended term of lease. The learned Appellate Tribunal appears to have based its decision purely on the definition of the words “owner” and “ownership” reproduced earlier in this judgment, but the question was not whether the respondent was owner of the property in question, but the question which required determination was, whether the respondent in view of the circumstances of the case could be taxed under the aforesaid provisions of the Income Tax Act. The Tribunal appears to have overlooked this fine distinction. The facts of the instant case are, therefore, clearly distinguishable, because, the respondent was charged tax on the income actually received by it. In the result, we are of the view that the learned Appellate Tribunal was not justified in holding that the assessee was not the owner of the building in question. Cases referred to : Bachu Bat F.E. Dinshaw v. Commissioner of Income Tax (1967) 15 Tax 37; Gooptu Estate Ltd. v. Commissioner of Income Tax (41 TC 146); Sri Ganesh Properties Ltd. v. Commissioner of Income Tax (1941) ITR 695; S. G. Mercantile Corporation P. Ltd. v. Commissioner of Income Tax (1972) 83 ITR 700; Ballygunge Bank Ltd. v. Commissioner of Income Tax (1946) 14 ITR 409; Commissioner of Income Tax v. Chandra Agro (P.) Ltd. (1979) 117 ITR 251; Commissioner of Income Tax v. Alpana Talkies (1983) 139 ITR 1055; Addl. Commissioner of Income Tax v. Lawlys Enterprises (P.) Ltd. [1975] 100 ITR 169.
Commissioner of Income Tax, Central Zone ‘C’, Karachi v. B.D. Avari – [1991] 64 TAX 110 (H.C.Kar.) = 1991 PTD 839 1170.
Wealth Tax paid on any asset or property owned by the assessee for the purposes of income is deductible expenses in computing the assessee‘s income.
We have gone through this judgment and find that the question which was referred by the Tribunal was exactly the same as contained at point (b). This Court after giving exhaustive reasons came to the conclusion that wealth tax paid on any income yielding asset or income, owned by the assessee or held for the purpose of his property is deductible as expenses in computing the assessee‟s income, profit or gain under sections 10 and 12 of the Income Tax Act, 1922. Mr.
822 Section 19
Income Tax Digest.
Shaikh Haider also states that the latest law on the point is the same which has been given in this report. Case followed : Commissioner of Income Tax, Central Zone „B‟, Karachi v. Zakla Siddiqui (1989) 59 Tax 79 (H.C.Kar.) = (1989 PTD 135).
B.D.Avari v. Commissioner of Income Tax – [1989] 60 TAX 79 (H.C.Kar.) 1171.
Title to the property does not pass by mere executing an agreement to sell.
The applicant filed return for the assessment year 1972-73 but did not declare 1/3rd of the income from the property known as Beach Luxury Hotel as the said property had been sold to his minor sons. It was pleaded that the agreement to sell was entered into between the parties on 22.4.1971 when sale consideration was received by the applicant and therefore, he was not liable to declare the income of the property. The Income Tax Officer did not agree and held that the title to the property did not pass to the applicant by mere executing an agreement to sell. The applicant maintained that after the agreement to sell he has not received any rent and the beneficial owners i.e. his sons had become the real owners. When the matter came up before the Tribunal it maintained the order of the Assessing Officer. In the present case the applicant had merely entered into an agreement for sale. Under section 54 of the Transfer of Property Act a contract of sale does not create any right in the property. The right in the property is created on registration of the sale-deed if value of the property is Rs.100 or more. Under section 9 it is the owner of the property who is liable to pay tax. Applying these principles, we are of the view that during the assessment year under consideration the applicant was the owner of the property and was liable to pay tax in respect of income under section 9 of the Income Tax Act. Cases referred to: Bachu Bai F.E. Dinshaw v. Commissioner of Income Tax [1967] 15 TAX 37 (H.C.Kar.) = (1967 PTD 170) and Rajah Sir M. A. Muthiah Chettiar v. Commissioner of Income Tax (1986 PTD 514).
Bachu Bai F.E. Dinshaw, Karachi v. Commissioner of Income Tax – [1967] 15 TAX 37 (H.C.Kar.) = 1967 PTD 170 = PLD 1067 Kar. 372 1172.
Property was not conveyed by a registered deed but purchaser were given possession of property and rights to enjoy rental income, held that were owner of property and liable to tax.
The executors of the estate of late Mr. F.E. Dinshaw entered into an agreement, on the 14th December 1946, with Mrs. S.G.M. Eduljee for
823 INCOME FROM HOUSE PROPERTY
Section 19
the sale of a plot of land with building thereon for a sum of Rs.7,50,000. At the time of agreement Rs.75,000 was paid as earnest money and the balance of the purchase price was agreed to be paid within four months on the sellers giving one or more conveyance at the instance of the purchaser or her nominee. No regular sale-deed was executed. In 1950 on the payment of the balance of the sale money the executors by letter dated the 7th February 1951, allowed the purchaser to take possession of the property with permission to collect rent from the various tenants from the 1st February 1951. Subsequently, the executors sold a portion of the plot of land, at the instance of the purchaser, to Messrs. Electronics and Films Equipment Ltd., for the consideration of Rs.1,30,000 which was received by the executors under a registered sale-deed dated the 26th August 1950. In making the assessment for the charge year 1953-54 the Income Tax Officer included in the total income of the executors the bona fide annual value of the property on the ground that as the property in question was not properly conveyed to the purchaser, the executors continued to be its real owner. In the subsequent two years, namely, 1954-55 and 1955-56 the Income Tax Officer treated the income from the said property to be income of the two beneficiaries of late F.E. Dinshaw. Against the orders of assessment the assessee went in appeal to the Appellate Assistant Commissioner contending that the Income Tax Officer was not justified in assessing the income because the property in dispute had been sold in February 1931 and its possession was with the Purchasers who were enjoying the rental income. The Appellate Assistant Commissioner confirmed the assessment orders holding that the assessee at the material time were the owners of the property and were liable to pay tax under section 9(1) of the Income Tax Act. He observed that the tax payable under section 9 is in respect of the ownership and not the occupation or possession of the property. When the matter went up to the Appellate Tribunal the assessees challenged the assessment orders on the further ground that the doctrine of part performance as envisaged in section 53A of the Transfer of Property Act applied to the case, under which the transferee was entitled to continue in possession of the property in question and the sellers could not dispossess her. It was further contended that the sellers being not entitled to recover the rent or the income of the said property could not be considered to be its owners and were not liable to pay any tax under section 9 of the Act. The Appellate Tribunal affirming the order of the authorities below held that under section 9 of the Act the liability to pay tax on income of the property is on the “owner” of the
824 Section 19
Income Tax Digest.
property and that “the doctrine of part performance does not give the transferee any right on which he can found a suit but only a right which is available to him as defendant in order to protect his possession. It does not confer any right on the transferee who takes possession in pursuance of a written but unregistered contract.” On a reference the Appellate Tribunal referred to the High Court the question whether the assessees were liable to tax under section 9 of the Act as owners of the estate but the question raised by the assessee as to whether they were liable to tax in respect of the property which was transferred under a registered sale-deed was refused to be referred to the High Court on the ground that this question having not been agitated before the Income Tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal did not arise out of its order. Held, that: (i)
the true test under section 9 of the Income Tax Act for assessing the income is to find out who is the owner of the property. It is the owner alone who can be assessed to Income Tax. It may be that the owner may not be able to recover the rent or may be out of possession or there is no likelihood to recover the rent from the property owned, but that would not in the least exempt him from liability to pay Income Tax under the said provision of law;
(ii)
the provisions of section 53A of the Transfer of Property Act does not give any right to the transferee but only a right to protect his possession. On this provision of law it is not possible to hold that Mrs. Eduljee became the owner of the property or the assessee ceased to be its owner; and
(iii)
the question whether the assessee is entitled to claim any allowance in respect of the income from property transferred to Electronics and Films Equipment Co., under a registered sale-deed, does not arise out of the Tribunal‟s order, as the assessee did not claim any exemption on this ground before the subordinate Income Tax authorities and this point was not even specifically taken or urged before the Appellate Income Tax Tribunal. It is not open to the court to adjudicate upon it even if there is material before it for doing so.
It is a well established general principle that where the law prescribes a mode of transfer compliance with that made is necessary in order to confer title against third parties. It seems to us that when the law
825 INCOME FROM HOUSE PROPERTY
Section 19
requires a registered instrument, title or ownership cannot be conferred by mere agreement of parties. This is quite clear from the provisions of section 54 of the Transfer of Property Act and section 49 of the Registration Act. It will not be out of place to mention that the relevant provision under which Income Tax is levied is section 3, 2(15), 6 and 9 of the Income Tax Act, 1922. The charging section is section 3 which provides that the total income of the assessee is liable to be taxed. Section 2(15) of the Income Tax Act defines “total income” as the total amount of income, profits and gains computed in the manners laid down in this Act. So far as the income from the property is concerned it is computed in accordance with section 9 of the Income Tax Act. According to this provision of law the income from property, which is made liable to tax, is not the actual income but an artificial or statutory income as defined under section 9 which is the bona fide annual value of the property. It is for this reason that the circumstance whether the true owner receives the true income of the property or not has no material bearing for purposes of assessment. What the Income Tax authorities are concerned is the annual value of the property and to charge it from the person who is found to be the owner of the property. The question whether the owner is recovering the rent or will be able to recover the rent or there is likelihood to recover rent of such property by him is not taken into consideration for determining his liability. In these circumstances, we are satisfied that the Income Tax authorities were perfectly justified in holding that as the property in dispute had not been properly conveyed by a registered sale-deed to Mrs. S.G.M.Eduljee, the assessees being its owners were liable to be taxed for its income. Cases relied on: D. M. Vakil and others v. Commissioner of Income Tax [1946] 11 ITR 298; and Sir Currimbhoy Ibrahim Baronetcy v. Commissioner of Income Tax [1963] 48 ITR 507. Cases distinguished: Maneklal Mansukhbhai v. Hormusji Jamshedji Ginwalla and Sons (AIR 1950 S.C. 1); Collector of Bombay v. Municipal Corporation of the City of Bombay and others (AIR 1951 S.C. 469); Abdullah Bhai and others v. Ahmed Din (PLD 1964 S.C. 106) and Bayllgunge Bank Ltd., v. Commissioner of Income Tax (AIR 1947 Cal. 159). Cases referred to: Probodh Kumar Das and others v. Dantamara Tea Co. Ltd., (AIR 1940 P.C. 1); Burma Railways v. Secretary of State for India (1921) ITC 140; Commissioner of Income Tax v. Dewan Bahadur Dewan Kirshna Kishore [1939] 7 ITR 427; S. N. Banerjee and another v. Kuchwar Lime and Stone Co. Ltd., and another (AIR 1941 P.C. 128); In the matter of Official Assignee for Bengal [1937] ITR 233; Muhammad Idrees Barry & Co., v.
826 Section 19
Income Tax Digest.
Commissioner of Income Tax [1959] 1 TAX 14 (S.C.); National Mutual Life Association of Australia v. Commissioner of Income Tax (63 Indian Appeals 99) and Raja Bahadur Sir Rajendra Narayan Bhanj Deo v. Commissioner of Income Tax (AIR 1940 P.C. 158).
E.R. Chowdhury, Pro. Late Eklasur Rahman Chowdhury v. Commissioner of Taxes, Chittagong – [1986] 53 TAX 80 (H.C.B.D.) 1173.
In the absence of any evidence that wife and sons of assessee were Benamidars for assessee, such persons could be taken to be real owners.
The facts of the case, in short are that the assessee submitted a return for his income from business under section 10 of the Act for the assessment year 1969-70 regarding the accounting period ending on 30.6.1969 in response to notice under section 34 of the Act. The Deputy Commissioner Taxes, Survey Circle II, Chittagong not only included the assessee‟s income from his dealings in tea business but also included the income from house properties in total income-The property at 74, Jubilee Road was purchased from a third party in 1955. The purchaser‟s name in the Kabala for the said property is Mahmudul Hoque Chowdhury who is son of the assessee Mr. E.R. Chowdhury. Property at Feringhee Bazar was purchased in 1954 from a third party. In the Kabala for the said property purchased is Mazharul Hoque Cbowdhury who is the son of the assessee. The properties at Bahaddarhat and Arakan Road were purchased from third parties. In the Kabala for these properties the name of Mrs. Roushan Ara Begum, wife of the assessee appears as the purchaser. On the basis of departmental Inspector‟s report the Deputy Commissioner of Taxes took the view that Mahmudul Hoque Chowdhury and Mazharul Hoque Chowdhury were at the time _of purchase minors with no Ostensible source of income. Tin Deputy Commissioner Taxes while adding to the total income the income from the house properties standing in the names of the two sons and wife held, “The assessee thus had income from house properties, let out at Bahaddarhat, Arakan Road, Feringhee Bazar and Jubilee Road”. In the instant case the department‟s case is that the assessee paid the consideration money and purchased the house properties in question in the names of his wife and two sons. There is not an iota of evidence indicated in the assessment order and the judgment of the Appellate Joint Commissioner as well as the Appellate Tribunal to show that the consideration money was paid by the assessee. Even if it is true that the sons were minors at the time of purchase, from
827 INCOME FROM HOUSE PROPERTY
Section 19
the fact alone it cannot be presumed that the assessee purchased the properties in the benami of his sons. Merely on the basis of suspicion, conjectures or surmises the department is not justified in holding that the properties in question were purchased by the assessee with his own money in the benami of his sons and wife. The wife of the assessee from her dower money may have purchased her properties and a host of relations such as grandfather, uncle, etc. Of the song of the assessee and the father etc. or the wire of the assessee may have given the money to the sons and wife of the assessee to purchase these properties. It is curious to note that after stating the legal proposition that mere collection of rent for the house properties by the assessee on behalf of the owners will not make him an owner of properties and that the Income Tax Department is not the forum for deciding the matters of title to land or house property, the Income Tax Appellate Tribunal without any basis whatsoever observed that there was a prima facie case for benami and shifted the burden to the assessee for proving that he had not purchased it in the benami or his sons and wife. We have already stated that it is a well-settled principle of law that a heavy burden lies on the taxing authorities to prove that the persons in whose name the property stands are not the real owners but are only benamidars for another and that the assessee has absolutely no burden to show that the properties purchased from third parties standing in the names of his sons and wife are not his properties. It is to be presumed that owners of then house properties are the sons and wife of the assessee. If the income from each of the properties is taxable, the Department is to notify the owners of these properties and ask them to pay tax in respect of such income and may also ask them to explain who. paid the consideration money. In this view of the matter we find that the Appellate Tribunal was not justified in law in affirming the order of Appellate Joint Commissioner of the wife and sons of the assessee including the income from the aforesaid house properties in the total income of the assessee. Cases referred to : Pandit Gaya Prasad Tawari v. Commissioner of Income Tax [1942] 10 ITR 308; Ramkinkar Bajarji v. Commissioner of Income Tax [1936] ITR 180 and Severam Jokhiram v. Commissioner of Income Tax [1944] ITR 110.
Commissioner of Income Tax v. Dewan Bahadur Dewan Krishna Kishore – [1941] 9 ITR 695 (PC) 1174.
Words ‗property of which he is the owner‘ in section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] cannot be read as meaning ‗of which annual value he is the owner‘.
828 Section 19
Income Tax Digest.
The words „property of which he is the owner‟ in section 9 of 1922 Act [section 19 of the Income Tax Ordinance, 1979] cannot be read as meaning „of which annual value he is the owner‟. _______________
PROFITS AND GAINS OF BUSINESS OR PROFESSION VS. INCOME FROM HOUSE PROPERTY LETTING OF PROPERTIES
Karachi Gymkhana, Club Road, Karachi v. Commissioner of Income Tax, (East), Karachi – [1986] 53 TAX 1 (H.C.Kar.) 1175.
Accrual of notional income is liable to tax.
The applicant upto the assessment year 1970-71 had been showing the notional income of the property owned by it as a part of its taxable income. For the assessment year 1971-72, however, the said income from the property was claimed as exempt from income tax. The plea was rejected by the Income Tax Officer. The applicants then filed an appeal to the Income Tax Appellate Tribunal which also rejected the claim for exemption. In our view, however, the word „income‟ mentioned under item 42(c) of Schedule III to the Constitution of Pakistan, 1962, should be construed in the broadest sense of the term. In fact, none of the items in the Schedule is to be given a narrow or restricted meaning and that each general word should be taken to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it; union the context warrants otherwise. Giving the widest possible construction to the word „income‟ occurring in an entry in the legislature head, conferring legislative powers, means and includes, so as to have effect in its widest amplitude, notional income, or as stated in some of the judgments, cited by Mr. Shaikh Haider, artificial income, statutory income or, as we put it, „implied income‟ as against the „actual income‟. We are mindful of the words occurring in section 9 of the Act that the tax is payable by an assessee under the head income from property in respect of the bona fide annual value of the property consisting of building or lands appertinent thereto of which he is the owner. The word „bona fide‟ as used in section 9, denotes something which may not be „actual‟. The word „income‟, therefore, under section 9 may mean what would generally be not treated as income. The assessee is taxed under section 9 of the Income Tax Act on the basis of the bonafide letting value of the property
829 INCOME FROM HOUSE PROPERTY
Section 19
consisting of buildings or lands appertinent thereto of which the assessee is the owner, other than what is occupied for his business or profession, the profits of which are chargeable to income tax under section 10 of the Act. Section 2(6-C) of the Income Tax Act does not contain an exhaustive definition of the word „income‟ but is inclusive. Notional letting value can, therefore, be an income as in the case of self occupied house. Cases relied on : Commissioner of Income Tax v. Biman Behari Show Shebait [1968] 68 ITR 815; The United Services Club, Simla v. The Crown [1918] 1 ITC 113; Commissioner of Income Tax v. Sheeler Club Ltd. [1963] 49 ITR 52 and D.M. Vakil v. Commissioner of Income Tax [1946] 14 ITR 298. Cases distinguished : Navinchandra Mafat Lal v. Commissioner of Income Tax [1954] ITR 758 and Pakistan Industrial Development Corporation v. Pakistan [1984] 49 TAX 76.
Commissioner of Income Tax, Lahore Zone, Lahore Muhammad Allah Bux – [1977] 35 TAX 74 (H.C.Lah.) 1176.
v.
Income from letting out of factories, is assessable under section 10 and not under section 12 of 1922 Act.
The admitted facts of this case are that the respondent is an assessee since 1927-28. He then owned two cotton factories and one ice factory which were being run by himself. In the years to come he made a number of additions with the result that he owned several factories in 1942-43. All those were being operated by the assessee directly till 1953 except three factories at Jaranwala, Tandlianwala and Multan which he leased out after 1943-44. The. factories in question were leased out in 1953 and 1954 for five years. Before the two leases expired on 31st August 1958, and 31st August 1959. the respondent sold those factories vide two agreements dated 13th May 1959 and 23rd May 1958. The history of the case shows that the assessee had for quite some time been running the various factories himself. He later thought of getting the best out of his business and gave over the cotton factories to be run by allied concerns, as was found by the Income Tax Officer in para 10 of his order, on comparison of profits earned by these factories before and after the arrangements of lease. Thus the apparent intention of lease of the factories was not to use the factories for a fixed income but was in fact to increase the profits from business in this manner. The terms of the lease also show that the assessee had every intention of preserving his commercial assets, fit to be taken over to be worked by himself. He had the right to get them well maintained in good condition. The lessee as obliged to repair and
830 Section 19
Income Tax Digest.
replace machinery. The assessee could change the miller, engineer and other technical staff if their working was unsatisfactory or inefficient. The factories which started as commercial asset continued in that state through out. The fact whether the assessee was running them himself or had let out to the others will not make much difference. The books of assessee had been found to include the income in its „business account‟. Commercial Properties Ltd. v. Commissioner of Income Tax – 3 ITC 23 (Cal.) & Ballygunge Bank Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 409 (Cal.) 1177.
Where a company is owner of property, income from letting out is taxable under the head ‗House property‘ and not as ‗Business income‘, even if company‘s object was to take land on lease, construct stalls, and let them out.
The liability to tax under section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] is of the owner of the building or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, qua income from letting out the properties, he would be liable to pay tax under section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon. The income derived by such a company from the tenants of the shops and stalls constructed on the land for the purpose of setting up market will not be taxed as „business income‟. The object for which the company was formed, inter alia, was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of, land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the company took on lease the property in question and undertook to spend Rs.5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to subject the different portions. The company‟s activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. The question was whether the impugned income was taxable as property income.
831 INCOME FROM HOUSE PROPERTY
Section 19
Held that since the appellant-company was not the owner of the property or any part thereof, no question of making the assessment under the head „Property income‟ arose. Judicial analysis : In the case, Ballygunge Bank Ltd. v. Commissioner of Income Tax [1946] 14 ITR 409 (Cal.), cited by Mr. Joshi, it was held, following the decision in Commercial Properties Ltd., In re AIR 1928 Cal. 456, that „income derived from the ownership of buildings is chargeable to tax under section 9 of the Indian Income Tax Act [section 19 of the Income Tax Ordinance, 1979] irrespective of whether an individual or a company is the owner and also irrespective of whether one of a company‟s objects, or its sole object, is to acquire and let out buildings at rents; ownership itself if the criterion of assessment under that section‟.....These two cases cited by Mr. Joshi would only lead to the conclusion that, where the income is derived from the letting out of the bare tenements, the source of income is the ownership of the property and the income appropriately falls under section 9 of the Act [section 19 of the Income Tax Ordinance, 1979]. _______________
ANNUAL VALUE
_
GENERAL
Commissioner of Income Tax v. Kathiawar CO-OP Housing Society – [1985] 51 TAX 5 (H.C.Kar.) 1178.
―Annual value‖, meaning of
It has been argued on behalf of the society that the annual value for the purpose of assessment shall be the actual rent which is being recovered by the Society from the tenants and not the annual value which the properties might fetch. This plea was not accepted by the Income Tax Officer and the Income Tax Appellate Commissioner, while the Tribunal it had held that the annual value shall be the rent actually recovered by the Society. This view of the Tribunal runs counter to the definition of the „annual value‟ given in sub-section 9(2) of the Act. Had the intention of legislature been to charge tax on the actual annual rental value according to the lease agreement executed by the lessor, then the language of sub-section (2) of section 9 would have been different. From plain reading of sub-section (2) it would appear that the actual rent received by the landlord is not the basis for determining that taxable amount, but the amount which the leased property is likely to fetch by way of rent or which the property might reasonably be expected to fetch from year to year shall be the basis of calculating the taxable amount. In view of the plain language of sub-section (I) read with sub-section (2) of section 9 of the Income Tax Act. We ate unable to agree with the view taken by the Tribunal.
832 Section 19
Income Tax Digest.
Babulal Raj Garhia, In re – [1936] 4 ITR 148 (Cal.) 1179.
Lease deed stipulating annual value is not conclusive evidence of annual value.
A lease deed stipulating an annual rental value though a piece of evidence is not conclusive evidence of the bona fide annual value of the property, and in determining the annual value, all the circumstances of the case must be considered. Calcutta Stock Exchange Association Ltd. In re – [1935] 3 ITR 105 (Cal.) 1180.
‗Residence‘ in proviso to section 9(2) of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] does not apply to company.
The word „residence‟ in the proviso to sub-section (2) of section 23 of the 1961 Act is to apply only to dwelling houses of human beings. The word „own‟ between „his‟ and „residence‟ indicates that it is not applicable to fictional person such as limited companies. _______________
LESSEE
Ballygunge Bank Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 409 (Cal.) 1181.
Lessee who constructs a building on leasehold land is owner and liable to tax.
In India, when a lessee erects a house upon his lessor‟s land during the period of a demise, such house does not become appurtenant to the land but belongs to the lessee who can remove it, or demolish it and take away the materials, at the termination of the demise, unless there is a term to the contrary contained in the lease. Where the lease granted to the assessee-company contained a term which prevented removal of the houses erected during its currency and at the end of the tenure the houses was to belong to the lessor: Held that the lessor had no right of ownership in the structure until the lease determined by efflux of time; upon erection the assessee was the owner and its ownership would continue throughout the period of the lease until its expiration when, and not before, the ownership would pass to the lessor. The lessee was, therefore, liable to tax on income from house property. _______________
833 INCOME FROM HOUSE PROPERTY
Section 19
TRUSTEES
D.M. Vakil v. Commissioner of Income Tax – [1946] 14 ITR 298 (Bom.) 1182.
Trustees are assessable under section 9 of the 1992 Act [section 19 of the Income Tax Ordinance, 1979], qua the trust property even.
The liability to tax does not depend on the power of the owner to let the property, as it also does not depend on the capacity of the owner to receive the bona fide annual value of the property. Where a will provided that no body except the beneficiaries could use the property, and the contention of the trustee was that since the property could not be let out, there was no taxable income, it was held that the income was taxable in the trustee‟s hands. Commissioner of Income Tax v. Abubaker Abdul Rehman – [1939] 7 ITR 139 (Bom.); Commissioner of Income Tax v. Ibrahimji Hakimji – [1940] 8 ITR 501 (Sind) 1183.
Where property is held in trust for beneficiaries, beneficiaries are assessable.
The words „of which he is the owner‟ should be read as meaning „of which annual value he is the owner‟. Where the trustees held properties under trust for the benefit of the wife and children of the settlor, it was held that the trustees were not owners of the property and could not be assessed under section 9 of the 1922 [section 19 of the Income Tax Ordinance, 1979]; as regards the income of the trust properties the assessment was to be made on beneficiaries. _______________
OFFICIAL ASSIGNEE
Official Assignee for Bengal (Estate of Jnanendra Nath Pramanik), In re – [1937] 5 ITR 233 (Cal.) 1184.
Official assignee bencomes owner of property vesting in him on insolvency of owner.
When on the making of an order of adjudication under the Presidency Towns Insolvency Act, the property of the insolvent becomes vested in the Official Assignee and such Official Assignee takes possessions thereof, the Official Assignee is to be taken as the „owner‟ of the property. _______________
834 Section 19
Income Tax Digest.
CO-OPERATIVE SOCIETY
Goud Saraswat Brahmin Co-operative Housing Society Ltd. v. Commissioner of Income Tax – 10 ITC 422 (Bom.) 1185.
In case of a co-operative society.
The assessee was a society registered under the Co-operative Societies Act and one of its objects was to acquire immovable properties in the islands of Bombay and elsewhere and to erect and maintain dwelling houses for the use of its members. The properties could be let to outsiders when no member was willing to take them. The society during the year of assessment made a certain profit out of letting its immovable properties; and the question was whether that property was rightly assessed under section 9 [section 19 of the Income Tax Ordinance, 1979] as being profits and gains derived from the ownership of the property. Held that the Income Tax Officer was correct in computing the income of the assessee in respect of house properties owned by it under section 9 [section 19 of the Income Tax Ordinance, 1979]. _______________
IN CASE OF MONEY-LENDER
MTT. AR.S.AR. Arunachalam Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 184 (Mad.) 1186.
Income from property taken over in money-lending business is assessable as income from house property.
Where the assessee had acquired certain foreign property in the course of its money-lending business, it was held that the assessment of income from such property had to be made under section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979]. _______________
ZAMINDARI
Raja Probhat Chandra Barua v. Commissioner of Income Tax – 5 ITC 1 (Cal.) 1187.
Zamindari income is not chargeable under section 22 [section 19 of the Income Tax Ordinance, 1979].
Section 9 of the 1922 Act [section 19 of the Income Tax Ordinance, 1979] deals with the head „Property‟, and a perusal of it makes it clear that the „income, profits and gains‟ charged under the head „Property‟
835 INCOME FROM HOUSE PROPERTY
Section 19
are confined to the annual value of „buildings or lands appurtenant thereto‟, in other words; to the annual value of what may be conveniently called „house property‟. The income of a zamindar derived from his zamindari would not be chargeable under the head „Income from house property‟. If chargeable, it would be only under the head „Other sources‟. Note: See also Judicial analysis of Nalinkant Ambalal Mody v. S.A.L. Narayan Row, Commissioner of Income Tax [1966] 61 ITR 428 (SC). _______________
PROPERTY USED FOR BUSINESS
Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 1188.
Question as to whether the assessee was occupying any part of a building for the purposes of business carried on by him is a question of law.
The Question as to whether the assessee was occupying any part of a building for the purposes of business carried on by him is a question of law.
836 Section 20
Income Tax Digest.
Section 20* Deductions
PAGE NO
WEALTH-TAX LIABILITY IS AN ALLOWABLE EXPENSE
1189. Wealth-tax liability is an allowable expense. TAX 129 (H.C.Kar.) DEDUCTIONS - REPAIRS
1190. Repairs, connotation of.
_
ANNUAL CHARGE
1191. ‗Annual‘, connotation of.
_
[1992] 65
[1933] 1 ITR 227/AC 368 (PC)
_
[1937] AC 785
837
837
838
1192. Deposit of title deeds does not constitute a charge on _ properties. [1933] 1 ITR 141 (All.)
838
1193. Cases decided prior to Income Tax Ordinance, 1979. _ [1946] 14 ITR 638 (Bom.)
838
INTEREST ON BORROWED CAPITAL
1194. Where debentures, secured on the assessee-company‘s properties are deposited with the bank as security for overdraft, interest payable on debentures is not deductible. _ [1947] 15 ITR 405 (PC) TAXES
1195. Police tax.
_
10 ITC 234 (All.)
1196. Income Tax Officer‘s discretion.
_
839
840 5 ITR 442 (All.)
840
CERTAIN TERMS DEFINED -IMPARTIBLE ESTATE
1197. Position prior to amendment in 1948. (PC)
*
Corresponding to section 9(1)(i) of the 1922 Act.
_
[1941] 9 ITR 695 840
837 DEDUCTIONS
Section 20
Section 20* Deductions
WEALTH TAX LIABILITY IS AN ALLOWABLE EXPENSE
Commissioner of Income Tax, Central Zone ‘C’, Karachi v. M. Hussain Ahmad – [1992] 65 TAX 129 (H.C.Kar.) 1189.
Wealth Tax liability is an allowable expense.
As neither party wants the question relating to limitation being answered, we refrain from making any observation in this regard. The other question relating to wealth tax liability being an allowable expense under section 10 or 12 of the Income Tax Act, 1922, has been correctly decided by the Tribunal. The decision of this Court in 1989 PTD 135 = (1989) 59 Tax 79 (H.C.Kar.) with which we agree, supports the view taken by the Tribunal. In the circumstances, these applications under section 136(2) of the Income Tax Ordinance, 1979, are dismissed with on orders as to costs. Case followed: Commissioner of Income Tax v. Zakia Siddiqui (1989) 59 TAX 79 (H.C.Kar.) = (1989 PTD 135). _______________
DEDUCTIONS - REPAIRS
Rhodesia Railways Ltd. v. Income Tax Collector – [1933] 1 ITR 227 / AC 368 (PC) 1190.
Repairs, connotation of.
The idea of „repair‟ may include replacement or even a renewal. But the converse may not be true. All replacements or renewals need not necessarily be „repairs‟. In the case of a building, restoration of stability or safety of a subordinate or subsidiary part of it or any portion of it can be considered as repair while the reconstruction of the entirety of the subject matter may not be so regarded. The somewhat comprehensive import of the word „repair‟ in this context is evident from the reliance by Forbes, J. in Ravenseft Properties Ltd. v. Davastone (Holdings) Ltd. [1980] QB 12/[1979] 2 WLR 897, 906, on *
Corresponding to section 9(1)(i) of the 1922 Act.
838 Section 20
Income Tax Digest.
The following observations of Sir Herbert Cozens-Hardy M.R. in Lurcott v. Wakeley & Wheeler [1911] 1 KB 905, 914-915 (CA): “It seems to me that we should be narrowing in a most dangerous way the limit and extent of these covenants if we did not hold that the defendants were liable under continents framed as these are to make good the cost of repairing this wall in the only sense in which it can be repaired, namely, by rebuilding it according to the requirements of the country council.” _______________
ANNUAL CHARGE
Moss Empires Ltd. v. IRC – [1937] AC 785 1191.
‗Annual‘, connotation of.
The fact that certain payments were contingent and variable in amount did not affect their character of being annual payments and that the word „annual‟ must be taken to have the quality of being recurrent or being capable of recurrence. Basant Lal Thakat Singh v. Commissioner of Income Tax – [1933] 1 ITR 141 (All.) 1192.
Deposit of title deeds does not constitute a charge on properties.
A deposit of title deeds with a creditor outside the towns specified in section 59 of the Transfer of Property Act, does not constitute a charge on the properties within the meaning of section 9(1)(iv) of the 1922 Act [section 19 of the Income Tax Ordinance, 1979]. Metro Theatre Bombay Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 638 (Bom.) 1193.
Cases decided prior to Income Tax Ordinance, 1979.
The assessee took on lease a plot of land. The agreement provided for payment in instalments with interest on the balance outstanding from time to time and the agreement between the assessee and the Government further provided that if the assessee made default in the payment of any instalment, it would be lawful for the Government to recover the same under the Bombay City Land Revenue Act: Held that the interest payable could not be allowed under section 9(1)(iv) of the 1922 Act [section 20(1)(f) of the Income Tax Ordinance, 1979] as it was not a charge on the land inasmuch as a charge could not arise under the Bombay City Land Revenue Act unless and until there had been a default. _______________
839 DEDUCTIONS
Section 20
INTEREST ON BORROWED CAPITAL
Commissioner of Income Tax v. Chowringhee Properties Ltd. – [1947] 15 ITR 405 (PC) 1194.
Where debentures, secured on the assessee-company‘s properties are deposited with the bank as security for overdraft, interest payable on debentures is not deductible.
The assessee-company deposited with a bank its bearer debentures (forming part of a large series) as security for the moneys for the time being owing by it to the bank on overdraft. The debentures contained the common form of agreement to pay to the bearer the principal and, on stated dates, the interest. The debentures were entitled to the benefit of a trust deed under which properties of the company, including the buildings mentioned, stood as security for the payment of the principal and interest on the debentures. In the relevant year 1938-39, the company, while paying interest on its overdraft, paid no interest on the debentures held by the bank, but claimed that the interest on the debentures was deductible as interest on mortgage, in the computation of property income. The question for consideration was whether the claim was allowable. Held that the debts for principal and interest which were created as secured debts by the issue of the debentures to the bank, were in this transaction treated as property of the company vested in the bank which the company was at liberty to charge and in fact did charge. It was elementary that while the company could charge its own property, it could not charge the bank‟s property. The debt for interest payable thus formed part of the company‟s property. It was a segregated asset of the company in the hands of the bank. It followed that the interest when paid became a part of the property charged. When received, it was applicable by the bank only for the purpose of being applied in reduction of the overdraft. Until so applied, the only for the purpose of being applied in reduction of the overdraft. Until so applied, the only course open to the bank was to carry it to the credit of the company in some other account. It was not the bank‟s free property. The right to demand payment of the debenture interest indeed could be exercised by the bank to the extent necessary for reduction or extinction of the overdraft but otherwise that right was not available to the bank, and if nothing was owing on overdraft, no payment of interest could be required. The result was that although the interest payable under the debentures was undoubtedly interest receivable by the bank as being part of charged property belonging to the company and, by virtue of the charge, so receivable as the company‟s mandatory to apply it in a
840 Section 20
Income Tax Digest.
particular way. Interest payable to such a mandatory was clearly not deductible. Interest received or receivable from the company under its debentures charged to the bank in truth stood from the bank‟s point of view in no different position from interest received or receivable by it from debentures of an outside concern lodged by the company as security. The interest belonged to the company subject to the charge and to the mandate interest in the transaction. The claim was, therefore, not allowable. Case review : Decision of the Calcutta High Court in Commissioner of Income Tax v. Chowringhee Properties Ltd. [1944] 12 ITR 434 reversed. _______________
TAXES
Tejpal Jamna Das v. Commissioner of Income Tax – 10 ITC 234 (All.) 1195.
Police tax.
Punitive police tax levied under the Police Action Force in a municipality, is not admissible as deduction in computing income from property. Seths Basant Rai & Takhat Singh v. Commissioner of Income Tax – 5 ITR 442 (All.) 1196.
Income Tax Officer‘s discretion.
Under section 9 of the 1922 Act the maximum amount to be allowed has been laid down as 6 per cent on the annual value. As the 6 per cent allowed on the annual realisation is within the maximum, it is open to the Income Tax Officer to allow that amount. The mere fact that the words „6 per cent‟ have been used does not compel the Income Tax Officer to allow this percentage on the total annual value. Note:
The position under section 20(1)(g) of the repealed Income Tax Ordinance 1979 is different. The limit is now 6% of the annual value and not net realizable rent. _______________
CERTAIN TERMS DEFINED - IMPARTIBLE ESTATE
Commissioner of Income Tax v. Dewan Bahadur Dewan Krishna Kishore – [1941] 9 ITR 695 (PC) 1197.
Position prior to amendment in 1948.
Property income of impartible estate is assessable in the status of HUF.
841 LIABILITY IN THE CASE OF CO-OWNERS
Section 21
Section 21* Liability in the case of co-owners
PAGE NO
WORDS “DEFINITE” AND “ASCERTAINABLE”, EXPLAINED
1198. Words ―definite‖ and ―ascertainable‖ as used in Section 21 _ explained. [2000] 81 TAX 458 (H.C.Kar.) = 2000 PTD 1288 CO-OWNERS - SHARES TO BE DEFINITE
1199. Co-owners are to be assessed separately. 141 (H.C.AJ&K)
_
842
[1996] 74 TAX
1200. If there is litigation among co-owners, it cannot be said that _ their shares are definite. [1944] 12 ITR 302 (Lahore)
843 844
TAX AS AOP
1201. Where shares are definite income cannot be taxed as AOP. _ [1996] 74 TAX 141 (H.C.AJ&K)
844
ILLUSTRATION
1202. Co-heirs.
*
_
[1943] 11 ITR 443 (Lahore)
Corresponding to section 9(3) of the 1922 Act.
845
842 Section 21
Income Tax Digest.
Section 21* Liability in the case of co-owners
WORDS ―DEFINITE‖ AND ―ASCERTAINABLE‖, EXPLAINED
Qasim Ali and others v. Commissioner of Income Tax, Zone VI, Karachi – [2000] 81 TAX 458 (H.C.Kar.) = 2000 PTD 1288 1198.
Words ―definite‖ and ―ascertainable‖ as used in section 21 explained.
From a perusal of the various meanings of the words “definite” and “ascertainable” we are unable to subscribe to the view advanced by Mr. Shaikh Hyder on behalf of respondent/department that the share of the co-owners must be capable of being partitioned or bifurcated according to the shares of each co-owner in a manner so as to form independent units capable of transfer/disposal independently. From none of the meanings of the words “definite” and “ascertainable” reproduced hereinabove from the ordinary as well as law dictionaries it can be deduced or inferred that the words “definite” and “ascertainable” used in section 21 of the Ordinance are not to be interpreted or defined to mean that the share of each co-owner must be capable of physical partition or division and that the partitioned share of portion must be such that it must form an independent unit capable of being identifiable by metes and bounds. The only meaning which these two words carry is that the shares of the co-owners must be definite and ascertainable. In the absence of specific shares having been assigned to the applicants/assessees in the sale-deed in questions, they would have equal shares in the property in accordance with section 45 of the Transfer of Property Act. Each of seven applicants/assessees joint co-owners of the property would be having 1/7th share therein which represents a definite and ascertainable share. It may also be pointed out that in the agreement dated 7.8.1982 between the members of the AOP it was agreed that such member would be having 1/7th share in the property.
*
Corresponding to section 9(3) of the 1922 Act.
843 LIABILITY IN THE CASE OF CO-OWNERS
Section 21
We are satisfied that in the case in hand the applicants/assessees would be holding equal share in the property in accordance with the provisions of section 45 of the Transfer of Property Act as well as the deed of agreement dated 7.8.1992 and such equal shares are to be held as “definite” and “ascertainable” as used in section 2 of the Ordinance. The applicants/assessees, therefore, are to be assessed under section 21 of the Ordinance on the basis of their independent share and not as an association of persons. Upon the above discussions, we answer both the questions in the negative. This I.T.R. is allowed, order of the Appellate Tribunal dated 28.4.1992 is set aside and the Income Tax Officer is directed to frame the assessment under section 21 of the Income Tax Ordinance as was being done in the previous assessment years. _______________
CO-OWNERS - SHARES TO BE DEFINITE
Mst. Fazal Be and 6 Others v. Commissioner of Income Tax – [1996] 74 TAX 141 (H.C.AJ&K) 1199.
Co-owners are to be assessed separately.
In the above reproduced portion of the sale deed It has been stated that the plot was sold to four persons. The word” ba-hisa braber (Urdu word)” is specifically mentioned the words convey that all the four vendees shall be the proprietors of the plot in equal shares. By use of the phrase equal share‟, there remains no doubt about the proportion of the share of the vendees inter se. It means that right of each one of them extends to 1/4th of the entire property purchased. Consequently, the benefits arising out of this property will be a apportioned by the purchasers In equal share and no one is entitled to have more than 1/4th. The provisions of the repealed Act as well as of new law are identical. According to contents of section 21, share of each partner is to be computed separately and then it Is to be added in other income of assessees if any. No other provisions of the Income Tax Law has been cited by the counsel for the respondents to show that Income Tax Authorities had the powers to make the assessment as AOP of a persons whose shares are well defined. In the case of property, the shares are to be determined by reference to the title deed. In the present case, the sale deed dated 22.6.1974 is the title deed, which indicates that share of all the vendees will be equal. Since there is no other evidence to support the finding of the Tribunal, it is held that its finding is not warranted by law.
844 Section 21
Income Tax Digest.
As upshot of the above discussion, we accept reference applications and hold that the petitioners who initially purchased the property were not AOPs but four different individual, hence the Income derived by them from this property respecting the assessment year 1976-77 and 1977-78 shall be assessed as individuals and not as AOP. Abdul Rahman v. Commissioner of Income Tax – [1944] 12 ITR 302 (Lahore) 1200.
If there is litigation among co-owners, it cannot be said that their shares are definite.
Even if the properties were jointly owned, jointly managed or jointly developed and there was not even a distribution of the income earned, the provisions of section 9(3) of the 1922 Act [section 21 of the Income Tax Ordinance, 1979] would be attracted „if the shares of the owners of the properties were definite and ascertainable‟. But if there is a dispute among the heirs regarding ownership and a litigation is going on, it cannot be said that the share of each heir is definite, though it may be ascertainable. The term „definite‟ in ordinary parlance means „fixed, exact and clear‟ and in a case where even it cannot be said as to how many heirs will eventually share the property, it cannot be urged that the share of any heir is so fixed or clear. Where there was dispute among the co-heirs regarding their shares in the property, and a suit had been filed, it was held that during the pendency of the suit they could not be separately assessed under section 9(30 of the 1922 Act [section 21 of the Income Tax Ordinance, 1979], since their shares were not definite and ascertainable. _______________
TAX AS AOP
Mst. Fazal Be and 6 Others v. Commissioner of Income Tax – [1996] 74 TAX 141 (H.C.AJ&K) 1201.
Where shares are definite income cannot be taxed as AOP.
According to contents of section 21 of the Income Tax Act, 1922, share of each partner is to be computed separately and then it is to be added in other income of assessees if any. No other provisions of the Income Tax Law has been cited by the counsel for the respondents to show that Income Tax Authorities had the powers to make the assessment as AOP of a persons whose shares are well defined. _______________
845 LIABILITY IN THE CASE OF CO-OWNERS
Section 21
ILLUSTRATION
Nizam-ud-Din Amir-ud-Din of Lahore, In re – [1943] 11 ITR 443 (Lahore) 1202.
Co-heirs.
Co-heirs are to be assessed separately, even if rent is collected jointly and distributed.
846 Section 22
Income Tax Digest.
Section 22* Income from business or profession
PAGE NO
REVENUE RECEIPTS VS. CAPITAL GAINS - SECTION 22 AND SECTION 27 OF THE ORDINANCE
1203. Capital gain vs. revenue receipts - Tests of. = [1986] 53 TAX 59 (S.C.Pak.)
_
1984 SCC 594
1204. Gross profit or receipts after deduction of allowable _ expenditure is taxable under section 22. [1988] 57 TAX 46 (H.C.Kar) = 1988 PTD 532
860
862
PROFIT MOTIVE, MEANING & RELEVANCE OF
1205. ‗Profit‘ - Meaning of. PLD 823
_
1960 PTD 1121 (H.C.Dacca) = 1960
1206. Terminal profit on ―sale‖ etc. (H.C.Pesh.)
_
863 [1983] 47 TAX 184 863
1207. ‗An accretion to capital‘ did not become income merely because the original capital was invested in the hope and _ expectation that it would rise in value. [1930] 15 Tax. Cas. 333 (HL)
864
1208. The real question in the case of a single transaction is: whether there was a gain made in an operation of business _ carrying out a scheme for profit-making. [1938] 6 ITR 210 (Rangoon)
865
ISOLATED TRANSACTION WHEN CAN CONSTITUTE ADVENTURE IN THE NATURE OF TRADE
1209. Profits of the pre-incorporation period are assessable in the _ hands of the promoters. [1974] 29 TAX 248 (H.C.Lah.)
865
1210. Profits of the pre-incorporation period are assessable in the _ hands of vendors. [1974] 29 TAX 143 (H.C.Kar.)
866
*
Corresponding to section 10(1), 10(6), 2(6c) of the 1922 Act.
847 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
1211. Profits earned prior to incorporation are assessable in the hands of promoters of the company in the status of an _ Association of persons. [1972] 27 TAX 149 (H.C.Lah.)
868
1212. An isolated transaction can satisfy the description of an _ adventure in the nature of trade. [1935] 3 ITR 58 (Mad.)
869
1213. Even an isolated transaction can be treated as adventure in the nature of trade; what is relevant is the nature of _ commodity dealt in. [1942] 24 Tax. Cas. 498 (HL)
870
1214. Isolated purchase with a view to make a sale later on the expectation of rise in prices cannot normally amount to a _ venture in the nature of trade. [1926] 11 Tax Cas. 538
870
1215. Isolated purchase and sale of a commodity unconnected with the assessee‘s line of business is an adventure in the nature _ of trade. [1942] 24 Tax. Cas. 498 (HL)
871
1216. Mere expectation of realisation of enhanced value cannot make an isolated transaction an adventure in the nature of _ trade. [1930] AC 415 (HL)
871
BUSINESS INCOME - GENERAL PRINCIPLES
1217. Trading receipts could not change their character by just _ transferring them to some other account. [1989] 60 TAX 45 (H.C.Kar.)
872
PROFITS AND GAINS, CONNOTATION OF
1218. Profits can be ascertained only after setting off the relevant _ expenditure and other obligations. [1892] 3 Tax Cas. 185
873
1219. Profit or loss of a business is to be computed as difference between what it started with at beginning of year and what _ was position at end of year. [1945] 13 ITR 290 (Mad.)
873
1220. Profits attract tax once they come into existence, subsequent application of profits is not relevant for tax purposes. _ [1934] 2 ITR 63 (PC)
874
1221. Profits cannot be taxed until they have been ascertained and _ earned, despite book entries having been made. 52 TC 242 (HL) _ 1222. No taxable profit will arise by trading with oneself. [1887] 2 Tax Cas. 387 1223. Where business is not carried on, income is not assessable as _ business income. 6 ITC 178 (PC)
874 875 875
848 Section 22
Income Tax Digest. PAGE NO
1224. If there is no evidence that the heirs have carried on business, income from business of deceased cannot be _ assessed under head ‗Business‘. [1942] 10 ITR 405 (Peshawar)
876
BUSINESS WHEN DEEMED TO BE CARRIED ON
_ 1225. Business when deemed to be carried on. 1990 SCC 744 = [1991] 63 TAX 120 (S.C.Pak.) = 1991 PTD 573 = 1991 PLD 280
876
BUSINESS INCOME VS. INCOME FROM OTHER SOURCES – SECTION 22 & SECTION 30 OF THE ORDINANCE
_ 1226. Interest income cannot be taxed as business income. 1962 SCC 108 = [1962] 5 TAX 262 (S.C.Pak.) _ 1227. Receipt when held not to be revenue in nature. [1983] 47 Tax 211 (H.C.Kar.)
877 878
1228. Company‘s main business was construction of railway line it was also to invest or employ money upon securities or shares held that interest on deposit is not income from business. _ [1961] 3 TAX 48 (H.C.Dacca) = 1961 PTD 136 = 1961 PLD 108
878
1229. Business in the name of company controlled by an individual held that ownership of business can be unveiled. _ [1976] 33 TAX 121 (H.C.Lah.)
880
INCOME DETERMINED IN THE CASE OF THE TRUST
1230. Trust income computed by estimating the sales and applying G.P. rate and 1/4th of the income determined in the case of _ the Trust held to be income of the Mutawalli. [1989] 59 TAX 102 (H.C.Kar.)
880
BUSINESS INCOME ON PURCHASE OF SHARE
1231. Negligible capital gain on sale of shares cannot be a trading _ activity. [1982] 45 TAX 204 (H.C.Kar.)
881
1232. In the absence of evidence that assessee was actually trading in shares any surplus arising out of sale of shares is held no _ liable to tax. [1980] 42 TAX 122 (H.C.Kar.)
882
BUSINESS INCOME IN THE NATURE OF CASUAL OR NON-RECURRING
1233. Taxable income should be from business and not of a casual _ and non-recurring nature. [1977] 35 TAX 121 (H.C.Lah.)
882
849 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
“ABANDONED” AND “DISCARDED”, MEANING OF
1234. ―Abandoned‖ and ―discarded‖, meaning of. 150 (H.C.Kar.)
_
[1986] 54 TAX 884
LOSS / FORFEITURE OF DEPOSIT
1235. Outstanding amount realised after discontinuance of business were not‖ taxable income‖— (position prior to 1979). [1973] 28 TAX 115 (H.C.Lah.)
885
1236. Loss accruing outside Pakistan is not allowable in the case _ of a non-resident company. [1989] 59 TAX 37 (H.C.Kar.)
886
1237. Loss incurred in East Pakistan held _ expenditure. [1988] 57 TAX 46 (H.C.Kar.)
888
as
allowable
1238. Loss suffered on redemption of Government loans is a _ capital loss and not deductible from profit. [1985] 51 TAX 102 (H.C.Kar.) = 1985 PTD 329
888
1239. Loss of security deposit made to obtain new line of business _ is not deductible. [1940] 8 ITR 132 (PC)
889
DISPOSAL OR REMUNERATION OF INCOME IS NOT ADMISSIBLE IN LAW
1240. Amount kept in suspense account payable to certain _ unascertioned creditors held not liable to tax. [1983] 47 TAX 182 (H.C.Kar.)
890
1241. High Court order under section 153 of Companies Act, 1913 _ held not binding on Income Tax Officer. [1979] 39 TAX 147 (H.C.Lah.)
890
INCOME OR CAPITL RECEIPTS
1242. Compensation when is capital receipt in the hands of _ assessee. [1979] 39 TAX 21 (H.C.Kar.)
892
BUSINESS INCOME - TESTS TO DETERMINE NATURE OF TRANSACTION
1243. Loss when held not to be speculative. (H.C.Kar.) 1244. Transaction held not to be speculative. (H.C.Kar.)
_ _
[1993] 68 TAX 77 893 [1970] 21 TAX 75
1245. Surplus arising from the difference in the face and the purchase prices of compensation books and credited to capital reserve account in balance sheet held to be not _ business income. [1983] 48 TAX 1 (H.C, Kar.)
893
894
850 Section 22
Income Tax Digest. PAGE NO
1246. Assessee-company forming association of trades-men, businessmen or manufacturers with main objects, such as assistance to members to obtain essential machinery and materials for promotion and development of thread ball industry, held to be a Trade Association and receipts from _ donation etc. held to taxable in its hand. [1974] 29 TAX 179 (H.C.Kar.)
895
1247. Not only initial intention but subsequent event and conduct of assessee must also be taken into account to determine whether transaction in question was in nature of trade. _ [1944] 12 ITR 472 (Lahore)
896
1248. Speculations and adventures must be ‗in the nature of trade‘ before the profits and gains resulting from them become _ taxable. [1939] 7 ITR 470 (Rangoon)
896
1249. Question as to whether in making investments the intention of the assessee was to make profit as a part of its business, is _ a finding of fact. [1937] 5 ITR 307 (Lahore)
897
VEIL OF CORPORATION CAN BE LIFTED
1250. Veil of company can be lifted. TAX 62 (S.C.Pak.)
_
1974 SCC 422 = [1975] 31
1251. Veil of incorporation of a corporate personality, can be lifted in suitable cases to discover the real nature of transaction. _ [1976] 33 TAX 121 (H.C.Lah.)
897
898
PROFITS DERIVED FROM SALE OF SHARES AND BONUS SHARES
1252. Promoters of the company are liable to tax for profits prior to _ the incorporation of the company. [1990] 62 TAX 1 (H.C.Kar.)
898
1253. Profits derived from sale of shares and bonus shares, transactions not directly connected with the trade or business, held not to be adventure in the nature of trade. _ [1976] 33 TAX 221 (H.C.Kar.)
899
DEALING IN LAND WHEN CONSTITUTE BUSINESS
1254. Purchase of land with dominant intention to sell a portion of _ it is adventure in the nature of trade. [1967] 16 TAX 46 (H.C.Kar.) _ 1255. Purchasing land to sell it as plots is a business. [1939] 7 _ ITR 154 (Lahore); [1944] 12 ITR 472 (Lahore)
900 901
851 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
1256. Where assessee bought certain villages with borrowed capital, divided it into plots and sold some of them, profit _ arising from such venture was business income. [1940] 8 ITR 179 (Bom.)
902
COMPULSORY ACQUISITION OF PROPERTY
1257. Where a portion of the land, purchased by the assessee with the intention of selling plots of it as building site, was acquired by the Government after the assessee had sold off _ the remaining portion of land. 6 ITC 74 (Nag.)
903
IN CASE OF MONEY-LENDER
1258. Where the assessee, carrying on the money-lending business, made a solitary purchase of mortgage right, took over the mortgaged property and sold it subsequently realising profit _ therefrom. 7 ITC 297 (Mad.)
903
1259. Where the assessee, a landowner and money-lender, purchased at a court auction right, title and interest of a person in certain legacies at a certain price and later in a suit realised a sum under the legacies which was in excess of _ the sum paid by the assessee for purchasing the legacies. 8 ITC 76 (Mad.)
904
OTHER ILLUSTRATIONS
1260. Where premises are suitably equipped so as to facilitate letting for public entertainments, it is an adventure in the _ nature of trade. [1920] 7 Tax Cas. 517 (HL)
904
DEALERS IN SHARES
1261. Purchase and sale of shares, even if it is an isolated transaction and is mainly aimed at recovering some prepaid taxes from the revenue, is nevertheless an adventure in the nature of trade if it was covered by the objects of the _ company. [1965] 58 ITR 328 (PC)
905
GOLD AND SILVER TRANSACTIONS
1262. Where the assessee-HUF, carrying on money-lending business, had purchased gold when England went off the gold standard and the price for the same was paid by withdrawing money from fixed deposits before their maturity and from a firm in which it was a partner and it _ later sold the gold at profit after several years. [1944] 12 ITR 209 (Lahore)
908
852 Section 22
Income Tax Digest. PAGE NO
1263. Assessee purchased silver through her husband, who was a partner in a money-lending firm, and after retaining it in the raw state for about three years, sold it in one lot through _ the firm for a profit. [1939] 7 ITR 470 (Rangoon) OTHER ILLUSTRATIONS
1264. Coffee growing is ‗business‘.
_
[1939] 7 ITR 48 (PC) _ 1265. Advancing money for litigation. [1935] 3 ITR 177 (All.)
909
909 910
CONCEPT OF BUSINESS - CONNOTATION OF
1266. Business means some real, substantial and systematic _ activity with a set purpose. [1947] 15 ITR 263 (All.)
910
1267. Business is an activity carried on with an object to earn _ profit. [1938] 6 ITR 1 (All.)
911
1268. ‗Business‘ in the context of the Income Tax Act means a business which is so carried on that profits of such business _ are assessable under the Act. 6 ITC 21 (Bom.)
911
PROFESSION / OCCUPATION / VOCATION
1269. General.
_
[1940] 8 ITR 187 (All.)
1270. ‗Business‘ and ‗vocation‘ are not synonymous. ITR 263 (All.)
_
911 [1947] 15 912
1271. Business or vocation in ordinary parlance does connote activities in which a ‗person‘ is engaged with a set purpose, and the frequency or the repetition of the activity, though at times a decisive factor, is by no means an infallible test. _ [1947] 15 ITR 263 (All.)
912
1272. In case of investment of the income derived from money_ lending business in the purchase of property. [1949] 17 ITR 394 (East Punj.)
913
ILLUSTRATIONS
1273. Dealing in shares.
_
[1934] 2 ITR 155 (All.)
1274. Maintenance of race horses, running them in races and betting on horses, if undertaken as a past time does not constitute business, profession, vocation or occupation. _ [1940] 8 ITR 187 (All.) _ 1275. Coffee growing is ‗business‘. [1939] 7 ITR 48 (PC) 1276. Where assessee is carrying on business, fact that amount received by assessee or profits earned by it is comparatively _ small, is irrelevant. [1947] 15 ITR 263 (All.)
913
913 914
915
853 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
1277. If there is no evidence that the heirs have carried on business, income from business of deceased cannot be _ assessed under head ‗Business‘. [1942] 10 ITR 405 (Peshawar)
915
CARRYING ON BUSINESS / CLOSURE OF BUSINESS
1278. Where business is not carried on, income is not assessable as _ business income. 6 ITC 178 (PC)
916
1279. Question as to whether the assessee was carrying on a _ business or not is a question of fact. [1940] 8 ITR 179 (Bom.)
916
SAME BUSINESS - CONNOTATION OF
1280. Mere common ownership of two businesses does not make _ them one business. [1943] 11 ITR 128 (Bom.)
916
RENTAL INCOME - HIRING OF BUSINESS ASSETS
1281. Where business includes sale as well as hiring of manufactured assets, profit on sale of hired assets is _ assessable as business profits only. [1925] 12 Tax Cas. 720 (HL)
917
RENTAL INCOME - OTHER ILLUSTRATIONS
1282. Where assessee held considerable areas under a lease from Agra Cantonment authorities, on a portion of which it had constructed buildings which were let out on rent and vacant lands included in lease were also let out to squatters from _ whom assessees realized ground-rent. Tax 4 ITC 324 (All.)
917
1283. Where speculative builder sells houses on leasehold basis for premium-cum-ground rent payments, retaining reversionary interest, capitalised value of ground rents could not be taxed _ as profits accruing on the date of transaction. [1940] 8 ITR (Suppl.) 57 (HL)
918
ROYALTIES
1284. Royalties will fall under ‗other sources‘ and not under _ ‗profits and gains of business‘. [1943] 11 ITR 513 (PC) _ 1285. Royalty received under mining lease. [1943] 11 ITR 513 (PC) 1286. Where securities are sold by a dealer of securities before _ receiving interest. [1935] 3 ITR 464 (Mad.)
919 920 920
854 Section 22
Income Tax Digest. PAGE NO
COMPENSATION
1287. Compensation for cessation of oil distributing agencies is not _ business income. 6 ITC 178 (PC)
920
1288. Insurance money received for destruction of stock-in-trade in _ fire, is assessable in full as a trading receipt. [1929] 14 TC 364 (HL)
920
SALE PROCEEDS OF BUSINESS / BUSINESS ASSETS / STOCK-IN-TRADE
1289. Where facts clearly indicated a trading venture which was also authorised by the articles of association, transaction of _ sale of assets could result in profit only. [1904] 5 Tax Cas. 159
921
EXPLOITATION OF MINING RIGHTS
1290. Exploitation of right by a company would result in profit _ only and not in a capital receipt. [1946] 14 ITR (Suppl.) 17 (PC)
922
1291. Discharge of onus to prove that profits realised on sale of _ investments is business income. [1940] 8 ITR 635 (PC)
922
SHARE DEALING
1292. In case of a solitary transaction of sale and purchase of _ shares. [1944] 12 ITR 50 (Pat.)
923
MONEY-LENDING BUSINESS
1293. Profit on properties acquired in money-lending business, which thereafter are treated as stock-in-trade, are business _ income. 4 ITC 200 (Mad.)
923
1294. In case of profits realised by money-lender from sale of mortgaged property which he obtained as assignee of _ original mortgagee. [1934] 2 ITR 295 (Mad.)
923
1295. Question as to whether rentals derived from foreign property taken over in satisfaction of debt can be said to be profits and gains of the assessee‘s foreign money-lending business is _ in each case a question of fact. [1933] 1 ITR 389 (Mad.)
923
1296. The sale of securities by the assessee-bank in order to meet withdrawal by depositors is a normal step in carrying on the banking business and the profit made in such a sale are on _ revenue account and assessable to Income Tax. [1940] 8 ITR 635 (PC)
924
855 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
OTHER ILLUSTRATIONS
1297. Where stock is sold for a consideration, which is partly in cash and partly in marketable securities, value of the marketable security must be taken into account in assessing _ taxable profits. [1936] 4 ITR 8 (HL)
926
1298. No question of law arose from finding of fact that what assessee got on partition of HUF was converted by him into stock-in-trade and thus profit on sale of such land was _ taxable. [1941] 9 ITR 244 (Lahore)
926
1299. Periodical payment to a person whose business is taken over, to prevent him from carrying on a competitive business, is _ not business income in his hands. [1941] 9 ITR 642 (Sind)
927
BUSINESS LOSS / DEDUCTION - ALLOWABILITY OF LOSS AND EXPENDITURE
1300. Profits should be computed after deducting the losses and expenditure incurred for the purposes of business unless the losses and expenditure are expressly, or by necessary _ implication, disallowed by the Act. [1931] 5 ITC 363 (PC)
927
1301. Conditional payments can in appropriate cases be treated as _ expenditure incurred to earn profits. AIR 1931 PC 165; [1937] 5 ITR 270(PC)
927
CONDITIONS PRECENDENT
1302. Fee charged from members dealing in forward delivery contracts for specific services rendered to them is liable to _ tax in the hands of Association. [1967] 15 TAX 128 (H.C.Kar.)
928
1303. To be deductible, losses must really be incidental to the _ trade and not merely connected remotely with it. [1906] 5 Tax. Cas. 215 (HL)
928
1304. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss, but whether the loss has occurred in the course of carrying on the business or _ is incidental to it. [1943] 11 ITR 38 (Mad).
929
1305. Expenses of a business which is stopped cannot be set off _ against income of other business. [1949] 17 ITR 394 (Punj.)
929
856 Section 22
Income Tax Digest. PAGE NO
1306. Where an assessee carries on different varieties of trade, commerce or manufacture, each variety will have to be regarded as a separate business for the purposes of section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] unless of course one or more varieties are so closely connected with each other as to be capable of being regarded _ as one business. [1949] 17 ITR 394 (Punj.)
930
OTHER CONCEPTS
1307. Nomenclature given by parties is not relevant to decide _ whether payment is allowable or not. [1948] 16 ITR Suppl. 101 (HL)
930
1308. Profits on their coming into existence attract tax at that point, and revenue is not concerned with subsequent _ application of profits. AIR 1931 PC 165
931
1309. In case of succession to business, income is to be computed with reference to the position at the time it was earned. _ [1937] 5 ITR 137 (Lahore)
931
1310. No question of law arose, where on the basis of the verified returns submitted by the assessee-firm and the statement on oath made by it before the Income Tax Officer, the Income Tax Officer held that certain losss claimed by the assessee _ were not its losses. 2 ITC 355 (Nag.) _ 1311. Others. [1941] 9 ITR 278 (Mad.)
931 932
DISTINCTION BETWEEN „FIXED CAPITAL‟ AND „CIRCULATING CAPITAL‟ - DEVALUATION LOSS
1312. Distinction between ‗fixed capital‘ and ‗circulating capital‘. _ [1966] 13 TAX 163 (H.C.Lah.) 1313. Loss on account of depreciation in value of foreign currency is allowable only if foreign currency was held on revenue _ account. [1937] 5 ITR 456 (Rangoon) _ 1314. Others. 6 ITC 318 (Nag.)
932
934 939
PAYMENT OF PORTION OF PROFITS
1315. Payment of portion of profits by assessee to concern whose _ business it has taken over, is not deductible. [1937] 5 ITR 270 (PC)
940
REVENUE OR OF CAPITAL LOSS - TEST OF
1316. Revenue or capital loss - Test of. (H.C.Kar.)
_
[1982] 45 TAX 204 941
857 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
LOSSES ON SALE OF SHARES
1317. Loss from shares where assessee does not carry any business _ in purchase and sale of shares is capital loss. [1934] 2 ITR 155 (All.)
941
1318. Shareholder‘s loss on shares following liquidation of _ company is capital loss. [1938] 6 ITR 686 (Pat.)
942
LOSS ON SALE OF SECURITIES / BENEFITS
1319. Where under the Government Salt Purchase Rules, anyone seeking deferred payment of salt charges payable to Government had to deposit securities with Government and an abolition of this scheme of deferred payment, assesseesalt dealer sold at loss securities deposited with _ Government. [1935] 3 ITR 309 (Lahore)
942
LOSS ON SALE OF ASSETS / LAND, ETC.
1320. Loss incurred by a dissolved firm in realisation of assets, is _ not allowable. [1943] 11 ITR 540 (Mad.)
943
1321. Loss from sale of land purchased as investment is not _ allowable. [1933] 1 ITR 304 (Sind)
943
LOSS ARISING TO MONEY-LENDERS
1322. Loss arising to money-lender from investment in debenture is capital loss, if the transaction is not connected with _ money-lending business. [1937] 5 ITR 210 (Bom.)
944
1323. Where assessee doing money-lending business purchased debtor‘s property pending insolvency of debtor for sum exceeding the debt and suffered loss, loss was not deductible. _ [1936] 4 ITR 303 (Lahore)
944
1324. Where assessee, doing money-lending business, purchased a mortgaged property in part satisfaction of a mortgage decree and later sold such property at a loss, loss was a capital _ loss. 6 ITC 159 (Bom.)
945
1325. Where assessee, a money-lender, purchased a property in satisfaction of a mortgage, and after having returned income therefrom as property income for two years, sold the _ property, loss was a business loss. 10 ITC 255 (Sind)
945
1326. Mere revaluation of assets on reconstruction of money-lender _ firm, does not result in trading loss. [1934] 2 ITR 183 (Rangoon)
945
858 Section 22
Income Tax Digest. PAGE NO
1327. No question of law arises where the assessee-money-lender‘s claim for deduction of loss incurred on the purchase of a mortgaged property was disallowed on the ground that the _ actual value at the time of sale was not proved. 5 ITC 338 (Nag.)
946
DEDUCTIONS IN CASE OF PARTNERS
1328. Losses of one partner of a dissolved firm which another partner is forced to bear, are not allowable as bad debt in _ latter‘s hands. [1936] 4 ITR 173 (PC)
946
OTHERS
1329. Loss incurred due to higher price paid for excluding other _ purchasers is a deductible item. [1937] 6 ITR 580 (Rangoon)
947
1330. Where a debtor transferred to assessee a colliery representing it to be free from encumbrances and assessee subsequently discovered that there were arrears of rent due _ to superior landlord and paid such arrears. [1933] 1 ITR 94 (PC)
947
1331. Where company issues shares at par instead of at a _ premium, no deductible trading loss can arise. [1940] 8 ITR Suppl. 88 (HL)
948
1332. In case of two mortgages in same property amount recovered in a suit is to be appropriated first towards the earlier _ mortgage. [1941] 9 ITR 278 (Mad.)
950
YEAR IN WHICH DEDUCTIBLE - GENERAL
1333. Before loss can be allowed it has to be proved that it was _ incurred in relevant previous year. 9 ITC 82 (Rangoon)
951
OTHERS
_ 1334. Losses of branch office. 10 ITC 126 _ 1335. Losses of firm. 8 ITC 249 (Pat.)
951 952
TRADE / PROFESSIONAL ASSOCIATION „SPECIFICATION SERVICES‟ - CONNOTATION OF
1336. Fee for providing specific service to some of members, is an _ assessable income. [1946] 14 ITR 628 (Bom.)
952
859 INCOME FROM BUSINESS OR PROFESSION
Section 22 PAGE NO
SPECULATION BUSINESS - SCOPE OF PROVISION
1337. ―Speculation‖ constitutes a sub-head within a head. 53 TAX 165 (H.C.Kar.)
_
[1986]
1338. Speculation in different commodities does not make transactions in each commodity, a separate business. _ [1946] 14 ITR 764 (Bom.)
953
953
VALUATION OF LAND
1339. Where lands are taken over in satisfaction of debt, for the purpose of computing profits and losses their value is not the _ amount of the debt but the estimated value of lands. [1934] 2 ITR 417 (Rangoon)
954
1340. For ascertaining true profits, whereas the Income Tax Officer is not bound by the book figures of value of lands taken over in satisfaction of debt, the assessee is also entitled _ to prove the true value. [1934] 2 ITR 417 (Rangoon)
955
OTHER ILLUSTRATIONS
1341. Others.
_
[1950] 18 ITR 984 (Lahore)
956
MUTUAL BENEFIT SOCIETIES
1342. In order to satisfy the requirements of the Explanation to section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] there must be recurring subscription paid periodically by subscribers of a mutual _ benefit society. [1934] 2 ITR 427 (Mad.) _ 1343. Illustration. 7 ITC 317 (Mad.)
956 956
860 Section 60
Income Tax Digest.
Section 22* Income from business or profession
REVENUE RECEIPTS VS. CAPITAL GAINS - SECTION 22 AND SECTION 27 OF THE ORDINANCE
Commissioner of Income Tax, Central, Karachi v. Habib Bank Executors & Trustees Co. Karachi – 1984 SCC 594 = [1986] 53 TAX 59 (S.C.Pak.) 1203.
Capital gain vs. revenue receipts – Tests of.
The assessee in this case is the Habib Bank Executors and Trustees Company, a public limited company incorporated on 6th July, 1953 with a paid-up capital of rupees ten lac. In the very year of its incorporation on 15th December, 1953 it purchased 39,166 shares of Habib Bank Limited and 11,000 shares of Habib Insurance Company Limited. These two companies were allied concerns of the assessee. The shares of the Habib Bank Limited were initially of the value of Rs.10 each and that of Insurance Company were initially of the value of Rs.10 each and were subsequently divided into 5 rupee shares each. In 1956 the assessee received four thousand bonus shares. During the assessment year 1958-59 ending on the 31st of December, 1957 the assessee sold two thousand five hundred shares out of the shares obtained from the Habib Bank Limited and four thousand shares out of the shares received from the Habib Insurance Company and made a profit of Rs.86,900 in the former transaction and of Rs.78,960 in the latter making a total of Rs.1,65,860. The learned counsel for the appellant has contended before us that all the authorities dealing with the case, as well as the High Court, have in unmistakable terms held, by reference to the memorandum of association of the assessee that dealing in shares, or investments was a lawful object for the company inasmuch as it was authorised to invest money and to deal with such investments. The activity being within the permissible field and the assessee having indulged in it and the motivation being one of making profit it cannot be said to be not *
Corresponding to section 10(1), 10(6), 2(6c) of the 1922 Act.
861 INCOME FROM BUSINESS OR PROFESSION
Section 22
doing the business which it actually did. The treatment of the loss in the immediately preceding year would not, according to the learned counsel for the appellant, on any principle, bind the department on a question of law. The treatment given to the assessee in the disputed accounting year was in accordance with the law and could not be objected to. The learned counsel for the respondent on the other hand contended that the purchase of shares of allied concerns in the year of its incorporation was in fact an investment of surplus funds of the Company. It never formed part of the stock in trade. It was kept intact rather long. Section 10 of the Income Tax provides that the tax shall be payable by an assessee under the head „profits and gains of business‟ . . . in respect of the profits or gains of any business . . . carried on by him. Section 2(4) defines what business is by stating that it includes a trade or manufacture or any adventure in the nature of trade and manufacture items to be included or excluded and one of the exceptions contained in clause (7) of subsection (3) is receipts not being receipt arising from business which are of a casual and non-recurring nature shall not be included in the total income of person receiving them. The clause also while excluding such receipts provided an exception to it where such receipts be receipts from business in which case they will be treated as taxable income. All the authorities have held that the normal trading activity of the assessee did not include dealing the shares. The object of the company was also not to deal in shares. It was only a permissible activity for the company confined to utilisation of capital or reserve assets. The very first assessment order dated 2 nd September, 1958 bears this out. When the assessee was asked to explain why the profits gained by sale of shares be not treated as business profit and brought to tax the assessee gave the following three reasons:(i)
That the company is primarily established as Executors & Trustees and that the surplus funds are invested in shares etc., and that they are nowhere empowered by the Article of Association to deal in shares.
(ii)
That the shares sold by them were held for a considerable time and that the sale was only a change of investment since they wanted to purchase Government Securities etc.
(iii)
That in the preceding investment year, there was a loss in sale of shares which was accepted by the Department as a capital loss.
862 Section 22
Income Tax Digest.
As the distinction between revenue and capital in the law of income tax is fundamental, it is necessary to comprehend correctly the capital structure of the business of the assessee. The paid-up capital was rupees ten lac and in the very first year of its incorporation the company, it appears, out of its reserves purchased shares in two of its allied concerns and kept the same till we come to the assessing year and the year immediately preceding. From the facts stated or on record it also appears that in the interregnum the assessee had not been dealing, so far as its own property and reserves were concerned, in the business of purchasing and selling of shares. In other words, these shares purchased at the time of incorporation of the company were not being used as trading stock but were being kept as reserve capital. There is absolutely no material to hold and none of the authorities dealing with the case have held as a fact that the assessee was in the business as investor, or that it was dealing speculatively with the investments already made or that the investments formed the stock in trade. On the contrary, the record shows that these investments were of funds surplus to its need, were made in not the most lucrative stocks but is assessee‟s own allied concerns. Besides, disinvestments or change in investments did not take place too frequently to project a systematic planned commercial activity. The only fact that its memorandum permitted it to so invest the surplus fund is not on the fact and circumstances of this case sufficient to alter the character of a stray isolated investment into trade or business or an adventure in the nature of trade. Note:
The position drastically changed under the Income Tax Ordinance, 1979 wherein shares, even if they constituted stockin-trade are to be treated as capital asset [s. 2(12)(i)] and hence chargeable to tax under section 27 and not section 22.
Commissioner of Income Tax v. Pakistan Investment Ltd. – [1988] 57 TAX 46 (H.C.Kar.) = 1988 PTD 532 1204.
Gross profit or receipts after deduction of allowable expenditure is taxable under section 22.
The rule is simple what is to be taxed is the profit and gain of business, which cannot be arrived at without deducting the loss under section 10(1) and legitimate expense under section 10(2) of the 1922 Act . . . . . for the purposes of section 10(2) of the 1922 Act the loss which has actually been incurred must be incurred must be deducted to arrive at the sun figures of income for. Under the law, tax is payable only in respect of profits or gains of any business profession or vocation carried on by an assessee. _______________
863 INCOME FROM BUSINESS OR PROFESSION
Section 22
PROFIT MOTIVE, MEANING & RELEVANCE OF
Rajnagar Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca; New Samanbagh Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca – 1960 PTD 1121 (H.C.Dacca) = 1960 PLD 823 1205.
‗Profit‘ – Meaning of.
The word “profit” includes commercial as well as common-sense meaning. Commissioner of Income Tax v. Karimi Industries – [1983] 47 TAX 184 (H.C.Pesh.) 1206.
Terminal profit on ―sale‖ etc.
The facts clearly show that the partners of the firm formed themselves into a private limited company. The partners are the same and the shares allotted to each of them in the company are also in the same proportion as the shares held by them in the firm. It is thus evident that the assets, the partners of the firm and the shareholders of the company are the same and identical. The main question is whether the transfer in question (transfer of all assets and liabilities, including fixed assets by the firm to the limited company) is a “sale” and such a sale can be brought within the mischief of section 10(2)(vii) of the Act. Sub-section (1) to section 10 provides that an assessee is liable to pay tax in respect of profits or gains of any business. There is no denying the fact that the firm in question has earned a profit by the transfer of its assets as the sale price exceeds the written down value of the said assets which is obviously a sale. Now the next question which is to be answered is whether to such a sale proviso to clause (vii) of section 10(2) is attracted. On going through the relevant provisions, we find no clear exception in the second proviso to clause (vii) to the effect that if the property remains in the same hands it will not be a sale within the meaning of this section. A similar view was taken in the Dacca case, cited during the arguments. In the circumstances it will be a sale in the eye of law as assets were transferred to a different company having a separate legal entity. There is no provision to the effect that if there is a sale from one set of person to another, profits earned thereon would not be liable to taxation. The intention of the Legislature must be given effect to in letter and spirit and we, therefore, entertain no doubt in our mind that there is no ambiguity whatsoever as we are not permitted to read into the proviso any words which are not there.
864 Section 22
Income Tax Digest.
Once a company had been duly incorporated under the Companies Act, it becomes person completely different and distinct from its shareholders. The shareholders of that company do not own anything owned by the company and sale to the company can never be considered a sale to the shareholders because the property of the company is not the property of the shareholders. There is no dispute about the fact that a company is a legal personality entirely different from its members. Similarly a company is capable of enjoying rights and of being subjected to the duties which are not the same as those enjoyed or borne by its members. As such, the proposition that no body can sell to himself and make profits out of such a sale will not be attracted to such cases as it will be transfer by one legal entity to another legal entity and not by an individual shareholder to another shareholder. The objects of clause (vii) to section 10(2) and the second proviso to it are quite clear. Clause (vii) grants allowance in respect of property which is discarded, demolished or destroyed whereas the object of the second proviso is to bring to charge by fiction the excess of the sale price over the written down value. They apply to two different situations, though they are in respect of the same property, namely, the one which was used in the previous year. It cannot, however, be treated as an independent provision of law because it related to the same property which is referred to in the mentioned enactment and it is only by fiction that the profits have been created for the purposes of taxation even in cases where the sale takes place after the close of the corporation. Case relied on: Commissioner of Income Tax v. A.K. Plywood Company [1966] 13 TAX Dacca 271. Case differed with: Commissioner of Income Tax, North Zone, Lahore v. Haji Abdul Majid Khan Zaman and Co. (PLD 1973 Lahore 843) = [1973] 28 TAX 78. Case referred to: Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income Tax [1963] 48 ITR 483.
Leeming v. Jones (Inspector of Taxes) – [1930] 15 Tax. Cas. 333 (HL) 1207.
‗An accretion to capital‘ did not become income merely because the original capital was invested in the hope and expectation that it would rise in value.
„An accretion to capital‟ did not become income merely because the original capital was invested in the hope and expectation that it would rise in value.
865 INCOME FROM BUSINESS OR PROFESSION
Section 22
B.B. Jubb v. Commissioner of Income Tax – [1938] 6 ITR 210 (Rangoon) 1208.
The real question in the case of a single transaction is: whether there was a gain made in an operation of business carrying out a scheme for profit-making.
The real question in the case of a single transaction is : whether there was a gain made in an operation of business in carrying out a scheme for profit-making. Where the assessee acquired mining rights in 1932 and soon thereafter entered into negotiations for its resale and sold them for a profit in 1934 and purchased a rubber estate with the sale proceeds, it was held that there was evidence for the finding that it was his business to secure mining areas with a view to resale and the profits were assessable as business income. _______________
ISOLATED TRANSACTION WHEN CAN CONSTITUTE ADVENTURE IN THE NATURE OF TRADE
Haripur Rosin & Turpentine Factory Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore – [1974] 29 TAX 248 (H.C.Lah.) 1209.
Profits of the pre-incorporation period are assessable in the hands of the promoters.
The Government of West Pakistan, the Pakistan Industrial Development Corporation and the Guest Agency Company Limited, entered into an agreement, executed on 27th January, 1958, for the promotion of a public limited company. The company was incorporated on 18.12.1959 and started functioning on 1.3.1960. In anticipation of the incorporation the aforementioned promoters started business on 1.4.1958. This business was taken over by the incorporated company on 1.3.1960. The question for determination was as to whether the profits of the pre-incorporation period were assessable in the hands of the promoters in the status of Association of Persons. The High Court, answering the question in the affirmative: Held,
(1) that the petitioner company came into existence only on 18.12.1959 when it was incorporated, (2) that not being in existence before that date it could not carry on any business either itself or through any agent including the promoters; (3) that under section 10 of the Income Tax Act liability to assessment exists only in respect of the person who carries
866 Section 22
Income Tax Digest.
on business. This may be carried on either directly or through agents; (4) that since the company was not in existence during the period it seeks to have itself taxed for the business carried on by the Association of Persons, it could not carry on any business either itself or through any agents could not carry on any business either itself or through any agents and is, therefore, not liable to tax for any profit or gain derived during that period and (5) that the company took over the business from 1st March, 1960 and is not liable to any tax for any business carried on prior to that period. A company, under section 23 of the Companies Act, 1913, comes into being from the date of incorporation mentioned in the certificate of incorporation. Before that date, it could not be a body corporate as defined under the Companies Act. It becomes a legal entity as soon as it is incorporated and is on that date clothed with a legal personality. In other words, a company could not be in existence on any day prior to the date of its registration with the Registrar, Joint Stock Companies. Cases referred to: Salmond on Jurisprudence, 11th Edn., p. 350 and Natal Land & Colonization Co. Ltd., v. Pauline Colliery & Development Syndicate Ltd. 1940 A.C. 120.
Nishat Textile Mills Ltd. v. Commissioner of Income Tax (Investigation), Karachi – [1974] 29 TAX 143 (H.C.Kar.) 1210.
Profits of the pre-incorporation period are assessable in the hands of vendors.
The assessee-firm entered into an agreement with a person, acting on behalf of a company, on the 17 th March, 1958, for the sale of the firm‟s business to the company which was in the process of formation. In terms of the agreement the sale of the business was given effect from the 1st Match, 1958 and from that date the vendors of the business carried on the business for the benefits of the company. The company was actually incorporated on the 16th November, 1959 and on the next day the aforementioned agreement dated the 17th March, 1958, was adopted by the company. The assessee-firm‟s contention was that the profits of the business of the pre-incorporation period commencing from‟ 1st March, 1958, belonged to the company and not the assesseefirm: Held that the vendors of the business, who have agreed to transfer the business to the company upon its incorporation, remain the legal owners of the business until such incorporation, and until the
867 INCOME FROM BUSINESS OR PROFESSION
Section 22
adoption of the agreement by the company, notwithstanding any provision in the agreement of sale that, until incorporation of the company the vendors shall carry on the business for the benefit of the company. It is the vendors, as legal owners, who are the person to whom the income, profits and gains of the business would accrue or be received by them. Sections 2(9), 3, 10 and other relevant provisions of the Income Tax Act, 1922, emphasise the point that a person is liable to assessment for Income Tax in respect of the total income, subject to the provisions of the Income Tax Act, which has accrued to him or which has been received by him. Income, profits and gains do not accrue, nor are they receivable, to vacuum. There would be some person to whom the income, profits or gains have accrued, or who has received such, income, profits or gains. A person who is not in existence, who is not yet born, cannot be said to have income, profits or gains accrued to him or received by him. A company comes into existence with its incorporation only, and not before. Therefore, during the pre-incorporation period, the Company cannot be said to have carried on any business, nor can it be seriously maintained that, during this pre-incorporation period, any income, profits or gains accrued to the Company or were received by it. The Company was not yet born, and therefore there can be no question of accrual or receipt of any income profits or gains to or by the Company. During the pre-incorporation period, the assessee-firm carried on the business and was in effective control thereof and of its income, profits and gains and was, in effect, the legal owner of the business, it may be that there was fiduciary relationship between the assessee-firm and the Company when it came into existence upon its incorporation. But that is a matter between the assessee-firm and the Company and the relationship between them is of no consequence as far as assessment to Income Tax is concerned for the pre-incorporation period. There may possibly be a case where a Company becomes incorporated say after three years of the agreement of the sale of a business by the promoters, and adopts and ratifies this agreement upon its incorporation, will the income, profits and gains for these three years be chargeable to tax in the hands of the Company? It may be contended, in such a case, that the Company is not the person to whom income, profits and gains have accrued during the previous year or previous years within the meaning of section 3 of the Income Tax Act, or that, during such previous year or previous years, the Company did not carry on the business within the meaning of section
868 Section 22
Income Tax Digest.
10 of the Act. In such a case the income, profits and gains would be taxable neither in the hands of the promoters, nor in the hands of the Company. But such a situation is not contemplated by the Income Tax Act, 1922. Case relied on: Haripur Rosin and Turpentine Factory Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore [1973] 27 TAX 149. Cases referred to: Lydney & Vigpool iron Ore Company v. Bird (1886) 38 Ch. D 85.
Haripur Rosin & Turpentine Factory Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore – [1972] 27 TAX 149 (H.C.Lah.) 1211.
Profits earned prior to incorporation are assessable in the hands of promoters of the company in the status of an Association of persons.
The assessee-company was incorporated under the Companies Act on 18th December, 1959 and started functioning as such with effect from 1st March, 1960. In anticipation of the incorporation the promoters had started business with effect from 1st April, 1958 which was taken over by incorporated company on 1st March, 1960. The question for decision before the High Court was whether the assessment made by the Income Tax Officer on the profits earned before incorporation of the company was rightly assessed in the hands of the promoters in the status of an Association of Person. The High Court answering the question in the affirmative: Held, that: (1)
That the petitioner company came into existence only on 18th December, 1959 when it was incorporated;
(2)
That not being in existence before that date it could not carry any business either itself or through my agent including the promoters;
(3)
That under section 10 of the Income Tax Act liability to assessment exists only in respect of the person who carries on business. This may be carried on either directly or through agents;
(4)
That since the company was not in existence during the period it seeks to have itself taxed for the business carried on by the Association of Persons, it could not carry on any business itself or through any agents and is, therefore, not
869 INCOME FROM BUSINESS OR PROFESSION
Section 22
liable to tax for any profit or gain derived during that period; and (5)
That the Company took over the business from 1st March, 1960 and is not liable to any tax for any business carried on prior to that period.
Case referred to : Natal Land and Colonization Company Ltd. v. Pauline Colliery and Development Syndicate Ltd. [1904] A.C. 120 (P.C.)
Mothay Gangaraju v. Commissioner of Income Tax – [1935] 3 ITR 58 (Mad.) 1212.
An isolated transaction can satisfy the description of an adventure in the nature of trade.
When section 2(4) of the 1922 Act [section 2(11) of the Income Tax Ordinance, 1979] refers to an adventure in the nature of trade, it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them; and so, even an insolated transaction can satisfy the description of an adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true it, in the metaphor, summer represents trade, but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade, it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade. It would be unreasonable to apply the conventional test of „income coming in with some sort of regularity or expected regularity from definite sources‟ or „income being likened pictorially to the fruit of a tree or the crop of the field‟, to the decision of the question as to whether a single or an isolated transaction can be regarded as an adventure in the nature of trade.
870 Section 22
Income Tax Digest.
IRC v. Fraser – [1942] 24 Tax. Cas. 498 (HL) 1213. Even an isolated transaction can be treated as adventure in the nature of trade; what is relevant is the nature of commodity dealt in. It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade. But what is a good deal more important is the nature of the transaction with reference to the community dealt in. the individual who enters into a purchase of an article or commodity may have in view, the resale of it at a profit, and yet it may be that, that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some of the cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds t. A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it. If he continues to hold it, there may be also a certain pride of possession. But the purchaser of a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, can scarcely be considered to be other than an adventurer in a transaction in the nature of a trade. The fact that the transaction was not in the way of the business (whatever it was) of the respondent in no way alters the character which almost necessarily belongs to a transaction like this. Most important of all, the actual dealings of the respondent with the whisky were exactly of the kind that take place in ordinary trade. IRC v. Livingston – [1926] 11 Tax Cas. 538 1214. Isolated purchase with a view to make a sale later on the expectation of rise in prices cannot normally amount to a venture in the nature of trade. If the venture was one consisting simply in an isolated purchase of some article against an expected rise in price and a subsequent
871 INCOME FROM BUSINESS OR PROFESSION
Section 22
sale, it might be impossible to say that the venture was „in the nature of trade‟, because the only trade in the nature of which it would participate would be the trade of a dealer in such articles, and a single transaction falls as short of constituting a dealer‟s trade as the appearance of a single swallow does not make a summer. The trade of a dealer necessarily consists of a course of dealings, either actually engaged in or at any rate contemplated and intended to continue. IRC v. Fraser – [1942] 24 Tax. Cas. 498 (HL) 1215.
Isolated purchase and sale of a commodity unconnected with the assessee‘s line of business is an adventure in the nature of trade.
The assessee, a woodcutter, bought for resale, whisky in bond, in three lots. Later, he sold it at considerable profit. The assessee never dealt in whisky before, he had no special knowledge of the trade, he did not take delivery of the whisky nor did he have it blended and advertised. The question was whether this transaction constituted an adventure in the nature of trade. Held, that the purchaser of a large quantity of whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which could not be turned to account except by a process of realisation, could scarcely be considered to be other than an adventurer in a transaction in the nature of a trade. The fact that the transaction was not in the way of the business (whatever it was) of the assessee in no way altered the character which almost necessarily belonged to a transaction like this. Jones v. Leeming – [1930] AC 415 (HL) 1216.
Mere expectation of realisation of enhanced value cannot make an isolated transaction an adventure in the nature of trade.
An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income. The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever, a casual profit made on an isolated purchase and sale, unless merged with similar transaction in the carrying on of a trade or business is not liable to tax - Ryall v. Hore [1923] 2 KB 447, 454. As held in the case of Leeming v. Jones [1930] 1
872 Section 22
Income Tax Digest.
KB 279, „in the case of an isolated transaction of purchase and resale of property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and resale of property‟. _______________
BUSINESS INCOME - GENERAL PRINCIPLES
Nishat Talkies, Karachi v. Commissioner of Income Tax – [1989] 60 TAX 45 (H.C.Kar.) 1217.
Trading receipts could not change their character by just transferring them to some other account.
The applicants are exhibitors of motion pictures in their cinema known as Nishat Talkies. They collected Entertainment Duty and upto the year 1974-75 offered it for tax but claimed exemption. This amount was not paid to the provincial Government as a dispute had arisen between Cantonment Board and the Provincial Government who were claiming the said amount. For the assessment year 1977-78 the petitioners disclosed in part-IV of the return an amount of Rs.11,48,309 as Entertainment Duty payable to the provincial Government. The Income Tax Officer treated the aforesaid amount as trading receipt of the petitioners and added to their profits. The petitioner filed an appeal which was allowed and Rs.11,48,309 was deleted from the income. The Department then filed an appeal before the Tribunal which noted that Rs.11,48,309 is comprised of Entertainment Duty collected during the following three assessment years: (1)
1975-76
Rs.3,86,354,
(2)
1976-77
Rs.4,34,381,
(3)
1977-78
Rs.3,27,574.
For the assessment year 1975-76 and 1976-77 the Tribunal had decided earlier that these amounts were not liable to be taxed as they did not constitute trading receipt in the relevant assessment years. But so far Rs.3,27,574 in respect of assessment year 1977-78 is concerned the Tribunal came to the conclusion that as the petitioners have received the Entertainment Duty and have not paid it to the Provincial Government and further that as the entire amount of Rs.11,48,309 has been distributed amongst the partners during the relevant assessment year, it is liable to tax.
873 INCOME FROM BUSINESS OR PROFESSION
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In view of the principles laid down by the Supreme Court we find that the Entertainment Duty collected by the applicants has been always treated as a liability to be paid by them to the Provincial Government or Cantonment Board. It therefore, cannot be treated as income as the character of the receipt is determined from the date it was received initially. By transferring the amount of Entertainment Duty amongst the partners it can not be inferred that it was appropriated for their benefit. It remained in their hand as liability to be discharged by payment to the Provincial Government or the Cantonment Board. The partners will hold it for the benefit of the rightful claimant as they are precluded from enjoying it. Cases referred to: P.I.A. Corporation v. Commissioner of Income Tax (1988 SCMR 872) and Commissioner of Income Tax v. E. V. Miller (PLD 1959 S.C. 219). _______________
PROFITS AND GAINS, CONNOTATION OF
Gresham Life Assurance Society v. Styles – [1892] 3 Tax Cas. 185 1218.
Profits can be ascertained only after setting off the relevant expenditure and other obligations
When one speaks of the profits and gains of a trader, one means that which he had made by his trading - whether there be such thing as profit or gain can only be ascertained by setting off against the receipts the expenditure or obligations which have arisen. Commissioner of Income Tax v. AR.M.M. Firm – [1945] 13 ITR 290 (Mad.) 1219.
Profit or loss of a business is to be computed as difference between what it started with at beginning of year and what was position at end of year.
M was carrying on a money-lending business in partnership with his brother. An irrecoverable debt of $5,000 was written down in the books of that business to $5. The partnership was thereafter dissolved and both took half share of the assets and liabilities. When M started the assessee-firm, he entered the aforesaid debt in the books of the assessee-firm at a figure of $2,50. Ultimately the debt was written off and the assessee-firm claimed that it was entitled to deduct as trading loss the sum of $2,500 being half of the $5,000 which the dissolved firm had advanced. The Income Tax Officer rejected this contention, but he allowed a deduction of $30, made up of the $2,50 and expenses which the firm had incurred in connection with the debt. The assessee
874 Section 22
Income Tax Digest.
appealed to the AAC who held that the firm was entitled to deduct $2,524, being half of the $5,000, plus expenses. Held that in deciding what was the profit of the assessee-firm during the year of account regard could only be had to what it started with and what was the position at the end of the period. As the real value of the debt when it was started was nil, it was not entitled in law to the allowance of the claim of $2,500 as a deduction from its income from business. Bharat Insurance Co. Ltd. v. Commissioner of Income Tax – [1934] 2 ITR 63 (PC) 1220.
Profits attract tax once they come into existence, subsequent application of profits is not relevant for tax purposes.
A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits. Willingale (H.M. Inspector of Taxes) Commercial Bank Ltd. – 52 TC 242 (HL) 1221.
v.
International
Profits cannot be taxed until they have been ascertained and earned, despite book entries having been made.
The assessee-bank was formed to provide medium-term finance in world markets to commercial companies by way of loans running for between two to seven years, later extended to ten years. Part of its business consisted of discounting or purchasing bills or notes or similar obligations issued by borrowers all over the world. In its annual accounts, the bank followed the usually accepted practice of dividing the total discount applicable to each bill or note by the number of days to which the discount related, and taking the discount for the appropriate number of days for the relevant year into the profit and loss account as part of the receipts and earnings for that years. Thus, if the bank acquired a note with a face value of 100 pounds on 1.1.1970 which was payable on 1.1.1976, and its discounted value as on 1.1.1970 was 64 pounds, the total discount of 36 pounds would be divided by six, and 6 pounds would be credited in the banks profit and loss account in each of the six years during which the note was held. In that way the amount of the discount was treated as accruing at an even rate over the whole period during which the bank held the note. If, as sometimes happened, it sold a note before maturity, it would bring into account for the years in which the bill was sold the
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Section 22
difference between the discounted value at the beginning of the years and the sale price. The question for consideration was whether the bank was liable to be taxed on the proportionate discount credited in each year‟s account even though the bank might continue to hold the notes during the relevant year. Held, (by majority) that it is well settled that a profit may not be taxed until it is realised. This does not mean until it has been received in cash but it does mean until it has been ascertained and earned. It followed that tax could not be levied in respect of the bank‟s transactions until the fiscal year in which the note matured. The tax was leviable even defaulted, an adjustment would be made for the bad debts in the following year. The bank‟s accounts prepared for commercial purposes were drawn up on the principle of anticipating future profits from its holding of bills and notes. There were no doubt excellent commercial reasons for preparing the accounts in that way. But they were not a proper basis for assessing the bank‟s liability to tax. Dublin Corporation v. M. Adam (Survey of Taxes) – [1887] 2 Tax Cas. 387 1222.
No taxable profit will arise by trading with oneself.
No man can trade with self; he cannot make, in what is its true sense or meaning taxable profit by dealing with himself. Commissioner of Income Tax v. Shaw, Wallace & Co. – 6 ITC 178 (PC) 1223.
Where business is not carried on, income is not assessable as business income.
The words used in section 2(4) of the 1922 Act [section 2(11) of the Income Tax Ordinance, 1979] are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Again, the words „carried on by him‟ in section 10 of 1922 Act [section 22 of the Income Tax Ordinance, 1979] are an essential constituent of that which is to produce the taxable income: it is to be the profit earned by a process of production. And this is borne out by the provision for allowance which follows. They include rent paid for the premises where the business is carried on; the cost of current repairs in respect of such premises, interest on money borrowed for carrying on the business, etc. Thus, where the assessee received compensation for termination of the business of oil agencies carried on by it earlier, it was held that since
876 Section 22
Income Tax Digest.
the sum was received, not for carrying on this business but as some sort of solatium for its compulsory cessation, it was not assessable as profits from business. Haji Ghulam Hussain v. Commissioner of Income Tax – [1942] 10 ITR 405 (Peshawar) 1224.
If there is no evidence that the heirs have carried on business, income from business of deceased cannot be assessed under head ‗Business‘.
Where on the death of their father, who had been carrying on moneylending business, there was no evidence that the sons carried on the money-lending business. Held that in respect of income from outstanding loans the sons could not be assessed under section 10 [section 22 of the Income Tax Ordinance, 1979]; they must be assessed under section 12 in which case the provisions of section 26(2) of the 1922 Act [section 73 of the Income Tax Ordinance, 1979] will not apply. To bring it under the head „Business‟, there must be some evidence that the business of money-lending was actually carried on by the successor of the deceased money-lender. _______________
BUSINESS WHEN DEEMED TO BE CARRIED ON
Commissioner of Income Tax, Central, Karachi v. Fakir Cotton Ginning and Pressing Industries Ltd. and another – 1990 SCC 744 = [1991] 63 TAX 120 (S.C.Pak.) = 1991 PTD 573 = 1991 PLD 280 1225. Business when deemed to be carried on.
It seems to us that the main enactment and the second proviso are reconcilable with each other. In our opinion, the condition precedent laid down in section 10(1) that the business must be carried on in the year of account before any item is treated as income is implicit in the second proviso. Its very language supports this condition. We would, therefore, hold that the view of the Tribunal that since in the present cases business was done by the assessees in the relevant years of the account and the machinery or plant were not used during any part of the year, the main section and clause would have no application and the above second proviso would also have no application is correct. Another reason which weighed with the learned Judges of the Division Bench of the West Pakistan High Court in the case of
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Commissioner of Income Tax v. West Punjab Factories Ltd., Okara [PLD 1966 Lah. 236] as summarised by the Full Bench in the judgment under appeal also reported as 18 Tax Cases 67, was that “by this proviso the Revenue in fact takes back what it had given by way of depreciation allowance in the preceding years and not only in the previous year, for otherwise the assessee would receive allowance in excess to his original, cost.” This observation is correct to this extent that “by this proviso the Revenue in fact takes back what it had given by way of depreciation allowance in preceding year not only in the previous year.” But the reasoning “For otherwise the assessee would have received allowance in excess of his original cost” is not, with utmost respect, correct, for, neither the sale price nor the excess between the sale price and the written down value can be equated with depreciation allowance. In no case the assessee could receive allowance in excess of his original cost. It may be pertinent to point out that the Legislature must be aware of the decision in Commissioner of Income Tax v. Phillips Holzman (supra) when it substituted clause (vii) and its 1st and 2nd provisos by Finance Act 1 of 1962 as mentioned in para 8 hereinabove and made a deeming provision in the following words:“. . . . . and the business, profession or vocation in which such building, machinery or plant has been used shall, for the purpose of sub-Section (1), be deemed to be carried on by the assessee in the year in which the sale; exchange or acquisition, as the case may be, took place.” No such words were there in the statute at the relevant time, therefore, the rule laid down in the Court of Appeals‟ case quoted above is fully applicable to these appeals. _______________
BUSINESS INCOME VS. INCOME FROM OTHER SOURCES - SECTION 22 & SECTION 30 OF THE ORDINANCE
Commissioner of Income Tax, East Pakistan, Dacca v. Liquidator, Khulna Bagerhat Railway Co. Ltd., Ahmadabad – 1962 SCC 108 = [1962] 5 TAX 262 (S.C.Pak.) 1226.
Interest income cannot be taxed as business income.
Each case must be decided on its facts. In the present case the normal business of the company is construction and running of railways. Although Articles of Association empower the company to invest
878 Section 22
Income Tax Digest.
money, yet in the present circumstances interest arising out of surplus money deposited in bank does not constitute normal business income. Adamjee & Sons v. Commissioner of Income Tax – [1983] 47 Tax 211 (H.C.Kar.) 1227.
Receipt when held not to be revenue in nature.
The Income Tax Tribunal while rejecting the appeal of the assessee observed that it was not the case of the Department that the appellant is a dealer in shares nor the sum of Rs.12,78,252 was taxed as profits of a trade in the nature of venture but in spite of these conclusions the Tribunal maintained the order of the Income Tax Officer treating the sum of Rs.12,78,252 as revenue receipt relying on its earlier decision in I.T.As. Nos. 2496,2497,2498 and 2499 of 1966-67, decided on 9.9.1968. The learned counsel for the applicant pointed out that the view expressed by the Tribunal in the aforesaid cases relied by the Tribunal was not accepted by this Court in the case of Pakistan Industrial Credit Investment Corporation Ltd. v. Commissioner of Income Tax (1980 PTD 322). The judgment in the above case applies on all fours to the case before us and the learned counsel for the Department was unable to distinguish the same in any manner. In fact the question referred to this Court in the above cited case is the same as is now before us in this Reference. We further find that the PICIC‟s case has also bees followed in a later decision of this Court in the case of Yousuf Hakimuddin v. Commissioner of Income Tax (1981 PTD 3). We are in respectful agreement with the view expressed in the aforesaid two cases and for reasons stated therein we hold that the Tribunal was not justified in holding the surplus of Rs.12,78,252 arising on sale of Karnaphuli Paper Mill‟s shares there was a revenue receipt. Cases referred to: I.T.As Nos. 2496, 2497, 2498 and 2499 of 1966-67; Pakistan Industrial Credit Investment Corporation Limited v. Commissioner of Income Tax (1980 PTD 322) = [1980] 42 TAX 122 (H.C.Kar.) and Yousuf Hakimuddin v. Commissioner of Income Tax 1981 PTD 3 = [1981] 43 TAX 132.
Commissioner of Income Tax, East Pakistan, Dacca v. The Liquidator, Khulna-Bagerhat Railway Co. Ltd., Ahmadabad [1961] 3 TAX 48 (H.C.Dacca) = 1961 PTD 136 = 1961 PLD 108 1228.
Company‘s main business was construction of railway line but it was also to invest or employ money upon securities or shares held that interest on deposit is not income from business.
The assessee, a railway company, entered into an agreement with the Government for the construction of railway line. As per Memorandum
879 INCOME FROM BUSINESS OR PROFESSION
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and Articles of Association of the Company it was also to “invest or otherwise employ moneys belonging to or entrusted to the company upon securities or shares as may be thought proper and from time to time vary the same as the company may think fit”. Since the whole of the share capital of the company was not immediately required for expenditure on the construction of the line some amounts were invested and kept deposited in Bank. The company received certain amount by way of interest on such deposits. The Income Tax Officer held that the interest received by the company from the unexpended portion of the money was an income from business as in the Memorandum and Articles of Association it was provided to “invest or employ money” of the company “upon securities or without securities,” etc. On appeal both the Appellate Assistant Commissioner and the Appellate Tribunal considered the de facto activities and primary purpose of the company and held that the income by way of interest derived by it from the unspent share capital, at that moment kept in deposit in the bank, was not an income from its normal business and making income, profits and gains by investing money was not the normal business of the company. On a reference, made at the instance of the Department, the High Court confirmed the order of the Tribunal. His Lordship the C. J., in the course of the judgment observed that if a businessman keeps his money intended to be used as capital of his particular business or part of such money or his other money in banks and derives income, by way of interest it would be his income, no doubt, from other sources but certainly it would not be his income from business. Judicial review : CONFIRMED BY - The Supreme Court of Pakistan in Commissioner of Income Tax, East Pakistan, Dacca v. Liquidator, Khulna Bagerhat Railway Co. Ltd., Ahmadabad 1962 SCC 108 = [1962] 5 TAX 262 (S.C.Pak.). Their Lordship observed that:“. . . . . We have no hesitation in agreeing with the view of the High Court that the normal business of the company was the construction and running of the Railway and not investment of its money on interest. Other powers were also given to the company by the Articles of Association, but it not contended that all those powers pertained to the earning of normal business income. If the company, instead of retaining its surplus money in idle condition, invested them under the powers given to them by their Articles of Association, it would not follow that the income so derived would be part of the company‟s normal business income. Each case must be decided on its own facts and, in the instant case, the circumstances brought out in the evidence do not indicate that the receiving of interest on invested money was really included in
880 Section 22
Income Tax Digest.
the business income of the company. We are, therefore, of the opinion that the view taken by the High Court is not open to any legal exception . . . . .” Cases referred to: In re. Commercial Properties Ltd. (ILR 55 Cal. 1057); In re. Shadhucharan Roy Chowdhury (ILR 62 Cal. 804); Commissioner of Inland Revenue v. Korean Syndicate Ltd., (1 KBD 598 p. 603); Seksaria Biswan Sugar Factory Ltd., v. Commissioner of Income Tax, (Central), Bombay (1950) 18 ITR 139; and Commissioner of Income Tax, Bombay v. LarkanaJacoba bad (Sind) Light Railway Co. Ltd., AIR (1946) Sind 161; (1946) ITR 395.
Naseer A. Sheikh v. Commissioner of Income Tax – [1976] 33 TAX 121 (H.C.Lah.) 1229.
Business in the name of company controlled by an individual held that ownership of business can be unveiled.
There is little doubt that an individual may control a company but it does necessarily follow from this that the business carried on by the company is the business of the controller. At the same time it cannot be denied that a person in that position may cause such an arrangement to be entered into between himself and the company as will suffice to constitute the company his agent for the purpose of carrying the business and thereupon, the business will for all taxing purposes be his business. Cases referred to: Commissioner of Income Tax v. Mercantile Bank of India and others (1936) 4 ITR 293); Stan by Surveyor of Taxes v. Gramophone and Typewriter Ltd. (5 T.C. 358) and The President v. Justice Shauket All (PLD 1971 S.C. 585 ). _______________
INCOME DETERMINED IN THE CASE OF THE TRUST
Hakeem Muhammad Saeed v. Commissioner of Income Tax – [1989] 59 TAX 102 (H.C.Kar.) 1230.
Trust income computed by estimating the sales and applying G.P. rate and 1/4th of the income determined in the case of the Trust held to be income of the Mutawalli.
Trust filed its return before the Income Tax Officer claiming exemption in respect of 3/4th of income reserved for charitable purposes. This plea was not accepted by the Income Tax Officer and the entire income of the Trust was subjected to tax. The Income Tax Officer had rejected the account submitted by the Trust and computed the income by estimating the sale and applying gross profit rate
881 INCOME FROM BUSINESS OR PROFESSION
Section 22
thereto. By such computation the income of the Trust was determined more than actually shown in the return. As is obvious from the statement of facts that the applicant is the creator of the Trust. He is the Mutawalli and he has reserved 1/4th income of the Trust for himself or his family. Therefore, the income of applicant would be 1/4th of the income which has accrued to the Trust. It has not been provided in the Trust that the income of the applicant will be only that income which is audited and declared before the Income Tax Officer. If the account books of the Trust are rejected then the income of the applicant on record is bound to be affected. In present case the accounts have not been accepted and the income of the Trust has been enhanced on well recognised principles. Therefore, applying the provision of clause 41 which provides for apportionment of the income of the Trust, the applicant would be entitled to 1/4th of the income and in the present case the income determined by the Income Tax Officer is the real income of the Trust. Income of the Trust cannot be bifurcated in two parts i.e. one for the purpose of income tax and the other for determining the income of the applicant. What the applicant will get is 1/4th of what the Trust has earned. _______________
BUSINESS INCOME ON PURCHASE OF SHARE
Commissioner of Income Tax (East), Karachi v. International Computors & Tabulators, Ltd., Karachi – [1982] 45 TAX 204 (H.C.Kar.) 1231.
Negligible capital gain on sale of shares cannot be a trading activity.
The view that prevailed with the Tribunal in relation to profit of Rs.1,990.10 was that the assessee was a man of affluence and there was, therefor, no need for him to sell the shares and receive a negligible profit of Rs.1,990.10 and he was, therefore, trading in shares. I would have thought that reverse ought to be the conclusion for a man of affluence would not be trading in share with a total holding of shares value at Rs.6,24,181 for again of Rs.1,990.10. Considering the petitioner‟s entire holding during the year, the purchases made during the year and sales effected even on the Assumption that the shares in the five companies referred to above were purchased with intent not to hold the same that by itself, as was observed by Lord Dunedin, would load to no conclusion whatsoever and when we examine the sales of the shares effected by
882 Section 22
Income Tax Digest.
the assessee in this year in context of not only his total shareholding and purchases made, but also in relation to his other income, it cannot be said that the assessee was trading in shares so as to make the gains arising therefrom taxable income. This conclusion will be further reinforced by the assessee‟s conduct in the past years in relation to shares. Cases referred to: P.I.C.I.C. v. Commissioner of Income Tax [ITR No. 1 of 1971 Tax Reference No. 73 of 1970]; Jones v. Leeining (1930 AC 415) and Commissioners of Land Revenue v. Rein (34 Tax Cas. 389). _______________
BUSINESS INCOME IN THE NATURE OF CASUAL OR NON-RECURRING
Commissioner of Income Tax (Investigation), Lahore v. Colony Textile Mill – [1977] 35 TAX 121 (H.C.Lah.) 1232.
Taxable income should be from business and not of a casual and non-recurring nature.
Under section 4(3) „subject to the provisions of this Act any income, profits or gains falling within the following classes shall not to such extent as may be specified in this sub-section prescribed in this behalf be included in the total income of the person receiving them........(vii) any receipts not being capital gains, chargeable according to the provisions of section 12(b) and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non recurring nature or are not by way of addition to the remuneration of an employee‟. It is, therefore, necessary, that for becoming taxable income the amount sought to be assessed should be in the present context a receipt arising from business and should not be of a casual or non-recurring nature. Pakistan Industrial Credit and Investment Corporation Ltd. v. Commissioner of Income Tax (East), Karachi – [1980] 42 TAX 122 (H.C.Kar.) 1233.
In the absence of evidence that assessee was actually trading in shares any surplus arising out of sale of shares is held no liable to tax.
Whether or not a transaction or transactions are in the line of assessee‟s trade is not capable of an easy answer. The answer to be given cannot be promised on a single criterion. In each case regard must be had to the character and circumstances of the transaction, if
883 INCOME FROM BUSINESS OR PROFESSION
Section 22
what is purchased is something which is itself an ordinary investment, such as shares, a potential source of revenue, the transaction, in the absence of evidence to the contrary, will not be in the line of business. On the other hand buying and selling shares speculatively in order to make gain, the shares will become stock-intrade and dealing in such investments, a business, making the profits a revenue receipt. Such dealing would amount to commercial disposal of shares. The latter will be profit income and the former accretion to capital. It may also be added that if the purpose is investment, the fact that in varying the investment, sale of shares results in profits will not make such profits revenue income unless it is shown that variation amounts to dealing in investments. If it is a case of numerous purchases and sales and the sales being within a short time of the purchase, the conclusion may be that it was a case of trading for then the inference would be that the purchases were made with the sole object of turning it over and selling it at a profit. If on the other hand there are a few sales although a number of purchases and when sales are made at long intervals after the purchase, the conclusion more appropriately will be investment, notwithstanding the fact that there was no intention of holding over the shares purchased and the purchase was in expectation of being able to sell it off at profit when the shares appreciate in value. The burden will be on the Revenue to show that gain made is a revenue receipt for it is the Revenue which must net the assessee within the taxing provisions of the statute. If the facts are equivocal the benefit must go to the assessee. The Memorandum gives scope of the activities of a company. It authorises the company to embark upon one or several businesses. It tells us the object or objects for which a company has come into existence. But whether or not a specified activity becomes business of the company depends upon its working. On entering upon an activity the company will be in that business. A subsidiary activity may be so connected with its main business as to become in line of business of the company. A company may be authorised to deal in shares and securities. If, therefore, the company buys and sells shares it may amount to carrying on the business in shares and securities. But if the company is also authorised to invest in shares and securities and therefore, act as an investment holding company in addition to investment dealing company, it will have to be shown that its activity amounted to dealing commercially in shares before profit made therefrom is made taxable. If shares and securities were purchased at investments and at times sold and further purchases made to
884 Section 22
Income Tax Digest.
augment the investment it will, notwithstanding the memorandum that it may deal in shares, will not amount to trading in shares. If on the other hand buying and selling of shares is incidental to the business which is carried on by a Company, much as a bank selling shares to raise money to pay its depositors, it will be sale in line of business. It is not sufficient for the Revenue to rest its case on one of the objects of the PICIC which enables it to deal in shares for it is also the object of the company to invest in shares and in the absence of evidence that PICIC was actually trading in shares, the profits made on sale of shares will not be taxable. Cases reported to : Sardar Indra Singh & Sons v. Commissioner of Income Tax (1951) 24 ITR 416; Commissioner of Inland Revenue v. Scottish Automobile & General Insurance Co. Ltd. (1929) I6 Tax Cas. 381; Dunn Trust Ltd. v. Williams (1950) 31 Tax Cas. 477 and California Copper Syndicate v. Harris (1904) 5 Tax Cas. 159. _______________
―ABANDONED‖ AND ―DISCARDED‖, MEANING OF
Pakistan Services Limited v. Commissioner of Income Tax (Revision), Karachi – [1986] 54 TAX 150 (H.C.Kar.) 1234.
―Abandoned‖ and ―discarded‖, meaning of.
The contention of Mr. Nasim Ahmed had been that since the assets in question were taken over by the Government of Bangladesh under the said Presidential Order, the same would be deemed to have been “discarded” by the petitioner in Dacca and as such, by virtue of section 10(2)(vii) of the Income Tax Act, 1922, deduction on account of loss at such assets, comprising building, machinery and plant would be admissible. As far as the argument of Mr. Shaikh Haider, is concerned, the same cannot be accepted as clause (vii) of section 10(2) of the Income Tax Act clearly allows certain deductions in respect of buildings, machinery or plant which have been sold, transferred, acquired. discarded, demolished or destroyed as admissible and the language of clause (vii) no where suggests that such deductions are admissible only against capital gains. However, in our view, since the word used in clause (vii) of section 10(2) is “discarded” and not “abandoned” it is the interpretation of the word „discard‟ which clinches the issue. Considering the context in which it has been used, the said term, in our opinion, means to cast off
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or to reject. which involves some volition. Moreover, the word has been used in clause (vii) in company of other words such as sold, transferred, acquired, demolished or destroyed, which with the exception of the word „destroyed‟ deflate same intentional act. Even apart from that, a plain reading of clause (vii) of section 10(2) itself shows that the proceeds of sale, transfer, exchange, etc., of any building, machinery or plant, sold, transferred, exchanged acquired. discarded, demolished, or destroyed, or its scrap value, are to be adjusted against its written down value. That further shows_ that the legislature clearly contemplated that the property sold, transferred, exchanged, discarded, etc. would fetch some value, which could be adjusted against its written down value. It is the case of the petitioner itself that due to breaking out of war between Pakistan and India and the events which followed thereafter, the petitioner was compelled to abandon the said Hotel with all its assets and equipment as it was not possible for it either to retain the ownership or manage the same. The abandonment of hotel and assets was therefore, clearly due to reasons over which the petitioner had no control whatsoever. Such abandonment of assets by the petitioner, cannot be construed as their discarding and as such, the same cannot fall within the purview of clause (vii) of section 10(2) of the Income Tax Act so as to entitle the petitioner to claim deductions as aforesaid. It is, therefore, clear that the petitioner did not discard its asset in Dacca, within the meaning of clause (vii) of section 10(2) and as such it is not entitled to claim any deduction thereunder. See also: 1993 SCC 1029 for Supreme Court decision. _______________
LOSS / FORFEITURE OF DEPOSIT
Pakistan Cement Pipe Construction Company v. Commissioner of Income Tax – [1973] 28 TAX 115 (H.C.Lah.) 1235.
Outstanding amount realised after discontinuance of business were not‖ taxable income‖— (position prior to 1979).
The assessee, a registered firm, carried on business of manufacture of R.C.C. cement pipes and contracts for sewerage work. It carried on its business upto 31.10.1956. By a dissolution deed dated 1.11.1956, the firm was dissolved as on 31.10.1956. Three of the five partners of the defunct firm joined to constitute another firm under the same name by a partnership deed dated 6.12.1955. However, the dissolved firm maintained a skeleton establishment upto 31.10.1958 for the purpose of realising the claims pending with the M.E.S. Authorities and for
886 Section 22
Income Tax Digest.
winding up the affairs of the firm. One of the partners was entrusted with this work and the said partner submitted claims to the M.E.S. Authorities which totalled Rs.30,16,481.00, in connection with the sewerage work executed by the dissolved firm. Ultimately, the disputes with regard to these claims were referred to arbitration in January, 1957. On 9.7.1958, the arbitrator gave his award whereby be adjudged a sum of Rs.11,81,276.00 in favour of the dissolved firm over and above the payments which had already been received by the firm. After making certain adjustments and claiming certain expenses, a return was filed purporting to be on behalf of the dissolved firm for the assessment year 1959-60, corresponding to the accounting year ending 31.10.1958. The return showed a net surplus of Rs.2,94.814.00 after making certain adjustments. But this net surplus was claimed as not taxable on the ground that the amount of Rs.11,81,276.00 was received long after the firm was dissolved and had ceased to carry on business, and therefore, the amount was in the nature of capital receipt and consequently exempt from tax. This contention was neither accepted by the Income Tax Officer nor by the Income Tax Appellate Tribunal. Consequently the amount in question was subjected to tax. On a reference, the High Court: Held, that the amounts received after discontinuance of a business or profession or vocation or occupation are neither taxable income nor income. Note:
In the Income Tax Ordinance 2001 and the repealed Ordinance, 1979, independent provisions have been created to tax such receipts.
Royal Exchange Assurance, Karachi v. Commissioner of Income Tax, Central Zone, Karachi – [1989] 59 TAX 37 (H.C.Kar.) 1236.
Loss accruing outside Pakistan is not allowable in the case of a non-resident company
The applicant is a non-resident company having its Head Office in United Kingdom. The Applicant was carrying on business at Karachi and East Pakistan. For the assessment year 1973-74 ending December 31, 1972, the applicant claimed loss of current assets to the extent of Rs.3,62,530/- suffered due to fall of East Pakistan. The Income Tax Officer disallowed the claim which was confirmed by the Appellate Assistant Commissioner and upheld by the Tribunal. The applicant has claimed loss which had occurred in Bangladesh during the year 1972 which ended on 31st December, 1972. Admittedly the applicant is a non-resident company with its head-
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office in United Kingdom and branches at Karachi and in the then East Pakistan. The moment East Pakistan separated and State of Bangladesh was created the branch in the territory of Bangladesh fell outside the territorial limits of Pakistan. The assessment for the business carried on in Bangladesh could not be made with applicant‟s branch at Karachi. The income in Bangladesh could not be treated as income of the applicant in Pakistan nor could it be taxed in Pakistan. Therefore, whatever loss the applicant suffered in 1972 it was in a foreign country out-side the territorial limits of Pakistan. The losses suffered in Bangladesh cannot be claimed by the applicant in the account of branch at Karachi. Before the creation of Bangladesh the applicant could have claimed the losses of East Pakistan Branch in its account at Karachi because at that time East Pakistan was part of Pakistan and the applicant‟s income wherever it accrued in Pakistan was taxable at Karachi. The cases cited by the applicant do not apply to the facts of the present case. In Shabbir and Company‟s case the assessee was carrying on business in Pakistan. Only Burgury Danga‟s case is nearer to the applicant‟s case but it is also distinguishable on facts. In this case assessee was carrying on business in India and Malaya as well. His business in Malaya was a branch office and the assessment was made in India where the Head-office was located. The assessee was, therefore, allowed to claim the losses suffered in Malaya due to bombing during war in the accounts in India. This case, therefore, does not apply to the applicant‟s case. As stated earlier, that applicant is a non-resident company and the income which had accrued in Bangladesh after 16.12.1971 cannot be treated as income accrued in Pakistan nor the income which have been accrued there could be taxed in Pakistan after that date. The company in the then East Pakistan was taken over by Bangladesh government and at the time of nationalisation the company and the business did not exist within the territorial limits of Pakistan, therefore, the question of allowing deduction in Pakistan does not arise. In the facts and circumstances the loss, which occurred in Bangladesh, cannot be treated as incidental to running of business by the applicant which is a non-resident company carrying on business in Pakistan. The applicant cannot claim set off in Pakistan where its registered Head office is not situated. Cases referred to: Commissioner of Income Tax, Karachi v. Shabbir and company (PLD 1966 S.C. 540) = [1966] 13 TAX 220 (S.C.); Commissioner of Income Tax, v. Naini Tal Bank Ltd. [1965] 11 TAX 318 (S.C.)
888 Section 22
Income Tax Digest.
Commissioner of Income Tax, Central Zone-A, Karachi v. Pakistan Investment Ltd. – [1988] 57 TAX 46 (H.C.Kar.) 1237.
Loss incurred in East Pakistan held as allowable expenditure.
Under the law, tax is payable only “in respect of profits or gains of any business profession or vocation” carried on by an assessee. To come up, we are of the view, that the provisions of sub-section (1) of section 10 are enough to accommodate the case of the assessee. We therefore undo the treatment by the two officers below and direct that the claim be admitted now. We are inclined to hold that the learned Income Tax Tribunal has recorded as a finding of fact that the above amount was an admissible expense keeping in view the nature of business of the respondent assessee and, therefore, no legal point in fact is involved. Even otherwise, the conclusion arrived at by the learned Income Tax Tribunal that the loan amount which had become a bad debt for want of recovery since 1969 was an admissible item of expense under section 10 seems to be in consonance with law. Grindlays Bank Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi – [1985] 51 TAX 102 (H.C.Kar.) = 1985 PTD 329 1238.
Loss suffered on redemption of Government loans is a capital loss and not deductible from profit.
The assessee claimed loss of Rs.71, 030/- in the said assessment. The Income Tax Officer disallowed loss and held that investment in those securities did not represent the assessee‟s stock-in-trade and as such it was not a capital loss. On appeal filed by the assessee before the Income Tax Appellate Tribunal, the Tribunal set aside the order of the Income Tax Officer and observed that in banking concern dealing in securities in both for the sake of investment as well as for carry on its normal business activities, the assessee holds certain Government securities and earns interest thereon. It has also been affecting purchases and sales in securities and has been showing trading profits thereon. When the department had taxed those gains as revenue income it cannot contend in the same breath that any loss in the redemption of the securities that necessarily relate to the investment above and as such of a capital nature. The tribunal remanded the case to Income Tax Officer to examine the true character of the securities on which loss has been claimed were held at capital nature. From the material on record, it is cleat that the Tribunal had proceeded on the basis that the securities were held by way of investment. We are of opinion that the above conclusion of the
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Tribunal on the facts and in the circumstances of the case, has got to be sustained. We are of the view that, it was for the Tribunal to give its decision on facts. Case referred to: Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax, Punjab [1940] 10 ITR 635. Case distinguished : Malabar Co-operative Central Bank Ltd. v. Commissioner of Income Tax [1975] 101 ITR 87.
Commissioner of Income Tax v. Motiram Nandram – [1940] 8 ITR 132 (PC) 1239.
Loss of security deposit made to obtain new line of business is not deductible.
The assessee-HUF, carrying on business as dealers in cloth and yarn as well as money-lenders, entered into an agreement with a company to act as organising agents for the company. As a precondition, the assessee deposited Rs.50,000 with the company, which was recoupable from out of the deposits paid by agents sponsored by the assessee to the company. The assessee received only Rs.10,500 out of this deposit, by which time the company became insolvent. the assessee claimed the irrecoverable balance of Rs.39,500 as a trading loss of a revenue nature. Held that the character of the expenditure which the assessee claimed as business loss must be determined with reference to the business of organising agents in which the assessee engaged under the agreement with the company. This business was different from that of a moneylender, and the principle that money is the stock-in-trade or circulating capital of a money-lender cannot by itself determine the question whether the loss was allowable. The question as to what was the object of the expenditure must be answered from the standpoint of the assessee at the time they made it, i.e. when they were embarking upon the business of organising agents of the company. The deposit was clearly exacted by the company as a condition of the assessee being given an agency, which it hoped to manage profitably. The purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature and the deposit could not,, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. Therefore, the amount of Rs.39,500 was not a trading loss but a loss of capital, and was, hence, not allowable as a deduction. Case review : Decision of the Nagpur High Court in Commissioner of Income Tax v. Motiram Nandram [1938] 6 ITR 10 revrsed. _______________
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Income Tax Digest.
DISPOSAL OR REMUNERATION OF INCOME IS NOT ADMISSIBLE IN LAW
Commissioner of Income Tax, (Central), Karachi v. Haji Jethabhoi Gokul & Co. – [1983] 47 TAX 182 (H.C.Kar.) 1240. Amount kept in suspense account payable to certain unascertained creditors held not liable to tax. A bare reading of the above provision of law [Section 10(2A)] will show that in order to make a sum computable as profits or gains of a company under section 10(2A) of the Act such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability under section 10(2A) of the Act and the assessee in any subsequent year had received either in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof. We accordingly enquired from Mr. Nasrullah Awan, the learned counsel for the Department if the sum of Rs.26,873 was ever allowed to be deducted in any assessment year by the department to the respondent as a loss, expenditure or this amount represented the benefit in respect of any trading liability which was obtained by the assessee by way or remission or cessation thereof. The learned counsel very frankly stated before us that the record of the Department does not show that the sum of Rs.26,873 was ever claimed by the Respondent or was allowed to be deducted by the Department, by way of loss, expenditure or that it refers to any benefit in respect of any trading liability which the assessee had obtained. In the absence of these circumstances, in our view, the Income Tax Officer could not treat the sum of Rs.26,873 as profits or gains, of the company for the year 1960-61 and therefore the Tribunal was right in allowing the appeal of respondent and excluding the sum of Rs.26,873 from being treated as profits of the company for the year 1960-61. _______________
ORDER OF A JUDGE UNDER COMPANIES‘ LAW IS NOT BINDING ON THE TAXATION OFFICER
Haideria Transport Company Limited v. Government of Pakistan and Income Tax Officer, Companies Circle – [1979] 39 TAX 147 (H.C.Lah.) 1241. High Court order under section 153 of Companies Act, 1913 held not binding on Income Tax Officer. The learned counsel have not relief upon any case-law in support of their contentions. There is no doubt that even after the grouping the
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Section 22
Company remained registered as a company with the Registrar of Joint Stock Companies. The groups as such were not incorporated A separately as separate Companies. It, therefore, prima facie appears that the grouping was not binding upon the creditors and was only a step towards creating a domestic harmony among the share-holders. it was only an internal arrangement. It is unnecessary to develop upon this particular point for the reason that even if it is assumed that the two groups of the Company became separate Companies which they were not, the Income Tax Officer is not bound by the order of the High Court. Section 153 provides that where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, The Court may, order a meeting of the creditors or class of creditors or of The members of the company or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. Sub-section (2) of section 153 provides that the compromise will be subject to sanction if a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members agree to any compromise or arrangement. In the present case, it appears that the High Court had proceeded on the assumption and, in fact, on the misrepresentation that there were no Creditors of the Company. It is clear from Annexures „F‟ „E‟ and „H‟ that the creditors had shown profits in the returns which means that they had accepted their liability to pay some income tax. In view of this it cannot be doubted that the Income Tax Officer was their creditor. They, however, obtained an Order from the High Court by concealing this fact and by misrepresenting that there were no creditors of the Company. If this fact. had been brought to the notice of The High Court the meeting of the creditors, which is mandatory in section 153, would have been arranged. I can contemplate of a case where the creditors, by resolution passed by them, either unanimously or by a majority of three-fourths, as laid down in the section, agree to the compromise. In such a case it can be urged that if the creditors have agreed to recover their dues from any particular group or share-holders, the liability of other groups ceases. But in the present case, there is no such agreement on behalf of the Income Tax Officer. The Income Tax Officer was, therefore, right in assessing the Company, as a whole. This is further supported by the conduct of the petitioner himself in filing Civil Original No. 44 of 1970, for liquidation of the Company as a whole without making any
892 Section 22
Income Tax Digest.
reference to the groupings thereof. It will, therefore, appear that the Company was treated to be a separate entity by the petitioners themselves. I, therefore, find no ground to interfere with the impugned orders and disallow this petition. I will, however, leave the parties to bear their own Costs. _______________
INCOME WHEN CAPITAL RECEIPTS
Commissioner of Income Tax (East) Karachi v. Forbes Campbell & Co. Ltd – [1979] 39 TAX 21 (H.C.Kar.) 1242.
Compensation when is capital receipt in the hands of assessee.
The sole-selling agency right of the respondent was undoubtedly an income-yielding asset and a capital asset, compensation received for loss of a capital asset is a capital receipt. It would not be correct to say that there was no loss of sole-selling agency rights, but only a “modification” or “variation” of it and that the amount of Rs.60,000 was paid as an extra commission to the respondent for agreeing to accept the agency in a modified shape. It could not be denied that by accepting to become one of the main dealers, there was distinct deterioration of an enduring nature. It is not disputed that if the compensation was paid for agreeing not to compete with the principal‟s business, it would prima facie be a capital receipt. It is true that the letter of 17th November, 1962, setting out the terms of the new arrangement did not categorically provide for compensation for refraining from competing with the principal. But, the sum of Rs.60,OO0 was offered to the respondent on condition that it accepted the offer to become a main dealer. The letter also provides that each main dealer - was to be exclusive dealer of “Exide” batteries within his own territory. Reading the two provisions together, there is no difficulty in holding that by agreeing to become one of the main and exclusive dealers, the respondent had agreed not to compete with the business of the principal. Cases distinguished : Kettlewell Bullen & Co. Ltd. v. Commissioner of Income Tax (1964) 53 ITR 261 = (1961) 10 TAX 180 (S.C.) and Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Inocme Tax (1964) 53 ITR 283 = (1954) 10 TAX 241 (S.C.). _______________
893 INCOME FROM BUSINESS OR PROFESSION
Section 22
BUSINESS INCOME - TESTS TO DETERMINE NATURE OF TRANSACTION
Commissioner of Income Tax v. Paracha Textile Mills Ltd. – [1993] 68 TAX 77 (H.C.Kar.) 1243.
Loss when held not to be speculative.
We are inclined to held that the view found favour with the learned Income Tax Tribunal that the above transactions cannot be treated a speculative distinct from the normal business of the respondent assessee and, therefore, the above loss was deductible from the profit account seems to be in consonance with law. We are unable to subscribe to the submission made by the learned counsel for the applicant Mr. Salahuddin that the bonus vouchers are (not) of the specie of stock and share. As a matter of fact, bonus vouchers are more akin to an import licence against which inter alia specified commodities could have been imported under the scheme. The case cited by Mr. Ali Athar is applicable to the instant case and not the case which has been relied upon by Mr. Salahuddin. Case applicable: Azad Friends Co. Ltd. v. Commissioner of Income Tax [1970] 21 TAX 75. Case not applicable: Dada Sons Hyderabad v. Commissioner of Income Tax (Central), Karachi [1986] 53 TAX 165 (H.C.Kar.).
Azad Friends Company Limited v. Commissioner of Income Tax – [1970] 21 TAX 75 (H.C.Kar.) 1244.
Transaction held not to be speculative.
The assessee-company was manufacturer of stationery articles and for this purpose imported raw materials under bonus vouchers which it purchased in the market from time to time. During the assessment year the assessee entered into 19 transactions for the purchase of bonus vouchers but in two of these transactions no delivery of bonus vouchers was taken and the transactions were settled by payment by the assessee of the differences in prices. The assessee, thereby, suffered a loss of Rs.20,000 which it sought to adjust against its income. The Income Tax Officer disallowed the claim. When the matter reached the Tribunal, it held that these two transactions were of a nature distinct from the other transactions of purchase of bonus vouchers entered into by the assessee during the same assessment year and, therefore, that these two transactions were in the nature of speculative transactions within the meaning of section 24 of the Income Tax Act and, accordingly, under the proviso to subsection (1) of this section, these two transactions should be deemed to constitute a
894 Section 22
Income Tax Digest.
distinct and separate business and the loss sustained by the assessee could be set off only against the income, profits and gains of such business, that is, the business involving speculative transactions and not against the income, profits and gains of its normal business. Reversing the order of the Tribunal, the High Court: Held, that these two transactions are not such a continuous exercise of activity, or such real, substantive, systematic or organised course of activity, as to constitute a distinct and separate business of the assessee. This being so, the proviso to section 24(1) under which the loss sustained by the assessee in speculative transactions cannot be set off against the income of his other business, does not come into operation at all. Another point which has to be taken into consideration is the definition of the term “speculative transaction” contained in Explanation 1 to mean a transaction in which a contract for the purchase and sale of any commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. If it were to be held that the principle laid down in clause (a) of this Explanation did not apply to bonus vouchers, then it is doubtful if a transaction of purchase of bonus vouchers settled otherwise than by actual delivery could at all be treated as a speculative transaction, for bonus vouchers cannot be treated as a commodity within the meaning of Explanation 1, and it is doubtful if bonus vouchers would even come under the expression “stocks and shares‟‟. If the definition of speculative transaction is held inapplicable to such transactions, then in that case it would be difficult to hold that the proviso to section 24(1) under which loss sustained in speculative transaction could not be set off against loss sustained in the normal business of an assessee, would at all come into operation in the present case. Cases referred to : Commissioner of Income Tax v. Shaw Wallace & Co. [AIR (1932) P.C. 138]; Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITR 765; Graham v. Green (9 Tax Cases 309).
Commissioner of Income Tax (Central) v. Beach Luxury Hotel Ltd., – [1983] 48 TAX 1 (H.C, Kar.) 1245.
Surplus arising from the difference in the face and the purchase prices of compensation books and credited to capital reserve account in balance sheet is not business income.
In the facts and circumstances of the case before us, we are of the view that the case of (1961) 41 ITR 534 is most helpful in the decision of the present ease and it has laid down that the basic question to be
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Section 22
considered is the intention at the time of the transaction. In the present case before us we find that the respondent which doing business in hotel had intended to acquire Nedous Hotel Lahore which was a capital asset and in order to acquire that capital asset they had already resolved before the auction that they will pay the price by purchase and surrender of compensation book, and therefore, they had considered it feasible to offer a price of the same concern upto a maximum of Rs.1,25,00,000. This fact is clearly disclosed in the order of the Income Tax Officer. We also find that although the assessee had adopted an elaborate method of acquiring the compensation books but still the whole object was not trading in the compensation books, but with a view to secure a cheaper mode of payment of the price of a capital asset. In these circumstances, it is difficult to divorce the acquisition of compensation books from acquisition of Nedous Hotel and the two are almost integrated with each other and we have no doubt in our mind that the whole activity was aimed at acquiring the capital asset in a cheaper manner and not in order to make a profit out of it and in fact there was no actual profit in terms of money‟s worth which had come into the pocket of the assessee or which the assessee had realised but it was in fact nominal game which they had made in terms of book adjustment. Consequently, the Appellate Tribunal was right in holding that the net surplus of Rs.16,74,788 arising from the difference in the face and purchase prices of compensation books and credited to the capital reserve account in balance sheet, was not chargeable to tax. Commissioner of Income Tax, Karachi v. Pak Thread Ball Manufacturers’ Association, Karachi – [1974] 29 TAX 179 (H.C.Kar.) 1246.
Assessee-company forming association of tradesmen, businessmen or manufacturers with main objects, such as assistance to members to obtain essential machinery and materials for promotion and development of thread ball industry, held to be a Trade Association and receipts from donation etc. held to taxable in its hand.
It is not disputed that the assessee-company is an association of tradesmen, businessmen or manufacturers associated with the thread ball industry. According to its Memorandum and Articles of Association its main object are to promote and develop the thread ball industry to assist its members for this industry and to import raw materials for the industry and to distribute the same among its
896 Section 22
Income Tax Digest.
members. The assessee-association qualifies for the description of trade or similar association referred to under section 10(6) of the Income Tax Act. A bare perusal of the resolutions of the assessee-company in respect of contributions and donations to be made by the members makes it clear that donations and contributions were to be made only by those member, who received quota of yarn, whether indigenous or imported and that such donations or contributions were in direct proportion to the quota of yarn supplied to the members concerned. It would also appear that the facility of testing machine was provided against payment. Since the payments were made by only those members who received quota of yarn or yarn imported by the assessee-company or who got their yarn tested on its machine the donations and contributions made by them for this purpose were directly relatable to services rendered to them by the assessee-company. Although one of the objects of the association undoubtedly was to assist the members to obtain material, etc. for the use of the thread ball industry, since was levying charges for the specific services rendered by it of importing yarn and acquiring or distributing local quota of yarn or testing the same for those members who were receiving such benefits or services, such income would be liable to payment of Income Tax under section 10(6) of the Income Tax Act. Kahan Chand and Kishan Chan v. Commissioner of Income Tax – [1944] 12 ITR 472 (Lahore) 1247.
Not only initial intention but subsequent event and conduct of assessee must also be taken into account to determine whether transaction in question was in nature of trade.
No doubt, the governing factor is the intention of the assessee at the time of the purchase, but the subsequent conduct of the assessee has certainly a material bearing on the question of his intention at the time of purchase. Mrs. Sooniram Poddar v. Commissioner of Income Tax – [1939] 7 ITR 470 (Rangoon) 1248.
Speculations and adventures must be ‗in the nature of trade‘ before the profits and gains resulting from them become taxable.
Speculations and adventures must be „in the nature of trade‟ before the profits and gains resulting from them become taxable. Every speculation has in it the element of adventure, but it must be a
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Section 22
speculation in the nature of trade if it is to be considered an adventure in the nature of trade. The dividing line between assessability and exemption depends on whether what is done, is done in the nature of trade or not. A simple isolated purchase and sale is not an adventure in the nature of trade. It is a mere speculation. If the transaction is an isolated one, then in order to constitute it an adventure in the nature of trade there must be some activity of a trading nature, undertaken in order to make the property marketable, i.e., to put it into a saleable state or to attract purchasers. Amritsar Produce Exchange Ltd., In re – [1937] 5 ITR 307 (Lahore) 1249.
Question as to whether in making investments the intention of the assessee was to make profit as a part of its business, is a finding of fact.
When once it is found as a matter of fact that the assessee‟s intention was to make profit from investment as part of its business, it is doubtful if the High Court can go behind that finding. The question whether in making investments the intention of the assessee was to make profit as a part of its business, is a finding of fact. _______________
VEIL OF CORPORATION CAN BE LIFTED
Commissioner of Income Tax, Karachi, East Karachi v. Amsons Dairies Ltd., Karachi – 1974 SCC 422 = [1975] 31 TAX 62 (S.C.Pak.) 1250.
Veil of company can be lifted.
Mr. S.A. Nusrat, learned counsel for the petitioner admitted that the facts of this case are indentical to the facts of the case in Commissioner of Income Tax v. Bufco Tanneries Ltd. In that case it was held by the West Pakistan High Court as under:In this case, we find that it is only a re-adjustment made by the partners of the firm to carry on their business as a limited company. The enterprise is the same, the persons are identical, the assets, machinery, building and plant have been absorbed in the share capital of the new company and in this way neither any change of ownership has taken place nor any re-installation of machinery has been occasioned. In this view of the matter it cannot be said that the machinery is second hand and we are of the opinion
898 Section 22
Income Tax Digest.
that the depreciation claimed went with the assets and even if it can be said that the assets were owned by two different legal persons, the allowance has no reference to the persons who owned it but it attached to the machinery and plant itself. The learned counsel for the petitioner was unable to satisfy us that the view taken in this decision is not in accordance with law. If the unveiling of the limited company is done it is quite clear that it is only a re-adjustment made by the partners of the firm to carry on their business as a limited company. In these circumstances the authorities below and the High Court were perfectly justified in holding that it is the same person who is concerned in the matter. The machinery is the same and there being no new installation the respondent-company was entitled to have depreciation on it. The impugned order calls for no interference. The petition is dismissed. Naseer A. Sheikh v. Commissioner of Income Tax – [1976] 33 TAX 121 (H.C.Lah.) 1251.
Veil of incorporation of a corporate personality can be lifted in suitable cases to discover the real nature of transaction.
It is permissible to lift the veil of incorporation of a corporate personality in suitable cases to determine its tax liability. There is no absolute bar against it in the instant case. The Tribunal after having pierced into veil of incorporation of the two companies the Colony Textile Mills Ltd. and the Colony Sarhad Mills Ltd., was able to discover the real nature of the transaction in question. _______________
PROFITS DERIVED FROM SALE OF SHARES AND BONUS SHARES
Eruck Maneckji and others v. Commissioner of Income Tax – [1990] 62 TAX 1 (H.C.Kar.) 1252.
Promoters of the company are liable to tax for profits prior to the incorporation of the company.
Applicant No. 1 entered into an agreement dated 24.7.1962 with Dalmia Cement Ltd., whereby Dalmia agreed to sell to applicant No. 1 all its properties and assets in Pakistan comprising of two cement factories at Karachi and Dadot. In terms of the agreement option was given to applicant No. 1 that the agreement or the subject matter could be transferred to any body corporate formed and controlled by applicant No. 1, if so desired, and in that case Dalmia shall transfer it
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Section 22
to such a body corporate. The main agreement was modified by a further agreement dated 2.11.1962 in which clause 3 provided that the profits and losses arising from the operation of the cement factory subsequent to 30.9.1962 would in the event of completion of the sale transaction be to the account of applicant No. 1. The sale deed was executed on 30.9.1964 between Dalmia as vendor and Pakistan Progressive Industries Ltd., as vendee being the nominee of applicant No. 1 and applicant No. 1 as the confirming party. The Pakistan Progressive Industries (hereinafter called the company) filed a return of income on 7.8.1965 showing profit of Rs.28,58,844/- for the period from 1.9.1962 to 31.7.1964. It was subsequently revised and the profit was reduced to Rs.25,49,898/- for the period from 1.10.1962 to 30.9.1964. The Income Tax Officer however, issued notice under section 34 of the Income Tax Act to the Promoter of the company namely applicants No. 1 and 2 in respect of the assessment for the period from 1.10.1962 to 18.10.1964. The applicants filed return showing Nil income and denied that they are liable to pay any tax on the ground that they were promoters of the company and the profits belonged to the company and not to them. This plea was rejected and the applicants were charged to profit in their hand from 1.10.1962 till the date of incorporation of the company. A perusal of the agreements will show that the factory was run and business was conducted an account of Manackji. We have also noted that the Income Tax Officer and the Tribunal have found that the factory was run by the officers of the company for the benefit and in the account of Manackji. This finding of fact has not been challenged by the applicants. The question as framed accepts the finding of fact. Cases referred to: Nishat Textile Mills Ltd. v. Commissioner of Income Tax [1974] 29 TAX 143; Commissioner of Income Tax v. The Bijli Cotton Mills Ltd. [1953] 23 ITR 278; Commissioner of Income Tax v. Tea Producing Co. of India Ltd. [1963] 48 ITR 200.
Commissioner of Income Tax v. Habib Bank (Overseas) Ltd. – [1976] 33 TAX 221 (H.C.Kar.) 1253.
Profits derived from sale of shares and bonus shares, transactions not directly connected with the trade or business held not to be, adventure in the nature of trade.
Looking to the circumstances involved, it cannot be said that the purchase of the shares was merely a commercial proposition or with the avowed object of selling them one day at profit. With the advantage of hindsight, it can be said that the management of the
900 Section 22
Income Tax Digest.
respondent-Bank guaging the tempo of the time were astute enough to invest their securities in real guilt-edged securities and reaping some considerable profit in the bargain. But it was not in the line with their business. It also appears that the respondents were not allowed to purchase shares from the deposits when even the restricted permission was accorded, and the shares had been purchased from the capital of the bank. The Appellate Tribunal found that the purchase and the sale were not in the course of their business, for it was not an adventure in the nature of trade, and the conclusion arrived at by it was absolutely in order. _______________
DEALINGS IN LAND WHEN CONSTITUTE BUSINESS
International Traders Ltd., Karachi v. Commissioner of Income Tax – [1967] 16 TAX 46 (H.C.Kar.) 1254.
Purchase of land with dominant intention to sell a portion of it is adventure in the nature of trade.
The assessee was doing the business of import and sale of motor parts and other goods. The assessee bad taken on lease the business premises from Messrs. Electronics and Film Equipment Ltd. The owners of the premises brought a suit for ejectment and recovery of arrears of rent on the ground that the assessee was a defaulter in rent and had also trespassed over an adjoining site belonging to the owners. The suit was compromised on the 28th March, 1956, the date on which an agreement was executed whereby the assessee agreed to purchase the entire plot of land measuring about 1069 square yards for a sum of Rs.2 lacs. On the 14th April, 1956, the assessee entered into another agreement with Messrs. Standard Vacuum Oil Company under which 653 square yards of land out of the total area of 1069 square yards. agreed to be purchased by the assessee were agreed to be sold for a sum of Rs.2,50,000, on the condition that purchasers would set up a petrol service station on it and give it on lease to the assessee. The final sale deeds both in favour of the assessee and in favour of the Standard Vacuum Company were executed by one document on the 2nd August, 1956. On this transaction the assessee made a profit of Rs.87,752. The Income Tax Officer added the amount to the total income of the assessee treating it as revenue receipt. The Income Tax Officer took the view that the land had been purchased by the assessee for the purpose of carrying on its normal business, and the sale of a portion of the plot was effected in fulfilling its intention of
901 INCOME FROM BUSINESS OR PROFESSION
Section 22
expanding the petrol business. When the matter reached the High Court the assessee‟s counsel contended that (i) the purchase and sale of land not being within the ordinary business of the assessee, could not be treated as venture in the nature of trade especially when it amounted to a solitary transaction and as such the profit made in such transaction could not be charged to tax; (ii) the view of the Tribunal was incorrect when they said that the intention of the assessee at the time of purchasing the plot was to make profit on it; and (iii) even if the view of the Tribunal he correct then what was necessary for the purpose of determing the transaction in issue to be in the nature of trade was to find out the dominant intention of the assessee at the time of purchasing the land: Held,
that from the facts and the circumstances of the case there can be no two opinions about the fact that the dominant intention of the assessee at the time of purchasing the land was to sell a portion of it to Messrs. Standard Vacuum Oil Company and earn a profit on it. A solitary transaction, therefore, of the purchase and sale of the land in this case will not deter anybody from. reaching the conclusion that the adventure of the assessee in purchasing and selling the land was in the nature of trade the profit earned by the assessee consequently was rightly charged to tax.
The High Court is not a Court of Appeal and as such it cannot for a moment consider a situation whether the finding on appraisal of evidence on questions of fact given by the Income Tax authorities was erroneous or correct. What the High Court has to see is whether the Income Tax authorities could, in the circumstances of the case, reach the conclusion they had reached on the question of fact. To come to that conclusion the High‟ Court has not to further probe in the matter to see if the conclusions are correct or not. Cases relied on: Commissioners of Inland Revenue v. Reinhold [1953] 34 Tax Cases 389 and In re. Beharilal Jhandumal [1944] 12 ITR 209.
Thakar Datt Sarma v. Commissioner of Income Tax – [1939] 7 ITR 154 (Lahore) 1255.
Purchasing land to sell it as plots is a business.
Where certain persons jointly purchased a lease area of building sites in three lots over a period of three years and about twenty years later sold a substantial area of such land in small plots to several purchasers, it was held that there was material for the conclusion that the venture was one of the nature of trade.
902 Section 22
Income Tax Digest.
Kahan Chand and Kishan Chand v. Commissioner of Income Tax – [1944] 12 ITR 472 (Lahore)
The assessee, carrying on export and import business, purchased some lands, after the issue of a preliminary notification issued by the Government for the acquisition of lands which gave rise to tremendous speculation in landed property in that area. The area proposed to be acquired by the Government did not cover the lands purchased by the assessees. Subsequently, a lay-out plan was drawn by the assessee. The sales were advertised and the plots were sold to various persons as building sites. Held that the transaction was an adventure in the nature of trade. But in another transaction where the assessee had purchased land a year before the notification and sold it similarly, in plots, it was held not to be an adventure in the nature of trade, because it had been purchased before the „speculation fever‟ set in and the assessee had not purchased it with intention to sell at a profit. K.M. Mody, In re – [1940] 8 ITR 179 (Bom.) 1256.
Where assessee bought certain villages with borrowed capital, divided it into plots and sold some of them, profit arising from such venture was business income.
In 1930 the assessee purchased a village with borrowed monies. The village comprised 1,330 acres and out of that area he proceeded to set aside for development and sale as building sites an area of 266 acres divided into 1,000 plots. The finding of fact was that he had incurred some expenses on the development of that property. In connection with the development of this property he had constructed a well at a cost of Rs.1,100 and had spent Rs.4,000 in surveying the property and laying out a scheme of development. But apparently the actual development was to be mostly done by the purchasers. In these circumstances it was argued by the assessee that there was no business of buying and selling of land; that all that had happened was that the assessee purchased this estate in 1930 and sold a part of it in 1936 and was proposing to sell some more, but he was not carrying on in any sense the business of buying and selling land. Held that the question whether assessee was carrying on business or not was a question of fact on which the Court could not interfere and the Commissioner had found as a fact that the assessee was carrying on business. It was impossible to say that there was no evidence on
903 INCOME FROM BUSINESS OR PROFESSION
Section 22
which that finding of fact could be justified. It was difficult to suppose that the assessee borrowed money at 7/1-2 per cent interest if he was merely desiring to purchase this inam village as an investment. The question whether the assessee was properly assessed at the figure at which he was assessed was largely a question of law. It was to be noted that the whole transaction was not yet complete. The figure did not actually represent profits. However, there was evidence to support the finding of the Commissioner that the profit, if any, made on the sale and purchase of the village, or any part thereof, was profit earned by the assessee in the business of purchasing, development and selling land carried on by him. _______________
COMPULSORY ACQUISITION OF PROPERTY
Parashram Chintaman Joglekar v. Commissioner of Income Tax – 6 ITC 74 (Nag.) 1257.
Where a portion of the land, purchased by the assessee with the intention of selling plots of it as building site, was acquired by the Government after the assessee had sold off the remaining portion of land.
Where a portion of the land, purchased by the assessee with the intention of selling plots of it as building site, was acquired by the Government after the assessee had sold off the remaining portion of land, it was held that the profit resulting from this compulsory acquisition of land was profit resulting from a transaction in the nature of trade. _______________
IN CASE OF MONEY-LENDER
S.R.M.S. Subrahmanyam Chettiar v. Commissioner of Income Tax – 7 ITC 297 (Mad.) 1258.
Where the assessee, carrying on the money-lending business, made a solitary purchase of mortgage right, took over the mortgaged property and sold it subsequently realising profit therefrom.
Where the assessee, carrying on the money-lending business, made a solitary purchase of mortgage right, took over the mortgaged property and sold it subsequently realising profit therefrom, it was held that though at the inception, the mortgage loan was not actually advanced by the assessee, the subsequent advance for getting an assignment of
904 Section 22
Income Tax Digest.
the mortgagees‟ rights was certainly a venture coming within the generally recognized ambit of the money-lending business and could not be deemed to be so disconnected with the profession of a moneylender business and could not be deemed to be so disconnected with the profession of a money-lender as to take it out of the category of business carried on by the assessee; thus, the profit derived by the assessee in the year of account in respect of such a transaction was connected with his money-lending business and, therefore, was assessable as business income. Rao Bahadur Mothay Gangaraju v. Commissioner of Income Tax – 8 ITC 76 (Mad.) 1259.
Where the assessee, a landowner and money-lender, purchased at a court auction right, title and interest of a person in certain legacies at a certain price and later in a suit realised a sum under the legacies which was in excess of the sum paid by the assessee for purchasing the legacies.
Where the assessee, a land owner and money-lender, purchased at a court auction right, title and interest of a person in certain legacies at a certain price and later in a suit realised a sum under the legacies which was in excess of the sum paid by the assessee for purchasing the legacies, it was held that as the said transaction was in no way connected with the assessee‟s money-lending business or its business activities, the transaction was not an adventure in the nature of trade. _______________
OTHER ILLUSTRATIONS
Governors of the Rotunda Hospital v. Coman – [1920] 7 Tax Cas. 517 (HL) 1260.
Where premises are suitably equipped so as to facilitate letting for public entertainments, it is an adventure in the nature of trade.
The Governors of a charitable maternity hospital owned a building which comprised rooms earmarked for public entertainments, and which were connected with the hospital building by an internal passage. The derived a substantial income from letting the rooms for public entertainments, concerts, etc., and applied the income for the general maintenance of the hospital. The terms of letting included the provision of seating, heating and attendants, but an additional charge was levied for consumption of gas and electricity. The question was
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whether such letting amounted to an adventure in the nature of trade, so that profits therefrom were assessable to tax. Held that though the profits were undoubtedly applied to charitable purposes, they were profits derived not merely from the letting of the tenement but from its being let properly equipped for entertainments, with seats, lighting, heating and attendants. The subject which was hired out was a complex one. The mere tenement as it stood, without furniture, etc., would be almost useless for entertainments. The business of the Governors in respect of those entertainments was to have the hall properly fitted and prepared for being hired out for such uses. The profits were the proceeds of a concern in the nature of q trade which was carried on by the Governors, and consisted in finding tenants and having the rooms so equipped as to be suitable for letting. The profits derived from the letting of the rooms were hence assessable as profits of a trade or business. _______________
DEALERS IN SHARES
Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. – [1965] 58 ITR 328 (PC) 1261.
Purchase and sale of shares, even if it is an isolated transaction and is mainly aimed at recovering some pre-paid taxes from the revenue, is nevertheless an adventure in the nature of trade if it was covered by the objects of the company.
The respondent-company carried on business as merchants until some time in the year 1953-54. In October 1953, the Memorandum of Association was altered so as to include dealings in stocks and shares as one of the objects of the company. The respondent had carried forward business loss for that year. In December 1953, it purchased all the issued share capital of company J for £16,900, borrowing £15,900 for this purpose. Company J was not at the relevant date carrying on any business, but it had accumulated profits, which were available for distribution as dividend. In January 1954, J declared a dividend of £28,913, less income tax £13,011, and the respondent received a net dividend of £15,902. Out of this amount, the respondent repaid the loan of £15,900, and later in June 1954, sold the shares to J itself for the face value of £1,000. The respondent claimed the loss of £15,900 incurred in the transaction as a trading loss, which, if allowed, would have entitled them to take credit for the tax of £13,011 deducted at source on dividends. The Commissioners disallowed the claim on the grounds, (i) that the
906 Section 22
Income Tax Digest.
respondent purchased the shares with a view to obtaining a dividend against which it could claim to set off its losses, and (ii) that the transaction was not entered into as part of any trade of dealing in shares and was not an adventure in the nature of trade. The question was whether there was evidence to support the Commissioner‟s findings, and whether the impugned transaction was a trading operation carried on by the respondent. Held (by majority) that the transaction was a trading transaction carried on by the respondent. Per Visconi Simonds : Here was a company whose object it was to deal in shares. It entered into a commercial transaction which, though it might be given an invidious name, contained no element of impropriety, much less of illegality...A dealer may seek his profit, if a profit is essential, otherwise than by an enhanced price upon a resale, as by a declaration of dividend, a repayment upon a reduction of capital or upon a liquidation of the company whose shares he had bought. It appears wholly immaterial, so long as the transaction is not a sham, whatever may be the fiscal result or the ulterior fiscal object of the transaction, and since this could be the only ground upon which the Commissioner could have reached their determination, it could not be upheld. Per Lord Morris of Borth - It has not been and could not be suggested that the transaction of the company in the shares was a sham transaction. The company bought the shares, received a dividend and then sold the shares. These facts seemed to point firmly to the conclusion that the transaction was entered into as part of a trade of dealing in shares or was an adventure in the nature of trade. The inherent nature of the transaction suggested a trading operation. A trading transaction does not cease to be such merely because it is entered into in the confident hope that, under an existing state of the law, some fiscal advantage will result. In judging as to the essential nature of a transaction, it will often be relevant and of assistance to consider the objects and intentions which are the inspiration of the transaction. In the present case, there was no room for doubt that the transaction was demonstrably of a trading nature and it was not divested of that nature merely because it was entered into with expectation that as a result (but not as part of the trading activity of the company as such) some tax recovery might be claimed.
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It is doubtless true to say that in general a trader embarks upon trade with the intention of making a profit: but it cannot be said that if this intention is lacking, there is no carrying on of a trade. A trade may be carried on with the knowledge that losses will result. Equally, if on an ordinary examination of them, certain transactions must be regarded as trading transactions or a adventures in the nature of trade, they do not cease to be such because those conducting them have embarked upon them with a view to obtaining some fiscal benefit. There may be trading transactions which can be the prelude, if the state of the law so allows, to tax recovery activities. If tax recovery is possible, it is as taxpayers and not as traders that the recovery is obtained. the possibility of tax recovery may be a result made possible by the trading activity, but it cannot be accepted that if a transaction fairly judged has in reality and not fictionally the features of an adventure in the nature of trade, it must be denied any such description if those taking part in it had their eyes fixed upon some fiscal advantage. Per Lord Gust - Where the company has power under its Memorandum of Association to indulge in a particular activity, and the transaction contains otherwise all the indicia of trading in that line of business, the fact that it was an isolated transaction is nibil ad rem. In any event, regard must be had to the subsequent dealings in shares by this company, and so viewed, this was not an isolated transaction, but one of many. An individual or a company can conduct their business in the most extravagant way, they can conduct it with the certainty of making a loss. But the revenue is not concerned with the particular method of trading : they are only concerned with the results of the business. If there are profits or gains and the business is a trade, then income tax is payable. If there are losses, relief is available. Neither payment of tax nor recovery of tax is part of the trading activities of a company; they are the results which the law imposes on the trade. No doubt if it is established that a transaction is entered into with the evident intention of making a profit, that may be a strong indication that the company was trading. But the corollary by no means follows that the absence of an intention to make a profit or the intention to make a loss negatives trading. The test is an objective one. The question to be asked is not quo animo - was the transaction entered into but what in fact was done by the company. One has look at the transaction by itself irrespective of the object, irrespective of the fiscal consequences, and ask the question “whether the operations involved in it are of the same kind, and carried on in
908 Section 22
Income Tax Digest.
the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made”. The company had power to deal in shares; they bought shares, they received a dividend on these shares, they sold the shares. This was just the ordinary commercial transaction of a dealer in shares. the transaction in question was an adventure in the nature of trade and the Commissioners had no grounds upon which they could hold that it was not. _______________
GOLD AND SILVER TRANSACTIONS
Behari Lal Jhandu Mal, In re – [1944] 12 ITR 209 (Lahore) 1262.
Where the assessee-HUF, carrying on money-lending business, had purchased gold when England went off the gold standard and the price for the same was paid by withdrawing money from fixed deposits before their maturity and from a firm in which it was a partner and it later sold the gold at profit after several years.
Where the assessee-HUF, carrying on money-lending business, had purchased gold when England went off the golf standard and the price for the same was paid by withdrawing money from fixed deposits before their maturity and from a firm in which it was a partner and it later sold the gold at profit after several years: Held that the transaction of purchase and sale of gold was an adventure in the nature of trade, because the transaction was from its very inception a speculation in gold and not a mere investment of unrequired capital. Case review : Mrs. Sooniram Poddar v. Commissioner of Income Tax [1939] 7 ITR 470 (Rangoon) dissented from with the observation that it appeared to have been assumed in that case that an adventure is in the nature of trade only if (1) it is part of a business of the assessee, (2) the operations involved in it are of the same kind and carried on in the same way as in the line of business in which the adventure was made, and (3) the assessee had engaged in income activity of a trading nature between the purchase and the sale in order to make the property marketable, i.e. to put it into saleable state or to attract purchasers. The case does not appear to have been rightly decided. The three indices which the learned Judges held to be characteristics of an adventure in the nature of a trade may or may not exist in a particular case. That the venture may be an isolated venture and not part of the assessee‟s usual business and
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that indeed it may be entirely outside the assessee‟s line of business is established beyond question. And where the transaction is a transaction of purchase and sale of precious metals the questions whether the operations involved in the purchase and sale are carried in the same way as in ordinary trading in that metal and whether anything further has been done by the assessee to make the metal purchased marketable does not arise. The essential test in my opinion in such cases is whether the purchase of metal was made not with the intention to use it nor with the intention to invest one‟s capital in it but with the sole object of selling it in future in order to make a profit. If the purchase is with that intention the purchase and the subsequent sale are an adventure in the nature of trade.
Mrs. Sooniram Poddar v. Commissioner of Income Tax – [1939] 7 ITR 470 (Rangoon) 1263.
Assessee purchased silver through her husband, who was a partner in a money-lending firm, and after retaining it in the raw state for about three years, sold it in one lot through the firm for a profit.
Where the assessee purchased silver through her husband, who was a partner in a money-lending firm, and after retaining it in the raw state for about three years, sold it in one lot through the firm for a profit. Held that the profits could not be construed as having arisen out of „business‟ as envisaged in section 2(4) of the 1922 Act [section 2(11) of the Income Tax Ordinance, 1979], and were hence not taxable. The fact that she employed a businessman, whether he was her husband or not, to purchase the silver and later to sell it again fell far short of making her an adventurer in trade. _______________
OTHER ILLUSTRATIONS
Commissioner of Income Tax v. Diwan Bahadur S.L. Mathias – [1939] 7 ITR 48 (PC) 1264.
Coffee growing is ‗business‘.
The assessee had coffee estates on which coffee was grown by labour recruited by him mainly at another place M where manure, spray materials, tools, crop bags, etc., were also purchased. The crops were harvested by labour and brought to M in raw state because there was no market for raw coffee. The assessee got the green coffee cured at M by persons owning curing factories on payment of a commission to them. The cured coffee was insured against fire till sale. The question
910 Section 22
Income Tax Digest.
was whether the assessee was running a business and if so, whether the income could still be treated as income from agriculture: Held that the assessee was carrying on a „business‟ within the meaning of the word in section 2(4) and 10 of the 1922 Act [section 2(11) and 22 of the Income Tax Ordinance, 1979]. The profits as the assessee derived from his possession of land, were derived by means of a business; and the fact that agricultural operations formed an element in the business did not render it any the less a business. On the other hand, the mere circumstance that income was to be placed under the head „Business‟ had no effect to negative its being „agricultural income‟ as defined by section 2(1) of the 1922 Act [section 2(1) of the Income Tax Ordinance, 1979]. Case review : Decision of the Madras High Court in Commissioner of Income Tax v. Diwan Bahadur S.L. Mathias [1937] 5 ITR 435 reversed.
Gayaprasad and Chotey Lal, In re – [1935] 3 ITR 177 (All.) 1265.
Advancing money for litigation.
Where the assessee had advanced moneys to K for conducting litigation and the agreement was that if K succeeded, he had to pay to the assessee certain sum in addition to the amount advanced and, if K did not succeed, the assessee was to get nothing, i.e., not even the amount advanced, it was held that the additional sum so received by assessee on K‟s success did not fall under section 4(3)(vii) of the 1922 Act [section 14 of the Income Tax Ordinance, 1979] but the transaction amounted to business. The business which yielded profit to the lender commenced from the date of agreement and continued till the assessee realised the additional sum. There was continuity and regularity in the sense that he advanced sums from time to time as occasions arose for K to borrow, and took steps to enforce the agreement against K. _______________
CONCEPT OF BUSINESS - CONNOTATION OF
Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 1266.
Business means some real, substantial and systematic activity with a set purpose.
Upon a proper construction of the words „business‟ and „vocation‟ in the context of the Indian Income Tax Act, there must be some real,
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substantive and systematic course of business or conduct, before it can be said that a business or vocation exists, the profits of which are taxable as such under the Act. A company is not like an individual who can choose his activities. A man may work or play or engage himself in what he likes, with or without system. A company exists for one purpose only - its „business‟. When a company does something, then, even if it amounts technically to a „vocation‟, it could be nothing else but its business. In the case of a company, the words „business‟ and „vocation‟ are virtually synonymous. Mahammad Faruq, In re – [1938] 6 ITR 1 (All.) 1267.
Business is an activity carried on with an object to earn profit.
The word „business‟ is not defined exhaustively in the Income Tax Act, but it denotes an activity with the object of earning profit. To say that a business is being carried on means no more than that profit is to be earned by a process of production. Provident Investment Co. Ltd. v. Commissioner of Income Tax – 6 ITC 21 (Bom.) 1268.
‗Business‘ in the context of the Income Tax Act means a business which is so carried on that profits of such business are assessable under the Act.
The expression „business‟ in the context of the Income Tax Act means a business which is so carried on that profits of such business are assessable under the Act. _______________
PROFESSION / OCCUPATION / VOCATION
Lala Indra Sen, In re – [1940] 8 ITR 187 (All.) 1269.
General.
In determining whether an activity constitutes business, profession, vocation or occupation, all the surrounding circumstances must be considered and common sense applied. If there is one test which is more valuable than another, it is to try to see what is the man‟s own dominant object - whether it was to conduct an enterprise of a commercial character or whether it was primarily to entertain himself. If the latter was his real objective, the circumstance that his hobby might possibly yield him a reward is not conclusive of this question whether what he is doing constitutes a „business‟,
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„profession‟, „vocation‟ or „occupation‟ within the meaning of this Act. Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 1270.
‗Business‘ and ‗vocation‘ are not synonymous.
The words „vocation‟ and „business‟ are not synonymous. The word „vocation‟ is a word of wider import than the word „profession‟. Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 1271.
Business or vocation in ordinary parlance does connote activities in which a ‗person‘ is engaged with a set purpose, and the frequency or the repetition of the activity, though at times a decisive factor, is by no means an infallible test.
Business or vocation in ordinary parlance does connote activities in which a „person‟ a engaged with a set purpose, and the frequency or the repetition of the activity, though at times a decisive factor, is by no means an infallible test. It has been held in In re, Giffin 60 L.J.Q.B. 235, that „if an isolated transaction, which if repeated would be a transaction in a business, is proved to have been undertaken with the intent that it should be the part of several transactions in the carrying on of a business, then it is a first transaction in an existing business‟. Further, there is high authority for the view that the word „vocation‟ is analogous to the word „calling‟ which is a very large word; „it means the way in which a man passes his life and it is a very large word indeed‟. The words „business‟ and „vocation‟ by themselves are very ordinary English words and what, in the common parlance of language, constitutes a business or a vocation and what does not, would, apart from any particular context, normally constitute a pure question of fact. Neither a „business‟ nor a „vocation‟ is prima facie a creation of the law, as are a „firm‟ or a „trade union‟. A business and a vocation are words applied to certain practical activities of mankind. It may be that a business or a vocation is sometimes, as a matter of fact, difficult to distinguish from a hobby, a pastime or even a single experiment, but it is nonetheless. _______________
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ILLUSTRATIONS
Ram Chndra Munna Lal v. Commissioner of Income Tax – [1949] 17 ITR 394 (East Punj.) 1272.
In case of investment of the income derived from money-lending business in the purchase of property.
Investment of the income derived from money-lending business in the purchase of property can by no stretch of imagination be regarded as a transaction made in furtherance of that business itself or as otherwise constituting a part of that business. Seth Ganga Sagar, In re – [1934] 2 ITR 155 (All.) 1273.
Dealing in shares.
A man may either buy shares or securities with the object and intention of making a gain from the sale when these shares or securities have risen to a higher price, or he may purchase the shares or securities with the intention of keeping his capital safe and receiving meanwhile a certain amount of dividend or interest. the intention must be deduced from the facts and from the circumstances of the case. It is the intention with which the purchase is made which makes the difference. Where a man makes a business of speculating this will be deduced by the court from the fact that he makes numerous purchases and sales, the sales being within a short time of the purchase. On the other hand, where a man makes few sales, although he may make a number of purchases, and where the sales are made at long intervals after the purchases, the conclusion to be drawn is that he is not indulging in the business of speculating in these stocks and shares, but that he is investing his capital in these stocks and shares. Lala Indra Sen, In re – [1940] 8 ITR 187 (All.) 1274.
Maintenance of race horses, running them in races and betting on horses, if undertaken as a past time does not constitute business, profession, vocation or occupation.
It is not correct to say that in no circumstances can a man ever be said to be an owner of race horses, or a gambler, as a business proposition; that would be going much too far. It may well be that there are cases in which by the scale on which he conducts his racing or his gambling (whether on horses or in other ways), by the commercial methods adopted, by his declared intention or by the absence of any other
914 Section 22
Income Tax Digest.
means of livelihood, he may make it clear that its object is to make a „business‟ of it. The assessee carried on business as money-lenders and dealers in precious stones. He also maintained three racing horses and ran them in races and bet on them. It incurred losses on the maintenance, management and running horses and betting during the relevant year and claimed such losses as deductible from his assessable income. Held that from the nature of the assessee‟s activities, the assessee‟s management and running of horse races was a mere hobby, a pastime not designed to yield a profit and did not in law constitute the business, profession, vocation or occupation of the assessee, and hence the assessee was not entitled to claim a set off a losses either on the racing establishment account or in the betting account against its other assessable income. Commissioner of Income Tax v. Diwan Bahadur S.L. Mathlas – [1939] 7 ITR 48 (PC) 1275.
Coffee growing is ‗business‘.
The assessee had coffee estates on which coffee was grown by labour recruited by him mainly at another place M where manure, spray materials, tool, crop bags, etc., were also purchased. The crops were harvested by labour and brought to M in raw state because there was no market for raw coffee. The assessee got the green coffee cured at M by persons owning curing factories on payment of a commission to them. The cured coffee was insured against fire till sale. The question was whether the assessee was running a business and, if so, whether the income could still be treated as income from agriculture? Held that the assessee was carrying on a „business‟ within the meaning of that word in section 2(4) and 10 of the 1922 Act [section 2(11) and 22 of the Income Tax Ordinance, 1979]. The profits as the assessee derived from his possession of land were derived by means of a business; and the fact that agricultural operations formed an element in the business did not render it any the less a business. ON the other hand, the mere circumstance that income was to be placed under the head „Business‟ had no effect to negative its being „agricultural income‟ as defined by section 2(1) of the 1922 Act [section 2(1) of the Income Tax Ordinance, 1979]. Case review : Decision of the Madras High Court in Commissioner of Income Tax v. Diwan Bahadur S.L. Mathias [1937] 5 ITR 435 reversed.
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Upper India Chamber of Commerce v. Commissioner of Income Tax – [1947] 15 ITR 263 (All.) 1276.
Where assessee is carrying on business, fact that amount received by assessee or profits earned by it is comparatively small, is irrelevant.
The assessee, whose main object was to protect trade, commerce and industry in India and who had several other ancillary objects, received interest on securities and bank deposits, subscriptions from its members and a comparatively small sum from non-members for managing their affairs and on the registration of trade mark. It also owned a building and its offices were located in a portion of that building. The question was whether the assessee was carrying on any business or vocation the profits of which were assessable to tax under section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979]. Held that the objects of the assessee‟s business constituted its business. As the „management of affairs‟ of other associations and registration of trade marks could be said to fall with the scope of the objects of the assessee, those activities of the assessee constituted a business or vocation the profits of which were assessable to tax under section 10 [section 22 of the Income Tax Ordinance, 1979]. The fact that the amount received by the assessee under this head was a comparatively small was wholly irrelevant. Haji Ghulam Hussain v. Commissioner of Income Tax – [1942] 10 ITR 405 (Peshawar) 1277.
If there is no evidence that the heirs have carried on business, income from business of deceased cannot be assessed under head ‗Business‘.
Where on the death of their father, who had been carrying on moneylending business, the sons did not carry on the money-lending business: Held that they could not be assessed under section 10 of the 1922 [section 22 of the Income Tax Ordinance, 1979] in respect of the income derived by them from moneys lent by their father in his lifetime but they were to be assessed under section 12 of the 1922 Act [section 30 of the Income Tax Ordinance, 1979] in respect of such income. To bring it under the head „business‟, there must be some evidence that the business of money-lending was actually carried on by the successors of the deceased money-lender. _______________
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Income Tax Digest.
CARRYING ON BUSINESS / CLOSURE OF BUSINESS
Commissioner of Income Tax v. Shaw Wallace & Co. – 6 ITC 178 (PC) 1278.
Where business is not carried on, income is not assessable as business income.
The words used in section 2(4) of the 1922 Act [section 2(11) of the Income Tax Ordinance, 1979] are no doubt wide, underlying each of them is the fundamental idea of the continuous exercise of an activity. Again, the words „carried on by him‟ in section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] are an essential constituent of that which is to produce the taxable income: it is to be the profit earned by a process of production. And this is borne out by the provision for allowance which follows. They include rent paid for the premises where the business is carried on; the cost of current repairs in respect of such premises and interest on money borrowed for carrying on the business, etc. Thus, where the assessee received compensation for termination of oil agencies carried on by it earlier, it was held that since the sum was received, not for carrying on this business but as some sort of solatium for its compulsory cessation, it was not assessable as profits from business. K.H. Mody, In re – [1940] 8 ITR 179 (Bom.) 1279.
Question as to whether the assessee was carrying on a business or not is a question of fact.
The question as to whether the assessee was carrying on a business or not is a question of fact and where there was evidence to support the finding of fact that the assessee was carrying on a business of purchasing and selling land, the Court cannot interfere with that finding. _______________
SAME BUSINESS - CONNOTATION OF
Hirala Kalyanmal, In re – [1943] 11 ITR 128 (Bom.) 1280.
Mere common ownership of two businesses does not make them one business.
Mere common ownership of the businesses does not mean that they are merely branches of the same business. It is also obvious that the mere fact that two businesses are of a distinct nature does not
917 INCOME FROM BUSINESS OR PROFESSION
Section 22
necessarily mean that they are distinct businesses. There can be two branches of a multiple store, one selling drugs, and the other selling cloth. Nobody would suggest that these two departments constitute two different businesses. On the other hand, if one has a shop in Bombay selling cloth, and a shop in Ahmedabad selling drugs under different names and different management and under separate accounts, common ownership would hardly make them one business. Whether two businesses were separate businesses or were really two branches of the same business, is obviously a question of fact and the only question that can be raised, is : “Whether there was material before the Income Tax Officer on which he could come to the conclusion, that they are one business”. _______________
RENTAL INCOME - HIRING OF BUSINESS ASSETS
Gloucester Railway Carriage & Wagon Co. Ltd. v. IRC – [1925] 12 Tax Cas. 720 (HL) 1281.
Where business includes sale as well as hiring of manufactured assets, profit on sale of hired assets is assessable as business profits only.
The appellant-company carried on the business of manufacturing wagons, both for sale and for hiring out. It sold some of the wagons, which were formerly hired out, and contended that the profit realised by such sale was an isolated transaction resulting in a capital profit. Held that the business was all one, namely, to make profit out of the wagons. Hence, the impugned profit realised by sale of wagons was taxable as business profit. _______________
RENTAL INCOME - OTHER ILLUSTRATIONS
Basant Rai Takhat Singh v. Commissioner of Income Tax – 4 ITC 324 (All.) 1282.
Where assessee held considerable areas under a lease from Agra Cantonment authorities, on a portion of which it had constructed buildings which were let out on rent and vacant lands included in lease were also let out to squatters from whom assessees realized ground-rent.
Where the assessee held considerable areas under a lease from the Agra Cantonment authorities, on a portion of which it had constructed
918 Section 22
Income Tax Digest.
buildings which were let out on rent and the vacant lands included in the lease were also let out to squatters from whom the assessees realized ground-rent: Held that the income from sub-letting was not assessable under section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] as the contract with the cantonment authorities was not a „business‟. Hughes v. Utting (B.G.) & Co. Ltd. – [1940] 8 ITR (Suppl.) 57 (HL) 1283.
Where speculative builder sells houses on leasehold basis for premium-cum-ground rent payments, retaining reversionary interest, capitalised value of ground rents could not be taxed as profits accruing on the date of transaction.
The respondent-company carried on the business of developers of building estates or, of speculative builders. In the course of its trade the company dealt with some of the houses which it had built by granting a lease for ninety-nine years. A ground rent of £9 or £10 was received by the company and a premium was paid to the company by the lessee. The company retained the reversionary estate, and sought to bring into the computation of the profits and gains of the company for the year of assessment in respect of the houses their cost only (or market value if less than cost) until the sale of the reversion. The question for consideration was whether the capitalised or realisable value of the ground rent must also be brought into the company‟s profit and loss account as trading receipt. Held that speculative builder created by his expenditure certain assets, including completed houses. So long as the houses were not sold or otherwise disposed of, they went into his accounts at cost or market value, whichever was lower. When the freehold was completely disposed of, the sums realized took the place of the house and showed a profit or a loss, as the case may be. But when, instead of the house being sold, it was let on a long-term lease at the ground rent, there was not a complete but a partial realization. An interest was carved out of the freehold. The residue of the complete freehold estate was not disposed of but was retained by the builder. That interest was the freehold reversion, which normally included the right to the ground rent, the right to enforce the restrictive covenants in the lease, the right of re-entry for breach of covenants, and the right to resume possessions at the end of the term. That was an estate which, in the case envisaged, was not traded away by the speculative builder. It was not correctly described as a new asset, but was a residue of the
919 INCOME FROM BUSINESS OR PROFESSION
Section 22
original asset. The house must now be represented in the accounts by the premiums and the freehold reversion, in practice often described as „the ground rents‟ and entered at cost or market value, whichever was lower. The speculative builder might find that this method of disposing of the houses was in certain cases more convenient or profitable to him. He might keep the „ground rents‟ in hand until he decided to dispose of them. Until he did dispose of them, he could not be taxed on a profit on the footing that it had been realized in the year of charge when it had never been realised and might never be realized at all. He could not in such a case be taxed on a notional profit. When he did „sell the ground rents‟, the proceeds would then be brought into charge in the appropriate year. The value of the reversion, though no doubt directly related to the rent reserved by the lease, might vary from time to time; and the company had full power under its memorandum of association to retain the reversion unsold and to collect the rent. Until it sold the reversion (and the Commissioners found that the company had not yet sold any reversions) the company had not ceased to be interested in the plot, and its profit on the realization of the plot had not been finally ascertained. The respondents had retained, as they had a perfect right to do, an interest in the houses of a real and substantial character. This was in the ordinary exercise of the trade or business of a speculative builder who might have reasons for retaining the reversionary estate of any house or houses, until he could realise them altogether, or possibly under better market conditions. There could be no reason or principle which compelled him to pay tax on the capitalised value of the rents which he had reserved. _______________
ROYALTIES
Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 1284.
Royalties will fall under ‗other sources‘ and not under ‗profits and gains of business‘.
Under the Indian Act, the provisions of section 9 of the 1922 [section 19 of the Income Tax Ordinance, 1979] with reference to „property‟ are regarded as excluding royalties from being held to come under that head. Royalties cannot be regarded as „profits or gains‟ of a business. The sources of the royalties may properly be deemed to be
920 Section 22
Income Tax Digest.
the lessees‟ covenants to pay them, and, hence, royalties fall under „other sources‟. Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax – [1943] 11 ITR 513 (PC) 1285.
Royalty received under mining lease.
Salami received under mining lease is capital receipt, but royalty and minimum royalty received under said lease is revenue receipt. RM. AR. AR. RM. Arunachalam Chettiar & Commissioner of Income Tax – [1935] 3 ITR 464 (Mad.) 1286.
Son
v.
Where securities are sold by a dealer of securities before receiving interest.
Where securities are sold by a dealer of securities before receiving interest, the interest due included in the sale price is assessable as business income. _______________
COMPENSATION
Commissioner of Income Tax v. Shaw Wallace & Co. – 6 ITC 178 (PC) 1287.
Compensation for cessation of oil distributing agencies is not business income.
A sum of money received as compensation for loss or cessation of oil distributing agencies is not income, profits or gains within the meaning of the Income Tax Act. Green v. J. Gliksten & Sons Ltd. – [1929] 14 TC 364 (HL) 1288.
Insurance money received for destruction of stock-in-trade in fire, is assessable in full as a trading receipt.
In a fire which occurred in the assessee-company‟s premises, timber (held as stock-in-trade) worth £160,824 (book value) was destroyed. The assessee‟s method of valuation of stock was accepted for purposes of taxation. The timber had been insured for many years and the assessee had been allowed to deduct the insurance premiums in computing its assessable profits. The assessee received £477,838 from the insurers, representing the replacement value of the destroyed timber. The assessee however replaced only a small part of this timber since the current demand was for a timber of a different character. Accordingly, the assessee credited in its profit and loss account as a trading receipt only £160,824 of the insurance payment, and entered
921 INCOME FROM BUSINESS OR PROFESSION
Section 22
the balance as a reserve in the balance sheet. The question was whether even this balance amount was assessable as a trading receipt. WHAT WAS THE DECISION, FIND AND WRITE HERE _______________
SALE PROCEEDS OF BUSINESS / BUSINESS ASSETS / STOCK-IN-TRADE
Californian Copper Syndicate v. Harris – [1904] 5 Tax Cas. 159 1289.
Where facts clearly indicated a trading venture which was also authorised by the articles of association, transaction of sale of assets could result in profit only.
The assessee-company was formed with the object of acquiring copper and other mines, mining rights, metalliferous and auriferous land, and any interest therein. It was also authorised „to lease, sell, charter or otherwise dispose of absolutely or conditionally, or for any limited interest, the whole or any part of the undertaking, property rights, concessions, or privileges of the company for such consideration in cash, shares or otherwise as the company may think fit‟. The company acquired 480 acres of copper-bearing land and spent money on its development. Later, it sold the entire land in two lots to another company for a consideration in the form of fully paid shares in that company. The assessee contended that this was only a conversion of one kind of capital into another kind, and hence, there could be no profit arising in the transaction. Held, that the facts of the case indicated a highly speculative business, and the mode of the actual procedure employed also indicated a trading venture. It was a proper trading transaction and one, which was not only within the powers of the company but also authorised by the articles of association. The assessee-company was formed in order to acquire certain mineral fields or workings not to work the same themselves for the benefit of the company, but solely with the view and purpose of reselling the same at a profit. _______________
922 Section 22
Income Tax Digest.
EXPLOITATION OF MINING RIGHTS
British South Africa Co. v. Commissioner of Income Tax – [1946] 14 ITR (Suppl.) 17 (PC) 1290.
Exploitation of right by a company would result in profit only and not in a capital receipt.
The assessee-company was incorporated, inter alia, for carrying into effect concessions and agreements which had been made by certain chiefs of South Africa and such other concessions which the company might acquire. After acquiring such concessions and mining rights the assessee gave special grants to other companies for a consideration which was in the form of fully paid shares and annual payments over a fixed number of year. The question for consideration was whether the sums received by the assessee were capital receipt or profits or gains of business. Held that the payments were income derived from the business of turning to account the company‟s rights under the concessions of winning and disposing of minerals by participating in the proceeds of the exploitation of such rights by its licensees. The income was, therefore, taxable as the profits and gains of a trade or business. It was not material that in dealing with its mineral rights the company had retained an interest by way of a possible reverter of the property or by a shareholding in a company to which it made a special grant. Judicial analysis : The case, of course, is one to which the warning often given that it is not desirable to rely upon decisions under different taxing statues, would seem applicable but in the judgment of the Privy Council, it is made clear that the Rhodesian Act was not different from the British Law. The decision also rests, not upon the provisions of any special enactment but upon the more general consideration whether such receipts can be considered in a business sense as belonging to capital account or revenue, and in what circumstances.
Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax – [1940] 8 ITR 635 (PC) 1291.
Discharge of onus to prove that profits realised on sale of investments is business income.
In order to render profits realised on sales of investments taxable as business income it is not necessary to establish that the taxpayer has been carrying on what may be called a separate business either of buying or selling investments or of merely realising them. _______________
923 INCOME FROM BUSINESS OR PROFESSION
Section 22
SHARE DEALING *
Dalmia Cement Ltd. v. Commissioner of Income Tax – [1944] 12 ITR 50 (Pat.) 1292.
In case of a solitary transaction of sale and purchase of shares.
Where the assessee-cement company, which was empowered under its memorandum of association to deal in shares, had with its idle funds indulged in a solitary transaction of purchase and sale of shares, with profit motive, it was held that profit arising from transaction was business income. _______________
MONEY-LENDING BUSINESS
O.R.M.O.M.S.P. Lashmanan Chettiar Income Tax – 4 ITC 200 (Mad.) 1293.
v.
Commissioner
of
Profit on properties acquired in money-lending business, which thereafter are treated as stock-in-trade, are business income.
In settlement of debt given by him as a money-lender the assessee took over the rubber estate of the debtor, and sold the estate. The assessee claimed the resultant profit as not taxable, since it was an isolated transaction, not forming part of his business. Held that, despite being an isolated transaction, since the expenses of rubber estate were debited in the business accounts, the income therefrom was also to be credited in the business accounts and the profits were assessable to tax as business income. S.R.M.S. Subrahmanyan Chettiar v. Commissioner of Income Tax – [1934] 2 ITR 295 (Mad.) 1294.
In case of profits realised by money-lender from sale of mortgaged property which he obtained as assignee of original mortgagee.
Profits realised by money-lending from sale of mortgaged property which he obtained as assignee of original mortgagee is taxable as business receipt. A.S.P.L.V.R. Ramaswami Chettiar v. Commissioner of Income Tax – [1933] 1 ITR 389 (Mad.) 1295.
*
Question as to whether rentals derived from foreign property taken over in satisfaction of debt can be said to be profits and
See also cases under section 2(12) & 27.
924 Section 22
Income Tax Digest.
gains of the assessee‘s foreign money-lending business is in each case a question of fact. Question as to whether rentals derived from foreign property taken over in satisfaction of debt can be said to be profits and gains of the assessee‟s foreign money-lending business is in each case a question of fact. Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax – [1940] 8 ITR 635 (PC) 1296.
The sale of securities by the assessee-bank in order to meet withdrawal by depositors is a normal step in carrying on the banking business and the profit made in such a sale are on revenue account and assessable to Income Tax.
Enhanced values obtained from realizations or conversion of securities may be assessable where what is done is not merely a realization or change of investment, but an act done in what is truly carrying on, or carrying out, of a business. In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposit. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt, there will generally be loans to person of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If some of the securities of the bank are realised in order to meet withdrawals by depositors, this is a normal step in carrying on the banking business, or, in other words, that it is an act done in „what is truly the carrying on‟ of the banking business. It is not necessary to prove that the taxpayer has carried on a separate or severable business of buying and selling investment with a view to profit in order to establish that profits made on the sale of investments are taxable. The contention of the assessee-bank was that it had treated the investment in shares and securities as a reserve for emergencies and had resorted to their sale because they had to meet heavy withdrawals of deposits and that it did not „deal in shares and securities‟ and, therefore, the profit made by the sale of shares and securities was not profits and gains of business. The finding of fact however was that the purchase and sale of shares and securities were so much linked with the deposits and withdrawals of clients that the purchase and sale of
925 INCOME FROM BUSINESS OR PROFESSION
Section 22
shares and securities were as much part of a bank‟s business as receiving deposits from clients and paying them off. Held that the surplus was taxable as profits and gains of business. Case review : Decision of the Lahore High Court in Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax [1938] 6 ITR 355 affirmed. Judicial analysis : The following propositions may be gathered from the decided cases: (1)
We must consider first, as to whether a particular transaction resulting in profit or loss, is a mere appreciation or depreciation of an investment by the assessee, or is connected with the assessee‟s business or trade.
(2)
If the transaction can be said to have taken place in connection with such trade or business, and in the usual course thereof, then it is assessable income and not a capital gain.
(3)
For this purpose it is not necessary that the assessee should be carrying on a separate business in dealing with investments.
(4)
If the transaction is an exchange, it is immaterial whether it amounts to a barter. The exchange need not always be for cash. Where shares and securities are being exchanged for other shares and securities, it is immaterial whether this is done voluntarily or by compulsion. In the matter of such exchange, where one share or security is exchanged for another, then it must be considered as a new adventure. In other words the old holding must be deemed to have been realised, and the appreciation and the depreciation, as the case may be, can be at once quantified and must be considered as profit or loss liable to assessment.
(4)
Authority for the proposition that a profit made by a banking society by sale of shares and securities held by it was its profits and gains from business assessable to tax.
(5)
It is not necessary that the surplus should have resulted from a course of dealing in securities which by itself would amount to carrying on of business of buying and selling securities and that it is enough if such sales are effected in the usual course of carrying on business. In other words, it is observed that, if the realisation of securities is a normal step in the carrying on of the business of the assessee, it must be held that the sales are so connected with the carrying on the assessee‟s business that he surplus constitutes its profits and gains of business. _______________
926 Section 22
Income Tax Digest.
OTHER ILLUSTRATIONS
John Emery & Sons v. Lord Advocate – [1936] 4 ITR 8 (HL) 1297.
Where stock is sold for a consideration which is partly in cash and partly in marketable securities, value of the marketable security must be taken into account in assessing taxable profits.
The appellants, who carried on the business of builders and dealing in real estate, entered into certain transactions by which they bought certain land, built houses upon it, and disposed of their entire interest in the land for cash and for certain „ground annuals‟. The position of the ground annuals was that there was an obligation created in the several purchasers of the land by which the land became subject to what was known in England as rent charge, which was a personal obligation of the purchaser, but which was an annual charge which could be realised out of the land. It was established that obligation, or that right on the part of the appellants, was a realisable right, in the sense that it was akin to a market security which the appellants could have realised at any moment by going into the market. The question was whether the value of such marketable security should be brought into account for assessing the taxable profits. Held that this was a case where people had sold in the course of business, part of their stock for money plus money‟s worth, namely, the equivalent of a marketable security. It was not a case where the appellants exchanged part of their stock for a different kind of stock, but it was a case where the appellants disposed of the whole of their stock for money plus money‟s worth. Therefore, on the plainest principles, the value of that marketable security had to be brought into account for the purpose of assessing the profits which they made in the particular year of trade. Seth Mathra Parshad v. Commissioner of Income Tax – [1941] 9 ITR 244 (Lahore) 1298.
No question of law arose from finding of fact that what assessee got on partition of HUF was converted by him into stock-intrade and thus profit on sale of such land was taxable.
No question of law arose from finding of fact that what assessee got on partition of HUF was converted by him into stock-in-trade and thus profit on sale of such land was taxable.
927 INCOME FROM BUSINESS OR PROFESSION
Section 22
Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 1299.
Periodical payment to a person whose business is taken over, to prevent him from carrying on a competitive business, is not business income in his hands.
Periodical payment to a person whose business is taken over, to prevent him from carrying on a competitive business, is not business income in his hands. _______________
BUSINESS LOSS / DEDUCTION - ALLOWABILITY OF LOSS AND EXPENDITURE
Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax – [1931] 5 ITC 363 (PC) 1300.
Profits should be computed after deducting the losses and expenditure incurred for the purposes of business unless the losses and expenditure are expressly, or by necessary implication, disallowed by the Act.
Under section 28(i) [section 22 of the Income Tax Ordinance, 1979] the charge of Income Tax is not on gross receipts but on profits and gains properly so called. The word „profits‟ is to be understood, said Lord Halsbury in Gresham Life Assurance Society v. Styles [1892] 3 TC 185 (HL), in its natural and proper sense - in a sense which no commercial man would misunderstand. Subject to the special requirements of the Act, the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial trading and commercial accounting. It is thus clear that profits should be computed after deducting the losses and expenditure are expressly, or by necessary implication, disallowed by the Act. Indian Radio and Cable Communication Co. Ltd. v. Commissioner of Income Tax – AIR 1931 PC 165; [1937] 5 ITR 270(PC) 1301.
Conditional payments can in appropriate cases be treated as expenditure incurred to earn profits.
It is not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of a company....If a company having made an apparent net profit of £10,000 to directors or managers as the
928 Section 22
Income Tax Digest.
contractual recompense for their service during the year, it is plain that the real net profit is only £9,000. _______________
CONDITIONS PRECEDENT
Karachi Stock Exchange Ltd., Karachi v. Commissioner of Income Tax – [1967] 15 TAX 128 (H.C.Kar.) 1302.
Fee charged from members dealing in forward delivery contracts for specific services rendered to them is liable to tax in the hands of Association.
The assessee, a stock exchange association, recovered Laga fee from those members of the association who carried on business of forward delivery contracts. In return the assessee rendered specific services to these members in terms of Byelaw 3(iv) of the Byelaws of the Association. On these facts, the question for decision by the High Court was whether the Laga fee received by the assessee could be treated as income chargeable to tax under section 10(6) of the Income Tax Act. Held, that laga being recovered by the Karachi Stock Exchange Ltd., for rendering special services to a particular section of its members had to be treated as income chargeable to tax under section 10(6) of the Income Tax. Strong and Company of Romsey Ltd. v. Woodifield – [1906] 5 Tax. Cas. 215 (HL) 1303.
To be deductible, losses must really be incidental to the trade and not merely connected remotely with it.
A deduction cannot be allowed on account of loss not connected with or arising out of a trade. No sum can be deducted unless it be money wholly and exclusively laid out or expended for the purpose of the trade. It does not follow that if a loss is in any sense connected with the trade it must always be allowed as a deduction; for it may be remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. Only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader is some character other than that of trader. The assessee, a brewery company, owned a licensed house in which it carried on the business of innkeepers. It had to pay damages to a customer who was, when sleeping in the inn, injured by a falling
929 INCOME FROM BUSINESS OR PROFESSION
Section 22
chimney, the fall of the chimney being due to the negligence of the assessee‟s servants. The question was whether the damages so paid were deductible as a business loss. Held that the assessee was not entitled to deduct the expenditure in computing its profits for income tax purposes. PR.AL.M. Muthukaruppan Chettiar v. Commissioner of Income Tax – [1943] 11 ITR 38 (Mad). 1304.
It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it.
Where the assessee-money-lender took a large building on lease for subletting and paid certain sums to lessor to settle the dispute as to the validity of lease and though it recovered some of the said sums from sub-lessees, there were certain irrecoverable sums, which he wrote off: Held that the entering into a lease of a large building was not part of the assessee‟s business as a money-lender and, therefore, the said loss could not be treated as a business loss. Ram Chandra Munna Lal v. Commissioner of Income Tax – [1949] 17 ITR 394 (Punj.) 1305.
Expenses of a business which is stopped cannot be set off against income of other business.
Though the head may be one, namely, „business‟, where its components are different as in the case of several businesses run by the assessee each of a distinct nature, each has got to be taken as a separate unit for purposes of ascertainment of profits. Expenditure under section 10(1) of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] is allowed not as a deduction or as allowance but as the component inherent in the process of ascertaining the profits, namely, arriving at the net result of credits and debits referable to a particular independent activity of business. The expenditure should partake of the very source of profit, namely, the particular business activity and it is taken into account as an outgoing in ascertaining the profits. The aggregation of the profits derived from several independent business activities can make no difference to this particular phenomenon involved in the process of ascertaining the profits from each business activity.
930 Section 22
Income Tax Digest.
Thus, where the assessee was carrying on several businesses and one of the business was stopped, the expenses of a stopped business could not be set off against the income of other business. Ram Chandra Munna Lal v. Commissioner of Income Tax – [1949] 17 ITR 394 (Punj.) 1306.
Where an assessee carries on different varieties of trade, commerce or manufacture each variety will have to be regarded as a separate business for the purposes of section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] unless of course one or more varieties are so closely connected with each other as to be capable of being regarded as one business.
Business‟ has been defined as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Where an assessee carries on different varieties of trade, commerce, or manufacture each variety will have to be regarded as a separate business for the purposes of section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] unless of course one or more varieties are so closely connected with each other as to be capable of being regarded as one business. _______________
OTHER CONCEPTS
Inland Revenue Commissioners v. Wesleyan General Assurance Society – [1948] 16 ITR Suppl. 101 (HL) 1307.
Nomenclature given by parties is not relevant to decide whether payment is allowable or not.
Two well-established propositions in the application of the law relating to Income Tax are: (i)
The name given to a transaction by the parties concerned does not necessarily decide the nature of the transactions. To call a payment a loan if it is really an annuity does not assist the taxpayer any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.
(ii)
A transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the
931 INCOME FROM BUSINESS OR PROFESSION
Section 22
same result could be brought about by a transaction in another from which would attract tax. Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax – AIR 1931 PC 165 1308.
Profits on their coming into existence attract tax at that point, and revenue is not concerned with subsequent application of profits.
A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. If assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits. Ram Rakha Mal & Sons Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 137 (Lahore) 1309.
In case of succession to business, income is to be computed with reference to the position at the time it was earned.
In a business of the HUF salaries had been paid to members of the HUF, which were not allowable as deduction. The business was succeeded to by a company in which the members of the HUF were shareholder‟s and the company was made liable for the income of the predecessor in business (HUF). The company‟s contention was that salaries paid by a company to shareholders were not inadmissible, and, therefore, the deduction though not allowable to HUF was allowable to it. Held that the deduction was not admissible. Bhikaji Vyankatesh Dravid & Co. v. Commissioner of Income Tax – 2 ITC 355 (Nag.) 1310.
No question of law arose, where on the basis of the verified returns submitted by the assessee-firm and the statement on oath made by it before the Income Tax Officer, the Income Tax Officer held that certain losss claimed by the assessee were not its losses.
Where, on the basis of the verified returns submitted by the assesseefirm and the statement on oath made by it before the Income Tax Officer, the Income Tax Officer held that certain losss claimed by the assessee were not its losses, it was held that no referable question of law would arise.
932 Section 22
Income Tax Digest.
S.S.S. Chockalingam Chettiar & Sons v. Commissioner of Income Tax – [1941] 9 ITR 278 (Mad.) 1311.
Others.
In case of two mortgages qua same property amount recovered in a suit is to be appropriated first towards the earlier mortgage. _______________
DISTINCTION BETWEEN ‗FIXED CAPITAL‘ AND ‗CIRCULATING CAPITAL‘ - DEVALUATION LOSS
Gillanders Arbuthnot And Company v. Commissioner of Income Tax – [1966] 13 TAX 163 (H.C.Lah.) 1312.
Distinction between ‗fixed capital‘ and ‗circulating capital‘.
The assessee, a resident and, ordinarily resident in Pakistan, was acting as a selling for manufacturer in United Kingdom, inter alia on the terms the commission on sale was payable in pound sterling in the United Kingdom. The assessee‟s principal in London which held controlling shares of the assessee used to collect the commission and sent periodical statements of accounts in which the amount of commission received was incorporated in pound sterlings. On receipt of the statements the assessee converted the amount in Pakistan currency and credited the same into “commission account”. On the 1st August 1955 the Pakistan currency was revalued and in the result the value of the pound sterling increased from Rs.9-4-3 to Rs.13-5-3. In spite of this change the assessee during the relevant accounting year continued to enter in the books the amount of commission received at the, old rate of foreign exchange with the result that at the close of the year there was a surplus of Re. 1,45,719. In the profit and lose account, the sum was posted under the head “profit on the evaluation and gain in exchange” and the assessee claimed before the Income Tax Officer that since the amount represented capital gains unconnected with the trade, it was exempt from tax. The Income Tax Officer rejected the plea and added back the surplus on the ground that profit was made during the course of assessee‟s business and, as such, was assessable to tax. Having failed before the Appellate Assistant Commissioner the assessee went in further appeal to the Appellate Tribunal, contending that the amount of commission which had already been collected in pound sterling had become the assessee‟s capital “for the time-being lying in the United Kingdom as a temporary investment in pound sterling and the accretion due to alteration in the rate of
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foreign exchange was a capital gain”. This plea did not find favour with the Appellate Tribunal which concluded that “the gain which arose, in one sense, out of alteration in the exchange rate was profit which arose directly from the trade which the assessee was carrying on”. Before the High Court the assessee‟s case, in substance, was that the commission earned during the account year 1954, having been converted into Pakistan currency and Income Tax paid on it, the subsequent increase on account of revaluation of Pakistan currency was an accretion to fixed capital and not a trading gain or receipt and that the same was true about the commission earned from the 1st January 1955 to the 31st July 1955, the only difference being that in the case of this item the income had not already been assessed to tax. Held,
that profits and losses are ascertained by comparing circulating capital, which includes the stock-in-trade as it existed in the beginning of the year, to the circulating capital as it existed at the end of the year. It is only by causing the floating capital to exchange in value that loss in profit is made. An accretion in the value of the stock-intrade would, therefore, always be trading receipt notwithstanding delay in causing them to move from one place to another nor on account of non-user during the account period.
“Fixed capital” represents the amount spent on setting up structure of the business, e.g., land and machinery for manufacture of goods, the sum paid for acquiring a concern and the amount spent on purchase of stock and securities, etc. Appreciation of their value is not a trading receipt and their depreciation not a trading expense to be incorporated in the profit and loss account. Circulating or floating capital is the amount spent on running the concern, in “carrying on” and “carrying out” “an operation of business for profit making”, for example, purchase of raw material, pay-roll, Directors‟ fee, etc. Literally, it is that capital which keeps circulating and floating in the course of business and does not constitute its outer framework. The amount spent in this account is a trading expense and an increase on it a trading receipt to be incorporated in the profit and less account. The notion of fixed capital and circulating capital is, however, not inflexible, e.g., land and machinery will be circulating capital in the hands of a real estate dealer and manufacturer of machinery, respectively, but fixed capital in the hands of a manufacturer of goods.
934 Section 22
Income Tax Digest.
Keeping in view the distinction between “fixed capital” and “circulating capital”, it could not be denied that the amount of commission earned by the assessee in the present case was circulating capital. If circulating capital is invested in acquiring foreign exchange for the purpose of trade, the surplus due to alteration in exchange rate is a part of trading profit. In the present case, what was a trading receipt in the hands of the principals of the assessee in the U.K. did not change into “fixed capital”, pending remittance of the amount to Pakistan. Cases referred to: Landes Brothers v. Sympson (19 T.C. 62); Eastmans Ltd., v. Shaw (H.M. Inspector of Taxes) (14 T.C. 218); The Commissioner of Island Revenue v. F. Gliksten & Son Ltd., (14 T.C. 364); Imperial Tobacco Co., v. Kelly 25 (T.C. 292); City of London Contract Corporation v. Styles (2 T.C. 239); Alianza Company Limited v. Bell (5 T.C. 60) and Golden Horse Shoe (New Co.) v. Thurgood (18 T.C. 280). Cases not followed: Mckinlay (H.M. Inspector of Taxes) v. H. T. Fenkins & Son Limited (10 T.C. 372).
CIR v. A.S.A. Concern – [1937] 5 ITR 456 (Rangoon) 1313.
Loss on account of depreciation in value of foreign currency is allowable only if foreign currency was held on revenue account.
It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much a trading loss as any other and it makes no difference that tit is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that this material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example, the stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasions the loss would be immaterial: the loss, being in respect of a trading asset, would be a trading loss.
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Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well-recognised distinction between the two concepts. Adam Smith in his Wealth of Nations describes „circulating capital‟ as what he makes profit of by parting with it and letting it change masters; „circulating capital‟ means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while „fixed capital‟ means capital not so employed in the business, though it may be used for the purposes of a manufacturing business and does not constitute capital employed in the trading operations of the business. If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capita, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting transaction n revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. The assessee-company which had its head office in Calcutta had a cotton mill situate in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending 31.3.1954, relevant to the assessment year 1954-55, it made large profits amounting to Indian Rs.1,68,97,232 converted at the then prevailing rate of exchange – 100 Pakistan rupees equal to 144 Indian rupees. On 8.8.1955, Pakistan devalued its rupee restoring the parity between the Indian rupee and the Pakistan rupee. Thereafter during the accounting periods relevant to the assessment year 1957-58 and 195960, the assessee had obtained the permission of the Reserve Bank of Pakistan and remitted to India Rs.25 lakhs and Rs.12 lakhs, respectively. The assessee claimed that, on remittance, it had suffered respectively a loss of Rs.11 lakhs and Rs.5½ lakhs but the claim was
936 Section 22
Income Tax Digest.
rejected by the department and the Tribunal sustained the disallowance. On reference, the High Court held that no loss was sustained by the assessee on the remittance of the amounts from West Pakistan, and, in that event, the loss could not be said to be a business loss, because it was not a loss arising in the course of the business of the assessee but was one caused by devaluation which was an act of the State. the question for consideration was whether the impugned loss was a business loss : Held that the question, whether the loss suffered by the assessee was a trading loss or a capital loss, could not be answered unless it was first determined whether the two amounts of Rs.25 lakhs and Rs.12½ lakhs were held by the assessee on capital account or on revenue account, and since the Tribunal had not enquired into this, the matter had to be remitted to the Tribunal to determine whether the amounts were held in West Pakistan as a capital asset or as a trading asset and then decide whether the loss suffered by the assessee was a trading loss or a capital loss. Case review : Decision of the Calcutta High Court in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax [1971] 81 ITR 641 set aside. Judicial analysis : EXPLAINED IN - Indo-Burma Petroleum Co. Ltd. v. Commissioner of Income Tax [1982] 136 ITR 251 (Cal.) in the following words: “. . . . .It was observed, as we have mentioned before, that where profit or loss arises to an assessee on account of appreciation or depreciation (italicised by us) in the value of foreign currency held by him, on conversion into another currency (italicised by us), such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. There are two aspects which, it may be specifically pointed out, do not seem to have been urged before the Supreme Court [in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax [1979] 116 ITR 1 (SC)] whether, it is a profit which arose on appreciation r deprecation at that point of time or is it a profit which arose on conversion of the currency into another currency? The moment a currency is devalued or revalued there is an appreciation or depreciation. At that point of time there is no question of conversion. Sometimes the conversion takes place later on. At what point of time the profit should be computed and to which year would that profit or loss be attributed, that aspect the Supreme Court has not clarified. The second aspect that requires consideration and upon which stress was laid in this case was that where a profit or loss arises to an assessee on account of appreciation or
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depreciation in the value of foreign currency, then such profit should be attributable either to capital or revenue, if the amount was held either as capital or as revenue. Now, in so far as it held that merely the character of the asset would be decisive, this aspect of the Supreme Court in the case of Commissioner of Income Tax v. Canara Bank [1967] 63 ITR 328, where the exact point was in dispute and the relevant passage we have quoted herein before. We must hesitate to observe that this observation of the Supreme Court in the subsequent case [i.e., Sutlej Cotton Mills (supra)] was an observation of a general nature and was not necessary for the purpose of determining the actual point involved before the Supreme Court. The point involved before the Supreme Court was the allowability of a particular loss. It is well settled that a loss may be allowable in a business, even though the loss is not occasioned by the carrying on of the operation by the assessee. No assessee carries on business for making losses, but losses are incidental to or arise in the course of the business. But the assessee carries on business for making profit. Therefore, profit being taxable must arise out of or in the course of the activity of the assessee. It would not be sufficient if it was merely connected with the business of the assessee....Now, this point is exactly with the ratio of the Supreme Court decision in the case of Canara Bank (supra), which is a decision mentioned by us herein before and rendered by three learned judges. In so far as the decision of the Supreme Court decision in the case of Sutlej Cotton Mills Ltd. (supra) relating to the profit runs counter to those observations, we must adhere to the decision of the larger Bench.....”(pp.275-276) EXPLAINED IN - Namdang Tea Co. Ltd. v. Commissioner of Income Tax [1982] 138 ITR 326 (Cal.) in the following words : “It is true that as laid down by the Supreme Court in Sutlej Cotton Mills‘ case [1979] 116 ITR 1 (SC), if any trading loss arises on account of conversion of foreign currency such loss should be allowed in assessing the income of the assessee fro the purpose of payment of the income tax. But before an assessee can claim that he has sustained a trading loss on account of devaluation of foreign currency, it must be proved that such loss has been occasioned directly as a result of devaluation.....”(p.331) “The facts in the above Supreme Court [Sutlej Cotton Mills‘ case [1979] 116 ITR 1 (SC)] case show that on account of the appreciation of the Indian rupee the assessee had suffered loss in India, where the assessment was made, of the income of the assessee that arose in Pakistan. If there had been no repatriation of the said sums of money by the assessee to India, there could be no question of the assessee suffering any loss....So, in our opinion, the question whether the appreciation or depreciation of a foreign
938 Section 22
Income Tax Digest.
currency has occasioned any loss to an assessee or not will depend on the place of assessment and the place where the income accrues to the assessee. If the business is carried on in one country and the assessment is made in another country, the question of appreciation or depreciation of currency of the country where the business is carried on will be relevant for the purpose of considering the profit or loss of the assessee. But where....the business is carried on in the same country where the assessment is made, the question of the assessee suffering any loss or gaining any profit as a result of change in the exchange rate of currency between the country where the assessment is made and the country where the head office of the assessee is situate does not arise at all.”(p.332) EXPLAINED IN - Commissioner of Income Tax v. Martin & Harris (P.) Ltd. [1985 154 ITR 460 (Cal.) in the following words : “. . . . .The main question before the Supreme Court was whether the loss claimed by the assessee was a capital loss or a revenue loss. The Supreme Court [in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax [1979] 116 ITR 1 (SC)] no doubt observed that a profit or a loss would arise on conversion into another currency in the case of a devaluation but it was not held that actual conversion or repatriation is a precondition for accrual of profit or for a resulting of loss even where the accounts are kept on a mercantile basis. In our view, conversion can be considered on a notional basis in such a case. The state of accounts as at the end of the accounting year has to show a reduction in liability and a consequent increase in taxable surplus.”(p-465) EXPLAINED IN - Commissioner of Income Tax v. Oil India Ltd. [1983] 143 ITR 848 (Cal.) in the following words: “The Supreme Court [in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax [1979] 116 ITR 1 (SC)] has not....laid own any special rule for taxation in case of profit or loss arising out of appreciation or depreciation in value of foreign currency. If the assessee follows the mercantile system of accounting, the profit or loss will have to be assessed on the accrual basis and if the assessee follows the cash system of accounting, the profits or loss will have to be assessed on the basis of actual receipt.”(p-854) DISTINGUISHED ON FACTS IN - Commissioner of Income Tax v. International Combustion (I) (P.) Ltd. [1982] 137 ITR 184 (Cal.) on the ground that, in the case on hand, there was a clear finding by the Tribunal that the outstanding liability was on account of purchase of plants and machineries which were the stock-in-trade of the assessee.(p-189)
939 INCOME FROM BUSINESS OR PROFESSION
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DISTINGUISHED ON FACTS IN - Commissioner of Income Tax v. Vitre Engineering Co. [1984] 150 ITR 183 (Bom.) on the ground that the Supreme Court case was not comparable to the case on hand.(pp.187-88) DISTINGUISHED ON FACTS IN - Bombay Burmah Trading Corporation Ltd. v. Commissioner of Income Tax [1988] 169 ITR 148 (Bom.) on the ground that, in the case before the Supreme Court, the assessee continued to run a business in the foreign country, whereas in the case on hand, the assessee ceased to run its business in the foreign country.(pp.157-58) FOLLOWED & APPLIED IN - Kirloskar Asea Ltd. v. Commissioner of Income Tax [1979] 117 ITR 82 (Kar.); Groz-Beckert Saboo Ltd. v. Commissioner of Income Tax [1981] 127 ITR 608 (Punj. & Har.); Fabindia v. Commissioner of Income Tax [1981] 130 ITR 143 (Delhi); Union Carbide India Ltd. v. Commissioner of Income Tax [1981] 130 ITR 351 (Cal.); Commissioner of Income Tax v. Samuel Osborn (I) Ltd. [1982] 135 ITR 699 (Cal.); Indo Burma Petroleum Co. Ltd. v. Commissioner of Income Tax [1982] 136 ITR 251 (Cal.); Davidson of India (P.) Ltd. v. Commissioner of Income Tax [1983] 140 ITR 344 (Cal.); Bengal & Assam Investors Ltd. v. Commissioner of Income Tax [1983] 142 ITR 156 (Cal.) Triven Engg. Works Ltd. v. Commissioner of Income Tax [1985] 156 ITR 202 (Delhi); Periyar Chemical Ltd. v. Commissioner of Income Tax [1986] 162 ITR 163 (Ker.) and E.I.D. Parry Ltd. v. Commissioner of Income Tax [1988] 174 ITR 11 (Mad.).
R.B. Bansilal Abirchand v. Commissioner of Income Tax – 6 ITC 318 (Nag.) 1314.
Others.
A London company took over a Burma company as a going concern in which the assessee held rupee shares. In exchange of rupee shares the assessee-company was allotted sterling shares by the London company. The assessee claimed as loss the difference between the price paid by the assessee for the rupee shares and the face value of sterling shares. Held that since the assets of the old company were the assets of the new company, the old transaction could not be considered to be closed and a new transaction commenced. Although there had been a change in the company which managed the undertaking and a conversion of rupee shares into sterling shares, the assessee still held an interest in the same undertaking and there had been no reason for calculating the value of their interest in the undertaking as opposed to the market value of the shares. Thus, the said loss claimed in respect of the shares ought not to have been allowed as a business loss incurred by the assessee. _______________
940 Section 22
Income Tax Digest.
PAYMENT OF PORTION OF PROFITS
Indian Radio & Cable Communications Co. Commissioner of Income Tax – [1937] 5 ITR 270 (PC) 1315.
Ltd.
v.
Payment of portion of profits by assessee to concern whose business it has taken over, is not deductible.
Company I and Company C were running the business of radio/wireless communications in competition with each other. Later, by an agreement the businesses were combined and were to be run by I. C placed its plant at the disposal of I to be used by I during the period of agreement. In return, I agreed to pay one-half of profits to C. The question was whether payment of profits by I was deductible expenditure. The contention of I was that the payment was in the nature of rent for the use of plant and, therefore, deductible. Held that, of course, it is not universally true to say that a payment the making of which is conditional on profits being earned, cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of the company. If a company having made an apparent net profit of £10,000 and has then to pay £1,000 to directors or managers as the contractual recompense for their service during the year, it is plain that the real net profit is only £9,000. But in the present case the sum was in truth made payable as part of the consideration in respect of a number of different advantages which the assessee derived from the agreement and not all of them could be shown to be of a purely temporary character. The agreement as a whole was much more like one for a joint adventure for a term of years between the assessee-company and C company than one for a lease for that year. There was no sufficient ground for holding that the sum in question was of the nature of a rent. It was neither described as a rent, nor did the agreement contain several of the clauses which a lease of plant of such a character would naturally contain. Circumstances of greater importance were that the sum payable may be small or great or nothing - a most unusual feature in the case of rent - and that it was impossible to presume or infer that the half share of profits was being paid only as rent, or as a similar payment, in consideration merely of the use. Accordingly, the impugned payment was not deductible. Case review : Decision of the Bombay High Court in Indian Radio & Cable Communications Ltd. v. Commissioner of Income Tax [1936] 4 ITR 90 affirmed. _______________
941 INCOME FROM BUSINESS OR PROFESSION
Section 22
REVENUE OR OF CAPITAL LOSS - TEST OF
Commissioner of Income Tax (East), Karachi v. International Computers & Tabulators, Ltd., Karachi – [1982] 45 TAX 204 (H.C.Kar.) 1316. Revenue or of capital loss - Test of. In the circumstances, we proceed to consider the questions referred to us on the assumption that the machine in question had become obsolete. In the above order dated 5.2.1971 the Tribunal has referred to the fact that machines were being sold by the assessee to its customers and that further such computers and accountancy machines which were sold to its customers would “represent capital as far as the customers are concerned”. If the Company was dealing in sales of commuters and accountancy machines, these computers and accountancy machines would be treated under the Income Tax Law as stock-in-trade and not as a capital and as correctly pointed out by the Tribunal such computers and accountancy machines would represent capital only in so far as the purchasers/customers are concerned. In the circumstances if the machines are to be treated as the stock-intrade, spare parts and cards which were maintained by the assessee for the purpose of servicing and repairing these computers and accountancy machines cannot but be stock-in-trade of the assessee. In our, view the Tribunal had taken a correct decision that in the circumstances of the case the spare parts and card were stock-in-trade and could not be treated as of capital nature. _______________
LOSSES ON SALE OF SHARES
Seth Ganga Sagar, In re – [1934] 2 ITR 155 (All.) 1317. Loss from shares where assessee does not carry any business in purchase and sale of shares is capital loss. A man may either buy shares or securities with the object and intention of making a gain from the sale when these shares or securities have risen to a higher price, or he may purchase the shares or securities with the intention of keeping his capital safe and receiving meanwhile a certain amount of dividend or interest. The intention must be deduced from the facts and from the circumstances of the case. Where a man makes a business of speculating this will be deduced by the Court from the fact that he makes numerous purchases and sales, the sales being within a short time of the purchase. On the other hand, where a man makes a few sales, although he may make a number of purchases, and where the sales are made at long
942 Section 22
Income Tax Digest.
intervals after the purchases, the conclusions to be drawn is that he is not indulging in the business of speculating in these stocks and shares, but that he is investing his capital in these stocks and shares. Where the assessee had claimed deduction for the loss incurred by him on sale of shares and the Commissioner had found that the assessee did not carry on ay business in the purchase and sale of shares but had only invested his capital in shares for earning dividends. Held that the said loss was a capital loss. Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1938] 6 ITR 686 (Pat.) 1318.
Sir
Shareholder‘s loss on shares following liquidation of company is capital loss.
Consequent on a company going into liquidation and formation of a new company taking over its assets, the assessee, who held shares in the first company, was allotted shares and debentures in the new company, and also received a certain sum from the liquidators, all put together falling short of the value of shares originally held. The assessee claimed the resultant loss as a business loss. Held that if the assessee had been a person whose business was a trade in shares, the loss which he had sustained might have been taken into consideration in computing his profits assessable to income tax; but there was no such finding and it would be impossible in the circumstances to have arrived at any such finding. It was clear that the difference between what the assessee had in fact got, and what he originally invested was a loss which was clearly a loss of capital and, therefore, it could not be taken into consideration for the purpose of arriving at the assessable income. _______________
LOSS ON SALE OF SECURITIES / BENEFITS
Hiranand Jairam Singh v. Commissioner of Income Tax [1935] 3 ITR 309 (Lahore) 1319.
Where under the Government Salt Purchase Rules, anyone seeking deferred payment of salt charges payable to Government had to deposit securities with Government and an abolition of this scheme of deferred payment, assessee-salt dealer sold at loss securities deposited with Government.
The assessee was a dealer in salt. Under the Government Salt Purchase Rules, anyone seeking deferred payment of salt charges payable to the
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Section 22
Government had to deposit securities with the Government. On the abolition of this scheme of deferred payment, the assessee sold the securities deposited with the Government and incurred a loss. Held that the deficit was obviously one of a capital nature for which no allowance could be given. His loss, therefore, in selling the securities was a capital item. _______________
LOSS ON SALE OF ASSETS / LAND, ETC.
O.RM.OM.RM.PL. Muthukaruppan Chettiar v. Commissioner of Income Tax – [1943] 11 ITR 540 (Mad.) 1320.
Loss incurred by a dissolved firm in realisation of assets, is not allowable.
A loss suffered in realisation of assets is not a deductible loss. Of course, just as in the case of a company, the business of a dissolved partnership may be carried on in order to facilitate the winding-up of the partnership and if a profit is made it will be taxable as such. Likewise a loss will be a deductible loss. But if the business was not „carried on‟, it stopped completely after which the partners contended themselves with taking steps to realize the assets, the loss would not be deductible as it would not be a loss incurred either in or for the carrying on of the business of the partnership. Commissioner of Income Tax v. Hemraj Kanji – [1933] 1 ITR 304 (Sind) 1321.
Loss from sale of land purchased as investment is not allowable.
Land was purchased jointly by the undivided Hindu family, of which the assessee a commission agent, was a member. Portion of land was allotted to the assessee on HUF‟s partition. the question was as to deductibility of loss incurred on sale of such land. Held that it was admitted by the assessee that it was not his business to buy and sell property and that there were no such transactions involved. The purchase, therefore, appeared to have been an investment of capital in land and not a purchase made for the purpose of business in buying and selling land; and in the second place, when it came to the assessee in partition, it formed part of his capital; it was not used by him in the business of purchasing and selling land. Thus, the said loss was not deductible. _______________
944 Section 22
Income Tax Digest.
LOSS ARISING TO MONEY-LENDERS
Sir Chinnubhai Madhavlal v. Commissioner of Income Tax – [1937] 5 ITR 210 (Bom.) 1322.
Loss arising to money-lender from investment in debenture is capital loss, if the transaction is not connected with moneylending business.
It cannot seriously be contended that if a man has a business of money-lending, then every single transaction which he enters into, which involves the lending of money must be taken as part of the money-lending business. It is plain that a money-lender, like other people, may invest his capital or accumulated profits in forms of investment which are in law loans, e.g., Government or Municipal loans, mortgages and debentures. If he invests his capital in such a manner and suffers a loss on the investment, the loss is a loss of capital and cannot be set off against profits or gains. Badri Shah Sohan Lal v. Commissioner of Income Tax – [1936] 4 ITR 303 (Lahore) 1323.
Where assessee doing money-lending business purchased debtor‘s property pending insolvency of debtor for sum exceeding the debt and suffered loss, loss was not deductible.
The assessee was a bullion dealer and money-lender. Rs.8,503 were due from S to the assessee in May 1928. The debtors sold their land for a sum of Rs.18,000 to the assessee on the 28th of May 1928. This sum of Rs.18,000 was made up of Rs.8,503 due from the vendors to the vendee, and an advance of Rs.9,497 made by the vendee to the vendors. The assessee paid this sum in cash to S. At the time of this sale however insolvency proceedings were pending against S. On 5.10.1931, District Judge passed an order converting the above mentioned sale into a mortgage without possession for Rs.8,500. As regards the balance of Rs.9,497 the District Judge ordered that the assessee shall rank as unsecured creditor and shall have to prove his claim. Up to May 1933, the assessee received from the Official Receiver the amount of the original debt amounting to Rs.8,503 and interest thereon and a further sum of Rs.3,097 leaving a deficit of Rs.6,403. This was the sum which the assessee sought to deduct from the profits earned by him during the year of assessment. Held that since the purchase of the land did not arise out of the assessee‟s money-lending business, the loss suffered by him in respect
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of this purchase could not be regarded as expenditure incurred solely for the purpose of earning profits or gains in the money-lending business. It was not necessary for him in order to realise his loan to purchase a large area of land for a sum of Rs.18,000. The transaction of the purchase of land was really divisible into two transactions, that is, a purchase of a part of the land for Rs.8,503 in order to secure the payment of the loan due to the assessee, and purchase of another part of the land for Rs.9,497 as an independent purchase of landed property. The latter purchase did not arise out of money-lending business. Himatlal Motilal and Ramanlal Lallubhai v. Commissioner of Income Tax – 6 ITC 159 (Bom.) 1324.
Where assessee, doing money-lending business, purchased a mortgaged property in part satisfaction of a mortgage decree and later sold such property at a loss, loss was a capital loss.
Where the assessee, doing money-lending business, purchased a mortgaged property in part satisfaction of a mortgage decree and later sold such property at a loss, it was held that the property was the about property of the mortgagee and he could deal with it as he chose and as he had chosen to sell it at loss, the loss was a capital loss. Abdul Hussain Moosaji v. Commissioner of Income Tax – 10 ITC 255 (Sind) 1325.
Where assessee, a moneylender, purchased a property in satisfaction of a mortgage, and after having returned income therefrom as property income for two years, sold the property, loss was a business loss.
Where the assessee, a moneylender, purchased a property in satisfaction of a mortgage and after having returned income therefrom as property income for two years sold the property, it was held that the resultant loss was not allowable as business loss since, at the time of purchase, the assessee had never made it clear that the asset would form part of his money-lending business. Commissioner of Income Tax v. K.A.R.K. Firm – [1934] 2 ITR 183 (Rangoon) 1326.
Mere revaluation of assets on reconstruction of moneylender firm, does not result in trading loss.
In case of a moneylender‟s assessment, where immovable property is received during the accounting year in repayment of a loan by the
946 Section 22
Income Tax Digest.
assessee, the practice is that if during the year the property is sold and the proceeds of the sale are loess than the loan the repayment of which they represent, the difference is allowed as a trading loss in the business of the assessee. Unless and until property taken in repayment of loans is sold or otherwise disposed of for value there can of course be no realized trading loss in respect of such property during the accounting year. Accordingly, if in such a case the firm is reconstituted and such property is revalued, the estimated loss of capital value on such revaluation is not a trading loss. R.B. Seth Bansilal Abirchand v. Commissioner of Income Tax – 5 ITC 338 (Nag.) 1327.
No question of law arises where the assessee-money-lender‘s claim for deduction of loss incurred on the purchase of a mortgaged property was disallowed on the ground that the actual value at the time of sale was not proved.
Where the assessee-money-lender‟s claim for deduction of loss incurred on the purchase of a mortgaged property was disallowed on the ground that the actual value at the time of sale was not proved, it was held that no question of law would arise. _______________
DEDUCTIONS IN CASE OF PARTNERS
RM. AR.AR.RM. Arunachalam Chettiar v. Commissioner of Income Tax [1936] 4 ITR 173 (PC) 1328.
Losses of one partner of a dissolved firm which another partner is forced to bear, are not allowable as bad debt in latter‘s hands.
No countenance can be given to a suggestion that upon a dissolution of partnership, a partner‟s share of the losses for several preceding years can be accumulated and thrown into the scale against the income of another partner for a particular year. No principle of writing off a bad debt could justify such a course, whether in the year following the dissolution or as logic would permit, in some subsequent year in which the partner‟s insolvency has crystalised. The „bad debt‟, would not, if good, have come in to swell the taxable profits of the other partner. A and B were carrying on partnership business which was later dissolved. B became insolvent and was unable to meet his share of loss, due to which A had to bear, in addition to his own share in the
947 INCOME FROM BUSINESS OR PROFESSION
Section 22
losses, B‟s share in the loss also. A claimed to set off B‟s share in the loss against his profit from some other business. Held that the set off claimed was not allowable. _______________
OTHERS
Commissioner of Income Tax v. Kyauktaga Grant Ltd. – [1937] 6 ITR 580 (Rangoon) 1329.
Loss incurred due to higher price paid for excluding other purchasers is a deductible item.
The assessee-company owned about 28,000 acres of paddy land. The land was let out to tenants, the company paying the land revenue due to Government. Some time before the harvest of 1933 the management of the company considered that at the price then prevailing for paddy the tenants would not be able to pay their rents to the company and interest on advances which they had received from a bank, a subsidiary concern. The company did not wish to reduce the rents as it thought that this would create a bad precedent. At the same time the company feared that unless the tenants were induced to deliver over their paddy they would dispose of it to others and the company would be paid no rent. Accordingly, the assessee decided to pay enhanced rate of the paddy to the tenants and it was agreed by the tenants that out of the moneys payable to the tenants by way of purchase consideration the company would deduct the amounts due for rent and pay the balances into the accounts which the tenants had with the bank. In this arrangement a loss occurred to the assessee in the relevant year, deduction of which was claimed by the assessee. Held that when a commodity is desired from a particular source and to the exclusion of other purchasers, it may very well be that the purchaser will have to pay a higher price than that ruling in the open market. The assessee was thus entitled to claim the deduction of the above loss. Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) 1330.
Where a debtor transferred to assessee a colliery representing it to be free from encumbrances and assessee subsequently discovered that there were arrears of rent due to superior landlord and paid such arrears.
The assessee had taken over among other assets, a colliery in satisfaction of a loan advanced by him, and it was valued at
948 Section 22
Income Tax Digest.
Rs.7,37,339. Later, it transpired that though the debtor had stated that it was free from encumbrances, arrears of rent of Rs.67,872 were due to the superior landlord. The question was whether it could be allowed to be deducted from his colliery income. Lowry (Inspector of Taxes) v. Consolidated African Selection Trust Ltd. – [1940] 8 ITR Suppl. 88 (HL) 1331.
Where company issues shares at par instead of at a premium, no deductible trading loss can arise.
The respondent-company wrote a letter to certain members of the staff of the company in the following terms. “The directors desire to show their appreciation of special services you have rendered to the company by giving you an opportunity to acquire a share interest in the company on favourable terms. if you will kindly fill up and return to the Secretary the enclosed form of application for - shares __ together with a remittance for £ being payment in full at par, namely, 5s. per share, you will in due course receive an allotment‟. In response to this invitation applications were made for the whole of the 6,000 shares so offered and payment was made in full. On July 2, 1934, allotments were made and certificates issued to the applicants. On that day that market price of the ordinary shares was £ 23s 16d to £ 21s. 4d. making a middle market price of £ 23s. 9d. It was, therefore, calculated that if the new shares had been issued in the open market, a premium at the rate of £ 119s. 9d. would have been received amounting to a total of £ 11.625, this amount representing the difference between the middle price of the shares in the open market and the sum paid on allotment. The respondents claimed to deduct this sum in computing their profits for Income Tax purposes. The question was whether such a deduction was allowable. Held that it could not be said that the issue of these shares in the manner adopted involved the respondent in any disbursements or expenses...wholly and exclusively laid out or expended for the purposes of its trade. Its capital was intact after the issue of the shares; not a penny was in fact disbursed or expended. Its trading receipts were not diminished, nor was it a right view of the facts to say that the respondent gave away money‟s worth to its own pecuniary detriment. The company was entitled to issue its shares at par. It did so, and the company never received, and never elected to receive, anything more than the par value of the shares. Quite apart from any desire to let the employees have shares / interest in the company, the directors might have had very good reasons for deciding not to issue
949 INCOME FROM BUSINESS OR PROFESSION
Section 22
shares to the company‟s employees at a price which could only be justified by an expectation of very high dividends over a long period of time. If in the circumstances of this case the company must be held to have suffered a financial detriment, or in other words, to have incurred an expense, solely by reason of the fact that it did not issue its shares at a premium, very far-reaching results might follow in many cases in which for one reason or another an opportunity of securing some financial advantage was not used. The plain fact was that the cost of the company of earning its trading receipts was not increased by the issue of these shares at less than their full market value. Upon an issue of shares the assets of the company are increased by the amounts obtained from the subscribers. These amounts are obviously not profits or gains of the trade, and they are not liable to be brought into the accounts for income tax. It may be said that these amounts are of the nature of capital, but beyond all doubt they are not profits and gains arising or accruing from a trade. This is equally true whether the shares are allotted at par or at a premium. The sum of £11,625 which in this case the company might hypothetically have received for premiums was not an item in its profits and gains. In the ordinary course such a sum would be carried to a reserve account in the balance sheet: but carrying it to some account in the profit and loss account would not have affected the matter. It would not be an item of profit of the trade. Indeed the issue of shares by a limited company is not a trading transaction at all. The corporate entity becomes pro tanto larger; but the receipt of the trade on the one hand and the amount of the costs and expenditure necessary for earning these receipts on the other remain unaltered. It is well settled that profits and gains must be ascertained on ordinary commercial principles, and this fact must not be forgotten. If money or money‟s worth in any form, whether from capital or income, is given to an employee in discharge of an ordinary trading obligation or debt due to him incurred in the course of the trade and is accepted as such, one can readily accept the view that the amount of the debt or liability so discharged will find its way into the profit and loss account on ordinary commercial principles and will pro tanto reduce the profits for the year for income tax purposes. A man‟s salary with his consent can be paid in meal or malt as well as in money, and that salary is one of the items of expenditure which go to reduce the amount of the profits and gains. If in this case the employees were paying the par value shares and also releasing to the company some amounts of salary due to them
950 Section 22
Income Tax Digest.
the case would be very different from what it is. All that had happened was that the company had chosen to issue 6,000 shares at par to the employees and they had received the benefit of that issue. The employees had given up nothing. The company had not lost or parted with any asset. It had a fewer number of shares remaining for issue; but, of course, it could create as many more as it pleased. There was, no transaction of trade at all, nor an item of any kind that ought to be carried to either side of the profit and loss account. If the company, apart from the issue of 6,000 shares, made a profit of half a million in the year in question, it could not be said that profit had been reduced to the extent of a farthing (much less £11,625) by reason of the fact that the company had 6,000 fewer shares to issue to the public. The company could not, even if it would deal in its own shares, and the latter did not partake in any sense of the nature of stock-in-trade. The issue of shares by a company, whether at par or over, does not affect the profits or gains of the company for the purposes of income tax. In the circumstances, the respondent-company was not entitled to any deduction towards the issue of shares at par instead of at a premium. S.S.S. Chockalingam Chettiar & Sons v. Commissioner of Income Tax – [1941] 9 ITR 278 (Mad.) 1332.
In case of two mortgages in same property amount recovered in a suit is to be appropriated first towards the earlier mortgage.
Where an assessee holds two mortgages on the same property then he is entitled to appropriate the amount recovered in execution of a decree in the first place to the principal and interest due on the first mortgage. Only if they were sufficient to discharge both the principal and interest due on the first mortgage could there be any appropriation towards the second mortgage. The assessee held two mortgages over the same property, the first being for Rs.40,000 and the second for Rs.10,850. In view of the fact that the property was not worth more than Rs.50,000 and the principal and interest due on the first mortgage alone was Rs.71,000 he regarded the second mortgage as irrecoverable and did not ask for a decree qua the second mortgage. When he claimed the deduction for the sum of Rs.10,850 the revenue allowed the deduction of Rs.850 only on the ground that suit filed by the assessee was in respect of the recovery of two principal sums, i.e. Rs.40,000 and Rs.10,850.
951 INCOME FROM BUSINESS OR PROFESSION
Section 22
Held that the assessee‟s claim was to be upheld. _______________
YEAR IN WHICH DEDUCTIBLE - GENERAL
P.L.S.M. Chettyar Concern v. Commissioner of Income Tax – 9 ITC 82 (Rangoon) 1333.
Before loss can be allowed it has to be proved that it was incurred in relevant previous year.
Deductions can be permitted in respect of only those expenses and losses which are incurred in the relevant accounting year. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant. In the previous year relevant to the assessment year 1966-67, the assessee despatched certain goods worth Rs.73,081 to a purchaser, and credited the sales by debiting purchaser‟s account and crediting sale account. In the previous year relevant to the assessment year 1969-70, the assessee realised the mistake that since, the purchasers had not taken delivery of the goods, they were not its debtors and the debit entry appearing in their account was not correct. Hence, it reversed the entries and claimed deduction of Rs.73,081 as bad debt. Held that there was no trading loss and in any event the loss had not occurred in the year in which it was claimed; it was, therefore, not allowable. _______________
OTHERS
Mela Mal Shiv Dayal v. Commissioner of Income Tax – 10 ITC 126 1334.
Losses of branch office.
Where, for the assessment year 1932-33, the previous year adopted by the assessee for its head office was from 20.3.1931 to 5.4.1932, and that of the branch office was the financial year, it was held that the losses of the branch for the year ended 31.3.1931 could not be allowed in the assessment 1932-33.
952 Section 22
Income Tax Digest.
Bhudarmull Chandi Prasad v. Commissioner of Income Tax – 8 ITC 249 (Pat.) 1335.
Losses of firm.
The assessee, who were partners in a firm, took over the firm as successors thereof under section 26(2) of the 1922 Act [section 73 of the Income Tax Ordinance, 1979] in 1929, on the retirement of a partner. In 1930, the assessee obtained a bond from the outgoing partner to redeem his part of loss. In the assessment for the year 1929-30, the assessee claimed deduction of the whole of the loss the firm had suffered during the previous year 1929. The claim was disallowed to the extent to which they had taken bond from the outgoing partner in respect of his share of loss. Held that the bond was executed in 1930 and, therefore, it could not be taken into account for the purposes of the previous year 1929. However, for the year in question the whole of loss claimed by the assessee was deductible. _______________
TRADE / PROFESSIONAL ASSOCIATION - ‗SPECIFICATION SERVICES‘ - CONNOTATION OF
Native Share & Stock Brokers’ Association v. Commissioner of Income Tax – [1946] 14 ITR 628 (Bom.) 1336.
Fee for providing specific service to some of members, is an assessable income.
The rules of the Bombay Stock Exchange lay a definite scheme for allowing members to employ authorised clerks and for the admission, registration, conduct, control and supervision of the authorised clerks for the benefit primarily of the members who employed them. On the question whether the annual fee recovered from its members for admission of their authorised clerks, was the assessable income of the stock exchange: Held that rules lay down a definite scheme and provide an organised arrangement, controlled and supervised by the Association for the benefit of its members. No doubt the benefit of the scheme would be for the benefit of all members since all would have the advantage of disciplined supervision exercised over the authorised clerks. Just because the payment for the carrying of the scheme was provided for only by members who availed themselves of the use of the authorised clerks, it could make no difference. It could not make a difference whether the remuneration for the services performed was provided by
953 INCOME FROM BUSINESS OR PROFESSION
Section 22
some or all the members provided it was supplied by members. The services performed were specific because they provided an identifiable scheme laid down with suficient clarity and the remuneration was definitely rlated to the services and was for the benefit of the members of the Association. Thus, the fees so received were taxable. _______________
SPECULATION BUSINESS - SCOPE OF PROVISION
Dada Sons, Hyderabad v. Commissioner of Income Tax (Central), Karachi – [1986] 53 TAX 165 (H.C.Kar.) 1337.
―Speculation‖ constitutes a sub-head within a head.
The relevant facts are that in the gram account (Karachi) the applicant claimed a loss of Rs.21,600/- on account of settlement difference paid and in the rape-seed account they claimed a loss of Rs.2600/-. It was argued before the Income Tax Appellate Tribunal that the original intention was to deliver the goods but due to transport difficulties the goods could not be delivered and therefore, settlement had to take-place. However, the argument was repelled in view of the clear wording of the explanation to section 24 of the Act and transactions were held by the Tribunal as speculative in nature. The Tribunal also found that because of the proviso to section 24(1), a speculative loss could be set off only against income of the speculative transactions. We may at the very outset state that in view of the clear language of the explanation to section 24(1) of the Income Tax Act, 1922, the intention of the petitioners that they wanted to purchase grams and rapeseeds and not to enter into a speculative transaction was immaterial for the explanation clearly treats a contract for purchase and sale of any commodity which was periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips considered as a speculative transaction. Accordingly, we hold that the loss on account of the speculative transaction could be set off only against the income of the speculative transaction. Govindram Bros. Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 764 (Bom.) 1338.
Speculation in different commodities does not transactions in each commodity, a separate business.
make
The fact that in particular year the assessee-company as a speculator does not happen to speculate in a particular commodity or in a particular market does not make him carry on a separate or a new
954 Section 22
Income Tax Digest.
business when he recommences to deal in that commodity or in that market. It cannot be said that a business which speculates in any commodity in which it anticipates that it will make a profit, is for the purpose of determining whether it is carrying on one business or a multiplicity of businesses, in any different position from a stockbroker, or a book-maker or a man who keeps a general store. Where the assessee was engaged in speculation business in various commodities right from inception, in the same premises, and with the aid of the same staff, it was held that it was the same business and loss incurred in one commodity could be carried forward and set off against profits earned in another commodity. _______________
VALUATION OF LAND
Commissioner of Income Tax v. P.L.S.M. Concern – [1934] 2 ITR 417 (Rangoon) 1339.
Where lands are taken over in satisfaction of debt, for the purpose of computing profits and losses their value is not the amount of the debt but the estimated value of lands.
The amount of the debt in satisfaction of which the land is transferred is not a criterion of the value of the lands taken over, as the extent to which the lands are to be treated as liquidating the debt is a matter of adjustment between the creditor and the debtor, in many instances the lands being taken in satisfaction of the debt as a whole not because the value of the land was in any sense the equivalent of the value of the debt, but merely because the debtor had no other property and there was no prospect of the debtor being in a position otherwise to liquidate the amount that he owed to the assessee. No doubt the value of the land as set out in the assessee‟s books of account may be treated as prima facie evidence of its true value, and an assessee normally would have no cause for complaint if the income tax authorities accepted for income tax purposes the value which the assessee himself had put upon his assets in his books of account. But in every case it is incumbent upon the Income Tax Officer to ascertain as a matter of fact what are the real profits and gains of the business in the accounting year. However, the Income Tax Officer is not bound to accept the assessee‟s figure and is free to fix his own estimate of the value in the accounting year of the lands that have been transferred to the best of his ability. It follows that if the estimated value of the lands in the accounting
955 INCOME FROM BUSINESS OR PROFESSION
Section 22
year is greater than the principal sum that was lent, the income tax authorities will be entitled to treat the balance, after deducting an amount equivalent to the loan, as representing profits and gains accruing from the transaction, and to assessee the same as income chargeable with income tax. Per contra if the estimated value of the lands is less than the amount of the principal sum that has been lent no tax will be chargeable in the accounting year in which the lands are transferred, although it may be that the estimated value of the lands in that year exceeds the amount due to the assessees in respect of interest on the loan. Thus, where the assessee had in the past been valuing such lands at the amount of debt, but desired to change it in the relevant accounting year to the estimated value of land, it was held that he could do so; but he could adopt the revaluation only for lands taken over in that year and not to lands taken over in earlier years. Commissioner of Income Tax v. P.L.S.M. Concern – [1934] 2 ITR 417 (Rangoon) 1340.
For ascertaining true profits, whereas the Income Tax Officer is not bound by the book figures of value of lands taken over in satisfaction of debt, the assessee is also entitled to prove the true value.
Where the assessee has valued the lands taken over in satisfaction of debt, in his books at a figure equal to the amount of debt but has sought to revalue then at the estimated value for the purpose of computing profits and gains, it is erroneous for the income tax authorities to think that whereas for the purpose of ascertaining as a matter of fact the actual profits and gains that accrued during the accounting year the income tax authorities have a free hand, an assessee is precluded by his book entires from proving what the true position is, and that for the purpose of assessment the Income Tax Officer is entitled – applying as it were a rule of thumb – to take as the actual value of the lands, the figure at which the lands are entered in the assessees‟ books, notwithstanding that the value at which the lands stand in the assessees‟ books may be merely an arbitrary and fictitious figure, and that the assessees may be in a position to prove that the figure at which the lands have been valued in their books of account bears no relation to the real value of the lands that have been transferred in satisfaction of the debt. _______________
956 Section 22
Income Tax Digest.
OTHER ILLUSTRATIONS
Lakshmi Insurance Co. Ltd. v. Commissioner of Income Tax – [1950] 18 ITR 984 (Lahore) 1341.
Others.
In computing total income of an assessee that is carrying on the business of insurance and has also other sources of income, income from latter sources including interest on securities must be added to amount of profits and gains of insurance business. _______________
MUTUAL BENEFIT SOCIETIES
Commissioner of Income Tax v. Madhwa Siddhantha Onnahini Nidhi Ltd. – [1934] 2 ITR 427 (Mad.) 1342.
In order to satisfy the requirements of the Explanation to section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] there must be recurring subscription paid periodically by subscribers of a mutual benefit society.
In order to satisfy the requirements of the Explanation to section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] there must be recurring subscription paid periodically. „Recurring‟ means a happening again and again, not that which occurs only once. Where the members of the assessee-society, carrying on ordinary banking business, had paid their contributions in lump sum, it was held that the guaranteed interest paid to the members was not deductible under section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] since (i) the assessee was not a mutual benefit society as its banking transactions were not confined to its own members; and (ii) the payment was also not a recurring one. Sriman Madhwa Siddhanta Onnahini Nidhi Commissioner of Income Tax – 7 ITC 317 (Mad.) 1343.
Ltd.
v.
Illustration.
The assessee-Nidhi, registered as a limited company, claimed that guaranteed interest paid to its shareholders on their capital was deductible under the Explanation to section 10(2)(iii) [section 23 of the Income Tax Ordinance, 1979]. Its memorandum and articles of association provided that subscriptions towards share capital
957 INCOME FROM BUSINESS OR PROFESSION
Section 22
should be paid in one lump sum, and it was also provided that non members would also be eligible to raise loans and to invest in fixed deposits. Held that the assessee was not a mutual benefit society but a mere banking concern. The shares were to be paid for in one lump sum, which meant that payment was not „recurring‟. Thus the Explanation to section 10(2)(iii) [section 23 of the Income Tax Ordinance, 1979] would not apply to the assessee. The claim for deduction was thus not allowable.
958 Section 23
Income Tax Digest.
Section 23* Deductions – Business expenditure
PAGE NO
GENERAL PRINCIPLE
1344. Wealth tax paid is an allowable expenditure. TAX 1 (H.C.Lah.) = 1999 PTD 4120
_
[2000] 81 961
1345. Remuneration foregone by the assessee is not admissible _ expenses. [1996] 73 TAX 240 (H.C.Lah.) 1346. Expenses incurred in violation of some law cannot be _ disallowed merely on this ground. [1995] 71 TAX 57 (H.C.Kar.) _ 1347. Losses cannot be adjusted against fictional income. [1991] 64 TAX 126 (H.C.Kar.) _ 1348. Foreign exchange loss is an admissible deduction. [1991] 63 TAX 14 (H.C.Kar.)
962
962 963 963
1349. Expenditure incurred on account of commercial expediency; even if higher price was paid for acquisition of shares could not be a ground for disallowing the adjustment of interest paid on _ capital borrowed. [1990] 62 TAX 20 (H.C.Kar.) = 1990 PTD 240
964
1350. Wealth tax is allowable expenditure if incurred wholly or _ exclusively to earn income. [1989] 59 TAX 79 (H.C.Kar) = 1989 PTD 135
965
1351. Amount of legal expenses incurred for recovery of loan when _ not admissible. [1984] 50 TAX 216 (H.C.Kar.) _ _ 1352. Exchange loss when not deductible. 1960 PTD 1121 (H.C.Dacca) = 1960 PLD 823
966 966
BUSINESS EXPENDITURE - SCOPE OF DEDUCTIBILITY
1353. Business expenditure - scope of deductibility. 567 = [1982] 45 TAX 134 (S.C.Pak.)
*
Corresponding to section 10(2) of the 1922 Act.
_
1981 SCC 967
959 DEDUCTIONS – BUSINESS EXPENDITURE
Section 23 PAGE NO
1354. Litigation expenses are deductible in the year in which incurred and not in the year in which decision is given by _ court. [1942] 10 ITR 95 (Nag.)
969
GRATUITY CANNOT BE CONSTRUED AS A FREE RESERVE
1355. Gratuity cannot be construed as a free reserve. TAX 25 (H.C.Kar.) = 1991 PTD 672
_
[1991] 64 969
TESTS FOR CAPITAL OR REVENUE EXPENDITURE
1356. Tests for capital or revenue expenditure. 199 (H.C.Kar)
_
[1985] 51 TAX 970
1357. Expenditure incurred on mining timber and gunny bags, is _ not expenditure of capital nature. [1967] 16 TAX 107 (H.C.Kar.)
971
1358. Distinction between capital and revenue expenditure. – [1961] 4 TAX 197 (H.C.Dacca) = 1961 PTD 1092 = 1962 PLD 86
972
COMPUTATION OF PROFITS - BASIC PRINCIPLES
1359. Statutory deductions must be allowed as per relevant _ provisions and not on commercial principles. [1936] 4 ITR 255 (Cal.)
974
CONSTRUCTION OF DOCUMENTS
1360. If contract is genuine, it is not open to Assessing Officer to question consideration shown therein. – [1943] 11 ITR 299 (Pat.)
974
REPAIRS TO OTHER PREMISES
1361. Pay of mali.
_
5 ITC 458 (All.)
RENT
1362. Expenditure by way of sharing of profits is not rent. 6 ITR 243 (Lahore)
974 _
[1938] 975
DEPRECIATION - GENERAL
1363. „Original cost to assessee‟ does not mean cost to original _ purchaser, but to assessee by whom tax is payable. [1935] 3 ITR 384 (PC)
975
960 Section 23
Income Tax Digest. PAGE NO
BONUS OR COMMISSION - APPLICATION OF PROVISION
1364. Prohibition of section 36(1)(ii) [section 23(1)(viii) of the Income Tax Ordinance, 1979] applies when amount payable _ as dividend is disguised as bonus or commission. [1946] 14 ITR 647 (Bom.) CASES UNDER 1922 ACT
1365. Relevance of situs re business in taxable territories. 505 (Mad.)
_
976
2 ITC
1366. Relevance of situs of payment or borrowing in business. _ [1936] 4 ITR 306 (Lahore)
977 977
RULE 14 OF FOURTH SCHEDULE
1367. „His share‟ means employer‟s contributions and interest _ thereon up to date of transfer. [1939] 7 ITR 187 (Nag.)
977
1368. Words „without interest‟ means „without taking into account the interest earned on the fund after it has been transferred _ to the trustees‟. [1939] 7 ITR 187 (Nag.)
977
ANIMALS - APPLICATION OF PROVISIONS
1369. Deduction cannot be granted in respect of animals sold not because they became useless but because business is closed _ down. [1938] 6 ITR 489 (All.)
977
961 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23
Section 23* Deductions – Business expenditure
GENERAL PRINCIPLE
Commissioner of Income Tax v. Arif Latif – [2000] 81 TAX 1 (H.C.Lah.) = 1999 PTD 4120 1344.
Wealth tax paid is an allowable expenditure.
A judgement of the Supreme Court in re: Commissioner of Wealth Tax v. Hoor Bai Ibrahim 1992 PTD 671 has been referred at the bar. The issue decided in that case by the apex Court was, however, different. Their Lordships were considering the phrase “debt owed” as used in section 2(m) of the Wealth Tax Act, 1963. It was finally held that Wealth Tax liability for the current year could be deducted to reach net wealth chargeable to wealth tax. The above question referred for our opinion, however, relates to a different provisions of a different law namely Income Tax Act and therefore, no help from the ratio settled in that case can possibly be received. Before concluding it needs to be stated that the above question is only of an academic interest. After the repeal of Income Tax Act, 1922 the substituted legislation namely the Income Tax Ordinance enforced from 1.7.1979 provided for a parallel provision as contained in section 23(1)(xviii). Also the Ordinance expressly provided for deduction of wealth tax paid by an assessee from his total income. The concession so provided under clause (129) of the Second Schedule to the Ordinance was available to all and sundry assessees irrespective of the nature and source of their income. C.B.R. Circular No. 1 dated September 15, 1979 explained the same. However, that clause was omitted from the Ordinance by Finance Act, 1994. C.B.R. Circular No. 6 of 1994, dated July 10, 1994 issued to explain the amendments/changes made by the Act still agreed that wealth tax paid shall continue to be allowed as specific deduction against relevant head of income if otherwise admissible under the law e.g. in computing income from house property. Thus, the Revenue has *
Corresponding to section 10(2) of the 1922 Act.
962 Section 23
Income Tax Digest.
accepted the above view adopted by the Tribunal and has rather gone a step further by allowing the deduction in not only cases of income from business but also from other sources including income from property. Commissioner of Income Tax, Rawalpindi v. Pak. Mineral Industries Ltd., Rawalpindi – [1996] 73 TAX 240 (H.C.Lah.) 1345.
Remuneration foregone by the assessee is not admissible expenses.
Subsequent disposal or remuneration of income is not admissible in law and is therefore added back for assessment purposes. As the income had accrued to the respondent, much prior to the resumption to forego remuneration was to be taxed in the hands of the department. The assessee is precluded to forego the commission after it had accrued to him as held in Morvi Industries Limited v. Commissioner of Income Tax Central Calcutta, (Taxation India September 1964, page 37.) In view of the foregoing discussion we are of the view that the reference referred for opinion is answered in negative against the assessee and in of the department. Cases referred to: [1960] 2 TAX (lnd. Vol. 3) 207; [1962] 2 TAX 293 and Morvi Industries Ltd. v. Commissioner of Income Tax [1964] TAX (Ind) 37.
Beecham Pakistan Ltd. v. Commissioner of Income Tax – [1995] 71 TAX 57 (H.C.Kar.) 1346.
Expenses incurred in violation of some law cannot be disallowed merely on this ground.
We would like to point out that the view taken by the learned Appellate Tribunal on the face of it, seems to be erroneous. No doubt Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 indicates that no person shall spend more than five per cent of his turn over on advertising, sampling and other promotional activities in respect of drugs. And rule 12 provides for cancellation or suspension of a licence by the Central Licensing Board in case any provision of the Drugs Ordinance or the Rules framed thereunder is violated by a Licensee. But the penalty provided by the said Rule cannot be extended to the provisions of Income Tax Ordinance as no such penalty has been provided by the provisions of the said Ordinance. Reference has also been made by Mr. Iqbal Naim Pasha to an earlier judgment of this Court in General Tyre and Rubber Co. v. Commissioner of Income Tax Central Karachi (1985) 52 TAX 146
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(H.C.Kar.) = (1986 PTD 52), in this case a distinction was clearly drawn between a case where a trader has actually incurred expenses in connection with his business but in violation of some law and a case where a penalty has been imposed on him due to transgression of some law. We are consequently of the view that the view taken by the learned Appellate Tribunal is un-sustainable and the question is answered in the negative. Cases referred to: Commissioner of Income Tax v. Alpha Insurance Company (1981) 44 TAX 1; (1981) 43 TAX 69 (Trib.) and General Tyre and Rubber Co. v. Commissioner of Income Tax Central, Karachi (1985) 52 TAX 146 (H.C.Kar.) = (1986 PTD 52).
Commissioner of Income Tax, Central Zone ‘A’ Karachi v. Karachi Electric Supply Corporation Ltd. – [1991] 64 TAX 126 (H.C.Kar.) 1347.
Losses cannot be adjusted against fictional income.
After giving our thoughtful consideration to the entire matter, we are of the view that losses amounting to Rs.25,04,540 could not be adjusted against the fictional income and the respondent/assessee is entitled to its carrying forward and set-off in the subsequent years. The net result, therefore, is that the respondent/assessee has in the total effect suffered the loss of saving 60% of his future tax. We are afraid that the same is against the spirit as well as clear words of section 10(2)(vi) proviso of the Act. Case followed: Commissioner of Income Tax, (Central Zone), Karachi v. Karachi Electric Supply Corporation Ltd. (1985) 52 Tax 98 (H.C.Kar.) = (1985 PTD 389)
Commissioner of Income Tax v. Roneo Vicker Limited, Karachi – [1991] 63 TAX 14 (H.C.Kar.) 1348.
Foreign exchange loss is an admissible deduction.
In the assessment year 1973-74 respondent made a claim of Rs.7,28,955.00 for exchange loss caused by devaluation of Pakistan; Rupee. This was disallowed by the Assessing Officer and was maintained in appeal. The Tribunal however admitted this claim observing as under: “Where an assessee under any arrangement, business dealing or contract is obliged to pay any party in foreign currency then it incurs a liability in foreign currency. If the devaluation of a currency adversely affects the liability of the assessee it has to procure same amount of foreign
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currency by spending more local currency and then it suffers a loss.” We, respectfully following the aforesaid judgment answer the question in the affirmative. Case followed: General Tyre & Bubber Co. Pakistan Ltd. v. Commissioner of Income Tax, Central Zone, Karahci [1989] 60 TAX 34 (H.C.Kar.) = (1989 PTD 582).
Mian Muhammad Mansha v. Commissioner of Income Tax, Central Zone ‘C’ Karachi – [1990] 62 TAX 20 (H.C.Kar.) = 1990 PTD 240 1349.
Expenditure incurred on account of commercial expediency; even if higher price was paid for acquisition of shares could not be a ground for disallowing the adjustment of interest paid on capital borrowed.
The Income Tax Officer who dealt with the cases of applicant for the assessment years 1973-74 and 1974-75 disallowed the adjustment of interest paid on the borrowed sum of Rs.45,00,000/- on the ground that amount of Rs.45,00,000 spent by the applicant for the purposes of acquiring shares of Nishat Mills was motivated with the object of object of getting control of the Company and as such it was not an allowable expenditure under section 12(2) of the Act. The Income Tax Tribunal also concurred with the Income Tax Officer and further held that as against the prevailing price of shares at Rs.7 per share at the relevant period, the applicant had paid an extra amount of Rs.45,00,000 which clearly indicated that the object of acquiring the shares by the applicant was to get the control of the Company and as such it did not come within the scope of section 12(2) of the Income Tax Act. Income Tax Officer as well as Income Tax Appellate Tribunal disallowed adjustment of interest paid by the applicant on the borrowed sum was that the shares were acquired by the applicant for the purposes of getting the control of the Company, namely, Nishat Mills. In our view, the above object of the applicant is neither prohibited under any provision of the Income Tax Act nor it was an unlawful object. The above expenditure by the assessee was undoubtedly on account of commercial expediency and in order to facilitate the carrying on of the business effectively. The fact that the applicant had paid higher price for acquisition of shares as compared to prevailing prices at that time, in our view, could not be a ground for disallowing the adjustment of interest on the borrowed sum under section 12(2) of the Income Tax Act as there is no finding that the transaction was not genuine.
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Case referred to: Omerods (India) Private Ltd. v. Commissioner of Income Tax (1959) 1-TAX (III) 459; Eastern Investment Ltd. v. Commissioner of Income Tax AIR (38) 1951 S.C. 138; Indian Radio & Cable Communications Ltd. v. Commissioner of Income Tax (1937) 5 ITR 270 and Tata Hydro Electric Agencies Ltd. v. Commissioner of Income Tax [1937] 5 ITR 202.
Commissioner of Income Tax v. Zakia Siddiqui – [1989] 59 TAX 79 (H.C.Kar.) = 1989 PTD 135 1350.
Wealth tax is allowable expenditure if incurred wholly or exclusively to earn income.
The respondent is an individual deriving income from dividend, interest and property. He submitted his return for the assessment year 1977-78 claiming allowance of Wealth Tax liability. This claim was rejected by the Income Tax Officer. In appeal the Appellate Assistant Commissioner of Income Tax allowed proportionate Wealth Tax liability against the income of the respondent. This order was upheld by the Tribunal. The Department then filed application under section 66(1) of the Income Tax Act, 1922. The Wealth Tax is levied under a statute and is not paid voluntarily by the assessee. He is bound to pay it. It is a necessary consequence of owning and possessing property and assets of a value beyond a certain limit. For deriving income, profit or gains from the properties and assets Wealth Tax is mandatory for proper maintenance and existence of assets and properties from which income, profit or gain accrues. It can thus be concluded that it is “wholly or exclusively laid out for purposes of earning profits”. Any amount spent to accomplish or facilitate the running of business or on ground of commercial expediency which directly benefits the business is the money spent wholly and exclusively for earning profit and gain. Such expenses will cover tax which is statutorily levied on income yielding assets of the assessee non-payment of which may result in depletion or diminution of assets and properties or cause danger or risk which may diminish or reduce their value and utility. In Pakistan no such amendment has been made. In fact the Income Tax Ordinance, 1979 retains the same provision as contained in the Income Tax Act, 1922. This fact is indicative of the intention of legislature and can be an aid to interpretation of sections 10(2)(xvi) and 12(2) of the Income Tax Act, 1922. It is a well-recognised principle of interpretation that if a fiscal statute is capable of two reasonable interpretations then the one which is favourable to the subject should be adopted.
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We are therefore, of the considered view that the Wealth Tax paid on any income yielding asset or property owned by the assessee or held for the purpose of his business, is deductible as expenses in computing the assessee‟s income, profit or gain under section 10 or 12 of the Income Tax Act, 1922. Cases referred to: Moffatt v. Webb [1913] 16 CLR 120; Strong and Company of Romsey Ltd. v. Wood-field [1906] 5 TC 215 (HL); Smith v. Lion Brewery Company [1910] 5 TC 561 (HL); Usher‟s Wilshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL); Harrods (Bounos Aires) Ltd. v. Taylor Goodbye [1964] 41 TC 450 (CA); Commissioner of Inland Revenue v. Dowdell O‟ Mahoney & Co. [1951] 33 TC 259 (HL).
Cowasjee Family Funds v. Commissioner of Income Tax Karachi – [1984] 50 TAX 216 (H.C.Kar.) 1351.
Amount of legal expenses incurred for recovery of loan when not admissible.
Apparently, the contention before the High Court in Income Tax Case No. 433 of 1963, on behalf of the assessee, was that the assessee-firm was carrying on money-lender‟s business. We, however, find from the statement of the case that according to the Income Tax Tribunal there was no material before the Tribunal to verify that the assessee-firm was carrying on money-lenders‟s business. This statement of fact contained in the statement of case is to be taken as correct for the purposes of the present reference. The factual position that emerges is that before the Tribunal there was neither any material to verify whether the assessee firm was carrying on money-lenders‟ business nor any explanation had been given by the assessee firm about the nature of the loan in question and the reason why the expenses for its recovery were initially borne by Rustam Cowasjee and taken over by the assess-firm at a later stage. In the face of factual position which is to be taken as correct for the purposes of the present reference, we are of the view, that the Income Tax Tribunal had taken a correct decision that the amount of Rs.15,000/- incurred in filing of suit against M.B. Dalal for the recovery of the loan in question was not legally admissible for deduction. Rajnagar Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca; New Samanbagh Tea Co. Ltd., Calcutta v. Commissioner of Income Tax, East Pakistan, Dacca – 1960 PTD 1121 (H.C. Dacca) = 1960 PLD 823 1352.
Exchange loss - when not deductible.
The assessee company treated as resident in Pakistan was owing debts to its managing agents in India. Deduction of loss claimed on
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account of devaluation of Pakistan currency. Held not admissible in absence of obligation under which dues were payable in Pakistan. _______________
BUSINESS EXPENDITURE - SCOPE OF DEDUCTIBILITY
Commissioner of Income Tax, Rawalpindi Zone v. M. Bahar Ahmad & sons – 1981 SCC 567 = [1982] 45 TAX 134 (S.C.Pak.) 1353.
Business expenditure - scope of deductibility.
Mr. Amirzada Khan, learned counsel for the appellant, contended that clause (xvi) was of residuary nature, while clause (iii) was a special provision, and if what the assessees had sought by way of deduction was interest paid on capital borrowed by the assessees for their business, the deduction sought would be permissible, if at all, under the special provision contained in clause (iii), and if the assessees failed to make out a case under the special provision, it will not be open to them to fall back upon the residuary general clause (xvi), for the rule of interpretation is gereralise specialibus non derogate - Things special derogate from things general. In support of this contention, the learned counsel invited our attention to a D.B. judgment of the Lahore High Court in the case of Commissioner of Income Tax v. Attock Oil Company Ltd. (PLD 1975 Lahore 1181) in which the question before the Court was whether educational expenses incurred by the assessee, which were admittedly not admissible under the specific provision contained in clause (xiv-a) of sub-section (2) of section 10 of the Act, were admissible under the general clause (xvi) as expenditure wholly and exclusively incurred for the purpose of business. The Court examined the scheme of the purpose of income tax, the profits or gains of a business shall be computed after making due allowance for the expenditure wholly and exclusively incurred for the purposes of business. The Court examined the scheme of the entire sub-section (2) of section 10 of the Act which lays down that for the purpose of income tax, the profits or gains of a business shall be computed after making due allowance for the expenditure incurred under clauses (i) to (xviii) enumerated thereunder. The expenditure enumerated in sub section (2) of section 10 is admissible subject to the conditions laid down in the respective clauses. The Court came to the conclusion that excepting (xvi) the remaining clauses are sufficiently specific and restrictive in laying down the limits within which deduction was permissible while clause (xvi) was of a general nature, which allows for any expenditure laid out or expended wholly and exclusively for the business and the rule generalise specialibus non derogate, for any other construction would mean that the general and more comprehensive
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clause (xvi) will not only be overlapping, but also destructive of most of the other special clauses. Learned counsel next argued that the reliance by the High Court in the impugned judgment on the decision of the Supreme Court of India in the case of Bombay Steam Navigation Co. v. Commissioner of Income Tax, Bombay (1965 PTD 624) was misplaced inasmuch as in that case interest paid by the assessee was allowed under the general clause of sub-section (2) of section 10 of the Act, on the finding that the transaction between the assessee and the Company, to whom the interest was payable, was not a loan transaction, but interest on deferred payment of part consideration due from the assessee for purchasing certain assets. For the proper understanding of sub-section (2) of section 10 of the Income Tax Act, I may, with advantage, refer to this Court‟s decision in the case of Commissioner of Income Tax v. Engineers Ltd. (PLD 1967 SC 524), in which the assessee had claimed by way of expenditure a sum of Rs.7709 spent on the training abroad of two Engineer Directors as deductible item under clause (xvi) as a sum wholly laid out in the interest of the assessee‟s business. The Department had contended that such an expenditure was deductible if at all under specific clauses (xii)(xiv) or (xv), and since the assessee‟s case was not covered by any of these clauses, the assessee was not entitled to fall back upon the residuary clause (xvi). The clauses in controversy read as follow:(xii)
any expenditure (not being in the nature capital expenditure) laid out or expended on scientific research related to the business:
(xiv)
any expenditure of a capital nature on scientific research related to the business;
(xv)
any expenditure laid out or expended on the training abroad of citizens of Pakistan, in connection with a scheme approved by the Central Board of Revenue for the purposes of this clause.”
(xvi)
reproduced above. The Court repelled the contention of the Department holding:-
The scope of clause (xvi) which is of residuary nature is thus wholly different from the sums included in clauses (xii)(xiv) and (xv). There being no similarity of subject-matter between clauses (xii), (xiv) (xv) and (xvi) of section 10(2) of the rule „general is specialibus non derogate‟ was clearly not attracted”.
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Thus, it will be noticed that the Court will have to examine the scope of each clause and the occasion to apply the rule „things special derogate from things general‟ will arise only if the scope between the special and general clauses was the same. If these are parallel clauses, or if in its application there was no conflict between the two clauses, it will be immaterial if deduction is granted under the general clause while it may more appropriately fall under the specific clause. There will be then no occasion to have recourse to this rule of construction. Let me illustrate. Clause (iii) speaks of interest on capital borrowed by the assessee for the purposes of its business and if in a given case none of the provisos to this clause is attracted, the interest paid will equally be an expenditure incurred exclusively for the purposes of business. In such an event, it will in substance, make no difference if deduction is granted under clause (xvi), though it would be more appropriate to mention clause (iii). We, therefore, are of the view that the interest paid was more appropriately deductible under clause (iii) and the fact that this deduction was allowed by the Department as falling under clause (xvi) is, for the reason aforementioned, irrelevant, for, in the present case, the expenditure incurred can also be said to fall under general clause (xvi) of sub-section (2) of section 10 of the Income Tax Act. Commissioner of Income Tax v. Mathuradas Mannalal – [1942] 10 ITR 95 (Nag.) 1354. Litigation expenses are deductible in the year in which incurred and not in the year in which decision is given by court. Where the assessee, who speculated in cotton, suffered loss in certain forward contracts and since the assessee was unable to meet these losses, a suit was instituted against him and he incurred litigation expenses in defending the suit, in the assessment year 1935-36, it was held that such expenditure was deductible in the year in which it was incurred, irrespective of the fact that the decree was passed in the assessment year 1936-37. _______________
GRATUITY CANNOT BE CONSTRUED AS A FREE RESERVE
Commissioner of Income Tax, Central ‘B’, Karachi v. Philips Electrical Co. of Pakistan Ltd., Karachi – [1991] 64 TAX 25 (H.C.Kar.) = 1991 PTD 672 1355.
Gratuity cannot be construed as a free reserve.
For the assessment year 1968-69 the respondent claimed retirement gratuity for the staff as an expense admissible to it. The Income Tax
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Officer in computing the free reserves included the provision of retirement gratuity for the staff and did not agree with the respondent that it was not a free reserve. We are, therefore, inclined to hold that since the amount set apart for gratuity, were intended to provide for ascertained liabilities which accrued in the financial years in question, the same were proper charge on the P&L account on the basis of the proper principles of commercial accountancy as held by the learned Income Tax Tribunal in the relevant years. Our answer to the above quoted questions referred to hereinabove in para. 1, is that the gratuity cannot be construed as a free reserve in terms of S.R.O. No. 116(R)/68 but it is an ascertained liability and therefore it is a proper charge on the P&L account for the assessment years in question on the basis of the proper principles of commercial accountancy. Case followed: Commissioner of Income Tax, Karachi v. Pakistan Security Printing Corporation Ltd, Karachi (1985) 51 Tax 137 (H.C.Kar.) = (1985 PTD 413). _______________
TESTS FOR CAPITAL OR REVENUE EXPENDITURE
Commissioner of Income Tax v. Pakistan Progressive Cement Industries – [1985] 51 TAX 199 (H.C.Kar.) 1356.
Tests for capital or revenue expenditure.
We must state have that we are clear in our mind that the payment of interest on account of acquisition of the two factories (capital assets) could not be considered to be so closely related to the business carried, that it could be viewed as an integral part of the conduct of the business, for, as already stated, the payment of interest had to be made along with the installments of purchase price in the same manner as money itself irrespective whether the assessee carried on the business or not. In any case, it could not on the facts and in the circumstances of the case, be said that the payment of interest was wholly and exclusively for the purpose of business which is the second condition required to be fulfilled to claim deduction as allowance under clause (xvi) of sub-section (2) of section 10 of the 1922 Act. Indeed the liability to pay the interest arose directly out of purchase of capital assets and payment of interest could only be attributed to capital expenditure and nothing else.
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N.A.S. Gilani & Co. Ltd., Quetta v. Commissioner of Income Tax – [1967] 16 TAX 107 (H.C.Kar.) 1357.
Expenditure incurred on mining timber and gunny bags, is not expenditure of capital nature.
The assessee, a private limited company, was engaged in the business of coal mines in Baluchistan areas. For the assessment year 1954-55 the assessee filed return of income showing net profit at Rs.50,209 after deducting Rs.1,60,449 as expenses incurred on mining timber and Rs.29,395 on gunny bags. The Income Tax Officer disallowed the expenses to the extent of Rs.30,000 and 15,000 on mining timber and gunny bags, respectively, on the ground that the expenses incurred on exploring and developing new mining areas was expenditure of capital nature. On appeal the Appellate Assistant Commissioner deleted the additions made by the Income Tax Officer holding that the expenses for excavation, timbering and gunny bags spent for new pits and adits for raising coal could not be considered as capital expenditure. The Appellate Tribunal, on further appeal at the instance of the department, restored the order of the Income Tax. Officer, holding that the expenditure was not a revenue charge but an item of “capital expenditure.” In coming to this conclusion the Tribunal relied on the observation of Chief Justice Abbot in King v. Attwood [6 Branewell and Cresswell 277], cited by the House of Lords in Coltness Iron Company v. Black [1 Tax Cases 287]. On reference, the High Court reversing the order of the Appellate Tribunal: Held,
that the Tribunal was not justified in treating the sums of Rs.30,000 and 15,000 on mining, timber and gunny bags, respectively, as expenditure of capital nature out of the total expenses claimed.
As stated above the Appellate Tribunal did not set aside these findings of the learned Assistant Commissioner Appellate and the only basis for allowing the departmental appeal was the observation of Chief Justice Abbot referred to above. Seeking guidance from these observations the Appellate Tribunal clearly fell into an error because it did not notice that the incidents of assessment on mining in Pakistan are totally different from those in the United Kingdom. Unlike in the United Kingdom, where profits from mining are treated as those earned from “property”, in Pakistan they are treated as earned from “business” by virtue of provisions contained in section 10 of the Income Tax Act. If profits from mining are to be treated as those earned from property, the expenses incurred in connection with exploration of mines can be placed at par with the expenses of the
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accretion of “property” and thus an expenditure on “capital outlay.” But if profits from mining are to be treated as profits from business, the above principle will not be relevant. There thus, being basic difference in the mode of assessment in respect of mining in Pakistan and the United Kingdom, neither the decision of the House of Lords nor that of King‟s Bench, relied upon by the Appellate Tribunal would be applicable to the present case. The very basis and support which was sought by the Appellate Tribunal for allowing the departmental appeal thus disappears. Cases distinguished: King v. Attwood (6 Rranewell and Cresswell 277) and Coltness Iron Company v. Black (1 Tax Cases 287).
Commissioner of Income Tax, Dacca v. Tangail General Trading & Transport Corporation Ltd., Mymensingh – [1961] 4 TAX 197 (H.C.Dacca) = 1961 PTD 1092 = 1962 PLD 86 1358.
Distinction between capital and revenue expenditure.
The assessee, a public limited company, acquired a licence from the Regional Transport Authorities for plying four buses on certain routes. In terms of the licence each passenger bus was entitled to 10 trips, up and down taken together, per month. Subsequently, the assesseecompany entered into contract with the Postal authorities for carrying the mails for a period of three years, not for remuneration but on payment of a premium of Rs.5,000 per month in advance, under the terms and conditions laid down by the Postal authorities. By this agreement, the assessee-company got 30 trips per month which meant 20 trips more than ordinary non-mail carrying passenger buses. As these buses were to run everyday in the morning and in the evening, their right to carry passengers in these mail-carrying buses, did not depend upon the agreement on the basis of which they got the right to carry mail, rather it was not a right but an obligation. This obligation was taken to get more facility to carry more passengers and thereby to make more profit in the bus plying business. The Income Tax Officer disallowed the expenditure paid as premium on the ground that it was of a capital nature as it was incurred to get the contract and for the purchase of opportunity for earning from larger number of trips and that it did not form part of the working expenditure. On appeal, the Appellate Assistant Commissioner confirmed the assessment order holding further that the expenditure was incurred not for the purpose of conducting the business but for acquiring exclusive right to carry the postal mails and also to ply buses during appointed time attracting more passengers, resulting in more profits. On further appeal the Tribunal held that the payment of
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Rs.5,000 per month was a revenue expenditure incurred wholly and exclusively for the purpose of the business. On a reference: Held, that (i) the payment of Rs.5,000 a month was not for acquisition of any advantage or any asset but for the purpose of earning profits in the conduct of the business and, therefore, is a revenue expenditure and not a capital expenditure; (ii) by this payment the assessee did not acquire any asset or any advantage of enduring benefit having the element of permanency. The agreement with the Postal authorities did not create any right for carrying passengers in these mailcarrying buses but that was on account of the license already obtained from the Regional Transport Authority, and (iii) the money spent in procuring the agreement for carrying mail was the money spent by the assessee for the purpose of the business to earn larger profits that could otherwise be realised and formed part of the trade that the assessees carried on. Judicial analyses : CONFIRMED BY - The Supreme Court of Pakistan in Commissioner of Income Tax, East Pakistan, Dacca v. Tangail General Trading & Transport Corporation Limited, Mymensingh 1966 SCC 282 = [1967] 15 TAX 1 (S.C.Pak.). Their Lordship observed: “If the traffic increased on this route or the number of buses plying on it decreased for one reason or other the number of trips for each bus would presumably have been correspondingly increased by the RTA without altering in any manner the structure of the respondent‟s business. It followed that the premium paid to the postal Department by the respondent on annual basis was not the value of a durable asset, such as, premium paid for a term of lease or for acquisition of monopoly.” Cases referred to: The Commissioner of Income Tax v. Sir Homi M. Mehta (1943) 11 ITR 142; Tata Hydro-Electric Agencies Ltd., v. Commissioner of Income Tax (1937) 5 ITP 202; Vithaldas Thakordas & Co. v. Commissioner of Income Tax, Bombay (1946) 14 ITR 822; Commissioner of Income Tax, Dacca v. Gurudayal Sarkar & others (1960) 10 PLR 122 Dacca; Anglo-Persian Oil Co. v. Dale (1932) 1 KB 124; Commissioners of Inland Revenue v. The Granite City Steamship Co. Ltd. (1937) 13 TC 1; Mohanlal Hargovind of Jubbalpur v. Commissioner of Income Tax (1949) AIR 311 (P.C.). Cases relied on: Commissioner of Income Tax, East Pakistan v. Luxmi Narayan Mills Ltd., [1960] 2-TAX (III-538); Pingle Industries Ltd., v. Commissioner of Income Tax, Hyderabad [1960] 2-TAX (III-547) and R. S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax, Lahore (AIR 1947 Lah. 82).
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CASE DISTINGUISHED - Pyrah (Inspector of Taxes) v. Annis & Co. Ltd. [1957] 31 ITR 517. _______________
COMPUTATION OF PROFITS - BASIC PRINCIPLES
Lakshmi Narayan SEn & Sons Ltd., In re – [1936] 4 ITR 255 (Cal.) 1359.
Statutory deductions must be allowed as per relevant provisions and not on commercial principles.
Statutory deductions must be allowed as per relevant provisions and not on commercial principles. _______________
CONSTRUCTION OF DOCUMENTS
East Khas Jharia Colliery Co. Ltd. v. Commissioner of Income Tax – [1943] 11 ITR 299 (Pat.) 1360.
If contract is genuine it is not open to Assessing Officer to question consideration shown therein.
If a contract is a genuine contract for the supply of goods for some consideration at a lower rate than that prevailing in the market, it is not permissible to any Court to write out a new contract for the parties. Where the assessee-company had sold goods to its allied concern at less than market value and the allied concern sold the goods to the railways, at a slightly higher price, but the Income Tax Officer valued the sales at market price which was much higher: Held that the addition that could be made was the difference between the price charged by the assessee to the allied concern and the price charged by the allied concern to the railways, as reduced by the expenses of the allied concern. _______________
REPAIRS TO OTHER PREMISES
R.B. Seth Ganga Sagar Jatia v. Commissioner of Income Tax – 5 ITC 458 (All.) 1361.
Pay of mali.
The pay of a mali (gardener) is not allowable as part of the cost of repairs to business premises. _______________
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RENT
Gopinath Vir Bhan v. Commissioner of Income Tax – [1938] 6 ITR 243 (Lahore) 1362.
Expenditure by way of sharing of profits is not rent.
The assessee got his cotton ginned by a company which rendered such service exclusively to the assessee only, and the assessee agreed to pay, in addition to ginning charges, a percentage of his profits to the said company. In case of loss, there was no liability on the company to make good any portion of the loss. the assessee claimed the profits apportioned as a deduction by way of rent. Held that the fluctuating item like a share in profits could not be treated as rent, and hence the deduction was not allowable under section 30 nor could it be allowed as business expenditure; it was a payment for acquisition of monopoly right of having the cotton ginned. Further, it was in the nature of a quasi-partnership between the assessee and the company and the profits were to be paid after they were earned, and as such it could not be expenditure incurred to earn the profits. _______________
DEPRECIATION - GENERAL
Commissioner of Income Tax v. Buckingham & Carnatic Co. Ltd. – [1935] 3 ITR 384 (PC) 1363.
„Original cost to assessee‟ does not mean cost to original purchaser, but to assessee by whom tax is payable.
The word „assessee‟ is used in section 10(2)(vi) of 1922 Act [section 23 of the Income Tax Ordinance, 1979] in two places: firstly, with regard to the ownership of the property and secondly, with regard to the original cost thereof. In the ordinary and natural meaning of the subsection, the word „assessee‟ used in the two connections must refer to the same person. Who then is that person? The answer is given by the sub-section itself, namely, the person who owns the property in question and who is being assessed and the depreciation is to be based on the original cost of such property to such person. If there were any doubt about this being the correct interpretation, it could be removed by reference to the definition of the „assessee‟ contained in section 2(2) of the 1922 Act [section 2(6) of the Income Tax Ordinance, 1979]. The word „assessee means the person by whom income tax is payable. It follows, therefore, that the cost which is to be considered for the
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purpose of the allowance for depreciation must be the original cost to the person by whom the income tax is payable. Where the assessee-company which had purchased assets from certain other companies (to whom the original cost was Rs.91.12 lakhs), for Rs.34.55 lakhs, which was their written down value, contended that it was entitled to depreciation not on the cost to it, but on the original cost to the vendors, it was held that depreciation was admissible on the price paid by the assessee. Case review : Massey & Co. Ltd. v. Commissioner of Income Tax AIR 1929 Mad. 453 overruled. Commissioner of Income Tax v. Saraspur Mills Ltd. [1932] ILR 56 Bom. 129 and Motiram Roshan Lal Coal Co. v. Commissioner of Income Tax [1933] 1 ITR 329 (Pat.) approved. The above case is approved in Indian Iron & Steel Co. Ltd. v. Commissioner of Income Tax [1943] 11 ITR 328 (PC). _______________
BONUS OR COMMISSION - APPLICATION OF PROVISION
Loyal Motor Service Co. Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 647 (Bom.) 1364.
Prohibition of section 36(1)(ii) [section 23(1)(viii) of the Income Tax Ordinance, 1979] applies when amount payable as dividend is disguised as bonus or commission.
Clause (x) of section 10(2) of the 1922 Act [section 23(1)(viii) of the Income Tax Ordinance, 1979] is intended to prevent an escape from taxation by describing a payment as bonus, when in fact ordinarily it should have reached the shareholder as profit or dividend. The plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus, if the payment is in lieu of dividend on profit. The sum expected under the expression „such sum‟ in section 10(2)(x) [section 23(1)(viii) of the Income Tax Ordinance, 1979] must be the same sum as is described by the expression „any sum paid as bonus or commission‟, it refers to the quantum and not the character of the payment. _______________
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Section 23
CASES UNDER 1922 ACT
M.T.T.K.M.M.S.M.A.R. Somasundaram Chettiar v. Commissioner of Income Tax – 2 ITC 505 (Mad.) 1365. Relevance of situs of payment or borrowing or business. The expression „the business‟ in section 10(2)(iii) of the 1922 Act [section 23 of the Income Tax Ordinance, 1979] means only the business in British India the income of which is liable to be taxed. MacNabb v. Commissioner of Income Tax – [1936] 4 ITR 306 (Lahore) 1366. Relevance of situs of payment or borrowing or business. Interest on money borrowed in British India for purchasing securities outside British India are not to be deducted from interest earned on deposits. _______________
RULE 14 OF FOURTH SCHEDULE
Commissioner of Income Tax v. Central India Spg. & Wvg. Co. Ltd. – [1939] 7 ITR 187 (Nag.) 1367. „His share‟ means employer‟s contributions and interest thereon up to date of transfer. „His share‟ means employer‟s contributions and interest thereon up to date of transfer. Commissioner of Income Tax v. Central India Spg. & Wvg. Co. Ltd. – [1939] 7 ITR 187 (Nag.) 1368. Words „without interest‟ means „without taking into account the interest earned on the fund after it has been transferred to the trustees‟. Words „without interest‟ means „without taking into account the interest earned on the fund after it has been transferred to the trustees‟. _______________
ANIMALS - APPLICATION OF PROVISIONS
Ganeshilal Bhattqawala, In re – [1938] 6 ITR 489 (All.) 1369.
Deduction cannot be granted in respect of animals sold, not because they became useless but because business is closed down.
Where due to closure of his dairy business the assessee sold his livestock and claimed the resultant loss as a deduction from its income
978 Section 23
Income Tax Digest.
from brick-kiln and property, it was held that the allowance could not be given as the words „for the purpose of the business‟ in the said clause is referable to the business in respect of which a return has been called for an submitted, and not a closed business.
979 DEDUCTIONS - ALLOWANCES
Section 23(1)(iii)
Section 23(1)(iii)* Current repairs
PAGE NO
EXPENDITURE ON REPAIRS
1370. Fair and relevant standard for evaluating the _ reasonableness of expenditure on repairs. [1980] 41 TAX 182 (H.C. Lah.)
980
1371. „Mosaic flooring‟ of Cinema Hall constitutes “current _ repairs”. [1968] 17 TAX 209 (H.C. Dacca)
981
*
Corresponding to section 10(2)(v) of the 1922 Act.
980 Section 23(1)(iii)
Income Tax Digest.
Section 23(1)(iii)* Current repairs
EXPENDITURE ON REPAIRS
Burhan Transport Service Ltd., Wah Cantt. v. Commissioner of Income Tax, Rawalpindi – [1980] 41 TAX 182 (H.C.Lah.) 1370.
Fair and relevant standard for evaluating the reasonableness of expenditure on repairs.
Keeping in view the past history as depicted by the petitioner himself it cannot be said that the variance is so great as to appear to be arbitrary. It has also to be kept in view that the accident expenditure has been separately provided for and similarly heavy expenditure on purchase of spare parts not covered by this permissible expenditure. In the absence of the stock registers and proper accounts the controversy raised by the petitioner remains substantially in the domain of facts and poses no question of law. The finding of fact recorded is that there is no stock register at the purchase and is of the spare parts and that the accounts kept are defective. In the absence at these documents the authorities have adopted a fair and relevant standard for evaluating the reasonableness of the expenditure on repairs. Commissioner of Income Tax, East Pakistan, Dacca v. Gulistan Cinema Company, Dacca – [1968] 17 TAX 209 (H.C.Dacca) 1371.
„Mosaic flooring‟ of Cinema Hall constitutes “current repairs”.
The assessee derived income from exhibition of films. In its assessment for the charge year 1960-61 the assessee claimed a sum of Rs.20,803 towards repairing expenses. This amount was made up of Rs.9,240 on account of oil painting and Rs.11,563 on account of mosaic flooring of the cinema hall. The assessee was a tenant but he could not produce any agreement effect that it was its duty to undertake the repairs. The Income Tax Officer disallowed the entire claim on the ground that it was of capital nature. The Appellate Assistant Commissioner allowed as admissible expenses the amount of Rs.9,240 spent for oil painting of the walls of the cinema hall. He, however, *
Corresponding to section 10(2)(v) of the 1922 Act.
981 DEDUCTIONS - ALLOWANCES
Section 23(1)(iii)
upheld the disallowance of Rs.11,563 which was spent for mosaic following, on the ground that it was an expenditure of capital nature. On further appeal the Appellate Tribunal allowed deduction of the amount of Rs.11,563 holding that such an amount came within the expression of „current repairs as contemplated in section 10(2)(v) of the Income Tax Act. It also observed that this deduction would be allowable under section 10(2)(xvi) of the said Act. On a reference: Held,
that mosaic flooring, in the facts and circumstances of the ease, would be current repairs within the meaning of clause (v) of sub-section (2) of section 10 of the Income Tax Act. The Tribunal was right in deleting the disallowance of Rs.11,563 and was also right in allowing deduction under section 10(2)(v) of the Act.
Case affirmed: I.T.A. No. 52 of 1961-62 [1964] 9 TAX 32 (Trib.)
982 Section 23(1)(v)
Income Tax Digest.
Section 23(1)(v) read with Third Schedule* Depreciation allowance
PAGE NO
DEPRECIATION IN GENERAL
1372. Unabsorbed depreciation cannot be set-off where assets to _ which it related were sold. [1982] 46 TAX 143 (H.C.Lah.) _ 1373. No depreciation for unseaworthy ship. [1982] 46 TAX 31 (H.C.Kar.)
984 985
1374. Assessee a transferee of an evacuee cotton factory with Provisional Transfer Order in his favour is entitled to _ depreciation. [1977] 35 TAX 178 (H.C.Lah.)
986
1375. Residence of buildings not meant for industrial labour do _ not qualify for depreciation. [1976] 35 TAX 40 (H.C.Lah.)
987
1376. Vessels registered outside Pakistan which were neither used nor installed in Pakistan for the first time; initial and additional depreciation on prorata basis is to be allowed. _ [1971] 23 TAX 121 (H.C.Kar.)
987
1377. Plant and machinery used by the firm was exclusive property of the partner and depreciation on plant and machinery was neither claimed nor allowed in the hands of the firm; partner is entitled to deduct depreciation from his _ share of profits in the firm. [1966] 13 TAX 214 (H.C.Lah.)
988
1378. Additional depreciation is to be allowed in case of change of status of business from partnership to an incorporated _ company. [1966] 13 TAX 185 (H.C.Dacca) _ 1379. Excess realised over WDV is taxable. [1966] 13 TAX 122 (H.C.Lah.)
989 990
COST HOW TO BE DETERMINED
1380. Cost how to be determined. 40 (S.C.Pak.)
*
_
1981 SCC 546 = [1981] 44 TAX
Corresponding to section 10(2)(vi) of the 1922 Act.
992
983 DEDUCTIONS – DEPRECIATION ALLOWANCE
Section 23(1)(v) PAGE NO
DEPRECIATION ON BUILDINGS EXPLAINED
1381. Depreciation on buildings explained. 1990 PTD 834
_
1980 SCC 471 = 993
WORLD DEPRECIATION POOL
1382. Non-resident company can set off depreciation from world _ pool. 1965 SCC 240 = [1965] 12 TAX 57 (S.C.Pak.)
993
FULL DEPRECIATION IN CASE OF PRE-DISSOLVED AND POST RECONSTITUTED
1383. Pre-dissolved and post reconstituted firms should have been treated as a separate entity for each period and each firm _ was entitled to full depreciation in each period. [1993] 67 TAX 227 (H.C.Lah.)
994
DEPRECIATION IS ADMISSIBLE ON ASSETS RECEIVED AS GIFT
1384. Depreciation is admissible on assets received as gift. 63 TAX 163 (H.C.Kar.) = 1991 PTD 359 DEPRECIATION ON HOTEL BUIDLING
1385. Hotel building is not a “factory”. (H.C.Kar.)
_
_
[1991] 994
[1990] 62 TAX 34
1386. Purchase of hotel building from Settlement Department in auction where face value is much lower rates than their face value, depreciation, will be admissible on the actual price _ paid and not the face value. [1971] 23 TAX 161 (H.C.Kar.)
996
997
DEPRECIATION OF UNREGISTERED FIRM CAN BE CARRIED FORWARD AND SET OFF AGAINST PROFITS OF REGISTERED FIRM
1387. If Unregistered firm is assessed as registered firm in subsequent year any loss and depreciation of unregistered firm can be carried forward and set off against profits of _ registered firm. [1973] 28 TAX 9 (H.C.Lah.)
999
DIFFERENCE BETWEEN ORIGINAL COST PRICE AND WRITTEN DOWN VALUE
1388. Transfer of assets constitutes “sale” and difference between original cost price and written down value is taxable. _ [1966] 13 TAX 271 (H.C.Dacca)
1000
984 Section 23(1)(v)
Income Tax Digest.
Section 23(1)(v) read with Third Schedule* Depreciation allowance
DEPRECIATION IN GENERAL
Pakistan Lyallpur-Samundri Transport Co. Ltd. Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1982] 46 TAX 143 (H.C.Lah.) 1372.
Unabsorbed depreciation cannot be set-off where assets to which it related were sold.
The petitioner is a private Ltd. Company engaged in the transport business. It had admittedly an unabsorbed depreciation of Rs.73,708 carried forward from the assessment year 1967-68 requiring consideration in the profit and loss account of the subsequent years. It was taken into consideration and benefit given by the Income Tax Officer for the assessment year 1968-69 of which assessment was finalized by order dated 25.11.1968. On 27.10.1970 a notice was served on the assessee seeking its rectification by disallowing the benefit of the unabsorbed depreciation carried forward from earlier years on the ground that “since the assets to which the unabsorbed depreciation allowance related had been sold and were not in existence during the year in question, the unabsorbed allowance relating to those assets shall have to be ignored”. The petitioner objected to such rectification without disputing that the assets to which the unabsorbed depreciation related had in the meantime been alienated or were not in existence with the petitioner-Company. Nevertheless, the Income Tax Officer ignored it on the ground that “the assets from which the said amount of unabsorbed depreciation of Rs.73,708 have meanwhile been sold and nothing is in existence this amount shall not be carried forward”. The petitioner went in appeal to the Tribunal which too came to the conclusion that in view of the amendment introduced in section 10 sub-section (2) clause (vi) by Finance Act, 1965, the position could not be any different and “the
*
Corresponding to section 10(2)(vi) of the 1922 Act.
985 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
appellant‟s representative perhaps lost sight of these provisions and consequently on admitted facts we cannot sustain this objection”. The first question which requires determination in the case is whether on the facts before the Appellate Tribunal the interpretation of the law was correct or not. The authorities have taken the view that after this amendment the assets had to be retained for claiming set off against the business accounts of the unabsorbed depreciation of the same assets carried forward from previous years. The only objection that the learned counsel for the petitioner seems to be taking to such an interpretation is that in that case the clause that follows i.e. “if there is no such allowance for that year be deemed to be the allowance for that year and so on for succeeding years” becomes redundant. This argument is advanced on the assumption that every asset retained must earn depreciation and there cannot be a situation where the asset is retained but it does not earn depreciation. This assumption itself is not correct for the very succeeding clause i.e. clause (e) places a restriction that “the aggregate of all such allowances made under this Act or any Act repealed hereby, or under the Indian Income Tax Act, 1886, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant, or furniture, as the case may be”. Therefore, theoretically a situation may arise where the plant, machinery etc. may be in existence and in the hands of the assessee yet it may not earn depreciation on account of the ceiling on that account having already been reached. Therefore, a situation can readily be visualised where even after retaining the assets the same may not earn depreciation at all. We find that the petitioner was rightly denied the set off and the unabsorbed depreciation carried forward was rightly ignored in the assessment years in question. We answer the question accordingly. The petitioner shall bear the costs of the proceedings. Pan Islamic Steamship Co. Ltd. v. Commissioner of Income Tax, Karachi – [1982] 46 TAX 31 (H.C.Kar.) 1373.
No depreciation for unseaworthy ship.
The Tribunal has come to finding that the seaworthiness of the ship had not been proved in spite of opportunity having been given to the applicants to prove the same. We are in agreement with the view of the Tribunal that the “mere survey reports of the repair of the ship does not prove the seaworthiness of the ship in view of the fact there was no evidence produced from any Kobe Port Authority, in respect of the same. We are not impressed by the statement that mere sailing of ship on its own steam amounts that it was seaworthy. What was to be
986 Section 23(1)(v)
Income Tax Digest.
proved by the applicants was that it was seaworthy for the purpose of sailing. One cannot understand what prevented the applicants from proving the seaworthiness of the ship by producing certificate from competent authority of the Port of disembarkation particularly when the Tribunal had required the applicants to produce the certificate of the seaworthiness of the ship. The applicants had failed to produce that certificate of seaworthiness. They had also failed to produce the Insurance Policy and in any case, the Insurance Policy could not prove seaworthiness of the ship. We are consequently of the view that since the Tribunal has considered the material evidence produced by the applicant in respect of seaworthiness of the ship, but it has not accepted that evidence and has given reasons for the same then the same cannot be termed as an arbitrary finding or a finding inconsistent with the evidence. In any case, the decision of the Tribunal is really a decision of question of fact about the seaworthiness of the ship and the same is based on cogent reasons and does not appear either arbitrary or devoid of any reason or inconsistent with the evidence as sufficient evidence was not produced and the evidence has been fairly discussed and has not been found satisfactory. The applicants have failed to produce sufficiently reliable evidence and in these circumstances, the decision of the Appellate Tribunal was justified. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. Batala Cotton Ginning Pressing and General Mills, Lyallpur – [1977] 35 TAX 178 (H.C.Lah.) 1374.
Assessee a transferee of an evacuee cotton factory with Provisional Transfer Order in his favour is entitled to depreciation.
Learned counsel for the petitioner vehemently argued that the case of the assessee does not fall within the purview of section 10(2)(vi) of the Income Tax Act since the property does not belong to the assessee. We are afraid, we cannot agree with the submission made, for the issuance of Provisional Transfer Order confers right on the assessee though subject to certain conditions. We asked the learned counsel as to whether the Mill has been taken away from the assessee by the Settlement Department to which he replied in the negative. We are of the considered view that the Tribunal was right in allowing the relief to the assessee. The Supreme Court has held in Rahim Bakhsh v. Ch. Ahmad Bakhsh and others (PLD 1964 SC 189) that certain rights do accrue to the transferee.
987 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
Case referred to : Rahim Baksh v. Ch. Ahmad Baksh and others (PLD 1964 SC 189).
Commissioner of Income Tax, Lahore v. Colony Textile Mills Ltd., Lahore – [1976] 35 TAX 40 (H.C.Lah.) 1375.
Residence or buildings not meant for industrial labour do not qualify for depreciation.
A bare reading of the first sub-clause shows that it is applicable to such buildings as have been completed within the period mentioned in that sub-clause and are not covered by sub-clause (aa) and sub-clause (b). The nature or use to which such buildings are put are alien to subclause (a) as no reference has been made to either of the aforesaid matters in this sub-clause. Such buildings are entitled to a rebate of 15 per cent of the cost. Sub-clause (aa) deals with such buildings as are used for the purposes of residence but only by industrial labour and which have been constructed between the dates mentioned in that sub-clause. The depreciation to be allowed in cases falling within this clause is 25 per cent of the cost of the assessee. Sub-clause (b) is attracted to all other buildings, i.e. all buildings which do not fall within the four corners of those described in subclause (a) and sub-clause (aa). The depreciation in their case is allowable at 10 per cent. The present case relates admittedly to buildings which were constructed between the 1st day of April, 1946, and the 30th day of June, 1975, and were not meant for housing industrial labour. It is, therefore, very clear to us that neither being buildings which were meant for the residence of industrial labour nor being such as were not constructed between the 1st day of April, 1946 and 30th day of June, 1975, they could not by any stretch of imagination be classified as buildings covered by sub-clause by (aa) and sub-clause (b). Commissioner of Income Tax, Karachi v. Shahennihon Steamship Co. Ltd., Karachi – [1971] 23 TAX 121 (H.C.Kar.) 1376.
Vessels registered outside Pakistan which were neither used nor installed in Pakistan for the first time; initial and additional depreciation on pro rata basis is to be allowed.
The assessee, a foreign company, carried on business of plying ships in the seas of the world including the waters of Pakistan. In respect of the assessment year 1956-57 the assessee declared a loss of Rs.11,181/-, which included the claim of initial depreciation under section 10(2)(vi) of the Income Tax Act, and additional depreciation under rule 8(2) (now rule 9) of the Income Tax Rules. The Income Tax
988 Section 23(1)(v)
Income Tax Digest.
Officer adopting the second method of calculation envisaged in rule 33 (now rule 40) of the Income Tax Rules, took into consideration the total world income of the company and then by taking into consideration the receipts of the company in Pakistan, found out the proportion of such receipts to the total receipts in the world and adopted the profits of the company in Pakistan to be an amount that represented the proportion of the receipts of the company in Pakistan. In this manner he determined the loss in Pakistan at Rs.853. He farther took the view that the assessee-company was not entitled to initial and additional depreciation as claimed. The Appellate Assistant Commissioner, on appeal by the assessee, accepted the claim of the assessee holding that as the Pakistan income was worked out on prorata basis, the appellant‟s claim on account of depreciation both initial and additional, could not be ignored while computing the total world income. The Appellate Tribunal concurred in the view taken by the Appellate Assistant Commissioner. On a reference it was contended on behalf of the assessee that the meaning of the words “and not having previously been used in Pakistan has been installed”, appearing in section 10(2)(vi) and rule 8(2) do not mean that a ship should have been for the first time installed in Pakistani waters because the expression “installed” is unqualified. On the other hand it was urged on behalf the department that it is implicit in the language of the provision that the ship should have been for the first time installed in Pakistani waters. It was argued that the words “not having previously been used in Pakistan” occur before the words “has been installed”, therefore, it was an unnecessary repetition to add the words “in Pakistan” after the words “has been installed”. Held, that the assessee is entitled to claim the initial and additional depreciation even if the ships were not for the first time installed in the taxable territory provided that assessment is made according to the second method prescribed by rule 33 of the Income Tax Rules. Case relied on: Netherlands Steam Navigation Co. Ltd. v. Commissioner of Income Tax [1969] 74 ITR 72.
Commissioner of Income Tax v. Muzaffar-ud-Din and Sons – [1966] 13 TAX 214 (H.C.Lah.) 1377.
Plant and machinery used by the firm was exclusive property of the partner and depreciation on plant and machinery was neither claimed nor allowed in the hands of the firm; partner is entitled to deduct depreciation from his share of profits in the firm.
The assessee was a partner in two registered firms. Besides, he carried on business of commission agency in hides and skins. The
989 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
machinery and the plant used by these two firms were the exclusive property of the assessee and depreciation thereon was neither claimed nor allowed in the hands of these firms. In his personal assessment the assessee declared share of profits from these two firms and claimed depreciation on the machinery and plant which were owned by him. The Income Tax Officer disallowed the claim on the ground that the share income in the hands of the assessee was not assessable under section 10 but under section 12 of the Income Tax Act. The Appellate Assistant Commissioner, on appeal by the assessee, reversed the order of the Income Tax holding that the share income was assessable under section 10(1) of the Act and the assessee was therefore entitled to be allowed depreciation under section 10(2) of the Act. The Appellate Tribunal concurred in the view taken by the Appellate Assistant Commissioner. On a reference: Held, that the share income of the individual assessee as a partner of these two firms falls under the head profits and gains of „business‟ within the meaning of section 6(iv) and section 10(1) of the Income Tax Act and the assessee is entitled to deduct the depreciation permissible to him upon his machinery and plant under clause (vi) of section 10(2) in computing his total income under the head “business”. Cases referred to : Commissioner of Income Tax v. Sir S.M. Chitnavis (1932) 59 l.A. 290 and P.M. Mathuraman Chettiar v. Commissioner of Income Tax (1957) 31 ITR 61.
Commissioner of Income Tax v. Bufco Tanneries Limited – [1966] 13 TAX 185 (H.C.Dacca) 1378.
Additional depreciation is to be allowed in case of change of status of business from partnership to an incorporated company.
The assessee originally carried on business in tannery, hides and skins as a firm, comprised of 6 partners. The tannery business was set up during the previous year relevant to the assessment year 1956-57 and the firm was allowed the benefit of additional depreciation on machinery for the assessment year 1956-57 under rule 8(2) of the Income Tax Rules. In April 1956 the firm incorporated itself into a private limited company. The share-holders of the new company were the same and they were allotted a share of equal value as shareholders in the new company against their capital in the firm. In respect of the assessment year 1957-58 the assessee-company claimed
990 Section 23(1)(v)
Income Tax Digest.
additional depreciation allowance. The Income Tax Officer allowed 10 per cent depreciation and rejected the claim for additional depreciation on the ground that the machinery was second-hand and not installed by the assessee-company. The Appellate Tribunal allowed additional depreciation holding that there was no transfer or change in the ownership in the real sense and the partners of the firm, who were carrying on the business, had formed themselves into a private limited company. The High Court affirming the order of the Appellate Tribunal: Held, that it cannot be said that the machinery is secondhand and we are of the opinion that the depreciation claimed went with the assets and even if it can be said that the assets were owned by two different legal persons, the allowance has no reference to the persons who owned it but attached to the machinery and plant itself. In this case it is only readjustment made by the partners of the firm to carry on their business as a limited company. The enterprise is the same, the persons are identical, the assets, machinery and plant have been absorbed in the share capital of the new company and in this way neither any change of ownership has taken place nor any reinstallation of machinery has been occasioned. Commissioner of Income Tax, Lahore v. West Punjab Factories Limited, Okara – [1966] 13 TAX 122 (H.C.Lah.) 1379.
Excess realised over WDV is taxable.
The assessee, a private limited company, owned four cotton factories. In the account years, relevant to the assessment years 1958-59 and 1959-60, it sold away two of its factories which yielded a surplus of Rs.96,493 and. Rs.1,00,913, respectively. The Income Tax Officer subjected to tax the surplus arising out of the sale of machinery in the respective years under the second proviso to section 10(2)(vii) of the Income Tax Act. The assessee appealed to the Appellate Assistant Commissioner on the ground that since the two factories were not used in the relevant accounting years, the second proviso to section 10(2)(vii) of the Act was not attracted. The Appellate Assistant Commissioner affirmed the order of the Income Tax Officer holding that the condition for the application of the proviso was fulfilled in as much as the assessee had carried on its normal business by the working of the remaining factories. In second appeal the assessee in addition to other contentions again urged before the Appellate Tribunal that the second proviso was not attracted because
991 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
the two factories which were sold were not actually used during the previous year. This plea found favour with the Appellate Tribunal which held that the surplus was not taxable. In coming to this conclusion the Tribunal observed that “the words “such building, machinery or plant” appearing in the second proviso obviously refer to that machinery, building or plant which has been referred to in clause (iv) of section 10(2) and they make it clear that only (that) building, machinery or plant is contemplated which had actually been used for the purposes of the business during the year of account.” The High Court reversing the order of the Appellate Tribunal: Held, that (i)
the Tribunal was not right in holding that the surplus arising out of the sale of the two factories by the assessee was not liable to tax under the second proviso to section 10(2)(vii) of the Income Tax Act; and
(ii)
notwithstanding that the two factories were not used for the purpose of the assessee‟s business during the relevant accounting period since depreciation was allowed on them in the preceding years under clause (vi) the same was liable to be taken back to the extent the sale price exceeds the cost price.
The word “such” in clauses (i), (iv), (vi) and (vii) provides that in order to earn allowances mentioned in them the “building, machinery or plant” must have been used for the purpose of business, profession or vocation in the previous year which yielded profits or gains brought to charge under sub-section (1). The second proviso to clause (vii) is, however, an independent provision having no relation whatever with the use of the “building, machinery or plant” in the relevant accounting period. By this proviso the revenue, in fact takes, back what it had given by way of depreciation allowance in preceding years and not only in the previous year for otherwise the assessee would receive allowance in excess of his original cost. The condition on which the revenue takes back the allowance is, therefore, not dependent in any sense to the use of the “building, machinery or plant” in the previous year but to the total allowance given to the assessee since he first came to use these assets for the purposes of his business. The word “such” in the proviso refers to “building, machinery or plant” used for the purposes of the business, profession or vocation as
992 Section 23(1)(v)
Income Tax Digest.
provided in clause (iv) and (vi), but it will be noticed that no specific accounting period is mentioned in these clauses. The result is that the “building, machinery or plant” must have been used in the previous year is, therefore, achieved by reading section 10(1) along with section 3 of the Act which provides that tax shall be charged in respect of the total income of the previous year. There is, thus, no warrant for the proposition that “building, machinery, or plant” must have been used in the relevant accounting period to attract the second proviso to clause (vii) of section 10(2). It is well-settled rule of interpretation that a proviso cannot travel beyond the scope of the main enactment, but apart from the use of the word “such” there is no word in the clause to the effect that the building, machinery or plant must have been used for the purposes of the business during the “previous year”. The second proviso, therefore, in no manner travels beyond the scope of the main enactment or seeks to control it. In fact there is no true relationship between the main clause (vii) and the second proviso to it. The clause deals with an allowance and the proviso takes back what was given as an allowance in the preceding years. Case reversed: Tribunal‟s order in I.T.A. Nos. 817 io 820 of 1961-62 [1963] 7 TAX 65 (Trib.) Cases not approved: Commissioner of Income Tax v. National Syndicate [1961] 3 TAX 149 (S.C.). _______________
COST HOW TO BE DETERMINED
Beach Luxury Hotel Ltd. v. Commissioner of Income Tax, Dacca – 1981 SCC 546 = [1981] 44 TAX 40 (S.C.Pak.) 1380.
Cost how to be determined.
Assessee was maintaining mercantile system of accounting. It purchased in auction an evacuee property and part payments were made through compensation books. The difference in nominal value of compensation books and price paid by assessee for obtaining it should be excluded from cost to the assessee for the purpose of depreciation allowance. _______________
993 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
DEPRECIATION ON BUILDINGS EXPLAINED
Commissioner of Income Tax, Lahore v. Colony Textile Mills Ltd., Lahore – 1980 SCC 471 = 1990 PTD 834 1381.
Depreciation on buildings explained.
A bare reading of the first sub-clause shows that it is applicable to such buildings as have been completed within the period mentioned in that sub-clause and are not covered by sub-clause (aa) and sub-clause (b). The nature or use to which such buildings are put are alien to subclause (a) as no reference has been made to either of the aforesaid matters in this sub-clause. Such buildings are entitled to a rebate of 15 per cent of the cost. Sub-clause (aa) deals with such buildings as are used for the purposes of residence but only by industrial labour and which have been constructed between the dates mentioned in that sub-clause. The depreciation to be allowed in cases falling within this clause is 25 per cent of the cost of the assessee. Sub-clause (b) is attracted to all other buildings, i.e. all buildings which do not fall within the four corners of those described in sub-clause (a) and sub-clause (aa). The depreciation in their case is allowable at 10 per cent. The present case relates admittedly to buildings which were constructed between the 1st day of April, 1946, and the 30th day of June, 1975, and were not meant for housing industrial labour. It is, therefore, very clear to us that neither being buildings which were meant for the residence of industrial labour nor being such as were not constructed between the 1st day of April, 1946 and 30th day of June, 1975, they could not by any stretch of imagination be classified as buildings covered by sub-clause (aa) and sub-clause. _______________
WORLD DEPRECIATION POOL
United Netherlands Navigation Co. Ltd. v. Commissioner of Income Tax, South Zone (West Pakistan), Karachi – 1965 SCC 240 = [1965] 12 TAX 57 (S.C. Pak.) 1382.
Non-resident company can set off depreciation from world pool.
In the case of a non-resident company where assessment is made on the basis of total world income, depreciation allowance is allowable and can be set off in relation to world depreciation pool. _______________
994 Section 23(1)(v)
Income Tax Digest.
FULL DEPRECIATION IN CASE OF PRE-DISSOLVED AND POST RECONSTITUTED FIRMS
Commissioner of Income Tax, Lahore (Now at Multan) v. Five Star Calico, Printing Works, Lyallpur (Now Faisalabad) – [1993] 67 TAX 227 (H.C.Lah.) 1383.
Pre-dissolved and post reconstituted firms should have been treated as a separate entity for each period and each firm was entitled to full depreciation in each period.
We are in respectful agreement with the views expressed in the precedent cases. In addition, the Income Tax Appellate Tribunal rightly upheld the plea of the assesses that the firm should be treated as a separate entity in respect of each period and thus entitled to full depreciation accordingly. Their reliance upon the case of Rivoli Theatres, Karachi (supra) as also Gouri Sankar Sheroff and others (supra) has not been shown to be suffering from any infirmity whatsoever. As to the plea of Mr. Muhammad llyas Khan, Advocate, that the case the firm is treated as separate entity and allowed full depreciation for each period, this would tantamount to multiply/enhancement of the claim of the assessee if and when there is change in the constitution of the firm, suffice it to say that this proposition is too wide and startling and no basis has been laid down to successfully canvass the same. Cases referred to: Rivoli Theaters, Karachi v. Commissioner of Income Tax, South Zone, Karachi and another (1971 SCMR 621); Commissioner of Income Tax, Karachi East, Karachi v. Aznsons Dairies Ltd., Karachi (1975) 31 TAX 62 (S.C.Pak); Commissioner of Income Tax v. S.K. Sahana & Sons, Kodarma (AIR 1946 Pat 414); Commissioner of Income Tax v. Motors and General Stores Ltd. (AIR 1946 Mad. 327); Commissioner of Income Tax v. Dalmia Cement Ltd. (AIR 1946 Pat. 39) and Commissioner of Income Tax v. Massey & Co., Ltd. (AIR 1929 Mad. 453). _______________
DEPRECIATION IS ADMISSIBLE ON ASSETS RECEIVED AS GIFT
Pakistan Tobacco Co. Ltd. v. Pakistan through The Secretary, Ministry of Finance, Islamabad and 4 others – [1991] 63 TAX 163 (H.C.Kar.) = 1991 PTD 359 1384.
Depreciation is admissible on assets received as gift.
The petitioner had set up his factory in 1976 which was extended during the years 1982-83, 1983-84 and 1984-85. The petitioner
995 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
claimed depreciation on such machinery. These machineries were given to the petitioner as a gift by its parent company. The Income Tax Officer while making reassessment under section 65 and assessing in respect of assessment year 1986-87 observed that as the plants and machineries were gifted to the petitioner there was no actual cost to the assessee for acquiring them and therefore, there could be no written down value of these machineries and no depreciation could be claimed. Under the scheme of the Ordinance, section 23 permits the depreciation allowance in computing the income from business or profession. The depreciation is allowed on any building, plant or machinery, furniture and fitting of which the assessee is the owner. The depreciation which is admissible under the third schedule to the Ordinance shall be allowed as deduction. The conditions for admissibility of depreciation allowance as specified by the Third Schedule are that the machinery, plant, building and furniture must be owned by the assessee and must have been used for the purposes of business or profession during the accounting year. Once the entitlement is proved the depreciation allowance will be calculated as provided by rule 2 . . . . . once the entitlement is established there remains question of calculation of depreciation allowance in manner provided by Rule 2 which is a formula for mechanical calculation and has no reference to the conditions of entitlement to claim depreciation. In these circumstance can it be claimed that although the assessee fulfils requisite condition, he cannot claim depreciation as he has acquired the assets without payment of any price. This cannot be the intention of the legislature otherwise section 23(1)(v) and rule 1 while prescribing the condition that the assessee must be owner must have provided that such ownership should have been acquired on payment of consideration. The petitioner‟s stand is that it has received the machinery as a gift. According to the Income Tax Officer as no cost has been paid by the petitioner it is not entitled to any depreciation. As discussed above section 23(1)(v) and Rule 1 of the Third Schedule lay down the conditions precedent for claiming depreciation. Once the entitlement is established there remains question of calculation of depreciation allowance in the manner provided by Rule 2 which is a formula for mechanical calculation and has no reference to the condition of entitlement to claim depreciation. In these circumstances can it be claimed that although the assessee fulfils the requisite condition, he cannot claim depreciation as he has acquired the asset without payment of any price. This cannot be the
996 Section 23(1)(v)
Income Tax Digest.
intention of the legislature otherwise section 23(1)(v) and rule 1 while prescribing the condition that the assessee must be the owner must have provided that such ownership should have been acquired on payment of consideration. A property can be acquired by purchase, exchange, acquisition, gift, inheritance or will. Except in cases of purchase, exchange or acquisition the new owner does not pay any consideration to its previous owner for acquiring ownership. Once entitlement is established term „actual cost‟ should be interpreted in such a manner that a written down value is determined. The „actual cost to the assessee‟ may be the price paid by him or the price on the date of transfer which he would have been liable to pay for such machinery/asset. A fair market value on the date of transfer will be written down value of the machinery. In Pakistan Rule 8(7) of the Third Schedule to the Income Tax Ordinance has adopted the same definition of the „written down value‟ which was found in the Income Tax Act, 1922. It has been interpreted in the aforestated judgments and no other judgment taking a different view has been brought to our notice. Where an assessee becomes entitled to the depreciation allowance but such asset was acquired by him by gift or inheritance, the written down value shall be the fair market value of such asset on the date of acquisition. The petitioner was therefore entitled to depreciation. Cases referred to : Nawabzada Mohammed Amir Khan v. C.E.D. (PLD 1961 S.C. 119); Sind Industrial Trading Estate Ltd. Karachi v. C.B.R. and 3 others (PLD 1975 Kar. 128); Nagina Silk Mills, Lyallpur v. Income Tax Officer (1963 PTD 633); (PLD 1958 SC 437); (PLD 1959 SC 177); (1968) 18 Tax 1; (1969) 19 Tax 97; (1972 SCMR 556); (1989) 179 ITR 287; (1989) LTR 140; (PLD 1979 Lah. 559); (1985 PTD 465); Commissioner of Income Tax v. E. Solemon & Sons (1933) 1 ITR 324 and Francis Vallabarayar v. Commissioner of Income Tax (1960) 40 ITR 426. _______________
DEPRECIATION ON HOTEL BUILDING
Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone, Karachi – [1990] 62 TAX 34 (H.C.Kar.) 1385.
Hotel building is not a “factory”.
The applicant is a public limited company in the years under assessment it claimed depreciation an buildings, consisting of office and hotel buildings at an enhanced rate of 5% and 10% on the plea that the hotel buildings owned by the applicant fall within the definition of factory buildings. This contention was rejected and the
997 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
Income Tax Officer allowed the normal depreciation on office and hotel building at the rate of 2/1-2% and 5% respectively. . . . . . the word „factory‟ connotes an industrial operation in which manufacturing, production or repairing of goods and products is carried out under any process by manual, power or mechanical device. The definition of „factory‟ as defined in the Factories Act 1934 will not be applicable to the present case as it is a special meaning given for that particular Act with reference to the workers and their welfare. In any event, the applicant is not engaged in manufacturing or production of goods. its main business is to run the hotel and if in that process food is prepared the applicant can not be converted into a factory. Commissioner of Income Tax v. Beach Luxury Hotel Ltd., Karachi – [1971] 23 TAX 161 (H.C.Kar.) 1386.
Purchase of hotel building from Settlement Department in auction where face value is much lower rates than their face value, depreciation, will be admissible on the actual price paid and not the face value.
The assessee purchased hotel building with lands attached to it, an evacuee property, in an open auction held by the Settlement Department for a sum of Rs.1,21,00,000. An earnest money of Rs.5,000 was paid by the assessee in cash. before the commencement of the auction and a further sum of Rs.5 lakhs were paid at the fall of the hammer. After the auction but on the same date the assessee entered the transaction in its books of account showing its liability to be of Rs.1,21,00,000 without clarifying that the consideration was payable in the form of compensation books also. Out of the entire balance of the purchase price, Rs.50,000.00 were paid by the assessee by surrendering compensation books of that face value. This was done over a period of few years according to the time allowed by the Settlement authorities. But in the assessment year 1962-63, which followed the year of the auction, the assessee claimed full depreciation on buildings. For this purpose the assessee had to apportion the price of Rs.l,21,00,000 between the superstructure and the land. An architect was employed by the assessee who calculated the value of the building to be Rs.25 lakhs and that of the land to be Rs.96 lakhs. In this manner the assessee claimed depreciation for the building on the basis bf the entire value, namely, Rs.25 lakhs. The Income Tax Officer found that the assessee had paid Rs.30,79,485 including the above mentioned two sums in the assessment year and that he had
998 Section 23(1)(v)
Income Tax Digest.
made the payment of Rs.25,29,485 by surrendering compensation books of that face value which it had purchased from the market for Rs.13,46,015. The assessing officer held that the assessee was entitled to depreciation of the building firstly in respect of the price which it had actually paid and not the price which was apportioned by the architect, and secondly that such depreciation could be claimed in the assessment year with respect to that part of the price which was actually paid in that year. The assessee‟s first appeal was dismissed by the Appellate Assistant Commissioner. The Appellate Tribunal, on second appeal by the assessee, held that “depreciation is available to the assessee on Rs.25 lakhs as a whole during the year under consideration and not on the lesser amount actually paid to satisfy the demand of Rs.25 lakhs nor in the piecemeal manner as done by the assessing officer”. Against this order the department filed application under section 66(1) of the Income Tax Act requiring the Tribunal to refer to the High Court the question (i) whether the sum of Rs.25 lakhs was the actual cost which included face value of the compensation books purchased at much lower rates and (ii) depreciation could be allowed on the total cost of the building in the year under consideration although actual payments were made in subsequent years. The Tribunal referred to the High Court the first question but refused to refer the second question holding that although it was “very much a question of law‟‟ but it was too simple to be referred to the High Court. On reference the High Court answering the first question in the negative and directing the Tribunal to refer to it the second question: Held, that (i)
the assessee has not surrendered compensation books which were issued to him to compensate him for his property but were purchased by him from the market at a much lower price than their face value, therefore, the auction price which he had actually paid by surrendering them is no more to him than the price of the compensation books paid by him. It is not possible to say that he has paid more money than that towards the auction price and
(ii)
it was a term of the auction sale that the price be paid by installments which fact, according to one side, is open to the interpretation that the liability to pay was broken up into parts and that, therefore, payability with respect to the installments may not be said to be separate from the liability which was prima facie broken up.
999 DEDUCTIONS - DEPRECIATION ALLOWANCE
Section 23(1)(v)
Case distinguished : Cement Agencies Ltd. v. Income Tax Officer (1969) 20 TAX 33 (S.C.). Cases referred to : Pindi-Kashmir Transport Co. Ltd. v. Commissioner of Income Tax (1962) 2 TAX 142; Motiram Roshanlal Coal Co. v. Commissioner of Income Tax (1933) 1 ITR 329; Commissioner of Income Tax v. Harveys Ltd., (1940) 8 ITR 307; Commissioner of Income Tax v. Poona Electric Supply Co. Ltd., (1946) 14 ITR 622; Commissioner of Income Tax v. Ranchl Electric Supply Co. Ltd. (1954) 26 ITR 89 and Corporation of Birmingham v. Barnes (H.M. Inspector of Taxes) (1935) 19 Tax Cases 214. _______________
DEPRECIATION OF UNREGISTERED FIRM CAN BE CARRIED FORWARD AND SET OFF AGAINST PROFITS OF REGISTERED FIRM
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Pakistan Standard Oil & Ginning Mills, Multan – [1973] 28 TAX 9 (H.C. Lah.) 1387.
If unregistered firm is assessed as registered firm in subsequent year any loss and depreciation of unregistered firm can be carried forward and set off against profits of registered firm.
For the charge year 1962-63, the Income Tax Officer made assessment jut the status of a registered firm as against the preceding year in which assessment was made in the status of an unregistered firm. The Income Tax Officer, however, refused to set off the losses including depreciation of Rs.40,250 relating to the preceding year‟s assessment against the profits of the assessment year 1962-63 for the reason that as a result of registration the firm had assumed a different entity. When the matter reached the Appellate Tribunal it allowed the claim holding that the conversion of an unregistered firm into a registered firm did not affect its legal entity and as such the losses suffered as an unregistered firm could be carried forward and set off against the profit earned as a registered firm during the sub-sequent year. On a reference it was contended before the High Court. On behalf of the department, that the cases relied on by the Tribunal did not deal with the offset of depreciation but that of losses and as such were not relevant to the facts and circumstances of the case under reference. Affirming the order of the Appellate Tribunal the High Court: Held, that the authorities relied upon by the Income Tax Appellate Tribunal were rightly invoked. No doubt, as contended by the learned counsel for the department, these authorities do not specifically refer to the offset of depreciation, yet the principle remains the same. Of course, offset of losses would take precedence over that of depreciation.
1000 Section 23(1)(v)
Income Tax Digest.
Case relied on: Commissioner of Income Tax v. Yusuf and Company [1967] 15 TAX 4 and Commissioner of Income Tax v. Tayyab Moosa and Company [1967] 15 TAX 62. Case referred to: Y. Narayana Chetty and another v. Income Tax Officer [1939] 35 ITR 388. _______________
DIFFERENCE BETWEEN ORIGINAL COST PRICE AND WRITTEN DOWN VALUE
Commissioner of Income Tax, East Pakistan, Dacca v. A.K. Khan Plywood Co., Chittagong – [1966] 13 TAX 271 (H.C.Dacca) 1388.
Transfer of assets constitutes “sale” and difference between original cost price and written down value is taxable.
The partners of a firm who were carrying on the business of manufacture and sale of plywood, tea and tea-chest, etc. formed themselves into a private limited company, the shares allotted to each of them in the company being in the same proportion as the shares held in the firm. The assets of the firm having the written down value of Rs.2,13,349 were transferred to the company at the original cost of Rs.5,89,316. The question for decision before the High Court was whether the transaction was „sale‟, within the meaning of the second proviso to section 10(2)(vii) of the Income Tax Act and the difference between the written down value and the original cost was liable to tax. Held, that: (i)
if a firm sells its assets to another company the vendor is liable to pay Income Tax for the difference between the written down value on the date of the sale and the price at which the assets are actually sold, that is, the profits earned by it, even if the partners of the firm are identical; and
(ii)
there is no exception in the second proviso to clause (vii) of section 10(2) to the effect that if the property remains in the same hands, it will not be a sale within the meaning of this section. If there is a sale in the eye of law and if a profit results therefrom, the making of such profits is liable to taxation.
Case distinguished : Doughty v. Commissioner of Taxes (1927) A.C. 327. Case referred to : In re. Exchange Banking Company [1882] 21 Cd.Div. 519.
1001 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
Section 23(1)(vii)* Interest paid on borrowed capital
PAGE NO
GENERAL
1389. Interest paid on unpaid price is integral part of earning _ profit. 1993 SCC 1073=[1993] 68 TAX 19 (S.C.Pak.)
1004
1390. Department cannot disallow any part of interest if loan is _ used for business purposes. 1991 SCC 878 = [1992] 66 TAX 176 (S.C.Pak.)
1005
1391. Assessee is not to be deprived of the deduction only because _ the borrowed capital produces non-taxable income. [1937] 5 ITR 97 (Mad.)
1006
INTEREST ON MONEY BORROWED WHEN DEDUCTIBLE
1392. Interest paid on unpaid purchase price is allowable business _ expenditure. 1988 SCC 702 = [1989] 60 TAX 55 (S.C.Pak.) = 1989 PTD 500, 1989 PTD 55 _ 1393. Interest on money borrowed when deductible. 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.)
1006
1394. Relevance of fact that borrowed money was lost in _ succeeding assessment year. 3 ITC 209 (Mad.) _ 1395. Borrower to pay land revenue. [1936] 4 ITR 137 (Lahore)
1007
1396. Where borrowed fund has been utilised for non-business _ purposes, interest paid on it is to be disallowed. 2 ITC 281 (Pat.)
1006
1009
1009
DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE
1397. Distinction between capital and revenue expenditure. SCC 113 = [1962] 6 TAX 49 (S.C.Pak.)
_
1962
1398. Interest capitalised paid to acquire to machinery is entitled for deprecation and not allowable as revenue expenditure. _ [1991] 64 TAX 105 (H.C.Kar.)
*
Corresponding to section 10(2)(iii), (xvi), (xvi)(a) of the 1922 Act.
1009
1010
1002 Section 23(1)(vii)
Income Tax Digest. PAGE NO
1399. Interest paid on unpaid purchase price is not a revenue _ expenditure. [1985] 51 TAX 199 (H.C.Kar)
1010
1400. Expenses towards purchase of judicial stamp paper is an ingredient part of expenditure incurred for raising loan by issuance of debentures and is, therefore, arising from _ issuance of debentures of enduring nature. [1973] 27 TAX 253 (H.C.Lah.)
1012
1401. Interest paid by assessee company on overdrafts and loans to be invested in subsidiary-company is held revenue _ expenditure. [1966] 14 TAX 304 (H.C.Kar.)
1013
CAPITAL BORROWED - CONNOTATION OF
1402. Interest paid on unutilized capital is allowable deduction. _ [1987] 55 TAX 59 (H.C.Kar.)
1014
1403. Higher rate of interest is no basis to disallow the expenses. _ [1984] 50 TAX 196 (H.C.Kar.)
1016
1404. Interest paid on the overdrafts relating to predecessor‟s _ business is deductible allowance. [1984] 50 TAX 189 (H.C.Kar.)
1017
1405. If capital borrowed outside Pakistan is not utilised for the purposes of the business in Pakistan, interest is not allowable deduction when tax was not deducted at source. _ [1968] 17 TAX 133 (H.C.Dacca)
1018
1406. Interest neither paid to any agent of foreign company in Pakistan nor tax therefrom deducted at source in Pakistan _ is not allowable deduction. [1965] 12 TAX 64 (H.C.Dacca)
1019
1407. Unless there is borrowing of capital, interest is not _ deductible. [1936] 4 ITR 203 (Lahore)
1019
ILLUSTRATIONS WHERE INTEREST IS NOT DEDUCTIBLE
1408. Interest paid on deferred payment of purchase consideration _ is not deductible. [1946] 14 ITR 638 (Bom.)
1020
1409. Guaranteed interest paid to shareholder on paid up capital _ is not deductible. [1935] 3 ITR 277 (Cal.)
1020
1410. Where shareholders of assessee-fund, registered as a company, after paying certain contribution for certain period, were paid back contribution plus something which _ was called as „guaranteed interest‟. [1933] 1 ITR 46 (Mad.)
1021
1003 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii) PAGE NO
1411. Amounts paid to shareholders in excess of their contributions is not deductible under section 10(2)(iii) off the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, _ 1979]. [1937] 5 ITR 703 (Mad.)
1021
1412. Interest paid by surviving partners on the capital of the _ retiring partner, is not deductible. [1934] 2 ITR 284 (Mad.)
1021
1413. Where assessee, five brothers, which included four minors, purportedly entered into partnership with equal shares in a money-lending business allotted to them at the family partition, and in their assessment as an AOP claimed deduction of interest paid on capital introduced by the _ minors. 7 ITC 398 (Rangoon)
1022
1414. If debenture loan is illusory and colourable, interest paid _ thereon is not allowable. [1940] 8 ITR 307 (Mad.)
1022
1415. No trust or gift is created by mere book entries; interest _ credited to such accounts is not deductible. [1945] 13 ITR 311 (Mad.)
1022
1416. No trust or gift is created by mere book entries; interest _ credited to such accounts is not deductible. [1946] 14 ITR 716 (Bom.)
1023
1417. Where assessee‟s claim for deduction of interest paid on stridhana moneys of certain female relatives of the partner, was disallowed on ground that moneys were in reality, surplus investment of partners, no referable question of law _ would arise. 3 ITC 416 (Rangoon) _ 1418. Others. [1947] 15 ITR 87 (Mad.) _ 1419. Others. [1938] 6 ITR 243 (Lahore)
1023 1024 1024
GENERAL ILLUSTRATIONS
_ 1420. Position under 1922 Act. [1933] 1 ITR 202 (Sind); [1939] 7 ITR 662 (Mad.) _ 1421. Others. [1938] 6 ITR 476 (Pat.)
1024 1025
1004 Section 23(1)(vii)
Income Tax Digest.
Section 23(1)(vii)* Interest paid on borrowed capital
GENERAL
Packages Ltd. v. Commissioner of Income Tax – 1993 SCC 1073 = [1993] 68 TAX 19 (S.C.Pak.) 1389.
Interest paid on unpaid price is integral part of earning profit.
Assessee claiming deduction of interest on loan borrowed by him for import of machinery. Income Tax Officer disallowed such claim on the ground that interest relating to “pre-production stage” was being capitalised by him. He however, allowed depreciation at 10 per cent as the machinery was installed and used during the year under assessment. Income Tax Officer‟s decision in capitalising the assessment of interest was affirmed by the hierarchy of Income Tax. The High Court on reference answered in the affirmative the question referred to it as to “whether in the facts and circumstances of the case Income Tax Appellate Tribunal was justified in not allowing the specified amount being interest on loan for import of certain machinery, under section 10(2)(iii), Income Tax Act 1922”. Plea raised in leave to appeal was that although the High Court did take note of some Indian cases relevant directly or indirectly in the matter, yet it did not notice judgment of Supreme Court reported as 1989 SCMR 61, wherein it was ruled that the amount of interest paid by the purchaser of an industrial concern to the vendee on the unpaid price was an integral part of the profit earning process - Leave to appeal was granted to consider the question: whether the judgment (1989 SCMR 61) in question, supported assessee‟s case and to what extent as also the related question required examination. Assessee had a running business when he obtained loan for the purchase of additional machinery. Loan was not obtained for installation of machinery in order to go for new products but to add efficiency to the production already in existence. Amount of interest paid by assessee being an integral part of profit earning process *
Corresponding to section 10(2)(iii), (xvi), (xvi)(a) of the 1922 Act.
1005 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
related to the carrying on or conduct of business brings the case within the fold of section 10(2)(xvi) of the Act. Deduction of interest under section 10(2)(iii) has to be allowed in full regardless of the fact whether stage was pre-production or otherwise. Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. – 1991 SCC 878 = [1992] 66 TAX 176 (S.C.Pak.) 1390.
Department cannot disallow any part of interest if loan is used for business purposes.
The fact that the respondent was receiving lesser interest @ 4½ % while paying higher interest @ 9% to its creditors cannot be a ground to presume that the transaction was sham or has lost the character of a loan. In Commissioner of Income Tax v. Pudukothai 84 ITR 788, it was held that mere charging of interest at a lower rate on the money earned by the assessee is not sufficient to disentitle an assessee from claiming allowance under section 10(2)(iii). In East India Industries v. Commissioner of Income Tax 31 ITR 803, Birla v. Commissioner of Income Tax 44 ITR 847 and Bansidhar v. Commissioner of Income Tax 58 ITR 462, it was observed that in case of genuine business borrowings the department cannot disallow any part of the interest on the ground that the interest unreasonably high. In Amna Bai v. Commissioner of Income Tax 51 ITR 835, it was observed that if the assessee had enough funds the same cannot be made a ground for rejection that he needed no borrowing. Similar view was expressed in Ramkishan v. Commissioner of Income Tax 56 ITR 186 and Commissioner of Income Tax v. Bombay Samachar 74 ITR 723. The entire observation of the Tribunal is based on the advisability and possible conduct of a prudent businessman and nowhere it has been held in clear terms that the borrowed amount was not utilised for business purposes. The respondent had challenged the order of the Tribunal on the plea that the Income Tax Appellate Tribunal had misdirected itself in law in disallowing interest. It may be observed that the question as framed is wide enough and challenges the finding of the Tribunal as well. It was not based on the finding of the Tribunal but had termed the decision of the Tribunal as a result of misdirection in law which will include the challenge to the finding of fact if based on no evidence. We do not find any force in this contention. We, therefore, dismiss the appeal.
1006 Section 23(1)(vii)
Income Tax Digest.
S.A.S.S. Chellappa Chettiar v. Commissioner of Income Tax – [1937] 5 ITR 97 (Mad.) 1391.
Assessee is not to be deprived of the deduction only because the borrowed capital produces non-taxable income.
The assessee is not to be deprived of the advantages conferred by exemptions such as section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] only because the capital benefiting therefrom by means of permissible deductions happens to produce a non-taxable income. Where the assessee borrowed money for carrying on his money-lending business, and in the course of that business, was obliged to receive agricultural lands in settlement of debts, it was held that, despite agricultural income not being liable to tax, he was entitled to education of interest paid on that much of the capital borrowed as was represented by the agricultural lands. Note : The correctness of this decision was endorsed by the Supreme Court in Commissioner of Income Tax v. Indian Bank Ltd. [1965] 56 ITR 77 and in Commissioner of Income Tax v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC). _______________
INTEREST ON MONEY BORROWED WHEN DEDUCTIBLE
Commissioner of Income Tax, West Zone Karachi, & Others v. Khairpur Textile Mills Ltd. and others & Pakistan Progressive Cement Industries v. Commissioner of Income Tax, Karachi Ltd. – 1988 SCC 702 = [1989] 60 TAX 55 (S.C.Pak.) = 1989 PTD 500 1392.
Interest paid on unpaid purchase price is allowable business expenditure.
The assessee borrowed money for acquisition of land on which a cinema was built subsequently. Such expenditure (interest paid on borrowed money) was not for the acquisition of any property but was so closely related to the business that it could be viewed as integral part of the conduct of the business. It thus satisfied the test to bring it within the four corners of section 23(1)(vii) as revenue expenditure laid out wholly and exclusively for the purpose of business. Howrah Trading Co. (Pvt.) Ltd. v. Commissioner of Income Tax, East Pakistan – 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) 1393.
Interest on money borrowed when deductible.
Deduction of the amount of the interest payable on borrowed capital is only to be allowed “in respect of capital borrowed for the purpose of
1007 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
the business, profession or vocation”. If, therefore, the assessee in the present case, claims a deduction on account of the interest he has to pay to his creditors in India under this clause, he must at the same time, make a representation that the money was expressly borrowed for the very business which has given rise to the assessable income. If he contends, as he has done in the present case, that it has brought its own money out of a financial pool which it holds in India, without expressly borrowing from its creditors for its venture in Pakistan, then the condition of eligibility for the allowance has not been fulfilled. The assessee, in my opinion, therefore, finds itself on the horns of a dilemma. If it makes out that the capital in question was not expressly borrowed for investment in Pakistan, then clause (vii) of section 23 cannot be invoked to its aid. If, on the contrary, it is admitted that the capital brought into the country was in fact borrowed from investment here, then the income that might accrue to the creditors by way of interest on the money lent, would seem to be covered under section 12(2)(a) would, therefore, be income chargeable in this country to tax, within the meaning of the provision. Unless, therefore, in such a case either the tax on the interest income which has accrued to the Indian creditors, has either been paid or deducted under section 50, the allowances claimed would not be admissible. So whichever way the case is looked at, the decision must go against the appellant. A.L.A.R. Bros. v. Commissioner of Income Tax – 3 ITC 209 (Mad.) 1394.
Relevance of fact that borrowed money was lost in succeeding assessment year.
The assessee was mainly carrying on banking business on borrowed capital. It also had a separate department for trading in piecegoods, the finance for which was provided by the borrowed capital of the banking department, on payment of interest. On the cessation of the piece-goods business, the assessee‟s claim for deduction of interest on that portion of the borrowed capital which was used in that business was disallowed by the department on the ground that he sums had become lost and were no longer available as capital of any business that was being done by the assessee in the relevant account year. Held that the money was borrowed for the purposes of the business and was employed in the business for its purposes until it was lost. Nevertheless interest had to be paid on it and the test was to be not whether it continued to be available for the purpose off the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessee‟s business and whether interest was in fact paid on that borrowed capital (existing or lost) during the
1008 Section 23(1)(vii)
Income Tax Digest.
year of assessment. Thus, the said interest on the borrowed money could be claimed as a deduction under section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] in computing the profits and gains off the banking business for the year of account following the year of the loss. Judicial analysis : EXPLAINED IN - Malapchand R. Shah v. Commissioner of Income Tax [1965] 58 ITR 525 (Mad.) with the following observations: “. . . . .In that case, the assessee-firm was carrying on a banking business with borrowed money. It was also running a separate piece-goods business and advances were made to that business. This piece-goods business was closed and loss resulted of the sums invested therein. The claim was made by the assessee-firm that it was entitled to deduct the interest paid on that business until it was lost. They say: „Nevertheless, interest had to be paid on it and the test seems to us to be not whether it continued to be available for the purposes of the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessee‟s business and whether interest was in fact paid on that borrowed capital, (existing or lost) during the year of assessment.‟ Relying upon this passage, the learned counsel urges that since the firm had borrowed moneys to the tune of Rs.12,00,000 for the purpose of its business and paid interest on it, whatever might have been done with the sum so borrowed, the interest paid upon it is allowable as a deduction. It seems to us that these observations cannot possibly be carried to the length of supporting the interpretation placed upon them by the learned counsel. The real ratio of the decision is that when money borrowed was in fact utilised for the purpose off the business, but it had become lost at some point of time, in the succeeding year off assessment, the interest paid on the borrowed capital was still liable to be deducted under section 10(2)(iii), [section 23(1)(v) of the Income Tax Ordinance, 1979] notwithstanding that in the relevant account year the money was not available for the purposes of the business. What this decision really emphasises is that the money should have been borrowed for the purposes of the business, that the needs of the business required such borrowed and that it was in fact utilised for the purposes of the business at some point of time that is apparent in the facts off the decision cited. It is obviously impossible to apply this decision to a case where money is borrowed but never utilised for the purposes of the business except to a small extent and never even intended to be used for the purpose of the business. Whether money was borrowed for the purpose off the business or not can only be ascertained by examining the use of which the money was put. It
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Section 23(1)(vii)
is not the mere stated but unfulfilled purpose that justifies the deduction under section 1092)(iii) [section 23(1)(v) of the Income Tax Ordinance, 1979].”(pp.529-530)
H.T. Conville v. Commissioner of Income Tax – [1936] 4 ITR 137 (Lahore) 1395.
Borrower to pay land revenue.
Interest on the money borrowed by the assessee for the purposes of paying land revenue, etc., cannot be exempted from income tax under the provisions of section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979]. Maharaja Guru Mahadeo Ashram Prasad Sahi Bahadur v. Commissioner of Income Tax – 2 ITC 281 (Pat.) 1396.
Where borrowed fund has been utilised for non-business purposes, interest paid on it is to be disallowed.
Where an overdraft obtained by the assessee from a bank by pledging Government securities, was not shown to be for the purpose of business, it was held that interest paid on the overdraft was not an allowable business deduction. _______________
DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE
Assam-Bengal Cement Co. Ltd. v. Commissioner of Income Tax East Pakistan, Dacca – 1962 SCC 113 = [1962] 6 TAX 49 (S.C.Pak.) Distinction between capital and revenue expenditure. An asset or advantage namely, a monopoly in respect of the Durgasil area to run with the lease itself being an instrument by which the company assured to itself adequate supplies of basic raw material for its process, can be truly regarded as “capital expenditure”. It did not form a part of the working of the business. The fact that payment was not made “once for all”, but in annual installments, is incidental, and does not affect the substance of the matter. Therefore, strictly speaking, the payment was of a composite nature being partly payment for buying off competition and party payment in the nature of an additional royalty and to that extent, at least it influenced directly the working of the company itself and its expenditure laid out as part of its process of profit earning. The later part would, according to the principles indicated above, in my humble opinion, be more appropriately revenue expenditure having a direct relationship with the working expenses of the company. 1397.
1010 Section 23(1)(vii)
Income Tax Digest.
Pak Packages Ltd. v. Commissioner of Income Tax, Central Central Zone-A, Karachi – [1991] 64 TAX 105 (H.C.Kar.) 1398.
Interest capitalised paid to acquire to machinery is entitled for deprecation and not allowable as revenue expenditure.
It was observed that accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition and in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of fixed asset created as a result of such expenditure. In the case before us, we find that interest on the loan was treated as capital expenditure and initial depreciation was also allowed. Capitalisation of the said interest was confirmed by the Appellate Assistant Commissioner. Orders of the Income Tax Officer and the Appellate Assistant Commissioner in this regard were not challenged by the assessee before the Income Tax Appellate Tribunal. Even before us no contention was raised against the orders of the Income Tax Authorities regarding capitalisation of interest. Interest on capital borrowed by the assessee from PICIC admittedly being treated as capital expenditure was not covered by clause (iii) of section 10(2). In our view, the Income Tax Appellate Tribunal was justified in not allowing the claim of the assessee in the circumstances of this case where interest on the loan was capitalised and such orders were accepted by the assessee. The Question referred to us by the Tribunal is, therefore, answered in the affirmative. Judicial analysis: Overruled in (1993) 68 TAX 19 (S.C. Pak). See details under case 1389. Cases referred to: Calico Dyeing and Printing Works v. Commissioner of Income Tax (1958) 34 ITR 265; Challapalli Sugars Led. v. Commissioner of Income Tax (1975) 98 ITR 167 (S.C.); India Cements Ltd. v. Commissioner of Income Tax (1966) 60 ITR 52 and Commissioner of Income Tax v. Shah Theatres (P.) Ltd. (1988) ITR 499.
Commissioner of Income Tax (Central Zone), Karachi v. Pakistan Progressive Cement Industries Ltd. – [1985] 51 TAX 199 (H.C.Kar.) 1399. Interest paid on unpaid purchase price is not a revenue expenditure. According to the statement of facts, the respondent is an Association of Persons consisting of two members who were promoters of Pakistan
1011 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
Progressive Cement Industries Limited, which was incorporated on 18.4.1964. Before the said company was floated Eruch Maneckji, one of the members of the Association of Persons, entered into an agreement dated 24.7.1962, which was supplemented by another agreement dated 20.11.1962, with Dalmia Cement Limited, wholly a subsidiary of an Indian Company known as Dalmia (Bharat) Limited for purchase of the two cement factories situated at Karachi and at Dandot, in Pakistan. It was agreed that till the sale deed was finally executed the profits would belong to Eruch Maneckji or his nominee. The purchase price was to be paid in installments by way of export of cement to India. The unpaid portion of the purchase price carried 6% interest with effect from 1-10-62 payable in the same manner as the purchase money itself. During the aforesaid assessment years the respondent claimed the amounts mentioned in the questions as revenue expenditure on account of interest payable on the unpaid balance of purchase price but the Income Tax Officer disallowed the same on the ground that these payments related to capital costs and did not relate to capital borrowed and were inadmissible both under sections 10(2)(iii) and 10(2)(xvi) of the Act. Aggrieved by the aforesaid orders of assessment, the respondent filed separate appeals before the Income Tax Appellate Tribunal which the Tribunal following its earlier decision dated 27.10.1972, passed in Appeal No. ACC/575/A for the assessment year 1965.65, allowed by the order dated 27.10.1972. It was on the basis of the said tests that the Supreme Court in both the cases found that the transaction was so closely related to the business that it could be viewed as an integral part of the conduct of the business and therefore, the payment of interest in both the cases was held to be revenue expenditure laid out wholly and exclusively for the purpose of business. But in the case on hand, taking all the facts and circumstances thereof into consideration we have already stated the conclusion reached that the payment of interest was for acquisition of the two factories, capital assets. We must state here that we are clear in our mind that the payment of interest on account of acquisition of the two factories could not be considered to be so closely related to the business carried that it could be viewed as an integral part of the conduct of the business, for, as already stated, the payment of interest had to be made along with the installments of purchase price in the same manner as money itself irrespective whether the assessees carried on business or not. In any case, it could not, on the facts and in the circumstances of this case, be said that the
1012 Section 23(1)(vii)
Income Tax Digest.
payment of interest was wholly and exclusively for the purpose of business which is the second condition required to be fulfilled to claim its deduction as an allowance under clause (xvi) of sub-section (2) of section 10 of the Act. Indeed the liability to pay interest arose directly out of purchase of capital assets and payment of interest could only be attributed to capital expenditure and nothing else. It may be recalled that assessee was a newly formed company and started its business with the acquired assets. This also answers the second question posed by us in paragraph 3 above. Case relied on: Bombay Steam Navigation Company v. Commissioner of Income Tax (1963) 48 ITR 476.
Kohinoor Industries Ltd., Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1973] 27 TAX 253 (H.C.Lah.) 1400.
Expenses towards purchase of judicial stamp paper is an integral part of expenditure incurred for raising loan by issuance of debentures and is, therefore, arising from issuance of debentures of enduring nature.
Looking at the transaction as a whole we are of the opinion that the debentures were meant to supplement the capital of the company for all times to come. The expenditure on purchase of judicial paper was an ingredient part of the expenditure incurred for raising the loan by issuance of debentures. The benefit arising from their issuance, being of an enduring character, the expenditure incurred in that connection could, therefore, truly be regarded as a „capital expenditure‟. The question of law, stated to arise for determination by this Court, does not arise out of the order of the Tribunal, Before it, it was admitted that the money raised by issuing the debentures was utilised for the purchase of machinery. In view of this admission, the Tribunal rightly held that the said amount was a component part of the cost of the machinery, which ranked for depreciation. The case set up before us does not appear to have been raised before the Tribunal. Hence the so-called question of law, posed for determination by this Court, cannot be allowed to be canvassed, in view of the circumstances stated above. Cases referred to: British Insulated and Helsby Cables v. Atherton (1926) AC. 205 and Assam-Bengal Cement Co. Ltd. v. Commissioner of Income Tax (PLD 1962 S.C. 295); [1962] 6 TAX 49 (S.C).
1013 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
Commissioner of Income Tax v. Gammon (Pak) Limited, Karachi – [1966] 14 TAX 304 (H.C.Kar.) 1401.
Interest paid by assessee company on overdrafts and loans to be invested in subsidiary-company is held revenue expenditure.
The assessee, a limited company, was carrying on engineering works in both the wings of the country until the 15th August 1954, when its East Pakistan Branch was converted into a full-fledged subsidiarycompany. The assessee-company made the entire investment of the capital of the subsidiary company and owned 100 per cent of its interest. The subsidiary company was doing the same business as the assessee-company. At the assessment stage the assessee-company claimed as an admissible deduction under section 10(2)(iii) of the Income Tax Act, the amounts representing interest paid on overdrafts and loans taken by it for the purpose of investment in the subsidiarycompany. The Income Tax Officer disallowed the claim on the ground that they were of capital nature and were not covered by the provisions of section 10(2)(iii). The Income Tax Officer took the view that the subsidiary company was quite a separate legal entity and the investment made in that concern was distinct from the main business activity of the assessee. The Appellate Tribunal allowed the interest as revenue expenditure holding that the investment made by the assessee in the subsidiary company was in the normal course of its business and the borrowings from the banks were in the same connection. Affirming the order of the Tribunal: Held,
that the interest paid by the parent company on overdrafts and loans taken by it for the purpose of investment in the subsidiary-company were admissible expenditure under section 10(2)(iii) of the Income Tax Act.
Although in law the East Pakistan subsidiary company is a separate legal entity, yet on the well settled principle that in revenue cases regard must be had to the substance of the transactions rather than its mere form, we cannot ignore the facts and circumstances in which the East Pakistan subsidiary company was floated and is doing business in that part of the country. Admittedly the assessee-company made the entire investment of the capital of the subsidiary company and owns 100 per cent of its interest. The subsidiary company is doing the same business that was done by the original Branch company of the assessee-company in East Pakistan. If that branch had continued to function for the assessment years in question, no question could have been raised that the interest paid on the overdrafts and loans taken by the assessee-company for the purposes of investment in that Branch, would not be admissible under section 10(2)(iii) of the Income
1014 Section 23(1)(vii)
Income Tax Digest.
Tax Act. This question has arisen because that branch was converted into a subsidiary company by the assessee. Although previsions of law cannot altogether be disregarded yet regard must be had to the real nature of the transactions entered into by the assessee-company and in fit cases the substance instead of artificial fiction and camouflage of law may be examined. If the present case is examined in this light, it would be noticed that in spite of the fact that on the formation of the East Pakistan subsidiary-company a different legal entity came into existence but in substance, it continues to function as the original Branch of the assessee-company, carrying on the same business of the assessee. On these facts the view taken by the Appellate Tribunal is unassailable. _______________
CAPITAL BORROWED - CONNOTATION OF
Pakistan Industrial Engineering Agencies Ltd. v. Commissioner of Income Tax (Central), Karachi – [1987] 55 TAX 59 (H.C.Kar.) 1402.
Interest paid on unutilized capital is allowable deduction.
[Per Ibadat Yar Khan, J.]-The assessee is a private Limited Company and deals in import of ball bearings. They have been assessed from year to year since long time. But we are here concerned with the accounting years ending 30.9.1968, 30.9.1969 and 30.9.1970. In all these three years their claim for exemption of interest paid by them on the amounts borrowed for the purpose of the business have not been allowed by the income Tax Officers, who have passed assessment orders in respect of these three years. This grievance was taken in appeal to the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal has passed a single order disposing of the three appeals against orders passed on 10.5.1973 relating to Assessment years 1969-70, 1970-71 and 1971-72. The exemption claimed is in respect of a cash amount to the extent of Rs.3 lacs for each year. Question arises which sum in cash was employed for the F.D.R. and which was put in circulation for business purposes. All that we know is that amount of loan borrowed as early as 1959 remained in circulation for a period of time and then was invested in FDRs. Can it be asserted with certainty that the loan amount remained in circulation for business purposes and the surplus which has remained fluctuating between Rs.4 lacs to 8 lacs during the years under review was utilised for investment in FDRs.
1015 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
If the loan amount has been put in FDRs and the surplus funds have been utilised for purposes of business then clearly the assessee is not entitled to the deductions under section 10(2)(iii) because be has used his own funds and not the borrowed funds for the purposes of business. On this view of the matter also the assessee‟s claim must fail on account of lack of identity of the funds for which exemption is claimed. Cases referred to: Commissioner of Income Tax v. Fateh Ally & Co. (1984) 50 Tax 189; Commissioner of Income Tax v. Adamjee Sons (1984) 50 Tax 196; Eastern Silk Stores v. Commissioner of Income Tax [PLD 1957 (W.P.) Kar. 130].
[Per K. A. Ghani, J. (Contra)].-To me it appears that without any material on record and against the past history of the loans borrowed by the assessee company for its business on which interest was paid at the same rate to the same creditors in spite of available cash surplus invested in Fixed Deposit account, the Tribunal could not have acted suo moto without any material and justification in disallowing claim under section 10(2)(iii) by inference drawn on mere surmises that the loan did not remain loans for purposes of business for the years under consideration the findings of the tribunal ate against the statutory provisions contained in section 10(2) (iii) of the Act which provides for allowance of interest in respect of “capital borrowed for the purposes of business”. The Tribunal as well as income Tax Officer nowhere held that the amount borrowed‟ from the two shareholders was not capital borrowed for purposes of business. The observation of the Tribunal that how it can be thought that Rs.3 lacs was needed for the purposes of business if the business be carried on even after depositing Rs.6,65,000/. in 1971-72 and Rs.4,15,000/- in the year 1969-70 and that in such circumstances the loan did not remain loan for purposes of business, in my opinion are not only against the past history of the case, but are also based upon mere surmises. It is not for the revenue authorities to decide for the assessees or guide them as to how the investments be made by them. Cases referred to: Amna Bai Hajee Eisa v. Commissioner of Income Tax., Madras (1964) 51 ITR 853); Commissioner of Income Tax v. Fateh Ali Co. (1984 PTD 341) and Commissioner of Income Tax (West) Karachi v. Adamji Sons, Karachi (1984 PTD 390).
[Per Saeeduzzaman Stddiqui, J. (Concl.)]-In view of above discussion I am quite clear in my mind that in the above case in the absence of a finding by the Income Tax Authorities to the effect that the borrowed capital by the assessee was not utilized for the business
1016 Section 23(1)(vii)
Income Tax Digest.
purposes, the claim of the assessee for deduction of the interest paid on the borrowed capital could not be disallowed under section 10(2)(iii) of the Act. I accordingly agree with the conclusion of my learned brother K.A. Ghani, J. and answer the question referred to the court in the above References in the affirmative. Cases referred to: Commissioner of Income Tax, Lahore Zone v. Shaikh Mohammad Ismail and Co. [1986] 53 Tax 122 (S.C.Pak.).
Commissioner of Income Tax, (West), Karachi v. Adamjee Sons, Karachi – [1984] 50 TAX 196 (H.C.Kar.) 1403.
Higher rate of interest is no basis to disallow the expenses.
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. It was further held by the Tribunal that the assessee was entitled to utilise its entire capital in any manner it chose. It 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. The assessee was entitled to utilise the amount in any way it chose and that the fact that the assessee had charged 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. 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.
1017 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
Cases relied on: Amna Bai Hajee Issa v. Commissioner of Income Tax [1964] 9 TAX 332 and Commissioner of Income Tax v. Gammon Pak. Ltd., Karachi, [1966] 14 TAX 304.
Commissioner Of Income Tax, Karachi v. N. Futeh Ally and Co., Karachi – [1984] 50 TAX 189 (H.C.Kar.) 1404.
Interest paid on the overdrafts relating to predecessor‟s business is deductible allowance.
The factual position was that advances of money in respect of which the interest claims have been disallowed, were out of the company‟s general consolidated funds and that no specific loan or overdraft was taken by the company for allowing any advance or loan to its directors or share-holders. It was also held that the assessee-company had secured the bank loans as and when found necessary for the carrying on its own business and its advances to its directors were made in the usual course of business. These are findings of facts of the Tribunal which cannot be assailed before us nor they have been challenged by the department, we are, therefore, of the view that interest paid by the assessee-company on borrowings for the purpose of investment in Futehally Chemicals was paid on capital borrowed for the purpose of business of the company. According to the order of the Tribunal, the factual position was that the advances of money in respect of which the interest allowance has been claimed, were out of the companies funds end no specific loan or overdraft was taken by the company for allowing any advance or loan of its directors or share-holders. The Tribunal also concluded that the assessee-company secured the bank loans as and when found necessary for carrying on of its own business, and that its advances to its directors were made in the usual course of business. It was further held by the Tribunal that it was not proved that the assessee-company had obtained any specific loan for advancing the same to any one else. All these conclusions of the Tribunal amount to finding of fact, which cannot be challenged before us. On the basis of these findings the Tribunal had, in our view, rightly decided the question of interest as deductible expenditure under section 10(2)(iii) of the Act. Cases relied on: Commissioner of Income Tax v. Gammon (Pak) Limited, Karachi [1956] 14 TAX 304; Amna Bai Hajee Issa v. Commissioner of Income Tax [1964] 9 TAX 332.
1018 Section 23(1)(vii)
Income Tax Digest.
Carew And Company Ltd., Darsana v. Commissioner of Income Tax, East Pakistan, Dacca – [1968] 17 TAX 133 (H.C.Dacca) 1405.
If capital borrowed outside Pakistan is not utilised for the purposes of the business in Pakistan, interest is not allowable deduction when tax was not deducted at source.
The assessee-company was a public limited company having its registered office in India. It also carried on business at Darsana in Pakistan. In its assessment, the assessee claimed allowance in computing its profits under section 10(2)(iii) of the Income Tax Act, on account of (a) interest paid to the Imperial Bank of India for the accommodation granted to it by that Bank by way of over-drafts long before the independence; and (b) interest paid on the debentures held by its creditors in India. Both these claims were rejected by the Income Tax Officer. On appeals by the assessee both the Appellate Assistant Commissioner and the Appellate Tribunal upheld the decision of the Income Tax Officer. The interest paid on debentures was disallowed by the appellate authorities on the ground that no payment of interest was made in Pakistan on the debenture loan which was floated in 1938 and no tax payable on such interest was deducted in Pakistan. When the matter finally reached the High Court, the assessees counsel conceded that the interest paid to the Imperial Bank of India on the over-draft account could not be treated as an admissible deduction because the assessee could not be regarded as an agent of the non-resident payee of the interest on the over-draft account. He, however, claimed that the assessee had borrowed capital by means of floating debentures for which interest had been paid in India. It was, therefore, entitled to deduction under section 10(2)(iii) of the Act. In regard to non-deduction of tax at source on the amount of interest, the Counsel contended that since the interest was paid outside Pakistan it was not chargeable in Pakistan for it could not be said that the interest paid was on account of “money lent at interest and brought into Pakistan in cash or in kind” within the meaning of section 42 of the Act. Affirming the Tribunal‟s order: Held,
that it is clear that the money has not been utilised for the purposes of “the business” of the assessee and as such it is not entitled to claim deduction under clause (iii) of subsection (2) of section 10. It was clearly the duty of the assessee to deduct the tax at source.
Case relied on: Howrah Trading Company (Private) Ltd., v. Commissioner of Income Tax, East Pakistan [1963] 8 TAX 59 (S.C.).
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Section 23(1)(vii)
Mohini Mills Limited v. Commissioner of Income Tax, East Pakistan, Dacca – [1965] 12 TAX 64 (H.C.Dacca) 1406.
Interest neither paid to any agent of foreign company in Pakistan nor tax therefrom deducted at source in Pakistan is not allowable deduction.
The assessee, which had its registered office in India, owned two mills, one in Pakistan and the other in India. In its assessment in Pakistan the assessee claimed exclusion from the taxable income the amount of interest alleged to have been paid to the creditors in India. The Income Tax Officer rejected the claim on the ground that the assessee failed to produce any evidence that the interest was paid in India and further that the assessee was not entitled to this claim under the proviso to section 10(2)(iii) of the Income Tax Act, because neither the interest was paid to any agent of the assessee in Pakistan nor any tax was deducted therefrom under section 18(3B) of the Act. When the matter went up to the High Court the assessee did not challenge the aforementioned provisions of law but contended that it was entitled to the relief under the Minutes of the Two-Man Committee of Pakistan and India, which was to the effect that “interest on borrowed capital should be allocated according to the production of each mill”. Held, that: (i)
it is not the case of the assessee that the interest has been paid to any agent of the foreign company in Pakistan nor is the case that it has deducted the tax payable on the interest and accordingly the assessee is not entitled to the deduction as claimed by it; and
(ii)
even assuming that there is such an understanding between the two Governments and is binding on the Governments, that does not necessarily go to show that the minutes had over-weighed the provisions of law.
Case followed : Howrah Trading Company (Private) Ltd. v. Commissioner of Income Tax, East Pakistan (1963) 8 TAX 59 (S.C.).
Mian Channu Factories Union v. Commissioner of Income Tax – [1936] 4 ITR 203 (Lahore) 1407.
Unless there is borrowing of capital, interest is not deductible.
Where two firms and HUF formed a partnership to gin cotton in their factories and it was provided that each factor would invest its own capital in purchase and sale of goods, on which they would get interest at a certain rate from the partnership, it was held that there was no
1020 Section 23(1)(vii)
Income Tax Digest.
borrowing of capital within the meaning of section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] and interest was thus not deductible. _______________
ILLUSTRATIONS WHERE INTEREST IS NOT DEDUCTIBLE
Metro Theatre Bombay Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 638 (Bom.) Interest paid on deferred payment of purchase consideration is not deductible. The assessee took a plot on long-term lease and constructed a cinema theatre on part of it. The agreement for lease provided for payment of the amount in installments with interest on outstanding balance. On the Question, whether the interest was deductible. Held that interest paid was not deductible under 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] because a mere purchase of capital asset on a long-term credit with a stipulation for the payment of interest on the reducing balance would not amount to borrowing of capital. Nor could it be deductible under the residuary clause of section 37(1) of the 1961 Act. 1408.
Case review : Approved in Bombay Steam Navigation Co. (1953) (P.) Ltd. v. Commissioner of Income Tax [1965] 56 ITR 52 (SC).
Ahmadpur Katwa Railway Co. Ltd. In re – [1935] 3 ITR 277 (Cal.) 1409.
Guaranteed interest paid to shareholder on paid up capital is not deductible.
Under an agreement with the Secretary of State for India, the assessee-company agreed to raise a certain sum of money and hand it over to the former for constructing and operating a railway. One of the conditions stipulated that the Secretary of State would guarantee payment of a minimum interest at a specified rate on the company‟s paid up share capital. The company made a public issue of shares to raise the capital with a mention that the guaranteed interest would be paid to the shareholders. It claimed deduction for the interest so paid to the shareholders. Held that the guaranteed interest was nothing but dividend and could not be treated as having been paid on borrowed capital, and was hence not deductible.
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Section 23(1)(vii)
Commissioner of Income Tax v. Madura Hindu Permanent Fund Ltd. – [1933] 1 ITR 46 (Mad.) 1410.
Where shareholders of assessee-fund, registered as a company, after paying certain contribution for certain period, were paid back contribution plus something which was called as „guaranteed interest‟.
Where shareholders of assessee-fund, registered as a company, after paying certain contribution for certain period, were paid back contribution plus something which was called as „guaranteed interest‟. Held that the interest so paid was not interest on share capital but was deductible as interest on capital borrowed for the purposes of the assessee‟s business since the assessee-fund was not really a company but a mutual benefit society with a fluctuating capital dependent entirely on the amount subscribed by its members. Further the fact that the guaranteed interest was not dependent in any way on the earning of profits; showed that it was in no way a payment connected with the share capital. Trichinopoly Tennore Hindu Permanent Fund Ltd. Commissioner of Income Tax – [1937] 5 ITR 703 (Mad.) 1411.
v.
Amounts paid to shareholders in excess of their contributions is not deductible under section 10(2)(iii) off the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979].
Amount paid by the assessee-company, a banking concern, to its shareholders in excess of their contribution, is not deductible under section 10(2)(iii) of the 1922 Act [section 23(1)(v) of the Income Tax Ordinance, 1979] inasmuch as the sums so paid are dividends and not interest on borrowed capital. Commissioner of Income Tax v. Karuppaswami Mooppanar – [1934] 2 ITR 284 (Mad.) 1412.
Interest paid by surviving partners on the capital of the retiring partner, is not deductible.
Where two of the three partners of the firm retired after receiving from the sole surviving partner their capital together with interest thereon till the date of dissolution: Held that the fact that at the time of assessment the firm had been succeeded to by the surviving partner did not convert the capital contributed by the ex-partners into borrowed capital prior to the dissolution of the partnership. Thus, the sole surviving partner was
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Income Tax Digest.
not entitled to deduct the interest so paid by him to the retiring partners. Note: The reasoning of this decision is based on section 26(2) of the 1922 Act [section 73(1) of the Income Tax Ordinance, 1979] governing successions to business.
S.L.S.L. Firm v. Commissioner of Income Tax – 7 ITC 398 (Rangoon) 1413.
Where assessee, five brothers, which included four minors, purportedly entered into partnership with equal shares in a money-lending business allotted to them at the family partition, and in their assessment as an AOP claimed deduction of interest paid on capital introduced by the minors.
Where the assessee, five brothers, which included four minors, purportedly entered into partnership with equal shares in a moneylending business allotted to them at the family partition, and in their assessment as an AOP claimed deduction of interest paid on capital introduced by the minors: Held that the claim was not allowable, because (i) there was no evidence of an agreement under which the minor brothers agreed to lend capital for purposes of business on the footing that they should receive interest; and (ii) the minors could not even otherwise lawfully enter into such an agreement. Commissioner of Income Tax v. Harveys Ltd. – [1940] 8 ITR 307 (Mad.) 1414.
If debenture loan is illusory and colourable, interest paid thereon is not allowable.
Where the assessee-company purchased assets of another business for Rs.15 lakhs, when its value was much less, and it issued shares of the face value of Rs.5 lakhs and debentures of the nominal value of Rs.10 lakhs to the nominees of the vendors, it was held that the shares and the debentures could not have value beyond the value of the assets acquired and since the figure off purchase price was fictitious, the interest paid on debentures was not deductible. E.M.V. Muthappa Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 311 (Mad.) 1415.
No trust or gift is created by mere book entries; interest credited to such accounts is not deductible.
Mere credit entries in the books of account without allocation of specific assets or funds corresponding to such entries cannot operate as valid gifts or trusts.
1023 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
The assessee, to carry out wishes of his father to credit certain sums to his sister and daughter to be utilised for their marriage streedhanam and seermurai, etc., merely made credit entries in his family business books, but no assets or funds corresponding to the credit entries were set apart or allocated at any time, and the whole funds continued to be utilised in the business as before. The assessee claimed interest paid on these credits as deductions. Held that in the absence of any fund set apart or appropriated for the purposes mentioned in the will, there was no valid gift or trust. Hanmantram Ramnath v. Commissioner of Income Tax – [1946] 14 ITR 716 (Bom.) 1416.
No trust or gift is created by mere book entries; interest credited to such accounts is not deductible.
Interest credited to a trust which was created by mere book entries and there was no divestiture of properties by the settlor was not deductible. Although the Indian Trusts Act does not apply to charitable trusts, it is clear that he three certainties therein described are required to create a charitable trust. They are (1) a declaration of trust which is binding on the settlor; (2) setting apart definite properties and the settlor depriving himself of the ownership thereof; and (3) a statement of the objects for which the properties is thereafter to be held, i.e. the beneficiaries. Where there was no setting apart of ascertained property and no evidence to show that the settlor had diverted himself of the ownership, mere entries in the account books of the settlor could not create a valid trust, when there was not sufficient cash available. Accordingly, the trust could not be the creditor with interest and interest credited in the books to the trust was not deductible in computing the settlor‟s income under section 10 of the 1922 Act [section 23 of the Income Tax Ordinance, 1979]. Note: See Gopal Jalan v. Commissioner of Income Tax [1972] 86 ITR 317 (All.)
L.R.M.S.T. Firm v. Commissioner of Income Tax – 3 ITC 416 (Rangoon) 1417.
Where assessee‟s claim for deduction of interest paid on stridhana moneys of certain female relatives of the partner, was disallowed on ground that moneys were in reality, surplus investment of partners, no referable question of law would arise.
1024 Section 23(1)(vii)
Income Tax Digest.
Where the assessee‟s claim for deduction of interest paid on stridhana moneys of certain female relatives of the partner, was disallowed on ground that moneys were in reality, surplus investment of partners, no referable question of law would arise. Commissioner of Income Tax v. S. Ramsay Unger – [1947] 15 ITR 87 (Mad.) 1418.
Others.
The assessee and his father were partners in a firm. The father had, under a will executed by him, directed that even after his death his capital should continue to remain with the firm and that the assessee as the executor, should pay pecuniary legacies bequeathed to two person under the will. Only after the death of the two persons, the residuary estate was to be apportioned among the heirs. After the death of his father, the assessee became the sole proprietor of the business and claimed as deduction interest paid on the testator‟s estate. The aforesaid two persons were then alive. The question was whether the interest so paid was allowable. Held that since the two person were still alive, the residue could not be said to have become vested in the primary legatee, but still remained as the testator‟s estate in the assessee‟s hands as executor. The amount credited to the estate in the business of the books could be treated as borrowed capital, and hence the claim for deduction of interest was allowable. Gopinath Vir Bhan v. Commissioner of Income Tax – [1938] 6 ITR 243 (Lahore) 1419.
Others.
The question as to whether an advance made by a partner is a loan to the partnership so as to entitle the latter to deduct interest thereon or an increase in the capital of the firm, is a question of act. _______________
ILLUSTRATIONS
Commissioner of Income Tax v. Tejbhandas Motumal – [1933] 1 ITR 202 (Sind) & P.R.M. Abdul Rahman & Co. v. Commissioner of Income Tax – [1939] 7 ITR 662 (Mad.) 1420.
Position under 1922 Act.
Where partner advanced money to firm on condition that interest should be paid to him irrespective of profits, interest paid to such partner by firm was allowable.
1025 DEDUCTIONS - INTEREST PAID ON BORROWED CAPITAL
Section 23(1)(vii)
Commissioner of Income Tax v. Raja Bahhadur Dhakeshwar Prasad Narain Singh – [1938] 6 ITR 476 (Pat.) 1421.
Others.
Where the assessee purchased decree in consideration of zarpeshgi lease for fixed term and interest on zarpeshgi amount was taken into account in fixing period of lease, such interest could not be set off against interest accruing due to decree.
1026 Section 23(1)(viii)
Income Tax Digest.
Section 23(1)(viii)* Bonus or commission paid to employees
PAGE NO
PROVISION OF BONUS
1422. Provision of bonus made in the mercantile system of _ accounting without having paid it is admissible. [1990] 61 TAX 149 (H.C.Kar.)
1027
MANAGING DIRECTOR IS ENTITLED FOR BONUS BEING AN EMPLOYEE
1423. Managing director is entitled for bonus being an employee. _ [1985] 51 TAX 66 (H.C.Kar.)
1028
1424. Bonus paid to director, not an employee of the company, is not permissible deduction in the hands of the company. _ [1972] 27 TAX 95 (H.C.Lah.)
1029
REASONABLENESS OF BONUS
1425. Reasonableness of bonus; three conditions mentioned in section 10(2)(x) of the 1922 Act should be considered cumulatively and not by reference to any one of them. _ [1973] 28 TAX 155 (H.C.Kar.)
1031
1426. Payment of bonus by Pakistani branch, which suffered a loss, to employees in Pakistan in pursuance of direction by _ head office is admissible deduction in Pakistan. [1969] 20 TAX 216 (H.C.Kar.)
1032
EXPENDITURE HELD TO BE INADMISSIBLE
1427. Obligation to pay bonus was not discharged during the accounting year, the expenditure held to be inadmissible in view of meaning of the word “paid” in section 10(2)(x) of the _ 1922 Act. [1980] 42 TAX 81 (H.C.Lah.)
*
Corresponding to section 10(2)(x) of the 1922 Act.
1033
PAGE NO
1027 DEDUCTIONS - BONUS OR COMMISSION PAID TO EMPLOYEES
Section 23(1)(viii)
Section 23(1)(viii)* Bonus or commission paid to employees
PROVISION OF BONUS
Commissioner of Income Tax, Central Zone ‘A’, Karachi v. Chemdyes Pakistan Limited – [1990] 61 TAX 149 (H.C.Kar.) 1422.
Provision of bonus made in the mercantile system of accounting without having paid it is admissible.
For the assessment year 1974-75 the respondent claimed a sum of Rs.5,01,671 as Bonus to staff and executives, Out of this amount Rs.1,11,706 represented the amount equal to two months salary which was actually paid during the relevant year and Rs.3,89,965 which was equal to five months salary of the staff and executives had not been paid but was to be paid to them. The Income Tax Officer allowed the claim to the extent of two months salary which was paid as bonus but disallowed the claim of Rs.3,89,965 for which provision was made in the books of accounts. The main ground for rejecting the claim was that this filed appeal before Appellate Assistant Commissioner who upheld the order of the Income Tax Officer also holding that seven months salary as bonus is highly excessive as compared to past or to the subsequent years. The respondents filed appeal before the Income Tax Appellate Tribunal, which allowed the claim of the assessee. The applicant then filed an application for referring the question to High Court but it was rejected. The applicant has filed this application under section 136(1) of the Income Tax Ordinance. According to section 10(5) the word “paid” in section 10(2) means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section... Therefore, more than one meaning has been assigned to the word “paid” which is not restricted to actual payment above. In order to ascertain the correct implication it is necessary to advert to the second meaning which relates to the method of accounting. It is an admitted position that the respondent is employing Mercantile System *
Corresponding to section 10(2)(x) of the 1922 Act.
1028 Section 23(1)(viii)
Income Tax Digest.
of accounting. The provision of section 13 permits the assessee to employ any method of accounting on the basis of which profits and gains can be correctly and clearly deduced. Therefore, it is the option of the assessee to employ any method of accounting which may be either cash or mercantile. So far as cash system is concerned, it means that the account is maintained on the basis of actual amount received or expended. But so far as mercantile system is concerned, actual payment or receipt is not material. The moment the receipt or payment is entered in the books of account it shall be deemed to be actually received or paid. The respondent is employing mercantile system therefore, the liability will be incurred the moment, any expense or payment is entered in the books of account. The respondent has made provision for payment of bonus and thus incurred the payment in terms of section 10(5). The judgment of the Supreme Court is completely distinguishable and cannot be applied to the facts of the present case as in section 16(2) the word “paid” had not been used in the wide senses as used in section 10(2) & 10(5). We may further observe that actual payment made afterwards in the next assessment year will not deprive the assessee for the benefits of section 10(2)(x) provided he has adopted mercantile method of accounting and entry has been made during the relevant assessment year. In this context reference can be made to Commissioner of Income Tax v. Nagri Mills Co. Ltd., [1958] 33 ITR 681. We therefore answer in the Affirmative. Cases distinguished: Commissioner of Income Tax v. Mst. Wazirunnisa Begum (1972 SCMR 116) and Commissioner of Income Tax, Rawalpindi Zone v. K. K. & Company Ltd., Peshawar (1980 PTD 210). Cases followed: Commissioner of Income Tax v. Smt. Singari Bai [1945] 13 ITR 224. _______________
MANAGING DIRECTOR IS ENTITLED FOR BONUS BEING AN EMPLOYEE
Highland Manufacturers (Pak.) Ltd. v. Commissioner of Income Tax (West), Karachi – [1985] 51 TAX 66 (H.C.Kar.) 1423.
Managing director is entitled for bonus being an employee.
It had been argued before the Tribunal that the Managing Director was holding only 185 out of 1,000 shares of the Company and as such he could not be entitled to as high a sum of dividend as the bonus
1029 DEDUCTIONS - BONUS OR COMMISSION PAID TO EMPLOYEES
Section 23(1)(viii)
payment of Rs.4,500 calculated on the basis of his three months salary and hence the amount should be deducted as an expense. In fact we are of the view that the said clause (x) does not make any distinction between different type of employees and it treats the shareholder employees and non-shareholder employees in the same position. But it only provides one safeguard against the misuse of the provision of clause (x) by providing that if any amount is paid to an employee as bonus, and the same is only a safeguard to change the nature of profits or dividend into a bonus and is thus the device to escape the payment of tax, then alone deduction would not be allowed to be made. We are clear in our mind that if there are a good number of employees in the firm or company and every one of them is being paid a bonus similar to the bonus paid to a shareholder employee then; merely because a shareholder employee is entitled to receive some profits as well, this alone would not be sufficient to disentitle the company or firm from claiming the deduction in respect of bonus paid to such an employee. We would observe that the Income Tax provisions have to be strictly construed and should be interpreted in a manner which is more favourable to the subject. The language of the clause being clear it was not open to the Appellate Tribunal to take a view of the clause, which was more favourable to the State merely on the consideration that if such an interpretation was followed then the bulk of the income was to be washed off. We may observe here that the Appellate Tribunal or the Courts can hardly assume themselves the position of saving the income from escaping assessment. That jurisdiction vests in the Legislature and those problems are, therefore, really for the Legislature to solve and not for the Courts and Tribunals to worry about. We, therefore, answered the question in the affirmative by a short order dated 9.1.1984 and these are the reasons for the same. Cases referred to: Loyal Motor Service Co v. Commissioner of Income Tax (1946) 14 ITR 647: [1969] 19 TAX 84 (Trib.): [(1946) 14 ITR 606] and (AIR 1947 Bom. 15).
Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Owen Roberts & Co. Ltd., Lahore – [1972] 27 TAX 95 (H.C.Lah.) 1424.
Bonus paid to director, not an employee of the company, is not permissible deduction in the hands of the company.
The amount allowable under sub-section (2)(x) of section 10 must have been paid to (i) an employee, (ii) as bonus or commission and (iii) for
1030 Section 23(1)(viii)
Income Tax Digest.
services rendered. If such sum would have been otherwise admissible to him as profits or dividends it would not be covered by the language of this sub-section. This sub-section requires that the amount so paid should be reasonable and for determining the reasonableness of the amount it also specifies the criteria. The criteria are contained in clauses (a), (b) and (c) of the proviso to this sub-section. The language in which the proviso is couched leaves no manner of doubt that each of one of these conditions has to be fulfilled before the amount can be termed reasonable. The first clause ends in a semicolon while the second has the conjunctive article “and” after the semicolon and before the last clause. These three clauses have, therefore, to be read collectively and not in the alternative. The mere fact that one or two of these conditions exist in a particular case would not be enough for granting the allowance under this sub-section. The reasonableness shall have to be determined by testing on the touchstone of the criteria collectively provided by the aforesaid three clauses. Clause (b) of proviso makes the bonus relatable to the profits of the year in question. The amount to be paid as bonus, therefore, has also to be reasonable in relation to the quantum of profits. This requirement pre-supposes the declaration of profits for the year in question by the assessee. If loss has been declared instead of profits the further question of determining the reasonableness of the amount of bonus in relation to the profits would just not arise. It has already been seen that the reasonableness is to be determined qua the three criteria laid down in the proviso. If one of them, it, the profit is nonexistent, the precondition for the allowance of bonus is just not there. That being so, any bonus paid by an assessee who is running in a loss in the relevant year would not be a sum paid to an employee as bonus within the meaning of section 10(2)(x). In the present case, the conditions of service of Begum Hayat have not been produced before the department to support the contention that the amount paid as bonus was reasonable. In the absence of such evidence being produced, the allowance claimed by the assessee cannot be permitted. There could hardly be two opinions on the postulate that it is for the assessee who wants an allowance to prove the conditions precedent for the grant of it. Since the assessee has failed in doing this, it cannot claim the concession. The word “employee” is too well understood in the English language and usage to require any elucidation and we would restrict ourselves to observing that the expression “employee” clearly envisages the relationship of master and servant and can hardly be applied to a
1031 DEDUCTIONS - BONUS OR COMMISSION PAID TO EMPLOYEES
Section 23(1)(viii)
person who is an alter ego of a juristic person. Begum Hayat, therefore, was not even an employee so as to entitle the company to an allowance under section 10(2)(x) in respect of the bonus paid to her. _______________
REASONABLENESS OF BONUS
Commissioner of Income Tax, Karachi v. Paracha Textile Mills, Karachi – [1973] 28 TAX 155 (H.C.Kar.) 1425.
Reasonableness of bonus; three conditions mentioned in section 10(2)(x) of the 1922 Act should be considered cumulatively and not by reference to any one of them.
The assessee, a public limited company, derived income from sale of yarn. For the charge year 1959-50, apart from other expenses, the assessee claimed a sum of Rs.68,510.00 on account of bonus paid to its employees at the rate of one month‟s salary to each employee. The returned loss was Rs.6,54,510.00 which was finally determined by the Income Tax Officer at Rs.72,016.00. Admittedly, the returned loss was on account of the claim for depreciation and after eliminating the same the book results showed substantial profits. While considering the assessee‟s claim for bonus of Rs.68,510.00, the Income Tax Officer observed that this payment could not be allowed as an admissible business expenditure in view of the fact that the three conditions laid down under section 10(2)(x) of the Income Tax Act, namely, (i) the pay of the employees and conditions of their services, (ii) the profits of the business for the year in question and (iii) the general practice in similar business, were not cumulatively filled, specially clause (b) of the proviso to that section which lays down that the payment of bonus should be a reasonable amount with reference to the profits of the year in question. When the matter reached the High Court: Held,
that the existence of the profits is not the only factor to be considered in coming to the conclusion whether or not bonus paid was a deductible item of expenditure and it is the cumulative effect of all the three considerations which should govern the determination of reasonableness under that clause and, therefore, the test of commercial expediency is strictly germane to the consideration of the reasonableness of the deduction claimed for the amount paid out as bonus.
The word “profits” has not been defined in the Income Tax Act. Firstly the word “profits” as occurring in the said proviso must be understood
1032 Section 23(1)(viii)
Income Tax Digest.
in its context and that is, in relation to the bonus paid to the employees and the requirement of reasonableness between profits and bonus, including, as aforesaid, commercial expediency. It has also to be understood from the point of view of the employees to whom bonus is payable. Looked at in this context the word “profits” would not be the profits arrived at after deducting depreciation more so, as the Legislature is known to permit substantial depreciation deductions over and above the normal depreciation to encourage new industries. Such large deductions towards depreciation may result in no taxable income, and no profits and thus depriving the employees of the now well-recognised right to share. in the profits to which they have, by their labour contributed. If the intention of the Legislature was to give the word “profits” occurring in the proviso a restricted meaning the more appropriate words would have been “taxable income” or “assessed income”. For the purpose of determining whether there is a profit, the Income Tax Act itself makes bonus a properly deductible item of expenditure. Whatever other considerations may therefore properly apply to the payment of bonus, they must be taken into account and the profit then determined after deducting all legitimate items of which bonus is one. Where, therefore, the other conditions are fulfilled the assessee is entitled to pay bonus and claim it as a deduction for the purposes of calculating “profits and gains”. Commissioner of Income Tax v. United Commercial Bank Ltd., Karachi – [1969] 20 TAX 216 (H.C.Kar.) 1426.
Payment of bonus by Pakistani branch, which suffered a loss, to employees in Pakistan in pursuance of direction by head office is admissible deduction in Pakistan.
The head office of the assessee bank was situated in India and its branch in Pakistan. In pursuance of the declaration of bonus by the Head Office, the Pakistan branch paid bonus to the employees. In making the assessment of the Pakistan branch the Income Tax officer declined to deduct the amount paid as bonus on the ground that the branch was running in loss and, therefore, the condition laid down in section 10(2)(x)(b) of the Income Tax Act was not fulfilled. The Income Tax Officer took the view that since there was no profit in the year in question so far as the Pakistan branch was concerned, it was unreasonable to pay bonus. Held, that a consequence of this character and the nature of bonus is that they employees of a Pakistani branch become entitled to demand the, payment of bonus if it is declared by the Head office, in view of
1033 DEDUCTIONS - BONUS OR COMMISSION PAID TO EMPLOYEES
Section 23(1)(viii)
the overall financial condition of company, irrespective of the loss which may be incurred in the Pakistani branch. The Appellate Tribunal was, therefore, correct in not referring this question to this Court. _______________
EXPENDITURE HELD TO BE INADMISSIBLE
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. K.K. & Co. Ltd., Peshawar – [1980] 42 TAX 81 (H.C.Lah.) 1427.
Obligation to pay bonus was not discharged during the accounting year, the expenditure held to be inadmissible in view of meaning of the word “paid” in section 10(2)(x) of the 1922 Act.
In view of the decision quoted above, the word „paid‟ used in the context of the bonus under section 10(2)(x) could not be so extended as to cover any provision of payment at the end of the year unless the obligation is discharged by actual payment of the sum involved during the accounting year. In this view of the matter we are humbly of the opinion that the interpretation given to the word „paid‟ by their Lordships of the Supreme Court of Pakistan in the context of the dividend, as provided under section 16, sub-section (2) of the Income Tax Act, 1922 would be on all fours on the provision of bonus in the annual statement under the provision of section 10(2)(x) of the said Act. Case review: DISTINGUISHED and not followed in Commissioner of Income Tax, Central Zone „A‟, Karachi v. ChemDyes Pakistan Limited [1990] 61 Tax 149 (H.C.Kar.). This lordships observed: “. . . . the respondent is employing mercantile system therefore, the liability will be incurred the moment any expense is entered in the books of account . . . we may further observe that actual payment made afterward in the next assessment year will not deprive the assessee for the benefit of section 10(2)(x) of the 1922 Act provided he has adopted mercantile method of accounting and entry has been made during the relevant assessment year.” Judicial analysis: Overruled in (1992) 65 TAX 245 (S.C. Pak.). See cases no. 1422 & 1489. Cases referred to: Commissioner of Income Tax v. Mst. Wazirunnisa Begum (1972 SCMR 116) = (1974) 29 TAX 188 (S.C.) and Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (1975) 31 TAX 1 (S.C.).
1034 Section 23(1)(x)
Income Tax Digest.
Section 23(1)(x)* Bad debts
PAGE NO
BAD DEBTS - MEANING AND SCOPE OF
1428. Bad debts - Meaning and scope of. 46 TAX 133 (S.C.Pak.)
_
1982 SCC 584 = [1982]
1429. Bad debts are necessarily allowable as deduction - Position _ prior to 1922 Act. [1932] LR 59 IA 290 (PC) 1430. Where the assessee incurs loss by standing as surety to _ another firm unconnected with his business. 2 ITC 12 (Lahore) _ 1431. Others. 10 ITC 1 (Lahore) 1432. Where firm M, in which the assessee had a share, guaranteed a loan taken by one L for the purpose of underwriting certain shares in a company which had _ purchased a mill from M. 3 ITC 83 (Bom.) _ 1433. In case of joint borrowings. [1946] 14 ITR 236 (Mad.) BAD DEBTS - CONNOTATION OF
1434. Bad debt must be a trading debt.
_
9 Tax Cas. 319 _ 1435. A mere claim against Government is not a debt. [1945] 13 ITR 336 (Bom.) 1436. Where the assessee, a moneylender, collected bonds from a debtor and transferred them to his family members for a purported cash consideration at a discount and claimed the _ difference as a bad debt. 8 ITC 345 (Lahore)
1040 1040
1041 1041
1042 1042
1042 1043
1043
INCIDENTAL TO BUSINESS - GENERAL TEST
1437. Question as to whether sum advanced was in ordinary course of business is a question of act and the only question of law that arises is whether there was evidence to justify _ finding. [1946] 14 ITR 272 (Bom.)
*
Corresponding to section 10(1), 10(2)(xi), (2)(xi), of the 1922 Act.
1043
1035 DEDUCTIONS – BAD DEBTS
Section 23(1)(x) PAGE NO
EMBEZZLEMENT BY EMPLOYEE
1438. Embezzlement loss is not allowable as a bad debt. 15 ITR 246 (Pat.)
_
[1947] 1044
MANAGING AGENT
1439. Others.
_
[1946] 14 ITR 272 (Bom.)
1044
MONEYLENDER
1440. Basis of right to deduct irrecoverable loans before arriving at profit of money-lending is that, to money-lender, as to baker, money is his stock-in-trade or circulating capital; he is dealing in money; but a solvent man can hardly make a loan by lending money to himself even if another be made _ responsible for loan as well. [1936] 4 ITR 173 (PC)
1044
1441. Question as to whether a bad debt was incurred in money_ lending business is a question of fact. [1947] 15 ITR 121 (All.)
1046
1442. Where assessee, a zamindar and moneylender, had taken bonds and promissory notes from his tenants in lieu of arrears of agricultural rents and in the past department had treated bonds and promissory notes as investments of assessee‟s money-lending business and had taxed accrued _ interest. [1947] 15 ITR 165 (Pat.)
1046
1443. Debts taken over by partner of a dissolved money-lending firm, and treated as assets of his own money-lending business, are _ deductible if irrecoverable. [1946] 14 ITR 227 (Mad.)
1046
1444. Debts taken over by partner of a dissolved money-lending firm, and treated as assets of his own money-lending _ business, are deductible if irrecoverable. [1944] 12 ITR 116 (Pat)
1047
1445. Irrecoverable capital invested in a joint business is loss of _ capital and not bad debt. [1939] 7 ITR 149 (Mad.)
1047
1446. Debt of HUF allotted to assessee in family partition is not _ allowable since it is capital loss in his hands. [1938] 6 ITR 165 (Cal.)
1047
TEST FOR DETERMINING IRRECOVERABILITY OF DEBT OR WHEN THE DEBT HAS BECOME BAD - BASIC CONCEPTS
1447. If the assessee is not certain whether the amount had _ became irrecoverable, he cannot write off the debt. [1939] 7 ITR 76 (Mad.)
1048
1036 Section 23(1)(x)
Income Tax Digest. PAGE NO
1448. It does not follow that because a firm is in difficulties it will never recover and that all debts due from it should _ immediately be struck off as bad debts. [1936] 4 ITR 382 (Lahore)
1048
1449. So long as any ray of hope is left to recover a debt and so long as a debt is in the process of realisation it cannot be _ said that it has become irrecoverable. [1937] 5 ITR 279 (Lahore)
1048
1450. Bad debts are deductible in year when hope of their recovery _ is gone. [1941] 9 ITR 635 (All.)
1048
ONUS TO PROVE
1451. Burden is on assessee to show that debt has become bad. _ [1941] 9 ITR 222 (Lahore); 4 ITC 318 (Bom.); 5 ITC 303 (Cal.)
1049
TIME TO ALLOW BAD DEBTS / POWERS OF INCOME TAX AUTHORITIES
1452. Bad debts claimed by assessee-bank was disallowed by the Income Tax Officer on the ground that the suits were pending and was still hope for recovery; another amount of the claim was rejected on the ground that no legal action was taken for recovery. Tribunal‟s direction to the Income Tax Officer to admit the claim on the basis of provisions _ created by the bank held to be valid. [1991] 64 TAX 7 (H.C.Kar.)
1049
1453. Assessee-company filed a suit against the debtor and obtained decree, which could not be effected because the debtor left for India without leaving sufficient assets, bad _ debts held to be allowable. [1986] 54 TAX 38 (H.C.Kar.)
1050
1454. Claim of bad debt during the pendency of a suit by debtor involving a different controversy has to be considered _ especially when case has no bearing on the claim. [1983] 47 TAX 173 (H.C.Kar.)
1051
1455. Questions whether a particular debt has become bad or not and at what time it became bad are questions of fact to be _ decided by the Income Tax authorities. [1947] 15 ITR 16 (All.)
1052
1456. Decision of the Income Tax Officer to question whether a debt is bad or irrecoverable operates should be restricted _ only for the particular year under assessment. [1934] 2 ITR 329 (Lahore)
1052
1037 DEDUCTIONS – BAD DEBTS
Section 23(1)(x) PAGE NO
EFFECT OF PERIOD OF LIMITATION
1457. Loans advanced to two limited companies became bad as permission to commence business was not granted by the Government. Bad debts claimed held to be allowable. _ [1990] 61 TAX 155 (H.C.Kar.)
1053
1458. Debt relating to the assessment year 1961-62 becoming barred by time, held that cannot be added as profits to the _ total income. [1980] 42 TAX 147 (H.C.Kar.) = 1980 PTD 314
1054
1459. A statute-barred debt is not necessarily bad, neither is a debt _ which is not statute-barred necessarily good. 6 ITC 453 (PC)
1055
1460. Treating time barred debts as bad is not unreasonable. _ [1934] 2 ITR 20 (Pat.)
1055
1461. A time-barred debt need not necessarily be disallowed. _ _ [1933] 1 ITR 309 (Sind); [1937] 5 ITR 279 (Lahore)
1056
1462. Where interest on loan was debited to debtors account by assessee and assessee continued to obtain from debtor _ acknowledgement of his liability to pay. 7 ITC 117 (Pat.)
1056
RELEVANCE OF FACT THAT DEBTOR HAS BECOME INSOLVENT
1463. In case of insolvency bad debt can be deducted in the year in _ which final dividend is paid. [1941] 9 ITR 222 (Labore)
1056
1464. Where two debtors of the assessee were declared insolvent and discharged in 1929 and the assessee claimed the debt due from one of them as a bad debt in 1929 itself while in respect of the other debtor, he claimed bad debt in 1934, on _ ground that a paltry sum was received in 1933-34. 10 ITC 448 (Labore)
1057
RELEVANCE OF WRITING OFF OF DEBT
1465. In case of a banking company, loans were neither written off as irrecoverable nor any provision for bad debts was created _ yet the same held to be allowable. [1992] 65 TAX 135 (H.C.Kar.)
1057
1466. Mere fact that debt has been written off in books of assessee _ does not prove that debt is irrecoverable. [1941] 9 ITR 224 (Lahore)
1058
1038 Section 23(1)(x)
Income Tax Digest. PAGE NO
1467. Irrecoverable debt allotted to assessee-partner on dissolution _ of firm is not allowable as bad debt. [1940] 8 ITR 408 (Cal.)
1058
1468. Debt due from retiring partner is not allowable as bad debt _ or trading loss. [1935] 3 ITI1 462 (Bom.)
1058
1469. It is open to assessee to treat the amount found due from the other partner on settlement of accounts as loan given to the partner which if rendered irrecoverable, could be claimed as _ bad debt. [1933] 1 ITR 309 (Sind)
1059
ILLUSTRATIONS
1470. Where the creditor had taken no steps for the recovery of debt from its debtors, who were his close relatives, were solvent and were making profits assessable to Income Tax. _ 6 ITC 110 (Mad.)
1059
1471. Where the debtor to whom assessee had advanced a sum absconded in 1928 after repaying a certain part of the debt, and the assessee claimed deduction of the amount remaining due to him as bad debt in the assessment year _ 1931-32. [1936] 4 ITR 366 (Lahore)
1060
1472. Where assessee took over assets of debtors and wiped of the balance debt, he could not later claim that the remaining _ debt became bad in a subsequent year. [1938] 6 ITR 485 (Pat.)
1060
1473. In money-lending business, a bad debt which is not actually bad but is apprehended as likely to become bad is not _ allowable. 6 ITC 154 (Bom.) _ 1474. Others. [1936] 4 ITR 380 (Lahore); [1936] 4 ITR 140 (Lahore) 1475. Where debts have become bad even prior to commencement _ of year of account, they are not deductible. 6 ITC 453 (PC)
1061 1061 1062
DEBT SHOULD BECOME BAD IN RELEVANT ACCOUNT YEAR
1476. The system of accounting maintained permits reversal of entries in the Bad Debt Account in the event of unexpected realisation but it does not makes the entries provisional and _ claim is not liable to be rejected. [1976] 34 TAX 158 (H.C.Kar.) = 1976 PTD 237
1062
1477. Debts treated as good in one year cannot subsequently be _ held to have become bad earlier than that year. [1938] 6 ITR 290 (Pat.)
1063
1039 DEDUCTIONS – BAD DEBTS
Section 23(1)(x) PAGE NO
1478. If bad debts have been disallowed in one year as premature, this does not stop authorities from reconsidering position in _ succeeding years on proper investigation. [1941] 9 ITR 332 (Pat.)
1064
1479. Where claim is rejected on the ground that debt had not yet become bad it is open to the Income Tax Officer in subsequent year to hold materials that debt had become bad _ long ago. [1938] 6 ITR 577 (Lahore)
1065
REFERENCE TO HIGH COURT
1480. Question as to whether debt has become bad is a question of _ fact. [1934] 2 ITR 319 (PC)
1065
1481. Question as to whether debt has become bad is a question of _ fact. [1934] 2 ITR 319 (PC)
1065
1482. Where order allowing bad debts was not based on any _ evidence, a question of law would arise therefrom. [1936] 4 ITR 382 (Lahore)
1066
1483. Whether a debt is bad or not, and if so, at what point of time _ it became a bad debt, is a question of fact. [1932] 2 Camp. Cas. 464
1066
1484. Question as to whether a sum was a bad debt or not and at what point of time such claim could be allowed is purely a _ question of fact. [1947] 15 ITR 16 (All.)
1067
1485. Question as to whether a sum was a bad debt or not and at what point of time such claim could be allowed is purely a _ question of fact. [1934] 2 ITR 329 (Lahore)
1067
1486. Question as to what extent debt has become bad is a _ question of fact. [1934] 2 ITR 319 (PC)
1067
1487. Finding of the Tribunal that the assessee had lost all hope of _ recovering debts would be a finding of fact. [1947] 15 ITR 16 (All.)
1067
1488. Where Commissioner held that claim for bad debt was not admissible until attempt had been made to sell all the property recovered from the debtor, no question of law arose _ from Commissioner‟s order. [1945] 13 ITR 240 (Nag.)
1068
1040 Section 23(1)(x)
Income Tax Digest.
Section 23(1)(x)* Bad debts
BAD DEBTS
_
MEANING AND SCOPE OF
Roberts Cotton Association Ltd. v. Commissioner of Income Tax, North Zone, Lahore – 1982 SCC 584 = [1982] 46 TAX 133 (S.C.Pak.) 1428. Bad debts - Meaning and scope of. Counsel appearing for the appellant before the High Court conceded that the claim as expressed by the assessee in its income tax return before the Income Tax Officer was a bad debt under section 10(2)(xi). The High Court, accordingly, examined the matter in the light of that provision but rejected the contention. Nevertheless, the High Court proceeded to examine the further contention that the amount constituted trading or business loss but rejected the same, too, for the reason that the appellant had not claimed it as such as per income tax return, that the loss had not been sustained by the appellant on account of any deal with the debtor, that the loss had been voluntarily incurred in order to grant certain accommodations to Ali Group and that the short receipt was not incidental to business of the assessee with the Mill which must necessarily be something which came upon the assessee involuntarily in the incidence of its business. The High Court also examined the contention that the loss was covered by the provision of clause (xv) of sub-section (2) of section 10, but finding no circumstances to show how the appellant had benefited by the transaction, held that the transaction, if at all, only benefited Ali Group and as such was not an act of good management of business. The High Court further observed that a sale of actionable claims had not been a business of the assessee carried out during the year of the assessment, the appellant had made this “colourable entry” in order to claim an allowance which was not otherwise admissible under the law. Income Tax Commissioner v. Chitnavia – [1932] LR 59 IA 290 (PC) 1429. Bad debts are necessarily allowable as deduction - Position prior to 1922 Act.
*
Corresponding to section 10(1), 10(2)(xi), (2)(xi), of the 1922 Act.
1041 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What is chargeable to income tax in respect of a business are the profits and gains of a year, and in assessing the amount of profits and gains of a year, account must necessarily be taken of all the losses incurred, as otherwise one would not arrive at the true profits and gains. Note : Section 23(1)(x) of the 1979 Ordinance specifically allows deduction towards bad debts, provided certain conditions are satisfied.
Ishar Das Dharam Chand, In re – 2 ITC 12 (Lahore) 1430.
Where the assessee incurs loss by standing as surety to another firm unconnected with his business.
The loan for which the petitioner has stood surety has nothing whatever to do with the petitioner‟s business and the petitioner has stood surety in order to do friends of theirs a kindness. Such loss not being one incurred in connection with the assessee‟s business cannot be allowed as deduction. Badri Shah Sohan Lal v. Commissioner of Income Tax – 10 ITC 1 (Lahore) 1431.
Others.
The assessee was a bullion dealer and moneylender of G. In 1934-35 he was assessed on a total income of Rs.20,549 out of which Rs.14,673 represented his profits in business. Rs.8,503 were due from S to the assessee in May 1928. The debtors sold their land for a sum of Rs.18,000 to the assessee. This sum of Rs.18,000 was made up of Rs.8,503 due from the vendors to the vendee, and an advance of Rs.9,497 made by the vendee to the vendors. The assessee paid this sum in cash to S. However, at the time of this sale insolvency proceedings were pending against S. Eventually, the assessee received from the Official Receiver the amount of the original debt with interest thereon and a further sum of Rs.3,097 towards the unsecured claim leaving a deficit of Rs.6,403 which he claimed as a deduction from his assessable profits. Held that since the purchase of the land did not arise out of the assessee‟s money-lending business, the loss suffered by him in respect of this purchase could not be regarded as expenditure incurred solely for the purpose of earning profits or gains in the money-lending business. Hence, the said loss could not be allowed in computing the assessee‟s income.
1042 Section 23(1)(x)
Income Tax Digest.
Girdhardas Hirivallabhdas v. Commissioner of Income Tax – 3 ITC 83 (Bom.) 1432.
Where firm M, in which the assessee had a share, guaranteed a loan taken by one L for the purpose of underwriting certain shares in a company which had purchased a mill from M.
Firm M, in which the assessee had a share, guaranteed a loan taken by one L for the purpose of underwriting certain shares in a company which had purchased a mill from M. On L becoming insolvent, M had to discharge the liability to the bank and the assessee claimed his share in the loss as a deduction under section 10(2)(ix). Held that the guarantee given by M was not in the course of its business operations and hence the deduction claimed was not allowable. Commissioner of Income Tax v. S.A.S. Ramaswamy Chettiar – [1946] 14 ITR 236 (Mad.) 1433.
In case of joint borrowings.
The assessee was a Nattukottai Chettiar carrying on money-lending business. There was a custom among Chettiars to stand surety for one another when they borrowed from banks for the purpose of their money-lending business. If a Chettiar refused to accommodate another moneylender in this way, he would not be able to obtain a guarantor for his own essential borrowings. The assessee who had stood surety for the loan granted by the bank to another Chettiar suffered loss due to the latter‟s inability to pay. Held that the loss so suffered was business loss. _______________
BAD DEBTS
_
CONNOTATION OF
Curtis v. J & G Oldfield Ltgd. – 9 Tax Cas. 319 1434.
Bad debt must be a trading debt.
When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade, that is, in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits.
1043 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
National Petroleum Co. Ltd. v. Commissioner of Income Tax – [1945] 13 ITR 336 (Bom.) 1435.
A mere claim against Government is not a debt.
In 1934, the assessee-company paid customs duty on certain shipments under protest. Later, it filed a suit claiming refund, but the suit was dismissed in 1941 on the question whether the company could claim it as bad debt in 1941. Held that a bad debt presupposes the existence of a debt, and at no time there was a debt due by the Port Trust authorities to the assessee. At the highest the assessee had a claim against the Port Trust authorities. Tahlia Ram Amir Chand v. Commissioner of Income Tax – 8 ITC 345 (Lahore) 1436.
Where the assessee, a moneylender, collected bonds from a debtor and transferred them to his family members for a purported cash consideration at a discount and claimed the difference as a bad debt.
Where the assessee, a moneylender, collected bonds from a debtor and transferred them to his family members for a purported cash consideration at a discount and claimed the difference as a bad debt, it was held that the assessee‟s claim was not allowable as the transaction was one of accommodation and the amount claimed had not been proved to be irrecoverable. _______________
INCIDENTAL TO BUSINESS - GENERAL TEST
Vissonji Sons & Co. v. Commissioner of Income Tax – [1946] 14 ITR 272 (Bom.) 1437.
Question as to whether sum advanced was in ordinary course of business is a question of fact and the only question of law that arises is whether there was evidence to justify finding.
The question as to whether sum advanced was in ordinary course of business is a question of act and the only question of law that arises is whether there was evidence to justify finding. _______________
1044 Section 23(1)(x)
Income Tax Digest.
EMBEZZLEMENT BY EMPLOYEE
Sir Kameshwar Singh v. Commissioner of Income Tax – [1947] 15 ITR 246 (Pat.) 1438.
Embezzlement loss is not allowable as a bad debt.
An employee of the assessee a moneylender was found to have embezzled some money. As a result of settlement of accounts, that employee executed a promissory note in respect of the fund which he had embezzled. The assessee instituted a suit to recover the sums due on the promissory note and obtained a decree but nothing could be realised from the employee. The assessee claimed that this amount should be treated as irrecoverable loan and allowed as a loss in his money-lending business. Held that the loan in question was not made in the ordinary course of money-lending business and, therefore, this bad debt could not be allowed to the assessee. _______________
MANAGING AGENT
Vissonji Sons & Co. v. Commissioner of Income Tax – [1946] 14 ITR 272 (Bom.) 1439.
Others.
The assessee firm A was carrying on money-lending business. There was another firm B comprising the same partners which was the managing agent of a company. Firm B had advanced a loan to the company, which it later gave up. The question was whether firm A having the same partners and doing money-lending business could claim deduction. Held that though in law firms A and B were one entity having the same partners, the debt was not deductible, because it had been advanced in the course of managing agency business, and not moneylending business. _______________
MONEY LENDER
RM.AR.AR.RM. Arunchalam Chettiar Income Tax – [1936] 4 ITR 173 (PC) 1440.
v.
Commissioner
of
Basis of right to deduct irrecoverable loans before arriving at profit of money-lending is that, to money-lender, as to baker,
1045 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
money is his stock-in-trade or circulating capital; he is dealing in money; but a solvent man can hardly make a loan by lending money to himself even if another be made responsible for loan as well. The assessee was sole proprietor of money-lending business. He had 5/8 share in a firm doing business sin cotton, the other 3/8 belonging to one P, a man who had no means. The partners did not contribute any capital. The entire working capital was supplied by the assessee, who was also carrying on money-lending business. The assessee used to charge interest from the firm on the funds supplied. The firm suffered losses and the assessee‟s share was duly set off against his other profits. Later, liability for P‟s share of losses (who was insolvent) also was borne by the assessee, i.e. the debit against P in the partnership accounts was accordingly transferred to the assessee‟s money-lending accounts and the debit against P was later written off as a bad debt. The cotton business was closed on 31.3.1930. In calculating the taxable income of the assessee, the assessee claimed that in addition to his share of the loss incurred by the firm the amount thus written off should be set off against his income from the money-lending business. The question was whether the deduction of bad debt was admissible in money-lending business. Held that it was no part of the business of a moneylender to finance the moneylender‟s ventures in the cotton market. Conversely, it was not a sign or index of the moneylender that one advances money to ones own firm. The basis of the right to deduct irrecoverable loans before arriving at the profit of money lending is that, to the moneylender, as to the banker, money is his stock-in-trade or circulating capital: he is dealing in money. But a solvent man can hardly make a loss by lending money to himself even if another be made responsible for the loan as well. And when the loan is in reality but a putting of the hand into the pocket to pay for cotton, it seems desirable to ask what is the real equity between the parties. The true and ultimate right of the assessee against P was a right to contribution in proportion to the latter‟s share of profits. This was nonetheless true that the money was not put up by way of partner‟s capital. Even if three-fifths of the money could also be regarded as in equity a loan to P, it was very far from being money lent in the course of business as a money-lender, still less could it be considered as becoming bad in the year of account 1930-31, as evidently P‟s inability to meet his share of the loss was just as hopeless by the end of March 1930 as at any later time. The impugned debt was, therefore, not allowable.
1046 Section 23(1)(x)
Income Tax Digest.
Case review : Decision of the Madras High Court in Commissioner of Income Tax v. RM.AR.RM. Arunachanlam Chettiar & Son [1934] 2 ITR 401 affirmed.
Nand Ram Chhotey Lal v. Commissioner of Income Tax – [1947] 15 ITR 121 (All.) 1441.
Question as to whether a bad debt was incurred in moneylending business is a question of fact.
Question as to whether a debt which is claimed as a bad debt was incurred in the course of the money-lending business carried on by the assessee, is a pure question of fact. Deniti Prasad Singh v. Commissioner of Income Tax – [1947] 15 ITR 165 (Pat.) 1442.
Where assessee, a zamindar and moneylender, had taken bonds and promissory notes from his tenants in lieu of arrears of agricultural rents and in the past department had treated bonds and promissory notes as investments of assessee‟s moneylending business and had taxed accrued interest.
Where assessee, a zamindar and moneylender, had taken bonds and promissory notes from his tenants in lieu of arrears of agricultural rents and in the past department had treated bonds and promissory notes as investments of assessee‟s money-lending business and had taxed accrued interest. Held that the department could not disallow the claim of the assessee for deduction of such debts as had become irrecoverable under section 10(2)(xi) of the 1922 Act on the ground that the said transactions were not part of the money-lending transactions of the assessee. Commissioner of Income Tax v. Sri Talupuru Venkatasubhiah Chetty – [1946] 14 ITR 227 (Mad.) 1443.
Debts taken over by partner of a dissolved money-lending firm, and treated as assets of his own money-lending business, are deductible if irrecoverable.
The assessee-HUF carrying on money-lending business was also a partner in a firm, which too was carrying on money-lending business. On the dissolution of the firm, the assessee received as part of its share, certain promissory notes executed by persons to whom the partnership had lent money. These debts were entered in the books of the family business and were renewed from time to time in favour of the assessee and the interest paid to the family by the debtors was also included in the profits of the family. On some of these debts
1047 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
becoming bad, the question arose whether deduction was admissible to the HUF: Held that since the loans had become assets of the family‟s moneylending business, the assessee-HUF was entitled to the deduction of these debts. Commissioner of Income Tax v. Maharaja of Darbhanga – [1944] 12 ITR 116 (Pat) 1444.
Debts taken over by partner of a dissolved money-lending firm, and treated as assets of his own money-lending business, are deductible if irrecoverable.
Where on the dissolution of the money-lending firm the assesseepartner had taken over all the firm‟s assets, i.e., the firm‟s debts: Held that the debts which had become irrecoverable, were allowable as bad debts in the assessee‟s assessment. Mothay Camp Rem v. Commissioner of Income Tax – [1939] 7 ITR 149 (Mad.) 1445.
Irrecoverable capital invested in a joint business is loss of capital and not bad debt.
The assessee took out capital from his money-lending business and invested it in a joint business (tobacco). The business incurred loss and the other partner executed a mortgage in favour of the assessee in respect of his capital. Part of the amount ultimately became irrecoverable. Held that the said loss was not allowable as bad debt in the assessee‟s money-lending business. It was a loss of capital. Bissendoyal Doyaram, In re – [1938] 6 ITR 165 (Cal.) 1446.
Debt of HUF allotted to assessee in family partition is not allowable since it is capital loss in his hands.
Where, in a family partition, the assessee was allotted certain business properties as well as a debt of the family business whereas the business itself together with goodwill was allotted to the other coparcener, it was held that the assessee could not claim the debt as bad debt later, since what he got was a share in the assets of the old business which became capital in his hands, and the loss was, therefore, a capital loss. _______________
1048 Section 23(1)(x)
Income Tax Digest.
TEST FOR DETERMINING IRRECOVERABILITY OF DEBT OR WHEN THE DEBT HAS BECOME BAD - BASIC CONCEPTS
PR.AL.M. Muthukaruppan Chettiar v. Commissioner of Income Tax – [1939] 7 ITR 76 (Mad.) 1447.
If the assessee is not certain whether the amount had became irrecoverable, he cannot write off the debt.
Where the last realisation towards debt was between January and March 1931 and the assessee did not write it off in that year, but preferred to wait for some more time, it was held that the disallowance of bad debt in subsequent year on the ground that it should have been written off in 1930-31 was not justified. Som Chand Maluk Chand v. Commissioner of Income Tax – [1936] 4 ITR 382 (Lahore) 1448. It does not follow that because a firm is in difficulties it will never recover and that all debts due from it should immediately be struck off as bad debts. It does not follow that because a firm is in difficulties it will never recover and that all debts due fry it should immediately be struck off as bad debts. B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore) 1449.
So long as any ray of hope is left to recover a debt and so long as a debt is in the process of realisation it cannot be said that it has become irrecoverable.
So long as there is any ray of hope left to recover a debt, however dim it may be, and so long as a debt is in the process of realisation, it cannot be said that it has become irrecoverable. Thus, where the official assignee had not wound up the affairs of the debtor, and had, even after the relevant year of account, paid paltry dividends to the creditor, it was held that the debt could not be considered to have become bad in that year. HuIasllal Ramdayal, In re – [1941] 9 ITR 635 (All.) 1450. Bad debts are deductible in year when hope of their recovery is gone. Bad debts are legacies of years that have gone before but they become bad debts which have to be wiped out in particular year when all hopes of their recovery are gone. _______________
1049 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
ONUS TO PROVE
L.Bani Mal DaIal v. Commissioner of Income Tax – [1941] 9 ITR 222 (Lahore); Vallabhdas Murlldhar v. Commissioner of Income Tax – 4 ITC 318 (Bom.); Binjraj Hukamchand v. Commissioner of Income Tax – 5 ITC 303 (Cal.) 1451.
Burden is on assessee to show that debt has become bad.
„Bad debt‟ is claimed as an allowance by the assessee and, therefore, the burden is on him to show that he had no reasonable expectations of recovering it at the time he wrote off or that-there was no ray of hope at all on which he could rely for recovering the amount from his debtor at the time he wrote off the debt. Where the assessee had accepted hundies from a debtor for part of the debt and wrote off the balance and hundies were to mature after the close of the year and he had also filed a suit against the debtor for recovering the amount. Held that mere writing off of such amount would not entitle the assessee to claim it as bad debt. It is difficult to assume that a person having no reasonable expectation of recovering the debts from his debtor or a person having no ray of hope at all of recovering the debt from his debtor would go to the extent of filing a suit against the debtor and incur the expenses involved in such a litigation. Also, acceptance of hundies maturing in the following year was indicative of the fact that the assessee had not come to the conclusion that the debtor would not pay his debt. _______________
TIME TO ALLOW BAD DEBTS / POWERS OF INCOME TAX AUTHORITIES
Commissioner of Income Tax, Central Zone ‘C’, Karachi v. Grindlays Bank Limited, Karachi – [1991] 64 TAX 7 (H.C.Kar.) 1452.
Bad debts claimed by assessee-bank was disallowed by the Income Tax Officer on the ground that the suits were pending and was still hope for recovery; another amount of the claim was rejected on the ground that no legal action was taken for recovery. Tribunal‟s direction to the Income Tax Officer to admit the claim on the basis of provisions created by the bank held to be valid.
The respondent is a non-resident banking company. For the assessment year 1976-77 it claimed Rs.35,25,785 as bad debts. The
1050 Section 23(1)(x)
Income Tax Digest.
Assessing Officer disallowed Rs.31,09,478 on the ground that the suits were filed for sum aggregating Rs.13,85,652 which were pending and, therefore, there was still hope for recovery. For a sum of Rs.17,23,826 the claim was rejected on the ground that no legal action was taken for recovery of that amount. in appeal the order of the Income Tax Officer was confirmed. The respondent then filed appeal before the Tribunal which allowed. From the facts stated in the order of the Tribunal it seems that the respondent was claiming allowances in respect of bad debt to the extent of Rs.35,25,785 which was partly allowed by the Income Tax Officer. The controversy was whether the remaining amount is also bad debt to enable the respondent to claim allowance under section 10(2)(xi). The Tribunal has given a finding that the amount claimed by the respondent was bad debt. This is a finding of fact and has not been challenged by the applicant. On this finding, therefore, the respondent would be entitled to claim allowance of the entire bad debt admitted by the Tribunal. No question of law, therefore, arises. Commissioner of Income Tax (Central Zone), Karachi v. Esso Eastern Standard Inc. – [1986] 54 TAX 38 (H.C.Kar.) 1453.
Assessee-company filed a suit against the debtor and obtained decree which could not be effected because the debtor left for India without leaving sufficient assets, bad debts held to be allowable.
The relevant facts are that the assessee-company had claimed a sum of Rs.17,07,853 as bad debts for the years 1968-69, 1969-70 and 197071. The same had been disallowed up to the year 1970-71 by the Income Tax Officer, but the Appellate Tribunal allowed the adjustment of the same for the assessment year 1970-71 as admissible deduction against the property. The company had actually written off this amount as bad debts in August 1967 which was owed to them by one K. L. Saha, who was their Commission Agent. It was only on 21.3.1968 that a suit against the said K. L. Saha was filed by the respondent company and they obtained a decree against him on 24.6.1969. The proceedings in execution could not be taken as the appellant‟s staff and the lawyer advised that no further action was possible because the party had left for India without leaving sufficient assets to effect the recovery. A certificate had also been obtained from the Town Committee regarding the departure of the defaulter and about his assets and an independent enquiry had also confirmed the findings of the respondent‟s local staff.
1051 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
We are of the opinion that the view of the Appellate Tribunal in appeal could be justified on the basis that the respondent had filed a suit for the recovery of the amount, but had failed to recover the same on account of the lack of assets of the debtor, who had left for India. The decision of the Tribunal is essentially based on facts and the view that the Tribunal has taken is one which could be arrived at in the circumstances of the case. Bank of Bahawalpur Ltd. v. Commissioner of Income Tax – [1983] 47 TAX 173 (H.C.Kar.) 1454.
Claim of bad debt during the pendency of a suit by debtor involving a different controversy has to be considered especially when case has no bearing on the claim.
The relevant facts leading to the filing of the above reference are that the applicant Bank maintained a Current Account of Messrs Pakistan Development Corporation Ltd. The borrower opened a letter of credit for 12,196.18 in April, 1951 for import of safety matches from U.S.S.R. to East Pakistan. The documents for the imported goods were not returned by the borrower and the Bank had to pay cost of the goods and other charges. It seems that the above goods were cleared at Chittagong on 15.5.1951 through the Chartered Bank. The borrower did not pay the due amount in spite of the repeated demands. Consequently, the above goods were sold in July, 1953 for a sum of Rs.5,33,226 which resulted in a short-fall of Rs.91,000. The Bank required the borrower to make good of the above loss, but it was not done. On the contrary the borrower filed a suit claiming a sum of Rs.58,000 after adjusting the claim of the Bank. It further seems that on 7.12.1955, the Bank claimed from the borrower its aggregate dues amount to Rs.1,08,602 which was followed by service of a legal notice upon the borrower, which was also not responded to. It further seems that the Bank in the assessment year 1959-60 claimed the above amount of Rs.1,08,602 due from the borrower as a bad debt. Held, that in the suit the claim of the borrower was not that the Bank in fact had received any surplus amount but the claim was based on the averment that the Bank had sold the above consignment below the market price and that if they would have sold it at the market price, it would have resulted in a surplus of Rs.58,000 after adjusting its claim. In this view of the matter, the result of the suit would have no direct bearing for considering the Bank‟s claim in question on account of bad debt.
1052 Section 23(1)(x)
Income Tax Digest.
R.B. Seth Ganga Sagar v. ITAT – [1947] 15 ITR 16 (All.) 1455.
Questions whether a particular debt has become bad or not and at what time it became bad are questions of fact to be decided by the Income Tax authorities.
The questions whether a particular debt has become bad or not and at what time it became bad are questions of fact. The decisions of these question would depend mainly upon the state of mind of the assessee and although the time when the assessee writes off the debt in question may be a relevant circumstance, yet it is not conclusive upon the question when the debt became bad. The question of the state of mind of an assessee is one of fact and has to be determined upon the evidence before the Income Tax authorities and the Income Tax Tribunal. The finding arrived at by the Income Tax Tribunal upon this matter is not open to challenge unless it is clear that that finding has been arrived at through any error of law. In other words, no question of law can be said to arise out of the order of the Income Tax Tribunal unless some principle of law has been violated by that Tribunal in arriving at the finding. Even with regard to bad and doubtful debts due to assessee other than moneylenders it would be the finding of the Income Tax Officer as to the nature of the debt and also as to the time when the debt became “bad and doubtful” that would be decisive of the question. Rulla Mal-Raunak Ram v. Commissioner of Income Tax – [1934] 2 ITR 329 (Lahore) 1456.
Decision of the Income Tax Officer to question whether a debt is bad or irrecoverable operates should be restricted only for the particular year under assessment.
Whether a debt is a bad debt and when it becomes bad are questions of fact to be determined in case of dispute not by the assessee but by the appropriate authority upon a consideration of all relevant and admissible evidence. The decision of the Income Tax Commissioner on the question whether a debt is bad or irrecoverable operates only for the particular year under assessment and it would be open to the assessee to repeat his claim in respect of any particular debt in any subsequent year, provided the debt had not been recovered in the interval. _______________
1053 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
EFFECT OF PERIOD OF LIMITATION
Commissioner of Income Tax, Central Zone ‘C’ Karachi v. Muhammad Amin Muhammad Bashir Limited – [1990] 61 TAX 155 (H.C.Kar.) 1457.
Loans advanced to two limited companies became bad as permission to commence business was not granted by the Government. Bad debts claimed held to be allowable.
The respondent / assessee a private limited company, during the year 1973-74 claimed a sum of Rs.20,17,543 under the head “bad debts”. On scrutiny of the accounts the Assessing Officer found that out of the above stated amount a sum of Rs.5,07,000 was advanced to N...... S... M... P..., while another sum of Rs.8,20,230 was advanced to M...... C...... o P...... L... The Government, however, did not grant permission to the aforementioned two firms to commence business and as such the assessee was not able to recover the advances made to them. The Assessing Officer disallowed the claim for bad debts in respect of both the amounts on the ground that these before the Income Tax Appellate Tribunal, the case was remanded back to the Assessing Officer with the direction to enquire into as to whether the advances were made to the extent claimed by the assessee and whether there was any hope of recovery of these amounts. The Income Tax Officer again disallowed claim for the bad debts relating to the amounts mentioned above. However, in appeal the Appellate Assistant Commissioner held that on the basis of the observation of the Tribunal in the remand order the above mentioned two amounts were advanced in connection with the business of the assessee and as the Assessing Officer had found that there was no hope of recovery of these amounts, he allowed the claim of bad debts made by the assessee. The question, whether the above amount claimed by the assessee as „bad debts‟ was incurred by it as an expenditure of capital nature or it was the advances made in connection with the business of the assessee was no more a controversy in the case in view of the order of Appellate Tribunal dated 11.5.1978. It is quite clear from the subsequent orders of the Income Tax Officer and of the Assistant Appellate Commissioner that the advances which were claimed as „bad debts‟ by the assessee were in fact made to N...... S... M... P... and M... C...P... L... to the extent claimed by the assessee and that there was no possibility for recovery of these amounts in the circumstances of the case. In these circumstances, the Income Tax Appellate Tribunal was justified in directing the Income Tax Officer to allow a sum of
1054 Section 23(1)(x)
Income Tax Digest.
Rs.13,19,230 as bad debts under section 10(2)(xi) of the Income Tax Act, 1922. We accordingly answer the question Nos. 1 and 3 in affirmative while question Nos. 2 and 4 do not arise on the facts discussed above. Commissioner of Income Tax, Karachi (West), Karachi v. S. A. Rehman – [1980] 42 TAX 147 (H.C.Kar.) = 1980 PTD 314 1458. Debt relating to the assessment year 1961-62 becoming barred by time, held cannot be added as profits to the total income. Since the assessment year relating to the present case is 1961-62 the law applicable is as it stood before 1966 amendment was made. A significant departure in so far as is relevant to the present case has been made by insertion of clause (iii) in 1966 which clearly provides that trading liability or a portion thereof as had not been paid within three years of the expiry of previous year had to be added as profit for the purpose of computing the profits and losses in respect of the assessment year in question. To such extent the words “benefit in respect of such trading liability by way of remission or cesession” in the original provisions is significant. On a consideration of the matter, we are clear in our mind that the mere fact of liability becoming barred by the Law of Limitation only the creditors remedy may become barred but that will not ipso facto lead to the conclusion that the amount becomes a profit. In business traditions, routine and convention it is very often that even timebarred debts are paid. Even otherwise, a time-barred debt is considered a good defence in suits that may be filed by the debtor against the creditor in order to extinguish the liability. What is more that the entries in regard to the trading liabilities may in given cases operate as acknowledgment of liability by reason of section 19 of the Limitation Act; on proof of such acknowledgment of liabilities being in writing, signed by the party who is liable, a fresh period of limitation starts running, provided that the acknowledgment is written before the expiry of the initial period of limitation. In regard to the date of writing even oral evidence is admissible. The explanation in section 19 clearly states that a writing shall be sufficient acknowledgement even though it omits to specify the exact nature of property or right arid signature on the writing may be made either personally or by the agent duly authorised. It would be seen that if the books of account which are prepared in the handwriting of the assessee bear his signature, the writing acknowledging the liability would by itself be sufficient to extend the time of limitation so that the liability is mot extinguished.
1055 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
On a reading of the case it appears to us that the learned Judges of the Lahore High Court became conscious of the fact that if once trading liability is held in suspense after certain period the liability will stand terminated. No doubt this is a question that required consideration and the Legislature has in 1966 consciously provided a period of three years for the carrying over such unsatisfied liability, after which period the same shall be added to profits. However, as the law stood before 1966 efflux of time, to produce the result of liability being time-barred under the Limitation Act was never a consideration. There is a string of cases to that effect and some of these have been referred to in the earlier part of the judgment. Cases dissented from : Commissioner of Income Tax v. Mian Muhammad Allah Bux (PLD 1973 Lah. 381) = (1973) 27 TAX 145 (H.C.Lah.); Ashfaqur Rahman Muhammad Afzal v. Choudhry Mohammcid Afzal (PLD 1968 S.C. 230). Cases referred to : Morley v. Tattersall (22 Tax Cas. 51); Kohinoor Mills v. Commissioner of Income Tax (1963) 49 ITR 578; Ambica Mills Ltd. v. Commissioner of Income Tax (1964) 54 ITR 167; Commissioner of Income Tax v. Sandors Sons and Morgans (1970) 75 ITR 433 and Bhagwant Parsad & Co. v. Commissioner of Income Tax (1975) 99 ITR 111.
Commissioner of Income Tax v. Sir S.M. Chitnavis – 6 ITC 453 (PC) 1459.
A statute-barred debt is not necessarily bad, neither is a debt which is not statute-barred necessarily good.
The mere fact that a debt was incurred at a date beyond period of limitation will not of itself make the debt a bad debt still less will it fix the date at which it became a bad debt. A statute-barred debt is not necessarily bad; neither is a debt which is not statute-barred necessarily good. Bansidar Podd v. Commissioner of Income Tax – [1934] 2 ITR 20 (Pat.) 1460.
Treating time barred debts as bad is not unreasonable.
It has been the practice of the Income Tax Officer, and one cannot say that it is an unreasonable practice, to regard a debt as bad prima facie when it is barred by limitation and no longer recoverable and that appears as being the guide in the matter. The presumption is, however, rebuttable by evidence according to the circumstances of the case.
1056 Section 23(1)(x)
Income Tax Digest.
Commissioner of Income Tax v. Kbernchand Rarndas – [1933] 1 ITR 309 (Sind) 1461.
A time-barred debt need not necessarily be disallowed.
The mere absence in the Act of provision for loss in respect of a timebarred debt is no ground for disallowing it, but whether such loss could be claimed in any particular year or not is a question of fact depending upon the circumstances of each case. B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore)
Where loans advanced by the assessee, a money-lender, to his tenants were shown as having become bad debts in the balance sheet of the year ending 30.9.1933, it was held that the finding that the debts had not become bad in the year ending on 30.9.1934 only because the limitation period expired in that year, was not bad in law; it may be erroneous finding of fact; nevertheless it was conclusive. Bansidhar Poddar v. Commissioner of Income Tax – 7 ITC 117 (Pat.) 1462.
Where interest on loan was debited to debtors account by assessee and assessee continued to obtain from debtor acknowledgement of his liability to pay.
Where interest on loan was debited to the debtor‟s account by the assessee and the assessee continued to obtain from the debtor acknowledgement of his liability to pay, it was held that since the debt would become time barred only after the expiry of three years from the date of last acknowledgement it could not be held that the debt had become bad at an earlier stage and that the claim for bad debt made immediately after the expiry of the limitation period, was allowable. _______________
RELEVANCE OF FACT THAT DEBTOR HAS BECOME INSOLVENT
L.Bani Mal Dalal v. Commissioner of Income Tax – [1941] 9 ITR 222 (Labore) 1463.
In case of insolvency bad debt can be deducted in the year in which final dividend is paid.
Where the assessee had received final dividend from the estate of an insolvent debtor in November 1965, and the official assignee intimated in October 1966 that no further dividend was payable:
1057 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
Held that though the said communication was received from the official assignee on 12.10.1966, the communication made the dividend paid earlier of 10.11.1965 as the last and final dividend. Therefore, the assessee was entitled to treat the payment received on 10.11.1965, as the last and final dividend and claim the balance of the amount due from the insolvent as a bad debt in the assessment year 1966-67 Bhagwan Das Nanak Chand v. Commissioner of Income Tax – 10 ITC 448 (Labore) 1464.
Where two debtors of the assessee were declared insolvent and discharged in 1929 and the assessee claimed the debt due from one of them as a bad debt in 1929 itself while in respect of the other debtor, he claimed bad debt in 1934, on ground that a paltry sum was received in 1933-34.
Two debtors of the assessee were declared insolvent and discharged in 1929. The assessee claimed the debt due from one of them as a bad debt in 1929 itself, while in respect of the other debtor; he claimed the bad debt in 1934, on the ground that a paltry sum was received in 1933-34. Held that in the absence of any evidence to show that the assessee had any expectation of receiving any dividend qua the second debt, it should also be construed as having become bad in 1929 itself. The claim made in 1933-34 was, hence, not allowable. _______________
MEANING OF WRITING OFF OF DEBT
Commissioner of Income Tax, Central Zone ‘C’, Karachi v. Agricultural Development Bank of Pakistan, Karachi – [1992] 65 TAX 135 (H.C.Kar.) 1465.
In case of a banking company, loans were neither written off as irrecoverable nor any provision for bad debts was created yet the same held to be allowable.
So far as the second question is concerned, it pertains to the controversy whether the said amount is a bad debt. If it is so, the respondent is entitled to claim allowance. The Tribunal has given a finding that the amount claimed by the respondent was bad debt. This is a finding of fact and has not been challenged by the applicant. On this finding, therefore, the respondent would be entitled to claim allowance of the bad debt. In Commissioner of Income Tax v. Grindlays Bank Ltd. (ITR No. 37 of 1982), (1991) 64 Tax 7 (H.C.Kar.) = 1991 PTD 569, the Division Bench of this Court of which the author
1058 Section 23(1)(x)
Income Tax Digest.
of the judgment was also a member, a similar question was decided holding that the assessee was entitled to the allowance on entire bad debt. Cases followed: Commissioner of Income Tax v. Grindlays Bank Ltd. (1991) 64 Tax 7 (H.C.Kar.) = (1991 PTD 569) and Commissioner of Income Tax v. National Bank of Pakistan (1976) 34 Tax 158 (H.C.Kar.) = (1976 PTD 237).
Shyam Chambers Ltd. v. Commissioner of Income Tax – [1941] 9 ITR 224 (Lahore) 1466.
Mere fact that debt has been written off in books of assessee does not prove that debt is irrecoverable.
Where debts which were written off were still within limitation and the Income Tax Officer disallowed the claim: Held that there was no estoppel against the assessee recovering the total amount from the debtor if the debtor‟s circumstances improved. Therefore, the Income Tax Officer was justified. Chimanlal Rameswarlal v. Commissioner of Income Tax [1940] 8 ITR 408 (Cal.) 1467.
Irrecoverable debt allotted to assessee-partner on dissolution of firm is not allowable as bad debt.
Where consequent to the dissolution of a firm, carrying on timber and money-lending business, the assessee-partner was allotted certain debts due to the firm, and the assessee started a new business, it was held that if any of the debts allotted to him become irrecoverable, the loss would be in the nature of capital loss, and not allowable as a bad debt. Arnarchand Madhavjl & Co. v. Commissioner of Income Tax – [1935] 3 ITI1 462 (Bom.) 1468.
Debt due from retiring partner is not allowable as bad debt or trading loss.
The debts due from the retiring partners are never revenue of the continuing firm; they are capital sums and the loss cannot be written off as against the profits of the year in which they are written off. The assessee was a registered firm carrying on business as commission agents. It also dealt in gur and shakkar on its own account. Previously, the firm consisted of nine partners, including one J, who was a working partner. At the close of the Samvat year 2009-2010 J retired from the firm. At the time of retirement there was a debit balance in J‟s capital account. The amount consisted of the following two items (i) Rs.55,242 on account of excess drawings and losses during the period Samvat 2000 to Smavat 2012; and (ii) Rs.39,302 on
1059 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
account of interest charged during the said period. At the end of the relevant previous year the assessee wrote off the entire sum of Rs.94,544 and in the assessment for the assessment year under reference it claimed the amount as a revenue loss. Held that there was no dispute that the firm used to charge interest on the debt balance in the capital account of J and such interest was debited to his account all along. The firm was also assessed from year to year, on the amounts of interest debited to his account. Nevertheless the firm could not claim the sum of Rs.39,302 being the amount of interest debited to the account at the end of the relevant accounting year as bad debt under section 10(2)(xi) of the 1922 Act. As already stated, the firm used to carry on business in arhat as well as in gur and shakkar. The amount in question could not, therefore, be regarded as a trading debt. Commissioner of Income Tax v. Khernchand Rarndas – [1933] 1 ITR 309 (Sind) 1469. It is open to assessee to treat the amount found due from the other partner on settlement of accounts as loan given to the partner which if rendered irrecoverable, could be claimed as bad debt. Where the assessee suffered a loss in a partnership business and obtained from his other partner L, a document under which L agreed to pay his share of the loss in installments and on the failure of L to honour the document the assessee claimed the installments in default as irrecoverable debt: Held that it was open to the assessee to say that the amount due from L on settlement of accounts be treated as loan made by the assessee personally to L and if a part of this debt did really become irrecoverable during the period in question, the assessee would be entitled to claim this as business loss provided the assessee had maintained his accounts on mercantile basis and could satisfy the Income Tax Officer that the document executed in his favour was bona fide. _______________
ILLUSTRATIONS
Prag Naraln v. Commissioner of Income Tax – 6 ITC 110 (Mad.) 1470. Where the creditor had taken no steps for the recovery of debt from its debtors, who were his close relatives and were solvent and were making profits assessable to Income Tax. Where the creditor had taken no steps for the recovery of debt from its debtors, who were his close relatives and were solvent and were
1060 Section 23(1)(x)
Income Tax Digest.
making profits assessable to Income Tax, it was held that there was sufficient facts before the Income Tax authorities on which they could come to the finding that the assessee acted from motives of relationship and not from business motives in the transaction in question; as the assessee was found to have acted from motives of relationship it was obvious that the sums should not be written off as bad debts but that they should be regarded in the light of gifts made by the assessee. Harnand Rai Harbhagat Rat v. Commissioner of Income Tax – [1936] 4 ITR 366 (Lahore) 1471.
Where the debtor to whom assessee had advanced a sum absconded in 1928 after repaying a certain part of the debt, and the assessee claimed deduction of the amount remaining due to him as bad debt in the assessment year 1931-32.
Where the debtor to whom the assessee had advanced a sum absconded in 1928 after repaying a certain part of the debt, and the assessee claimed deduction of the amount remaining due to him as bad debt in the assessment year 1931-32 and the Commissioner disallowed the claim holding that the debt had become bad in 1928 and that it was a loss of capital in partnership: Held that there was no evidence before the Income Tax authorities to establish that this was not a loss pertaining to the money lending business but was a loss of capital invested in business. Further, it could not be said to have become a had debt in 1928. The debtor absconded, it was true, in that year but the assessee-firm had three years to make up its mind as to whether it was worthwhile suing him. It was not, therefore, till 1931, that it could be said that this was a bad debt. Therefore, the debt was allowable in the year 1931-32. Sheosheyamal HiralaI v. Commissioner of Income Tax – [1938] 6 ITR 485 (Pat.) 1472.
Where assessee took over assets of debtors and wiped of the balance debt, he could not later claim that the remaining debt became bad in a subsequent year.
Where the assessee and other creditors took over all the assets of a debtor in 1930 and realised 8 annas in the rupee towards the debt and did not in the later years return any interest on the balance debt, it was held that the balance debt became a bad debt then and there, and was, therefore, not allowable in the later year, as claimed by the assessee.
1061 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
F.E. Dinshaw v. Commissioner of Income Tax – 6 ITC 154 (Bom.) 1473.
In money-lending business, a bad debt which is not actually bad but is apprehended as likely to become bad is not allowable.
Loss which has not been actually incurred but which an assessee fears is likely to be incurred on account of a loan given in the course of a money-lending business cannot be allowed. Thus, where a moneylender lent money on the security of certain shares as well as the personal security of the debtor, he could not claim any bad debt merely because of a fall in the value of shares, without taking any legal action against the debtor for the enforcement of his personal liability. Commissioner of Income Tax v. Hukm Chand Jagadhar Mal – [1936] 4 ITR 380 (Lahore); Commissioner of Income Tax v. Hukam Chand Jagadhar Mal – [1936] 4 ITR 140 (Lahore) 1474.
Others.
On 2.12.1921, the assessee obtained a mortgage deed in his favour from S for Rs.45,000 advanced as a loan. A suit was instituted in 1924 for the usual mortgaged decree which was made on 19.12.1925. The property was sold and a balance of Rs.26,721 remained due. A personal decree for the balance was obtained by the assessee against his debtor in 1928 and there was an appeal by the debtor to this court against that decision. That appeal was not dismissed till 28.11.1931. In the meantime, the assessee had been trying to execute the personal decree he had obtained, although the appeal against it was pending. In the assessment year 1933-34, he claimed the above amount as a bad debt, the accounting period being 1932-33. The Income Tax Officer refused to grant him this relief on the ground that it had become a bad debt in 1929. Held that there was no evidence of any kind that the debt became a bad debt in 1929. The appeal against the personal decree was still pending and was not dismissed till the end of 1931. The assessee would have been guilty of a fraud if he had attempted to claim it as a bad debt earlier than the accounting year 1932-33. Whether it became a bad debt in that year or later remained a question of fact to be decided by the Income Tax authorities.
1062 Section 23(1)(x)
Income Tax Digest.
Commissioner of Income Tax v. Sir S. M. Chitnavis – 6 ITC 453 (PC) 1475.
Where debts have become bad even prior to commencement of year of account, they are not deductible.
For the purpose of computing yearly profit and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant. It thus follows that a debt, which had in fact become a bad debt before the commencement of a particular year, could not properly be deducted in ascertaining the profits of that year, because the loss had not been sustained in that year. _______________
PROVISION OF BAD DEBTS IN THE CASE OF BANKS IS ALLOWABLE
Commissioner of Income Tax v. National Bank of Pakistan, Karachi – [1976] 34 TAX 158 (H.C.Kar.) = 1976 PTD 237 1476.
The system of accounting maintained permits reversal of entries in the Bad Debt Account in the event of unexpected realisation but it does not makes the entries provisional and claim is not liable to be rejected.
I am unable to accept the submission, but I agree with Mr. S.A. Nusrat that the burden of proving that a debt had become irrecoverable was on the respondent. Mr. S. A. Nusrat then submitted that a debt was recoverable as long as there was a ray of hope for recovering it, and in support of this proposition, he referred us to the Judgment of a Full Bench of the Lahore High Court reported in Messrs B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax, Punjab, N.W.F.P. and Delhi Provinces (AIR 1937 Lah. 338). As I agree with the proposition advanced, it is not necessary to examine the case cited. But when can it be said that there is no ray of hope for recovering a debt Mr. S.A. Nusrat said that the question always was of the facts and circumstance of the case. But, in my opinion, it would be more accurate to say that the question will always be of the estimate of the facts and circumstances of a case, and because human estimates are necessarily fallible, the respondent‟s claim and/or its books of account cannot be rejected, merely because it maintains a system of accounts, which permits it, in the event of windfall from the debtor, so to say, to reverse the earlier entries writing off debt as irrecoverable.
1063 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
Mr. S. A. Nusrat then said that a debt was not irrecoverable, because it was time-barred. I would agree with this proposition only to the extent that a debt would not be irrecoverable merely because it was time-barred. This is for the obvious reason that. there are honest people in the world, and it is also in the interest of habitual borrowers not to take shelter in technical defences like limitations. However, when we invited Mr. S. A. Nusrat to give an example of when a debt would be irrecoverable, he would not do so; so I would take the extreme case of a bank which has not been able to recover the loan advanced by it even though it has exhausted all its legal remedies and obtained a bankruptcy order against the debtor. Obviously, in such a case the bank would have proved beyond any doubt that the debt was irrecoverable. “But even in such a case the debt might be repaid. if the debtor obtains an order of discharge and is able to succeed in his business, or trade. Or take the hypothetical case of a debtor receiving a legacy, or a debtor whose relations pay of the debt for the sake of the honour of the family. Such cases do occur, but because the debt had been believed to be irrecoverable, the bank would necessarily have entered it in its Bad Debt Provision Account. Then, on the unexpected realisation of the debt, the bank would have to reverse its earlier entry in the Bad Debt Provision Account and make an entry in its income account for the amount unexpectedly received by it. But, merely because of this reversal of entries, it cannot possibly be said that the earlier entry in the Bad Debt provision Account was provisional entry. However, that is what the Income Tax Officer held, and this finding was reversed by the Tribunal. I agree with these observations of the learned author, and, in my humble opinion, the Income Tax Officer erred in holding that the respondent‟s entries about its bad debts “show that the debts have been written off in the accounts provisionally”. The inference drawn by the Income Tax Officer is both incorrect and contrary to long established practice and I agree with the Tribunal‟s view, the more so, as it does not involve any loss to the exchequer. Case referred to: B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax (1931 AIR 338 Lah.).
Hanutram Bhuramal v. Commissioner of Income Tax – [1938] 6 ITR 290 (Pat.) 1477.
Debts treated as good in one year cannot subsequently be held to have become bad earlier than that year.
One N became indebted to the assessees business in respect of a sum of Rs.1,663. The account being kept on the mercantile system, this debt had been brought forward from year to year and had been treated
1064 Section 23(1)(x)
Income Tax Digest.
as an asset bearing interest and Income Tax had been charged upon it. In respect of the year previous to the year of assessment it was so treated. The department contended that whereas an attempt had now been made in respect of the year of assessment to wipe off the debt as had and irrecoverable it should have been written off and treated as bad and irrecoverable in the previous year of assessment when it was in fact treated by the department as a still subsisting debt and as an item concerning the profits of the business it was treated as true, good and subsisting. Held that such treatment was inconsistent. After all the department should treat a continuing business with a continuing and consistent system of treatment of items of account and the principles which are applicable to such an item of account and such a method of treatment of accounts in a consistent manner. Thus, the debt due from N was an admissible deduction in the year of assessment. Kaniram Ganpat Rai v. Commissioner of Income Tax – [1941] 9 ITR 332 (Pat.) 1478.
If bad debts has been disallowed in one year as premature, this does not stop authorities from reconsidering position in succeeding years on proper investigation.
Where Income Tax Officials have, after enquiry, proceeded to assess the assessee on a certain basis, though they may be entitled to reopen the enquiry, they cannot arbitrarily change the assessment simply on the ground that the succeeding Officer does not agree with the preceding officer‟s finding. The position is just like the position of any two parties who have proceeded on a certain basis in their relations. It may be open to one party to reopen the matter. But if he wants to do so there should be facts which would entitle him to do it. If fresh facts come to light, which on an investigation would entitle the Income Tax Officer to come to a different conclusion from that of his predecessor, he is entitled to reopen the question. But if there are no fresh facts, it is difficult to see how he can arbitrarily go behind the finding of his predecessor. The same principles of natural justice or judicial dealing, which courts impose upon Income Tax Officers, would prevent them capriciously setting aside the orders of their predecessors based on enquiry. Where in the previous assessment, the claim for bad debts was disallowed on the ground that the claim was premature, i.e. the debts had not become bad till then, and in the next assessment year, after due investigation the claim was disallowed on the ground that the
1065 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
debt had become bad long before the account year and the claim should have been made very much earlier. Held that the question whether the debt had become bad long before is a question of fact, and as there was evidence to support it, the High Court could not disturb the finding. Raj MaI-Pabar Chand v. Commissioner of Income Tax – [1938] 6 ITR 577 (Lahore) 1479.
Where claim is rejected on the ground that debt had not yet become bad it is open to the Income Tax Officer in subsequent year to hold materials that debt had become bad long ago.
Where a claim for bad debt made in the assessment year 1934-35 was disallowed by the Income Tax Officer as premature, but when the claim was preferred in the assessment year 1935-36, the successor - Income Tax Officer held that the debt became bad in 1932-33 itself: Held that as there was material for the conclusion arrived at, the decision of the Income Tax Officer was to he upheld. _______________
REFERENCE TO HIGH COURT
F.E. Dinshaw v. Commissioner of Income Tax – [1934] 2 ITR 319 (PC) 1480.
Question as to whether debt has become bad is a question of fact.
A question as to whether a debt is wholly or partly bad and to what extent has become irrecoverable is in every case a question of fact to be decided by the appropriate Tribunal upon a consideration of the relevant facts of that case. F.E. Dinshaw v. Commissioner of Income Tax – [1934] 2 ITR 319 (PC) 1481.
Question as to whether debt has become bad is a question of fact.
Section 36(1)(vii) permits deduction of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. A bad debt is thus allowable in an assessment year if it became a bad debt in the previous year relevant to the assessment year. However, even in those cases, where the Income Tax Officer finds that the debt did not become a bad debt in the relevant account year but in an earlier account year, he can grant relief under section
1066 Section 23(1)(x)
Income Tax Digest.
155(6) if it is found that the debt became a bad debt within a period of four years immediately preceding the account year in which the debt was written off. In case, where the rate of Income Tax is a flat rate and is the same for the four years preceding the account year in which the debt is written off, the question whether it became a bad debt in the account year in which it is written off or in the earlier four years would be academic in view of the relief to which the assessee is entitled under the provision of section 155(6). The question as to when a debt becomes a bad debt is a question of fact. Simply because a debt has become barred by time or the debtor has gone in for insolvency it cannot be said that the debt has become a bad debt. The age of the debt for and the financial condition of the debtor are no doubt relevant considerations but neither is conclusive on the question whether the debt has become a bad debt. What is required of the assessee is only an honest assessment at the time when he makes the write off. The writing off of a debt by the assessee is a material circumstance unless it can be shown from the materials on record that the writing off was not proper a bona fide. After all, the question as to when a debt became a bad debt is a question of fact and the Tribunal‟s opinion must prevail, unless there are strong circumstances to show that the finding reached by the Tribunal was perverse or contrary to law. Som Chand Maluk Chand v. Commissioner of Income Tax – [1936] 4 ITR 382 (Lahore) 1482.
Where order allowing bad debts was not based on any evidence, a question of law would arise therefrom.
Where the Commissioner had held that the assessee‟s debt should be allowed as bad debt since the debtor was in difficulties, it was held that a referable question arose under section 66(3) of the 1922 Act, since the finding was not based on any evidence or sound reasoning. Commissioner of Income Tax v. S.M. Chitnavls – [1932] 2 Camp. Cas. 464 1483.
Whether a debt is bad or not, and if so, at what point of time it became a bad debt, is a question of fact.
Whether a debt is a bad debt, and if so, at what point of time it became a bad debt, are questions of fact, to be decided in the event of dispute by the appropriate Tribunal, and not by the ipse dixit of anyone else. The assessee has no option of declaring a debt as bad. In every case it is a question of fact, to be determined after consideration of all relevant circumstances.
1067 DEDUCTIONS - BAD DEBTS
Section 23(1)(x)
Hukumchand Jagadharmal v. Commissioner of Income Tax – [1935] 3 ITR 211 (Lahore); L. Bani Mal Dalal v. Commissioner of Income Tax – [1941] 9 ITR 222 (Lahore); Commissioner of Income Tax v. Hukumchand Jagadharmal – [1936] 4 ITR 140 (Lahore); Commissioner of Income Tax v. Seth Bhirdichand – [1938] 6 ITR 367 (Nag.); Commissioner of Income Tax v. Sir S.M. Chitnavis – 6 ITC 453 (PC); B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore); Kaniram Ganpat Rat v. Commissioner of Income Tax – [1941] 9 ITR 332 (Pat.); R.B. Seth Ganga Sagar v. ITAT – [1947] 15 ITR 16 (All.) 1484. Question as to whether a sum was a bad debt or not and at what point of time such claim could be allowed is purely a question of fact. The question whether a sum was a bad debt or not and at what point of time such claim could be allowed is purely a question of fact. Rulia Mal-Ratinak Ram v. Commissioner of Income Tax – [1934] 2 ITR 329 (Lahore) 1485. Question as to whether a sum was a bad debt or not and at what point of time such claim could be allowed is purely a question of fact. Whether a debt is a bad debt and when it becomes bad are questions of fact to be determined in case of dispute not by the assessee but by the appropriate Tribunal upon a consideration of all relevant and admissible evidence. The decision of the Commissioner on the question whether a debt is bad or irrecoverable operates only for the particular year under assessment and it would be open to the assessee to repeat his claim in respect of any particular debt in any subsequent year, provided the debt had not been recovered in the interval. F.E. Dinshaw v. Commissioner of Income Tax – [1934] 2 ITR 319 (PC) 1486. Question as to what extent debt has become bad is a question of fact. A question as to whether a debt is wholly or partly and to what extent has become irrecoverable is in every case a question of fact to be decided by the appropriate Tribunal upon a consideration of the relevant facts of that case. R.B. Seth Ganga Sagar v. ITAT – [1947] 15 ITR 16 (All.) 1487. Finding of the Tribunal that the assessee had lost all hope of recovering debts would be a finding of fact. The finding of the Tribunal that the assessee had lost all hope of recovering debts would be a finding of fact and no question of law arises therefrom.
1068 Section 23(1)(x)
Income Tax Digest.
Shamsher Ali Abdul Hussein v. Commissioner of Income Tax – [1945] 13 ITR 240 (Nag.) 1488.
Where Commissioner held that claim for bad debt was not admissible till attempt had been made to sell all the property recovered from the debtor, no question of law arose from Commissioner‟s order.
Where Commissioner held that claim for bad debt was not admissible till attempt had been made to sell all the property recovered from the debtor, it was held that no question of law arose from Commissioner‟s order.
1069 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Section 23(1)(xviii)* Business expenditure
PAGE NO
GENERAL
1489. Claim of gratuity payable, though not paid, cannot be _ disallowed. 1991 SCC 891 = [1992] 65 TAX 254 (S.C.Pak.)
1088
1490. Assessee had deducted income tax from amount paid to employees as salaries was not sufficient ground or circumstance which would establish employees to had been employed for performing work incidental to or connecting with business or affairs with assessee‟s company. Tribunal was correct in holding that Commissioner of Income(A) was justified in confirming disallowance of salaries of employees as made by Income Tax Officer although tax was deducted from salaries paid to employees were assessed as such under _ head salaries. [2001] 83 TAX 383 (H.C.Kar.)
1088
1491. Expenditure restricted under the Drug Law cannot be made a basis to disallow the same while computing total income. _ [1995] 71 TAX 224 (H.C.Kar.)
1089
1492. Loss of fixed assets compulsorily acquired by the government _ is allowable expenditure. [1991] 65 TAX 164 (H.C.Kar.)
1090
1493. Amount paid as Workers‟ Welfare Fund can be treated as an expenditure for the purpose of computing total of income. _ [1992] 65 TAX 98 (H.C.Kar.)
1090
1494. Assets acquired by Bangladesh Government compulsorily is _ allowable deduction. [1988] 58 TAX 80 (H.C.Kar.)
1091
1495. Loss in respect of East Pakistani fixed assets held allowable. _ [1988] 58 TAX 48 (H.C Kar.)
1093
1496. Loss on account of properties lost in Bangladesh held to be _ allowable business expense. [1988] 57 TAX 160 (H.C.Kar.)
1094
1497. Administration charges of head office consistently claimed by assessee and allowed by Tribunal should be allowed on
*
Corresponding to section 10(2)(x) & 10(2)(xvi) of the 1922 Act.
1070 Section 23(1)(xviii)
basis of practice, precedent and previous order. TAX 74 (H.C.Kar.)
Income Tax Digest.
_
PAGE NO
[1986] 53 1096
1498. Ad-hoc additions not based on computation of income on any basis or relevant consideration are not sustainable. _ [1976] 33 TAX 1 (H.C.Lah.) = PTD 1976 Lah. 223
1096
WHOLLY AND EXCLUSIVELY - MEANING OF
1499. Expression „wholly and exclusively‟ does _ necessarily. [1925] 10 TC 155, 198 (HL)
not
mean
1500. What expenditure is wholly and exclusively laid out for the purpose of trade is a question which must be determined _ upon the principles of ordinary commercial trading. [1924] 8 Tax Cas. 671
1098
1098
WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS – ILLUSTRATIONS OF ALLOWABILITY / NON-ALLOWABILITY
1501. Department has no authority to examine whether the amount is spent on the grounds of commercial expediency is _ reasonable. 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.)
1098
1502. Expenses incurred wholly and exclusively for business _ purposes are allowable. 1967 SCC 289 = [1967] 16 TAX 81 (S.C.Pak.)
1099
1503. Salaries, general and professional charges claimed by the assessee against share income received from the firm are allowable expenditure being wholly and exclusively for _ earning profit form the firm. [1991] 64 TAX 14 (H.C.Kar.)
1099
1504. Wealth-tax liability is expenditure wholly and exclusively _ laid out for purposes of earning profit. [1991] 64 TAX 31 (H.C.Kar.)
1100
1505. „Racing Development expenses‟ is allowable wholly and _ exclusively expenses in the hands of a race club. [1991] 63 TAX 49 (H.C.Kar.)
1101
1506. Expenditure incurred indirectly or remotely connected with the business are not, incurred wholly and exclusively for the _ purpose of business hence, cannot be allowed. [1989] 60 TAX 8 (H.C.Kar.) = 1989 PTD 570
1102
1507. Fees paid to tax Advisor for conducting an appeal before the Income Tax Appellate Tribunal is an expenditure incurred wholly and exclusively laid out for business purposes. _ [1986] 54 TAX 155 (H.C.Kar.)
1103
1071 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
1508. Fee to legal adviser for appearing in an appeal is an _ allowable deduction. [1986] 53 TAX 137 (H.C.Kar.)
1104
1509. Payments made to other parties in agreement as excess share of profits to avoid unhealthy competition is an expenditure _ wholly and exclusively for the purposes of business. [1985] 51 TAX 16 (H.C.Kar.)
1105
1510. Payments to avoid unhealthy competition are expenditure _ wholly and exclusively for the purposes of business. [1980] 41 TAX 19 (H.C.Kar.)
1106
1511. Liability arising from the infraction of law cannot be regarded as expenditure wholly and exclusively for the _ purposes of business. [1979] 40 TAX 55 (H.C.Lah.)
1107
1512. Amount paid partly as compensation for termination of agency but mainly on condition that selling agent becomes the main dealer of the company is held for commercial necessity and expediency and, therefore, wholly and exclusively for purpose of business; does not adversely effects the revenue nature of payment in the hands of company. _ [1978] 38 TAX 126 (Kar.)
1108
1513. Interest paid on unpaid purchase price in terms of the sale agreement, held that payment of interest is separate from the principal amount due and should be allowed as expenditure, laid out or expended wholly and exclusively for _ the purpose of business. [1978] 38 TAX 120 (H.C.Kar.)
1109
1514. Management expenses in excess and in contravention of the maximum prescribed in rule 40 of the Insurance Rules, 1938, held that expenses were incurred wholly and exclusively for the purpose of business and are allowable as _ business expenditure. [1978] 37 TAX 273 (H.C.Kar.)
1110
1515. Expenses incurred in defending the employees against criminal prosecution arising out of ordinary course of business are expenses incurred to maintain good name of assessee and goodwill of employees and are wholly and exclusively for the purposes of business and admissible _ deduction. [1969] 20 TAX 15 (H.C.Kar.)
1110
1516. Penalty paid on behalf of the importer for contravention of law are not wholly and exclusively for the purpose of the _ business. [1968] 17 TAX 126 (H.C.Dacca)
1112
1072 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
1517. Tribunal‟s finding that some of the expenses claimed were wholly and exclusively connected with the business held _ justifiable. [1967] 15 TAX 254 (H.C.Kar.)
1113
1518. Whether expenditure is laid out wholly and exclusively for purposes of business, is to be determined on principles of _ commercial trading. [1937] 5 ITR 202 (PC)
1114
1519. The question as to whether an expenditure is laid out wholly and exclusively for business is always a question of law. _ [1936] 4 ITR 255 (Cal.)
1114
PREMIUM PAID ON ANNUAL BASIS
1520. Legal requirements in certain cases no bar for claiming _ business losses. 1993 SCC 1029 = [1993] 68 TAX 49 (S.C.Pak.)
1115
DEVALUATION OF CURRENCY
1521. Extra cost paid in discharging liability is admissible. SCC 1015 = [1993] 67 TAX 191 (S.C.Pak.)
_
1993 1115
1522. Extra expenditure incurred due to devaluation of currency is _ a trading loss and allowable expense. [1989] 60 TAX 75 (H.C.Kar.)
1115
1523. Increase due to devaluation in technical assistance fee paid by a subsidiary to its holding company is an admissible _ deduction. [1989] 60 TAX 34 (H.C.Kar.)
1116
1524. Pakistani company supplied goods to parties in India and was entitled to receive contractual amount in Pakistan currency held that due to devaluation of Indian currency _ corresponding loss is not a trading loss. [1962] 6 TAX 66 (H.C.Lah.) = 1962 PTD 611 = 1962 PLD 821
1119
“PENAL INTEREST AND THE PENALTY”, MEANING OF
1525. Compensation paid for late payment is not “fine” or _ “penalty”. [2001] 83 TAX 113 (S.C.Pak.)
1121
1526. Penalty paid for violation of Banking laws by banks is not _ allowable expenditure. [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213
1122
1527. Penal interest charged by the State Bank of Pakistan for bursting the credit ceilings under section 25 of the Banking Companies Ordinance, 1962 is an admissible expense. _ [1994] 70 TAX 159 (H.C.Kar.) [Overruled by the
1073 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
Supreme Court of Pakistan in [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213].
1122
1528. Penalty paid in lieu of confiscation of goods is not allowable _ expense. [1985] 52 TAX 146 (H.C.Kar.) = 1986 PTD 52
1123
LIQUIDATED DAMAGES ARE ALLOWABLE EXPENDITURE
1529. Liquidated damages are allowable expenditure. TAX 218 (H.C.Kar.)
_
[1995] 71
1530. If the assessee treated the foreign exchange involved as a part of revenue account, it would be an admissible item in trading expenses but if the foreign exchange was treated as a _ capital asset the loss would be of capital nature. [1993] 68 TAX 184 (H.C.Kar.)
1125
1125
EXPENSES INCURRED TO RAISE CAPITAL OR OBTAIN LOAN OR RECOVER DEBTS, ETC.
1531. “Incurred”- meaning of.
_
[1984] 49 TAX 110 (H.C.Kar.)
1125
1532. Assessee-company an agent of foreign company paid expenses of journey and stay in Pakistan of the expatriate technicians of foreign company for which no agreement between the assessee-company and the foreign, held that expenses so incurred, are not admissible as business _ expenditure. [1984] 50 TAX 26 (H.C.Kar.)
1126
1533. Expenses on litigation arising out of a contract of loan would be admissible expenditure in money-lending business. _ [1942] 10 ITR 214 (PC)
1127
EXPENDITURES ON RUNNING SCHOOL FOR CHILDREN OF EMPLOYEES
1534. Expenditures are allowable on running school for children _ of employees are allowable. 1981 SCC 557 = [1982] 45 TAX 1 (S.C.Pak.)
1128
LOSS OF STOCK-IN-TRADE / SPARES, ETC.
1535. Cash and ornaments (pledged) constituting stock-in-trade and their loss by theft held incidental to trade and _ deductible. [1962] 6 TAX 7 (H.C.Lah.) = 1962 PTD 575 = 1962 PLD 779
1129
1074 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
1536. Assessee purchased shares from Government at higher than the market rate of shares, loss arising from transaction is _ held to be admissible deduction. [1967] 15 TAX 145 (H.C.Kar.)
1130
1537. Loss of a stock-in-trade due to fire is allowable as a trading _ loss. [1947] 15 ITR 155 (Pat.)
1131
1538. Question as to the extent stock-in-trade was lost due to white _ ants, is a question of fact. [1947] 15 ITR 205 (All.)
1131
LOSS OR EMBEZZLEMENT OF CASH / ROBBERY OF THEFT
1539. Loss on account of robbery is allowable expenditure. SCC 260 = [1966] 13 TAX 197 (S.C.Pak.)
_
1966 1131
1540. Accountant was taking money to Customs House to pay off certain dues was robbed on way by driver held that loss was _ incidental to business and allowable deduction. [1963] 7 TAX 202 (H.C.Kar.) = 1963 PTD 395 = 1963 PLD 481
1131
1541. When a shortage in cash is found on making up accounts of _ the day in a money-lending business 6 ITC 318 (Nag.)
1133
1542. Where assessee, a piece goods merchant, who was taking deposits on interest from various people and using them in his business, lost a sum in cash in a dacoity perpetrated on _ his business premises. 7 ITC 398 (Lahore)
1133
RATES / TAXES
1543. Expenditure on educational institutions for the education of children and dependents of employees were admittedly not admissible deduction under section 10(2)(xiva) of 1922 Act held that cannot be allowed as business expenditure under _ section 10(2)(xvi) of 1922 Act. [1975] 32 TAX 57 (H.C.Lah.)
1134
1544. Rate imposed by State Government on building used for _ business is deductible. [1946] 14 ITR 100 (PC)
1135
REASONABLENESS OF REMUNERATION
1545. Remuneration to managing director can neither be _ disallowed nor can be curtailed. 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.)
1136
1546. The fact that remuneration was fixed on last day of income _ year does not mean that it is not allowable. 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.)
1136
1075 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
1547. Company increased salaries of its Directors. No evidence to show that remunerations so paid were for purposes other than business held that part of the remunerations cannot be _ disallowed on ground of reasonableness. [1966] 13 TAX 182 (H.C.Lah.)
1136
1548. Director was holding ninety-nine per cent shares and virtually sole proprietor of company. Quantum of his remuneration fixed after profits of company was declared and known. Held that reduction of remuneration made by _ Income Tax Officer was permissible. [1965] 11 TAX 335 (H.C.Dacca)
1137
1549. Where agents conducting a business on behalf of principal, pay only a portion of profits to him and retain the balance as their remuneration, the remuneration is not deductible in _ the assessment of the principal. [1936] 4 ITR 428 (Cal.)
1138
1550. Mere fact that remuneration is paid under agreement and payment is in fact made, will not preclude Income Tax Officer from enquiring into business necessity of such _ payment. [1936] 4 ITR 255 (Cal.)
1139
1551. Question as to whether payment to directors is bona fide is a _ question of fact. [1936] 4 ITR 255 (Cal.)
1139
1552. Where in respect of two persons, who were sole shareholders as well as sole directors of a private limited company, company fixed two-thirds of profit as their remuneration, _ remuneration paid was unreasonable. [1936] 4 ITR 264 (PC)
1139
CAPITAL OR REVENUE EXPENDITURE
1553. Goodwill fee paid to Government for acquiring liquor shop over and above annual licence fee and fee on sales is assessee acquiring enduring benefit by payment of goodwill is capital _ expenditure. [1967] 15 TAX 53 (H.C.Kar.)
1140
1554. Annual payment of „protection fees‟ to lessor to prevent lessor from granting similar rights to others in neighbouring _ queries is capital expenditure. [19601 2-TAX (III-228) (H.C.Dacca) = 1960 PTD 379 = 1960 PLD 389
1141
1555. Expenditure necessary for initiation of business and benefit derived under agreement of enduring nature held to be of _ capital nature. [1966] 14 TAX 7 (H.C.Dacca)
1142
1076 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
1556. Capital expenditure must be construed in business sense. _ [1949] 17 ITR 473 (PC)
1143
TESTS FOR DETERMINING NATURE OF EXPENDITURE
1557. Premium paid on annual basis is revenue expenditure. _ 1966 SCC 282 = [1967] 15 TAX 1 (S.C.Pak.)
1143
1558. Law expenses incurred for preparation of the lease deeds for _ long duration is not revenue expenditure. [1985] 52 TAX 27 (H.C.Kar.)
1144
1559. Assessee-company paid to its distributor on reduction in territorial area of the distributor, held that amount paid exgratis as mark of mutual goodwill is wholly and exclusively _ for the purpose of business as revenue expenditure. [1985] 52 TAX 23 (H.C.Kar.)
1144
1560. Assessee published certain books with permission of the owner of the copyright and certain amount was paid to the owner of the copyright, held that these are revenue _ expenditure. [1984] 50 TAX 88 (H.C.Kar.)
1145
1561. Assessee was doing business in Karyana articles and as commission agent entered into agreement with a Trust manufacturing clay products to share in profit and loss, held that advances made to the Trust for purchasing raw materials, etc. is revenue/trading expenditure incidental to _ business. [l982] 45 TAX 208 (H.C.Kar.)
1145
1562. If is often difficult in any particular case to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure and no single test of universal application can _ he discovered for a solution of the question. [1946] AC 295; _ _ [1946] AC 224 (PC); [1937] 5 ITR 270 (PC) _ _ 1563. General test. [1947] 15 ITR 185 (Lahore); [1910] 5 Tax Cas. 529 1564. Question as to whether expenditure in a shipowner‟s business is current as opposed to capital must essentially be _ one of degree and, therefore, one of fact. 3 ITC 10 (Rangoon) 1565. When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure
1147 1148
1149
1077 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
as properly attributable not to revenue but to capital. _ [1925] 10 Tax Cas. 155 (HL)
1150
1566. The test that when an expenditure is made, not only once and/or all, but with a view to bringing into existence an asset or an advantage for enduring benefit of a trade, there is very good reason/or treating such an expenditure as properly attributable not to revenue but to capital must yield where there are special circumstances leading to a contrary _ conclusion. [1935] 3 HR 21 (Cal.)
1150
INTEREST AND DIVIDENDS EARNED BY THE ASSESSEE IS AN ALLOWABLE DEDUCTION
1567. Income Tax deducted at source on the interest and dividends earned by an insurance company is an allowable deduction. _ [1990] 61 TAX 1 (H.C.Kar.)
1151
TEST OF FIXED OR CIRCULATING CAPITAL
1568. Test of circulating capital vs. fixed capital is a good test. _ [1933] 18 Tax Cas. 280
1152
RELEVANCE OF CHARACTER OF RECEIPT IN RECIPIENT‟S HANDS
1569. The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. _ [1933] 1 ITR 129 (Cal.)
1152
TRAVELLING EXPENSES FOR TRAINING ABROAD
1570. Travelling expenses incurred by company in connection with director sent abroad for training are admissible deduction. _ [1965] 11 TAX 181 (H.C.Dacca)
1153
EXPENDITURE MUST BE INCURRED IN THE CHARACTER AS A TRADER
1571. Expenses must be incurred in the capacity of trader, for the _ purpose of making profits. [1925] 12 Tax Cat 803
1154
EXPENDITURE MUST BE FOR CARRYING OF BUSINESS
1572. Expenditure to resume a stopped business which could not, _ however, be started is allowable. [1935] 3 ITR 350 (Mad.)
1154
1573. If expenditure is obligatory to be incurred even when business is closed down, it cannot be wholly and exclusively _ for purpose of business. [1946] 14 ITR 638 (Bom.)
1155
1078 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
QUANTUM OF EXPENDITURE
1574. Question as to whether payments are bona fide and not a _ device must always be a question of fact. [1936] 4 ITR 255 (Cal.)
1155
1575. Where, on the basis of his personal experience, the Income Tax Officer determined the allowable expenditure on a particular _ item, no question of law would arise. 5 ITC 302 (Nag.)
1155
RELEVANCE OF BENEFIT TO THIRD PARTY
1576. Benefit to third party, relevance of.
_
[1915] AC 433, 469 (HL)
1155
RELEVANCE OF PRODUCTION OF INCOME FROM EXPENDITURE
1577. To be allowed as an expenditure, it is not necessary to find out whether expenditure can produce taxable income. _ [1933] 1 ITR 129 (Cal.) _ 1578. Expenditure need not necessarily be remunerative. [1938] 6 ITR 636 (HL) _ 1579. Profit-yielding asset can easily be identified. 61 Corp. LR 337
1156 1156 1156
BUSINESS EXPENDITURE - SHARING OF PROFITS
1580. Where purchaser of business undertakes the liability of the vendor to pay to third parties, irrespective of whether there _ are profits or not, payment is not deductible. [1937] 5 ITR 202 (PC)
1157
1581. Remuneration based on profits does not amount to division _ of profits and is deductible. [1941] 9 ITR 155 (Rangoon)
1158
1582. Where sharing of profits by assessee on combining its business with another was held not to he deductible. _ [1937] 5 ITR 270 (PC)
1158
LAND / BUILDING, ACQUISITION OF
1583. Where a debtor transferred to assessee a colliery representing it to be tree from encumbrances and assessee subsequently discovered that there were arrears of rent due to superior _ landlord and paid such arrears. [1933] 1 ITR 94 (PC)
1160
BENEFIT OF CONTRACTS
1584. Payment for acquiring the benefit of pending contracts of father‟s business, which the assessee acquired on lump sum payment on the death of his father, is a capital expenditure. _ [1921] 2 AC 13 (HL)
1160
1079 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
GOODWILL
1585. Payment made far the use of goodwill is deductible, even if _ this payment is a proportion of profits. [1946] 14 ITR 822 (Bom.)
1162
SELLING AGENCY 1586. Where assessee entered into an agreement for purchase of all rights and privileges of manufacturing and selling a patent _ medicine. 6 ITC 65 (Mad.)
1162
COPYRIGHT
1587. Price paid for purchasing copyright of a book is a capital _ expenditure. [1947] 15 ITR 205 (All.)
1163
ELECTRICITY TRANSMISSION LINES / RAILWAY PLATFORMS, ETC.
1588. Expenditure as renewal at rail tracks is allowable as _ revenue expenditure. [1933] 1 ITR 227 (PC)
1163
EXPENDITURE TO SAVE BUSINESS REPUTATION
1589. Others.
_
[1943] 11 ITR 142 (Bom.)
1164
BRICK MANUFACTURERS
1590. General.
_
[1947] 15 ITR 185 (Lahore)
1164
1591. Where assessee look lease of a land for excavation of earth for manufacture of bricks and land was to revert back to lessor after expiry of seven years, lease rent was allowable as _ revenue expenditure. [1947] 15 ITR 185 (Lahore)
1165
1592. Lease amount paid where lease of land is taken for 7 years _ for manufacturing bricks, is capital expenditure. [1944] 12 ITR 504 (Oudh)
1166
1593. Cost of land purchased for extracting earth for brick-kiln is _ capital expenditure. [1938] 6 ITR 489 (All.)
1166
1594. Where manufacturer of bricks owns land or is the owner of leasehold rights in land from which earth is dug out, cost of _ earth so dug up is not deductible. [1937] 5 ITR 544 (All.)
1167
1595. Question as to whether an amount spent on taking leases of land/or brick kilns should be treated as capital expenditure _ or as business expenditure, is a question of law. [1944] 12 ITR 504 (Oudh)
1167
1080 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
BIDI MANUFACTURER
1596. Expenditure on right to collect tender leaves by bidi _ manufacturer is revenue expenditure. [1949] 17 ITR 473 (PC)
1167
MINING - MINING RIGHTS & MINING EXPENSES
1597. Where assessee-firm, engaged in business of conch shells, took on lease „the exclusive right, liberty and authority to take and carry away all shells found in the belt of the specified sea „for a period of three years, lease rent so paid _ was a capital expenditure. [1934] 2 ITR 395 (Mad.); [1937] 5 ITR 70 (Mad.); [1939] 7 ITR 652 (Mad.); 7 ITC 323 (Mad.)
1168
1598. Where assessee, manufacturing potassium nitrate and sodium chloride, spent sum in acquiring several short-term leases of salt-bearing lands for manufacturing crude saltpeter, expenditure incurred was allowable as revenue _ expenditure. [1945] 13 ITR 157 (Lahore)
1171
1599. Amount paid for right to collect saltpeter is not capital _ expenditure. [1946] 14 ITR 277 (Lahore)
1171
1600. Lease money paid for removing crude salt pet re is revenue _ expenditure. [1946] 14 ITR 181 (Lahore)
1172
1601. Amounts paid for acquiring the right to quarry a hill and _ sell stone therefrom, are capital in nature. 9 ITC 350 (Bom.)
1172
REPAIRS / RENOVATION
1602. Where the heritable corpus of a company is so far improved that in quality or caliber something better replaces it, that is a material alteration, which is in the nature of capital _ expenditure. 2 ITC 294 (Mad.)
1172
1603. Expenditure on repairs need not necessarily be with a view _ to earn income during the relevant year only. [1933] I ITR 227 (PC)
1172
ILLUSTRATIONS: REPAIRS TO PREMISES / FURNITURE
1604. Expenses incurred on premises (owned as well as teased) let _ out to tenants are admissible business deductions. [1914] 6 TC 399 (HL) ILLUSTRATIONS: REPAIRS TO MACHINERY
1605. Business conducted and machinery used during part of accounting year, held that sale of machinery after close of
1173
1081 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
business in accounting year is an admissible deduction. _ [1967] 15 TAX 199 (H.C.Kar.)
1173
1606. Cost of any substitution of new parts which substantially change identity of machine, effect a substantial improvement or result in a substantial extension of period of serviceableness, would be capital rather than revenue _ expenditure. 2 ITC 294 (Mad.)
1175
RENT
1607. The mere fact that the lessor takes half the total rent in one year; the rest of the rent being spread over nine years, gives no information upon which the court can come to any conclusion as to whether the first payment is in the nature of _ a premium. [1936] 4 ITR 104 (Lahore) _ 1608. Others. [1933] 1 ITR 94 (PC)
1175 1176
ROYALTY
1609. Royalty paid to wife as superior landlord cannot be disallowed merely on the presumption that she is benamidar _ of the assessee. [1936] 4 ITR 108 (Pat.) _ 1610. Others. 3 ITC 219 (All.)
1177 1177
FORFEITURE OF SECURITY DEPOSITS
1611. Where a security deposit was made to obtain agency and later due to reasons stated in agreement it became irrecoverable, irrecoverable deposit was not deductible as _ business expenditure. [1940] 8 ITR 132 (PC)
1178
CONTRIBUTION TO PROVIDENT FUND
1612. Contribution to provident fund. (Nag.) _ 1613. Others. 4 ITC 49 (Rangoon)
_
[1939] 7 ITR 187 1179 1179
OTHER ILLUSTRATIONS
1614. Amount compulsorily deducted from wages of employees _ towards charity is not allowable as deduction. [1944] 12 ITR 21 (Nag.) COMPENSATION TO MANAGING AGENTS / SELLING AGENTS
1615. Where the assessee-company paid lump sum compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to
1180
1082 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
revenue account, compensation was allowable as deduction. _ [1933] 1 ITR 129 (Cal.)
1180
1616. Where a sum was paid by the assessee to its agent on the termination of the agency for loss of agency provided the agent agreed not to compete with the assessee for five years, and to train the staff of the assessee, expenditure was _ deductible. [1935] 3 ITR 21 (Cal.)
1180
MANAGING AGENCY COMMISSION
1617. Where assessee-managing agent agreed to share commission with person advancing loan to managed company, share of _ commission so assigned was allowable. [1939] 7 ITR 195 (Born.) OTHERS
1618. Others.
_
7 ITC 466 (Bom.)
1181
1181
LITIGATION EXPENSES
1619. Damages paid in settlement of litigation for breach of contract are wholly and exclusively for purposes of business _ and admissible expenditure. [1967] 15 TAX 73 (H.C.Kar.)
1181
1620. Amount paid as sales tax is admissible expenditure, it has to be related back to the proper year and not to the year when _ the payment was actually made. [1973) 28 TAX 185 (H.C.Lah.)
1183
1621. Litigation expenses to avoid future liability are not _ deductible. [1941] 9 ITR 573 (Cal.)
1184
EXPENSES INCURRED TO PROTECT BUSINESS / BUSINESS ASSETS
1622. Expenses incurred in defending title an basis at mortgages not obtained in course of money-lending business are not _ deductible. [1947] 15 ITR 209 (All.)
1185
1623. Expenses incurred by the assessee in completing his title and entering into possession after sales have become absolute are _ not deductible. [1942] 10 ITR 186 (All.)
1185
1624. Where a company which was engaged in quarrying on a leased land with perpetual and exclusive quarrying rights, incurred litigation expenses on defending a suit for _ possession instituted by lessors of land. 7 ITC 375 (Lahore)
1185
1083 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
1625. Litigation expenses incurred to protect business premises are _ deductible. [1945] 13 ITR 340 (Lahore)
1185
1626. Legal expenses incurred by assessee in connection with a suit filed to restrain others from using assessee trademark, _ is revenue expenditure. [1943] 11 ITR 266 (Nag.)
1186
1627. Litigation expenses incurred on defending a suit for alleged _ infringement of patent rights are deductible. [1946] 14 ITR 206 (Nag.)
1186
1628. Litigation expenses to preserve directorship are deductible as _ revenue expenditure. [1946] 14 ITR 305 (Bom.)
1186
EXPENDITURE TO PROTECT PROFIT / SOURCE OF INCOME
1629. Expenses incurred by newspaper company in defending editor and printer in proceedings for contempt of court, are _ not allowable. [1937] 5 ITR 648 (Cal.)
1187
1630. Payment made on behalf of deceased director of company to settle a case of misfeasance against him, is not deductible. _ [1943] 11 ITR 478 (Lahore)
1187
EXPENSES PECULIAR TO FIRMS
1631. Litigation expenses to defend a suit by a partner for share of _ profits are not deductible. [1937] 5 ITR 727 (Mad.)
1187
1632. Litigation expenses for recovery of capital invested in a firm by a financing partner doing his own money-lending _ business are not capital expenses. [1944] 12 ITR 344 (Pat.)
1188
EXPENSES PECULIAR TO HUFS
1633. Where assessee HUF‟s member was charged with cheating in a sale transaction, and the case was ultimately _ compounded. 10 ITC 98 (All.)
1188
1634. Individual liabilities in civil or criminal case of an _ individual member of the HUF are not deductible. 6 ITC 188 (Pat.)
1188
PENALTY / DAMAGES PAID FOR BREACH OF CONTRACT
1635. Damages paid for dishonestly infringing an agreement are _ not deductible. [1943] 11 ITR 454 (Mad.)
1189
ESTATE DUTY
1636. Death duties and expenses for retaining letter of _ administration are not deductible. [1943] 11 ITR 597 (Mad.)
1189
1084 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
EXCISE DUTY / IMPORT DUTY
1637. Where the property tax is not wholly referable to premises _ occupied for the purpose of a business. [1946] 14 ITR 100 (PC) OTHERS
1638. Business expenditure - Borrowed amount. 196 (H.C.Kar)
_
1189
[1984] 50 TAX
1639. Assessee is entitled to manage the business according to the principles and on the line, considered more beneficial. _ [1979] 40 TAX 62 (H.C.Lah.) _ 1640. Cess. 2 ITC 87 (Cal.) 1641. Professional tax paid on business is not an allowable _ deduction. 2 ITC 142 (Mad.)
1190
1190 1191 1191
AMOUNT PAID TO WARD OFF COMPETITION
1642. Other illustrations. 1643. Other illustrations.
_ _
3 ITC 44 (Mad.)
1191
[1946] 14 ITR 66 (Lahore)
1191
GIFTS AND PRESENTS
1644. Expenditure on voluntary presents given on festive occasions _ is not allowable. [1933] 1 ITR 304 (Sind) _ 1645. Others. 3 ITC 54 (All.)
1192 1192
ADVERTISEMENT & SALES PROMOTION EXPENSES / EXPENSES FOR INAUGURAL FUNCTIONS
1646. Expenditure on canvassing customers for one‟s product is _ deductible. [1946] 14 ITR 66 (Lahore)
1193
TRADE MARK, CHARGES FOR REGISTRATION OF
1647. Application on fees for getting existing trademark registered _ is revenue expenditure. [1947] 15 ITR 105 (Bom.)
1193
IN CASE OF PROFESSION
1648. Expenses relatable to remuneration assessable as „salary‟ are _ not allowable against income from profession. 40 TC 11 (HL)
1194
1649. Expenditure on upkeep of professional dress by a barrister is _ not deductible. 57 TC 330 (HL)
1195
1085 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii) PAGE NO
EXPENSES INCURRED BY HOLDING COMPANY FOR SUBSIDIARY COMPANY
1650. Loss of wholly owned subsidiary company is not deductible _ in the hands of the parent company. [1941] 9 ITR (Suppl.) 92 (HL)
1195
BANKING COMPANY
1651. Profit on purchase and sale of shares in customer-company by a banking company is assessable as its trading profits. _ 40 TC 698 (HL)
1196
1652. Depreciation in value of securities in case of banks is _ deductible. 2 ITC 184 (Lahore)
1197
INSURANCE COMPANIES
1653. Provision for bonus is equal to provision for unpaid risk, hence allowable expense in the hands of an insurance _ company. [1991] 63 TAX 141 (H.C.Kar.) = 1991 PTD 57
1197
1654. Insurance company was incorporated in May, 1958 and certificate of registration under the Insurance Law was granted in January, 1960, held that expenses relatable to the business incurred prior to the grant of certificate of _ insurance are admissible. [1977] 35 TAX 14 (Lah.)
1198
1655. Insurance company engaged in non-life insurance business, incurred expenses in excess of the permissible under Insurance Act or the rule made thereunder, the same are _ allowable expenses. [1974] 30 TAX 111 (H.C.Kar.)
1198
1656. Where the assessee-insurance company had a scheme under which certain categories of policy-holders were entitled to share 90 per cent of the profits of the company, by taking out policies carrying premium at comparatively higher rates, and the assessee claimed profits so paid as a deduction, _ being expenditure incurred on earning profits. 5 ITC 288 (Lahore)
1199
1657. Claim of insurance company for revenue for un-expired risk beyond the permissible limit of 40% is not allowable. _ [1990] 61 TAX 1 (H.C.Kar.)
1200
1658. Distribution of profits of an insurance company among _ policy holders is not deducible expenditure. [1934] 2 ITR 63 (PC)
1200
1086 Section 23(1)(xviii)
Income Tax Digest. PAGE NO
IN CASE OF PARTNER OF A FIRM / FIRMS EXPENSES BY PARTNER / FIRM
1659. A deduction admissible to a partner cannot be disallowed on _ ground that profits of firm had not been assessed. [1944] 12 ITR 344 (Pal.)
1201
PAYMENTS TO RETIRING PARTNER
1660. Payment made by one partner to other partners to have sole right to profits or losses of the firm is capital expenditure. _ [1945] 13 ITR 430 (Lahore)
1201
1661. Payment by other partners to satisfy the claim for share of profits from a transaction by a partner who was excluded _ from said transaction, was not deductible. [1937] 5 ITR 727 (Mad.)
1202
EXPENDITURE INCURRED BY HUF- SALARY TO COPARCENER
1662. Salary paid to a person for managing affairs of business by a lady, held that Tribunal disallowing salary on ground that the person was a near relative if not the proprietor is _ not based on any material is unwarranted. [1979] 39 TAX 6 (H.C.Lah.)
1202
1663. Remuneration paid to a member of HUF is deductible in _ computing HUF‟s business income. [1945] 13 ITR 410 (Pat.)
1202
1664. No question of law arose from finding that payments made as remuneration to adult male members of the family firm were not bona fide payments but mere a device to escape _ Income Tax. 7 ITC 20 (Cal.)
1203
OTHERS
1665. Position of exclusion of wealth tax from income under the _ old Act and 1979 law explained. [1991] 63 TAX 90 (H.C.Kar.) = 1991 PTD 350
1203
1666. Loss of money on bank‟s becoming insolvent is deductible. _ [1941] 9 ITR 339 (Rangoon)
1204
1667. Money spent by a lawyer in replacing old editions of law _ books. 3 ITC 333 (Nag.)
1204
1668. Where, consequent on changing over its method of distribution of electricity from D.C. system to A.C. system, assessee-company became obliged to incur expenditure on replacement of consumers‟ fans and motors and on renewal _ of service lines. 6 ITC 303 (Nag.)
1204
1087 DEDUCTIONS - BUSINESS EXPENDITURE
1669. Others.
_
Section 23(1)(xviii) PAGE NO
6 ITC 208 (Pat.)
1205
„TO EFFECT OR KEEP IN FORCE‟ - CONNOTATION OF
1670. To „effect‟ an insurance also includes maintaining an _ insurance. [1946] 14 ITR 662 (Bom.) _ 1671. Only amount paid to maintain policy is deductible. [1946] 14 ITR 662 (Bom.)
1205 1205
CONTRACT OF INSURANCE, MEANING OF
1672. A contract of insurance must not necessarily be adverse to _ insurer. [1946] 14 ITR 662 (Bom.)
1206
PROVIDENT FUND
1673. Provision made for tax payable on the accumulated Provident Fund balances of retired employees and no evidence was available to support the presumption that the provision so made could be on account of commercial expediency, held that amount paid was not permissible _ deduction. [1975] 32 TAX 239 (H.C.Kar.) _ 1674. Railway provident fund connotation of. 5 ITR 591 (Lahore) INCOME OF CO-OPERATIVE SOCIETIES
_
1206 1207
CO-OPERATIVE BANK
1675. Where a principal co-operative bank purchases debentures of a Land Mortgage Bank from market, it does not give loan to _ latter and interest is interest on investment. [1942] 10 ITR 490 (Mad.)
1208
1088 Section 23(1)(xviii)
Income Tax Digest.
Section 23(1)(xviii)* Business expenditure
DISALLOWABILITY
_
GENERAL
Commissioner of Income Tax, v. Oriental Dyes and Chemicals Co. Ltd. – 1991 SCC 891 = [1992] 65 TAX 254 (S.C.Pak.) 1489.
Claim of gratuity payable, though not paid, cannot be disallowed.
The claim of gratuity payable cannot be disallowed. Gratuity as a liability gets accrued though to be discharged at a future date. It is a proper deduction while working out the profits and gains of business under the accepted principles of commercial practice and accountancy and that it is not necessary that the amount actually be expended or paid. Karachi Hospital Ltd. v. Commissioner of Income Tax – [2001] 83 TAX 383 (H.C. Kar.) 1490.
Assessee had deducted income tax from amount paid to employees as salaries was not sufficient ground or circumstance which would establish employees to had been employed for performing work incidental to or connecting with business or affairs with assessee‟s company. Tribunal was correct in holding that Commissioner of Income(A) was justified in confirming disallowance of salaries of employees as made by Income Tax Officer although tax was deducted from salaries paid to employees were assessed as such under head salaries.
The mere fact that the applicant had deducted income tax from the amount paid to the said employees as salaries is not a sufficient ground or circumstance which would establish the employees in question to have been employee for performing the work incidental to or connecting with the business or affairs with the applicant‟s company which was necessarily required to be established by the applicant/ assessee before it could claim the deduction thereof as the business expenditure.
*
Corresponding to section 10(2)(x) & 10(2)(xvi) of the 1922 Act.
1089 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Income Tax Officer was justified in disallowing the aforesaid four amounts claimed to have been paid by the applicant/assessee as salaries to its said employees during the aforesaid four assessment years and the Commissioner of the Income Tax (Appeals) as well as the Appellate Tribunal was absolutely right and justified in upholding the finding of the Income Tax Officer disallowing the aforesaid amounts in all the above four assessment years. Cases referred to: N.M. Khan and another v. Chief Settlement and Rehabilitation Commissioner, Pakistan 1970 SCMR 158, S.M. Ilyas & Sons v. Commissioner of Income Tax, Lahore [1982] 86 TAX 113 (S.C.Pak) = PLD 1982 SC 259.
Poibani Dolls v. Commissioner of Income Tax – [1995] 71 TAX 224 (H.C.Kar.) 1491.
Expenditure restricted under the Drug Law cannot be made a basis to disallow the same while computing total income.
We would like to point out that the view taken by the learned Appellate Tribunal, on the face of it, seems to be erroneous. No doubt, Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 indicates that no person shall spend more than five per cent of his turn over on advertising, sampling and other promotional activities in respect of drugs and rule 12 provides for cancellation or suspension of a licence by the Central Licensing Board in case any provision of the Drugs Ordinance or the Rules framed thereunder is violated by a licensee. But, the penalty provided by the said Rule cannot be extended to the provisions of Income Tax Ordinance as no such penalty has been provided by the provisions of the said Ordinance. Reference in this regard may be made to the case of Commissioner of Income Tax v. Alpha Insurance Co. Ltd. [1981] 44 TAX 1, also referred to by the learned tribunal in its order, in this case, rule 40C of the Insurance Rules provided a prohibition against exceeding the management expenses. Their Lordships of the Supreme Court held, that such rule could not he extended to disallowance of excess management expenses by the assessing authority. Reference has also been made by Mr. Iqbal Naeem Pasha to an earlier judgment of this Court in General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi [1985] 52 Tax 146 (H.C.Kar.) = (1986 PTD 52). In this case a distinction was clearly drawn between a case where a trader has actually incurred expenses in connection with his business but in violation of some law and a case where a penalty has been imposed on him due to transgression of some law.
1090 Section 23(1)(xviii)
Income Tax Digest.
We are consequently of the view that the view taken by the learned Appellate Tribunal is un-sustainable and the question is answered in the negative. Cases referred to: Commissioner of Income Tax v. Alpha Insurance Co. (1981) 44 TAX 1; General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi (1985) 52 TAX 146 (H.C.Kar.) = (1986 PTD 52) and (1981) 43 TAX 69 (Trib.).
Commissioner of Income Tax v. Glaxo Laboratories (Pak.) Ltd. – [1991] 65 TAX 164 (H.C.Kar.) 1492.
Loss of fixed assets compulsorily acquired by the government is allowable expenditure.
The question relating to allowance of East Pakistan losses under section 10(2)(vii) of the Income Tax Act was considered and decided by a Division Bench of this Court in the case of United Liner Agencies of Pakistan v. Commissioner of Income Tax [1988] 57 TAX 160 (H.C.Kar.) = (1988 PTD 277) in the affirmative in favour of the assessee. Case followed : United Liner Agencies of Pakistan v. Commissioner of Income Tax [1988] 57 TAX 160 (H.C.Kar.) = (1988 PTD 277).
Pakistan Tobacco Company Ltd. v. Commissioner of Income Tax, Central Zone ‘A’, Karachi – [1992] 65 TAX 98 (H.C.Kar.) 1493.
Amount paid as Workers‟ Welfare Fund can be treated as an expenditure for the purpose of computing total of income.
A perusal of sub-section (1) of section 4 clearly indicates that no amount payable under the said sub-section can be computed without first determining the assessable income of the assessee. It is pertinent to point out that no corresponding amendment has been made in section 10 of the repealed Income Tax Act or section 23 of the Income Tax Ordinance, 1979 under which net taxable income of the assessee is determinable. No doubt, sub-section (7) of section 4 of the Workers‟ Welfare Fund Ordinance provides that any payment made to the said Fund shall be treated as an expenditure for the purposes of assessment of income tax but if the legislative intent was to make such expenditure as an expenditure under section 10 of the repealed income Tax Act or section 3 of the Income Tax Ordinance, a corresponding amendment would have been made therein in this regard. Consequently, it would be erroneous to assume that the amount payable to the Fund under section 4(1) is to be calculated at the time of computation of the assessable income of the assessee. Subsection (1) of section 4 clearly indicates that the said two per cent is to
1091 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
be calculated on the basis of the assessable income of the assessee, as pointed out earlier, and unless such income is determined, it would not be possible for the Income Tax Officer to calculate the amount payable to the said Fund. However, the Legislature has made its intention clear by providing that any expenditure made by the assessee on account of the said Fund shall be treated as an expenditure for the purpose of assessment of Income Tax. Consequently, although, such expenditure would not be an expenditure allowable under the Income Tax Act, but the same is nevertheless to be excluded from the total gross income of the assessee to give effect to the provisions of sub section (7) of section 4 of the Workers‟ Welfare Fund Ordinance. Consequently, in our view, although the learned Tribunal was right in holding that the levy of Workers‟ Welfare Fund is not an admissible expenditure under the repealed Income Tax Act or as the case may be the Income Tax Ordinance, 1979 but such expenditure would still be deductable from the total gross income of the assessee. Asbestos Cement Ltd. v. Commissioner of Income Tax – [1988] 58 TAX 80 (H.C.Kar.) 1494.
Assets acquired by Bangladesh Government compulsorily is allowable deduction.
For the assessment year 1973-74, for which the relevant accounting period was the year which ended on 30th June, 1973, for the purpose of levy of income tax under the Act, the assessee company claimed the written down value of East Pakistan fixed assets amounting to Rs.47,26,965/- as revenue loss under section 10(2)(vii) of the Act. The case of the assessee company was that the fixed assets have either been compulsorily acquired by the Bangladesh Government or „discarded‟ within the meaning to section 10(2)(vii) of the Act. The Income Tax Officer rejected the assessee‟s contention as in his opinion (i) the expression „competent authority‟ as used in section 10(2)(vii) does not include the Government of Bangladesh and (ii) the word „discarded‟ refers to plant and machinery which is discarded in the normal course of wear and tear. In his view, the loss is not admissible. Against the assessment order the matter was directly taken in appeal to the Income Tax Appellate Tribunal. The Appellate Tribunal held that the Government of Pakistan had recognised Bangladesh on 23.2.1974 and prior to that Bangladesh was part of Pakistan. In its view recognition could not be given with retrospective effect i.e. from date of its existence on 23.3.1971. In the result the appeal was dismissed.
1092 Section 23(1)(xviii)
Income Tax Digest.
The principles laid down in the above decision and the passage reproduced from a treatise of International Law and Halsbury‟s Laws of England lay down that the true effect of the doctrine of retroactivity is that it applies to validate only those acts done by newly recognised de jure government at a time when it was the de facto government and which were done within its own jurisdiction and within the sphere of its own sovereignty. It is also clear that this court can take judicial notice of the fact that Bangladesh was recognised by Pakistan and normal diplomatic relations were established between the two governments followed by an exchange of ambassadors. According to the principle laid down by the British and American courts recognition is retroactive, that is, recognition is retrospective in the sense that the courts treat as valid the acts of the recognised States of Government dating back to the commencement of the activities thus recognised. In this view of the matter it seems that learned Tribunal has not correctly held that the recognition can be from 1974. Coming to the question, section 10(2)(vii) of the Act which is already reproduced in the earlier part of this judgment. The properties were acquired by the Bangladesh Government under the Bangladesh Banks (Nationalisation) Order, 1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order by the competent authority. In these circumstances, we think it appropriate to hold that section 10(2)(vii) of the Act applies to all cases where the properties were acquired by the Bangladesh Government. A Division Bench of this Court interpreted the term „discard‟. The learned Bench observed that „abandonment of assets by the petitioner cannot be construed as their discarding and as such the same cannot fall within the purview of clause (vii) of section 10(2) of the Act so as to entitle the petitioner to claim deduction as aforesaid. It is, therefore, clear that the petitioner did not discard its assets in Dacca within the meaning of clause (vii) of section 10(2) and as such it is not entitled to claim any deduction thereunder‟: In our opinion, this represents the correct position in law. We are in respectful agreement with the proposition of law. Under the circumstances, it must be held that the finding made by the Tribunal in regard to disallowance of losses claimed by the assessee under section 10(2)(vii) was not correct. The language of section 10(2)(vii) supports the view that the expression “acquired by competent-authority” in the sense where. It was intended to convey that the properties were acquired by competent authority under any
1093 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
law and the properties have ceased to exist, so far as the assessee were concerned or the assessee have completely divested themselves of the interests and rights in the properties concerned. The words used are discarded or acquired. This shows that the assessees in order to claim allowance under this subsection were required to show that they had served all connections between themselves and the properties concerned which were either discarded or acquired by competent authority. In the result, it can be said that the properties were acquired by the competent authority within the weaning of section 10(2)(vii) of the Act. It was therefore entitled to claim under that section the deduction of the loss from the Income. Answer to the question as framed, therefore, must be in the negative, in favour of the assessees and against the revenue. Cases referred to : Pakistan Services Ltd. v. Commissioner of Income Tax (1986) 54 TAX 150.
Lever Brothers Pakistan Limited v. Commissioner of Income Tax – 988] 58 TAX 48 (H.C Kar.) 1495.
Loss in respect of East Pakistani fixed assets held allowable.
Learned counsel for the respondent / Department has submitted that before the Income Tax Officer, the Appellate Assistant Commissioner and also before the Income Tax Tribunal, the case proceeded only on the question, whether the case was covered by the word „discard‟, used in the above sub-clause (vii) of sub-section (2) of section 10 of the Act and not on the question, whether the property was acquired by a competent authority. He has further submitted that there is a judgement of a Division Bench of this Court on the question what constituted discard, namely, in the case of Pakistan Service Ltd. v. Commissioner of Income Tax [1986] 54 TAX 150 in which while construing the word „discard‟, it is held that the abandonment of business by an assessee owing to the happenings over which it had no control and was compelled to abandon its assets and equipments could not be considered as discarding within the ambit of the above clause (vii) of sub-section (2) of section 10 of the Act. From the order of the Income Tax Tribunal declining the applicant‟s application under section 66(1) of the Act relevant portion of which is reproduced hereinabove in para 5, it seems that the other grounds in addition to discard covered by above clause were agitated before the Income Tax Tribunal as the above order apparently was written by Mr. A.A. Zuberi, Accountant Member of the Appellate Tribunal who
1094 Section 23(1)(xviii)
Income Tax Digest.
had also written the aforesaid earlier order dated 22.11.1978 disallowing the above loss as discard. We are, therefore, of the view that since the ground of acquisition by a competent authority has been raised before us and was also apparently raised before the Income Tax Tribunal, the applicant cannot be denied the relief merely on the ground that the Income Tax Officer or the Appellate Assistant Commissioner have not referred to the above other ground in their orders. As pointed out hereinabove that since the point in question was apparently raised before the Appellate Tribunal though not dilated upon by it, the question whether the applicant‟s East Pakistani assets in question were competently acquired by the Bangladesh Government arises out of the order of the Appellate Tribunal. We are inclined to hold that if an assessee raises a point before the Income Tax Appellate Tribunal along with other points and if the former is not decided or dilated upon by the Tribunal, it will be deemed to have been dealt with by it and, therefore, will arise out of its order. In the aforesaid unreported judgment dated 4.11.1987 (of which paras 21 to 23 have been quoted hereinabove in para 5) the question in issue has been dealt with exhaustively and the same is answered in favour of the assessee. We see no reason to take a different view in the matter, and, therefore, for the reasons recorded in the above judgement, we answer the above quoted question in the negative. Cases referred to: Pakistan Service Ltd. v. Commissioner of Income Tax [1986] 54 TAX 150 and Commissioner of Income Tax v. Scindia Steamship Navigation Co. Ltd. [1961] 42 ITR 589 (SC) = [1961] 4 TAX 103 (S.C.Ind.).
United Liner Agencies of Pakistan Ltd. Karachi and others v. Commissioner of Income Tax, Central Zone, Karachi – [1988] 57 TAX 160 (H.C.Kar.) 1496.
Loss on account of properties lost in Bangladesh held to be allowable business expense.
The assessee Companies contended that the Bangladesh Government acquired the properties of the assessee Companies on 26.3.1972 under the Bangladesh Banks (Nationalization) Order, 1972 and the Bangladesh Abandoned Property (Control, Management and Disposal) Order, 1972. The Government of Pakistan recognized Bangladesh Government on 23.2.1974 as de facto Government. Their submission is that according to the practice of British and American Courts
1095 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
retrospective effect must be given from the date of its existence, that is 25.3.1971. Words “compulsorily acquired by any law for the time being in force” means that the property is to be acquired under the provisions of the Land Acquisition- Act, 1894. The further submission was that the Bangladesh was part of the Pakistan until 22.2.1974 and it was for the first time recognized as Bangladesh Government on 23.2.1974. Their submission is that the Income Tax Authorities have correctly held the recognition can be effective from 23.2.1974. The arguments of the learned counsel for the Revenue cannot be accepted. The words “compulsorily acquired by the competent authority under any law for the time being in force” have not been defined in the Act. International Law and Halsbury‟s Laws of England lay down that the true effect of the doctrine of retrospectively is that it applies to validate only those acts done by the newly recognised de jure Government at a time when it was the de facto Government and which were done within its own jurisdiction and within the sphere of its own sovereignty. It is also clear that this court can take judicial notice of the fact that Bangladesh was recognised by Pakistan and normal diplomatic relations were established between the two governments followed by an exchange of ambassadors. According to the principles laid down by the British and American courts recognition is retroactive, that is, recognition is retrospective in the sense that the courts treat as valid the acts of the recognized States or government dates back to the commencement of the activities thus recognized. In this view of the matter it seems that learned Tribunal has not correctly held that the recognition can be from 1974. Under the circumstances, it must be held that the finding made by the Tribunal in regard to disallowance of losses claimed by the assessee under section 10(2)(vii) was not correct. The language of section 10(2)(vii) supports the view that the expression acquired by competent authority in the sense where it was intended to convey that the properties were acquired by competent authority under any law and the properties have ceased to exist, so far the assessees were concerned or the assessees have completely divested themselves of all interests and rights in the properties concerned. The words used are discarded or acquired. This shows that the assessees in order to claim allowance under this subsection were required to show that they had served all connections between themselves and the properties
1096 Section 23(1)(xviii)
Income Tax Digest.
concerned which were either discarded or acquired by competent authority. In the result, it can to said that the properties were acquired by the competent authority within the meaning of section 10(2)(vii) of the Act. It was therefore entitled to claim under that section the deduction of the loss from the income. Answer to the questions as framed, therefore, must be in the negative, in favour of the assessees and against the Revenue. Case referred to : Pakistan Services Ltd. v. Commissioner of Income Tax (1986) 54 Tax 150 (H.C.Kar.).
Commissioner of Income Tax (Central Zone) v. Monotype Corporation Ltd. – [1986] 53 TAX 74 (H.C.Kar.) 1497.
Administration charges of head office consistently claimed by assessee and allowed by Tribunal should be allowed on basis of practice, precedent and previous order.
The Income Tax Officer did not allow these expenses because they had not been accounted for in the books of accounts of the branch at Karachi. He also, however, noted that such charges were disallowed in previous years by his predecessor, but the same had been allowed by the. Appellate Assistant Commissioner in appeal and the Department had gone in had Appeal before the Income Tax Appellate Tribunal. Since such charges (B.E.) have been consistently claimed by the respondent (assessee) and have been allowed by the Tribunal and at least it is clear from the order of the A.A.C. had been upheld, therefore, there was justification for the Tribunal to allow such expenses on the basis of practice and previous precedent which has been allowed to become final as the applicant‟s counsel has not been able to show that the previous order of Appellate Tribunal was challenged before this Court. Rajput Metal Works Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi – [1976] 33 TAX 1 (H.C.Lah.) = PTD 1976 Lah. 223 1498.
Ad-hoc additions not based on computation of income on any basis or relevant consideration are not sustainable.
The Tribunal on further appeal adduced cogent reason for rejecting the accounts and the declared version based on these, but has at the same time made an ad-hoc addition of Rs.30,000 in the Pak Pipe Industries accounts and Rs.15,000 in the Asian Steel Re-Rolling
1097 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
account. In this respect the Tribunal did not make the computation of the income of the assessee on any basis whatsoever. Then additions appear to have been made arbitrarily and on no relevant considerations. The Income Tax Officer relied on the past history of the case in making the addition to the Pak Pipe Industries account. But the Tribunal singularly failed to eves advert to it in making the addition to the extent of Rs.30,000 in the account. It did not evolve any basis for the addition of Rs.15,000 to the Steel Re-Rolling account. The additions thus made by the Tribunal cannot be sustained under the proviso to section 13 of the Act. The first proviso to section 13 of the Act expressly lays down that if no method of accounting has been regularly employed or if the method so employed is such that in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deduced therefrom; the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine. It Is, therefore, clear from this proviso that after the Income Tax Officer had rejected the account version for the reasons assigned by him, a further and much onerous duty was cast upon him to make his “computation” of the income upon such “basis” and in such manner as he may “determine”. The determination and the computation of the income must be made on the basis evolved by the Income Tax Officer. His judgment must be based on reason.. He cannot just take a leap in dark and indulge in a pure guess by making arbitrary, capricious and an ad-hoc addition without laying down the basis for it. He should endevour to the best of his ability to ascertain the Income, profits and gains of the assessee nearest to his true Income profits and gains as far as possible under the circumstances of the case. Cases referred to : Seth Nathuram Mannalal v. Commissioner of Income Tax (1954) 25 ITR 216; Jonnaiagadda Yedukondala Rao v. Commissioner of Income Tax (1959) 36 ITR 485; Pandit Bros. v. Commissioner of Income Tax (1954) 26 ITR 159; Pakistan Cycle Industrial Co-operative Society Ltd. v. Commissioner of Income Tax, Lahore (T.R. No.59 of 197 (Unreported); Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income Tax (1954) 26 ITR 775 and Jhandu Hal Tara Chand Rice Mills v. Commissioner of Income Tax (1971) PTD 969. _______________
1098 Section 23(1)(xviii)
Income Tax Digest.
WHOLLY AND EXCLUSIVELY - MEANING OF
British Insulated & Helsby Cables Ltd. v. Atherton – [1925] 10 TC 155, 198 (HL) 1499.
Expression „wholly necessarily.
and
exclusively‟
does
not
mean
A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency. and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. Robert Addle & Sons’ Colleries Ltd. v. IRC – [1924] 8 Tax Cas. 671 1500.
What expenditure is wholly and exclusively laid out for the purpose of trade is a question which must be determined upon the principles of ordinary commercial trading.
What is „money wholly and exclusively laid out for the purposes of the trade‟ is a question which must be determined upon the principles of ordinary commercial trading. It is necessary accordingly, to attend to the true nature of the expenditure, and to ask oneself the question is it a part of company‟s working expenses. Is it expenditure laid out as part of the process of profit earning? _______________
WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ILLUSTRATIONS OF ALLOWABILITY / NON-ALLOWABILITY
Ata Hussain Limited v. Commissioner of Income Tax, East Pakistan Dacca – 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.) 1501.
Department has no authority to examine whether the amount is spent on the grounds of commercial expediency is reasonable.
The only thing that the Department is entitled to examine is whether the amount claimed was spent wholly and exclusively for the purpose of the business. It is open to the Department to ascertain whether the amount was spent on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business but nothing more. The onus of showing that the amount was spent for such Department by applying some subjective standard of reasonableness can disallow such an expenditure. If, however, it is
1099 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
found on evidence that the expenditure was not incurred on grounds of commercial expediency but for consideration other than that it is open to the Income Tax Officer to disallow such an expenditure. Commissioner of Income Tax, East Pakistan, Dacca v. Engineers Limited, Dacca – 1967 SCC 289 = [1967] 16 TAX 81 (S.C. Pak.) 1502.
Expenses incurred wholly and exclusively for business purposes are allowable.
Keeping in view the distinction observed in Assam Bengal Co. Ltd. v. Commissioner of Income Tax, East Pakistan and Golden Horse Shoe (New Co.) v. Thur Goods between expenditure of capital nature and revenue expense it could not be disputed that the sum laid out by the assessee on the training abroad of two of its engineer directors was a revenue expenses and is covered by clause (xviii) of section 23(1) of the Income Tax Ordinance, 1979. Jamshed Marker Brothers Ltd. v. Commissioner of Income Tax, Central Zone, Karachi – [1991] 64 TAX 14 (H.C.Kar.) 1503.
Salaries, general and professional charges claimed by the assessee against share income received from the firm are allowable expenditure being wholly and exclusively for earning profit form the firm.
The applicant is a private limited company. It is a partner in a registered firm styled as Bridge Stock & Co. During the assessment years 1971-72 and 1972-73 the applicant claimed expenses under the head salaries, general charges and professional charges etc. against its share income received from the firm. It was pleaded that the applicant being a juristic person carries on its business through its employees and therefore, any amount spent on that account was a permissible deduction under section 10 of the Income Tax Act. This contention was not accepted by the Assessing Officer and even the Tribunal repelled the same. What are chargeable to Income Tax in respect of a business are the profits and gains of a year, and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains”. These observations would equally apply to the share of a partner in a registered firm which is being assessed to tax. It is not the share as ascertained on the assessment of the firm that is liable to tax, but the share as representing the true profit of the partner”. “The deduction which would ordinarily be allowed to him would be a deduction which was necessary in order that the assessee was enabled
1100 Section 23(1)(xviii)
Income Tax Digest.
to earn the income which represented the share in the profits. If it was incumbent upon the assessee to spend an amount in order that he should be in a position to remain a partner and to earn the profit, it may be argued that that was a permissible deduction because without allowing that deduction the share of the profits would not represent the true income of the assessee. From the aforestated authorities it is clear that where a partner in a firm earns profits out of the business of the firm and in his individual assessment claims any expenditure incurred in earning that profit he is entitled to such deduction in respect of his own business. If a partner is able to establish that expenditure claimed by him was incurred wholly and exclusively for the purposes of his business and was spent in view of commercial expendiency to earn the share of his profit from the firm he would be entitled to claim deduction of such expenses under section 10(2)(xvi) of the Income Tax Act. It is the total income of a partner and not the profits of the firm which is under consideration as income from business under section 10 earned by him. In order to arrive at the true profits and gains of the assessee permissible deductions have to be allowed. Unless such allowances are made true profits can not be calculated. Cases referred to : Shantikumar Narottam Movajee v. Commissioner of Income Tax (1955) 27 ITR 69; Commissioner of Income Tax v. Ramniklal Kothari (1969) 74 ITR 57; Commissioner of Income Tax v. K.R. Irani (1963) 48 ITR 525 and Feroz H. Kundianwala v. Commissioner of Income Tax (1978) 113 ITR 873.
Commissioner of Income Tax Central Zone ‘A’, Karachi v. S.M. Naseem Allawala – [1991] 64 TAX 31 (H.C.Kar.) 1504.
Wealth Tax liability is expenditure wholly and exclusively laid out for purposes of earning profit.
The assessment was completed under section 23(1) of the Income Tax Act, 1922. The respondent, during the assessment year was liable to pay wealth tax. He claimed allowance under section 10(2)(xvi) of the Income Tax Act, for the wealth tax on the profit yielding assets. The Income Tax Officer did not allow the said claim in his order passed on 23.1.1979. The respondent preferred an appeal before the Asstt. Appellate Commissioner, who allowed the same by his order date 9.10.1980. The department being dissatisfied with the aforesaid order preferred an appeal before the Income Tax Appellate Tribunal but the same was dismissed. The present Applicant then submitted an application to the Income Tax Appellate Tribunal under section 136(1) of the Income Tax Ordinance, 1979.
1101 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
It, there, follows that the payment of wealth tax is necessary for proper maintenance and existence of assets and properties from which income, profits or gain accrues. It can thus be concluded that it is „wholly or exclusively laid out for purposes of earning profits‟. Any amount spent to accomplish or facilitate the running of business or on ground of commercial expediency which directly benefits the business is the money spent wholly and exclusively for earning profits and gain. Such expenses will cover tax which is statutorily levied on income yielding assets of the assessee non-payment of which may result in depletion or diminution of assets and properties or cause danger or risk which may diminish or reduce their value or utility. Commissioner of Income Tax, Central Zone, Karachi v. Karachi Race Club Ltd. – [1991] 63 TAX 49 (H.C.Kar.) 1505.
„Racing Development expenses‟ is allowable wholly and exclusively expenses in the hands of a race club.
Messer Karachi Race Club (hereinafter to be mentioned as Assessee) is a company, established with the object to carry on the business of Horse-Racing and Horse-Breeding etc. For the Assessment year 196970 it submitted Income Tax Return, wherein it claimed in the income and expenditure account a sum of Rs.2,04,843 under the head „Racing Development Expenses‟, which included a sum of Rs.1,40,000 being payments mad etc. Quetta Racing Club for development of the Races at Quetta. During scrutiny of the Income Tax Return, the concerned Income Tax Officer on going through minute Book of Managing Committee of the assessee, found that said amount of Rs.1,40,000 represented donations. Accordingly he held said amount to be inadmissible expenditure. The Income Tax Officer also disallowed an amount of Rs.11,344 claimed as losses on horses, on the ground that losses on horses were of recoverable nature. The assessee took said order of the Income Tax Officer in appeal before the Tribunal (5th bench) Karachi which under an order dated 7.1.1975 allowed both claims of the assessee. In view of the provisions contained by section 10(2)(xvi) of the Income Tax Act and in the light of the case-law discussed above and on the basis of findings of fact given by the Tribunal, we have no hesitation in holding that the amount in question was laid out and expended wholly and exclusively for the purpose of business of Horse Racing and as such the amount in question was admissible under clause (xvi) of section 10(2) of the Income Tax Act. Consequently we reply question No.1 in the affirmative.
1102 Section 23(1)(xviii)
Income Tax Digest.
Cases referred to : General Tyre and Rubber Co. v. Commissioner of Income Tax (1986 PTD 52); Commissioner of Income Tax v. Royal Calcutta Turf Club (1961) 41 ITR 414 and Commissioner of Income Tax v. Pakistan Investment Limited (1988) 57 TAX 46 (H.C.Kar.) = (1988 PTD 582). Case distiaguished : Commissioner of Income Tax v. Chundulal Keshavlal & Co. [I960] 38 ITR 601.
Hashmi Can Company Ltd. v. Commissioner of Income Tax, Karachi – [1989] 60 TAX 8 (H.C.Kar.) = 1989 PTD 570 1506.
Expenditure incurred indirectly or remotely connected with the business are not, incurred wholly and exclusively for the purpose of business hence, cannot be allowed.
The Company claimed that Rs.24,000 paid each year to its Director Mrs. Zeb Gohar Ayub Khan should be allowed as expense incurred wholly for purpose of business. The assessing Officer disallowed on the ground that there was no evidence to show that she had rendered any concrete service and therefore the payments made to her were not due to commercial considerations or expediency. Profits and gains shall be computed inter alia after making allowance of any expenditure which is not in the nature of capital expenditure or personal expenses and has been incurred wholly and excessively for the purpose of business. Where an assessee makes a claim for such allowance the burden is upon him to prove that the expense was incurred only for the purposes of the business of the assessee. Such burden can be discharged by producing evidence to establish that the money claimed as allowance was spent solely for business expediency, commercial exigencies or entirely for running, maintaining or developing the business. In order to establish its claim the learned counsel for the applicant has referred to the resolutions of the Board of Directors and the General Body. These resolutions can only prove that the remuneration to be paid to her was duly approved. This by itself does not lead to the presumption that the money was spent solely and exclusively for purposes of business. Nor is it sufficient to claim allowance under section 10(2)(xvi). In this regard reference can be made to Ata Hussain‟s case in which reference has been made to Aspro Limited‟s case 1932 A.C. 683 where it was observed that if the only evidence produced is the company‟s resolution fixing the Director‟s fees and vouchers for such payments it is difficult to see how it could be said that the amount had been unreasonably disallowed. The applicant claims that the said Director had been arranging finance and has helped sale promotion but no document and no instance of arranging the finances or promoting sale has been produced on record.
1103 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
In the state of this evidence in our view the conclusion drawn by the learned Tribunal was correct. The Supreme Court of Pakistan has laid emphasis that the expenditure should be on the ground of business expediency or wholly and exclusively for purposes of the business. The Department can examine this aspect and also whether it was spent in order to facilitate the carrying on of the business‟. There should be a nexus between the expenditure and the business of the company. Any expense incurred which may be indirectly or remotely connected with the business cannot be said to have been incurred solely and excessively for purposes of business. In our humble view the benefit or financial gain from the services rendered by a director may be one way determining the question whether the remuneration has been paid solely and exclusively for business purposes. But it cannot be made the sole criterion for granting such allowance. There may be cases where a person may render his service for obtaining a tender or executing a project but due to unavoidable circumstances he does not succeed and the company is not benefited. In such circumstances can it be ruled that the salary paid to him was not spent wholly and exclusively for business purposes or that it was not expended for business expediency. The question as framed does not dispute the facts as determined by the Tribunal. Where a question opens with expression „whether on the facts and circumstances of the case‟, it means that finding of fact as determined by the Tribunal is to be accepted for deciding the case. Such questions proceed on the assumption that finding of fact is correct and has not been challenged. On the facts found by the Tribunal and applying the principles as discussed above our answer is in affirmative. Case referred to: Ata Hussain Khan Limited v. Commissioner of Income Tax, East Pakistan, Dacca [1970] 21 TAX 1 (S.C.).
United Licence Agency v. Commissioner of Income Tax – [1986] 54 TAX 155 (H.C.Kar.) 1507.
Fees paid to tax Advisor for conducting an appeal before the Income Tax Appellate Tribunal is an expenditure incurred wholly and exclusively laid out for business purposes.
The statement of facts show that the assessment for the charge year 1968-69 ending 31.12.1967 was completed by the Income Tax Officer Campanies Circle VX, Karachi under section 23(3) of the Act of 1922
1104 Section 23(1)(xviii)
Income Tax Digest.
on 31.12.1973. In the accounts for the accounting year ending 31.12.1967 the assessee claimed a sum of Rs.1050 as an allowable deduction under the income Tax Act, 1922 which was paid to the Tax Advisors of the assessee for conducting an Income Tax appeal before the Appellate Tribunal. Income Tax Officer while framing the assessment on 31st January, 1973 disallowed the said sum as being inadmissible. The assessee preferred an appeal to the Appellate Tribunal challenging inter alia the aforesaid disallowance and contended that the fees paid for conducting appeals is admissible in the same manner as the expenses incurred during the course of assessment proceedings for professional assistance because the appeal proceedings are only continuation of the assessment proceedings. By order passed on 7.5.1974, the Income Tax Appellate Tribunal however for the reasons recorded in its order held that for conducting the appeal the fees paid to the tax advisors is not allowable expense and decided this issue against the assessee. For the reasons discussed above I hold that fees paid to tax advisors, by the assessee in conducting legal proceedings before the Income Tax Appellate Tribunal to reduce tax liability of the assessee, reasonably and honestly, likely to result in more funds being left for the purposes of carrying an its business and thus a possibility of higher profits, are admissible deductions within the meaning of section 10(2)(xvi) of the Income Tax Act, 1922. The question referred is accordingly answered in the negative. Cases referred to: Smith‟s Potato Estates Ltd. v. Bolland (1949) I.T.A. (Suppl. (1); Strong and Co. of Romsey Ltd. v. Woodifieled (1906) A.C. 448, 5 T.C. 215); Moore v. Stewards and Lloyds (1906) 6 Tax Cas. 501 and British Insulated and Helsby Cables Ltd. v. Atherton [1926] 10 TC 155; (1926) A.C. 205 at P.P. 221 and 235).
United Lines Agency Pakistan Ltd. v. Commissioner of Income Tax (Central), Karachi – [1986] 53 TAX 137 (H.C.Kar.) 1508.
Fee to legal adviser for appearing in an appeal is an allowable deduction.
The assessment for the charge year 1968-69 ending 31.12.1967 was completed by the Income Tax Officer, Companies Circle XV, Karachi under section 23(3) of the Act of 1922 on 31.12.1973. In the accounts for the accounting year ending 31.12.1967 the assessee claimed a sum of Rs.1050/- as an allowable deduction under the Income Tax Act, 1922 which was paid to the tax advisers of the assessee for conducting an income tax appeal before the Appellate Tribunal. Income Tax Officer while framing the assessment on 31st January, 1973 disallowed the
1105 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
said sum as being inadmissible. The assessee preferred an appeal to the Appellate Tribunal challenging, inter alia the aforesaid disallowance and contended that the fees paid for conducting appeals is admissible in the same manner as the expenses incurred during the course of assessment proceedings for professional assistance because the appeal proceedings are only continuation of the assessment proceedings. By order passed on 7.5.1974, the Income Tax Appellate Tribunal however for the reasons recorded in its order held that for conducting the appeal the fees paid to the tax advisers is not allowable expense and decided this issue against the assessee. For the reasons discussed above I hold that fees paid to tax advisers, by the assessee in conducting legal proceedings before the Income Tax Appellate Tribunal to reduce tax liability of the assessee reasonably and honestly are likely to result in more funds being left for the purposes of carrying on its business and thus a possibility of higher profits, are admissible deductions within the meaning of section 10(2)(xvi) of the Income Tax Act, 1922. Cases referred to : Smith‟s Potato Estates Ltd. v. Bolland (1949) I.T.A.; Strong and Co. of Ramsey Ltd. v. Woodifield (1906) A.C. 448; Atta Hussain v. Commissioner of Income Tax (PLD 1969 S.C. 517); Eastern Investments Ltd. v. Commissioner of Income Tax (20 ITR 1); Indian Radio and Cable Communication Ltd. v. Commissioner of Income Tax (1937) 5 ITR 270 (P.C.); Tata Hydra Electric Agencies Ltd. v. Commissioner of Income Tax (1937) 5 ITR 202 (P.C.); Moore v. Stewards and Lloyds (1906) 6 Tax Cas. 501 and British Insulated and Helsby Cables Ltd. Atherton [1926] 10 TC 155; (1926) A. C. 205.
Commissioner of Sales Tax (Central), Karachi v. Moosa Umer & Co., Karachi & 26 others – [1985] 51 TAX 16 (H.C.Kar.) 1509.
Payments made to other parties in agreement as excess share of profits to avoid unhealthy competition is an expenditure wholly and exclusively for the purposes of business.
Mr. Ali Athar learned counsel for the respondent has relied on the earlier decision of this court between the same parties in respect of the same subject-matter as is under consideration in the reference, which is reported as Commissioner of Income Tax Karachi v. Moosa Omar & Co. Ltd. [1980] 41 Tax 19 (H.C.Kar.). It was not a case of joint venture for dividing profits and we agree with the interpretation and finding by the Tribunal that the payments were admissible deductions under section 10(2)(xvi) of the Income Tax Act. They also observed that they were unable to accept the contention
1106 Section 23(1)(xviii)
Income Tax Digest.
of Mr. Mansoor Ahmed Khan that the conclusion reached by the Appellate Tribunal was not supported by evidence. Mr. Ali Athar also wanted us to consider another point which has been noticed in paragraph 9 of the judgment cited by him but we do not consider it necessary to go into it for we are of the view that the view of law expressed by the other Division Bench of this Court in the earlier case is not only sound but no arguments or cogant reasons have been advanced to the contrary view nor has any other case been cited to require any further review of the case law. Case relied on : Commissioner of Income Tax Karachi v. Moosa Omar & Co. Ltd. [1980] 41 Tax 19 (H.C.Kar.). Case followed: Guest, Keen and Nettlefolds, Ltd. v. Fowler (Surveyor of Taxes) (5 T.C. 511). Cases distinguished : Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax (AIR 1931 PC 165); Commissioner of Income Tax v. C. Macdonald & Co. [1935] ITR 459 and Indian Radio and Cable Communication Co. Ltd. v. Commissioner of Income Tax [1937] 5 ITR 270. Case referred to : Union Cold Storage Co. Ltd. v. Adamsons [1931] 16 TC 293; Gramhamston Iron Co. v. Crowford (Surveyor of Taxes) (7 TC 25); Commissioner of Income Tax v. Sarbianga Sugar Co. Ltd. [1957] 32 ITR 64 and E.D. Sassoon & Co. Ltd. v. Commissioner of Income Tax [1954] 26 ITR 27.
Commissioner of Income Tax, Karachi v. Moosa Omar & Co. Ltd. – [1980] 41 TAX 19 (H.C.Kar.) 1510.
Payments to avoid unhealthy competition are expenditure wholly and exclusively for the purposes of business.
The main question is whether the two sums of money paid by the respondent company as excess share of profit to the other parties in the agreement, represented division of profits earned by it, or whether the payments amounted to expenditure incurred wholly and exclusively for the purpose of its business. We have ourselves construed the terms and conditions of the agreement and are inclined to agree with Mr. Athar that the object of the arrangement was to maintain a minimum sale price and avoid cutthroat competition amongst themselves and also to enable them to make larger profits. It was not a case of joint venture for dividing profits and we agree with the interpretation and the finding by the Appellate Tribunal that the payments were admissible deductions under section 10(2)(xvi) of the Income Tax Act.
1107 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Cases referred to : Pondichery Railway Co. Ltd. v. Commissioner of Income Tax (AIR 1931 P.C. 165); Commissioner of Income Tax v. C. Macdonald & Co. (1935) 3 ITR 459; Indian Radio & Cable Communications Co. Ltd. v. Commissioner of Income Tax (1937) 5 ITR 270; Union Cold Storage Co. Ltd. v. Adamson (1931) 16 T.C. 293, 321; Guest, Keen and Netherlands Ltd. v. Fowler (Surveyor of Taxes) (5 T.C. 511, 517); Grahamston Iron Co. v. Crowford (Surveyor of Taxes) (7 T.C. 25, 28); Commissioner of Income Tax v. Sarbianga Sugar Co. Ltd. (1957) 32 ITR 64 and E.D. Sassoon & Co. Ltd. v. Commissioner of Income Tax (1954) 26 ITR 27, 47.
Commissioner of Income Tax, Lahore Zone, Lahore v. Punjab Oil Expeller Co., Lahore – [1979] 40 TAX 55 (H.C.Lah.) 1511.
Liability arising from the infraction of law cannot be regarded as expenditure wholly and exclusively for the purposes of business.
In order that an assessee may be found entitled to deduction of any amount from his total income he has got to prove that a particular amount of expenditure was incurred by the assessee and that expenditure was laid out or expended “wholly and exclusively” for the purpose of business profession or vocation. It is not part of the business of an assessee to commit violation of law and thus any liability arising from the infraction of law would not be regarded as an expenditure incurred wholly, exclusively and necessarily for the purposes of business. In the present case the finding of-the Martial Law Committee that the cash-in-hand held by the assessee on the 7th of June, 1971 was much less than amount tendered and that the assessee has been accepting demonetized currency on the 8th of June, 1971, do lend support to the proposition that the imposition or forfeiture was unconnected with business and was in the nature of penalty or fine imposed upon the assessee personally for the breach of the law in accepting demonetized currency and trying to inflate the claim for reimbursement of demonetized currency surrendered by the assessee. There is clear imputation of manipulation of the cash balances in violation of the Martial Law Regulations in force and in our opinion the forfeiture cannot be described as an admissible business expenditure within two meaning of clause (xvi) of sub-section (2) of section 10 of the Income Tax Act, 1922. Case referred to : Inland Revenue Commissioner v. Anglo Browning Co., Ltd. (1925) 12 Tax Case 803, 813; C.R. v. Warnes & Co. (1919) 2 K.B 444; I.R. v. Alexander Von Glehn & Co. Ltd. (2 T.C. 232) and Ata Hussain Khan Ltd. v. Commissioner of Income Tax [1970] 21 TAX 1.
1108 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax, West Karachi v. Excide Batteries of Pakistan – [1978] 38 TAX 126 (Kar.) 1512.
Amount paid partly as compensation for termination of agency but mainly on condition that selling agent becomes the main dealer of the company is held for commercial necessity and expediency and, therefore, wholly and exclusively for purpose of business; does not adversely effects the revenue nature of payment in the hands of company.
Upon a proper consideration of the terms of offer of payment of the disputed amount mentioned in the notice of termination we arc inclined to agree with the finding of the Appellate Tribunal that the payment of the amount was made for commercial expediency and in the interest of the smooth running and betterment of the respondent‟s business. It appears that although part of the consideration for making payment of the amount to the selling agent was to compensate it for the loss of profits resulting from the termination of the agency, the major part of it was a consideration for the offer of accepting to become a main dealer of the respondent. As stated in their letter, the amount was offered on condition and provided that the selling agent agreed to act as a main dealer of the respondent. As stated in their letter, the amount was offered on condition and provided that the selling agent agreed to act as a main dealer of the respondent. Otherwise, the same would not have been payable. It is clear from the terms of the letter that the respondent was terminating the agreement with the almost reluctance and yet wanted the selling agent to become a main dealer, no doubt because the respondent wanted to retain the services of the selling agent and obtain the benefits of its experience and knowledge with a view to smooth running and betterment business. The payment was, therefore, of a revenue nature. As earlier part of the consideration for payment of the amount was compensation for terminating the sole soiling agency which was being terminated in the interest of the respondent and for reasons of trade. In these circumstances the amount was expended wholly and exclusively for the purpose of the business and, as such, was admissible as a deduction as revenue disbursement. The mere fact that this amount in the hands of the selling agent is treated as a capital receipt, it does not follow that the payment may not be revenue payment from the point of view of the payer. Cases referred to : Atherton v. British Insulated Helsby Cables Ltd. [(1924) 10 TC 155]; Anglo Persian Oil Co. Ltd v. Commissioner of Income Tax (1933) 1 ITR 129; Commissioner of Income Tax v. Shaw Wallace & Co. (AIR 1932 PC
1109 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
138); Commissioner of Income Tax v. Chandulal Keshavlal & Co. [(1960) 38 ITR 601]; Commissioner of Income Tax v. Leyland Ltd. (1971) PTD 674; (1972) 86 ITR 549 (S.C.) and Henderson Maado-Kind Robinson & Co. Ltd. (22 TAX Cases 97).
Khairpur Textile Mills Ltd., Karachi v. Commissioner of Income Tax, Karachi – [1978] 38 TAX 120 (H.C.Kar.) 1513.
Interest paid on unpaid purchase price in terms of the sale agreement, held that payment of interest is separate from the principal amount due and should be allowed as expenditure, laid out or expended wholly and exclusively for the purpose of business.
Upon a construction of the Deed of Sale, it seems to us clear that as simple interest at 3-1/2% per annum was payable on the unpaid balance of the purchase price, it is to be treated separately from the principal amount due. The submission of the learned counsel for the Commissioner, therefore, does not seem to hive any force that interest paid was to be treated as part of the balance of the purchase price, or even as extra payment for acquiring the capital asset. It was not in dispute that the petitioner was carrying on the business in the year of account in which the interest amount was paid Paragraph 4 (b) of the Deed of Sale provided that the applicant-company recognised the vendor‟s lien over the property under sale until the stipulated reminder of the said price with interest was paid by the company. If the applicant had not paid the stipulated interest, it is possible that the business may have been in jeopardy, if the vendor decided to enforce its lien. It is, therefore, clear that the payment of interest was wholly and exclusively incurred as business necessity or business expediency for carrying on the business and as an integral part of the profit making process rather than for acquisition of capital assets of a permanent character. Judicial analysis: Confirmed in (1989) 60 TAX 55 (S.C. Pak.) = 1989 PTD 5. See case no. 1392. Cases distinguished: Bank of Bahawalpur Ltd. v. Syed Muhammad Shies (PLD 1967 Kar. 433) and Metro Theatre Bombay Ltd. v. Commissioner of Income Tax (14 ITR 638). Cases referred to : Bombay Steam Navigation Co. (1953) (Private) Ltd. v. Commissioner of Income Tax (1965) 65 ITR 52 and Commissioner of Income Tax v. Rohtas Industries Ltd. (1968) 67 ITR 783.
1110 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax, Karachi v. New India Assurance Co., Karachi – [1978] 37 TAX 273 (H.C.Kar.) 1514.
Management expenses in excess and in contravention of the maximum prescribed in rule 40 of the Insurance Rules, 1938, held that expenses were incurred wholly and exclusively for the purpose of business and are allowable as business expenditure.
The management excess in excess and in contravention of the maximum prescribed in this behalf under rule 40 of the Insurance Rules could be deemed to have been incurred wholly and exclusively for the purpose of the business under section 10(2)(xvi) and could be allowed as such. The assessing officer is to be guided only by the provisions of section 10 of the Act in determining whether to allow the expenditure or not. There is nothing in rule 6, nor is there any provision its the Income Tax Act, and none his been shown to us, which obliges the assessing officer to accept the percentage of management expense fixed under rule 40 of the Insurance Rules as expenses which are allowable under section 10(2)(xvi) of the Act, and conversely to reject the amount in excess of these percentages, as such. Nor is there any provision in the Act or the Rules, which makes the decision of the Controller of Insurance binding on him, if he has condoned the amount spent in excess of the prescribed limits of rule 40 under the proviso to section 40-C of the Insurance Act. These factors may be circumstances which the assessing officer may take into consideration for reaching his own independent finding whether the excess amounts are expenses of the character allowance under section 10(2)(xvi) of the Act. Cases referred to: Commissioner of Income Tax (Central), Karachi v. Mercantile Fire and General Insurance Company Pakistan Ltd,. Karachi (Civil Ref. No. 31 of 1966); Raj Waollen Industry v. Commissioner of Income Tax (1961) 43 ITR 36 and The Law and Practice of Income Tax, 1975 Edition, by Kangs and Palkivala.
Commissioner of Income Tax, Karachi v. Dalmia Cement Ltd., Karachi – [1969] 20 TAX 15 (H.C.Kar.) 1515.
Expenses incurred in defending the employees against criminal prosecution arising out of ordinary course of business are expenses incurred to maintain good name of assessee and goodwill of employees and are wholly and exclusively for the purposes of business and admissible deduction.
1111 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
The assessee, a public limited company, claimed in its assessment, allowance of expenses incurred by it on defending its Manager and Sales Manager who were prosecuted on the charge of selling cement in the black market under section of the Essential Commodities (Control of Distribution) Order, 1956. The Income Tax Officer rejected the claim on the ground that the expenditure could not he regarded as having been incurred wholly and exclusively for the purpose of the business. The Appellate Tribunal held that the amount should be admitted to deduction because it was wholly and exclusively incurred for the purpose of business It took the view that it was not the company but the Manager and the Sales Manager who were faced with possibility of conviction and imposition of the prescribed penalty, and, therefore, the expenses that the company incurred on the defence of these two employees were not for the purpose of saving itself but for maintaining its good name and retaining the goodwill of the employees without which the business could not be successfully carried on. Affirming the Tribunal‟s order the High Court: Held, that on the facts and the circumstances of the case the Tribunal was right to holding that the legal expenses were incurred wholly and exclusively for the purpose of the business of the assessee, and were thus deductible under section 10(2)(xvi) of the Act. The position which emerges from the foregoing discussion is that in order to claim an allowance under item (xvi) of sub-section (2) of section 10 of the Act in respect of legal expenses incurred on a criminal prosecution, it must be shown that the prosecution arose out of acts preformed in the ordinary course of business of the assessee and that the primary purpose of the expenditure was not to save the assessee himself from the consequences of the prosecution but to safeguard the good name of the business and to protect and preserve the goodwill of the employees of the assessee, without which no business could be carried on successfully. We are in respectful agreement with the view expressed by the Indian Supreme Court that the deductibility of such expenses cannot be made dependent upon the success or otherwise of the defence, for the primary test is whether the expenses were incurred wholly and exclusively for the purpose of the business. Such a test can be applied independently of the outcome of the criminal proceedings. Now, in the instant case, the assessee incurred the expenses in question on defending two of its employees who were prosecuted for acts arising out of the ordinary course of the business of the assessee, and the primary purpose of incurring the
1112 Section 23(1)(xviii)
Income Tax Digest.
expenses was to protect the good name of the business and to preserve the goodwill of the employees. The assessee being a public limited company was not itself faced with any penal consequences as a result of the prosecution. On these facts and circumstances the Tribunal was right in holding that the legal expenses were incurred wholly and exclusively for the purpose of the business of the assessee, and were thus deductible under section 10(2)(xvi) of the Act. Cases referred to : J.B. Advani & Co. Ltd. v. Commissioner of Income Tax [AIR (37) 1950 Bom. 297] Commissioner of Income Tax v. Hirjee [AIR 1953 S.C. 324]; Haji Aziz Abdal Shakoor Bros. v. Commissioner of Income Tax [(1961) 3 TAX 208 (S.C.)]; Yasin (East Pakistan Limited) v. Commissioner of Income Tax [(1968) 17 TAX 126]; J.N. Singh & Co., Private Ltd. v. Commissioner of Income Tax [1966] 60 ITR 732] and Commissioner of Income Tax v. Gasper & Co. [1940] 8 ITR 100].
Yasin (East Pakistan) Ltd., Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca – [1968] 17 TAX 126 (H.C.Dacca) 1516.
Penalty paid on behalf of the importer for contravention of law are not wholly and exclusively for the purpose of the business.
The assessee, a private limited company, was dealing in cloth and other kinds of goods. It purchased from an importer certain goods on forward contract basis. Subsequently, the assessee entered into „Indemnity Bond‟ with the importer whereby the goods were agreed to be sold by the importer „to the assessee on the express agreement that in addition to the price the assessee would pay all the duty required to be paid by the Customs authorities. In terms of this Indemnity Bond the assessee paid on behalf of the importer demurrages and penalties imposed by the Customs authorities on the importer for contravention of the Customs Regulations. In making the assessment the Income Tax Officer disallowed the expenses on account of demurrages in taking delivery of the goods and the customs penalties paid by the assessee on behalf of the importer. On appeal by the assessee the Appellate Assistant Commissioner allowed the expenses on account of demurrages but upheld the order of the Income Tax Officer to regard to the customs penalties holding that the amounts paid as penalty could not be deducted. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner observing that “though under original contract the assessee was not to pay any penalty that might be imposed for contravention of the Sea Customs Act yet he had voluntarily entered into an agreement with the Eastern Rice Syndicate (the importer) to pay penalty if imposed by the Customs authority. The payment was, we should say, a voluntary payment
1113 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
which the assessee was competent to make but this cannot be regarded as an expense which is incidental to trade”. Affirming the Tribunal‟s order: Held,
that in the facts and circumstances of the case the payment made by the assessee was not wholly and exclusively for the purposes of the business.
Cases referred to: Haji Aziz Abdul Shakoor Bros. v. Income Tax Commissioner [1961] 3 TAX 208 (S.C.); British Insulated and Helsby Cables Ltd. and Atherton [1926] A.C. 205; Commissioner of Income Tax v. Bai Shirinbai K. Kooka [1956] AIR Bom. 586: Lord‟s Dairy Farm Ltd., v. Commissioner of Income Tax [1955] AIR Bom. 352; Sir Kikabhal Premchand v. Commissioner of Income Tax [1953] AIR S.C. 509; Eastern Investment Ltd., v. Commissioner of Income Tax [1958] AIR (S.C.) 278 and Commissioner of Inland Revenue v. Alexander Von Glehn Co. Ltd., (2 K.B. 553).
Commissioner of Income Tax, Karachi v. Eddie Investment Company Limited – [1967] 15 TAX 254 (H.C.Kar.) 1517.
Tribunal‟s finding that some of the expenses claimed were wholly and exclusively connected with the business held justifiable.
The assessee, a limited company, derived income from property and shares from five firms. In making the assessment the Income Tax Officer reduced the expenditure claimed by the assessee to Rs.2,400 only on the ground that, strictly speaking, no expenses were allowable because the assessee was not carrying on any business against which the expenses could be claimed. When the matter went up to the Appellate Tribunal it disallowed, out of the expenses claimed, a part of salary of the rent collector and conveyance allowance to the extent of fifty per cent of the expenditure which were found to be in respect of private and personal use of the car by the directors of the company. The rest of the expenses claimed were allowed by the Tribunal on the ground that these were wholly and exclusively connected with the business of the assessee-company. Against this order the department sought reference application under section 66(1) of the Income Tax Act on the question whether there was evidence before the Tribunal to hold that the entire expenses were incurred by the company for purposes of business which had no independent business except shares in the firms. The Tribunal rejected the application holding that the question of law formulated did not arise out of its order On further reference under section 66(2) of the Act the High Court affirming the order of the Tribunal: Held,
that the Tribunal was perfectly justified to dismiss the application. The question raised by the department cannot
1114 Section 23(1)(xviii)
Income Tax Digest.
be said to arise from the order of the Tribunal. The Tribunal has nowhere held that the entire expenses claimed in respect of the year under consideration was incurred by the company for purposes of its business.... It is only in respect of the rest of the expenses that it came to the conclusion that it was wholly and exclusively connected with the business of the respondent. Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 202 (PC) 1518.
Whether expenditure is laid out wholly and exclusively for purposes of business, is to be determined on principles of commercial trading.
What is „money wholly and exclusively laid out for the purposes of the trade‟ is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly to attend to the true nature of the expenditure, and to ask oneself the question: Is it a part of the company‟s working expenses; is it expenditure laid out as part of the process of profit-earning? Lakshml Narayan Sen & Sons Ltd., – In re [1936] 4 ITR 255 (Cal.) 1519.
The question as to whether an expenditure is laid out wholly and exclusively for business is always a question of law.
Where the Tribunal had held that a certain expenditure was laid out wholly and exclusively for the purpose of the business, and the assessee contended that this being a finding of fact, was binding, it was held that the question whether on the facts found by the Tribunal the amount paid by the assessee was wholly and exclusively laid out or expended for the purpose of the business of the assessee was always a question of law which could be examined by the court in the exercise of its advisory jurisdiction. Case review: Observations in Commissioner of Income Tax v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 were explained by the Supreme Court in Commissioner of Income Tax v. Royal Calcutta Turf Club [1961] 41 ITR 414 by saying that though the question must be decided on the facts of each case, the final conclusion is one of law. _______________
1115 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
PREMIUM PAID ON ANNUAL BASIS
Pakistan Services Ltd. Karachi v. Commissioner of Income Tax (Revision), Karachi – 1993 SCC 1029 = [1993] 68 TAX 49 (S.C.Pak.) 1520.
Legal requirements in certain cases no bar for claiming business losses.
The benefit of clause (xvii) of sub-section (2) of section (10) of the Income Tax Act 1922, is available even if legal requirements were not fulfilled because in such cases the maxim lex non cogit and impossibilia - the law does not compel a man to do that he cannot possibly perform, exists. It is to be noted that the loss of assets had taken place in 1971. Its compulsory acquisition had taken place by the statutory instrument which has come into force in 1972; the recognition of Bangladesh itself had taken place in 1974 having retrospective effect from December 1971. Unless all the three requirements were complete, the assessee could not justifiably lay a claim to the loss nor could comply with the legal provision. The statutory provisions in such circumstances had the effect of retrospectively depriving the assessee of the property and prospectively enabling them to lay claim in respect of them. In these circumstances, the enforcement of legal requirements cannot be insisted upon. _______________
DEVALUATION OF CURRENCY
Commissioner of Income Tax, Companies II, Karachi v. General Tyre & Rubber Company of Pakistan – 1993 SCC 1015 = [1993] 67 TAX 191 (S.C.Pak.) 1521.
Extra cost paid in discharging liability is admissible.
If the assessee has to pay extra amount due to any valid reason such as devaluation of currency in the present case then the larger amount will still be treated as permissible deduction despite the extra cost incurred in discharging its liability. Abbot Laboratories Ltd. v. Commissioner of Income Tax, Central Zone, Karachi – [1989] 60 TAX 75 (H.C.Kar.) 1522.
Extra expenditure incurred due to devaluation of currency is a trading loss and allowable expense.
When the applicants made repayment after the devaluation they had to incur extra expenditure of Rs.28,57,358 for repatriating the same amount of loan in Dollar which they had borrowed. The applicants
1116 Section 23(1)(xviii)
Income Tax Digest.
therefore, claimed this amount as an allowance under section 10 (2)(xvi) of the Income Tax Act. The applicants claimed that the loan was utilised for the stock in trade, and therefore, it was spent for business and any extra amount paid for its repatriation was exclusive for the purpose of business. The Income Tax Officer did not accept this contention and held that the amount which applicants had to pay in excess of what was received in terms of rupees was a capital expenditure. The appeal filed before the Appellate Assistant Commissioner was dismissed. The applicants filed second appeal before the Tribunal which by a majority of two to one dismissed the appeal. However, another learned Member dissented from this opinion and held that the expenditure incurred in connection with the repayment of the loan was an expense allowable under section 10(2)(xvi) of the Act. There is no dispute that the amount was borrowed by the applicants as a loan for the purpose of utilising it in their business. The applicant‟s claim that they have purchased raw material for manufacturing medicine and drugs does not seem to be disputed. Therefore, this amount of loan was not kept by the applicants in tact or converted into a capital asset, but it was utilised for purchasing the raw material. In this process the applicants parted with the money, purchased the raw material manufactured the medicine and put it to sale. This entire process from taking of loan to manufacture and sale of medicine will clearly illustrate that the amount was utilised in business. It was held that the extra payment was made for business purpose, and therefore, the loss suffered due to devaluation of Pakistan currency was a trading loss and an expense allowable under section 10(2)(xvi). In the present case also the loss has been suffered by the applicants in respect of the loan which was taken by the applicants and utilised in purchasing raw material for manufacturing medicines. They are therefore, entitled to the benefits under section 10(2)(xvi). Cases referred to: Oil India Co. Ltd. v. Commissioner of Income Tax [1982] 137 ITR 156; Commissioner of Income Tax v. International (Pvt.) [1982] 137 ITR 184 and Civil Reference No. 25 of 1979 General Tyre and Rubber Co. v. Commissioner of Income Tax (Page 34 ibid).
General Tyre & Rubber Co. of Pakistan Ltd. v. Commissioner of Income Tax, Central Zone, Karachi – [1989] 60 TAX 34 (H.C.Kar.) 1523.
Increase due to devaluation in technical assistance fee paid by a subsidiary to its holding company is an admissible deduction.
The applicant filed its return for the assessment year 1973-74 and claimed deduction of Rs.5,050,055 on account of increase in its liability
1117 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
of technical assistance fee which could not be remitted to its parent company on accrual. The applicant has a Technical Service Agreement dated 26.5.1963 with the Parent Company according to which it has agreed to pay a fee equal to 5% of its annual net sales. The payment was to be made on or before last day of each month without prejudice to the year and adjustment. All payments due to the parent company as technical fee were to be made in U.S. Dollar at the exchange rate prevalent on the due date. The fee which had accrued under the said agreement could not be remitted to the parent company in that year. In the meanwhile Pakistan Rupee was devalued with the result that the applicant‟s liability in respect of unpaid amount of technical fee increased to the extent of Rs.5,050,055 which was deducted in the computation of profit for the year under reference. To correctly appreciate the problem the nature of contract and principles of Private International Law governing such international contracts involving two different currencies has to be clearly understood. First we will deal with the contract itself. As is obvious from the aforestated clauses of the agreement the parent company had agreed to supply technical as well as information and data for successful manufacture and sale of tyres, tubes accessories and repair materials and also to keep the applicant fully informed as to modern manufacturing methods used by the parent company. The applicant was to utilise the technical information, data and methods of manufacturing in its business. For the use of technical information furnished by the parent company, the applicant agreed to pay a fee equal to 5% of its annual net sale. The applicant was to submit immediately after the close of each month, its balance sheet, profit and loss statement and as well as manufacturing and production report. The technical fee was to be paid on or before the last day of each month on the net sale of the preceding month. The applicant was entitled to discount equal to 5% of each fee if payment was made to the parent company in U. S. Dollar on or before the due date of the said payment which would be without prejudice to the year and adjustment. Within 60 days after the end of each year the applicant was to furnish a detailed report and appropriate adjustment was to be made. According to clause 3 of the agreement the payment was to be made to the Parent company in U.S. Dollar at the rate of exchange prevalent on the due date. Clause 13 provides that if due to exchange or other restriction remittance is not possible in U.S. Dollars then it shall be deposited in the name of the Parent company, the respective U.S. Dollar equivalent at that date in a bank selected by the parent company. These clauses clearly stipulate that the amount equivalent
1118 Section 23(1)(xviii)
Income Tax Digest.
to 5% of the net sale shall be quantified in terms of Pakistan Rupee because the sales are made in Pakistan and the earning of the applicant is in this country. But so far as the liability for payment of this amount is concerned it is not in terms of rupee. It is in terms of U.S. Dollar, at the rate of exchange prevalent on the due date. It further emphasises and contemplates for contingency when due to certain restriction imposed on foreign exchange remittance, the technical fee cannot be remitted to the parent company is in terms of U.S. Dollar whether it is paid monthly, yearly or in a contingency as contemplated by clause 13. If fee in rupee then in cases of contingencies as provided in clause 13 it would have not provided to deposit the money in Pakistan equivalent to U.S. Dollar. Therefore, the agreement contemplates and fixes the liability of the applicant for payment of technical fee in terms of U.S. Dollars. In the present case the applicant was liable to pay technical fee to its parent company in U.S. Dollar. The place of payment has not been mentioned in the agreement, but according to well-recognised principle that the debtor must seek the creditor; the payment should be made at the place of business of the parent company. Therefore, the payment in U.S. Dollar was to be made in U.S.A. This factor itself determines the liability of the applicant to make payment in U.S. dollars. Therefore, the applicant was to pay a determined and ascertained amount of dollar to the parent company at the relevant date in U.S.A. If this payment has not been made then on any future date when the payment is made it should be the same amount of dollar which the parent company was entitled to receive on the due date. The applicant will have therefore, to spend Pakistan rupee for obtaining the determined and ascertained amount of dollar for payment to the parent company. In view of the devaluation of Pakistan currency the ascertained amount of dollar could be remitted only on payment of extra rupee which the applicant will have to spend for the purpose of remittance of technical fee. In the present case the applicant is contractually bound to pay the technical fee is U.S. Dollars. Such payment was made for business purposes and therefore the loss suffered due to devaluation of Pakistan currency was a trading loss. The applicant was thus entitled to its deduction. There can be no cavil with the aforesaid proposition of law. In the present case the assessee is a subsidiary company of its parent company which is in U.S.A. As stated above the agreement between
1119 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
the two parties spells out the area and sphere of technical assistance which is rendered by the parent company. The assistance, designs, and data which are supplied from time to time are necessary for the applicant not only for proper standardising its products but to make improvement from time to time and also to be acquainted with and benefited by the research, experience, expertise and technical knowledge which the parent company acquires in U.S.A. Therefore, the technical fee paid by the applicant is directly and intimately connected and wholly related to the business of the applicant. If the agreement is revoked or terminated then the applicant will be deprived of the assistance necessary for a better and proper manufacture of its products. From the various clauses reproduced above it is clear that in case of non-payment the parent company can terminate the agreement. The termination of the agreement is bound to affect the applicant adversely. Therefore, any loss caused or extra expenses incurred in payment of technical fee would be wholly and exclusively for the purpose of the business. Cases referred to: Commissioner of Income Tax, North Zone, West Pakistan, Lahore v. Khanewal Oil Mills Ltd., Khanewal [1962] 6 TAX 66; Radio Picture Ltd. v. Commissioner of Inland Revenue 22 T.C. 106; British Sugar Manufacturing Ltd. v. Harris (Inspector of Taxes) [1939] 7 ITR 101.
Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Khanewal Oil Mills Ltd., Khanewal – [1962] 6 TAX 66 (H.C.Lah.) = 1962 PTD 611 = 1962 PLD 821 1524.
Pakistan company supplied goods to parties in India and was entitled to receive contractual amount in Pakistan currency held that due to devaluation of Indian currency corresponding loss is not a trading loss.
In the account year ending 30th September 1949 the assessee, a limited company, supplied cotton-seeds to two parties in India for a total sum of Rs.33,694. Under the mercantile system of accountancy, which the assessee observed, the said sum was entered in its income, although no payment was made. On the 19th September 1949 the Indian Government devalued its currency and in consequence of it the assessee showed a trading loss of Rs.10,295 in respect of its assessment year 1950-51. The outstandings were not remitted by the Indian parties to the assessee until the income for the relevant year was assessed to tax on the 19th October 1950. The Income Tax Officer refused to accept the claim of the assessee that the amount of Rs.10,295 was a trading loss or bad debt, deductible from the total income. Being unsuccessful before the Appellate Assistant Tribunal
1120 Section 23(1)(xviii)
Income Tax Digest.
The Tribunal accepted the claim on the ground that devaluation had adversely affected the realizable value of the company‟s dues from its debtors in India and the difference was accordingly a business loss. On a reference by the Department, the High Court reversing the order of the Tribunal: Held, that (i)
the Indian parties who purchased cotton-seeds from the assessee are bound to tender the sum of Rs.33,693/12 in such currency notes as are legal tender in Pakistan, viz., the form in which such payment was intended to be made or shall be presumed to have been made by The parties when the buyers incurred the obligation to pay to the assessee the aforementioned sum in Pakistan currency regulated by the municipal law of Pakistan whose unit of account is in question; and
(ii)
if at the close of the year the Indian currency was devalued it did not result in any trading loss to the assessee, because the buyers were under legal obligation to pay the full amount of sale price to them in units of account, i.e., currency which was legal tender at the time when payment became due.
In the course of the judgment Yaqub Ali, J., observed that: “If
the Indian buyers are not liable to pay the full sum of Rs.33,693-12-0 in Pakistan currency but to remit that sum from India, which on conversion will result in a loss of Rs.10,295 then undoubtedly it is a trading loss permissible for deduction under section 10 of the Income Tax Act. On the other hand, if it is the right of the assessee to receive in Pakistan the contractual amount of Rs.33,693,12-0 in Pakistan currency, then the corresponding loss will be that of the Indian over and above the sum of Rs.33,693-12-0 for which they had purchased cotton-seeds from the assessee for the reason that before the payment could be arranged their Government devalued their currency.”
CASES RELIED ON - Pyrmont Ltd. v. Schott [1939] AC 145, Perry v. Equitable Life Assurance Society [1929] 45 TLR 468, Re Chesterman‟s Trusts [1923] 2 Ch. 466 (Courts of Appeal) and Ottoman Bank v. Chakarian 1938 AC 260 (PC).
1121 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Cases relied on: Pyrmont Ltd., v. Schott (1939) A C 145; Perry v. Equitable Life Assurance Society (1929) 45 TLR 468; Re Chesterman‟s Trusts (1923) 2 Ch. 466 (Court of Appeals) and Ottoman Bank v. Chakarian 1938 A C 260 (P.C.). _______________
“PENAL INTEREST AND THE PENALTY”, MEANING OF
Sui Southern Gas Company Ltd. v. Commissioner of Income Tax, Companies-V, Karachi – [2001] 83 TAX 113 (S.C.Pak.) 1525.
Compensation paid for late payment is not “fine” or “penalty”.
Penalty is to be levied or a fine is to be imposed on account of any criminal infraction / violation of the provision of law but in the instant case there was no criminal violation of any legal provision. In the instant case interest/compensation for delayed payment has been provided in the statute as well as in the agreement, therefore, it may be non-compliance with contractual obligations on the part of the petitioner to make additional payment as interest or compensation for late payment, but it could not be said to be violation or infraction of criminal law, therefore, such payment cannot be termed as a penalty or penal interest, having regard to the fact that payments were made for the purpose of carrying on business to enable the petitioner to carry on and earn profit in business, and if the payment had not been made the petitioner could have suffered losses. These payments and disbursements made by the petitioner were on account of commercial expediency to facilitate carrying on its business. These were essentially expenses for the purpose of business of the petitioner, as such these could not be termed to be penalty or penal interest or fine, hence petitioner would be entitled to deductions under section 23 as expenditures as laid out or expended wholly or exclusively for the purpose of business. We are fortified in our view by the precedent cases cited in paragraph 5 of the judgment. The decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal are based on concurrent findings of facts. Evidently there is no misreading or non-reading of evidence. No inherent legal infirmity has been pointed out. There being no violation of settled principles of law arising out of the orders passed by the two forums below, no interference was called for by the High Court in appeal under section 136 of the Income Tax Ordinance, 1979. Resultantly the points formulated for circumstances converted into appeal and the impugned order passed by the High Court is set aside. Consequently appeal is allowed.
1122 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax, Companies-1, Karachi v. Premier Bank Limited, Karachi and another – [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213 1526.
Penalty paid for violation of banking laws by banks is not allowable expenditure.
Revenue expenses incurred by the assessee wholly and exclusively for the purpose of his business can legitimately be claimed by him as an allowable deduction under section 10(2)(xvi), Income Tax Act, 1922 but expenditure incurred as penalty or fine paid on account of infraction of law cannot be permitted as expenditure laid out wholly or exclusively for the purpose of the business of the assessee. However, in case of expenditure which, although has been incurred by the assessee on account of infringement of a provision of a statute, but is not in the nature of penalty, the question whether such expenditure is admissible under section 10(2)(xvi), or not, would depend upon the circumstances of each case. Case referred: Messrs General Tyre and Rubber Co. v. Commissioner of Income Tax 1986 PTD 52, Commissioner of Income Tax, Lahore Zone, Lahore v. Punjab Oil Expeller Co., Lahore 1979 PTD 437, Commissioner of Income Tax, Companies-II, v. Messrs General Tyre and Rubber Company of Pakistan Ltd. 1993 PTD 383, Radio Picture Limited v. Commissioner of Inland Revenue 22 Tax Cas. 106, Commissioner of Income Tax v. Messrs Alfa Insurance Co, Ltd., PLD 1981 SC 293, Beecham Pakistan Ltd. v. Commissioner of Income Tax 1995 PTD 577, Commissioner of Income Tax, Bombay City v. Jagannath Kissonlal [1961] 41 ITR 360.
City Bank N.A., Karachi v. Commissioner of Income Tax, Central Zone-C, Karachi – [1994] 70 TAX 159 (H.C.Kar.) 1527.
Penal interest charged by the State Bank of Pakistan for bursting the credit ceilings under section 25 of the Banking Companies Ordinance, 1962 is an admissible expense.
Term “penalty” according to the Black‟s Law Dictionary is an elastic term with many differentiations of meaning. It involves an idea of punishment corporeal or pecuniary, civil or criminal, although its meaning generally is confined to pecuniary punishment. There cannot be two opinions about such meaning of the term. But in order to understand the real import of a term in a statute it is necessary to examine the statute itself as an aid to interpretation. The “penal interest” and the penalty” under Banking Companies Ordinance can be imposed under section 36(4) (substituted by Ordinance 57 of 1980) of the State Bank of Pakistan Act, 1956.
1123 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Careful examination of the two terms expressly used in two separate sub-clauses of subsection (4) of section 36 of the State Bank of Pakistan Act. 1956 indicates that these are two different terms and the method of calculation of such amounts that can be recovered are also different. It, therefore, indicates that even the legislatures intended to use these two terms with different meaning. Although both the “penal interest and the penalty” charged under the law is intended to deter the banking companies from committing violations of the directions contained in section 25 of the Banking Companies Ordinance, still both terms carry different meaning. We are, therefore, of the opinion that the penalty can only be imposed under section 25(3)(b) of the Banking Companies Ordinance read with section 38(4) of the State Bank of Pakistan Act, 1956. In the circumstances of the present cases, the action has been taken by the State Bank of Pakistan under section 36(4)(a) of the State Bank of Pakistan Act, 1956. It cannot be said that any penalty has been imposed on the banking companies. It may also be pointed out that the transactions made by the banks were admittedly integrally connected with carrying on of their normal banking business entitling them to earn more profits and consequently pay an increased income tax. The amount paid as penal interest can even be computed under section 10(1) of the Income Tax Act, 1922. Cases referred to: Central Bank of Netherland and 2 others v. Commissioner of Income Tax Central, Karachi (1991) 63 TAX 149 (S.C.Pak.) = (1991 PTD 687); Grindlays Bank Ltd. Karachi v. Commissioner of Income Tax Central, Karachi (1985) 51 TAX 102 (H.C.Kar.) = (1985 PTD 329); General Tyres and Rubber Co., Pakistan v. Commissioner of Income Tax, Central, Karachi (1985) 52 TAX 146 (H.C.Kar.) = (1986 PTD 52) and (1971) 79 ITR 493. Case review: OVERRULED by the Supreme Court of Pakistan in [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213.
General Tyres and Rubber Co., Pakistan v. Commissioner of Income Tax (Central), Karachi – [1985] 52 TAX 146 (H.C.Kar.) = 1986 PTD 52 1528.
Penalty paid in lieu of confiscation of goods is not allowable expense.
The assessee is a private limited company which carries on business of manufacture and sale of tyres and tubes. The company imported certain nylon fabrics for which no licence had been obtained. When the goods arrived the same were confiscated for lack of such licence. However, in order to obtain delivery of such goods the assessee agreed
1124 Section 23(1)(xviii)
Income Tax Digest.
to pay a penalty of Rs.2,91,000/-. After realisation of the goods, the assessee succeeded in obtaining an import licence for the goods and consequently the amount of penalty was reduced to Rs.1,16,400/-. Besides this amount, the assessee had also to pay certain demurrage and duties etc, and along with this amount such amounts totalled Rs.2,06,823/-. All these amounts were debited to the trading account by the assessee but disallowed by the Income Tax Officer for the reason that such expenditure was not incurred wholly and exclusively for the purpose of the assessee‟s business. The penalty paid by the assessee, no doubt, was not of a personal nature and was imposed on goods which were imported in connection with and for the purpose of the assessee‟s business but we are still of the view that payment of such penalty cannot come within the purview of clause (xvi) of section 10(2) of the Income Tax Act because such expenditure cannot be treated as expenditure incurred wholly and exclusively for the purpose of the business. The incurring of the expenditure, in the instant cases was not necessitated by the business of the assessee but by his conduct in importing the goods without a valid import licences. Although the point in issue before the Supreme Court was different, the observations made by it do support the Commissioner‟s case, though indirectly. In the result we would answer the question referred to us in the affirmative. In view of the nature of the points involved, there will be no order as to costs. Cases referred to : Commissioner of Income Tax v. Bannalal Narottamdas & Co. (67 ITR 667) (1970) 21 Tax 331; Govind Choudhury and Sons v. Commissioner of Income Tax (79 PTD 493) = (1973) 27 TAX 168; Commissioner of Income Tax v. S.C. Kothari (82 ITR 794); Commissioner of Income Tax v. Pranlal Kesurdas (49 ITR 931); Commissioner of Income Tax v. R.B. Rangta & Co. (50 ITR 233); Commissioner of Income Tax v. Sree Rajendra Mills Ltd. (93 ITR 122); Commissioner of Income Tax, Central Karachi v. Alpha Insurance Co. Ltd. and another (PLD 1981 S.C. 293) = (1981) 44 TAX 1; Raja Wollen Industries v. Commissioner of Income Tax (43 PTD 36); Indian Aluminium Co., Ltd. v. Commissioner of Income Tax (79 ITR 514); Commissioner of Income Tax v. Mihir Textile Ltd (104 ITR 167) and Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income Tax (41 ITR 350). _______________
1125 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
LIQUIDATED DAMAGES ARE ALLOWABLE EXPENDITURE
Commissioner of Income Tax, Karachi v. Instruments Krafts (Pvt) Ltd. – [1995] 71 TAX 218 (H.C.Kar.) 1529.
Liquidated damages are allowable expenditure.
The payment under consideration was made not as a penalty or as damages for breach of contract, but merely in fulfillment of the condition agreed to between the parties enabling the assessee to fulfill the contract and earn profits therefrom upon making the payment, though it was described as liquidated damages, it was payment directly connected with the business carried only by the assessee and was permissible deduction under section 10(2)(xvi) of the Income Tax Act, 1922. Since in the present case the deduction claimed by the respondent was a payment directly connected with the business carried on by the respondent, we are clearly of the view that the same was permissible under section 10(2)(xvi) of the Income Tax Act, 1922. Case applied: Central Trading Agency v. Commissioner of Income Tax [1975] 32 TAX 104.
Bayer Pharma Ltd., Karachi v. Commissioner of Income Tax ‘A’ Range, Karachi – [1993] 68 TAX 184 (H.C.Kar.) 1530.
If the assessee treated the foreign exchange involved as a part of revenue account, it would be an admissible item in trading expenses but if the foreign exchange was treated as a capital asset the loss would be of capital nature.
If the applicant had treated the foreign exchange involved as a part of revenue account, it would be an admissible item in trading expenses but if the foreign exchange was treated as a capital asset the loss would be of capital nature. _______________
EXPENSES INCURRED TO RAISE CAPITAL OR OBTAIN LOAN OR RECOVER DEBTS, ETC.
Commissioner of Income Tax (East), Karachi v. Volkmar Roeddes – [1984] 49 TAX 110 (H.C.Kar.) 1531.
“Incurred”, meaning of.
In the context in which the expression “incurred” occurs, it entirely means “incurred or to be incurred”. In this view of the law the question referred to us is answered in the affirmative.
1126 Section 23(1)(xviii)
Income Tax Digest.
Ciba Laboratories (Pakistan) Ltd. v. Commissioner of Income Tax (East), Karachi – [1984] 50 TAX 26 (H.C.Kar.) 1532.
Assessee-company an agent of foreign company paid expenses of journey and stay in Pakistan of the expatriate technicians of foreign company for which no agreement between the assesseecompany and the foreign, held that expenses so incurred, are not admissible as business expenditure.
Certain employees of the Swiss Company had come to Pakistan in connection with the import of Demeanor, pertained to the business of Swiss Company, and the applicant spent a sum of Rs.36,285, on the stay of those expatriates and claimed it as a business expenses. The Income Tax Officer did not allow that expenses and Appellate Tribunal also agreed with the Income Tax Officer and observed that it did not find any evidence that there was an agreement between the parent Company (Swiss Company) and the Company in Pakistan that the expenses on the visit of expatriates will be borne by the Pakistan Company. We agree that the applicant has not been able to substantiate that this was an expense for the business of the Applicant Company solely, inasmuch as that it was in the interest of both Pakistan Company as well as the Parent Company that Demeanor should be imported properly in Pakistan and therefore, the Parents Company was as much responsible for the expenses of the expatriate as the applicant. In fact the interest and stakes of Parent Company were for higher than that of the Applicant a Company and, therefore, the liability of the Company in respect of these expenses could be established only upon production of an agreement between Applicant Company and the Parents Company in this behalf. We are conscious that the agreement could be in the form of correspondence between the two companies but even that has not been done and inference is being drawn by the Applicant Company that since they were getting 4% commission, therefore, they were bound to pay the expenses of the expatriate. We do not find any justification in that inference and we are of the view that some sort of evidence was necessary to establish the contractual liability of the Company to pay the expenses of the expatriate. Another expense of Rs.36.516 was disallowed. The applicant had paid that amount as income tax liability of Mr. H. Leuenberger as tax on the salary which that gentleman received for assessment year 196465. The basis of rejection was that tax was deductible at source in the previous year and as such could not be allowed as deduction for
1127 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
assessment of the appellant for year under consideration. Mr. Sharif has not been able to show that this was not a correct position. Another argument relied upon by the Tribunal was that the concerned gentleman was an employee of the Head Office in Basel, and therefore, the taxes should be borne by the Swiss Company. The finding was that this employee was paid by the Head Office and that finding has not been challenged to be either arbitrary or unfounded. If the salary is paid by the Head Office then one cannot understand the reason as to why tax on that salary should be paid by the Company in Pakistan. If there had been an agreement to that effect entered into by the Parent Company and the Pakistan Company then of course it would have been a difficult position and in that case possibly the applicant could claim that they were liable for the income tax liabilities of the gentleman concerned, particularly in view of the fact that the Tribunal has held that the gentleman concerned was in Pakistan on a legitimate business of the Company. Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1942] 10 ITR 214 (PC) 1533.
Sir
Expenses on litigation arising out of a contract of loan would be admissible expenditure in money-lending business.
The assessee, carrying on money-lending business, had advanced a loan of Rs.10 lakhs to a company, and on company‟s default had obtained a decree against it. The litigation expenses were allowed as business expenditure. Later, the company initiated proceedings against the assessee for non-performance of the contract of loan alleging fraud, conspiracy, etc. The litigation expenses on these proceedings were disallowed on the ground that these proceedings had nothing to do with his money-lending business but had been instituted against him not because he was a money-lender but because, he was a wealthy nobleman and was, therefore, liable to attack by unscrupulous persons to relieve him of part of his surplus cash. The question was whether the expenses were rightly disallowed. Held that both suits were based on the same transaction of loan. The allegations of fraud, conspiracy, etc., were merely the extravagant embroidery which is commonly found in such actions they did not alter the main character of the action as being directed against the assessee as the money-lender, and the hitters‟ defence of the action was just as essential for the full protection of his rights as the creditor in the loan, as was his suit for the recovery of the loan. It has to be remembered
1128 Section 23(1)(xviii)
Income Tax Digest.
that money is the stock-in-trade of a money-lender. The expenditure was, thus, deductible. Case review: Decision of the Patna High Court in Commissioner of Income Tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1940] 8 ITR 52 affirmed. _______________
EXPENDITURES ON RUNNING SCHOOL FOR CHILDREN OF EMPLOYEES
Attock Oil Co. Ltd. Rawalpindi, v. Commissioner of Income Tax, Rawalpindi Zone – 1981 SCC 557 = [1982] 45 TAX 1 (S.C.Pak.) 1534.
Expenditures allocable on running school for children of employees are allowable.
The common question in these petitions is whether the petitioner‟s case falls under section 10(2)(xvi) of the Income Tax Act, 1922 [relevant to section 23(1)(xviii), of Income Tax Ordinance, 1979]. And, for the purpose of these petitions it is sufficient to state that the petitioner has been running a school and subsidising two other schools for the benefit of the children of its employees. We are also informed that this was in order to meet a demand of the employees, who had threatened to raise an industrial dispute. In this background, the petitioner claimed the right for the assessment years 1955-56 to 196566 to set off the expenses thus incurred on its three schools against the income for the aforesaid years under section 10(2)(xvi) of the Income Tax Act. The Income Tax Officer rejected this claim on the ground that the expenses could not be allowed, because they fell under section 10(2)(xvi)(a). The petitioner challenged these orders before the Income Tax Appellate Tribunal, which accepted its contention. Therefore, the department referred the question to the Lahore High Court and a Division Bench of the Lahore High Court after examining the case law carefully (we say so with respect) held that the petitioner was not entitled to the benefit of section 10(2)(xvi) of the Income Tax Act. Mr.Zafar challenged the validity of this view and the question whether the petitioner‟s claim fell under section 10(2)(xvi), as claimed by it, or is hit by the provisions of section 10(2)(xvi)(a), as held by the learned judges, requires further examination. Accordingly, we grant leave. _______________
1129 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
LOSS OF STOCK-IN-TRADE / SPARES, ETC.
Australasia Bank Ltd., Lahore v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore – [1962] 6 TAX 7 (H.C.Lah.) = 1962 PTD 575 = 1962 PLD 779 1535.
Cash and ornaments (pledged) constituting stock-in-trade and their loss by theft held incidental to trade and deductible.
The assessee, a bank, suffered a loss of Rs.2,99,872 in cash and ornaments, pledged with it, on account of theft. The assessee in its assessment claimed to deduct the amount of loss from its income and profits under section 10(1) of the Income Tax Act. Although the theft was admitted and it was also conceded that the money and ornaments that were lying in the bank were the assessee‟s stock-in-trade, and their theft was a trade loss yet the loss was not allowed by the Income Tax Officer and on appeal by the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal on the ground that it was not incidental to the conduct of the assessee‟s business. On a reference: Held, that: (i)
it has been held by the Income Tax authorities that the cash and the ornaments constituted the assessee‟s stock-intrade and were a trade loss. They were stolen from the premises of the bank by means of theft or robbery at night and in the circumstances of the case it must be held that the loss was connected with and incidental to banking business;
(ii)
whether the loss is incidental to the business must be decided with reference to the circumstances of a particular case. But ordinarily, a trading loss or a loss of stock-intrade is connected with business and is incidental to it; and
(iii) the cases in which the stock-in-trade has been converted into cash or capital or the cash has been appropriated by the assessee to his private use, stand on a different footing. The loss is not of the stock-in-trade. Capital loss is not loss of stock-in-trade and money appropriated to private use no longer remains the stock-in-trade. Cases relied on: Strong & Co of Ramsey Ltd. v. Moodfield (1906) A.C. 448. Cases distinguished: Bansidhar Onkarmal v. Commissioner of Income Tax (17 ITR 247); S. P. S. Ramaswami Chettiar and others v. Commissioner of Income Tax (4 I.T.C. 438); Mulchand Hiralal v. Commissioner of Income Tax (6 ITR 151) and L. N. Gododie & Company In re.
1130 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax v. Wali Bhai Qamaruddin – [1967] 15 TAX 145 (H.C.Kar.) 1536.
Assessee purchased shares from Government at higher than the market rate of shares, loss arising from transaction is held to be admissible deduction.
The assessee, a private limited company, was dealing in hosiery, stocks and shares. The return filed by the assessee showed debit of Rs.23,03,900 in the trading account as purchase price of 23,039 „A‟ class shares of Messrs. Valika Textile Mills Ltd. from the Sind Government at the face value of Rs.100 per share. During the material period 6000 shares were sold at Rs.86 per share and the balance shares left in the closing stock was shown at the value of Rs.86 annas 8 per share. The trading loss thus shown in the return was Rs.3,13,369. The Income Tax Officer found that the ruling value of the shares in the open market, at the material time, was Rs.75 8/- per share. He, therefore, held that Rs.5,64,455 were paid by the assessee to the Government ex gratia and as such there was no such loss as claimed. Accordingly the Income Tax Officer reducing the purchase price of the shares disallowed Rs.5,64,455 from the trading loss. When the matter went up to the Appellate Tribunal it allowed as admissible deduction the entire loss claimed holding that “the question before the assessing authorities was what price was in fact paid by the purchaser, and once they were satisfied that the price of Rs.100 per share was actually paid it was not legally competent to them to look into the considerations which weighed for the payment of price higher than the market price.” On a reference: Held, that: (i)
it is inconceivable in the extreme to think that the amount actually paid by the assessee to the Government of Sind in excess of the ruling market value of the share, will not be treated as trading loss of the assessee especially in view of the fact that there is no dispute about the fact that the amount in excess of the ruling market rate of the share was actually paid. It is not possible to issue directions to the contracting parties not to pay more than the actual value of the property. It is for the purchaser to pay whatever he chooses for the things he purchases; and
(ii)
the question sought to be referred to the High Court does not arise out of the order of the Tribunal. In the first place the question whether the amount was paid to the Sind
1131 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Government ex gratia was not agitated before the Tribunal and in the second place the assessee never asked for the excess amount paid by them on shares as deduction under section 10(2) of the Income Tax Act. Case relied on: East Khas Kharia Colliery Co. Ltd., v. Commissioner of Income Tax [1943] 11 ITR 299.
Motamal Jehumal v. Commissioner of Income Tax – [1947] 15 ITR 155 (Pat.) 1537.
Loss of stock-in-trade due to fire is allowable as a trading loss.
Loss of stock-in-trade due to fire is a trading loss on ordinary principles of commercial accountancy irrespective of the fact whether any part of it is insured, or any sum is received from the insurance company, if it is insured. Hira Lal Phoolchand v. Commissioner of Income Tax – [1947] 15 ITR 205 (All.) 1538.
Question as to the extent of stock-in-trade lost due to white ants, is a question of fact.
The question as to the extent to which the stock-in-trade was lost due to white ants, is a question of fact. _______________
LOSS OR EMBEZZLEMENT OF CASH / ROBBERY OR THEFT
Commissioner of Income Tax, Karachi v. Shabbir & Company, Karachi – 1966 SCC 260 = [1966] 13 TAX 197 (S.C.Pak.) 1539.
Loss on account of robbery is allowable expenditure.
The loss on account of robbery is incidental to the carrying on of the normal business of the assessee and, therefore, fulfils the tests of clause (xviii) of section 23(1). It is an allowable expense. Commissioner of Income Tax v. Shabbir & Company – [1963] 7 TAX 202 (H.C.Kar.) = 1963 PTD 395 = 1963 PLD 481 1540.
Accountant was taking money to Customs House to pay off certain dues was robbed on way by driver held that loss was incidental to business and allowable deduction.
Assessee‟s accountant went to the Customs House to pay a sum of Rs.15,221 on account of custom dues of sales tax. He was driven by the
1132 Section 23(1)(xviii)
Income Tax Digest.
driver of the assessee, who at the point of knife robbed him of the money and absconded. A sum of Rs.1,424 was spent by the assessee on tracing the driver. In his assessment the assessee claimed a sum of Rs.16,645 (Rs.15,221 + 1,424) as deduction under section 10(1) of the Income Tax Act. The Income Tax Officer disallowed the claim. On appeal the Appellate Assistant Commissioner allowed the deduction claimed on the ground that the loss had been incurred in the normal course of business, and thus it was a trading loss. When the matter went up to the Tribunal it reversed the order of the Appellate Assistant Commissioner holding that the loss by robbery was not incidental to the business of the assessee. On a reference; Held, that (i)
the act of the accountant in taking the money for payment of custom dues was wholly connected with the functioning of the trade of the assessee. The assessee could not carry on his business unless he was able to clear the goods from the customs which was the stock-in-trade. The loss of Rs.15,221 that the assessee sustained was incidental to the business and could be deducted while computing the profits and gains of the assessee;
(ii)
the sum of Rs.1,424 spent by the assessee in tracing out the driver cannot be said to be connected with the business of the assessee or incidental thereto; and
(iii)
in order that an assessee may claim a deduction on account of loss suffered by him in computing the profits and gains of the business, he must establish that the loss was incidental to the carrying on of the business. It is almost impossible to give an incidental to the all comprehensive definition as to when a loss can be said to be business. It would depend upon the circumstances of each case whether the loss that the assessee suffered was so connected with the business as to entitle him to a deduction while computing his profits and gains.
Judicial review : CONFIRMED BY - The Supreme Court of Pakistan in Commissioner of Income Tax, Karachi v. Shabbir & Company, Karachi 1966 SCC 260 = [1966] 13 TAX 197 (S.C.Pak.). Their Lordships observed: “The circumstances of the present case clearly establish that the loss was incurred by dishonest conduct of an employee, in the course of the regular functioning of the firm, and this was a necessary risk. We are, therefore, in agreement with the High Court that a deduction under section 10(1) of the Act of the
1133 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
amount lost by robbery, was eminently justifiable, in the circumstances of the instant case.” Cases referred to: Commissioner of Income Tax v. Chitnavis (59 I.A. 290); Ramaswami Chettiar v. Commissioner of Income Tax (1930) AIR 808 and L. N. Gododia & Co. (1934) 2 ITR 322.
R.B. Bansilal Abirchand v. Commissioner of Income Tax – 6 ITC 318 (Nag.) 1541.
When a shortage in cash is found on making up accounts of the day in a money-lending business.
When a shortage in cash is found on making up accounts of the day in a money-lending business, such shortage is allowable as a business loss because money is the stock-in-trade of the assessee and frequent occurrence of losses of this type cannot be ruled out. L.N. Gadodia & Co. v. Commissioner of Income Tax – 7 ITC 398 (Lahore) 1542.
Where assessee, a piece goods merchant, who was taking deposits on interest from various people and using them in his business, lost a sum in cash in a dacoity perpetrated on his business premises.
The assessee‟s sources of income chargeable to income tax were import and sale of piece goods, commission agency, interest on securities, dividends and property. There was no suggestion whatever on the record that the assessee was at any time engaged in money-lending business as well. The assessee claimed a deduction on account of loss of cash by a dacoity, perpetrated on his business premises. Held that this was the case of an assessee who carried on business in piece goods and for that purpose accepted deposits from various people and paid interest on those deposits, the money being used in the business. No money-lending business was carried on, so that, the money in question would not be the stock-in-trade of such a business. Nor was it expenditure necessary for carrying on the business or for the purpose of earning the receipts. The loss was clearly a loss of capital and no allowance could be made for it, while it was not claimed that it fell within any of the allowances given in section 10(2) [section 22 of the Income Tax Ordinance, 1979]. _______________
1134 Section 23(1)(xviii)
Income Tax Digest.
RATES / TAXES
Commissioner of Income Tax, Rawalpindi v. Attock Oil Company Limited, Rawalpindi – [1975] 32 TAX 57 (H.C.Lah.) 1543.
Expenditure on educational institutions for the education of children and dependents of employees were admittedly not admissible deduction under section 10(2)(xiva) of 1922 Act held that cannot be allowed as business expenditure under section 10(2)(xvi) of 1922 Act.
Sub-section (2) of section 10 of the Act lays down that for the purpose of Income Tax the profits or gains of a business shall be computed after making due allowance for the expenditure incurred under clause (i) to (xviii) enumerated thereunder. Broadly speaking in computing the taxable income deductions from the profits and gains of a business are admissible inter alia for any expenditure on account of the business any rent paid for the premises and its repairs, interest on the borrowed capital; insurance premium; current repairs; depreciation allowance sums paid on account of land revenue, rates and taxes; bonus or commission paid to employees; bad and doubtful debts; any sum laid out or expended on scientific research, educational institutions and hospitals established for the benefit of the employees and their families; any expenditure laid out or expended wholly and exclusively for the purpose of business, etc. etc. These expenditures enumerated in sub-section (2) of section 10 are admissible subject to the conditions laid down in the respective clauses. In our opinion these clauses constitute particular heads of account under which educations are admissible from the profits and gains of a business and for the matter of that each of these forms a separate and a distinct head of account for the purpose of the computation of taxable income of an assessee. Excepting clause (xvi), the remaining clauses are sufficiently specific and restrictive in laying down the limits within which the deductions are permissible. On the other hand the import of clause (xii) is of general nature. It allows for any expenditure laid oat or expended wholly and exclusively for the business. It is a general and a residuary clause as compared to its preceding clauses which are specially designed to allow for certain specified deductions within the limits prescribed by them. The Supreme Court of Pakistan in the Commissioner of Income Tax, East Pakistan, Dacca v. Messrs The Engineers Ltd., Dacca [PLD 1967 S.C. 524] was of the opinion that clause (xvi) was residuary in nature. In the interest of harmonious construction of these clauses it is necessary to apply the rule generalia specialibus non derogant (the general excluded the special). Any other
1135 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
construction would mean that the general and a more comprehensive clause (xvi) will not only be over-lapping but also destructive of most of the other clauses and the limitations laid in them. This can be best illustrated as reference to the instant case before us. In this case the expenses incurred by the respondent-company on educational institutions for the education of the children and dependents of its employees were considered to be inadmissible under the first proviso to clause (xiva), because of the fact that it was charging certain fees from them and the same expenditure cannot be allowed in another form by recourse to clause (xvi). Any other interpretation would, in the final analysis, render most of these clauses almost nugatory and redundant in the presence of this omnibus clause (xvi). On the facts and in the circumstances of this case the Tribunal was not justified in holding that the educational expenses in question incurred by the assessee could be allowed under section 10(2)(xvi) even though they were inadmissible under section 10(2)(xiva) of the Act. Therefore, our answer to the above question referred to the High Court, is returned in the negative. Cases referred to : Commissioner of Income Tax v. Haji Jamal Nur Muhammad & Co. (AIR 1925 Bombay 251); Subodhchandra Popatlal v. Commissioner of Income Tax/Excess Profits Tax, Bombay (1953) 14 ITR 566); N.M. Rayaloo Iyer and Sons v. Commissioner of Income Tax (Excess Profits Tax) (1954) 26 ITR 265); Rathan Singh v. Commissioner of Income Tax (AIR 1926 Madras 462); J.K. Woollen Manufactures Private Ltd. v. Commissioner of Income Tax (1963) 48 ITR 346; Commissioner of Income Tax, East Pakistan v. The Engineers Ltd., Dacca (PLD 1967 S.C. 524); (1967) 16 TAX 81 (S.C.) Shidrao Narayanrao Gumaste Patil v. Muncipality of Athni (AIR 1943 Bombay 21 and PLD 1957 S.C. 217). Case review: See 45 TAX 1 (S.C. Pak.)
Commissioner of Income Tax v. Gurupada Dutta – [1946] 14 ITR 100 (PC) 1544.
Rate imposed by State Government on building used for business is deductible.
The rate imposed under the provisions of the Bengal Village-SelfGovernment Act, 1919, on a person occupying a building within the Union, and using the same for the purpose of business is an allowable deduction in computing the profits of the business under section 10 of the 1922 Act [section 22 of the Income Tax Ordinance, 1979]. Case review: Decision of the Calcutta High Court in Commissioner of Income Tax v. Gurupada Dutta is affirmed. _______________
1136 Section 23(1)(xviii)
Income Tax Digest.
REASONABLENESS OF REMUNERATION
Ata Hussain Limited v. Commissioner of Income Tax, East Pakistan Dacca – 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.) 1545. Remuneration to managing director can neither be disallowed nor can be curtailed. The most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is “wholly and exclusively for the purpose” of the business of the Company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income Tax Department to say that the expenditure is not reasonable. Ata Hussain Limited v. Commissioner of Income Tax, East Pakistan Dacca – 1969 SCC 335 = [1970] 21 TAX 1 (S.C.Pak.) 1546. The fact that remuneration was fixed on last day of income year does not mean that it is not allowable. The facts that the remuneration was fixed on the last day of the year and after ascertainment of the profits and there was identity of interests of shareholders and the managing director were not enough to hold that the increase in remuneration was not wholly or exclusively for the purpose of the business of the company. The shareholders might have been actuated by the best of intention different decision with regard to the remuneration until the last day of the year and took such a decision only after ascertainment of the profits and proportionate to the volume of business and the profits earned by the company. This does not at any rate establish mala fide nor does it lead to the conclusion that the purpose was to pay less income tax. Brentford Yousuf & Co. Ltd. v. Commissioner of Income Tax, Lahore – [1966] 13 TAX 182 (H.C.Lah.) 1547. Company increased salaries of its Directors. No evidence to show that remunerations so paid were for purposes other than business; held that part of the remunerations cannot be disallowed on ground of reasonableness. The assessee, a private limited company, claimed under section 10(2)(xvi) of the Income Tax Act deduction of Rs.36,000.00 and Rs.12,000.00 paid to its two Directors as remuneration. The Income Tax Officer rejected the claim on the ground of inordinate increase in the salaries of these two Directors although income of the company had proportionately increased in that year. The Appellate Tribunal
1137 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
affirmed the order of the Income Tax Officer. It took the view that the increase in the remuneration was motivated by extra commercial reasons and was not wholly and exclusively for the purposes of the business... Reversing the order of the Tribunal the High Court: Held, that the Tribunal had no evidence to disallow part of the increase in the remuneration to the two Directors. The reasonableness of the amount fixed and paid by the assessee is to be decided by the assessee itself in the absence of any evidence to the contrary that the remunerations so paid were for purposes other than business. The criterion for deduction of remuneration may be different in the cases where payment is challenged or is disputed, but in the present case the factum of payment has been admitted and the taxing authorities applied their own standard of reasonableness. Ata Hussain Khan Ltd., Dacca v. Commissioner of Income Tax, East Pakistan, Dacca – [1965] 11 TAX 335 (H.C.Dacca) 1548. Director was holding ninety-nine per cent shares and virtually sole proprietor of company. Quantum of his remuneration fixed after profits of company was declared and known, held that reduction of remuneration made by Income Tax Officer was permissible. The assessee, a private limited company, was doing business of manufacturing tin containers, photo-offset, printing on containers, calendar printing of paper and tin plates, label printing and map printing, etc. In its assessments for the charge years 1956-57, 1957-58 and 1958-59 the assessee claimed as admissible expenditure the remunerations paid to its managing director at the rate of Rs.12,000, 24,000 and 24,000 per annum in respect of each of the three years respectively The Income Tax Officer reduced the amount of remuneration to Rs.4,800 per annum for all the three years on the ground that the managing director who was holding 999 shares out of 1000 shares of the company was actually the sole proprietor of the said company and as such the expenditure could not be taken as representing bonafide business expenses wholly and exclusively for the purpose of business and that the real purpose was to minimize the burden of taxation. The Appellate Assistant Commissioner, on appeal, accepted the assessee‟s claim in respect of the assessment years 195657 and 1957-58 but reduced the amount of remuneration for the year 1958-59 to Rs.12,000 per annum observing that “the whole show was run by the managing director and was a proprietary concern for all intents and purposes although it was a private limited company in form and that there was complete identity of person interested as shareholder and managing director.” On further appeal the Appellate Tribunal fixed the quantum of remuneration at Rs.12,000 per annum
1138 Section 23(1)(xviii)
Income Tax Digest.
for each of the three assessment years holding that “the managing director being the only technician in the line in East Pakistan, the demands for his services are high and the company‟s activities are all looked after by him without a manager retained for the purpose.” When the matter went up to the High Court the assessee‟s counsel contended that “inasmuch as the assessee‟s accounts had not been disbelieved and in fact the money had been paid, the assessee had discharged his initial onus to prove that the expenditure was incurred wholly and exclusively for the purpose of earning profits.” On behalf of the department it was urged that the sums not allowed by the Income Tax department was not incurred wholly and exclusively for the purpose of earning the profits because (1) the increment in the salary was not made by a resolution before the commencement of any accounting year but after the profits were declared and known and (ii) although it was a private limited company but, in fact, it was a one man‟s show as found by the Appellate Assistant Commissioner and not reversed by the Tribunal. Held, that the Income Tax authority was right in holding that the assessee had failed to prove that the sums claimed had been exclusively incurred in the production of the assessable income and that the Income Tax authority had sufficient evidence before it to come to the finding to exclude the sum of Rs.12,000 for each of the assessment years 1957-58 and 1958-59 out of the expenses incurred by the appellant for payment of remuneration to the managing director. Cases referred to: Aspro Ltd. v. Commissioner of Taxes (1932) A. C. 683. Judicial review: Overruled by Supreme Court of Pakistan in (1970) 21 TAX 1 (S.C. Pak) with the following remarks: “The most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is “wholly and exclusively for the purpose” of the business of the Company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income Tax Department to say that the expenditure is not reasonable.”
Nrisinga Chandra Nandy, In re – [1936] 4 ITR 428 (Cal.) 1549.
Where agents conducting a business on behalf of principal, pay only a portion of profits to him and retain the balance as their remuneration, the remuneration is not deductible in the assessment of the principal.
In section 10(1) of the 1922 Act [section 22 of the Income Tax Ordinance, 1979] the Legislature contemplates that the business
1139 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
carried on by the assessee is the assessee‟s business. But at the same time it cannot be said that in no circumstances can persons be assessable in respect of profits of a business which is not a business owned by them. It cannot be said that a principal cannot properly be described as carrying on business through his agents merely because there is no provision in the agreement permitting the principal to interfere in the executive control of the business. Where, under an agreement, the assessee appointed certain persons as agents to carry on its business and the agents were empowered to conduct business and after paying certain specified sums to the assessee, to retain the balance as remuneration, it was held that the assessee was liable to be taxed on the entire profits of the business; he was not entitled to deduct the sums retained by the agents by treating them as expenditure incurred solely for the purpose of earning profits; it was a case of division of profits. Laksbmi Narayan Sen & Sons Ltd., In re – [1936] 4 ITR 255 (Cal.) 1550.
Mere fact that remuneration is paid under agreement and payment is in fact made, will not preclude Income Tax Officer from enquiring into business necessity of such payment.
It is quite competent for the Income Tax authorities to ascertain what the real situation is - whether the payments alleged to have been made were in fact made and if they were made whether they were bona fide payments made upon a proper basis or whether they really constituted a device for the purpose of evading the payment of Income Tax or super tax. The question whether payments are bona fide and not a device must always be a question of fact. Laksbmi Narayan Sen & Sons Ltd., In re – [1936] 4 ITR 255 (Cal.) 1551.
Question as to whether payment to directors is bona fide is a question of fact.
Question as to whether payment to directors is bona fide is a question of fact. Aspro Ltd. v. Commissioner of Taxes – [1936] 4 ITR 264 (PC) 1552.
Where in respect of two persons, who were sole shareholders as well as sole directors of a private limited company, company fixed two-thirds of profit as their remuneration, remuneration paid was unreasonable.
Where in respect of two persons, who were sole shareholders as well as sole directors of a private limited company, company fixed two-
1140 Section 23(1)(xviii)
Income Tax Digest.
thirds of the profit as their fees as directors, it was held that in view of the fact that there was complete identity of the persons interested as shareholders in fixing the amount and of the persons to whom the fees were to be paid and other circumstances of the case, it could not be said that the amounts paid to the directors were incurred in the production of the assessable income; in the circumstance of the case the company‟s resolution fixing the remuneration of the directors did not preclude an enquiry by the Income Tax authorities into the excessiveness of the payment. _______________
CAPITAL OR REVENUE EXPENDITURE
Sind Trading Company v. Commissioner of Income Tax – [1967] 15 TAX 53 (H.C.Kar.) 1553.
Goodwill fee paid to Government for acquiring liquor shop over and above annual licence fee and fee on sales is assessee acquiring enduring benefit by payment of goodwill is capital expenditure.
The assessee, a dealer in liquor, acquired a shop by payment of goodwill fee. This fee was payable once and the payment lasted till the licence was cancelled. Besides this fee the assessee paid annual licence fee and fee on the sales. In making the assessment the Income Tax Officer rejected the assessee‟s claim that goodwill fee should be allowed as a revenue expenditure. Having failed before the Appellate Assistant Commissioner the assessee took the matter to the Appellate Tribunal contending that the goodwill fee was a revenue charge because no permanent or enduring asset had been acquired at the expense involved and that the fee was in substance an additional licence fee. The Appellate Tribunal rejected the appeal and held that “it was undeniable that the payment of the amount was a condition precedent for getting possession of the particular evacuee liquor shop....It was thus clear that it is a sort of expenditure incurred before starting the business.” On a reference: Held,
that the payment of goodwill was for the acquisition of the right to conduct the business and it had an enduring benefit until the licence lasted. The payment was to be made only once. The Tribunal was, therefore, right in refusing to treat the payment which represented the goodwill fee, as a revenue charge.
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The expression “enduring benefit” does not imply that it necessarily lasts for. ever. It only means that it should endure in the way that fixed capital endures. What degree of durability or permanence it should possess for qualifying as a capital asset, depends upon the facts of each case. The main consideration in such cases always is, whether the expenditure concerned, is part of the company‟s working expenses, or in other words, expenditure laid down as part of the process of profit-earning or whether on the other hand, it is a capital outlay, viz, expenditure necessary for the acquisition of property or of rights of a more or less permanent character, the possession of which is a condition of carrying on its trade at all. Cases relied on: Assam-Bengal Cement Co., v. Commissioner of Income Tax [1960] 2 TAX 228 (S.C.) and Anglo-Persian Oil Co., v. Dale [1932] 1 K.B. 124, 146.
Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax, East Pakistan – [19601 2-TAX (III-228) (H.C.Dacca) = 1960 PTD 379 = 1960 PLD 389 1554.
Annual payment of „protection fees‟ to lessor to prevent lessor from granting similar rights to others in neighbouring queries is capital expenditure.
The assessee-company acquired from the Government of Assam a lease of certain lime-stone queries for the purpose of carrying on the manufacture of cement. In addition to the rents and royalties the assessee agreed to pay to the lessor annually two sums of Rs.5,000/and Rs.35,000/- as protection fees and in consideration of that the lessor undertook not to grant to any person any lease, permit or prospecting licence for lime-stone in a group of queries without a condition that no lime-stone should be used for the manufacture of cement. In computing the profits or the assessee the above two sums paid to the lessor were added back by the Income Tax authorities holding that the amounts in question were not allowable deduction under section 10(2) (xvi). Appeals before the Appellate Assistant Commissioner and the Tribunal were unsuccessful. Held,
that on the facts arising in this particular case and on the interpretation of the term of contract as evidenced by the lease the amounts in question were not items of revenue expenditure but of capital expenditure and hence not allowable as an admissible deduction under section 10(2) (xvi) of the Income Tax Act.
Judicial analyses: PARTLY CONFIRMED & PARTLY OVERRULED BY The Supreme Court of Pakistan in Assam-Bengal Cement Co. Ltd. v. Commissioner of Income Tax East Pakistan, Dacca 1962 SCC 113 = [1962] 6
1142 Section 23(1)(xviii)
Income Tax Digest.
TAX 49 (S.C.Pak.) by majority decision holding that annual payment on Rs.5,000 during the whole period of lease is rightly held as capital expenditure, but Rs.35,000 or any lessor amount under clause (5) is revenue expenditure and is permissible allowance. Their Lordship considered clause (4) & (5) of the Agreement and reached the conclusion that clause (4) which provided an asset or advantage namely, a monopoly in respect of the Durgasil area to run with the lease, that lease itself being an instrument by which the company assured to itself adequate supplies of basic raw material for its process, can be truly regarded as capital expenditure. But as to clause (5), it provides for a payment, namely, Rs.35,000 per year, which was, by the very terms of the lease, related directly to the operations of the company, and therefore, this payment was to be made as a part of the working expenses of the company and not exclusively for gaining protection in respect of the area of the Khasi and Jaintia Hills District. Such payments are relate to the actual operations of a business cannot fall within the meaning of „capital expenditure‟. This is no doubt the leading judgement of the Honourable apex Court on the issue of determining what is capital expenditure or not, which is one of the most difficult areas of tax laws. DISTINGUISHED ON FACTS - Mohanlal Hagovind of Jabbulpor v. Commissioner of Income Tax, CP & Behar, Nagpur PLD 1949 PC 147. Cases referred to: British Insulated and Helsby Cables, Ltd. v. Atherton (1926 A.C. 205); R. S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax, Lahore (AIR 1947 Lahore 82); (1946) 14 ITR 66); Benarsi Dass Jagannath of Amritsar v. Commissioner of Income Tax (AIR 1947 Lah. 162); 15 ITR 185; In re The Century Spinning and Manufacturing Co. Ltd., (AIR 1947 Bom. 445); The Jagat Bus Service, Saharanpur v. Commissioner of Income Tax, U.P. and Ajmer-Merwara, Lucknow [AIR 1950 All. 295-(1950) 18 ITR 13]; The Commissioner of Income Tax, Bombay v. The Finlay Mills Ltd. (AIR 1951 S.C. 464, 20 ITR 475) and Commissioner of Income Tax, Calcutta v. Piggot Chapman & Co. [AIR 1952 Cal. 414-(1949) 17 ITR 317]. Case review : FOLLOWED BY - Messrs Assam-Bengal Cement Company Ltd. v. Commissioner of Income Tax, West Bengal [AIR 1955 SC 89].
Commissioner of Income Tax, Dacca v. B. S. Trading Company, Dacca – [1966] 14 TAX 7 (H.C.Dacca) 1555.
Expenditure necessary for initiation of business and benefit derived under agreement of enduring nature held to be of capital nature.
The assessee entered into agreement wish two companies for the manufacture of insecticides, ointments and other chemicals according to the formula disclosed by these companies and to sell these products under their registered trademarks to a certain specified period and in a certain limited area. In considerations of these agreements the
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Section 23(1)(xviii)
assessee was to pay certain amounts to these companies periodically. In the year under consideration the assessee paid a total sum of Rs.13,250 to these two companies and claimed as deduction in computation of the business income. The Income Tax Officer disallowed the claim holding that it was of capital nature. On appeal, the Appellate Assistant Commissioner allowed the claim of the assessee on the ground that what the companies transferred to the assessee was not the corpus (ownership) but the usufruct (use) of the trade mark and the trade name in consideration of certain amount payable for a certain specified period. Affirming the order of the Appellate Assistant Commissioner the Appellate Tribunal held that the expenditure was of a revenue nature. On a reference the High Court reversing the order of the Appellate Tribunal Held,
that it cannot be said that the benefit was not of enduring nature. Further the expenditure of the sums was necessary for starting or initiation of the business. Therefore, it cannot but be held that the sums paid was a capital expenditure.
Case reversed: ITA No. 407 of 1961-62 [1963] 8 TAX 25 (Trib). Cases relied on: Assam-Bengal Cement Co. v. Commissioner of Income Tax [1962] 6 TAX 49 (S.C.) and Commissioner of Income Tax v. Sri Pursottam Dos Thakurdas [1946] AIR 401 (Bomb.).
Mohanlal Hargovind of Jubbulpore v. Commissioner of Income Tax – [1949] 17 ITR 473 (PC) 1556.
Capital expenditure must be construed in business sense.
There is no definition of the expression „capital expenditure‟ in the Act, and it must be construed in a business sense save insofar as there may be rules of construction applicable to it. _______________
TESTS FOR DETERMINING NATURE OF EXPENDITURE
Commissioner of Income Tax, East Pakistan, Dacca v. Tangail General Trading & Transport Corporation Limited, Mymensingh – 1966 SCC 282 = [1967] 15 TAX 1 (S.C.Pak.) 1557.
Premium paid on annual basis is revenue expenditure.
Licence obtained by the assessee for plying buses on certain routes. A short-term contract was made with postal authorities for carrying mails on payment of premium on annual basis. Since premium paid by the assessee was not the value of a durable asset, it qualifies as business expenditure.
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Income Tax Digest.
Caltex Oil (Pakistan) Ltd., Karachi v. Commissioner of Income Tax, Central, Karachi – [1985] 52 TAX 27 (H.C.Kar.) 1558.
Legal expenses incurred for preparation of the lease deeds for long duration is not revenue expenditure.
The Income Tax Officer in his order disallowed an amount of Rs.5,100/ - out of law expenses, which were paid by the applicant for the preparation of documents in respect of lease of sites for petrol pumps. According to the Income Tax Officer it was capital expenditure. The said legal expenses were incurred for preparation of the lease deeds, which were for long duration, with the right or renewal to the applicants and the said plots were acquired for setting up petrol pumps and thereafter to lease out the said petrol pumps to other parties. In view of this said expenses cannot be considered to be a revenue expenses and consequently the Income Tax Officer had rightly disallowed the said expenses as revenue expenses and the Appellate Tribunal had rightly rejected the applicant‟s appeal in this connection. Ciba (Pakistan) Limited, Karachi v. Commissioner of Income Tax, Karachi – [1985] 52 TAX 23 (H.C.Kar.) 1559.
Assessee-company paid to its distributor on reduction in territorial area of the distributor, held that amount paid exgratis as mark of mutual goodwill is wholly and exclusively for the purpose of business as revenue expenditure.
Messrs. Eastern Pharmaceutical Distributors were acting as Distributors of the respondent for the whole of Pakistan under an agreement dated 7.9.1951. By a subsequent agreement dated 22.8.1961 this distributorship was reduced to the southern part of West Pakistan. There were certain negotiations in this respect as the distributors were resisting the reduction in the territorial area. They set up a claim against the respondent in this behalf for a sum of Rs.3,53.000/- for non-payment of proper commission for earlier years. Ultimately an agreement was arrived at by which the territorial area was reduced and the distributors were paid a lump sum of Rs.1,00.000/. ex-gratis as a mark of mutual goodwill. The facts and circumstances of the present case are that although the agreement by which Rs.1,00,000/- had been paid by the assessee to their dealer as an ex-gratis payment as a mark of mutual goodwill on the signing of the agreement. But as a matter of fact the payment had been made in order to avoid the counter claim of Rs.3,00,000/- made by
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the dealer and in order to get rid of the dealer from the northern part of the territory, and therefore, it was a payment made in order to avoid greater losses and with a view to smooth running and betterment of the business of the company to the extent of its northern territory. It was, therefore, obviously a payment made for commercial purposes and in the interest of good running of the business and hence it was clearly revenue expenditure. Commissioner of Income Tax, (Central Zone), Karachi v. Oxford University Press, Karachi – [1984] 50 TAX 88 (H.C.Kar.) 1560.
Assessee published certain books with permission of the owner of the copyright and certain amount was paid to the owner of the copyright, held that these are revenue expenditure.
In the present case as the respondent assessee bad not purchased the copyright but had published certain books with the permission of the owner of the copyrights, they had paid certain amount as royalties to the owner of the copyrights and therefore, the payment can be claimed as a revenue expenditure and in our view Income Tax Appellate Tribunal has rightly held so. Case referred to: Hira Lal Phoolchahd v. Commissioner of Income Tax [1947] 15 ITR 205.
Dawji Dadabhai & Co. v. Commissioner of Income Tax (West) Karachi – [l982] 45 TAX 208 (H.C.Kar.) 1561.
Assessee was doing business in karyana articles and as commission agent entered into agreement with a Trust manufacturing clay products to share in profit and loss, held that advances made to the Trust for purchasing raw materials, etc. is revenue/trading expenditure incidental to business.
Principles for determining revenue/trading expenditure, trading/ capital loss, bad debt, etc.: (i)
That a bad debt can be claimed as a trading loss in the assessment year, in which it becomes a bad debt and not in the assessment year in which the debt was advanced.
(ii)
The distinction between a revenue expenditure deductible in assessing Income Tax and a capital expenditure which is not so deductible is that the former is incurred in the course of business and is incidental to the business, whereas the latter is incurred in order to procure an asset or an advantage for the enduring benefit of the trade.
1146 Section 23(1)(xviii)
Income Tax Digest.
(iii)
Every loss is not deductible under section 10(1) of the Income Tax Act, but only those losses, which are incurred in carrying out the business and in incidental to the operation, e.g. loss incurred by a bank on account of the commission of dacoity or loss of security deposit which is made during the course of business transactions or loss of a loan advanced during business dealings.
(iv)
The loss suffered on account of sale of scrips purchased in order to procure business is not a trading toss but a capital loss not claimable under section 10(1) of the Income Tax Act.
(v)
Any loss suffered on account of subscribing to the capital shares in a Joint Stock Company is a capital loss and not a trading loss claimable under section 10(1) of the Act unless the assessee mainly deals in scrips of public limited companies in which case it will be a trading loss.
(vi)
An amount of money spent, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying of the business may be treated as trade expenditure.
Applying the above principles to the present case, we are inclined to hold that the a advances made by the applicants to the Trust for purchasing the raw materials etc. while they were themselves running the business cannot be termed as a capital expenditure as has been held by the Income Tax Authorities but a revenue expenditure / trading expenditure incidental to the applicant‟s business as to entitle them to claim under section 10(1) of the Act. In our view it is a matter of no consequence that the above expenses were incurred by the applicants while managing a new business and not in connection with their normal business of karyana merchant or of commission agent. The applicants were operating Trust‟s business on partnership basis, the expenses incurred for the aforesaid purpose, namely, on the purchase of raw materials etc. were not incurred for acquiring an asset or advantage for the enduring benefit of their business but the said expenses were incidental to running the business, which they were running under the agreement for profits and the income from which was to be tacked with the applicant‟s income earned from their usual business of karyana merchant and of a commission agent. Cases referred to : Commissioner of Income Tax, C.P. & Berar v. S.M. Chitnavis (AIR 1932 PC 178); Benarsidas Jagasnath (1947) 15 ITR 185;
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Section 23(1)(xviii)
Commissioner of Income Tax, U.P. v. Nainital Bank Limited (1965) 55 ITR 707; T.J. Lalvani v. Commissioner of Income Tax, Bombay (1970) 78 ITR 176; Jwala Parasad Radha Kishan v. Commissioner of Income Tax, U.P. (1971) 76 ITR 530; Law and Practice of Income Tax by N.A. Palkhiwala and B.A. Palkhiwala, VIIth Edn; State v. Heddinott (Surveyor of Taxes) [(1913-1921) 7 Tax Cas. 85]; M. Jacobs Young & Company Limited v. Harris (H.M. Inspector of Taxes) [(1926-1927) 11 Tax Cas. 221]; Assam Bengal Cement Co. Limited v. Commisstoner of Income Tax, East Pakistan, Dacca (PLD 1962 SC 295) and Law of Income Tax in India by V.S. Sundaram, 7th Edn.
Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) – [1946] AC 295 1562.
If is often difficult in any particular case to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure and no single test of universal application can he discovered for a solution of the question.
So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle. B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia – [1946] AC 224 (PC)
The solution to problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer. Indian Radio & Cable Communication Co. Commissioner of Income Tax – [1937] 5 ITR 270 (PC)
Ltd.
v.
Difficulty may often exist in deciding whether expenditure not in the nature of capital expenditure has been incurred solely for the purpose of making or earning income, profits or gains and it may be impossible
1148 Section 23(1)(xviii)
Income Tax Digest.
to formulate a test which may always suffice to discriminate between the expenditure which is and which is not allowable for the purpose of income tax. Henarsidas Jagannath, In re – [1947] 15 ITR 185 (Lahore) 1563.
General test.
The distinction between capital and revenue expenditure is in many cases an easy one. There are, however, a number of cases where it may be difficult to distinguish. The cost of acquisition of plant, machinery or premises for carrying on a business would clearly be in the nature of a capital expenditure; on the other hand, the pay of the establishment and the rents of the premises taken on lease for the business would be items of revenue expenditure. But it may be difficult to draw a line in cases which stand on the margin. It is not easy to define the term capital expenditure‟ in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows: 1.
Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sand in IRC v. Granite City Steamship Company [1927] 13 TC 1. In City of London Contract Corporation v. Styles [1887] 2 TC 239 at p.243, Bowen, LJ. observed as to the capital expenditure as follows: “You do not use it „for the purpose of‟ your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.”
2.
Expenditure may be treated as properly attributable to capital when it is made not only once and for all, hut with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. vide Viscount Cave, LC., in Atherton v. British Insulated & Helsby Cables Ltd. [1926] 10 TC 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour
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saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expressions „enduring benefit‟ or „of a permanent character‟ were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3.
Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or a floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.
Note: Approved in Assam Bengal Cement Co. Ltd v. Commissioner of Income Tax [1955] 27 ITR 34 (SC).
Vallambrosa Rubber Co. Ltd. v. Farmer – [1910] 5 Tax Cas. 529
In a rough way it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to secure every year. Rao Bahadur S. Ramanatha Reddlar v. Commissioner of Income Tax – 3 ITC 10 (Rangoon) 1564.
Question as to whether expenditure in a shipowner‟s business is current as opposed to capital must essentially be one of degree and, therefore, one of fact.
The question as to whether expenditure in a shipowner‟s business is current as opposed to capital must essentially be one of degree and, therefore, one of fact.
1150 Section 23(1)(xviii)
Income Tax Digest.
Atherton v. British Insulated & Helsby Cables Ltd. – [1925] 10 Tax Cas. 155 (HL) 1565.
When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
The question whether a payment is in substance a revenue or a capital expenditure, is a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case; but where there is no express finding by the Commissioners upon the point, it must be determined by the Courts upon the materials which are available and with due regard to the principles which have been laid down by the authorities. The criterion suggested in Vallambrosa Rubber Company v. Farmer [1910] 5 Tax Cas. 529, is no doubt often a material consideration. But the criterion suggested is not, and was obviously not intended to be, a decisive one in every case; for, it is easy to imagine many cases in which a payment, though made „once and for all‟, would be properly chargeable against the receipts for the year But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. Imperial Chemical Industries (India) Ltd., In re – [1935] 3 HR 21 (Cal.) 1566.
The test that when an expenditure is made, not only once and/or all, but with a view to bringing into existence an asset or an advantage for enduring benefit of a trade, there is very good reason/or treating such an expenditure as properly attributable not to revenue but to capital must yield where there are special circumstances leading to a contrary conclusion.
It is not possible to lay down any hard and fast rule or to enunciate a rigid and scientific principle which can be applied as a criterion when this particular point comes up for determination. The decided cases, however, do of course afford considerable assistance. In Vallambrosa Rubber Co. v. Farmer [1910] 5 TC 529, Lord Dunedin suggested one test to be applied and that is whether or not the payment was of a kind which would be made once and for all‟ by
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Section 23(1)(xviii)
way of a lump sum. Obviously that is not a test which would afford any great assistance in the majority of the cases coming before the Court and in regard to that particular test, Viscount Cave, who was the Lord Chancellor, in the case of British Insulated & Helsby Cables v. Atherton [1926] AC 205 made this comment: In Vallambrosa Rubber Co‟s case (supra) Lord Dunedin, as President of the Court of Session, expressed the opinion that „in a rough way‟ it was not a bad criterion of what is capital expenditure- as against what is income expenditure-to say that capital expenditure is a thing that is not going to recur every year and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case, for it is easy to imagine many cases in which a payment, though made „once and for all‟ would be properly chargeable against the receipts for the year. _______________
INTEREST AND DIVIDENDS EARNED BY THE ASSESSEE IS AN ALLOWABLE DEDUCTION
Commissioner of Income Tax v. New Jubilee Insurance Company – [1990] 61 TAX 1 (H.C.Kar.) 1567.
Income Tax deducted at source on the interest and dividends earned by an insurance company is an allowable deduction.
An amount of Rs.2,06,003 which represented Income Tax deducted, at source, on the interest and dividends earned by the assessee, in the year under consideration. The learned appellate Assistant Commissioner in his order disposing of the first appeal, inter alia, observed that, section 10(7) of the Income Tax Act of 1922 excluded the operation of section 18(4) of the Act, and hence, according to him, the addition made by the assessing officer, was not warranted by law. The learned Income Tax Appellate Tribunal confirmed the order of the learned Appellate Assistant Commissioner. As regards question No. 2, Mr. Ali Athar submits that it does not arise out of order of the Tribunal. Mr. Sheikh Haider has not been able to satisfy us that it does arise out of the impugned order. However, the Department seems to be wrong in adding the tax paid in advance under section 18-A of Income Tax Act to the income of the Assessee computing for tax purposes whereas by virtue of section 10(7) of the Income Tax (since repealed), the provision of section 18(4) is not attracted to the facts of the case. The learned Tribunal
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Income Tax Digest.
has rightly upheld the order of the learned Assistant Commissioner. The second question is, therefore, also decided against the Department. _______________
TEST OF FIXED OR CIRCULATING CAPITAL
Golden Horse Shoe Ltd. v. Thurgood (Inspector of Taxes) – [1933] 18 Tax Cas. 280 1568.
Test of circulating capital vs. fixed capital is a good test.
The test of circulating as contrasted with fixed capital, is as good a test in most cases, as can be found; but that involves the question of fact was the outlay in the particular case from fixed or circulating capital? Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining fact or must be the nature of the trade in which the asset is employed. the land upon which a manufacturer carries on his business is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So too, is the coal that a manufacturer of gas buys and from which he extracts his gas. _______________
RELEVANCE OF CHARACTER OF RECEIPT IN RECIPIENT‟S HANDS
Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income Tax – [1933] 1 ITR 129 (Cal.) 1569.
The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound.
The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto. The case of payer and payee must be considered upon an independent statement of the relevant facts proved in his presence, there being no overriding principle of law that the Income Tax authorities are entitled to tax once at least on every payment. _______________
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TRAVELLING EXPENSES FOR TRAINING ABROAD
Commissioner of Income Tax, East Pakistan, Dacca Engineers Limited, Dacca – [1965] 11 TAX 181 (H.C. Dacca) 1570.
v.
Travelling expenses incurred by company in connection with director sent abroad for training are admissible deduction.
The assessee-company was doing the business of construction of buildings, bridges, etc. During the relevant year of account it sent two of its Directors to United Kingdom for training in pre-stressed concrete works for two months and incurred an expenditure of Rs.7,700 towards purchase of two return air tickets. In its assessment the assessee claimed the amount as an admissible deduction under section 10(2)(xvi) of the Income Tax Act. The claim was rejected by the Income Tax Officer on the ground that the expenditure was of a capital nature which brought benefit of an enduring nature and that the scheme was not approved by the Central Board of Revenue as envisaged in clause (xv) of section 10(2) of the Act. On appeal the Appellate Assistant Commissioner allowed the expenses holding that it was necessary and useful for the assessee to impart this training to some of the Directors who were technical men and that the expenses incurred were in the interest of the company‟s business. The Appellate Tribunal affirming the order of the Appellate Assistant Commissioner held that the two engineers were sent abroad not for their own personal benefit but for the benefit of the business concern itself and that the two Directors went abroad for taking the training in prestressed concrete method which pursuit of knowledge is a scientific knowledge within the explanation of section 10(2). On a reference: Held that there is no reason as to why the expenditure which is not in the nature of capital expenditure or personal expenses of the assessee as found by the Tribunal and which has been found to be spent for the purpose of such business should not be treated as a deductible allowance under section 10(2) of the Income Tax Act. There might be cases which might fall under clause (xvi) and clause (xii) both and clause (xiv) might come in the alternative cases. It is possible that there might be overlapping provisions in a particular statute. See also: 1967 SCC 289 for Supreme Court decision. _______________
1154 Section 23(1)(xviii)
Income Tax Digest.
EXPENDITURE MUST BE INCURRED IN THE CHARACTER AS A TRADER
IRC v. Anglo Brewing Co. Ltd. [1925] 12 Tax Cat 803 1571.
Expenses must be incurred in the capacity of trader, for the purpose of making profits.
The words „for the purpose of such business‟ mean „for the purpose of keeping the trade going and of making it pay‟. Expenses cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss resulting to the assessee as a trader, the test being that expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. Judicial analysis: No doubt this judgment is really based upon the fact that an expense which is paid by way of penalty for breach of law cannot be said to be an amount wholly and exclusively laid out for the purpose of the business, but the observations in the decision go further and indicate that the expenditure, if incurred by the trader in some character other than that of a trader, is not an allowable deduction _______________
EXPENDITURE MUST BE FOR CARRYING OF BUSINESS
General Corpn. Ltd. v. Commissioner of Income Tax – [1935] 3 ITR 350 (Mad.) 1572.
Expenditure to resume a stopped business which could not, however, be started is allowable.
The assessee, carrying a mica business, was obliged to stop it on account of a cyclone. It then incurred expenditure on prospecting work during the year of account with the intention of resuming the same if conditions and prospects proved favourable, but the business, in fact, was never resumed. On the question, whether the expenditure was allowable as revenue expenditure: held that the expenditure so incurred was allowable as a deduction against the profits and gains of the assessee‟s other business. The prospecting work was done by the company‟s staff and the intention was to resume work. The business was therefore not closed during the year, only there was inactivity.
1155 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Metro Theatre Bombay Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 638 (Bom.) 1573.
If expenditure is obligatory to be incurred even when business is closed down, it cannot be wholly and exclusively for purpose of business.
If expenditure is obligatory to be incurred even when business is closed down it cannot be wholly and exclusively for purposes of business. _______________
QUANTUM OF EXPENDITURE
Lakshrni Narayan Sen & Sons Ltd., In re – [1936] 4 ITR 255 (Cal.) 1574.
Question as to whether payments are bona fide and not a device must always be a question of fact.
The question as to whether payments are bona fide and not a device must always be a question of fact. Ibrablmbhai Mulla Badruddin v. Commissioner of Income Tax – 5 ITC 302 (Nag.) 1575.
Where, on the basis of his personal experience, the Income Tax Officer determined the allowable expenditure on a particular item, no question of law would arise.
Where, on the basis of his personal experience, the Income Tax Officer determined the allowable expenditure on a particular item, it was held that no question of law would arise. _______________
RELEVANCE OF BENEFIT TO THIRD PARTY
Usher’s Wiltshire Brewery Ltd. v. Bruce – [1915] AC 433, 469 (HL) 1576.
Benefit to third party, relevance of.
Where the whole and exclusive purpose of the expenditure is the purpose of the expender‟s trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party‟s benefit, say that of the publican, or that the brewer incidentally obtains some advantage, say in his character of landlord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose. _______________
1156 Section 23(1)(xviii)
Income Tax Digest.
RELEVANCE OF PRODUCTION OF INCOME FROM EXPENDITURE
Anglo. Persian Oil Co. (India) Ltd. v. Commissioner of Income Tax – [1933] 1 ITR 129 (Cal.) 1577.
To be allowed as expenditure, it is not necessary to find out whether expenditure can produce taxable income.
Before section 10(2)(xv) was amended in 1939, an expenditure could be allowed only if „it was incurred solely for the purpose of earning such profits and gains. After the amendment, the only requirement is that the expenditure should be wholly and exclusively for the purpose of such business. „For the purpose of the business‟ is wider in scope than the expression „for the purpose of earning the profits‟. So long as the expenditure is incurred for the purpose of carrying on the business and the assessee incurs it in its capacity as the person carrying on that business, it is not necessary that the expenditure must produce profit in the year in which the expenditure is incurred. Hughes (Inspector of Taxes) v. Bank of New Zealand – [1938] 6 ITR 636 (HL) 1578.
Expenditure need not necessarily be remunerative.
Expenditure in course of the trade which is unremunerative is nonetheless a proper deduction, if wholly and exclusively made for the purpose of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. Sun Newspapers Ltd. and the Associated Newspapers Ltd. v. Federal Commissioner of Taxation – 61 Corn. LR 337 1579.
Profit-yielding asset can easily be identified.
As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For, the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. _______________
1157 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
BUSINESS EXPENDITURE - SHARING OF PROFITS
Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 202 (PC) 1580.
Where purchaser of business undertakes the liability of the vendor to pay to third parties, irrespective of whether there are profits or not, payment is not deductible.
If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole. The case of a transfer of a business undertaking liability, for example, for the rents under current leases of the premises in which the business was carried on by the transferor and is to be carded on by the transferee is quite a different case, for the rents paid are clearly an outlay necessary for the earning of a profit. A was the managing agent of company T and was entitled to ten per cent of net profits subject to a minimum of Ps. 50,000. Company T needed funds which had to be provided by A. Since A was unable to provide funds, X agreed to do it on the condition that in addition to interest payable by company T, the managing agent A should also pay 25 per cent of its remuneration. Later, A assigned the managing agency to B who also took over the obligation to pay 25 per cent of remuneration to X. The question was whether the payment made by B to X was allowable as deduction under section 10(2)(x) [later section 10(2)(xv) of the 1922 Act [corresponding to section 23(1)(xviii) of the Income Tax Ordinance, 1979]. Held that the payments in question were not deductible. They were certainly not made in the process of earning profits; they were not payments to creditors for goods supplied or services rendered to the assessee in its business; they did not arise out of any transactions in the conduct of their business. That they had to make those payments, no doubt, affected the ultimate yield in money to them from their business but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short, the obligation to make these payments was undertaken by the assessee in consideration of its acquisition of the right and opportunity to earn profits, that is, of the right to conduct the
1158 Section 23(1)(xviii)
Income Tax Digest.
business; and not for the purpose of producing profits in the conduct of the business; the expenditure was not incurred solely for the purposes of earning the profits or gains of the business of B. Thus, the impugned expenditure was not deductible. Note:
It was observed by the Judicial Committee that if the question had arisen in the case of A, they would have been entitled to deduction under section 10(2)(ix) of the 1922 Act.
Case review: Decision of the Bombay High Court in Tata Hydro-Electric Agencies Ltd v. Commissioner of Income Tax [1936] 4 ITR 92 affirmed on different grounds.
Commissioner of Income Tax v. Bombay Burma Trading Corpn. Ltd. – [1941] 9 ITR 155 (Rangoon) 1581.
Remuneration based on profits does not amount to division of profits and is deductible.
In order that it can be held in any case that there is an agreement for the division of profits, there must be some sort of joint venture and there must be one single profit fund for all purposes, not two profit funds to be ascertained for different purposes. Where the assessee-company had to pay half of net profit or 5 per cent of gross profits, whichever was less, as remuneration to a firm which was acting as its secretary, treasurer and manager, it was held that the payment so made was deductible as business expenditure. Indian Radio & Cable Communications Co. Commissioner of Income Tax – [1937] 5 ITR 270 (PC) 1582.
Ltd.
v.
Where sharing of profits by assessee on combining its business with another was held not to he deductible.
Company I and company C were running the business of radio/wireless communications in competition with each other. Later, by an agreement the business was combined and was to be run by I.C placed its plant at the disposal of I to be used by I during the period of agreement. In return, I agreed to pay one-half of profits to C. The question was whether payment of profits by I was deductible expenditure. The contention of I was that the payment was in the nature of rent for the use of plant and, therefore, deductible. Held that, of course, it is not universally true to say that a payment the making of which is conditional on profits being earned, cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a
1159 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
director or manager of a commission on the profits of the company. If a company having made an apparent net profit of £ 10,000 has then to pay £ 1,000 to directors or managers as the contractual recompense for their service during the year, it is plain that the real net profit is only £ 9,000. A contract to pay a commission at 10 per cent on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, that is, in the case supposed, a commission on £10,000. But in the present case the sum was in truth made payable as part of the consideration in respect of a number of different advantages which the assessee derived from the agreement and not all of them could be shown to be of a purely temporary character. The agreement as a whole was much more like one for a joint adventure for a term of years between the assessee-company and C company than one for a lease for that year. There was not sufficient ground for holding that the sum in question was of the nature of a rent. It was neither described as a rent, nor did the agreement contain several of the clauses which a lease of plant of such a character would naturally contain. Circumstances of greater importance were that the sum payable may be small or great or nothing. a most unusual feature in the case of rent and that it was impossible to presume or infer that the half share of profits was being paid only as rent, or as a similar payment, in consideration merely of the use. Case review: Decision of the Bombay High Court in Indian Radio & Cable Communications Ltd. v. Commissioner of Income Tax [1936] 4 ITR 90 affirmed. Judicial analysis: The true principle is to find out, on examination of the facts of each case, whether the payment represents a payment of a share of profits simpliciter or whether the payment represents an item of expenditure the calculation of which is made with reference to the profits. If the payment falls in the first class, the payment cannot be deducted in the assessment of profits of the assessee, but if the payment falls in the second class, the assessee is entitled to a deduction of the payment under section 10(2)(xv) of the 1922 Act, [s. 23(1)(xviii) of the Income Tax Ordinance, 1979 and s. 20 of the Income Tax Ordinance, 2001] as a payment laid out or expended wholly or exclusively for the purpose of the trade. The question whether the payment falls on either side of the line must be answered with reference to the specific facts of each particular case. _______________
1160 Section 23(1)(xviii)
Income Tax Digest.
LAND / BUILDING, ACQUISITION OF
Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) 1583.
Where a debtor transferred to assessee a colliery representing it to be tree from encumbrances and assessee subsequently discovered that there were arrears of rent due to superior landlord and paid such arrears.
The assessee had taken over among other assets, a colliery in satisfaction of a loan advanced by him, and it was valued at Rs.7,37,339. Later, it transpired that though the debtor had stated that it was free from encumbrances, arrears of rent of Rs.67,872 were due to the superior landlord. The question was whether it could be allowed to be deducted from his colliery income. Held that the sum overpaid by the assessee could not properly be described as a loss sustained by him on income account. It was a sum which was payable by him in order to get possession of the colliery, not a sum expended by him in the carrying out of the colliery. It was not rent for any period of his possession nor was It an expenditure Incurred for the purpose of earning the profits or gains of the colliery business. Case review: Decision of the Patna High Court affirmed. _______________
BENEFIT OF CONTRACTS
John Smith & Son v. Moore – [1921] 2 AC 13 (HL) 1584.
Payment for acquiring the benefit of pending contracts of father‟s business which the assessee acquired on lump sum payment on the death of his father is a capital expenditure.
The assessee was a coat merchant who had taken over his deceased father‟s business under powers given by the father‟s trust disposition and settlement. By the terms of that disposition, he succeeded to the business under the obligation of paying for its net value, excluding goodwill from the assets for the purpose of valuation. The business assets included contracts giving a call on the output of certain collieries at what had become favourable prices, none of the contracts having longer than nine months to run at the date of the father‟s death. A value of £ 30,000 was put upon the benefit of these contracts as an item of a coal merchant‟s business, although in fact the total sum that had to be paid for the business came out to less than
1161 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
£28,000. The question was whether the assessee was entitled to deduct £ 30,000 from his assessable profits for the accounting period that followed his father‟s death. Held that the sum was capital expenditure in relation to the assessee‟s business, and was hence not deductible. Judicial analysis: It appears clearly from a close study of the speeches of Lord Haldane and Lord Sumner that two elements in the case, or rather the combination of those two elements, determined their decision. First, no sum of £ 30,000 had ever been paid. What was acquired was a business consisting of a variety of assets, among which was the benefit of the contracts, and involving a number of liabilities; the only money that the son had paid was the sum representing the net value of that business... It is evident that both the teamed Lords felt it to be impossible to say that a sum paid to acquire a business as representing the net value of that business, but not specifically allocated to individual assets of the business, was anything but a capital expenditure upon a fixed asset. Lord Sumner regarded the case as being in effect governed by the earlier decisions of City of London Contract Corporation v. Styles [1887] 2 Tax Cas. 239 and Alianza Co. Ltd v. Bell [1904] 5 Tax Cas. 60. And so it was according to the terms in which he dealt with it. The second feature that was treated as of importance was the fact, alluded to by Lord Sumner, that in paying something in respect of the benefit of the contracts the son had not acquired stock-in-trade or anything like such stock. It is not difficult to suppose that in a different context a sum paid by a running concern to a trader for the right to take over his supply contracts at fixed prices, if limited to the year of profit ascertainment, might fairly be regarded as part of the cost of acquiring the commodity to be supplied and, as such, chargeable against the gross proceeds of its sale. Lord Sumner indeed seems to have visualised this, when he said in explanation of the Styles‟s decision „this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business; the sum was not paid as an outlay in a business already acquired, in order to carry it on and to earn a profit out of this expense as an expense of carrying it on‟. The John Smith decision therefore turned upon the combination of the elements as the facts of the case: an aggregate price paid as the net value of a business taken over, and the inclusion in the assets of that business of the benefit of short-term supply contracts which were not in a form allowing them to be treated as analogous to stock-in-trade. But for the combination of those elements it is not to be assumed that the decision would have been the same, for, it is difficult to accept as a sound general proposition that if a man acquires and pays for stock-in-trade for his own business on the taking over of another he is not entitled to set off against the gross proceeds of realising the stock the identifiable cost of acquiring it. _______________
1162 Section 23(1)(xviii)
Income Tax Digest.
GOODWILL
Vithaldas Thakordas & Co. v. Commissioner of Income Tax – [1946] 14 ITR 822 (Bom.) 1585.
Payment made far the use of goodwill is deductible, even if this payment is a proportion of profits.
After the death of V, who had during his lifetime carried on in his own name a bullion business, the assessee-firm entered into an arrangement with the widow of V for the use of V‟s name for their bullion business. The widow, who inherited the goodwill of her husband‟s business, allowed the use of the firm‟s name only in consideration for a proportion of profits and no term was fixed for the duration of the use of the goodwill: Held that if the partnership had acquired the goodwill by paying a lump sum, undoubtedly that would have been a capital expenditure; or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain installments, each installment would have been in the nature of a capital expenditure. But in this case, as the partnership did not acquire anything in the nature of a permanent asset, the payment was not a capital but revenue expenditure. Nor was it a payment of profits. It was an expenditure wholly and exclusively for the business and hence allowable. _______________
SELLING AGENCY
Minsararasam Co. Ltd. v. Commissioner of Income Tax – 6 ITC 65 (Mad.) 1586.
Where assessee entered into an agreement for purchase of all rights and privileges of manufacturing and selling a patent medicine.
Where the assessee. entered into an agreement for the purchase of all rights and privileges of manufacturing and selling a patent medicine: Held that the consideration paid by the assessee was capital expenditure. _______________
1163 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
COPYRIGHT
Hira Lal Phoolchand v. Commissioner of Income Tax – [1947] 15 ITR 205 (All.) 1587.
Price paid for purchasing copyright of a book is a capital expenditure.
Price paid for purchasing copyright of a book by a publisher and seller of books, is capital expenditure. _______________
ELECTRICITY TRANSMISSION LINES / RAILWAY PLATFORMS, ETC.
Rhodesia Railways Ltd. v. Income Tax Collector – [1933] 1 ITR 227 (PC) 1588.
Expenditure on renewal of rail tracks is allowable as revenue expenditure.
The assessee, a railway company, incurred expenditure on renewal of railway tracks which had become worn out due to wear and tear. The result of the renewals, which involved putting additional sleepers, was to bring the track back to normal condition and the line as renewed was not capable of giving more service than the original line. The question was whether the expenditure on such renewal was deductible as revenue expenditure. Under the relevant provisions, no depreciation was admissible on rails and sleepers. Held that the periodical renewal of sections of the rails and sleepers of railway line as they were worn out by use was in no sense a reconstruction of the whole railway and was an ordinary incident of railway administration. The fact that the wear although continuous was not and could not be made good annually did not render the work of renewal when it came to be effected necessarily a capital charge. The expenditure was incurred in consequence of the rails having been worn out in earning the income of previous years on which tax had been paid without deduction in respect of such wear and represented the cost of restoring them to state in which they could continue to earn income. It did not result in the creation of any new asset; it was incurred to maintain the assessee‟s existing line in a state to earn revenue. The analogy of a wasting asset had really no application to such a case. The expenditure was in the nature of repairs only. _______________
1164 Section 23(1)(xviii)
Income Tax Digest.
EXPENDITURE TO SAVE BUSINESS REPUTATION
Commissioner of Income Tax v. Sir Horni M. Mehta – [1943] 11 ITR 142 (Bom.) 1589.
Others.
Where the assessee, managing director of a company, had gifted certain sums to the company when it was in financial difficulties, for the purposes of saving his business reputation, it was held that the sum so paid was not deductible as the payment was not made solely for the purpose of enabling the assessee to maintain his income derived as the director‟s and managing director‟s fees and dividends on shares. _______________
BRICK MANUFACTURERS
Benarsidas Jagannath, In re – [1947] 15 ITR 185 (Lahore) 1590.
General.
In order to distinguish between a revenue expenditure (i.e., an expenditure which should properly form an item of debit in the profit and loss account of a manufacturer) which is deductible in assessing Income Tax and a capital expenditure which is not so deductible, one must carefully consider the nature of the concern, the ordinary course of business usually adopted by a manufacturer in that concern and the object with which an expense is incurred by him and then decide the category under which it falls. If a person as a manufacturer of bricks purchases land or takes it on a long lease for starting a concern and digs earth out of the land so acquired, the purchase price or the premium paid for the lease can safely be regarded to be a part of his fixed capital. If an owner of an already established kiln were to enter into forward contracts or agreements to procure earth, the price paid to acquire it would be an item in the profit and loss account only if it were lying in a loose state. But is there any difference in principle when the agreement to procure earth for the sole purpose of feeding a running brick kiln business does not take the form of a simple transaction of sale of goods but is entered into by a manufacturer for acquisition of earth before it has been excavated along with certain facilities for its excavation and removal even when he gets some interest in the land as long as the sole object of such an agreement was to obtain the raw material with which the bricks were to be prepared? Such an agreement cannot be held to confer any benefit of an enduring character. In the nature of things it must be held to
1165 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
confer a transitory advantage and as the material so acquired is consumed in the carrying on of the business it would be wrong to hold the expenditure incurred in purchasing that material to be of a capital nature. The agreement in such case is really for the acquisition of earth, though the transaction had to be expressed differently because the earth had to be excavated before it could be removed and utilized in making bricks. There is no material difference between such a transaction and a transaction which related to purchase of earth as goods. It may be presumed in a transaction of such a transitory nature that there was no intention of investing the money as capital of the concern. Had the transaction been of such a nature as would have conferred an advantage of an enduring nature on the trade and the payment was made once and for all to avoid recurring expenditure it may have been possible to infer that the expenditure incurred was of a capital nature but when the expenditure incurred neither swells the capital nor improves it, but it only increases or decreases the profit or loss it must be held to be a part of the profit and loss account of the business. Benarisdas Jagannath, In re – [1947] 15 ITR 185 (Lahore) 1591.
Where assessee took lease of a land for excavation of earth for manufacture of bricks and land was to revert back to lessor after expiry of seven years, lease rent was allowable as revenue expenditure.
The assessee took on lease various parcels of land for excavation of earth for the manufacture of bricks and also for installation of a brick kiln. Under the agreement of lease, the assessee was entitled to use the said land. The assessee could excavate earth up to a total depth of 6ft over a period of seven years and on the expiry of the said period the land was to revert to the lessor. It was, inter alia stipulated that the assessee would have no right whatsoever to the ownership of the said land. For each of the relevant assessment years, the assessee claimed deduction of one-seventh amount of the total lease money paid under the aforesaid agreement as revenue expenditure. Held that the present was not a case where the earth had to be won, extracted and brought to surface by any kind of quarrying operation. The soil was very much there in a defined area and the mere fact that it had to be dug up to a certain extent to procure supply of earth which was in the nature of raw material for the manufacture of bricks would not make it a transaction analogous to that of a mining of quarrying lease; rather it was a case where payment had been made in advance by the assessee to ensure regular supply of earth
1166 Section 23(1)(xviii)
Income Tax Digest.
over a period of seven years. The assessee was to get no right or interest in the land and he was to deliver back the possession of the same on the expiry of the stipulated period. Obviously, in taxation matters, emphasis must be placed upon the business aspect of a transaction rather than purely legal and technical aspect and the decision in each case must turn on its own facts. The lump sum payment in the instant case represented the commutation of a series of annual revenue payments rather than a capital outlay for acquiring an asset of enduring benefit, Accordingly, the said payment was revenue expenditure. Judicial analysis - In Commissioner of Income Tax v. Tika Ram & Sons Ltd [1937] 5 ITR 544 (All.) it was observed that“The case of a brick field is very similar to that of a quarry or a mine and the proprietor of the land or the lessee is not a mere purchaser of raw materials but a person who has acquired certain rights in the land, and the amount invested by him must, therefore, be treated as capital expenditure within the meaning of section 10(2)(ix).” (p. 548) The above observations made by the learned judge regarding the bed of brick earth is too general in nature and cannot have universal application in cases of brick kilns and the decision in each case must rest on its own facts.
Sardar Bahadur Sardar Singar Singh & Sons v. Commissioner of Income Tax – [1944] 12 ITR 504 (Oudh) 1592.
Lease amount paid where lease of land is taken for 7 years for manufacturing bricks, is capital expenditure.
The assessee a brick manufacturer had taken 3 leases of land for long periods for 10 to 12 years. In one lease the amount paid included cost of brick kiln already in existence; in the second the lessee could dig up to depth of 12 feet, and in the third up to 8 feet. Held that the leases were no different from leases for coal mines and the expenditure incurred by the assessee in taking the leases was capital expenditure. Ganeshilal Bhattawala, In re – [1938] 6 ITR 489 (All.) 1593.
Cost of land purchased for extracting earth for brick-kiln is capital expenditure.
The assessee, a brick manufacturer, incurred certain expenses to purchase a land. The assessee contended before the Assistant Commissioner that, since the land had been purchased for the purpose of extracting earth for manufacturing bricks, the price paid therefore, was expenditure necessary for earning profits; but the Assistant
1167 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Commissioner repelled this contention and held that the expenditure was of a capital nature. Held that in view of the decision in Commissioner of Income Tax v. Tika Ram & Sons Ltd. [1937] 5 ITR 544 (All.) the AAC was justified in holding that the said expenditure was capital expenditure. Commissioner of Income Tax v. Tika Ram & Sons Ltd. – [1937] 5 ITR 544 (All.) 1594.
Where manufacturer of bricks owns land or is the owner of leasehold rights in land from which earth is dug out, cost of earth so dug up is not deductible.
Where the assessee-company, carrying on business of brick manufacturer, owned a part of land and held leasehold right in land from which earth was taken for manufacture of bricks, it was held that value of earth used up in manufacture of bricks was not deductible as revenue expenditure. Sardar Bahadur Sardar Singar Singh & Sons v. Commissioner of Income Tax – [1944] 12 ITR 504 (Oudh) 1595.
Question as to whether an amount spent on taking leases of land/or brick kilns should be treated as capital expenditure or as business expenditure, is a question of law.
The question as to whether an amount spent on taking leases of land for brick kilns‟ should be treated as capital expenditure or a business expenditure, is a question of law _______________
BIDI MANUFACTURER
Mohanlal Hargovind of Jubbulpore v. Commissioner of Income * Tax – [1949] 17 ITR 473 (PC) 1596.
Expenditure on right to collect tendu manufacturer is revenue expenditure.
leaves
by
bidi
The assessee was engaged in the manufacture and vending of bidis and for this purpose, obtained tendu leaves by entering into a number of contracts with Government and other owners of forests. The relevant agreements conferred the grant of „the contract of collecting and removing‟ tendu leaves on the assessee on payment of a prescribed sum, and the assessee was also allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and
1168 Section 23(1)(xviii)
Income Tax Digest.
bigger leaves. The question for consideration was whether the sums so paid were allowable as revenue expenditure. Held that the agreements were merely examples of many similar contracts entered into by the assessees wholly and exclusively for the purpose of their business, the purpose being to supply themselves with one of the raw materials of that business. The contracts granted interest in land and no interest in the trees or plants themselves. They were simply and solely contracts giving to the grantees the right to pick and carry away leaves, which of course, implied the right to appropriate them as their own property. It was true that the rights under the contracts were exclusive but in such a case as this that is a matter which was of no significance. If the tendu leaves had been stored in a merchant‟s godown and the assessees had bought the right to go and fetch them and so reduce them into their possession and ownership, it could scarcely have been suggested that the purchase price was capital expenditure. There was no ground in principle or reason for differentiating the present case from that supposed. The sums paid under the agreements were, therefore, allowable as revenue expenditure. Case review: ITAT v. Haji Sabumiyan Haji Sirajuddin [1946] 14 ITR 447 (Nag.) overruled. DISTINGUISHED ON FACTS IN - Hindostan Commercial Bank Ltd., In re [1932] 21 ITR 353 (All.). _______________
MINING - MINING RIGHTS & MINING EXPENSES
Commissioner of Income Tax v. Chengalvaroya Mudallar – [1934] 2 ITR 395 (Mad.); Chengalvaroya Chettiar v. Commissioner of Income Tax – [1937] 5 ITR 70 (Mad.); K.T.M.T.M. Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income Tax [1939] 7 ITR 652 (Mad.); U. Chengalvaroya Mudaliar v. Commissioner of Income Tax – 7 ITC 323 (Mad.) 1597.
Where assessee-firm, engaged in business of conch shells, took on lease „the exclusive right, liberty and authority it, take and carry away all chanks found in the belt of the specified sea „for a period of three years, lease rent so paid was a capital expenditure.
The assessee-firm engaged in the business of conch shells, took on lease from Government the exclusive right, liberty and authority to take and carry away all chanks found in the sea. The coastline
1169 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
leased out was fairly long and the period of lease was also for a fairly long period, i.e., 3 years. An analysis of the agreement showed that the assessee obtained an exclusive right to fish for „chanks‟ by the method of diving and nets and to appropriate them except those below 2-1/4 inches in diameter, which had to be returned alive to the sea, and Valampiri shells which had to be sold compulsorily to the Government. It had also to report to its lessors at the end of the term the number of shells not sold. The right was exclusive but was not capable of being transferred or underlet. The question was whether the consideration for this right was capital or revenue expenditure. Held that under the lease which the assessee obtained, it had a right to take only chanks of particular dimensions and shape; but it had to fish for them and obtain them first. The rest of the chanks were not its property. The smaller chanks had to be returned alive to the sea, and Valampiri chanks had to be compulsorily sold to the State. Of course, the smaller chanks put back into the sea would grow, and if fished later, be its property to take; hut till they grew, it had no claim. The chanks were on the bed of the sea. Their exact existence was not known, till the divers found them, or they got netted. Chanks which were there one day might have been washed back into the deep sea, and might never be washed back into a place where they would be within reach. Similarly, other chanks not there one day might come within reach on another day. Thus, in obtaining the lease, the assessee obtained a speculative right to fish for chanks which it hoped to obtain and which might be in large quantities or small, according to its luck. The agreement was to reserve a source, where the assessee hoped to find shells which, when found, became its stock-in-trade but which, in situ, were no more the firms than a shell in the deepest part of the ocean beyond the reach of its divers and nets~. It would be a straining of the imagination to say that the amount paid for reserving the coastline for future fishing was the price of chanks, with which the assessee did its business. That amount was paid to obtain an enduring asset in the shape of an exclusive right to fish, and the payment was not related to the chanks, which it might or might not have brought to the surface in this speculative business. The rights were not transferable, but if they were and the assessee had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-intrade, because none had been bought by the assessee and none would have been sold by it. The expenditure was, therefore, on capital account.
1170 Section 23(1)(xviii)
Note:
Income Tax Digest.
To illustrate why this payment was capital expenditure, the Court made a comparison between the two methods adopted by the assessee in his business to obtain a supply of shells. It obtained its supplies from divers, from whom it purchased the chanks, and having got them, perhaps cheap, it resold them at a profit. This was one mode in which it carried on its business. In this business, it was directly buying its stock-in-trade for resale. The other method was to acquire exclusive right to fish for chanks by employing divers and nets. The business then changed to something different. The sale was now of the product of another business, in which divers and equipment was first employed to get the shells. It, thus, took leases of extensive coastline with all the right to fish for chanks for some years. The shells were not the subject of the bargain at all, as were the tendu leaves; but the bargain was about their right to fish. There would be no doubt that what it paid the divers when it bought chanks from them with the view of reselling them was expenditure laid out wholly and exclusively for the purpose of its business, which was not of a capital nature. That business was of buying goods and reselling them at a profit. But a different kind of business was involved when it went in for fishing for chanks. To be able to fish fur chanks in reserved waters it had to obtain the right first. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on par with payments of the other character was to err. It was possible to say of the former that the chanks were bought because the money paid was the price of the chanks, but it would he a straining of the imagination to say that the amount paid for reserving the coastline for future fishing was the price of chanks.
Dissenting view: Having regard to the nature of the respondent-firm‟s business and the course adopted by it for carrying it on, it appears rather farf etched to hold that by the contract in question, the respondent firm acquired property or right of a permanent character, the possession of which was a condition for carrying on its trade. The better view in a business sense seems to be that the respondent-firm merely acquired by means of the contract its stock-in-trade rather than a source of enduring asset for producing the stockin-trade. On principle and in a business sense there is no distinction between acquiring materials for a manufacturing business and acquiring or purchasing goods by a dealer for purposes of sale. DISTINGUISHED ON FACTS IN: Mohanlal Hargovind of Jubbulpore v. Commissioner of Income Tax [1949] 17 ITR 473 (PC) distinguished with following observation that ease thus involved no right in land or trees; the licence to be on the land was merely an accessory right; the right of cultivation was insignificant. The term was short, and the collection of leaves
1171 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
was seasonal. Leaves once collected, the operation pro temnpore was over till the fresh crop came. There was thus no acquisition of an enduring asset in the way capital endures; it was more a purchase of crops of two or three successive years skewered on an agreement to ensure the supply of raw materials.
Parma Nand Haveli Ram, ln re – [1945] 13 ITR 157 (Lahore) 1598.
Where assessee, manufacturing potassium nitrate and sodium chloride, spent sum in acquiring several short-term leases of salt-bearing lands for manufacturing crude saltpeter, expenditure incurred was allowable as revenue expenditure.
Where the assessee, manufacturing potassium nitrate and sodium chloride, spent certain sums in acquiring several short-term leases of salt-bearing lands for manufacturing crude saltpeter field that the expenditure incurred by the assessee for acquiring the lease was for running its business and was, therefore, not a capital expenditure. Whereas in this case the assessee must from year to year spend a large amount to acquire the right to collect kallar for a year or so, the expenditure did not become capital merely by reason of the fact that what was acquired was not kallar but the right to collect kallar, and such expenditure was as much a revenue expenditure as the expenditure in purchasing raw material by a manufacturer or stockin-trade by a trader. The result may perhaps be different where the land worked was the property of the assessee, or was acquired by him on a long-term lease. Commissioner of Income Tax v. Bhojraj Harichand – [1946] 14 ITR 277 (Lahore) 1599.
Amount paid for right to collect saltpeter is not capital expenditure.
The amount paid by the assessee, carrying on business of saltpeter, for the right to collect saltpeter is actually payment for obtaining raw material, and is revenue expenditure even if the parties have called it lease. it is in the nature of licence. If according to ordinary principles of the trade of the assessee the crude saltpeter obtained from the leased lands is merely raw material, then whether the raw material is obtained for a number of years or only for a year or so cannot affect the decision of the case and alter the nature of the revenue expenditure into capital expenditure. Case review: Parma Nand Haveli Ram, In re [1945] 13 ITR 157 (Lahore) followed but observations of Munir, J., with regard to long-term leases held to be obiter and dissented from.
1172 Section 23(1)(xviii)
Income Tax Digest.
Nand Lal Bhoj Raj, In re – [1946] 14 ITR 181 (Lahore) 1600.
Lease money paid for removing crude salt pet re is revenue expenditure.
Where the assessee, carrying on business of manufacturing saltpeter, acquired leases of lands containing deposits of crude saltpeter and was given no right in the land except permission to remove saltpeter from the said land to a depth of 2 feet „only from the surface and no pits shall be dug by them, it was held that the leased money paid was revenue expenditure. Shankar Shambhaji Gangla v. Commissioner of Income Tax – 9 ITC 350 (Bom.) 1601.
Amounts paid for acquiring the right to quarry a hill and sell stone therefrom, are capital in nature.
Amount paid for acquiring the right to quarry a hill and sell stone therefrom, are capital in nature and not allowable as deduction, even by spreading it over the period for which right was given. _______________
REPAIRS / RENOVATION
Ratan Singh v. Commissioner of Income Tax – 2 ITC 294 (Mad.) 1602.
Where the heritable corpus of a company is so far improved that in quality or calibre something better replaces it, that is a material alteration which is in the nature of capital expenditure.
Where the heritable corpus of a company is so far improved that in quality or calibre something better replaces it, that is a material alteration which is in the nature of capital expenditure. Rhodesia Railways Ltd. v. Income Tax Collector – [1933] I ITR 227 (PC) 1603.
Expenditure on repairs need not necessarily be with a view to earn income during the relevant year only.
In order to form a permissible deduction, it is not necessary that expenditure on repairs must have been incurred in the production of the actual year‟s income which is the subject of the assessment, or that the benefit of the expenditure must not extend beyond the year of assessment, for very many repairs have the result of enabling income to he earned in future years as well as in the year in which they are effected. _______________
1173 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
ILLUSTRATIONS : REPAIRS TO PERMISES / FURNITURE
Usher’s Wiltshire Brewery, Ltd. v. Bruce – [1914] 6 TC 399 (HL) 1604.
Expenses incurred on premises (owned as well as teased) let out to tenants are admissible business deductions.
The appellant was a brewery company and it was the owner or lessee of a number of licensed premises which they had acquired solely in the course of and for the purpose of their business as brewers and as a necessary incident to the carrying on of the said business more profitably. The appellant had let out the licensed premises to tenants who were „tied‟ to purchase liquor from the appellant. In respect of these tied premises, the appellant incurred expenditure on the following items - (i) repairs; (ii) difference between leasehold rent and rent recovered from tenants; (iii) fire and licence insurance premium; (iv) rates and taxes; and (v) legal and other costs. The question was whether these items of expenditure were deductible in the computation of profits of the appellant: Held that the impugned items were all expenditure essential to the earning of the profits, and were hence admissible deductions, as being money wholly laid out or expended for the purpose of the trade of the appellant. _______________
ILLUSTRATIONS : REPAIRS TO MACHINERY
Tar Mohammad And Company v. Commissioner of Income Tax, Karachi – [1967] 15 TAX 199 (H.C.Kar.) 1605.
Business was conducted and machinery used during part of accounting year, held that sale of machinery after close of business in accounting year is an admissible deduction.
The assessee having its head office at Karachi and a branch office at Hyderabad, owned a mill for crushing dal and oil at Hyderabad. The accounting year of the assessee, relevant to the assessment year 195455, ended on the 31st December 1953. The business at Hyderabad was closed on the 8th November 1953 and the machinery and building was sold on the 9th November 1953 on which date the possession of the building and the machinery was handed over to the vendee. The written agreement for this sale was, however, executed on the 15th
1174 Section 23(1)(xviii)
Income Tax Digest.
February 1954. In the assessment for the charge year 1954-55 the assessee claimed a loss of Rs.86,452 arising from the sale of machinery and building, under section 10(2)(vii) of the Income Tax Act. The claim was disallowed by the Income Tax Officer and this treatment was confirmed on appeals by both the Appellate Assistant Commissioner and the Appellate Tribunal. The Appellate Tribunal took the view that since the machinery and building were sold after close of the business the loss incurred on such a sale could not be in the course of carrying out of the business and as such was not permissible under section 10(2)(vii) of the Act. On a reference the High Court, reversing the order of the Tribunal Held, that: (i)
on the facts accepted by the Tribunal that the sale of the building and machinery took place on the 9th November 1953, there can obviously be no escape from the conclusion that the sale price of the building and machinery being less than the written down value the difference between the written down value and the sale price should have been allowed as losses incurred by the assessee, the admitted position being that the machinery was used in the account year under reference for some time; and
(ii)
the position would have been different if the Tribunal had taken the date of sale of the building and machinery by the assessee as the 15th February 1964, the date on which written agreement was executed by them in favour of the vendee.
It will be apparent from what is laid down in section 10(2)(iv) that the profits or gains have to be computed after making allowance in respect of insurance against risk of damage or destruction of building, machinery, plant, furniture, stocks or stores used for the purpose of the business or vocation. Section 10(2)(vii) refers to allowances being made for the amount by which the written down value exceeds the amount for which “such building, machinery or plant is actually sold.” The word “such” mentioned in section 10(2)(vii) obviously has a reference to building, machinery, plant, etc. mentioned in section 10(2)(iv) of the Income Tax Act. Under these circumstances, there can be no doubt about the fact that if the building, machinery or plant are sold for any amount less than the written down value the difference in the two amounts will be permitted as losses.
1175 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Case followed: Commissioner of Income Tax v. National Syndicate [1961] 3 TAX 149 (S.C.). Case reversed: I.T.A. No. 1326 of 1958-59, dated 17.9.1960 [1961] 3 TAX 30 (Trib.).
Ratan Singh v. Commissioner of Income Tax – 2 ITC 294 (Mad.) 1606.
Cost of any substitution of new parts which substantially change identity of machine, effect a substantial improvement or result in a substantial extension of period of serviceableness, would be capital rather than revenue expenditure.
Ordinarily the substitution in a machine of new parts for old and worn out part is in the nature of repairs or revenue expenditure. This is quite evidently true of the substitution, e.g., of new tyres for old and worn out tyres in a motor car. But the statement needs to be qualified in some manner, because it is clear that by successive substitutions, an old motor car might be convened into a new and that process would really be equivalent to selling the old car and buying the new one, a matter of capital expenditure. The question is really one of degree and it may perhaps be said that the cost of any substitution of new parts which substantially change the identity of the machine, effect a substantial improvement or result in a substantial extension of the period of the serviceableness, would be capital rather than revenue expenditure. Thus, it was held that if a car, as a result of an accident, had nothing left but a wheel and everything else had to be renewed, clearly the sensible view would be that the renewal of the car could only be described as an increase of capital. _______________
RENT
Hakim Ram Prasad, In re – [1936] 4 ITR 104 (Lahore) 1607.
The mere fact that the lessor takes half the total rent in one year; the rest of the rent being spread over nine years, gives no information upon which the court can come to any conclusion as to whether the first payment is in the nature of a premium.
If the agreement is proper leasing agreement, the mere fact that the lessor has taken substantial part of rent in the first year, does not make it a capital expenditure. There are cases where the sum paid
1176 Section 23(1)(xviii)
Income Tax Digest.
nominally for rent could be dissected and a conclusion arrived at whether the payment, or what portion of it, is capital or revenue. But to arrive at a conclusion of that nature, the Court must be in possession of the facts. The mere fact that the lessor takes half the total rent in one year, the rest of the rent being spread over nine years, gives no information upon which the Court can come to any conclusion as to whether the first payment is in the nature of a premium or merely, as it might well be, a payment of such a nature that would at least take away any risk of loss to the lessor company. Before a decision could he arrived at in such a case, it would be very necessary to know what is the total value of the leased machinery. If for example, it were proved that the lessee was paying in the course of ten years the total value of the machinery and that the machinery would be of no value at the end of the ten years, the Court could probably come to a decision that the whole expenditure over the ten years was in the nature of capital, except such amount which would have to he allowed as interest. On the other hand, it may very well be that the total payment over the ten years is only a fair rent for the machinery during that period, and that further the value of the machinery at the end of ten years may be quite a substantial amount. Where the assessee, cinema proprietor, took certain apparatus from a company on lease for ten years, and in the first year the assessee paid a lump sum (about half of the total rent for the entire period) and then yearly a certain sum, it was held that the arrangement was clearly a renting agreement and, therefore, the amounts paid by the assessee for the use of the apparatus could not be disallowed as capital expenditure. Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) 1608.
Others.
Where a debtor transferred to the assessee a colliery representing it to be free from encumbrances and the assessee subsequently discovered that there were arrears of rent due to superior landlord and paid such arrears, arrears so paid were not deductible. _______________
1177 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
ROYALTY
Ramkinkar Banerji v. Commissioner of Income Tax – [1936] 4 ITR 108 (Pat.) 1609.
Royalty paid to wife as superior landlord cannot be disallowed merely on the presumption that she is benamidar of the assessee.
The assessee had an interest in a colliery which paid him in the year in question Rs.15,408-14-0 as royalty. The assessee did not include this income in the return. The Income Tax Officer somehow or other came to know of this income and called upon the assessee to show cause why a penalty should not be imposed upon him for concealing this income. Thereupon the assessee appeared and stated that he did not in fact get any income inasmuch as he had paid Rs.15,353 as royalty to the superior landlord who, admittedly for some time, was L but whose right to receive the royalty had been acquired by S, the wife of the assessee. The Income Tax Officer rejected the assessee‟s claim holding that his wife was his benamidar. Held that there is no presumption that a property standing in the name of a married Hindu lady does in fact belong to her husband. The ordinary presumption of law is that the apparent state of affairs is real unless the contrary is proved. The absence of evidence one way or the other did not under the law justify an inference that the lady was a benamidar of her husband. If the Assistant Commissioner had disbelieved the payment of the money, much would have been said in favour of the view that it was a finding of fact but in this case the payment was not disputed. Therefore, the said amount could not be included in the assessee‟s income. Indian Turpentine & Rosin Co. Ltd. v. Commissioner of Income Tax – 3 ITC 219 (All.) 1610.
Others.
The assessee purchased a resin factory from the Government, and under the agreement, the Government was to supply resin to the assessee on payment, which included apart from cost of labour, delivery and normal royalty, additional royalty in case the assessee made profits in excess of a specified‟ percentage. The assessee claimed the additional royalty paid as a deduction. Held that the sum in question paid to the Government was paid as the price of resin supplied and that therefore the money so spent was a
1178 Section 23(1)(xviii)
Income Tax Digest.
part of the expenditure incurred solely for the purpose of earning the profits of the company. _______________
FORFEITURE OF SECURITY DEPOSITS
Commissioner of Income Tax v. Motiram Nandram – [1940] 8 ITR 132 (PC) 1611.
Where a security deposit was made to obtain agency and later due to reasons stated in agreement it became irrecoverable, irrecoverable deposit was not deductible as business expenditure.
The assessee, who was carrying on money-lending business, was appointed as organising agent of a company selling kerosene oil and other fuels. Under the agreement he was to make a security deposit of Rs.50,000 with the company but later when he was able to get the selling agents appointed who would make a deposit of Rs.10,000 each with him on the account of the company, he could retain Rs.50,000 out of such deposits. He was to get interest on the deposit of Rs.50,000 and also commission on sales. He made the deposit hut was able to reimburse himself only to the extent of Rs.10,000. The question was whether the irrecoverable balance could be deducted as expenditure of the business of organising agents. Held that the character of the expenditure which the assessee sought to bring within clause (ix) of section 10(2) must be determined with reference to the business of organising agents in which the assessee was engaged upon the terms of the agreement. This business was of a different nature from that of money-lender. The nature of the deposit of Rs.50,000 must he considered in relation to the business of organising agents. The question in such a case as the present must be „what is the object of the expenditure?‟ and it must be answered from the standpoint of the assessee at the time he made it, that is, when he was embarking upon the business of organising agents for the company. The deposit was clearly exacted by the company as a condition of the assessee being given an agency which he hoped to manage profitably. The purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature, and that the deposit could not, upon a true view of the terms of the agreement and the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. It was, therefore, a loss of capital and not deductible.
1179 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Case review-Decision of the Nagpur High Court in Commissioner of Income Tax v. Motiram Nandram [1938] 6 ITR 10 reversed. _______________
CONTRIBUTION TO PROVIDENT FUND
Commissioner of Income Tax v. Central India Spg. & Wvg. Co. Ltd. – [1939] 7 ITR 187 (Nag.) 1612.
Contribution to provident fund.
When an employee is paid the accumulated balance due to him from a provident fund, employer is entitled to have amount representing his contributions and interest thereon which had accrued up to date of transfer of fund to trustee, allowed as business expenditure. Burma Corpn. Ltd. v. Commissioner of Income Tax – 4 ITC 49 (Rangoon) 1613.
Others.
The assesses-corporation started a staff provident fund and also created a trust for this purpose by which the corporation vested in the trustees by transfer of Government securities a fund sufficient to cover the corporation‟s liability in respect of the provident fund and undertook to add to this fund from time to time so as to cover the liabilities outstanding. The trust deed provided, inter alia, that the trustees were to apply all money in their hands in satisfaction of the claims arising under the rules and pay the balance to the corporation. They could call upon the corporation, in case the securities in their hands fell short of the corporation‟s liability, to supply that deficiency either by cash payment or by furnishing further security, while there was no obligation on the corporation to make periodical payments of any sums to the trustees. In its assessment, the corporation claimed a deduction of their contributions to the provident fund as and when it credited the same to the trustees. Held that the corporation would be entitled to deduct the actual cash payments made to the trustees either for the purpose of meeting liabilities of the retiring or deceased members, or for the purpose of supplying any deficiency in the fund as contemplated by the trust deed and not the sums merely credited in their accounts. A mere credit in favour of the trustees instead of the employees, and the creation of a liability to the trustees for the payment of these contributions, were not enough. _______________
1180 Section 23(1)(xviii)
Income Tax Digest.
OTHER ILLUSTRATIONS
Commissioner of Income Tax v. Seth Ramkrishna Ramnath – [1944] 12 ITR 21 (Nag.) 1614.
Amount compulsorily deducted from wages of employees towards charity is not allowable as deduction.
Where the assessee was compulsorily deducting a fraction of the wages from employees towards charity, so that full amount of wages was shown as expenditure where as less than the wages was actually paid, it was held that the amount so deducted towards charity was not admissible expenditure. _______________
COMPENSATION TO MANAGING AGENTS / SELLING AGENTS
Anglo-Persian Oil Co. (India) Lid. v. Commissioner of Income Tax – [1933] 1 ITR 129 (Cal.) 1615.
Where the assessee-company paid lump sum compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to revenue account, compensation was allowable as deduction.
Where the assessee-company paid lump sum compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to revenue account, it was held that, in the absence of any finding that the payment was gratuitous or was made for oblique reasons, the payment was allowable as revenue expenditure and that the fact that the expenditure did not produce profits and that the receipt was capital in the recipient‟s hands were not relevant. Imperial Chemical Industries India Ltd., In re – [1935] 3 ITR 21 (Cal.) 1616.
Where a sum was paid by the assessee to its agent on the termination of the agency for loss of agency provided the agent agreed not to compete with the assessee for five years, and to train the staff of the assessee, expenditure was deductible.
Where a sum was paid by the assessee to its agent on the termination of the agency for loss of agency provided the agent agreed not to compete with the assessee for years, and to train the staff of the assessee, it was held that the said expenditure was capital in nature. _______________
1181 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
MANAGING AGENCY COMMISSION
Commissioner of Income Tax v. Tata Sons Ltd. – [1939] 7 ITR 195 (Born.) 1617. Where assessee-managing agent agreed to share commission with person advancing loan to managed company, share of commission so assigned was allowable. Where the assessee, a managing agent of a company, agreed to share its managing agency commission with a person who advanced loans to the managed company, when it needed funds, it was held that the share of commission so assigned was an expenditure incurred by the assessee solely for the purpose of earning profits and gains in the conduct of its agency business and it was, therefore, allowable as business expenditure. _______________
OTHERS
C.Macdonald & Co. v. Commissioner of Income Tax – 7 ITC 466 (Bom.) 1618. Others. The assessee was the owner of certain mining rights and concessions jointly with another party. He sold the same to a syndicate under an agreement providing for his appointment as agent of the syndicate. Later, the syndicate in turn sold their rights to company A in consideration of allotment of certain fully paid-up shares in the company and simultaneously A appointed the assessee as agent of the company. The assessee paid certain sum out of his agency commission to the members of the syndicate. Held that a division of profits after they were earned could not at all he styled as expenditure incurred for earning them. The profits were earned first and then disposed of. Thus, the assessee was not entitled to deduct the portion of commission payable to the third parties, since the payment did not arise out of any charge created on the managing agency business. _______________
LITIGATION EXPENSES
Karachi Steam Navigation Co., Ltd., v. Commissioner of Income Tax – [1967] 15 TAX 73 (H.C.Kar.) Damages paid in settlement of litigation for breach of contract are wholly and exclusively for purposes of business and admissible expenditure. The assessee, a private limited company, carried on business of plying cargo and freight ships, some belonging to itself and others chartered 1619.
1182 Section 23(1)(xviii)
Income Tax Digest.
from other parties. For the purpose of disposal of one of its oldest steamers the assessee entered into a contract with Messrs. William Michael Johnson Stockes and Master of Hong Kong on the 10th March 1952. The transaction could not, however, be finalised and the assessee sold the steamer subsequently as scrap to Messrs. Steamship Company of Hong Kong at a higher profit. In July 1952 the first purchaser filed two suits against the assessee at Hong Kong claiming $ 4,02,000 (Hong Kong) as damages for breach of contract. Finally the suits were compromised on payment of Rs.53,534 on the 8th October 1954. This amount was paid by the assessee in 1956 after obtaining necessary foreign exchange from the Government of Pakistan. In the assessment year 1953-54, relevant to the accounting year from 1st November 1951 to the 31st October 1952, the assessee offered for assessment under section 10(2)(vii) of the Income Tax Act the net profit of Rs.52,468 arising out of the sale of steamer. To arrive out at the net profit the assessee deducted from the sale proceeds of Rs.1,95,556, a sum of Rs.7,268 as travelling expenses, Rs.5,886 paid as brokerage, Rs.76,400 representing written down value of the steamer, and Rs.53,534 paid as damages and legal expenses. The Income Tax disallowed all these deductions on the ground that section 10(2)(vii) does not provide for any such allowance. In appeal the Appellate Assistant Commissioner allowed as admissible expenditure the amounts representing travelling expenses and brokerage. The amount of Rs.53,534 paid as damages was disallowed by him on the ground that the expenditure was not directly connected with the sale of the steamer. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner holding that the expenditure on account of damages was not laid out or expended wholly and exclusively for the purposes of the business and also that the expenditure could not be allowed in the assessment year 1953-54 as it was incurred and paid during the later assessment years. On a reference, the assessee‟s counsel contended before the High Court that (i) the sum of Rs.53,534 which the company had to pay as damages must be deemed to be an expenditure incurred in connection with the sale of the ship, deductible both under clauses (vii) and (xiv) of subsection (2) of section 10 of the Income Tax Act; and (ii) the assessee maintained mercantile system of accounting and while declaring the profits on the sale of the steamer all the expenditure which was legitimately incurred in connection with the sale of the steamer was to be deducted or related to the assessment year in which the profits from such sale were to be determined, irrespective of the fact whether such expenditure or any part thereof was actually paid or
1183 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
incurred in the subsequent years. On behalf of the department it was urged that the amount of damages paid was not an admissible deduction either under clauses (vii) or (xiv) of sub-section (2) of section 10 of the Act because the former does not admit of any such allowance and it could not be covered by the latter clause as the amount paid was not an expenditure for the purposes of the business. It was further argued that the expenditure was admittedly incurred in the following assessment years and as such it could not be allowed against the profits of the assessment year 1953-54. Held, that: (i)
the profits earned by the company on the sale of the steamer are to be taxed under the provisions of clause (vii) of sub-section (2) of section 10 of the Income Tax;
(ii)
in order to determine the amount for which the property is sold all expenditure incurred in connection with the sale must be taken into consideration in order to ascertain the profits which are “deemed to have been made” by the assessee under the mischief of the provisions of section 10(2)(vii) of the Act; and
(iii)
the amount of Rs.53,534 paid as damages was laid out and expended wholly and exclusively for the purposes of the sale of the steamer and the amount could be claimed and allowed to the applicant-company under section 10(2)(vii) of the Act.
Cases relied on: Commissioners of Inland Revenue v. Newcastle Breweries Ltd., [1927] 12 TC 927; Bernhard v. Gahan (13 ITC 723); Isaac Holden & Sons Ltd., v. Commissioners of Inland Revenue [1924] 12 ITC 768); Severne (H. M. Inspector of Taxes) v. Dadswell (35 TC 649) and Commissioner of Income Tax v. S. M. Chitnavis (AIR 1932 P.C. 178).
Sutlej Cotton Mills Limited, Okara v. Commissioner of Income Tax, North Zone (West Pakistan), Lahore – [1973) 28 TAX 185 (H.C.Lah.) 1620.
Amount paid as sales tax is admissible expenditure, it has to be related back to the proper year and not to the year when the payment was actually made.
It can be hardly doubted that the amount of Rs.78,969 paid by the assessee as sales tax is an expenditure exclusively for the purposes of the business carried on by the assessee in this case because the amount of money was paid as sales tax during the course of business in respect of which he was being assessed to tax.
1184 Section 23(1)(xviii)
Income Tax Digest.
The aforesaid amount “paid” by the assessee as sales tax has, therefore, to be related to a year “according to the method of accounting upon the basis of which the profits or gains are computed”. In other words, the amount of Rs.78,969 representing sales tax paid by the assessee has to be related back to the proper year and not to the year when the payment of sales tax was actually made. Cases referred to: (1960) PTD (Trib) 495 - [1960] 2 TAX 405 (Trib) and Bernhard v. Gahan (1927) 28 T.C. 741.
Magniram Bangor & Co., In re – [1941] 9 ITR 573 (Cal.) 1621.
Litigation expenses deductible.
to
avoid
future
liability
are
not
Litigation expenses incurred not for earning profits sought to be taxed but to prevent future claims, is not an allowable deduction. The assessee-firm advanced loans on interest to another firm which held leases from A. The firm mortgaged to the assessee 14 annas share in salamis and royalties. Under another deed of assignment, the balance of 2 annas share was also transferred and assigned to the assessee. The mortgagees failed to repay the loan pursuant to which the assessee instituted civil proceedings which ended in a compromise decree under which the assessee acquired title to the 14 annas share in the salamis and royalties. The decree, however, became infructuous as the mortgagees not only did not make any payment but also became extinct. For non-payment of rent and royalties A, the superior landlord, filed a civil suit against the firm in which he impleaded the assessee also as holder of 2 annas share. The assessee successfully defended the suit. The question was whether litigation expenses on the suit were deductible. Held that the deduction claimed was not allowable since the assessee‟s defence in this suit had nothing to do with the earning of any profits or gains in the year previous to assessment or in any year at all prior to the year of assessment. The suit was fought and the expenditure was incurred to prevent a liability arising in future, because the assessee realised that if A succeeded in this suit instituted against them, similar proceedings to which they would have no defence, would follow periodically. _______________
1185 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
EXPENSES INCURRED TO PROTECT BUSINESS / BUSINESS ASSETS
Seth Kaluram Kankaria, In re – [1947] 15 ITR 209 (All.) 1622.
Expenses incurred in defending title of mortgages not obtained in course of money-lending business are not deductible.
Where the assessee-money-lender had taken mortgage from a person, who was later declared an insolvent and in suit filed by the receiver under the Provincial Insolvency Act for annulment of mortgage as being fraudulent and void, the Court recorded a definite finding in favour of the receiver and against the assessee, it was held that litigation expenses incurred by the assessee to defend the said suit were not deductible as it could not be said that the assessee got the mortgage executed in his favour in the course of his money-lending business. Lachhman Das Brijballabh Das, In re – [1942] 10 ITR 186 (All.) 1623.
Expenses incurred by the assessee in completing his title and entering into possession after sales have become absolute are nor deductible.
The expenses incurred by the assessees in completing their title and entering into possession after the sales have become absolute, are not deductible by the assessees from their taxable profits. Kangra Valley Slate Co. Ltd. v. Commissioner of Income Tax – 7 ITC 375 (Lahore) 1624.
Where a company which was engaged in quarrying on a leased land with perpetual and exclusive quarrying rights, incurred litigation expenses on defending a suit for possession instituted by lessors of land.
Where a company, which was engaged in quarrying on a leased land with perpetual and exclusive quarrying rights, incurred litigation expenses on defending a suit for possession instituted by the lessors of the land, it was held that the expenditure was not allowable as revenue expenditure since it had been incurred on retaining a capital asset. Mahabir Parshad & Sons v. Commissioner of Income Tax – [1945] 13 ITR 340 (Lahore) 1625.
Litigation expenses incurred to protect business premises are deductible.
It is as necessary for a businessman to protect his business premises as his stock-in-trade and there is no distinction in principle between
1186 Section 23(1)(xviii)
Income Tax Digest.
litigation expenses incurred to defend the business premises and those incurred to defend the stock-in-trade. Both are incurred wholly and exclusively for the purposes of the business and do nut result in the acquisition, improvement or alteration of a capital asset. Where the assessee incurred litigation expenses in defending a suit for protection of a property which it bad purchased for business purposes, it was held that such expenditure was revenue expenditure. Central India Spg., Wvg. & Mfg. Co. Ltd. v. Commissioner of Income Tax – [1943] 11 ITR 266 (Nag.) 1626.
Legal expenses incurred by assessee in connection with a suit filed to restrain others from using assessee trade mark, is revenue expenditure.
Since a counterfeit trade-mark prejudicially affects the sale of goods and the threat is not directed against the capital of the company but against its trade, the expulsion of the counterfeit trade-mark from the market by means of litigation in Court would not make any addition to the capital of the company or bring any additional advantage but only remove an impediment in the way of earning legitimate profits by sale of the goods produced by the assessee. Therefore, legal expenses incurred in connection with a suit by assessee against another company to restrain the latter from using a trademark to which the assessee had acquired exclusive right by long user, are allowable as revenue expenditure. ITAT v. Chhaganmal Mangilal – [1946] 14 ITR 206 (Nag.) 1627.
Litigation expenses incurred on defending a suit for alleged infringement of patent rights are deductible.
Litigation expenses were incurred by the assessee in defending a suit filed by another for infringement of his trade mark by the assessee. The assessee, instead of carrying on expensive litigation, compromised the suit but this compromise of the claim did not amount to an admission that he had committed an infringement of the trade mark. Held that the expenditure on litigation and that the sum paid on compromise were deductible. Commissioner of Income Tax v. Sir Purshottamdas Thakurdas – [1946] 14 ITR 305 (Bom.) 1628.
Litigation expenses to preserve directorship are deductible as revenue expenditure.
1187 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Litigation expenses incurred by the assessee in defending a suit filed to set aside his election as director of RBI, were not in the nature of capital expenditure. _______________
EXPENDITURE TO PROTECT PROFIT / SOURCE OF INCOME
Amrita Bazar Patrika, In re – [1937] 5 ITR 648 (Cal.) 1629.
Expenses incurred by newspaper company in defending editor and printer in proceedings for contempt of court are not allowable.
Expenses incurred by a newspaper company in defending the editor and printer in proceedings for contempt of Court in respect of an article published in the paper, are not allowable as business expenditure since they are not incurred for earning the profits. Executors of Sardar Narain Singh, In re – [1943] 11 ITR 478 (Lahore) 1630.
Payment made on behalf of deceased director of company to settle a case of misfeasance against him, is not deductible.
In the liquidation proceedings of a hank, the Official Liquidator submitted claims against the directors under section 235 of the Companies Act, 1913 on grounds of misfeasance. The claim against one such director, who had since died, was eventually settled by the executors paying a certain sum out of income from his estate. The amount so paid was claimed as a deduction by the executors in computing the income of the estate. Held that the claim was not allowable, since the said payment could not be said to have been spent for the purpose of business, income from which, was included in the income of the estate. _______________
EXPENSES PECULIAR TO FIRMS
Rayalu Ayyar & Co. v. Commissioner of Income Tax – [1937] 5 ITR 727 (Mad.) 1631.
Litigation expenses to defend a suit by a partner for share of profits are not deductible.
Litigation expenses to defend a suit by a partner for share of profits are not deductible.
1188 Section 23(1)(xviii)
Income Tax Digest.
Jutharam Jankidas v. Commissioner of Income Tax – [1944] 12 ITR 344 (Pat.) 1632.
Litigation expenses for recovery of capital invested in a firm by a financing partner doing his own money-lending business, are not capital expenses.
The assessee-money-lender was a financing partner of a firm. The firm was dissolved and the assessee became entitled to receive his capital and some profits from the new financing partner of the firm. On the latter‟s failure to pay the dues, the assessee filed a suit to recover the same and incurred litigation expenses. Held that the litigation expenses incurred by the assessee were deductible as the assessee was still carrying on money-lending business. _______________
EXPENSES PECULIAR TO HUFS
Raghunath Das Govind Das v. Commissioner of Income Tax – 10 ITC 98 (All.) 1633.
Where assessee HUF‟s member was charged with cheating in a sale transaction, and the case was ultimately compounded
The assessee-family was carrying on jewellery business. One of its members was charged with cheating in a sale transaction, and the case was ultimately compounded. The assessee claimed the amount spent on the case as a business deduction. Held that, since an act of cheating was not legitimately incidental to the business carried on, any money spent to escape the legal consequences was not an admissible deduction. Mahanth Sah Thakur Dayal Sah v. Commissioner of Income Tax – 6 ITC 188 (Pat.) 1634.
Individual liabilities in civil or criminal case of an individual member of the HUF are not deductible.
Individual liabilities in civil or criminal case of an individual member of the HUE are not deductible from the taxable profits of the joint family business. _______________
1189 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
PENALTY / DAMAGES PAID FOR BREACH OF CONTRACT
Mask & Co. v. Commissioner of Income Tax – [1943] 11 ITR 454 (Mad.) 1635. Damages paid for dishonestly infringing an agreement are not deductible. Where the assessee had entered into an agreement with dealers in the same line not to sell below a certain price and had infringed the agreement and paid damages, it was held that the payment was not deductible as the assessees action in disregarding the undertaking given was palpably dishonest and the expenditure was not incidental to trade. Judicial analysis: DISTINGUISHED ON FACTS IN - Mediwala & Co. v. Commissioner of Income Tax [1986] 161 ITR 74 (MP), with the following observations: “ . . . . . The earlier Madras decision was based on the ground that the payment was made not for conduct of the business in a negligent manner but for conducting the business in a dishonest manner. Obviously, conducting of business in a dishonest manner was not treated as incidental to the business, whereas negligent conducting of business could be treated as incidental . . . . . ” (p.78) _______________
ESTATE DUTY
V.Ramaswamy Ayyangar v. Commissioner of Income Tax – [1943] 11 ITR 597 (Mad.) 1636. Death duties and expenses for retaining letter of administration are not deductible. Expenditure incurred by executors for paying death duty and for obtaining probate and letter of administration is not deductible from the income of the estate of the testator as it is not incurred wholly and exclusively for business. _______________
EXCISE DUTY / IMPORT DUTY
Commissioner of Income Tax v. Gurupada Dutta – [1946] 14 ITR 100 (PC) 1637.
Where the property tax is not wholly referable to premises occupied for the purpose of a business.
Where the property tax is not wholly referable to premises occupied for the purpose of a business or businesses, the assessee, on
1190 Section 23(1)(xviii)
Income Tax Digest.
establishing the portion of the tax which is so referable, would be entitled to deduct such portion under clause (ix) of section 10(2) of the 1922 Act [as it stood at the relevant time]. _______________
OTHERS
Commissioner of Income Tax v. Adamji Sons – [1984] 50 TAX 196 (H.C.Kar.) 1638.
Business expenditure - Borrowed amount.
If it is proved that the borrowed amount has been utilized 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 1922 Act, irrespective of the manner in which the borrowed amount is utilized. East Wing Indusiries, Sialkot v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi – [1979] 40 TAX 62 (H.C.Lah.) 1639.
Assessee is entitled to manage the business according to the principles and on the line, considered more beneficial.
There is no denying the fact that an assessee is entitled to manage his business according to the principles and on lines which he considered more beneficial for the purpose of his business. It is, however, subject to the paramount consideration that before any deduction for expenses is allowed it must be shown by positive evidence:(i)
that the expenditure in question has been bonafide incurred or paid according to system of accounting followed by assessee;
(ii)
that it is not being claimed in pursuance of a collusive arrangement to deprive the exchequer of its lawful share viz, tax on income derived from business;
(iii)
that the expenditure is warranted by commercial expediency viz. the expenditure has been incurred for the sole objective of promoting the business whether directly or indirectly; and
(iv)
that no part of the expenditure has been incurred for extra business consideration.
1191 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Isabella Coal Co. v. Commissioner of Income Tax – 2 ITC 87 (Cal.) 1640.
Cess.
Road and public works cesses paid under the Cess Acts on business premises are deductible in computing business profits. Commissioner of Income Tax v. King and Partridge – 2 ITC 142 (Mad.) 1641.
Professional tax paid on business is not an allowable deduction.
Professional tax paid by the assessee in respect of his business under the Punjab Professions, Trades, Callings and Employment Act, is not allowable as business expenditure. _______________
AMOUNT PAID TO WARD OFF COMPETITION
Rao Saheb A.S. Alaganan Chetty v. Commissioner of Income Tax – 3 ITC 44 (Mad.) 1642.
Other illustrations.
In order to induce a rival contractor for not to compete with him, a lump sum amount was paid by the assessee to him with the result that the assessee was able to obtain a contract at favourable rates. The assessee claimed the lump sum payment as revenue expenditure. Held that the payment of the said sum was not for the purpose of working the contract but for obtaining it. Thus, it was capital in nature. R.S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax – [1946] 14 ITR 66 (Lahore) 1643.
Other illustrations.
The assessee was a printer. To eliminate under-quoting from rival printers in securing Government‟s printing job, the assessee entered into an arrangement whereby the rival printers and the assessee agreed to quote uniform rates in the tenders which enabled the assessee to secure the job. As compensation to the rivals, the assessee agreed to pay them, irrespective of whether there was actual loss or profit, a certain share in the estimated profit. On the question whether such payments were deductible: Held that it was not a case of sharing of profits. The payment made to the competing firms was not made out of profits realised. There was
1192 Section 23(1)(xviii)
Income Tax Digest.
no arrangement between the competing firms that after ascertaining annual profits each will have a share out of those profits. Nor was it capital expenditure. The expenditure was of a recurring nature and arose in the course of the trade and conferred no enduring benefit on the trade. It only enhanced the annual profits and had no other purpose or object in view. It was, therefore, deductible. Judicial analysis: Rao Sabeb A.S. Alaganan Chetty v. Commissioner of Income Tax 3 ITC 44 (Mad.) explained and distinguished with the observation that in that case the learned Chief Justice regarded the amount paid as an expenditure incurred for the acquisition of a new concern and considered that each contract obtained in that case was a new business acquired by the assessee. Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income Tax [1937] 5 ITR 202 distinguished as in that case before their Lordships of the Privy Council The expenditure had been incurred for acquiring the concern and not for running the concern. _______________
GIFTS AND PRESENTS
Commissioner of Income Tax v. Hemraj Kanji – [1933] 1 ITR 304 (Sind) 1644.
Expenditure on voluntary presents given on festive occasions is not allowable.
Expenditure in the nature of charity or presents can never be deducted in the case of a business, whatever the system of accounting may be that is adopted. This of course means charity or presents regarded as gifts of a voluntary nature. Expenditure incurred voluntarily on making presents of cakes, fruits, tea and sweets on festive occasions would, in the absence of any details as to the persons to whom presents were made, not amount to expenditure, incurred solely for the purpose of earning profits, and, hence, and was not an allowable deduction. Chhitar Mal Ram Dayal, In re. – 3 ITC 54 (All.) 1645.
Others.
Where the assessees claim for deduction of certain irrecoverable advances and Diwali presents to servants as admissible business expenditure was rejected by the Income Tax Officer, no referable question of law would arise. _______________
1193 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
ADVERTISEMENT & SALES PROMOTION EXPENSES / EXPENSES FOR INAUGURAL FUNCTIONS
R.S. Munsht Gulab Singh & Sons. v. Commissioner of Income Tax – [1946] 14 ITR 66 (Lahore) 1646.
Expenditure on canvassing customers for one‟s product is deductible.
Expenses incurred in finding a customer are business expenses in the commercial sense of that term and must be deducted before net profits can be ascertained for tax purposes. Where the assessee publisher had paid certain amounts by way of subscriptions to certain schools which agreed to prescribe for their classes school books published by it, it was held that the said payments were deductible. _______________
TRADE MARK, CHARGES FOR REGISTRATION OF
Commissioner of Income Tax v. Century Spg., Wvg. & Mfg. Co. Ltd. – [1947] 15 ITR 105 (Bom.) 1647.
Application on fees for getting existing trade mark registered is revenue expenditure.
The assessee-company, a textile mill, incurred expenditure by way of application fees for the initial registration of its „old‟ trade mark, i.e., trade mark, which had been continuously in use since before 25.2.1937, in the year 1943-44. Under the Trade Marks Act, 1940, registration of a trade mark was valid for a period of seven years only after which it had to be periodically renewed by paying fresh fees. Held that the registration fees paid were not paid for the purpose of acquiring a right of transmissibility, which did not previously exist; the enhanced status of a registered trade mark was only incidental to a new right. It was not enduring since in order to keep it up periodic payments were necessary and, thus, it was to be treated as revenue expenditure. Further, the expenditure was wholly and exclusively for the purpose of assessee‟s business. Note:
This case was approved in Commissioner of Income Tax v. Finlay Mills Ltd [1951] 20 ITR 475 (SC). _______________
1194 Section 23(1)(xviii)
Income Tax Digest.
IN CASE OF PROFESSION
Mitchell and Edon (H.M. Inspectors of Taxes) v. Ross – 40 TC 11 (HL) 1648.
Expenses relatable to remuneration assessable as „salary‟ are not allowable against income from profession.
The assessees were practising medical specialists like radiologists, ophthalmologists, pathologists, psychiatrists and thorasis surgeons. In addition to private practice, they also held appointments as consultants on part-time basis. Their remuneration from such consultancy jobs was assessable under Schedule E (applicable to salaries) whereas their professional earning from private practice was assessable under Schedule I) (applicable to profits and gains of profession). The assessees claimed that since they were only exercising the same profession, whether as consultants or private practitioners, the expenses incurred by them for earning the remuneration from the part-time assignments were deductible in computing their profits from the profession which was assessable under Scheduled. The question was whether the deduction so claimed was allowable. Held that it must be regarded as fundamental and well-settled law that the Schedules to the Income Tax Acts were mutually exclusive, and that the specific Schedules A, B, C, D and E and the Rules which respectively regulated them afforded a complete code for each class of income, dealing with allowances, deductions and exemptions relating to them respectively. The decision in Fry v. Salisbury House Estate Ltd. [1930] AC 432 was a conclusive authority for the proposition that the scheme of the Income Tax Act demanded that each source of profit should be assessed under the appropriate Schedule, and in accordance with the Rules applicable to that Schedule alone. The profession, for this purpose, was a coherent series of activities of a particular character giving rise to assessable profits; it was not an abstract description in a dictionary. If the activities relating to the employment in the office were excluded, as must be because they belonged to Schedule E, the profession, the profits of which were assessable under Schedule D, must consist only of the remaining activities. And if that was so, the rules of Scheduled prohibited the deduction in that assessment of any expenses incurred in relation to the activities of the office, since such expenses were not a wholly and exclusively laid out . . . . . for the purpose of . . . . . the professions. In the circumstances, the deductions claimed by the assessees were not allowable.
1195 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Mallalieu v. Drummond (H.M. Inspector of Taxes) – 57 TC 330 (HL) 1649. Expenditure on upkeep of professional dress by a barrister is not deductible. The assessee was a practising barrister. Under the rules framed by the Court, she had to comply with certain dress regulations while appearing before the Court, as otherwise she would not be permitted to appear before the Court. Therefore she bought the specified items of dress solely with a view to enable her to exercise her profession. She had a private wardrobe of clothes and shoes which was amply sufficient to keep her clothes and shoes in comfort and decency, without having resort to the above-mentioned specified items. She claimed the expenditure incurred by her on the upkeep of her professional dress (like laundering and replacements of parts) as a deduction in the computation of her professional income. The Commissioners concluded that the assessee had two objects in making the expenditure, one to serve her profession, and the other to serve her own purposes by enabling her to be clothed properly. Since the expenditure had a dual purpose one of which was personal, the Commissioners held that the impugned expenditure was not deductible. Held that, indisputably, the assessee needed clothes to travel to work and clothes to wear at work, and it was inescapable that one object, though not a conscious motive, was the provision of clothing that she needed as a human being. The notion that the object of the taxpayer was inevitably limited to the particular conscious motive in mind at the moment of expenditure had to be rejected. Of course the motive of which the taxpayer was conscious was of a vital significance, but it was not inevitably the only object which the Commissioners were entitled to find to exist. The Commissioners were entitled to reach the conclusion that the taxpayer‟s object was both to serve the purposes of her profession and also to serve her personal purposes; the Court itself would have found it impossible to reach any other conclusion. The impugned expenditure was hence not allowable as a deduction. _______________
EXPENSES INCURRED BY HOLDING COMPANY FOR SUBSIDIARY COMPANY
Odbams Press Ltd. v. Cook – [1941] 9 ITR (Suppl.) 92 (HL) 1650. Loss of wholly-owned subsidiary company is not deductible in the hands of the parent company. There can be no doubt that limited companies who carry on business are separate taxable persons, and the profits and gains of their several
1196 Section 23(1)(xviii)
Income Tax Digest.
businesses are separate profits and gains for the purposes of the Income Tax Act. This is nonetheless true if one of the companies should be the parent company, and the other or others may be its subsidiaries of which the shares are held or owned by the parent company. The appellant-company undertook a printing job for its wholly owned subsidiary company. The subsidiary company incurred a net trading loss during the year and the appellant claimed that such loss was deductible from the receipts due to it for the printing job done for the subsidiary company, as an expenditure incurred wholly and exclusively for the purposes of its trade or business. Held that the trade or business of one company, even though it might affect very closely the trade or business of another, was not the same as the other‟s trade or business. The appellants were computing their profits and gains and it was their trade which was to be regarded, and the two companies were separate taxable persons. The deduction claimed was therefore not allowable. _______________
BANKING COMPANY
Frasers Glasgow Bank Ltd. v. Commissioners of Inland Revenue – 40 TC 698 (HL) 1651.
Profit on purchase and sale of shares in customer-company by a banking company is assessable as its trading profits.
The assessee-company was a banking company belonging to a group of companies controlled by H and most of its customers were other companies of the group or their employees. At the instance of H, the assessee purchased shares in one of the group companies in order to support its failing price in the stock market and for this purpose; the assessee had to raise an overdraft from another bank. Ten years later, when the price of the shares was on the upward trend, the assessee sold the above shares, and made a profit after repayment of the overdraft. The assessee contended that the profit was not assessable as its trading profit on the ground that the purchase of the stock was in no way connected with its banking business and that the object of maintaining the value of the group-company stock in the market was wholly divorced from the normal activities of the assessee. Held that the assessee had to use its trading facilities with its bankers to finance the purchase, and the continued prosperity of the group was of vital interest to the assessee as trader because its banking
1197 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
customers were in the main companies of the group and their employees. The sale of the stock was later made in order to put its trading bank account in better shape. Hence, the profits were assessable as its trading profits only. Punjab National Bank Ltd. v. Commissioner of Income Tax – 2 ITC 184 (Lahore) 1652.
Depreciation in value of securities in case of banks.
Investments in Government securities are made by banks, not for the purpose of trading in them, but for the purpose of retaining them permanently for use in an emergency. They are, therefore, not part of stock-in-trade, but part of fixed assets, and any depreciation in their value can hardly be called„expenditure‟. It is only a potential or temporary loss which, though it may affect the policy of the directors in declaring a dividend for the year, may in the succeeding year be converted into appreciation. Consequently, such depreciation cannot be treated as expenditure incurred for earning profits and allowed as deduction. _______________
INSURANCE COMPANIES
Commissioner of Income Tax v. United Insurance Co. of Pakistan Ltd. Karachi – [1991] 63 TAX 141 (H.C.Kar.) = 1991 PTD 57 1653.
Provision for bonus is equal to provision for unpaid risk, hence allowable expense in the hands of an insurance company.
During the assessment year 1975-76, the respondent claimed an amount of Rs.1,63,000/- as bonus payable to its employee. This amount was not paid in full at the time the books of account were closed. The Assessing Officer deducted the aforesaid amount on the assumption that the unpaid amount represented the provisions that were not allowable under repealed Income Tax Act. Although there are no specific decision of this Court on the point but on the basis of ratio laid down in the above referred cases and in another unreported decision of this court in the case of Commissioner of Income Tax v. New Jubilee Insurance Corporation Limited (ITC No. 272 of 1974) decided on 30.8.1972, we answer all the above questions referred to us in the affirmative.
1198 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax, Lahore, Zone Lahore v. Universal Life & General Insurance Co. Ltd. – [1977] 35 TAX 14 (Lah.) 1654.
Insurance company was incorporated in May, 1958 and certificate of registration under the Insurance Law was granted in January, 1960, held that expenses relatable to the business incurred prior to the grant of certificate of insurance are admissible.
It is not denied that the expenses claimed by the assessee was relatable to the business and, therefore, they have to be allowed irrespective of whether the insurance law did or did not permit the assessee to carry on that business. Commissioner of Income Tax, Karachi v. Crescent Star Insurance Co. Ltd. – [1974] 30 TAX 111 (H.C.Kar.) 1655.
Insurance company engaged in non-life insurance business, incurred expenses in excess of the permissible under Insurance Act or the rule made thereunder, the same are allowable expenses.
Sub-section(1) of section 10 of the Insurance Tax Act requires an assessee to pay income tax, subject to the provisions of the said Act, under the head “profits and gains of business” in respect of the profits or gains of any business carried on him. Sub-section (2) of the said section specifies the various allowances which are to be deducted while computing the profits or gains of a business. Clause (xvi) of the said sub-section permits to be deducted from such profits or gains “any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation”. The legislative intent seems to empower the Income Tax Officer to examine and scrutinize the profits and gains of any business of insurance other than life insurance and to allow expenditure permissible under section 10 of the Income Tax Act, even if such expenditure may not be permissible under the Insurance Act or the rules framed thereunder. An insurer who commits an infringement of section 40, 40-A, 40C or 41 of the Insurance Act or rule 40 of the Insurance Rules would undoubtedly be liable to a penalty under section 102 of the Insurance Act, but this fact by itself would not be a sufficient ground for further penalising the insurer by not granting him an allowance for expenditure which it has been found he has actually incurred, though such expenditure may not be permissible or
1199 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
may be in excess of the limits prescribed by the insurance law. The provisions of sections 40, 40-A and 40-C of Insurance Act and rule 40 of Insurance Rules have been framed mainly for the benefit of the insured parties, but if the insurer is further penalised under the Income Tax Act by requiring to pay tax on any expenditure which he has actually incurred, but which is in excess of the expenditure permitted or is an expenditure which is not authorised by the Insurance Act or the rules framed thereunder, it is so, so much the insurer who is likely to be penalised but the insured party, for the amounts available for disbursement to them would thereby be reduced. If the management expenses are in excess and contravention of the maximum prescribed in this behalf and under rule 40 of the Insurance Rules the assessing authority is not bound to hold that they are not incurred wholly or exclusively for the business under section 10(2)(xvi) of the Income Tax Act. Cases referred to: Life Insurance Corporation of India v. Commissioner of Income Tax 51 ITR 673; Pandyan Insurance Company v. Income Tax Commissioner (AIR 1965 S.C. 1004) and Commissioner of Income Tax v. Indian Life Insurance Co. Ltd. (14 ITR 347).
Bharat Insurance Co. Ltd. v. Commissioner of Income Tax – 5 ITC 288 (Lahore) 1656.
Where the assessee-insurance company had a scheme under which certain categories of policy-holders were entitled to share 90 per cent of the profits of the company, by taking out policies carrying premium at comparatively higher rates, and the assessee claimed profits so paid as a deduction, being expenditure incurred on earning profits.
Where the assessee-insurance company had a scheme under which certain categories of policy-holders were entitled to share 90 per cent of the profits of company, by taking out policies carrying premium at comparatively higher rates, and the assessee claimed profits so paid as a deduction, being expenditure incurred on earning profits, it was held that the deduction was not allowable, because (i) any expenditure incurred solely for the purpose of earning profits would ordinarily precede and not follow the accrual of the profits; it would certainly not be dependent on the existence of those profits; and (ii) the said expenditure had not necessarily to be incurred for the purpose of the business but was contingent on the existence of a surplus.
1200 Section 23(1)(xviii)
Income Tax Digest.
Commissioner of Income Tax v. New Jubilee Insurance Company – [1990] 61 TAX 1 (H.C.Kar.) 1657.
Claim of insurance company for revenue for un-expired risk beyond the permissible limit of 40% is not allowable.
The assessee, namely, New Jubilee Insurance Company Limited, were engaged in general insurance business, as well as life insurance. During the assessment year 1971-72 under consideration, the assessing officer disallowed a sum of Rs.10,27,365 which had been claimed, by the assessee, in excess of the limit of 40% allowed under the Insurance Act and the Rules, in the matter of Reserve for un-expired risks. This addition was, however, deleted by the learned Appellate Assistant Commissioner of Income Tax, relying on some earlier decisions of the Tribunal, including those, in the case of the same assessee. The learned Income Tax Appellate Tribunal maintained the said order of the Appellate Assistant Commissioner. From the foregoing we conclude that the Income Tax Officer is bound to accept balance of profits as disclosed by the accounts submitted by an assessee to the Collector of Insurance under section 15(1) of the Insurance Act, 1938 and accepted by him, except that the Income Tax Officer is entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act and that the amount set aside as reserves for unexpired risks is not “expenditure” within the meaning of rule 6 of the First Schedule and section 10 of the Income Tax Act. Cases followed: Eastern Federal Union Insurance Company [1980] PTD 73; Commissioner of Income Tax, Central Zone „B‟ Karachi v. Central Insurance Co. Ltd. [1989] 59 Tax 61 (H.C.Kar.) = [1989] PTD 128 and Commissioner of Income Tax, Central Karachi v. New Jubilee Insurance Co. Ltd. [1982] 46 Tax 125 (H.C.Kar.) = PLD 1982 Kar. 684.
Bharat Insurance Co. Ltd. v. Commissioner of Income Tax – [1934] 2 ITR 63 (PC) 1658.
Distribution of profits of an insurance company among policy holders is not deducible expenditure.
Profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits. Where the question was whether the profits distributed to participating policyholders were deductible from the surplus shown by the quinquennial valuation of a life insurance company, to arrive at the taxable income:
1201 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
Held that this being not expenditure incurred solely for the purpose of earning such profits, was not deductible. One could see how the fund for division could be spent in earning itself. The fund which was divided partly among the shareholders and partly among the policyholders was the excess of the earnings over the expenses incurred in earning that excess. _______________
IN CASE OF PARTNER OF A FIRM / FIRMS – EXPENSES BY PARTNER / FIRM
Jutharam Jankidas v. Commissioner of Income Tax – [1944] 12 ITR 344 (Pal.) 1659.
A deduction admissible to a partner cannot be disallowed on ground that profits of firm had not been assessed.
The assessee claimed litigation expenses in connection with recovery of certain amounts due to him from a firm in which he was partner. The assessee had not returned the income from partnership in the relevant year: Held that deduction could not be disallowed on the ground that the assessee had not returned any profit arising from the firm. If the assessee had not shown any profits from that business to the Income Tax Department in the year in which the profits were earned, he may have escaped from taxation but that was no ground whatsoever for disallowing him this business expenditure. _______________
PAYMENTS TO RETIRING PARTNER
Ramji Das Saint & Co., In re. – [1945] 13 ITR 430 (Lahore) 1660.
Payment made by one partner to other partners to have sole right to profits or losses of the firm is capital expenditure.
Where one partner agreed to pay to the other partners of the firm certain sums for five years irrespective of the firm‟s trading results and in lieu thereof the partner became the sole incharge and owner of the firm‟s profits and losses, it was held that the payments made were for acquiring a concern or for acquiring the right to conduct a business and were in the nature of capital expenditure.
1202 Section 23(1)(xviii)
Income Tax Digest.
Rayalu Ayyar & Co. v. Commissioner of Income Tax – [1937] 5 ITR 727 (Mad.) 1661.
Payment by other partners to satisfy the claim for share of profits from a transaction by a partner, who was excluded from said transaction, was not deductible.
Where profit was made by some of the partners of a firm and the partner who had been excluded from this transaction filed a suit for a share of profits which was decreed and the question was whether the litigation expenses and payment of the share of profits was deductible from the income of other partners: Held that the litigation expenses to defend the suit as well as the payments made to the excluded partner under the Court decree were not deductible under section 10(2)(xv) of the 1922 Act. The payment itself was part of the profits and was nothing more than distribution of profits. _______________
EXPENDITURE INCURRED BY HUF - SALARY TO COPARCENER
Kashmir Cap. House, Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1979] 39 TAX 6 (H.C.Lah.) 1662.
Salary paid to a person for managing affairs of business by a lady, held that Tribunal disallowing salary on ground that the person was a near relative if not the proprietor is not based on any material is unwarranted.
Under the circumstances there was no material before the Tribunal on the basis of which it was open to it to come to the conclusion that the sum of Rs.2200/- paid to Sh. Mohammad Jamshed was paid to the “proprietor”. We have no doubt that in deciding the question of admissibility of the assessee‟s claim the Tribunal did not go into the question as to who the assessee was. The disallowance of the salary on the ground that Sh. Mohammad Jamshed if not the proprietor is a near relative is, in our opinion unwarranted. Commissioner of Income Tax v. Jainaratn Jagannath – [1945] 13 ITR 410 (Pat.) 1663.
Remuneration paid to a member of HUF is deductible in computing HUF‟s business income.
A member of a joint family might conceivably do business in his individual capacity and in that capacity might render services to the joint family trading firm in consideration of which the firm might pay
1203 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
him such remuneration as it would pay to an outsider. If such remuneration is not excessive and is reasonable and is not a device to escape Income Tax, then it will be a legitimate deduction. If, on the other hand, the amount paid to an individual member of a family, is unreasonably high and disproportionate to the services rendered by him, then it may be treated as part of the profits of the firm distributed in a particular manner. B.K. Paul & Co. v. Commissioner of Income Tax – 7 ITC 20 (Cal.) 1664.
No question of law arose from finding that payments made as remuneration to adult male members of the family firm were not bona fide payments but mere a device to escape Income Tax.
Where the Commissioner found that payments made as remuneration to adult male members of the family firm were not bona fide payments but mere a device to escape income-lax. Held that the Commissioner‟s findings were findings of fact and no question of law arose from them. _______________
OTHERS
Commissioner of Income Tax, Central Zone ‘B’, Karachi v. Tariq Siddiqui – [1991] 63 TAX 90 (H.C.Kar.) = 1991 PTD 350 1665.
Position of exclusion of wealth tax from income under the old Act and 1979 law explained.
For the assessment year 1979-80 the respondent filed its return of income in the old form. By this time the Income Tax Ordinance 1979 had been implemented but as new forms were not available, the old form was used and Wealth Tax was not deducted as permitted by the Ordinance for computation of income. The assessing officer framed the assessment under sub-section (1) of section 59 and did not exclude the Wealth Tax liability. The respondent therefore filed an appeal before the Appellate Assistant Commissioner who in terms of clause (83) of the Second Schedule to the Income Tax Ordinance permitted the exclusion of the wealth tax liability as admissible deduction against income generating assets. The department filed an appeal which was dismissed by the Tribunal. The Wealth Tax payable by an assessee allowable under Wealth Tax Act was to be deducted from the income as exemption had been
1204 Section 23(1)(xviii)
Income Tax Digest.
granted under clause (83) of Schedule II of the Income Tax Ordinance. In this scheme of the Ordinance question of allowing the Wealth Tax as expenditure does not arise. Exemption from Income Tax and allowance as expenditure are two different concepts. There is no provision under the Income Tax Ordinance to permit the Wealth Tax payable by an assessee to be treated as expenditure for carrying the business. Case referred to : Commissioner of Income Tax, Central Zone „B‟, Karachi v. Zakia Siddiqui [1989] 59 TAX 79 (H.C.Kar.) = (1989 PTD 135).
Commissioner of Income Tax v. Hajee Abdul Gany Ayoob – [1941] 9 ITR 339 (Rangoon) 1666.
Loss of money on bank‟s becoming insolvent is deductible.
Where the assessee-merchant had maintained a banking account for the purpose of his business with a banking firm, which became insolvent: Held that as the loss occurred to the assessee due to the insolvency of the said bank, the same was an allowable deduction. There was no distinction between the debt owing by the banking firm to the assessee‟s business, and the debt owing by any customer of the business who had taken goods on credit from the business and owed for those goods. Both would stand exactly on the same footing. Dr. Sir Hari Singh Gour v. Commissioner of Income Tax – 3 ITC 333 (Nag.) 1667.
Money spent by a lawyer in replacing old editions of law books.
Expenditure by a lawyer for the replacement of old editions of law books by new ones is a capital expenditure. Nagpur Electric Light & Power Co. Ltd. v. Commissioner of Income Tax – 6 ITC 303 (Nag.) 1668.
Where, consequent on changing over its method of distribution of electricity from D.C. system to A.C. system, assessee-company became obliged to incur expenditure on replacement of consumers‟ fans and motors and on renewal of service lines.
Where, consequent on changing over its method of distribution of electricity from DC system to AC system, the assessee-company became obliged to incur expenditure on replacement of consumers‟ fans and motors and on renewal of service lines, it was held that the expenditure was capital in nature, since it was incurred in order to
1205 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
enable the assessee to carry out its plan of changing the mode of distribution. A.H. Forbes v. Commissioner of Income Tax – 6 ITC 208 (Pat.) 1669.
Others.
Investment in Government securities, howsoever regular, is not a „business‟. Income therefrom is also assessable under a separate provision in the Act. Therefore, commission paid to banks for the purchase of such securities is not allowable as business deduction. _______________
„TO EFFECT OR KEEP IN FORCE‟
_
CONNOTATION OF
Babulal Kanji v. Commissioner of Income Tax – [1946] 14 ITR 662 (Bom.) 1670.
To „effect‟ an insurance also includes maintaining an insurance.
As a life insurance policy may cover a period of five or ten years and the premium may be payable every year, it seems that the word „effect‟ in section 15(1) must include also maintaining an insurance on the life of the assessee. Note:
Section 80C(2)(a)(i) / 88(2)(i) of Indian Income Tax Act 1961 also uses the phrase „to effect or to keep in force an insurance‟. The same position prevails under the Pakistan income tax law.
Babulal Kanji v. Commissioner of Income Tax – [1946] 14 ITR 662 (Bom.) 1671.
Only amount paid to maintain policy is deductible.
In a policy-of insurance of the life of the assessee there was a condition that a compulsory loan of 95 per cent of the premium carrying interest at 6-1/4 per cent per annum should be taken by the assured within a week of the payment of each premium on the security of the policy only and that failure to raise such loans would make the policy null and void. The result was that the net payment paid by the assured was 5 per cent of the premium plus interest. The question was whether the full amount of premium was eligible for deduction/rebate. Held that only the five per cent of the total premium, which was not the subject-matter of the compulsory loan, was a permissible deduction under section 15(1). Accordingly, what sum was paid by the assured to maintain the life insurance policy was the premium, less the loan plus the interest paid by him. _______________
1206 Section 23(1)(xviii)
Income Tax Digest.
CONTRACT OF INSURANCE, MEANING OF
Babulal Kanji v. Commissioner of Income Tax – [1946] 14 ITR 662 (Bom.) 1672.
A contract of insurance must not necessarily be adverse to insurer.
In order to be a contract of insurance, the contract must be in consideration of a sum of money paid in one sum or by different installments, whereunder the insurer agrees to pay another sum on the happening of a contingent event, and which event must be connected with the life of the assured. The factor of the contract being necessarily disadvantageous to insurer is not a necessary ingredient. Where the policy was to mature after a fixed period or on death, whichever was earlier, but under the policy the assured was also to get less than what he had paid, it was held that it was an insurance on life. _______________
PROVIDENT FUND
Commissioner of Income Tax v. Muslim Commercial Bank Ltd – [1975] 32 TAX 239 (H.C.Kar.) 1673.
Provision made for tax payable on the accumulated Provident Fund balances of retired employees and no evidence was available to support the presumption that the provision so made could be on account of commercial expediency, held that amount paid was not permissible deduction.
The assessee, Muslim Commercial Bank, had some European employees on its staff who were to be paid 10% of their basic salary as Provident Fund according to the terms of their employment. Their own contribution towards the same was to be only 5% of their salary. It is said that some of these employees gave up the service of the assessee Bank and were paid off their accumulated balances of Provident Fund during the relevant years and the entire accumulation of the contribution by the employees was entertained by the Department as proper revenue charged when paid. The assessee then provided a sum of Rs.45,000 as Income Tax on the amount of the Provident Fund and claimed the same as permissible deduction within the meaning of section 10(2)(xvi) in the assessment year ending
1207 DEDUCTIONS - BUSINESS EXPENDITURE
Section 23(1)(xviii)
30.9.1957. The Income Tax Officer refused to allow this deduction holding that the expenditure not having been incurred wholly and exclusively for purposes of business, cannot be considered a proper charge against the income tax of the bank and hence the amount is added back. When the matter reached the High Court the counsel for the department contended that the assessee had failed to lay down any basis even for any presumption that the payment was on account of business expediency. The assessee alone has the special knowledge of facts, and he must disclose the same. It is not for the assessing authority to prove anything to the contrary. The assessee cannot claim to bring his case within the meaning of a clause which is in the nature of an exception, without establishing the qualifying facts and circumstances. Held, that the present case is neither of payment by agreement nor does the statement of facts disclose reference to any evidence to support the presumption that the amount of Rs.45,000 for tax could be on account of commercial expediency alone. The Tribunal was, therefore, not justified in holding that the provision of Rs.45,000 for tax payable on the accumulated Provident Fund balances of its retired employees was an admissible deduction under section 10(2)(xiv) of the Income Tax Act. Cases referred to : British Insulated and Melsby Cables Ltd. v. Atherton [All England Law Reports (135) p. 623]; N.M. Rayaloo Iyer and Sons v. Commissioner of Excess Profits Tax (1955) 28 ITR 669; Eastern Investments Ltd. v. Commissioner of Income Tax (1951) 20 ITR 1; Tata Hydrq Electric Agencies Ltd. v. Income Tax Commissioner (1937) 64 I.A. 215; Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax (1955) 27 ITR 34; Benarsidas Tagannath In re. (1947) 15 ITR 185; Ciba Dyes v. Commissioner of Income Tax (1954) 25 ITR 102; Commissioner of Income Tax v. Calcutta Agency Limited (1951) 19 ITR 191; Mitchell v. B.W. Noble Ltd. (1927) 1 K.B. 719 II-Tax Cases 327; Jethabhai Mirji and Co. v. Commissioner of Income Tax (1947) 17 ITR 533.
B.J. Heera v. Commissioner of Income Tax – [1937] 5 ITR 591 (Lahore) 1674.
Railway provident fund connotation of.
The Delhi Electric Supply Co. is not a „railway administration‟ within the terms of clause 2(f) of the Provident Funds Act, 1925, and its provident fund is not thereby a „railway provident fund‟ within clause 2(g) thereof. _______________
1208 Section 23(1)(xviii)
Income Tax Digest.
INCOME OF CO-OPERATIVE SOCIETIES - CO-OPERATIVE BANK
Commissioner of Income Tax v. Madras Provincial Co-operative Bank Ltd. – [1942] 10 ITR 490 (Mad.) 1675.
Where a principal co-operative bank purchases debentures of a Land Mortgage Bank from market, it does not give loan to latter and interest is interest on investment.
Where the assessee, principal co-operative bank, had purchased debentures of Land Mortgage Bank from the market, it was held that it was not a transaction of loan and interest received on debentures represented interest on an investment and was taxable income.
1209 Section 23(2)
Income Tax Digest.
Section 23(2)* Deductions
PAGE NO
GENERAL
1676. Tribunal disallowed half of the claim for expenses of the car as the car was not wholly used for the purpose of business but holding that since car was the asset of the assessee the whole amount claimed on account of depreciation should be allowed, irrespective of the fact whether the car was used for personal purpose of the assessee or not, held was not tenable. _ [1984] 49 TAX 118 (H.C.Kar.)
*
Corresponding to section 10(3) of the 1922 Act.
1210
1210 Section 60
Income Tax Digest.
Section 23(2)* Deductions
GENERAL
Commissioner of Income Tax, Karachi (East), Karachi v. Millwala & Sons Limited, Karachi – [1984] 49 TAX 118 (H.C.Kar.) 1676.
Tribunal disallowed half of the claim for expenses of the car as the car was not wholly used for the purpose of business but holding that since car was the asset of the assessee the whole amount claimed on account of depreciation should be allowed, irrespective of the fact whether the car was used for personal purpose of the assessee or not, held was not tenable.
It is admitted that the car was not wholly used for the purpose of the business as the Tribunal itself has disallowed half of the claim for expenses of the car for that very reason, and this part of the order has not been questioned by the respondent. Therefore, the reason advanced by the Tribunal that since the car was the asset of the assessee/respondent, the whole amount claimed on account of depreciation must be allowed is untenable in the face of the statutory provisions referred to above. Book referred to: Law & Practice of Income Tax by Jamshedji B. Kanga & N. Palkhivala (4th End, 1958), pp. 415, 353 & 354,
*
Corresponding to section 10(3) of the 1922 Act.
1211 DEDUCTIONS NOT ADMISSIBLE – ANY CESS, RATE OR TAX LEVIED ON THE PROFITS OR GAINS
Section 24(a)
Section 24(a)* Any cess, rate or tax levied on the profits or gains
PAGE NO
PROFITS OR GAINS OF BUSINESS OR PROFESSION - CONNOTATION OF
1677. The prohibition is limited only to those taxes/levies which are calculated on profits as determined under section 10 of _ 1922 Act. [1946] 14 ITR 100 (PC)
*
Corresponding to section 10(4) of the 1922 Act.
1212
1212 Section 24(a)
Income Tax Digest
Section 24(a)* Any cess, rate or tax levied on the profits or gains
PROFITS OR GAINS OF BUSINESS OR PROFESSION - CONNOTATION OF
Commissioner of Income Tax v. Gurupada Dutta – [1946] 14 ITR 100 (PC) 1677.
The prohibition is limited only to those taxes/levies which are calculated on profits as determined under section 10 of 1922 Act.
The assessee-HUF claimed deduction in its business income towards an amount paid by them as a Union Board Rate in respect of its business premises, under the provisions of the Bengal Village SelfGovernment Act, 1919 („the Bengal Act‟). The question for consideration was whether the amount was not deductible under section 10(4) of the 1922 Act. Held that in the absence of the necessary powers and machinery, which were not provided by the Bengal Act, the estimate of the annual income from business could only proceed on a rough guess, which was in no way comparable with the ascertainment of profits and gains under the Income Tax Act, and the inclusion of this element of business income as part of the „circumstances‟ of the assessee with a view to the imposition of the Union rate did not fall within section 10(4). It was conceded that the Union rate was not „levied on the profits or gains‟, which clearly implied an ascertainment of such profits and gains, and the words „assessed... on the basis of any such profits or gains‟ in the later part of section 10(4) must also be so limited. No such ascertainment of the profits and gains of the business could be undertaken for the purpose of the Union rate. The amount was, therefore, not disallowable under section 10(4). Case review: Decision of the Calcutta High Court in Commissioner of Income Tax v. Gurupocia Dutta [1943] 11 ITR 499 affirmed.
*
Corresponding to section 10(4) of the 1922 Act.
1213 DEDUCTIONS NOT ADMISSIBLE ANY CESS, RATE OR TAX LEVIED ON THE PROFITS OR GAINS
Section 24(a)
Judicial analysis: EXPLAINED IN - Jaipuria Sanula Amalgamated Collieries Ltd. v. Commissioner of Income Tax [1971] 82 ITR 580 (SC) by the Indian Supreme Court in the following words: “ . . . . . It is significant that in spite of the decision of the Privy Council in Commissioner of Income Tax v. Gurupatla Dune [1946] 14 ITR 100 (PC), Parliament did not make any change in the language of the provisions corresponding to section 10(4). It can, therefore, legitimately be said that the view of the Privy Council with regard to the true scope and ambit of section 10(4) of the Act was accepted . . . . . ” (p. 586)
1214 Section 24(b)
Income Tax Digest
Section 24(b)* Payments to non-residents
PAGE NO
GENERAL
1678. No effective arrangement for deduction of tax at source made from the payment of commission @ 1% on the amount of surety paid to the non-resident under section 10(4)(bb) of 1922 Act, held that Tribunal was justified in confirming _ disallowance of expenditure. [1984] 50 TAX 133 (H.C.Kar.)
1215
COMMISSION PAID TO NON-RESIDENT WITHOUT DEDUCTION OF TAX AT SOURCE
1679. Commission paid to non-resident without deduction of tax at source under section 18(3B), held as inadmissible deduction from the profits of assessee company as business _ expenditure. [1978] 37 TAX 125 (H.C.Kar.)
1216
1680. Interest paid to non-resident creditors without deduction of tax at source under section 18(3B). Held that assessee was _ not entitled to deduction under section 10(2)(iii). [1960] 2TAX (III-492) (H.C.Dacca) = 1961 PTD 900 = 1961 PLD 602
1217
*
Corresponding to section 10(4)(bb) of the 1922 Act.
1215 DEDUCTIONS NOT ADMISSIBLE PAYMENTS TO NON-RESIDENTS
Section 24(b)
Section 24(b)* Payments to non-residents
GENERAL
Commissioner of Income Tax, Karachi (East), Karachi v. Cogefar Astaldi Sidmail, Joint Venture, Karachi – [1984] 50 TAX 133 (H.C.Kar.) 1678.
No effective arrangement for deduction of tax at source made from the payment of commission @ 1% on the amount of surety paid to the non-resident under section 10(4)(bb) of 1922 Act, held that Tribunal was justified in confirming disallowance of expenditure.
Referring to the last contention of Mr. Shaikh Hyder, it may be mentioned that he has referred to section 10(4)(bb) of the Income Tax Act which also requires income tax deduction at source in order to claim as an item of expenditure for the payment of allowance in respect of any payment by way of brokerage or commission made to a person not resident in Pakistan. The payment of charges on the bank guarantee or performance bond cannot be equated with a payment of brokerage or commission referred to in the above provision of the Act. The payment of charges for the bank guarantee or performance bond are normal business expenditure, in case of building contract, and therefore the Tribunal was justified in allowing the same. Cases referred to: Commissioner of Income Tax v. Eastern Services Ltd., Karachi (1984 PTD 11). 1678A. “Loss arising out of valuation of closing stock is allowable”
It may be observed that the basis on which stock in hand is valued is a part of the method of accounting. The market value is assessed as at the close of accounting year and not in the mid of the year. It is either based on the actual cost of the closing stock or the average cost of the stocks purchased. The above rule of accounting allows an assessee to write down the stock when market value is less than its cost. This in fact permits an allowance for future unrealized loss. This is an *
Corresponding to section 10(4)(bb) of the 1922 Act.
1216 Section 24(b)
Income Tax Digest.
exception to the general rule that a precautionary loss for anticipated loss is not allowable. The Tribunal‟s decision in the instant cases on the point in issue seems to be in consonance with the above accepted accounting system. The question whether the above two figures were properly worked out, was a question of fact within the competency of the Tribunal and therefore, cannot be disturbed by this Court in the above references. Though the questions as framed proceed on the assumption that there was no evidence before the Tribunal, but this is not factually correct. The above two items were claimed on the basis of account books etc. In this regard reference may be made to the case of The Commissioner of Income Tax v. Eastern Services Ltd., Karachi, reported in 1984 PTD 11. Cases referred to: Commissioner of Income Tax v. Eastern Services Ltd., Karachi (1984 PTD 11). Cases referred to: Commissioner of Income Tax v. Eastern Services Ltd., Karachi (1984 PTD 11). _______________
COMMISSION PAID TO NON-RESIDENT WITHOUT DEDUCTION OF TAX AT SOURCE
Gulberg Textile Mills v. Commissioner of Income Tax, Karachi – [1978] 37 TAX 125 (H.C.Kar.) 1679.
Commission paid to non-resident without deduction of tax at source under section 18(3B), held as inadmissible deduction from the profits of assessee company as business expenditure.
A close reading of clause (bb) of section 10(4) shows that the language is restrictive and worded in negative. It provides that any allowance in respect of any payment by way of brokerage or commission made to a non-resident person shall not be deemed to be authorised as business expenditure under section 10(2)(xvi) unless tax has been deducted therefrom under section 18. In other word, the deduction of tax at the time of payment is made a condition to the allowance of the claim in respect of the payment of brokerage or commission. It is pertinent to observe that it is not a condition for the allowance of business expenditure of payment of every kind made to a non-resident person that it shall not be authorised unless tax has been deducted therefrom under section 18, but only of payment of brokerage or commission which are specifically provided for in clause (bb). As rightly observed by the Tribunal, the intention of the Legislature in enacting clause (bb) appears to be that the amount of brokerage or commission payable to a nonresident should not altogether escape the incidence of
1217 DEDUCTIONS NOT ADMISSIBLE PAYMENTS TO NON-RESIDENTS
Section 24(b)
taxation and the payer who is claiming the deduction of the amount from his profits as a business expenditure must deduct tax at the time of payment in accordance with the provisions of sub-section (1) of section 17 of the Act, leaving it either to the non-resident person to obtain a certificate in writing from the Income Tax Officer under the proviso to section 18(2B) specifying the rate at which the tax may be deducted, if any, or a payer to obtain an order to that effect. Section 18(3B) is expressed in the widest possible terms. It covers all sums (other than „interest on securities‟) chargeable under the provisions of the Act and payable to a non-resident, which are in the nature of income, that is pure income, as opposed to payment of a sum which in the hands of the recipient is a trading receipt, e.g. price of goods sold paid to a non-resident seller. In the former case of payment of a sum which is a pure income profit, the payer is bound to make the deduction of tax at the time of payment to the non-resident and he is not concerned with the ultimate result of the assessment of the nonresident person, to whom the payment is made which is a matter between the non-resident and the Revenue. The Tribunal was right in holding that the commission of Rs.40,175 paid to the Indonesian agents was not allowable as a deduction in the assessment of the applicant by virtue of section 10(4)(bb) of the Act, even though these payments were not chargeable to tax in Pakistan. Case referred to: Commissioner of Income Tax v. Cooper Engineering Ltd. [1968] 68 ITR 457 and Aggrawal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal [1958] 33 ITR 245.
Commissioner of Income Tax, East Pakistan, Dacca v. Howrah Trading Co. Ltd., Calcutta – [1960] 2-TAX (III-492) (H.C.Dacca) = 1961 PTD 900 = 1961 PLD 602 1680.
Interest paid to non-resident creditors without deduction of tax at source under section 18(3B). Held that assessee was not entitled to deduction under section 10(2)(iii).
The assessee, a non-resident foreign company, advanced loan to two Sugar Mills in Pakistan. The contract for the loan advanced was made outside taxable territories and the interest charged from the said Sugar Mills was at the rate of 3 per cent. The foreign company in its own turn paid interest at the rate of 4½ per cent to 8 parties in the foreign country from whom it borrowed the money. At the assessment stage the assessee admitted its liability to tax in Pakistan in respect of its income arising or accruing in Pakistan from interest received from the two Sugar Mills but claimed deductions under section 10(2)(iii) of the Income Tax Act of the interest paid to its creditors in foreign
1218 Section 24(b)
Income Tax Digest.
country from where it borrowed the money in the course of its business. The Income Tax Officer rejected the claim for deduction on the grounds that (i) Pakistan Income Tax had not been deducted under section 18(3B) from the interest paid to the creditors in foreign country in accordance with the proviso to section 10(2)(iii) and (ii) the activities of the two Sugar Mills, the assessee and the creditors in foreign country were all under the control of the managing agents of these two Sugar Mills and the said creditors had knowledge that the money sent by them would come to Pakistan with the result that the interest paid to the creditors attracted tax in Pakistan. The Appellate Assistant Commissioner as well as the Appellate Tribunal could not agree with the Income Tax Officer that the managing agents of the two Sugar Mills exercised control over the non-resident foreign company (assessee) and that the creditors in foreign country had knowledge that their monies would be taken to taxable territories. The Appellate authorities held that the income which arose to the creditors of the non-resident company (assessee) in the foreign country was not chargeable to Income Tax in Pakistan and allowed deduction under section 10(2)(iii) of the Act. On a reference by the Department it was held that (i)
it is no doubt true that income tax is levied under section 4 subject to the provisions of the Act and one of the provisions of the Act and mandatory one, under section 10, is to give deduction of interest paid on borrowed capital in determining assessable income but it is subjected to the proviso to section 10(2)(iii) of the Act which provides that no allowance shall be made for any interest chargeable which, is payable without the taxable territories except interest on which tax has been paid or from which tax has been deducted under section 18;
(ii)
if the Company wants to pay interest to its creditors in India out of the income derived by way of interest that would be deemed to be an income accrued or arose in the taxable territories out of the money lent by them to the Company and brought into the taxable territories. Of course in the present case, the Company and its eight creditors are non-resident foreigners. But section 18(3B) speaks of “any person responsible for paying to a person not resident in the taxable territories any interest.” It is an interest chargeable under the provisions of section 42 of the Act and as such under section 18(3B) the Company is bound to deduct Income Tax out of it. When the Company has not deducted
1219 DEDUCTIONS NOT ADMISSIBLE PAYMENTS TO NON-RESIDENTS
Section 24(b)
it, the proviso to section 10(2)(iii) will come into play and under that proviso no allowance can be made; (iii)
the provisions of section 42 speaks only of income accruing or arising through or from any money lent at interest and brought into the taxable territories and do not concern so much with the person who lent and who brought the money into the taxable territories as of the income out of the borrowed capital accrued or deemed to have accrued in taxable territories. If there is an income out of that borrowed capital, it shall be deemed to have accrued or arisen within the taxable territories and as such chargeable to Income Tax;
(iv)
under section 42 of the Act it is not absolutely necessary that the knowledge of the lender and borrower about bringing of the money into taxable territories should be integral part of the transaction. If knowledge of both is an integral part of transaction, it is well and good, if not, even then the provisions of the section would equally apply;
(v)
in cases coming under section 42, a nexus or connection is established between the taxable territories and the person who lent the money at interest, by reason of the fact that the source of income is in the taxable territories. The person who is taxed here is not the borrower but the lender whose source of income is the money which he lent and which in its original form or converted form is actually in existence in the taxable territories;
(vi)
the new words [in section 42(1) “through or from any money lent at interest and brought into the taxable territories in cash or kind” were included to guard against any subterfuge which can be adopted for the purpose of escaping Income Tax by showing that money was lent outside the taxable territories, though to all intent and purposes it is money lent for the purpose of taxable territories; and
(vii)
if the income accrues or arises or deemed to be an income accrued or arose in taxable territories it does not matter wherein it is received or paid, whether in or without the taxable territories.
Cases referred to: A. H. Wadia v. Commissioner of Income Tax, Bombay [(1949) 17 ITR 63; A 1 R 1949 P.C. 181; Commissioner of Income Tax, Karachi v. The Netherland Trading Society, Karachi [(1960) 2 Tax (Supple139)]; Commissioner of Income Tax v. Currimboy Ebrahim and Sons Limited [(1935) ITR; 395 AIR 1936 P.C.I.]; Commissioner of Income Tax, Bombay v.
1220 Section 24(b)
Income Tax Digest.
Bansimal Motilal [AIR 1930 Bombay 381]; and Banumal v. Munshi Ram [AIR 1935. Lahore 599]. Judicial analyses : CONFIRMED BY - The Supreme Court of Pakistan in Howrah Trading Co. (Pvt.) Ltd. v. Commissioner of Income Tax, East Pakistan 1963 SCC 150 = [1963] 8 TAX 59 (S.C.Pak.) by majority with dissenting order by Cornelius CJ. The conclusions of three Honourable Judges are reproduced below : Per Cornelius C.J., - “ . . . . . The interest payable by the Howrah Trading Co. to its own creditors in India on transactions of loan which are unconnected with the loans by the Howrah Trading Co. to the two Sugar Mills, is not chargeable to tax in Pakistan, and consequently, the proviso to section 10(2)(iii) of the 1922 Act has no application to the case. I would therefore allow this appeal, and reversing the opinion expressed by the High Court . . . . . ” Per S.A. Rehman J., - agreeing with B.Z. Kaikus J . . . . . ”I find therefore that section 10 and 42 of the 1922 Act, act and react on each other. Unless, therefore, in such a case either the tax on interest income which has been accrued to the Indian creditors, has either been paid or deducted under section 18 of 1922 Act, the allowances claimed would not be admissible. So whichever way the case is looked at, the decision must go against the appellant.” Per B.Z. Kaikaus J., - “. . . . . the borrower, that is the appellant, was deliberately investing it in Pakistan and if in Pakistan the investment (by way of lending to Mills) earned income, then interest on the capital invested shall be liable to the payment of tax. The important point to be kept in mind is that the money lent by the creditors of the appellant is creating income in Pakistan. . . . . ”
1221 DEDUCTIONS NOT ADMISSIBLE - SERVICES RENDERED, BROKERAGE OR COMMISSION OR RENT OF HOUSE PROPERTY
Section 24(c)
Section 24(c)* Services rendered, brokerage or commission or rent of house property
PAGE NO
IN CASES OF DIRECTORS
1681. Provisions of section 10(4)(a) of 1922 Act are not attracted in cases of directors who are not employers of the company. _ [1977] 36 TAX 223 (H.C.Lah.)
*
Corresponding to section 10(4)(a) of the 1922 Act.
1222
1222 Section 24(c)
Income Tax Digest
Section 24(c)* Services rendered, brokerage or commission or rent of house property
IN CASES OF DIRECTORS
Commissioner of Income Tax, Lahore v. Pak Cinemas Ltd. Lahore – [1977] 36 TAX 223 (H.C.Lah.) 1681.
Provisions of section 10(4)(a) of 1922 Act are not attracted in cases of directors who are not employers of the company.
The Tribunal having factually found that there was no relationship of master and servant between the Directors and the company the provision of section 10(4)(a) of the Income Tax Act cannot be attracted. Case referred to: Commissioner of Income Tax v. L. Armstrong Smith [1946] 14 ITR 606 and Commissioner of Income Tax v. Lady Navajbat R.J. Tata [1947] 15 ITR 8. Case review: The position under Income Tax Ordinance, 1979 and 2001, has changed. In both the enactments the expression “employee” includes all directors of the company in the definition of “employee” although they do not derive salary out of master servant relationship.
*
Corresponding to section 10(4)(a) of the 1922 Act.
1223 DEDUCTIONS NOT ADMISSIBLE - INTEREST, BROKERAGE, COMMISSION, SALARY OR OTHER REMUNERATION
Section 24(d)
Section 24(d)* Interest, brokerage, commission, salary or other remuneration
PAGE NO
INTEREST
1682. Even when business of a firm has been succeeded to, interest on capital invested by an ex-partner is not deductible. _ [1941] 9 ITR 358 (All.)
*
Corresponding to section 10(4)(b) of the 1922 Act.
1224
1224 Section 24(d)
Income Tax Digest
Section 24(d)* Interest, brokerage, commission, salary or other remuneration
INTEREST
Kunjamal & Sons., In re – [1941] 9 ITR 358 (All.) 1682.
Even when business of a firm has been succeeded to, interest on capital invested by an ex-partner is not deductible.
The assessee was carrying on a partnership business with another at Agra and Delhi. In 1936, the partnership was dissolved and the assessee took over the Agra business. In the assessment year 1937-38 a certain sum was paid as interest by the assessee to a partner of the old firm on the capital invested by him. Held that, even assuming that the assessee had succeeded to the business, the said interest had been correctly disallowed as it was paid on capital invested by a partner.
*
Corresponding to section 10(4)(b) of the 1922 Act.
1225 DEDUCTIONS NOT ADMISSIBLE - PROVIDENT FUND OR OTHER FUND ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF THE ASSESSEE
Section 24(h)
Section 24(h)* Provident fund or other fund established for the benefit of employees of the assessee
PAGE NO
GENERAL
1683. Effect of Explanation 3 added by Finance Act, 1975 did not bring any change made in the existing state of law through _ amendment. [1991] 63 TAX 32 (H.C.Kar.)
1226
DEDUCTION OF TAX AT SOURCE
1684. Disallowance held unjustified in case of contribution to the pension fund for which no effective arrangement for deduction _ of tax at source was made. [1985] 52 TAX 18 (H.C.Kar.)
1227
1685. Contribution to the pension fund for which no effective arrangement for deduction of tax at source made; disallowance _ held not maintainable. [1984] 50 TAX 126 (H.C.Kar)
1228
PENSION FUND WAS MAINTAINED IN FOREIGN COUNTRY FOR FOREIGN EMPLOYEES AND WAS PAYABLE IN FOREIGN COUNTRY AFTER RETIREMENT
1686. Pension fund was maintained in foreign country for foreign employees and was payable in foreign country after retirement held that although no effective arrangement made to deduct tax at source payment out of it were not _ liable to tax in Pakistan. [1960] 2-TAX (Suppl.-139) (H.C.Kar) = 1960 PTD 758 = 1957 PLD 167
*
Corresponding to section 10(4)(c) of the 1922 Act.
1228
1226 Section 24(h)
Income Tax Digest
Section 24(h)* Provident fund or other fund established for the benefit of employees of the assessee
GENERAL
Commissioner of Income Tax Central Zone „B‟, Karachi v. Pfizer Laboratories Ltd., Karachi – [1991] 63 TAX 32 (H.C.Kar.) 1683.
Effect of Explanation 3 added by Finance Act, 1975 did not bring any change made in the existing state of law through amendment.
In respect of assessment year 1974-75 the respondent filed statement of excess perquisite amounting to Rs.1,19,449 which did not include employer‟s contribution to provident fund amounting to Rs.69,674. The Income Tax Officer considered this amount as perquisite and added it back to the income. The respondent filed an appeal before the Appellate Assistant Commissioner which was allowed relying on the decision of the Tribunal which was based on the amendment made by Finance Ordinance, 1975 whereby explanation 3 was added to section 10(4)(d) of the Income Tax Act. It was held that although the amendment was made by Finance Act 1975 it was retrospective in operation and was applicable to assessment year 1974-75. It was further held that employer‟s contribution does not give any immediate benefit to employee and hence it could not form part of the salary consequently the addition made by the Income Tax Officer was deleted. The department filed an appeal before the Appellate Tribunal which was dismissed in view of Explanation No. 3 added to section 10(4)(d) of the Income Tax Act. The question arises whether employer‟s contribution to the provident fund is perquisite or not? Explanation I clarifies that the salary does not include employer‟s contribution to the recognized provident fund. Therefore, for the purpose of granting allowance the employer‟s contribution to the provident fund has not been treated as salary. However, the only question remains whether contribution made to the *
Corresponding to section 10(4)(c) of the 1922 Act.
1227 DEDUCTIONS NOT ADMISSIBLE - PROVIDENT FUND OR OTHER FUND ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF THE ASSESSEE
Section 24(h)
provident fund can be treated as perquisite and falls within the ambit of section 10(4)(d). The treatment given to such contribution in section 10(4)(d) will be completely negatived if it is treated as perquisite and section 10(4)(c) will be completely negatived if it is treated as perquisite and section 10(4)(d) is applied to it. The grant of allowance in respect of such contribution is conditional. Where condition laid down by section 10(4)(c) is satisfied, the assessee in terms thereof becomes entitled to the allowance in respect of contribution made to the provident fund. Therefore, the legal position which emerged before addition of explanation 3 was that allowance on payment of contribution to the provident fund established for the benefit of the employee was permissible on terms as provided by section 10(4)(c). Such contribution cannot therefore, be treated as perquisite for the purposes of granting allowance under section 10(4)(d). This legal position has been reiterated and explained, by Explanation 3 added in 1975. The scheme of the Act, the preceding and subsequent provisions, if relevant, have to be taken into consideration to find out the purpose and object which such explanation seeks to achieve. Explanation 3 hardly changed the existing state of law and therefore, the contribution made to the provident fund by the employer stands at the same footing and requires the same treatment as existed before the amendment. The application for reference was rejected. We respectfully follow this judgment and in view of the fact that the provision of law quoted above is obvious and the answer to the question sought to be raised is patently clear, we reject the application. _______________
DEDUCTION OF TAX AT SOURCE
Commissioner of Income Tax v. Reckitt & Colman of Pakistan Ltd. – [1985] 52 TAX 18 (H.C.Kar.) 1684.
Disallowance held unjustified in case of contribution to the pension fund for which no effective arrangement for deduction of tax at source made -
Where on the facts and in the circumstances of the case the Tribunal was justified in allowing the contributions to the pension fund for which no effective arrangements for deduction of tax from payment
1228 Section 24(h)
Income Tax Digest.
out of it were made as required under section 10(4)(a) of the Income Tax Act, 1922? For the reasons already recorded in the above judgement (I.T.R. Nos. 116, 117 & 118 of 1974) dated 4-4-1984, our answer to the above question is in the affirmative. However, there will be no order as to costs. Commissioner of Income Tax, (Central Zone), Karachi v. Pakistan Refinery Ltd., Karachi – [1984] 50 TAX 126 (H.C.Kar.) 1685.
Contribution to the Pension Fund for which no effective arrangement for deduction of tax at source made; disallowance held not maintainable.
We are inclined to hold that the contribution made by the respondent assessee towards pension fund maintained by the foreign company in a foreign country in fact does not amount part of the salary in terms of section 7 of the Act, but it is a payment for the purpose of reimbursing the foreign company for its future liability of making payment to its employee on his retirement or on death. We are, therefore, of the view that the view found favour with the tribunal that the above contribution could not have been disallowed by the Income Tax Officer seems to be in consonance with law. Our answer to the above reframed question is in the affirmative. Cases referred to: Commissioner of Income Tax, Karachi v. The Netherlands Trading Society, Karachi (PLD 1957 (W.P.) Karachi 167 and A.J. Hartshorn v. Commissioner of Income Tax/CST, Reference No. 475/1972 unreported. _______________
PENSION FUND WAS MAINTAINED IN FOREIGN COUNTRY FOR FOREIGN EMPLOYEES AND WAS PAYABLE IN FOREIGN COUNTRY AFTER RETIREMENT
Commissioner of Income Tax, Karachi, Sind and Baluchistan v. The Netherlands Trading Society, Karachi – [1960] 2-TAX (Suppl.-139) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 758 = 1957 PLD 167 1686.
Pension fund was maintained in foreign country for foreign employees and was payable in foreign country after retirement held that although no effective arrangement made to deduct tax at source payment out of it were not liable to tax in Pakistan.
The assessee had its head office in Holland and its various branches in Pakistan. It maintained a pension fund in foreign country governed by an irrevocable trust for the purpose of securing pension to the foreign
1229 DEDUCTIONS NOT ADMISSIBLE - PROVIDENT FUND OR OTHER FUND ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF THE ASSESSEE
Section 24(h)
employees at the time of retirement in foreign country. No effective arrangement was made by the assessee to secure that tax should be deducted at source. The Income Tax Officer refused to make an allowance under section 10(2)(xv) on the ground that the allowance was prohibited by section 10(4)(c). The Tribunal held that section 10(4)(c) does not apply to a case where the pension fund is maintained outside Pakistan and payment is made in foreign country and where the recipient is not taxable under the Income Tax Act. On a reference, the High Court upheld the decision. Cases referred to: Porbandar State Bank v. Commissioner of Income Tax, Bombay [18 ITR 134]; A.H. Wadia v. Commissioner of Income Tax [17 ITR 63]; and Wallace Brothers Co., Ltd. v. Commissioner of Income Tax [(1948) FCR 1]; [16 ITR 240]. Judicial analyses: Pension fund was maintained in foreign country for foreign employees and payable in foreign country after retirement. Since the payments were not taxable in Pakistan, no effective arrangement were made to deduct tax at source. Held that amount of fund was rightly allowed on the principle of cessante ratione legis, ipsa lex cessat (the reason of the law ceasing, the law itself ceases).
1230 Section 24(i)
Income Tax Digest
Section 24(i)* Deductions not admissible – Expenditure incurred by an assessee on perquisites, allowances
PAGE NO
EXCESS PERQUISITES
1687. Claim of perquisites and export rebate requires proper _ verification. 1992 SCC 946 = [1993] 67 TAX 222 (S.C.Pak.)
1231
USING THE WORD „OR‟ AS DISJUNCTIVE
1688. Bonus payable by the assessee to its employees would not form part of the salaries paid to the employees if the payment there of was not in accordance with terms of their employment. Word “or” in section 24(i) is to be construed as “disjunctive”. _ [1999] 80 TAX 106 (H.C.Kar.) = 1999 PTD 2901
1231
REIMBURSEMENT ON ACCOUNT OF MEDICAL BILLS IS A PERQUISITE
1689. The amount paid to the employees as reimbursement on _ account of medical bills is a perquisite. [1992] 65 TAX 300 (H.C.Kar.) PROVIDENT FUND IS NOT PERQUISITE
1690. Contribution to provident fund is not perquisite. TAX 130 (H.C.Kar.)
_
1232
[1992] 65 1233
1691. Employer‟s contribution to provident fund is not perquisite. _ [1991] 63 TAX 52 (H.C.Kar) = 1991 PTD 39
1233
1692. Employees contribution to the recognized provident fund is not covered by the term „perquisite‟ or other benefits for the _ purpose of section 24(i). [1984] 50 TAX 130 (H.C.Kar)
1234
*
Corresponding to section 10(4)(d) of the 1922 Act.
1231 DEDUCTIONS NOT ADMISSIBLE - EXPENDITURE INCURRED BY AN ASSESSEE ON PERQUISITES, ALLOWANCES
Section 24(i)
Section 24(i)* Deductions not admissible – Expenditure incurred by an assessee on perquisites, allowances
EXCESS PERQUISITES
Pakistan Tobacco Co. Ltd. v. Government of Pakistan through Secretary Finance & 3 others – 1992 SCC 946 = [1993] 67 TAX 222 (S.C.Pak.) 1687.
Claim of perquisites and export rebate requires proper verification.
Enquiry into the claim of perquisites and rebate requires consideration of facts and checking of accounts for which proper forum is departmental authorities as is provided under the Ordinance. It is open to the appellant before us to pursue departmental appeal against the order of assessment which was impugned in the High Court in the Constitutional petitions. _______________
USING THE WORD „OR‟ AS DISJUNCTIVE
Pakistan Services Ltd., Karachi v. Commissioner of Income Tax, Central Zone „C‟ (COS-1) – [1999] 80 TAX 106 (H.C.Kar.) = 1999 PTD 2901 1688.
Bonus payable by the assessee to its employees would not form part of the salaries paid to the employees if the payment there of was not in accordance with terms of their employment. Word “or” in section 24(i) is to be construed as “disjunctive”.
By using the word „or‟ as disjunctively in Explanation (i) to section 24(i) of the Ordinance between words “bonus” and “commission”, the interpretation which would follow would neither be importable nor
*
Corresponding to section 10(4)(d) of the 1922 Act.
1232 Section 24(i)
Income Tax Digest.
without any sense or contrary to any provision of the Ordinance. As a matter of fact the interpretation which would follow, i.e., bonus paid to the employees would form part of their salaries notwithstanding that there is no agreement between the employer and the employees for payment thereof would be merely beneficial to the taxpayer then the interpretation which would follow by using the word “or” conjunctively. Explanation (i) to section 24(i) of the Ordinance in our view conveys an intention on the part of the legislature to depart from its previous intention and to include “bonus” in the definition pf the salary irrespective of the fact that it is not payable in accordance with any agreement between the employer and the employee. We have come to this conclusion In view of the settled principle that every word is to be given its natural and ordinary meaning In Interpreting a provision of a statute and the word „or‟ is ordinarily to be used as disjunctive. Cases, referred to: Abdul Razak v. Karachi Building Control Authority reported in PLD 1994 SC 512; Sardar Muhammad and, others v. Municipal Committee, Jhelum, reported in PLD 1970 SC 497; Pakistan Tobacco Company Ltd. v. Karachi Municipal Corporation reported in PLD 1967 SC 241; In re, Sabir Shah‟s references under section 8-B of the Political Parties Act, reported in 1994 MLD 1569 and Abdul Rehman v. I.G. Police, Punjab and others, reported in PLD 1995 SC 546. _______________
REIMBURSEMENT ON ACCOUNT OF MEDICAL BILLS IS A PERQUISITE
Commissioner of Income Tax, Central Zone „C‟, Karachi v. Algemence Bank of Netherland, Karachi – [1992] 65 TAX 300 (H.C.Kar.) 1689.
The amount paid to the employees as reimbursement on account of medical bills is a perquisite.
In our view, without there being a nexus between the expenses incurred by an employee and his official duties in the course of his employment, payment for such expenses will be “perquisites” or “benefits” mentioned in section 10(4)(d) of the Income Tax Act, 1922. As observed, in some of the judgments cited by Mr. Ibrahim Pishori, to take the medical expenses outside the definition of “perquisites” or “benefits” it had to be shown that such expenses were “wholly, exclusively and necessarily incurred in the performance of the duties.” It has not been the case of the assessee company that the expenses incurred by its employees for medical treatment were expenses wholly,
1233 DEDUCTIONS NOT ADMISSIBLE - EXPENDITURE INCURRED BY AN ASSESSEE ON PERQUISITES, ALLOWANCES
Section 24(i)
exclusively or necessarily incurred in the course of the performance of their duties by the employees. In our view the Income Tax Officer had correctly disallowed the aforesaid sum of Rs.8353/- being excess perquisites / under section 10(4)(d) of the Income Tax Act, in the circumstances, the answer to the question referred to us is in the negative. Cases referred to : Pook v. Oven 45 TAX Cases 571; Commissioner of Income Tax v. D.R. Phatak [1975] 99 ITR 14; Commissioner of Income Tax v. Kanan Deven Hills Produce Co. Ltd. [1979] 119 ITR 431 and Indian Leaf Tobacco Development Company v. Commissioner of Income Tax [1982] 137 ITR 827. _______________
PROVIDENT FUND IS NOT PERQUISITE
Commissioner of Income Tax, Central Zone „B‟, Karachi v. Cynamid (Pak.) Ltd., Karachi – [1992] 65 TAX 130 (H.C.Kar.) 1690.
Contribution to provident fund is not perquisite.
We have heard Mr. Shaikh Haider, learned Advocate for the applicant. None appeared for the respondent. The first question came up for consideration before a Division Bench of this Court in the case of Pakistan Petroleum Ltd. v. Commissioner of Income Tax (Central), Karachi, reported in (1984) 50 Tax 130 (H.C.Kar.) = 1985 PTD 1. After referring to the case-law on the subject, the said question was answered in affirmative. Case followed: Pakistan Petroleum Ltd. v. Commissioner of Income Tax (Central), Karachi (1984) 50 Tax 130 (H.C.Kar.) = (I985 PTD 1).
Commissioner of Income Tax v. Pfizer Laboratories Ltd. – [1991] 63 TAX 52 (H.C.Kar.) = 1991 PTD 39 1691.
Employer‟s contribution to provident fund is not perquisite.
The question arises whether employer‟s contribution to the provident fund is perquisite or not? Explanation 1 clarifies that the salary does not include employer‟s contribution to the recognized provident fund. Therefore, for the purposes of granting allowance the employer‟s contribution to the provident fund has not been treated as salary. However, the only question remains whether contribution made to the provident fund can be treated as perquisite and fall within the ambit of section 10(4)(d) of 1922 Act. The treatment given to such contribution in section 10(4)(d) of 1922 Act will be completely negatived if it is treated as perquisite and section 10(4)(d) is applied to
1234 Section 24(i)
Income Tax Digest.
it. The grant of allowance in respect of such contribution is conditional. Where the condition laid by section 10(4)(c) of 1922 Act is satisfied, the assessee in terms thereof becomes entitled to the allowance in respect of contribution made to the provident fund. Therefore, the legal position which emerged before addition of explanation 3 was allowance on payment of contribution to the provident fund established for the benefit of the employee was permissible on terms as provided by section 10(4)(c). Such contribution cannot therefore, be treated as perquisite for the purposes of granting allowance under section 10(4)(c). This legal position has been reiterated and explained by explanation 3 added in 1975. Pakistan Petroleum Limited, Karachi v. Commissioner of Income Tax, (Central), Karachi – [1984] 50 TAX 130 (H.C.Kar.) 1692.
Employees contribution to the recognized provident fund is not covered by the term „perquisite‟ or other benefits for the purpose of section 24(i).
In our view, this explanation added to clause (d) of sub-section (4) of section 4 of the Act by Finance Act, 1975 (which came into force on 1.7.1975) was merely explanatory. It neither added to nor subtracted to any liability in the then existing Provisions of section 10 of the Act. It was enacted with the object to clarify the existing Provisions of law for guidance. In other words, clause (d) of sub-section (4) of section 10 of the Act should have been construed even prior to the addition of the above Provision, as the exclude an employer‟s contribution to a recognized Provident fund as perquisites and other benefits for the purpose of section 10(4)(d) of the Act. The learned counsel for the applicant / assessee has also drawn our attention to two subsequent orders of the Income Tax Appellate Tribunal, in which the above explanation has been taken into consideration though the assessmentyears pertained to prior to 1975.
1235 DEDUCTIONS NOT ADMISSIBLE - EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF A FINE OR PENALTY
Section 24(j)
Section 24(j) Deductions not admissible – Expenditure incurred on account of payment of a fine or penalty
PAGE NO
PENALTY, FINE AND FORFEITURE ARE NOT ADMISSIBLE EXPENSE
1693. Compensation paid for late payment is not “fine” or _ “penalty”. [2001] 83 TAX 113 (S.C.Pak.)
1236
1694. Penalty or fine paid by the banks for violation of section 25 of the Banking Companies Ordinance, 1962 is not _ admissible expenditure. [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213
1237
1695. Penalty, fine and forfeiture are not admissible expense. _ 1981 SCC 559 = [1981] 44 TAX 1 (S.C.Pak.)
1238
1236 Section 24(j)
Income Tax Digest
Section 24(j) Deductions not admissible – Expenditure incurred on account of payment of a fine or penalty
PENALTY, FINE AND FORFEITURE ARE NOT ADMISSIBLE EXPENSE
Sui Southern Gas Company Ltd. v. Commissioner of Income Tax, Companies-V, Karachi – [2001] 83 TAX 113 (S.C.Pak.) 1693.
Compensation paid for late payment is not “fine” or “penalty”.
Penalty is to be levied or a fine is to be imposed on account of any criminal infraction / violation of the provision of law but in the instant case there was no criminal violation of any legal provision. In the instant case interest/compensation for delayed payment has been provided in the statute as well as in the agreement, therefore, it may be non-compliance with contractual obligations on the part of the petitioner to make additional payment as interest or compensation for late payment, but it could not be said to be violation or infraction of criminal law, therefore, such payment cannot be termed as a penalty or penal interest, having regard to the fact that payments were made for the purpose of carrying on business to enable the petitioner to carry on and earn profit in business, and if the payment had not been made the petitioner could have suffered losses. These payments and disbursements made by the petitioner were on account of commercial expediency to facilitate carrying on its business. These were essentially expenses for the purpose of business of the petitioner, as such these could not be termed to be penalty or penal interest or fine, hence petitioner would be entitled to deductions under section 23 as expenditures as laid out or expended wholly or exclusively for the purpose of business. We are fortified in our view by the precedent cases cited in paragraph 5 of the judgment. The decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal are based on concurrent findings of
1237 DEDUCTIONS NOT ADMISSIBLE - EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF A FINE OR PENALTY
Section 24(j)
facts. Evidently, there is no misreading or non-reading of evidence. No inherent legal infirmity has been pointed out. There being no violation of settled principles of law arising out of the orders passed by the two forums below, no interference was called for by the High Court in appeal under section 136 of the Income Tax Ordinance, 1979. Resultantly the points formulated for circumstances converted into appeal and the impugned order passed by the High Court is set aside. Consequently, appeal is allowed. Commissioner of Income Tax, Companies-1, Karachi v. Premier Bank Limited, Karachi and another – [1999] 79 TAX 589 (S.C.Pak) = 1999 PTD 3005 = 1999 SCMR 1213 1694.
Penalty or fine paid by the banks for violation of section 25 of the Banking Companies Ordinance, 1962 is not admissible expenditure.
Section 36(4) of State Bank of Pakistan Act, 1956 indicates that for violation of the provisions of section 36(1) two different kinds of liabilities may be incurred by a scheduled bank. Where liability is assumed on the basis of profit and loss sharing “penalty” would be imposed in case of each violation, but in case liability is assumed on the basis other than profit and loss sharing, “penal interest” would be charged. But in both the cases, the object to be achieved appears to be the same as the provisions are meant to operate as a deterrent to prevent any fall in the level of credit balance required to be maintained by the scheduled banks. However, whether liabilities incurred in the form of penalty or in the form of penal interest, the main question, would be, whether such payments were closely related to the business of the assessee. In the present case, the expenditure on account of penal interest was necessitated because of the failure of the assessees to maintain the required level of their credit balance. Such expenditure, therefore, was not incurred in the normal course of business of the assessees but it was in the nature of penalty. Contention was that the expenditure incurred by the assessees on account of penal interest stood on a different footing as it could not be equated with “penalty”. No doubt, “penalty” carries with it an element of punishment which distinguishes it from “interest” even if the same is qualified by the word “penal”. However, the answer lies in the violated provisions of the statute itself. Even if deductions are claimed under section 10(1) of the Income Tax Act, 1922 the question to be determined would still remain the same.
1238 Section 25
Income Tax Digest.
The payments made by the assessees were in the nature of fine, therefore, in any case, they cannot be held to have been laid out wholly or exclusively for the purpose of its business. Therefore, it cannot be excluded as allowable expenditure for the purpose of determining profits or gains of the business carried on by the said assessee. Consequently, such expenditure appears to have been rightly excluded by the Income Tax Officer from the deductions claimed by the assessees. Case referred: Messrs General Tyre and Rubber Co. v. Commissioner of Income Tax 1986 PTD 52, Commissioner of Income Tax, Lahore Zone, Lahore v. Punjab Oil Expeller Co., Lahore 1979 PTD 437, Commissioner of Income Tax, Companies-II, v. Messrs General Tyre and Rubber Company of Pakistan Ltd. 1993 PTD 383, Radio Picture Limited v. Commissioner of Inland Revenue 22 Tax Cas. 106, Commissioner of Income Tax v. Messrs Alfa Insurance Co, Ltd., PLD 1981 SC 293, Becham Pakistan Ltd. v. Commissioner of Income Tax 1995 PTD 577, Commissioner of Income Tax, Bombay City v. Jagannath Kissonlal [1961] 41 ITR 360.
Commissioner of Income Tax, Central, Karachi v. Alpha Insurance Co., Ltd., Karachi, Commissioner of Income Tax, Central, Karachi v. Home Insurance Co. Ltd., Karachi – 1981 SCC 559 = [1981] 44 TAX 1 (S.C.Pak.) 1695.
Penalty, fine and forfeiture are not admissible expense.
It follows, therefore, that, penalty, fine and forfeiture have a different content altogether and are bound to receive a different treatment than expenses of business incurred, either in contravention of law or in carrying out the business in contravention of law. The former is invariably disallowed; the latter when some factor, other than or in addition to the taint of illegality is present, not otherwise. Our conclusions therefore are that: (i)
the rules contained in the First Schedule to the Income Tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business,
(ii)
the power of the Assessing Authority under rule 6 of the First Schedule to the Income Tax Act does not, like rule 2 of the same Schedule, or on the strength of section 40C of the Insurance Act or rule 40 of the Insurance Rules, extend to disallowance of excess management expense,
(iii)
the power of the Assessing Authority under first part of rule 6 (ibid) to read/just the balance of the profits disclosed by the annual accounts required to be furnished under the
1239 DEDUCTIONS NOT ADMISSIBLE - EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF A FINE OR PENALTY
Section 24(j)
Insurance Act 1938 is restricted to “exclude from it any expenditure, other than expenditure” which may under the provisions of section 10 of the Income Tax Act be allowed for computing the profits and gains of a business. The assessing Authority has to apply an independent mind uncontrolled by Insurance Act to arrive at such a readjustment, (iv)
the expense of management incurred in excess of the limit prescribed under section 40C of the Insurance Act and rule 40 of the Insurance Rules are not in the nature of penalty, fine or forfeiture for the purposes of their admissibility for deduction as business expenses under section 10 of the Income Tax Act.
In view of these conclusions all the four appeals fail and are dismissed with costs. Case referred: ITA No. 1403/63-64 (1967) Taxation 15 (Trib.) 1, C.R. No. 31 of 1966 Commissioner of Income Tax Central Karachi v. Mercantile Fire and General Insurance Company of Pakistan Ltd., Life Insurance Corporation of India v Commissioner of Income Tax (1964) 51 ITR 773, Haji Aziz Abdul Shakoor Brothers v. Commissioner of Income Tax 41 ITR 350, Minister of Finance v. Smith (1927) AC 193, Mann v. Nash (1929-1932).
1240 Section 25
Income Tax Digest
Section 25* Amounts subsequently recovered in respect of deductions, etc.
PAGE NO
TRADING LIABILITY
1696. Trading liability not claimed or allowed in the assessment of any preceding year as envisaged in law cannot be added _ under section 25(c) of 1979 Ordinance. [1996] 71 TAX 156 (H.C.Kar.)
1241
1697. “Trading liabilities”, meaning of - Section 25(c) of 1979 _ Ordinance. [1990] 61 TAX 4 (H.C.Kar.)
1241
1698. Assessee, engaged in insurance business should credit balance outstanding, which was unpaid under section 25(c) of 1979 Ordinance, held not applicable to insurance _ business. [1989] 59 TAX 63 (H.C.Kar.)
1242
1699. Trading liability and sundry creditors, which remained unpaid for a period of more than three years held wrongly _ added under section 25(c). [1985] 52 TAX 161 (H.C.Kar.)
1243
1700. Liability standing in the accounts foregone or unclaimed; appropriated by assessee is held amount includible in the _ total income of assessee. [1977] 36 TAX 210 (H.C.Lah)
1244
1701. Liabilities for goods and expenses, shown in the account books as outstanding for more than three years are to be _ included in the total income of the assessee. [1972] 27 TAX 145 (H.C.Lah.)
1244
LOSS
1702. Loss sustained covered by insurance policy suit against the insurance company was not decided, held that loss cannot _ set off ago lost the income of the year. [1966] 13 TAX 1 (H.C.Dacca)
*
Corresponding to section 10(2A) of the 1922 Act.
1245
1241 AMOUNTS SUBSEQUENTLY RECOVERED IN RESPECT OF DEDUCTIONS, ETC.
Section 25
Section 25* Amounts subsequently recovered in respect of deductions, etc.
TRADING LIABILITY
Lal Muhammad Abdul Sattar & Co. v. Commissioner of Income Tax, Hyderabad – [1996] 71 TAX 156 (H.C.Kar.) 1696.
Trading liability not claimed or allowed in the assessment of any preceding year as envisaged in law cannot be added under section 25(c) of 1979 Ordinance.
In the present case, the amount of Rs.305,776/- appearing in the name at Alma Cotta., Factory was a credit balance coming from the past years. This amount has been added by the Income Tax Officer as being a trading liability. But, nowhere we find that such trading liability had been claimed or showed in the assessment of any preceding year as envisaged in law. In the present case, the Tribunal examined the accounts and accepted the alternative plea of the assessee by adding Rs.229,795/- which was a three years‟ old loan. This itself shows that the Tribunal found the addition made by the Income Tax Officer as not justified. Case referred to: Commissioner of Income Tax v. Jethabhai Gokal [1983] 37 TAX 182.
Tanveer Textile Mills Ltd. v. Commissioner of Income Tax, Central Zone „C‟, Karachi [1990] 61 TAX 4 (H.C.Kar.) 1697.
“Trading liabilities”, meaning of - Section 25(c) of 1979 Ordinance.
For the year 1973-74, the applicant submitted its return of income under the Income Tax Act, 1922, disclosing a loss of Rs.2,47,676. The Income Tax Officer, however, determined the income of applicant for the above year at Rs.28,89,242. Among other additions, the Income Tax Officer added a sum of Rs.25,57,676 in the income of applicant *
Corresponding to section 10(2A) of the 1922 Act.
1242 Section 25
Income Tax Digest.
for the year 1973-74, which represented the outstanding liabilities of Excise duty, Sales Tax, Rehabilitation Tax, Defence Surcharge and Refugee Tax against the applicant for over 3 years. On appeal by the applicant against addition of the sum of Rs.25,57,676 by the Income Tax Officer in its income for the assessment year 1973-74, the Appellate Assistant Commissioner, maintained the addition of the sum of Rs.15,75,532 in the income of the applicant, which represented the outstanding liability of Excise duty against the applicant for over three years, but deleted the additions of Sales Tax, Rehabilitation Tax, and Defence Surcharge in the income of applicant for the above year. On further appeal before Income Tax Appellate Tribunal the above order of Appellate Assistant Commissioner was maintained. We are unable to agree with the learned counsel for the applicant. There is nothing in the language of section 10(2-A) of the Act to show that the Legislature had used the word „trading liability‟ in a limited or particular sense. No doubt one of meaning given in the dictionaries to the word „trade‟ is the act by buying and selling for money and therefore, the expression „trading liability‟ will also include a liability arising in connection with the buying and selling of merchandise for money. There is, however, no justification for concluding on the language of statute that the Legislature used the expression that trading liability” only in this restricted meaning. In our view the legislature used the grammatical sense which connotes a liability arising in connection with the trade, business or occupation followed by a person. This meaning is comprehensive enough to include liability of „Excise duty‟ which was shown as debited to the sale account in the account books of the applicant. Commissioner of Income Tax, Central Karachi v. Mercantile Fire and Central Insurance Co. Ltd. – [1989] 59 TAX 63 (H.C.Kar.) 1698.
Assessee, engaged in insurance business, should credit balance outstanding which was unpaid under section 25(c) of 1979 Ordinance, held not applicable to insurance business.
The respondent is a company engaged in fire and general insurance business. For the assessment years 1972-73 and 1973-74 the Income Tax Officer observed credit balances of Rs.59,185 and Rs.82,754 outstanding for more than three years. He treated them as assessee‟s income for the respective years under section 10(2A) of the Income Tax Act. The assessee challenged the taxability of credit standing unpaid for more than three years. In appeal the Tribunal held that in view of
1243 AMOUNTS SUBSEQUENTLY RECOVERED IN RESPECT OF DEDUCTIONS, ETC.
Section 25
the provisions of section 10(7), section 10(2A) could not be attracted to the case of Insurance Companies. This rule provides that the Income Tax Officer has to assess on the basis of the balance disclosed by the annual accounts required to be prepared under the Insurance Act. Section 10 has been applied only for the purpose of excluding expenditure other than which may under section 10 “be allowed for computing the profits and gains of the business”. This applicability is for limited purpose and the provisions of section 10(2A) cannot be applied under this garb. Case followed: Commissioner of Income Tax v. New Jubilee Insurance Co. Ltd. in I.T.C. No. 326 of 1974. Case referred to: Commissioner of Income Tax v. Alpha Insurance Co. Ltd., Karachi [1981] 44 TAX 1 (S.C.) = (PLD 1981 S.C. 293).
Commissioner of Income Tax, (East Zone), Karachi Mohammadi Re-rolling Mills – [1985] 52 TAX 161 (H.C.Kar.) 1699.
v.
Trading liability and sundry creditors, which remained unpaid for a period of more than three years held wrongly added under section 25(c).
As stated in the statement of facts that the respondent is a registered firm carrying on business of dismantling ships and selling scrap. In the assessment year 1964-65 the Income Tax Officer made add back of Rs.76,308/- on account of profit under section 10(2A) of the Act. It would therefore, appear that the premises on which the Tribunal based its order are obviously wrong. However, that would not make any difference so far as the deletion of the amount of Rs.76,308/- is concerned for under section 10(2A), as it then existed, an amount standing to the credit of a sundry creditor, could not have been added back as it could not be deemed to be profit thereunder even if remedy to recover it was barred due to efflux of time as under sub-section (2A), as then existing, no period of‟ limitation was provided within which the amount could be treated as profit, and it was subsequently in 1966 that such provision was made by substituting sub-section (2A) of section 10 of the Act. For the reasons recorded above, we do hold that the Income Tax Officer was not justified in adding back the sum of Rs.76,308/- from the sundry creditors on the ground that they had remained unpaid for the period of more than 3 years and the Income Tax Tribunal was justified in excluding that amount from the profits added by the
1244 Section 25
Income Tax Digest.
Income Tax Officer and our answer to the question would be in the affirmative. Cases referred to : Commissioner of Income Tax, Karachi (West), Karachi v. S.A. Rehman (1980 PTD 314) = [1980] 42 TAX 147; Commissioner of Income Tax, Lahore v. Mian Muhammad Allah Bux (PLD 1983 Lah. 381) and Commissioner of Income Tax, (Central), Karachi v. Morris Jacob & Company, Karachi.
Delhi Cloth And General Mills Co. Ltd. v. Commissioner of Income Tax, Rawalpindi – [1977] 36 TAX 210 (H.C.Lah.) 1700.
Liability standing in the accounts foregone or unclaimed; appropriated by assessee is held amount includible in the total income of assessee.
The view taken by the Department in Assessee v. The department [1964] 10 TAX 55 (Trib) and followed in the instant case does not seem to suffer from any infirmity supported as it is by the relevant text and the other reference hereinbefore mentioned. However, if there is any dispute or new development due to the latest amendment of 1972, as regards the year in which the income or amounts are to be included, the same can be got set right from the Tribunal by the assessee if he is so interested to move in this matter. Subject to this caveat and on broad principles, however, in the face of what has been written above, our answer to the question under examination will be that on the acts and in the circumstances of these cases the Tribunal was right in holding that the amounts mentioned hereinbefore were includible in the total income of the applicant by virtue of the provisions of subsection (2A) of section 10 of the Income Tax Act. Commissioner of Income Tax, Lahore Zone, Lahore v. Mian Muhammad Allah Bux, Karachi – [1972] 27 TAX 145 (H.C.Lah.) 1701.
Liabilities for goods and expenses, shown in the account books as outstanding for more than three years are to be included in the total income of the assessee.
In respect of the assessment year 1962-63 the Income Tax Officer treated as profit under section 10(2A) of the Income Tax Act, liabilities amounting to Rs.5,52,174 for goods and expenses which had been shown in the books of accounts of the assessee as outstanding for over three years. The Appellate Tribunal, on appeal by the assessee, affirmed the treatment meted out by the Income Tax Officer. On a reference:
1245 AMOUNTS SUBSEQUENTLY RECOVERED IN RESPECT OF DEDUCTIONS, ETC.
Section 25
Held, that the amount in question could be included in the total income of the assessee and treated as profit under section 10(2A) of the Income Tax Act. It is true that there is no express mention in the earlier provision of section 10(2A) of the Income Tax Act, 1922, as it stood before its amendment in 1966, of non-payment within three years, but it is clear that by use of the words “obtained some benefit in respect of such trading liability by way of remission or cessation thereof”, the intention was to treat as profit the benefit accruing on account of the liability having become time-barred for recovery. Since the period of limitation for such recovery is three years, the Income Tax Officer could not be said to have applied the amended provision and not the earlier provision merely because of his mention in his order that payment had not been made for over three years. It cannot be urged that a liability after the expiry of the period prescribed for action far its recovery would still remain liability in law. It was lastly urged on behalf of the assessee that the entire amount bad not been assessable to tax and that as such the assessment itself must fail. We must reject this contention too, because the question of the assessment having included legal and illegal items had never been taken before the Income Tax authorities nor does the same directly arise from the question under reference to this Court. Cases referred to : Morley (Inspector of Taxes) v. Tattersall (1939) 7 ITR 316; Asfaq ur Rehman v. Chaudhry Muhammad Afzal (PLD 1968 SC 230); Commissioner of Income Tax v. Bengalee Urban Co-operative [1935] 2 ITR 121; Bennett & White (Calgary) Ltd. v. Municipal District of Sugar City No. 5 (PLD 1951 PC 78) and Provincial Government of Madras v. J.S. Basappa (AIR 1964 SC 1873). _______________
LOSS
A.Hussain S. Mirza And Company, Dacca v. Commissioner of Income Tax, Dacca – [1966] 13 TAX 1 (H.C.Dacca) 1702.
Loss sustained covered by insurance policy suit against the insurance company was not decided, held that loss cannot set off against income of the year.
The assessee suffered a loss of Rs.60,697 during transit of his goods from Karachi to Chittagong. The goods were covered by insurance under a policy of Eastern Federal Union Insurance Co Ltd. The
1246 Section 25
Income Tax Digest.
insurance company refused to make good the loss suffered by the assessee and consequently a civil suit was filed by the assessee against the said company. At the assessment stage the assessee claimed set off of the loss against the income from business. The claim was rejected by the Income Tax Officer on the ground that the assessee would be entitled to claim the same when he would be unable to recover the loss. On appeal the Appellate Assistant Commissioner allowed the entire claim as admissible deduction. On further appeal by the department the Appellate Tribunal restored the order of the Income Tax Officer holding that “when the matter reaches finality the assessee should be entitled to bring forward his claim if the facts proved justify”. The High Court affirming the order of the Tribunal: Held, that the assessee is not entitled to rebate of this sum in the assessment year under consideration. The assessee‟s claim may be placed before the Income Tax authority when the assessee becomes unsuccessful in the suits to recover either from the Insurance Company or the Carrier. Cases referred to: Fadavji Narsidas & Co., v. Commissioner of Income Tax [1959] 1 TAX 139 and G. Mauavala Naidu v. Commissioner of Income Tax (41 ITR 725) and Commissioner of Income Tax v. Srimati Singari Bai (13 ITR 224).
1247 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
Section 26
Section 26* Special provisions regarding business of insurance and production of oil and natural gas and insurance business
PAGE NO
ASSESSMENT OF INSURANCE BUSINESS
1703. Assessing Officer has limited authority to challenge the _ accounts of an insurance company. 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 = PTCL 1997 CL. 478
1250
1704. Assessing officer is not competent to undermine accounts _ submitted to Controller of Insurance. 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.)
1251
POWERS OF ASSESSING OFFICERS UNDER FOURTH SCHEDULE
1705. Exemption contained in Second Schedule are not available. _ 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.)
1252
1706. The correct method of assessment in the case of non-life _ insurance company. 1991 SCC 853 = [1992] 65 TAX 229 (S.C.Pak.)
1252
1707. Accounts submitted to Controller by an insurance company cannot be rejected in entirety unless they are found to be _ fraudulent. 1991 SCC 853 = [1992] 65 TAX 229 (S.C.Pak.) _ 1708. The assessing officer can make suitable adjustments. 1991 SCC 853 = [1992] 65 TAX 229 (S.C.Pak.) 1709. Assessing officer has no power to add provision for taxation while commuting total income of an insurance company. _ 1991 SCC 842 = [1991] 64 TAX 173 (S.C.Pak.) 1710. The Department can invite the attention of the Controller to exercise his power under section 21 of the Insurance Act,
*
Corresponding to section 10(7) of the 1922 Act.
1252 1253
1253
1248 Section 26
1938 in case of excessive taxation reserves. [1991] 64 TAX 173 (S.C.Pak.)
Income Tax Digest.
_
1711. Principles of assessing insurance business. = [1990] 61 TAX 88 (S.C.Pak.)
PAGE NO
1991 SCC 842 = _
1253 1989 SCC 736 1254
1712. Benefit of exemption under “income from house property” is _ not available to life insurance companies. 1989 SCC 736 = [1990] 61 TAX 88 (S.C.Pak.)
1255
1713. Assessee an insurance company claimed taxation reserve as an item of expenditure which the Income Tax Officer disallowed and added back to the profits and gains, held that ITAT was justified in law in not deleting the provision _ for taxation. [1995] 72 TAX 67 (H.C.Kar.)
1255
1714. Income Tax Officer issued notice indicating that the dividend income declared by the assessee was not capable of being bifurcated and the same was chargeable to tax as a _ single unit, held that notice was valid in law. [1995] 71 TAX 164 (H.C.Kar.)
1256
1715. Change in rule 5(a) of Fourth Schedule of the 1979 Ordinance authorised the ITO to made necssary _ adjustments. [1992] 66 TAX 33 (H.C.Kar.)
1257
1716. Investment in Khas Deposit Certificates by insurance company and interest thereon was received, held that such interest lost its character and became part of profit and gains of insurance business and is was not entitled to _ exemption. [1992] 65 TAX 132 (H.C.Kar.) = 1992 PTD 32
1258
1717. “Income”, meaning of under section 2(9)(b), 10, 11, 14, 33. 58 _ of Insurance Act, 1938. [1969] 19 TAX 229 (H.C.Kar.)
1259
1718. In the case of non-life insurance business computation of profits and gains should be made under rule 6 of the First Schedule of 1922 Act unless there is evidence of fraud _ apparent from return filed. [1967] 16 TAX 112 (H.C.Kar.)
1262
1719. Insurance company is entitled to concessional rate of tax on _ dividend. [1967] 15 TAX 268 (H.C.Kar.)
1264
1720. An assessee, carrying on life insurance business, has right to set aside sums to reserve fund to meet depreciation and to treat such sums as business expenditure and there is nothing in rule .33 of 1922 Rules to compel an assessee who has exercised his option to bring back any sums which have been properly set aside by him in accordance with the rule,
1249 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
Section 26 PAGE NO
merely because there was an appreciation in a subsequent _ year. [1938] 6 ITR 44 (Bom.)
1265
BENEFIT OF PRODUCED RATE OF TAX TO INSURANCE COMPANIES
1721. The benefit of reduced rate on dividend income cannot be denied to insurance companies (engaged in life as well as general insurance business). [Position prior to 01.07.1999. The law has since changed and this benefit is no more _ available]. 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 = PTCL 1997 CL. 478 _ 1722. Post-1939 position. [1949] 17 ITR 13 (PC) _ 1723. Position prior to 1-4-1977. [1946] 14 ITR 809 (Bom.); _ _ [1946] 14 ITR 809 (Bom.); [1946] 14 ITR 809 (Bom.)
1265 1267 1267
1724. Accounts submitted to Controller of Insurance must form _ basis of assessments. [1973] 90 ITR 243 (Delhi)
1268
1725. Deduction is admissible only of amount of actual loss by _ depreciation. [1946] 14 ITR 347 (Sind)
1268
POSITION UNDER 1922 ACT
_ _ 1726. Position under 1922 Act. [1936] 4 ITR 44 (PC); [1936] 4 _ _ ITR 44 (PC); [1949] 17 ITR 173 (PC); [1936] 4 ITR 44 _ _ (PC); [1939] 7 ITR 402 (PC); [1937] 5 ITR 697 (Mad.); _ _ [1941] 9 ITR 589 (Cal.); [1938] 6 ITR 321 (Bom.); _ _ [1937] 5 ITR 349 (Cal.); [1941] 9 ITR 177 (Sind)
1268
1250 Section 26
Income Tax Digest
Section 26* Special provisions regarding business of insurance and production of oil and natural gas and insurance business
ASSESSMENT OF INSURANCE BUSINESS
E.F.U. General Insurance Co. & others v. Federation of Pakistan & Others – 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 = PTCL 1997 CL. 478 1703.
Assessing Officer has limited authority to challenge the accounts of an insurance company.
From section 26(a) of the Ordinance [section 10(7) of the Act] read with rule 5 of the Fourth Schedule [First Schedule of the Act] and the relevant provisions of the Insurance Act, 1938, it would follow that the Income Tax Officers have very limited jurisdiction to challenge the accounts submitted by a company dealing in insurance business. The jurisdiction of the Income Tax Officer is limited to the clauses (a) and (b) of rule 5 of the First Schedule to the Ordinance [and provided in rule 6 of the First Schedule to the Act]. Subject to the above, the Income Tax Officer is not competent to challenge the accounts submitted by the assessee under the Insurance Act, 1938. The Income Tax Officer cannot go behind such accounts. This question has been considered in sufficient detail by this Court in an earlier judgment in the case of Commissioner of Income Tax v. Phoenix Assurance Company Limited (1991 SCMR 2485). It was inter alia noted in the said judgment as follows:(i)
*
Under section 11 of the Insurance Act, 1938, every Insurance Company has to prepare, at the expiration of each calendar year, a balance-sheet, a profit and loss account and a revenue account in the prescribed form to be authenticated;
Corresponding to section 10(7) of the 1922 Act.
1251 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
Section 26
(ii)
Under section 15, such audited accounts and statements have to be furnished to the Controller of Insurance as returns;
(iii)
Section 18 of the Insurance Act requires every insurance company to furnish to the Controller of Insurance a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurance;
(iv)
Section 21 enables the Controller of Insurance to call for such further information from the insurer in respect of the return furnished by it if he feels that the same is inaccurate or defective in any manner;
(v)
He can examine the books of accounts, registers and documents as well as any office of the insurer;
(vi)
He is empowered to decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied and in case the Controller of Insurance declined to accept any return, the insurer shall be deemed to have failed to comply with the provisions of section 15 of the Insurance Act relating to the furnishing of return.
After referring to these provisions of the Insurance Act, it was then observed by this Court that it was in this context that finality has been given to the accounts for purposes of rule 6 of the First Schedule to the Act (Rule 5 of the Fourth Schedule to the Ordinance). It was held that the Income Tax Officer was not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, 1938 by applying the ordinary rules for computation of profits and accounts and for assessment of tax in the light of the provisions of Income Tax Law in respect of the income in regard to the head “business”. It was also held that there was no substance in the contention that the combined effect of section 10(7) read with rule 6 of the First Schedule to the Act (section 26(a) read with rule 5 of the Fourth Schedule to the Ordinance) was that the Income Tax Officer was vested the power to probe into the accounts submitted by the insurance company with a view to determining the real nature of any item of such accounts for purpose of excluding it in order to adjust the balance of profits.
1252 Section 26
Income Tax Digest.
Central Insurance Co. & others v. CBR, Islamabad etc. – 1993 SCC 1049 = [1993] 68 TAX 86 (S.C.Pak.) 1704.
Assessing officer is not competent to undermine accounts submitted to Controller of Insurance.
In the case of an insurance company (engaged in general insurance business), the assessing officer is not competent to upset the integrity, authenticity or finality of the accounts submitted by the assessee under the Insurance Act by ordinary rules. His jurisdiction is limited to add back items of expenditure and allowances or any reserve or provision not admissible. _______________
POWERS OF ASSESSING OFFICERS UNDER FOURTH SCHEDULE
Central Insurance Co. & others v. CBR, Islamabad etc. – 1993 SCC 1049 = [1993] 68 TAX 86 (S.C. Pak.) 1705.
Exemption contained in Second Schedule are not available.
Exemption available to other assessees under various clauses of Second Schedule to the Income Tax Ordinance, 1979 are not applicable to insurance companies as section 26 read with Fourth Schedule overrules the application of Second Schedule in their case. The fact that the Income Tax Department for the last more than four decades was allowing exemption on Khas Deposit Certificates/Defence Saving Certificates to insurance companies and reliance on the case of Nazir Ahmad v. Pakistan and 11 others (PLD 1970 S.C. 453) and the case of Asian Food Industries Ltd. and others v. Pakistan and others (1985 SCMR 1753) are rejected on the ground that “Any alleged practice cannot negate the provision of the Ordinance”. Commissioner of Income Tax, Karachi v. Queensland Insurance Co., Ltd., Karachi – 1991 SCC 853 = [1992] 65 TAX 229 (S.C.Pak.) 1706.
The correct method of assessment in the case of non-life insurance company.
In our opinion rule 6 provides an in-built mechanism to bring about all necessary adjustments in the accounts which are not found to be fraudulent or suffer from such large-scale concealments, which cannot be corrected, by ordinary adjustments. This was not the situation in the present case. Hence the wholesale rejection of the accounts and application of rule 8 was not called for. The High Court took a correct view of the situation and the opinion it tendered is unexceptionable and eminently in accordance with law.
1253 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
1707.
Section 26
Accounts submitted to Controller by an insurance company cannot be rejected in entirety unless they are found to be fraudulent.
The assessing officer cannot discard the accounts of an insurance company submitted to designated authorities in its entirety because law only permits suitable adjustments. The accounts could be rejected in their entirety only if they were found to be fraudulent. 1708.
The assessing officer can make suitable adjustments.
If on the issue of certain receipt/expenses the assessing officer was dissatisfied and was of the opinion that some of the expenses claimed were improper in the absence of the full details or that some expenses were concealed in some other accounts, he had, under the law, full authority to disallow these expenses and could make his own estimates by making suitable additions. But he could not discard the accounts accepted by the Controller of Insurance in its entirety. Commissioner of Income Tax, Central Zone A, Karachi v. Phoenix Insurance Co. Ltd. – 1991 SCC 842 = [1991] 64 TAX 173 (S.C.Pak.) 1709.
Assessing officer has no power to add provision for taxation while commuting total income of an insurance company.
Provision for taxation is not an expenditure and therefore Rule 5 of the Fourth Schedule to the Income Tax Ordinance, 1979 is not applicable. The assessing officer has no jurisdiction to examine or exclude the taxation reserve being not expenditure from the Profit and Loss account approved by the Controller of Insurance. He is bound to accept the balance of profits disclosed by the annual accounts submitted to the Controller of Insurance. 1710.
The Department can invite the attention of the Controller to exercise his power under section 21 of the Insurance Act, 1938 in case of excessive taxation reserves.
The appellant has submitted that the insurance companies provide huge amount by way of taxation reserve, which is far more than the actual tax liability for that year. If it is so, it was the Controller to see that the amount mentioned as taxation reserve was properly provided at the time of submission of accounts to the Controller of Insurance. He might not be aware of this fact. If the Controller had failed to check the accounts, the department was not without remedy. It could have asked the Controller to exercise his powers under section 21 of the Insurance Act, 1938 and called for the necessary particulars and
1254 Section 26
Income Tax Digest.
information. If he had failed to do so, the Department, was again not without remedy against him. Habib Insurance Co. Ltd. & another v. Commissioner of Income Tax – 1989 SCC 736 = [1990] 61 TAX 88 (S.C.Pak.) 1711.
Principles of assessing insurance business.
It is difficult to accept the contention of the learned counsel. As already noticed, so far as the business of life insurance is concerned, the ordinary methods of computing profits and gains have been done away with by section 10(7) of the Act and special rules for that purpose have been prescribed. As held by this Court in Commissioner of Income Tax v. Alpha Insurance Co. Ltd. Karachi [1981] 44 Tax 1, the rules set out in the First Schedule to the Income Tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of profits and gains of the insurance business. Thus, in computing profits and gains of the insurance business the categorisation of heads as made in section 6 and the manner of determining the taxable income under the different heads as set out in sections 7, 8, 9 and 10 are irrelevant. The view which we take is similar to that which found favour with the Indian Supreme Court in Vanguard Fire and General Insurance Co. Ltd. v. Commissioner of Income Tax [1966] 60 ITR 496. In that case too, the exemption made by section 4(3)(xii) of the Income Tax Act in respect of income from house property was sought to be invoked by an insurance company whose profits and gains had been computed in accordance with the provisions of First Schedule. Although the insurance company was not engaged in the business of life insurance by the construction placed by the Court on clause (xii) is equally applicable to life insurance. The Court held that it was impossible to apply the provisions of the said clause to an assessment made under section 10(7) of the Act read with paragraph 6 of the Schedule for there was no income chargeable under the head “Income from property” so far as the business of insurance was concerned; consequently, the Company was not entitled to the exemption created under the clause in respect of the income accruing to it from house property. There is also no merit in the contention that as the revenue had not contested the exemption granted to the assessees in respect of dividend income there was no reason why a similar exemption with regard to income from house property should have been denied to them. It is to be noticed that exemption in respect of dividend income
1255 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
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was allowed to the appellants under an entirely different provision of the Income Tax Act, namely, sub-paragraph 1(a) of paragraph B of Para 1 of the Fourth Schedule. The exemption envisaged by that provision is not before us for examination; all that we can say at this stage is that the said provision had no bearing whatsoever on the construction of clause (xii) ibid, upon which alone the appellants have founded their case in this appeal. 1712.
Benefit of exemption under “income from house property” is not available to life insurance companies.
Assessees engaged in the business of the life insurance are subject to special provision of Fourth Schedule and the income from all source is to be assessed as income under the head “income from business or profession”. Therefore, exemptions related to income from house property are not available to insurance companies engaged in the business of life insurance. Premier Insurance Company of Pakistan Ltd., Karachi v. Commissioner of Income Tax, Companies-Ill, Karachi – [1995] 72 TAX 67 (H.C.Kar.) 1713.
Assessee an insurance company claimed taxation reserve as an item of expenditure which the Income Tax Officer disallowed and added back to the profits and gains, held that ITAT was justified in law in not deleting the provision for taxation.
We would like to point out that before the amendment of Rule 5(a) although the profits and gains of any business of such insurance companies was to be taken to be the balance of profits disclosed by the annual accounts required under the Insurance Act, 1938 to be furnished to the Controller of Insurance but the same was only subject to adjustment in respect of any expenditure or any allowance which was not deductible in computing the income chargeable under the head „income from business or profession‟, as only such deductions were to be excluded by the assessing authority. However, by addition of the words „any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received‟, an intention was manifested by the legislature to further enlarge the scope of rule 5(a). Consequently, under the said rule, adjustment can be made by the assessing authority not only in respect of the expenditure actually incurred but even in respect of contingent or expected expenditure which though not actually incurred but has been claimed as expenditure by such insurance company. No doubt,
1256 Section 26
Income Tax Digest.
observations were made by the Supreme Court in the case of Alpha Insurance Company to the effect that taxation reserve not being expenditure could not be added back to the balance of profits for the purpose of putting it to tax but as has been pointed out earlier, the scope of Rule 5(a) has been materially enlarged on account of the said amendment introduced by Finance Act, 1980. Therefore, in our opinion, if any deduction is claimed on account of an expected expenditure, the same can also be adjusted by the Assessing Authority as provided by the said Rule. As was pointed out earlier, Mr. Muhammad Farid has very strongly contended that “expenditure” and provision for taxation are the expressions which cannot be held to be synonymous because income tax is to be paid out of the profits earned by the assessee. In our view, it is not necessary for us to go into this question because as is indicated by the circumstances of each case, the provision for tax was claimed by the applicants as an item of expected expenditure. If deduction is claimed on account of any expected expenditure, be that a provision for tax, in our opinion, the Taxing Authority has been vested with sufficient power to subject such provision to adjustments as contemplated by Rule 5. We, therefore, find ourselves in respectful agreement with the view earlier taken by the Division Bench in the case of Home Insurance Company 1992 PTD 1177. Cases referred to: Allen v. Farguharson Brothers & Co. (17 Tax Cases 59); Commissioner of Income Tax, Central Zone-A, Karachi v. Phoenix Assurance Co. Ltd. [1991] 64 TAX 173 (S.C.Pak.) = (1991 PTD 1028); Commissioner of Income Tax, Central Karachi v. Alpha Insurance Co. Ltd., Karachi [1981] 44 TAX 1 (S.C.Pak.) = (PLD 1981 SC 293) and Home Insurance Co. Ltd., Karachi v. Commissioner of Income Tax, Companies-Ill, Karachi [1992] 66 TAX 33 (H.C.Kar.) = (l992 PID 1177).
Adamjee Insurance Co, Ltd. and Others v. Income Tax Officer and Others – [1995] 71 TAX 164 (H.C.Kar.) 1714.
Income Tax Officer issued notice indicating that the dividend income declared by the assessee was not capable of being bifurcated and the same was chargeable to tax as a single unit, held that notice was valid in law.
As provided by clause “C”, for the purpose of charging income to tax such income is to be excluded but the said clause is clearly to be read subject to the provisions of section 26(a) and the said Rule 5 on account of the non obstante clause employed therein. Therefore, the entire income of the petitioners included in the profit and loss account, including income from dividends was liable to be assessed as a single unit by virtue of the special provisions contained in section 26 of the
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Income Tax Ordinance and the Fourth Schedule thereto. Consequently, concession cannot be claimed in respect of income consisting of dividends in the present case. For the aforesaid reasons, We are inclined to hold that the notices respectively issued by the respondent Income Tax Officers either under section 66 or 66-A of the Income Tax Ordinance are valid and they do not contravene any of the provisions of the Income Tax Ordinance. In the result, the petitions are dismissed. Cases referred to: Commissioner of Income Tax v. American Life Insurance Co. (1967) 15 TAX 268; Central Insurance Co. v. CBR (I993) 68 TAX 86 (S.C.Pak.) = (1993 PTD 766) and Adamjee Insurance Co. Ltd v. CBR (1989 PTD 1090).
Home Insurance Company, Limited, Karachi v. Commissioner of Income Tax, Companies-III, Karachi – [1992] 66 TAX 33 (H.C.Kar.) 1715.
Change in rule 5(a) of Fourth Schedule of the 1979 Ordinance authorised the Income Tax Officer to made necessary adjustments.
The present four cases relate to assessment year 1980-81 to 1983-84. Provisions of the repealed Income Tax Act, 1922, are admittedly not applicable to such assessments. These assessments are governed by Income Tax Ordinance 1979, and, as has been noticed, rules for computation of profits and gains of insurance business arc now contained in the Fourth Schedule to the Income Tax Ordinance as provided by section 26(a) of the Ordinance. The relevant rule relating to general insurance business is rule 5(a), which, prior to its amendment by the Finance Ordinance 1980, only referred to adjustment in regard to „expenditure or allowance‟. Before its amendment, rule 5(a) was more or less similar rule 6(1) of the First Schedule to the repealed Income Tax Act. However, by the amendment made through the Finance Ordinance, 1980, words „any reserve or provision for any expenditure‟ etc. have been added alter the words „any expenditure or allowance‟ in rule 5(a). We are not impressed by the contention of the learned counsel for the applicant/assessee that no change had occurred in the law. In our view, the amendment in rule 5(a) has altered the previous law. We find no anomaly or ambiguity in the term “any reserve or provision for any expenditure” in the amended rule. According to us, “reserve” and “provision for any expenditure” are different items. Accordingly, if any reserve is created or any provision for expenditure has been made by
1258 Section 26
Income Tax Digest.
an assessee general insurance company which is not deductible in computing income chargeable under the head “income from business or profession”, the assessing officer, under the Income Tax Ordinance, is required to disallow such amount. In the case of Phoenix Assurance Co. Limited, Supreme Court has declared that finality attaches to the accounts submitted by the assessee insurance company under the Insurance Act to the Controller of Insurance and the limited jurisdiction vesting in the Income Tax Officer is only to exclude the expenditure from the balance of profits in such account which is not permissible under section 10 of the Act. As has been observed, the aforesaid principle was enunciated on the basis of section 10(7) of the repealed Income Tax Act read with First Schedule to the Act in which the rules for computation of profits and gains of Schedule to the Act in which the rules for computation of profits and gains of insurance business were contained and in rule 6(1) thereof the words “reserve or provision for expenditure” did not find place. Now the rules are contained in the Fourth Schedule to the Income Tax Ordinance, 1979. Still finality attaches to the accounts submitted by the assessee insurance company under the Insurance Act to the Controller of Insurance but jurisdiction now vests in the Income Tax assessing authorities to exclude expenditure, reserve and provision for expenditure which is not permissible under section 26 of the Ordinance in view of rule 5(a) of the Fourth Schedule to the Ordinance as amended by Finance Ordinance, 1980. In our opinion, the Tribunal was right in confirming the orders of Income Tax Officer disallowing the aforesaid provisions for taxation, gratuity and civil commotion in view of the amended rule 5(a) of the Fourth Schedule to the Income Tax Ordinance. The question referred hi these four Income Tax cases are answered accordingly. Central Insurance Company Ltd. v. Commissioner of Income Tax, Karachi and another – [1992] 65 TAX 132 (H.C.Kar.) = 1992 PTD 32 1716.
Investment in Khas Deposit Certificates by insurance company and interest thereon was received, held that such interest lost its character and became part of profit and gains of insurance business and is was not entitled to exemption.
The learned Judges of the Division Bench came to the conclusion after giving cogent reasons, which are fully supported by various authorities discussed by them in the said judgment that accordingly,
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the interest income on securities derived by an insurance company which is included in the balance of profit declared by it in its annual account submitted to Controller of Insurance under the Insurance Act, 1938, loses its character as interest income on securities and becomes part of profits and gains of insurance business, and as such is liable to charge of the tax under the Ordinance accordingly. In our view as soon as the profits and gains of insurance business are computed in accordance with the provision of section 26 read with Rule 6 of IV Schedule ibid, it becomes one. unit of income which is not capable of being bifurcated for the purposes of charging to tax into different heads of income categorised in section 15 of the Ordinance. We respectfully agree with the view expressed in the said decision. We see no reason to take different view. We accordingly hold that the interest received by the petitioner of investment made by it in Khas Deposit Certificates which was included in the annual accounts submitted to the Controller of Insurance under the Insurance Act of 1938, and was shown in the balance of profits was not exempted from tax under the Ordinance. We hold that notice under section 85 of the Ordinance issued to the petitioner in the above petition was valid. We accordingly dismiss the petition in limine. Commissioner of Income Tax (Central), Karachi v. Habib Insurance Co. Ltd., Karachi – [1969] 19 TAX 229 (H.C.Kar.) 1717.
“Income”, meaning of under section 2(9)(b), 10, 11, 14, 33. 58 of Insurance Act, 1938.
The assessee, Messrs Habib Insurance Company Limited, was incorporated in 1943, as a public limited company. The primary object of the company was to carry on the business of insurance. Immediately on incorporation, the assessee-company commenced fire- insurance and a few months thereafter, it began life and other insurance business. In terms of the Memorandum of Association of the assessee was entitled to carry on non-insurance businesses also. During the relevant year the assessee derived income from purchase and sale of immovable properties, preference shares and sale of immovable properties, preference shares and ordinary shares. The surplus arising out of the transactions and the appreciated value of remaining shares and immovable properties shown by the assessee in the balance sheet were assessed to tax by the Income Tax Officer as income from insurance business under
1260 Section 26
Income Tax Digest.
the provisions of rules 3 and 6 of the Schedule to the Income Tax Act. The assessee disputed its liability to tax on the surplus and the appreciation on the ground that these investments were made directly out of the share capital of the company and that they were not shown in the revenue accounts of its insurance business. Moreover, it was argued that since the investments were made in the course of investment business of the company, it was not liable to be taxed on the said accounts, as income of insurance business. The Income Tax Officer rejected these contentions holding that the entry of the amounts in question in the balance sheet of the company amounted to appropriation of the said amounts to non-life insurance business of the company within the meaning of rule 3 of the First Schedule of the Act, and, therefore, these were properly taxed. The appellate authorities, on appeal by the assessee, concurred in the view taken by the Income Tax Officer. When the matter reached the High Court the assessee‟s counsel advanced a number of arguments. In substance it was contended that although the primary object of the company was to carry on the business of insurance it was entitled under its Memorandum of Association to carry on the business of investment and that the surplus realisations and book appreciation arose out of investment made by the company in the course of its business of investment and not of insurance. Thus, he argued, the Tribunal erred in taxing the said credits as income from insurance business of the company merely on the ground that the company had shown the said credits in the balance sheet. The contention on behalf of the department, amongst others was that if an insurer credits in his balance sheet the appreciation that is accrued on such investment tax is attracted on such appreciation, irrespective of the source of investment Held, that the Tribunal was correct in holding that (a) the appreciation in the book value of the investments and (b) realisation in respect of properties sold during the relevant years of accounts, were chargeable to tax under the provisions of section 10(7) of the Income Tax Act, read with rules 3 and 6 of the Rules set out in the First Schedule to the said Act. The principle underlying the above definitions is that in order to constitute a business, there must he a continuous exercise of activity for the purpose of gain. This element of continuity is essential to constitute a business of investment. The reason for this condition is that in modern society people no longer hold their savings in gold or cash but are encouraged to invest their savings in
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property and securities, yet a man who invests his savings in buying a property would not be said to be carrying on a business if he lets out the property on rent, nor would a person who has purchased shares out of his savings be said to carry on business merely because he derives income from his investments. If, however, he regularly buys and sells property or shares, so as to make profit out of the fluctuations in the prices of property or shares, then it would be said that he was carrying on the business of investment; there is thus a fundamental distinction between the business of investment, and the purchase and sale of investments by a person. As pointed out by Lord Wright, in the definition. quoted, even occasional speculation in shares does not amount to carrying on a business; therefore, a person, who buys property or shares and retains them for a long period of time, would not be considered to be carrying on the business of investment. In the instant case, the memorandum of the company does not state that each clause is to be treated independently of the other clauses and is not restricted by a reference to the main object of the company. Accordingly on the basis of the principle laid down in the above passage, the power to purchase and sale immovable property, to invest the monies of the company, and to carry on any other business must be construed as ancillary to the business of insurance of the company, which was the main object of the company. The result of this discussion is that the company was not entitled under its memorandum to carry on independent business of investment. We, therefore, hold, in view of the circumstances discussed that the company has failed to show that it was carrying on a separate business of investment. Having held that the word “income” in the Government of India Act, 1935 has to be given the widest possible meaning the Court observed that the gains taxed under section 12(B) were profits that were received by the assessee. It was in this context that the Court went on to say that, according to its ordinary meaning, income means “a thing that comes in.” The court did not consider the question whether capital gains not realised by an assessee could be deemed, to be income if so declared by a competent legislature, therefore, the judgment cited has no relevance to the questions in this reference, we have to construe the word “income” in the widest possible manner and, in our opinion the word is wide enough to include capital gains on the
1262 Section 26
Income Tax Digest.
appreciation of investment as provided in rules 3 and 6 even though such gains have not been realised. Cases referred to : Swadeshi Bima Co. v. Commissioner of Income Tax (1954) 26 ITR 530; Californian Copper Syndicate v. Harris (5 Tax Cases 159); In re. Debtor (1936, Chancery 237), Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Income Tax (20 ITR 189); Sutlej Cotton Mills v. Commissioner of Income Tax (1965) 11 TAX 353 (S.C.); State of Uttar Pradesh v. Lal (AIR 1957 S.C. 912); Navindchandra Nafar Lal v. Commissioner of Income Tax (AIR 1955 S.C. 58).
Queensland Insurance Company Ltd., v. Commissioner Of Income Tax – [1967] 16 TAX 112 (H.C.Kar.) 1718.
In the case of non-life insurance business computation of profits and gains should be made under rule 6 of the First Schedule of 1922 Act unless there is evidence of fraud apparent from return filed.
The assessee, a non-resident and non-life insurance company, carried on insurance business in Pakistan in fire, marine and accident. Since the very beginning, the assessee-company was charged to tax under rule 6 of the First Schedule to the Income Tax Act, on the basis of Pakistan Revenue Account as submitted to the Controller of Insurance. In making the assessments for the assessment years relevant to the accounting years ending the 30 th September, 1954 and the 30th September, 1955, the Income Tax Officer departed from this procedure and made assessment under rule 8 of the Schedule. He took the view that the declared net premium income was not correct and there was absence of more “reliable data”. On appeal, the Appellate Assistant Commissioner set aside the assessments to be made afresh under rule 6 of the Schedule. He came to the conclusion that the Pakistan Revenue Account constituted more reliable data and the Income Tax Officer was, therefore, not justified in not making the assessment under rule 6 and resorting to rule 8. He observed that even if the Income Tax Officer was of the opinion that the net premium income shown was not correct and it had been arrived at after deducting some expenses which were not admissible he could make his own estimate and could make suitable additions. On further appeal, at the instance of the department, the Appellate Tribunal restored the order of the Income Tax Officer holding that “in the facts of the case it was not unreasonable for the Income Tax Officer to hold that there was absence of “more reliable date” in this case and on this footing to have resorted to rule 8 of the First Schedule to the Income Tax Act. In doing so the Tribunal observed that there was a certain amount of conflict between rule 6 and rule 8. On a reference:
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Held,
Section 26
that the return filed under the Insurance Act and which is referred to in rule 6 has to be taken for the purpose of assessment of non-life insurance business, and unless there is some evidence of fraud appearing from the examination of such returns it is not permissible for the Income Tax authorities to apply the proportionate assessment provided by rule 8. it is not the case of the department that any such fraud was discovered in the return filed by the assessee.
We have given our anxious consideration to the question and the conclusion that we have reached is that in dealing with non-life insurance business the Income Tax authorities must read rule 8 subject to rule 6. As has been held by the Appellate Assistant Commissioner and the Tribunal rule 6 applies both to resident and non-resident insurance companies dealing with the business of insurance other than life insurance. This rule contains a mandatory provision which lays down that the profits and gains of such business shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act to be furnished to the Superintendent of insurance. It, therefore, seems to us that when rule 6 of the first schedule to the Income Tax Act provides that the profits and gains of such business shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act to be furnished the legislature took into account the checks and safeguards provided in the Insurance Act to ensure the correctness of such accounts. Rule 8 may now be read in the light of the above discussion. This rule provides that in the absence of more reliable data the profits and gains of a non-resident company may be deemed to be the proportion of the total world income of the company. . . . .Can it be said that in so far as the non-life insurance companies are concerned the data which has been provided by the Insurance Act in the shape of returns to the Controller of Insurance and which has been provided by rule 6 to represent the profits and gains of the business and which has to be taken as such is to be treated as a less reliable data than the proportionate method provided in rule 8, to which resort may be had. We do not think that this is permissible upon a fair construction of the two rules. Cases distinguished: Royal Insurance Co. Ltd., (1941) 9 ITR 589.
1264 Section 26
Income Tax Digest.
Commissioner of Income Tax v. American Life Insurance Company – [1967] 15 TAX 268 (H.C.Kar.) 1719.
Insurance company is entitled to concessional rate of tax on dividend.
The assessees were doing the business of life insurance. In respect of the assessment year 1960-61 they declared a loss of Rs.24,60,371 under Rule 2(a) of the First Schedule to the Income. tax Act and disclosed a surplus of Rs.5,47,270 under rule 2(b) of the said Schedule. The amount of surplus was inclusive of dividend income. At the assessment stage the assessee contended before the Income Tax Officer that the amount representing income from dividend included in the above surplus was chargeable to supertax at the rate of 15 per cent in terms of Pam B(1) of Part I and Para A(2)(a) of Part II of the Third Schedule to the Finance Ordinance, 1960. The Income Tax Officer rejected the plea on the ground that the profits and gains of insurance business from all sources are to be computed artificially in accordance with the Rules contained in the First Schedule to the Income Tax Act. Since the insurance company instead of submitting its return under the various heads as laid down in section 6 of the Income Tax Act had to submit one unit of income as provided in the First Schedule of the Act, it was to be charged as whole and the income from dividends included in the total income could not be separately charged as provided in the aforementioned Finance Ordinance of 1960. On a direct appeal the Appellate Tribunal held that though the computation of income in cases of life insurance business was to be computed in a particular manner yet for charging the tax reference had to be made to the different provisions of the Schedule to section 10 of the Finance Ordinance, 1960, and since it clearly demarcates different rates applicable to different kinds of income the rate applicable 10 the dividend as such had got to be adopted in conformity with the provisions. The High Court dismissing the reference application under section 66(1) filed by the department: Held,
that although by artificial method the computation of the income in cases of life insurance business is to be made in a particular manner yet for charging the tax one should refer to the different provisions of the Schedule to section 10 of the Finance Ordinance, 1960; and since this ordinance clearly demarcates different rates applicable to different kinds of income, the rates applicable to the dividend as such has got to be in conformity with those provisions.
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Case review : The viewpoint taken by the High Court was confirmed by honourable Supreme Court in EFU General Insurance v. Federation of Pakistan [1997] 76 TAX 213 = 1997 SCC 1174 = PTCL 1997 Cl. 478. The legislature amended the law in 1999 providing that such a benefit is not available to the insurance companies. However, in the Income Tax Ordinance, 2001 the original position was restored.
Western India Life Insurance Co. Ltd., In re. – [1938] 6 ITR 44 (Bom.) 1720.
An assessee, carrying on life insurance business, has right to set aside sums to reserve fund to meet depreciation and to treat such sums as business expenditure and there is nothing in rule .33 of 1922 Rules to compel an assessee who has exercised his option to bring back any sums which have been properly set aside by him in accordance with the rule, merely because there was an appreciation in a subsequent year.
An assessee, carrying on life insurance business, has right to set aside sums to reserve fund to meet depreciation and to treat such sums as business expenditure and there is nothing in rule 30 of 1922 Rules to compel an assessee who has exercised his option to bring back any sums which have been properly set aside by him in accordance with the rule, merely because there was an appreciation in a subsequent year. _______________
BENEFIT OF REDUCED RATE OF TAX TO INSURANCE COMPANIES
E.F.U. General Insurance Co. & others v. Federation of Pakistan & Others – 1997 SCC 1174 = [1997] 76 TAX 213 (S.C.Pak) = 1997 PTD 1693 = PTCL 1997 CL. 478 1721.
The benefit of reduced rate on dividend income cannot be denied to insurance companies (engaged in life as well as general insurance business). [Position prior to 01.07.1999. The law has since changed and this benefit is no more available]
The judgment in American Life Insurance Company case by a Division Bench of the High Court authored by Late Justice Wahiduddin Ahmad, as he then was, related to a life insurance company, but the principles enunciated therein fully applied to general insurance companies. Neither in the Act nor in the Ordinance or in the schedules to these statutes, there were/are any specific or different provisions for computing the tax on the income of insurance companies, life or
1266 Section 26
Income Tax Digest.
general. In the circumstances, it was held that tax would be charged in accordance with the general provisions regarding computation of tax on business income of companies, according to which dividend income of companies was chargeable to tax at a lower rate than the normal rate of tax on other income of the companies. As noted earlier, these principles enunciated in the case of American Life Company had been followed by the Department till 1991, by which time judgment of the Sindh High Court in the case of Adamjee Insurance Company 1989 PTD 1090 had been announced. After consideration of the decisions of the High Court and the Supreme Court in the cases of Adamjee Insurance Company and Central Insurance Company respectively, it may be observed that the ratio of Adamjee Insurance Company case is that, being part of profits and gains of general insurance business, interest on Khas Deposit Certificates/Defence Saving Certificates could not be exempt from tax under section 14 read with the Second Schedule to the Ordinance, and this Court affirmed this view in the case of Central Insurance Company by holding that such interest being part of the profits and gains of the assessees could be subject to tax. We reiterate this view expressed in the case of Central Insurance Company. However, neither of the two decisions is an authority for the proposition that dividend income of general insurance company is liable to tax at the normal rates provided in the First Schedule to the Ordinance and not at the lower rates at which the dividend income is chargeable to tax under the same schedule. Reliance placed by the department on the said two cases for the aforesaid proposition is, therefore, misplaced. Section 26(a) of the Ordinance, inter alia, provides that notwithstanding anything contained in the Ordinance, the profits and gains of any business of insurance and the tax payable thereon shall computed in accordance with the rules contained in the Fourth Schedule. Computation of profits and gains and computation of tax payable are two different concepts altogether. In rule 5 of the Fourth Schedule special provisions exist for computation of income from general insurance business, but there are no provisions at all in the rule for computation of tax on such income. This could lead to two interpretations. There being no provision in the Fourth Schedule for computation of tax, such income cannot be subject to tax or, in the absence of taxing provisions, general taxing provisions contained in the First Schedule for business income of companies will apply. The intention of the legislature is clear and that is that income from general insurance shall be subject to tax under the Income Tax Ordinance. The interpretation that such income will be tax-free is,
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therefore, to be rejected. Special provisions are, however, silent regarding computation of tax on such income. To give effect to the intention of the legislature and to harmonize different provisions of the Ordinance, the interpretation will be that for taxing such income the general provisions contained in the First Schedule providing for computation of tax or income of companies from business shall apply, and, while applying the provisions of the First Schedule for computation of tax on such income, if any benefit in the rate of tax is provided on any kind of income, general insurance companies cannot be deprived of such benefit in the absence of any provision that such benefit shall not be extended in respect of income from general insurance business. Admittedly, no such special provision appears in the First Schedule or in any provision of the Income Tax Law to deny the said benefit to the general insurance companies. There is no provision in the Ordinance or the Schedules that only one part of the First Schedule shall apply and the other shall not in the case of general insurance companies. Benefit in the rates of tax available under the First Schedule of the Ordinance can only be denied to the general insurance companies by suitably amending the law. [See case review under 1719.]
Commissioner of Income Tax v. Great Eastern Life Assurance Co. Ltd. – [1949] 17 ITR 13 (PC) 1722.
Post-1939 position.
Rule 2 of the Schedule of the 1922 Act applies to the Life Insurance Business of all persons, resident or non-resident, in India. Case review: Commissioner of Income Tax v. Great Eastern Life Assurance Co. Ltd. [1945] 13 ITR 141 (Bom.) reversed.
New India Assurance Co. Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 809 (Bom.) 1723.
Position prior to 1.4.1977.
The assessee is entitled to a deduction under rule 3(a) of half the amount of unappropriated profit carried forward to the subsequent valuation period. Income tax deducted at source and the income tax reserve created by an insurance company are not the amounts expended or reserved for or on behalf of the policyholders within the meaning of rule 3(a) of the Rules made under section 10(7) of the Income Tax Act.
1268 Section 26
Income Tax Digest.
Income Tax paid or amount transferred to Income Tax reserve is not expenditure on behalf of shareholders. New Asiatic Insurance Co. Ltd. v. Commissioner of Income Tax – [1973] 90 ITR 243 (Delhi) 1724.
Accounts submitted to Controller of Insurance must form basis of assessments.
The character of the entries in the accounts cannot be gone into and the accounts as accepted by the Controller of Insurance must form the basis of assessment. Thus, where certain amounts were transferred from dividend equalisation fund and general reserves to revenue account, it was held that they should be taken into consideration in computing the profits of the insurance company. Commissioner of Income Tax v. Indian Life Assurance Co. Ltd. – [1946] 14 ITR 347 (Sind) 1725.
Deduction is admissible only of amount of actual loss by depreciation.
Deduction is admissible only of amount of actual loss by depreciation. _______________
POSITION UNDER 1922 ACT
National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax – [1936] 4 ITR 44 (PC) 1726.
Position under 1922 Act.
The „total income, profits or gains of the companies‟ referred to in rule 35 are the income, profits or gains as they would be ascertained for the purposes of the Act, Where, however, in calculating the company‟s net profits, the Income Tax Officer has completely ignored the principle of mutuality and the non-participating premium received, but included the whole amount of consideration received in respect of annuities and further, he has deducted nothing in respect of the liabilities of the company, or for the expenses relating to the non-participating business, it is impossible to regard this figure as the proper ascertainment of the income, profits or gains of the company. Hence, the assessment so made under rule 35 is not valid. Case review: Commissioner of Income Tax v. National Mutual Life Association of Australasia Ltd. [1933] 1 ITR 350 (Bom.) reversed.
1269 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
Section 26
National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax – [1936] 4 ITR 44 (PC)
The Income Tax Officer is only authorized to have recourse to the method of computation provided by rule 35 of the 1922 Rules (corresponding to rule 6 of the First Schedule to the 1961 Act) „in the absence of more reliable data. This requires (a) a scrutiny of the data which in fact had been made available to the Income Tax Officer, irrespective of any question as to be validity or correctness of the return made, and (b) a consideration of the reliability of the data for the purpose of a proper computation of the income, profits or gains of the company. The appellant, a non-resident insurance company, contended that the Income Tax Officer had more reliable data available, (i) in the return made by the company and the revenue account and balance sheet of the Indian business, which accompanied it, (ii) in the said documents, supplemented by the triennial valuation reports, balance sheets and revenue accounts of the entire business for the relevant year. The Income Tax Officer however invoked rule 35 by taking the view that, in the case of a life insurance company, the only reliable data to arrive at its profit was by a valuation report, and he asked for a separate valuation report of the Indian business for the triennial period. Held that the Income Tax Officer was entitled to take the view that the income, profits or gains of the Indian business could not properly be deduced from the data supplied by the company with the return. Only a small proportion of the premium could be said to represent Income, profits or gains, and that would have to be taken on an average basis, as there will be losses on individual policies. The Income Tax Officer rightly took the view that the information submitted by the appellant did not afford more reliable data for the computation of the income, profits or gains of the Indian business than the method prescribed by rule 35, which is based on the total income, profits or gains of the company, the proportion attributed to the Indian business being calculated on the ratio of the Indian premium income to their total premium income. There can be no doubt that the total income, profits or gains of the company would fall to be computed on the basis of their triennial valuation reports, which is the most reliable method of computation in the case of a life insurance
1270 Section 26
Income Tax Digest.
company. The Income Tax Officer was thus justified in resorting to rule 35. Case review: Commissioner of Income Tax v. National Mutual Life Association of Australasia Ltd. [I933] 1 ITR 350: ILR 55 Bom. 637 reversed.
Commissioner of Income Tax v. Great Eastern Life Assurance Co. Ltd. – [1949] 17 ITR 173 (PC)
In assessing the profits and gains of the Indian branch of an insurance company not resident in British India, recourse must be had in the first instance to rules of the 1922 Rules, which is the only rule dealing specifically with that subject. In the absence of „more reliable data‟ the profits and gains must be computed on the proportionate basis laid down in the rule, In that case no other rule is relevant except for the purpose of computing the total world income which has to be apportioned. If their is more reliable data, that is data more reliable for computing the profits and gains of the Indian business of the assessee than on which the proportionate rule is based, then Rule 8 passes out of the picture and by virtue of section 10(7) of the 1922 Act, the computation of profits and gains must be made under the other rules in the Schedule which are appropriate. National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax – [1936] 4 ITR 44 (PC)
Computation on the basis of the triennial valuation reports is the most reliable method of commutation in the case of life insurance companies. The interest earned on investment, though it is an element in the ascertainment of the income, profits or gains, is not by itself a reliable data for such ascertainment. However, where such triennial valuation reports are not made available for the Income Tax Officer, the application of rule 35 will be justified. Case review: National Mutual Life Association of Australasia Ltd. v. Commissioner of Income Tax [1933] 1 ITR 350 (Bom.) reversed.
Himalaya Assurance Co. Ltd., In re – [1939] 7 ITR 402 (PC)
The „net profits‟ referred to in rule 25 mean the „surplus, if any‟ in the statutory form of valuation balance-sheet, of „life insurance and annuity funds‟ over „the net liabilities under life assurance and annuity transactions‟, and the Income Tax Department is not entitled to go behind the said valuation balance-sheet to find out if
1271 SPECIAL PROVISIONS REGARDING BUSINESS OF INSURANCE AND PRODUCTION OF OIL AND NATURAL GAS AND MINERAL DEPOSITS, ETC.
Section 26
there were any profits in respect of the period of the last preceding valuation. Case review: Judgment of the Calcutta High Court in Himalaya Assurance Co. Ltd., In re [1938] 6 ITR 227 affirmed.
Andhra Insurance Co. Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 697 (Mad.)
The wording of rule 5 is perfectly clear and says that the income of a life assurance company shall be the average annual net profits disclosed by the last preceding valuation, that is, the last preceding valuation at the time of the return. Royal Insurance Co. Ltd., In re – [1941] 9 ITR 589 (Cal.)
When reliable data is available to Income Tax Officer assessment is not to be made under rule 35 of 1922 Rules. Manufacturers‟ Life Insurance Co. of Canda v. Commissioner of Income Tax – [1938] 6 ITR 321 (Bom.)
In computing total income of a company for the purposes of applying rule 35 of 1922 Rules the entire Income Tax payable by company must be included, not Indian Income Tax alone. North British & Mercantile Insurance Co., In re – [1937] 5 ITR 349 (Cal.)
Where the profits of a life insurance company have been ascertained under rules 25 and 35 of the 1922 Rules, the assessees may claim exemption from Income Tax in respect of such part of the income, profits and gains of the Life Insurance Company as they can show are due to interest from securities issued by the Government of India declared to be tax-free. Commissioner of Income Tax v. Indian Life Assurance Co. Ltd. – [1941] 9 ITR 177 (Sind)
The mere fact that the accounts of a life assurance company have to be kept under the provisions of the Life Assurance Companies Act and the Rules made thereunder in a particular manner or that the income,
1272 Section 26
Income Tax Digest.
profits and gains are to be calculated in the manner prescribed in rule 25 of the 1922 Rules, does not affect in any way the statutory exemption from Income Tax on interest on certain securities given by the proviso to section 8.
1273 CAPITAL GAINS
Section 27
Section 27* Capital gains
PAGE NO
BONUS SHARE - VIEW‟S OF LAHORE HIGH COURT REVERSED
1727. Lahore High Court‟s view that cost of bonus share should be _ taken as nil, held to be incorrect. 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.)
1275
COST OF BONUS SHARES - METHOD OF CALCULATION
1728. Bonus shares are received as corpus and not as income by _ the share-holders. 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.)
1276
1729. Correct method for determination of cost of bonus share. _ 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.)
1276
1730. Difference of the original price and the claim received by the assessee from insurance company for loss of a ship in world _ could not be treated as capital gains. [1992] 65 TAX 212 (H.C.Kar.) = 1992 PTD 232 _ 1731. Cost of bonus shares - Method of calculation. 1991 SCC 818=[1991] 64 TAX 116 (S.C.Pak) = 1992 PTD 1693 1732. Cost of bonus shares by adopting the value by spreading the cost of old shares over the old shares plus the bonus shares _ held to be correct. [1991] 63 TAX 64 (H.C.Kar.) = 1991 PTD 374
1277 1278
1278
„IMMOVABLE PROPERTY‟ IS NOT A CAPITAL ASSET
1733. “Immovable property” is not a capital asset for the purpose _ of chargeability under the head Capital Gain 1991 SCC 777=[1992] 65 TAX 102 (S.C.Pak)=1992 SCMR 250
1280
FACE VALUE SHOULD BE COST OF BONUS SHARE
1734. Face value should be cost of bonus share to work out capital gain. [The view was not approved by Supreme Court in _ [1992] 66 TAX 6 (S.C.Pak)]. [1973] 28 TAX 159 (H.C.Lah.)
*
Corresponding to section 12B of the 1922 Act.
1280
1274 Section 27
Income Tax Digest. PAGE NO
IMMOVABLE PROPERTY VIS-A-VIS OWNERSHIP AND POSSESSION
1735. Immovable property vis-a-vis ownership and possession. _ 1959 PTD 176 (H.C.Sind) = 1958 PLD 270
1281
1275 CAPITAL GAINS
Section 27
Section 27* Capital gains
BONUS SHARE - VIEW OF LAHORE HIGH COURT REVERSED
Ebrahim Brothers (Pvt.) Ltd. v. Commissioner of Income Tax, Karachi – 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.) 1727.
Lahore High Court‟s view that cost of bonus share should be taken as nil, held to be incorrect.
Lahore High Court held that, for purposes of capital gain, the face value of the bonus shares is the cost to the assessee. As noticed, the Lahore High Court did not refer in detail to the decision of the Indian Supreme Court in the case of Dalmia Investment Co. Limited observing that the Indian Supreme Court has not held in that case that bonus shares were to be deemed to have been acquired at no cost and that it had only laid down the criterion for determining the costs. The impugned judgment relied upon the judgment of the Supreme Court of India in Dalmia Investment Co. which propounded that there are four methods for determining the cost of bonus shares: 1.
To take the cost as the equivalent of the face value of the bonus shares.
2.
As the share holders pay nothing in cash for the bonus shares, cost should be taken as nil.
3.
To take the cost of the original shares and to spread it over the original shares and bonus shares taken collectively.
4. To find out the fall in the price of the original shares on the Stock Exchange and to attribute this to the bonus shares.
Finally the Supreme Court of India approved the third method of evaluation of bonus shares and it was held that the bonus shares can be valued by spreading the cost of old shares over the old shares and the new issue taken together if the shares rank pari passu and where they do not the price may have to be adjusted either in the proportion of the face value they bear or on equitable consideration based on the *
Corresponding to section 12B of the 1922 Act.
1276 Section 27
Income Tax Digest.
market price before and after the issue. The learned judges of the High Court observed as follows:“The method of computing the cost of bonus shares approved by Hidayatullah J. in the case of Dalmia Investment Company Limited, is in accord with principles of business accountancy and based on good reasoning as well. The basis that bonus shares be valued at nil or zero can be ignored without much debate. A shareholder who is allotted bonus shares against his shareholding does not get the bonus shares as a gift for free. On allotment of bonus shares, value of his original shares goes down and he suffers a loss in respect of his original share-holding. Therefore, even if the shareholder has not literally made any payment for the bonus shares, law will not presume that he got the bonus shares as a gift and these be valued at zero value.” _______________
COST OF BONUS SHARES - METHOD OF CALCULATION
Ebrahim Brothers (Pvt.) Ltd. v. Commissioner of Income Tax, Karachi – 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak.) 1728.
Bonus shares are received as corpus and not as income by the share-holders.
It may be noticed that when the dividend is converted in the share capital nothing is paid to the shareholders. „Share‟ has been defined in the Companies Act, 1913, as „share in the share capital of the company.‟ A shareholder acquires a right of participation in the profits of the company but he does not have any interest in its assets and properties. According to Halsbury‟s Laws of England‟ a share is a right to a specified amount of the share capital of a Company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. „Dividend is a share in the profits but instead of distributing it as dividend to the shareholders‟ applies it in paying up new shares issued and allotted proportionately to the shareholders entitled to receive it, if dividends were paid, such profit ceases to be divisible. The shares so issued are received as corpus and not as income.‟ Reference may be made to R.A. Hill v. Permanent Trustee Company, AIR 1930 PC 302. 1729.
Correct method for determination of cost of bonus share.
Capital gain tax is charged under section 26, 27 of the Income Tax Ordinance, 1979. It charges profit or gain arising from the transfer of
1277 CAPITAL GAINS
Section 27
capital asset which is deemed to be income of the income year in which the transfer took place. In order to assess the profit or gains arising from such transaction two prices viz. cost price which the assessee had to pay for acquiring the capital asset and the price which he has received on transfer of such capital assets have to be taken into consideration. A shareholder has not to pay any amount for the bonus shares. The dividend which on distribution may have come to the hands of the shareholders on of bonus share is converted as a stock capital of the company in which a shareholder has no interest. Thus, the bonus share at the time of allotment does not cost anything to the shareholder. However, it has a value in the market but in order to calculate its value neither it can be termed as nil nor at the market value. The only reasonable and rational method to calculate the cost of the bonus shares is as held by the High Court in the impugned judgment namely that the cost of the share held by the shareholder on the basis of which bonus shares have been allotted be spread over on all such shares taken together if they rank pari passu and then average price per share be calculated on that basis. A shareholder acquires a bonus share in the stock, if he holds a certain number of shares in the company. Therefore, it is the original investment which he has made on which he has gained profits. In our view the reasonings and the conclusions reached by the High Court of Sindh in the matter correct and proper, which we approve. We, therefore, dismiss the appeal with no order as to cost. Commissioner of Income Tax, Central Zone „C‟, Karachi v. Transoceanic Steamship Company Ltd. [1992] 65 TAX 212 (H.C.Kar.) = 1992 PTD 232 1730.
Difference of the original price and the claim received by the assessee from insurance company for loss of a ship in world could not be treated as capital gains.
To bring any profit or gain within the mischief of section 12B of 1922 Act it is necessary that such profit or gain should have arisen from the sale, exchange or transfer of a capital assets. If the profit or gain has not arisen from any sale, exchange or transfer of the capital assets in question section 12-B will not be attracted and such profit or gain would not be taxable under the said provision. In our view, the Tribunal was right in holding that the difference between the original price of the ship in question and the amount received by the assessee from the insurance company under the insurance policy on account of the loss of the ship is not a profit or gain on account of the sale, exchange or transfer of the said ship.
1278 Section 27
Income Tax Digest.
Mr Nasrullah Awan, learned counsel for the Department made a feeble attempt to challenge the decision of the Tribunal on the basis that in fact some gain has come to the assessee. Just because some gain or profit has been received by an assessee would not be sufficient to bring such gain or profit within the mischief of section 12B of the repealed Income Tax Act, 1922. As observed, such profit or gain must arise from sale, exchange or transfer of the capital asset, which is lacking in the present case. Ebrahim Brothers (Pvt.) Ltd v. Commissioner of Income Tax, Central Zone “B”, Karachi – 1991 SCC 818 = [1991] 64 TAX 116 (S.C.Pak.) = 1992 PTD 1693 1731.
Cost of bonus shares - Method of calculation.
The bonus shares at the time of allotment does not cost anything to shareholder. However, it has a value in the market but in order to calculate its value neither it can be termed as nil nor at the market value. The only reasonable and rational method to calculate the cost of bonus shares is that the cost of the shares held by the shareholder on the basis of which bonus shares have been allotted should be spread over on all such shares taken together if they rank pari passu and then average price per share be calculated on that basis. Commissioner of Income Tax, Central Zone „B‟, Karachi v. Ebrahim Brothers Ltd., Karachi – [1991] 63 TAX 64 (H.C.Kar.) = 1991 PTD 374 1732.
Cost of bonus shares by adopting the value by spreading the cost of old shares over the old shares plus the bonus shares held to be correct.
As per the Statement of the case, the respondent, a private limited company, dealt in imported crockery and local goods. For the year under consideration, the assessee declared capital gain of Rs.9,96,000/- on sale of shares held by the assessee and sold during the year but the Income Tax Officer determined the capital gain of Rs.15,96,000/-. The difference in valuation was on account of different basis of calculation of the cost of bonus shares adopted by the assessee and the Income Tax Officer the assessee determined the cost of bonus shares at their face vale, whereas the Income Tax Officer worked out the cost of bonus shares by adopting the basis of average value i.e. by spreading the cost of old shares over the old shares plus the bonus shares taken together. It was observed by Hidayatullah, J. that though profits are profits in the hands of the company, when they are disposed of by converting
1279 CAPITAL GAINS
Section 27
them into capital instead of paying them over to the shareholders, no income can be said to accrue to the shareholder because the new shares confer a title to a large proportion of the surplus assets at a general distribution and the floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital, and the amount said o be payable to the shareholders as income goes merely to increase the capital of the company and in the hands of the shareholders the certificates are property from which income will be derived. The method of computing the cost of bonus shares approved by Hidayatullah J. in the case of Dalmia Investment Company Ltd. is in accord with principles of business accountancy and based on good reasoning as well. The basis that bonus shares be valued at nil or zero can be ignored without much debt. A shareholder who is allotted bonus shares against his shareholding does not get the bonus shares as a gift for free. One allotment of bonus shares, value of his original shares goes down and he suffers a loss in respect of his original shareholding. Therefore, even if the shareholder has not literally made any payment for the bonus shares, law will not presume that he got the bonus shares as a gift and these be valued at zero value. We find It difficult to subscribe to the view that bonus shares are in the nature of dividends and that the shareholder is deemed to pay the face value of the bonus shares to the Company against which presumed payment bonus shares and issued to the shareholder. As explained by Hidayatullah J., a dividend means a share in the profits and when profits are released in cash to the shareholder it can only then be said that dividend has been aid to the shareholder. But the conversion of reserves into capital does not involve the release of the profits to the shareholder. Allotment of bonus shares to a shareholder cannot amount to or deemed to be payment of dividend to the shareholder under the law or under the principles of business accountancy. Our decision, therefore, is that the cost price of the bonus shares to the assessee should have been determined by spreading the cost of ordinary shares of the same. Company held by the assessee against which such bonus shares were issued, over the ordinary shares and the bonus shares. Our answer to the question referred to us in the negative. Cases relied on : Commissioner of Income Tax v. Dalmia Investment Co. Ltd. [1964] 10 TAX 75 (S.C. Ind.).
1280 Section 27
Income Tax Digest.
Case review : The honourable Supreme Court of Pakistan in Ebrahim & Brother v. Commissioner of Income Tax, Karachi 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak) upheld this matter of working out cost of bonus share. _______________
„IMMOVABLE PROPERTY‟ IS NOT A CAPITAL ASSET
Julian Hoshang Dinshaw Trust & others v. Income Tax Officer Circle XVIII, South Zone, Karachi South 1991 SCC 777 = [1992] 65 TAX 102 (S.C.Pak.) = 1992 SCMR 250 1733.
“Immovable property” is not a capital asset for the purpose of chargeability under the head Capital Gain.
The exclusion of the immovable property from the ambit of „capital gains‟ in section 27(2)(a)(ii) is in line with item 50 of the Federal Legislative List, Part I, Fourth Schedule of the Constitution. Thus the imposition of tax on the capital gains arising from the “transfer” of immovable property is beyond the taxing powers of the Federation. _______________
FACE VALUE SHOULD BE COST OF BONUS SHARE
Commissioner of Income Tax, Lahore v. Umar Saigol, Lahore – [1973] 28 TAX 159 (H.C.Lah.) 1734.
Face value should be cost of bonus share to work out capital gain.
“Share” as defined in section 2(15) of the Companies Act, 1913 means “share in the share capital of the company and includes stocks and shares is expressed or implied.” Under the Companies Act, therefore, a share whether allotted on the basis of cash payment or on account of bonus stands on the same footing. Every share allotted by the Company has to be paid for in cash or kind because the shares are shares in the share capital of the company. Every share, therefore, represents a part of the capital and is relatable to it. When a share is allotted a certain amount of money has to be credited to the capital account of the company an account of the price of that share. It is axiomatic that a company cannot deal in its own shares. It cannot purchase its own share in any case. It consequently follows that when a share of the company is allotted to somebody it is not the company but the allottee or somebody also on its behalf who has to pay the corresponding amount for being credited to the capital amount of the company.
1281 CAPITAL GAINS
Section 27
When a company makes profit it divides a part of the profit amongst the shareholders in the shape of dividend. This dividend can either be paid in cash or instead of making a cash allocation the company can allocate shares of the same value to the shareholder and credit the amount to the capital account of the company which would have otherwise been paid as dividend to the shareholder. Shares so allotted are known as bonus shares. They have perforce to be relatable to the capital of the company and the payment for it is, therefore, made by a person other than the company to it. It is, therefore, incorrect to say that bonus shares are issued on a cost basis. Their face value is their cost. Cases referred to: Commissioner of Income Tax v. Dalmia Investment Co. Ltd. [1964] 10 TAX 75 (S.C.). Case review : DISAPPROVED by the honourable Supreme Court of Pakistan in Ebrahim & Brother v. Commissioner of Income Tax, Karachi 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak), observed that: Held that, for purposes of capital gain, the face value of the bonus shares is the cost to the assessee. As noticed, the Lahore High Court did not refer in detail to the decision of the Indian Supreme Court in the case of Dalmia Investment Co. Limited and the learned judges of the High Court observed as follows:“The method of computing the cost of bonus shares approved by Hidayatullah J. in the case of Dalmia Investment Company Limited, is in accord with principles of business accountancy and based on good reasoning as well. The basis that bonus shares be valued at nil or zero can be ignored without much debate. A shareholder who is allotted bonus shares against his shareholding does not get the bonus shares as a gift for free. On allotment of bonus shares, value of his original shares goes down and he suffers a loss in respect of his original share holding. Therefore, even if the shareholder has not literally made any payment for the bonus shares, law will not presume that he got the bonus shares as a gift and these be valued at zero value.” _______________
IMMOVABLE PROPERTY VIS-A-VIS OWNERSHIP AND POSSESSION
I.T.Assessments of the Estate of F.E. Dinshaw 1959 PTD 176 (H.C.Sind) = 1958 PLD 270 1735.
Immovable property vis-a-vis ownership and possession.
Possession is either actual or constructive, „possession‟ includes juridical and legal possession.
1282 COMPUTATION OF CAPITAL GAINS
Section 28
Section 28 * Computation of capital gains PAGE NO
FACE VALUE OF BONUS SHARE CONSTITUTES ITS ACTUAL COST
1736. Face value of bonus share is its actual cost. [This view was disapproved by Supreme Court in [1992] 66 TAX 6 _ (S.C.Pak)]. [1976] 33 TAX 227 (H.C.Lah.)
*
Corresponding to section 12(1) of the 1922 Act.
1283
1283 COMPUTATION OF CAPITAL GAINS
Section 28
Section 28* Computation of capital gains
FACE VALUE OF BONUS SHARE CONSTITUTES ITS ACTUAL COST
Miss Shirin Ayub Khan, Lahore v. Commissioner of Income Tax, Lahore – [1976] 33 TAX 227 (H.C.Lah.) 1736.
Face value of bonus share is its actual cost..
In the situation enumerated in sub-section (3) of section 12B the recipient gets the shares free of Cost but the capital gains are to be calculated not on this basis but on the basis of the actual cost of the previous owner. Undoubtedly the company cannot purchase its own share and it is not the owner of the shares either but in issuing the bonus shares it acts on the decision of the Director or resolution of the shareholders passed under the Articles of Association of the company. The actual, cost of the shares would thus be allowed under this section. Section 12B(2) specifically lays down that the value of the bonus shares shall be the face value. Case review : DISAPPROVED by the honourable Supreme Court of Pakistan in Ebrahim & Brother v. Commissioner of Income Tax, Karachi 1992 SCC 926 = [1992] 66 TAX 6 (S.C.Pak), observed that: Held that, for purposes of capital gain, the face value of the bonus shares is the cost to the assessee. As noticed, the Lahore High Court did not refer in detail to the decision of the Indian Supreme Court in the case of Dalmia Investment Co. Limited and the learned judges of the High Court observed as follows:“The method of computing the cost of bonus shares approved by Hidayatullah J. in the case of Dalmia Investment Company Limited, is in accord with principles of business accountancy and based on good reasoning as well. The basis that bonus shares be valued at nil or zero can be ignored without much debate. A shareholder who is allotted bonus shares against his shareholding does not get the bonus shares as a gift for free. On allotment of bonus shares, value of his original shares goes down and he suffers a loss in respect of his original share-holding. Therefore, even if the shareholder has not literally made any payment for
*
Corresponding to section 12(1) of the 1922 Act.
1284 Section 28 Income Tax Digest.
the bonus shares, law will not presume that he got the bonus shares as a gift and these be valued at zero value.”
1284 Section 30
Income Tax Digest.
Section 30* Income from other sources
PAGE NO
GENERAL
1737. Distribution made to assessee (a preference shareholder) cannot be reckoned as interest to earn exemption from tax under clause (iii) of section 10(2) of 1922 Act but is dividend _ income liable to tax. [1981] 43 TAX 9 (H.C.Lah.)
1286
1738. Dividend received out of excess income processed under Martial Law Regulations Nos. 43/48 of 1958 held not _ exempt from tax. [1977] 36 TAX 82 (H.C.Lah.) [Reversed by Supreme Court].
1287
1739. Particular source of income not specifically covered by any others head of income should be brought to tax under section _ 30 of 1979 Ordinance. [1977] 35 TAX 74 (H.C.Lah.)
1287
1740. Section 30 of the Ordinance can be resorted to only when _ other heads are exhausted. [1933] 1 ITR 197 (PC) _ 1741. Position under 1922 Act. [1936] 4 1711 270 (PC)
1288 1288
GRATUITY – POSITION PRIOR TO 1.7.1979
1742. Gratuity received by director is taxable not as „salary‟ but as _ income from other sources. [1947] 15 ITR 8 (Bom.) [Position is different under 1979 Ordinance].
1288
ZAMINDARI
1743. Income of a zamindari is assessable under the head „other _ sources‟. 5 ITC 1 (PC)
1289
INCOME FROM HOUSE PROPERTY VS. INCOME FROM OTHER SOURCES
1744. Illustratrion.
_
4 ITC 324 (All.)
ILLUSTRATION
1745. Payments for restrictive covenants. (Sind)
*
Corresponding to section 12(1) of the 1922 Act.
1290 _
[1941] 9 ITR 642 1290
1285 INCOME FROM OTHER SOURCES
Section 30
_
1746. University examination fees. 3 ITC 350 (Nag.) _ 1747. Position under 1922 Act. [1942] 10 ITR 405 (Peshawar)
PAGE NO
1291 1291
1286 Section 30
Income Tax Digest.
Section 30* Income from other sources
GENERAL
Colony Thal Textile Mills Limited v. Commissioner of Income Tax, Lahore – [1981] 43 TAX 9 (H.C.Lah.) 1737.
Distribution made to assessee (a preference shareholder) cannot be reckoned as interest to earn exemption from tax under clause (iii) of section 10(2) of 1922 Act but is dividend income liable to tax.
This clause [Clause (iii) of section 10(2) of 1922 Act] necessarily postulates the borrowing and lending of money on the condition of repayment of money with interest. The term “capital borrowed” as employed in this clause, contemplates the existence of relationship of the borrower and lender between the assessee and the recipient of the payments, sought to be exempted from the chargeability. It cannot be disputed that the preference shareholders, whose names are entered in the register of members of the company, maintained under section 30 of the Companies Act, 1913, like the holders of ordinary share, are the members of the company. Indeed the connotation of the word “shareholder” as given in the “Articles of Association” is also to the same effect. There is no gainsaying that a company is constituted by its members and the preference shares form part of the share capital of the assessee-company. The capital subscribed by these share holders, therefore, can neither bear the character of “borrowed capital” nor the constituents of the company be considered as lenders of the capital, within the meaning of clause (iii) of subsection (2) of section 10 of the Act. It is axiomatic that a company cannot borrow its own capital. There is no substance in the argument that the distribution made to preference share holders can be reckoned as interest to earn the exemption from taxability. A reference to Article 5(a) will provide that a fixed cumulative preferential dividend at the rite of 6 percent has been guaranteed on the preference shares. Article 156 lays down that *
Corresponding to section 12(1) of the 1922 Act.
1287 INCOME FROM OTHER SOURCES
Section 30
no dividend shall be paid otherwise than out of the profits of the company. Thus, what the preference shareholders received was not the interest but the dividend declared and distributed by the company. They got their share, in the net profits of the company in accordance with the Articles thereof. The character of the payment did not change, merely because a fixed cumulative preferential dividend, at a particular rate was guaranteed to them. The compulsory retention of preference shares of the assessee company by the Colony Textile Mills, under some contractual obligation and consequential distribution of guaranteed dividend to them even if found correct, does not affect the chargeability of the payments. The payments in question did not lose their character as taxable dividend income of the company and thus could not be allowed as permissible allowance under section 10(2)(iii) of the Income Tax Act. Cases referred to : Commissioner of Income Tax v. E. V. Miller (PLD 1959 S.C. 219) = (1959) 1 TAX 1 (S.C.); Henry v. Great Northern Railways Co. (LJR 27 Chancery 1); Mathew v. Great Northern Railway Co. (LJR 28 Chancery 375); Edupuganti Pitchyya and others v. Gonuguntla Venkata Ranga Row and Mohammadi Steamship Co. Ltd. v. Commissioner of Income Tax (Central) Karachi) (PLD 1966 S.C. 828) = (1966) 14 TAX 281 (S.C.).
Mian Aftab Ijaz v. Commissioner of Income Tax, Lahore Zone Lahore – [1977] 36 TAX 82 (H.C.Lah.) 1738.
Dividend received out of excess income processed under Martial Law Regulations Nos. 43/48 of 1958 held not exempt from tax. [Reversed by Supreme Court].
Held that the divided in the hands of the shareholders, declared by the Premier Cloth Mills Limited was taxable income and the assessee is liable to pay tax thereon. Martial Law Regulations 43 and 48 do not exempt this income from assessment. Commissioner of Income Tax, Lahore Zone, Lahore Muhammad Allah Bux – [1977] 35 TAX 74 (H.C.Lah.) 1739.
v.
Particular source of income not specifically covered by any others head of income should be brought to tax under section 30 of 1979 Ordinance.
An owner of a property may lease out as part of business or as a landowner. The property may be a building, when it will be covered by section 9. It may have in it installed machinery or plant which may not be separable from it. In such a situation section 9 will not apply. Whether section 10 or 12 applies, it must necessarily depend upon the object with which the act is done. Section 12 is the
1288 Section 30
Income Tax Digest.
residuary section. Therefore if a particular source of income is not specifically covered by any other section only then it will be brought to tax under section 12. Commissioner of Income Tax v. Basant Rai Takhat Singh – [1933] 1 ITR 197 (PC) 1740.
Section 30 of the Ordinance can be resorted to only when other heads are exhausted.
Section 30 of the Ordinance being, the residuary head of income, can be resorted to only if none of the specific heads is applicable to the income in question: it comes into operation only after the preceding heads are excluded. Commissioner of Income Tax v. Hungerford Investment Trust Ltd. – [1936] 4 ITR 270 (PC) 1741.
Position under 1922 Act.
If certain income of a company was exempt from tax, dividend apportionable to that income did not become taxable in shareholders‟ hands merely because company had not paid tax on that income. _______________
GRATUITY - POSITION PRIOR TO 1.7.1979
Commissioner of Income Tax v. Lady Navajbai R.J. Tata – [1947] 15 ITR 8 (Bom.) 1742.
Gratuity received by director is taxable not as „salary‟ but as income from other sources. [Position is different under 1979 Ordinance].
Gratuity is taxable under section 7 of the 1922 Act only when it is received from an employer. A gratuity must be paid by an employer, that is to say, that the relationship of master and servant must exist in order to bring a gratuity received by an assessee under the head of section 7 for taxation purposes. The assessee was a permanent director in a limited company. She was not appointed either as manager or as managing director by the company under its articles of association. She had also no contract with the company outside the articles. Further, she did not attend office everyday like the other directors of the company; hut she attended the board meetings. A question arose as to whether the sum of Rs.40,000 received by the assessee as her remuneration in the relevant account year was salary chargeable under section 7 of the 1922 Act.
1289 INCOME FROM OTHER SOURCES
Section 30
Held that the sum received by the assessee from the company as remuneration was neither salary nor wages but gratuity and as it was paid to her by virtue of her office as director and not as a servant or employee of the company, it did not fall to be taxed under section 7, but was to be brought to tax as income from other sources under section 12 of the 1922 Act. Case review: Reasoning of the decision of the Lahore High Court in Bhagwati Shankar, In re [1944] 12 ITR 193 approved but the conclusion disapproved. _______________
ZAMINDARI
Raja Probhat Chandra Barua v. Commissioner of Income Tax – 5 ITC 1 (PC) 1743.
Income of a zamindari is assessable under the head „other sources‟.
In section 6 of the 1922 Act, the words „other sources used in relation to the word „property, would naturally mean sources other than the source which the word „property‟ connotes in this Act. It would, therefore, not be correct to contend that the income derived from a zamindari was never brought into charge at all, because, in section 6 the words „other sources‟ must mean sources other than those described earlier and, therefore, could not include any source which could properly be described as „property‟. Such an argument, if successful, could not be confined to the income derived from a zamindari; it would free from liability to Income Tax all income derived from land which did not consist of buildings or lands appurtenant thereto, and it would seem to render unnecessary the specific exemption of agricultural income. Section 9 of the 1922 Act deals with the head „Property‟, and a perusal of it makes it clear that the „Income, profits and gains‟ charged under the head „Property‟, are confined to the annual value of‟ buildings or lands appurtenant thereto‟, in other words to the annual value of what may be conveniently called house property. The income of a Zamindar derived from his Zamindari would not be chargeable under that head. If chargeable, it would be under the head „Other sources‟. The wordings of section 12 of the 1922 Act make it clear that the sixth head mentioned in section 6 describes a true residuary group embracing within it all sources of income, profits and gains provided the Act applies to them, it, provided that they accrue or arise or are received
1290 Section 30
Income Tax Digest.
in British India or are deemed to accrue or arise or to be received in British India, as provided by section 4(1) of the 1922 Act, and are not exempted by virtue of section 4(3) of the 1922 Act. In the circumstances, sections 6 and 12 bring into charge for the purposes of Income Tax the income derived from a zamindari, and that a Zamindari is assessable in respect of income, profits and gains derived from that source. _______________
INCOME FROM HOUSE PROPERTY VIS-À-VIS INCOME FROM OTHER SOURCES
Basant Rai Takhat Singh v. Commissioner of Income Tax – 4 ITC 324 (All.) 1744.
Illustratrion.
The assessees hold considerable areas under a lease from the Agra Cantonment authorities, on a portion of which they had constructed their own buildings which were let out on rent. The vacant lands included in the lease were also let out to squatters from whom the assessees realized ground rent. They had also to pay ground rent to the Cantonment authorities. In the year in question the assessee‟s main sources of income arose from (a) the buildings constructed by them on the land leased from the Agra Cantonment authorities; (b) a portion of the aforesaid leased land which was let out to squatters from whom ground-rent was realized; and (c) a contract for the supply of „bhusa‟. They were assessed on their income from property under section 22. Held that the income from sub-letting was assessable under section 12 of the 1922 Act. _______________
ILLUSTRATION
Commissioner of Income Tax v. Mills Store Co. – [1941] 9 ITR 642 (Sind) 1745.
Payments for restrictive covenants.
Amount received by seller of a business from buyer under a restrictive covenant is not taxable as income from other sources in seller‟s hands.
1291 INCOME FROM OTHER SOURCES
Section 30
Dr. Sir H.S. Gout v. Commissioner of Income Tax – 3 ITC 350 (Nag.) 1746.
University examination fees.
University examination fees received by a lawyer are assessable as income from other Sources. Haji Gbulam Hussain v. Commissioner of Income Tax – [1942] 10 ITR 405 (Peshawar) 1747.
Position under 1922 Act.
If there is no evidence that the heirs have carried on business, income from business of deceased cannot be assessed under head „business‟ but under section 12 of the 1922 Act.
1292 Section 31
Income Tax Digest.
Section 31* Deductions
PAGE NO
SCOPE OF THE SECTION
1748. Scope of section 31 of 1979 Ordinance explained. TAX 68 (H.C.Kar.)
_
[1989] 59
1749. “Any expenditure incurred solely for the purpose of making _ or earning such income, profits or gains”, - Scope of. [1972] 25 TAX 156 (H.C.Kar.)
1294
1295
ANY OTHER EXPENDITURE, ETC., PAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR PURPOSE OF EARNING SUCH INCOME - BASIC PRINCIPLES
1750. Capital expenditure incurred in earlier years cannot he spread over subsequent years and claimed as deduction _ from income. [1933] 1 ITR 197 (PC)
1296
INTEREST
1751. Interest on money borrowed in British India for purchasing securities outside British India income from which is not _ taxable in India, is not deductible. [19361 4 ITR 306 (Lahore)
1297
1752. Element of notional interest taken into account to fix the period of termination of zarpeshgi lease, is not deductible _ expenditure. [1938] 6 ITR 476 (Pat.)
1297
1753. In case of bustee lands interest on mortgage created for other _ purposes is not allowable. [1936] 4 ITR 164 (Cal.)
1298
1754. Revenue paid on lands bearing coal from which royalty _ income is derived, is deductible. [1945] 13 ITR 17 (Pat.)
1298
IN CASE OF COMPANY IN LIQUIDATION
1755. Salary paid to receiver is deductible.
*
Corresponding to section 12(2) of the 1922 Act.
_
Tax 5 ITC 396 (Pat.)
1298
1293 DEDUCTIONS
Section 31 PAGE NO
OTHERS
1756. Unabsorbed depreciation in respect of assets used in business can be deducted from hire income from those assets which is subsequently taxed under head „Income from other _ sources‟. [1935] 3 ITR 114 (Cal.)
1299
1757. Payment made by a director of a company to settle a case of _ misfeasance against him. [1943] 11 ITR 478 (Lahore)
1299
1294 Section 31
Income Tax Digest.
Section 31* Deductions
SCOPE OF THE SECTION
Mian Muhammad Bashir v. Commissioner of Income Tax – [1989] 59 TAX 68 (H.C.Kar.) 1748.
Scope of section 31 of 1979 Ordinance explained.
While assessing the income from other sources the income profits and gains are computed after making allowance for the amount of interest paid in respect of money borrowed for the purposes of acquisition of the part of the shares capital of the company. Section 12(2) of the Income Tax Act grants this relief to the assessee to the extent of interest paid by him on the amount borrowed by him and invested in purchasing the shares capital of a company. Therefore, it seems proper to construe that interest will be an admissible allowance which has been paid in respect of loan borrowed for the purpose of acquisition of shares. This also implies that the shares have not been purchased before taking the loan. The borrowing should precede the acquisition of shares. Therefore, the question which falls for consideration is whether the amount has been borrowed by the assessee from which he has purchased the share. In the present case the applicant has adopted a different procedure. He had borrowed interest free loan from the company, purchased the shares and after sometime he borrowed loan from the bank and paid it to the company which had a large debit balance against him. As the amount borrowed from the bank was equal to the sum the applicant had invested in the purchase of shares, he claims that this amount has been invested in purchase of shares and he is entitled to the allowance in respect of interest paid by him. The applicant was maintaining a debit account and once he deposited Rs.16,00,000 with the company it was adjusted in the debit account. Therefore, the loan borrowed from the bank was for the purpose of paying the debt the applicant had obtained from the company irrespective of the fact whether part of the debt was invested in purchasing the share and part of the debt was for his own personal *
Corresponding to section 12(2) of the 1922 Act.
1295 DEDUCTIONS
Section 31
expenses. In this view of the matter it is difficult to conclude that the applicant had borrowed money from the bank for the purposes of acquiring share of a company. It is not the applicant‟s case that he had purchased the shares on credit basis and paid at the price on receipt of loan from the bank. he had already acquired the shares worth Rs.9,85,600 much before obtaining the loan from the bank. Mr. Shaikh Haider has rightly pointed out that there should be a nexus between the transaction of loan and purchase of shares. Here entire borrowing was for the purpose of clearing the debt taken from the company. The assessee can claim benefit under section 12(2) provided interest has been paid on a loan which was obtained with the sole object of purchasing the share. Therefore, the Tribunal was justified in rejecting the application under section 66(1) as no question of law arises from the order of the Tribunal. Nooruddin Moosaji v. Commissioner of Income Tax – [1972] 25 TAX 156 (H.C.Kar.) 1749.
“Any expenditure incurred solely for the purpose of making or earning such income, profits or gains”, - Scope of.
If the scheme of the Income Tax Act is taken into consideration, then the necessary conclusion would be that if the object is to earn income, profits or gain, the assessee can claim deduction of permissible allowances. Notwithstanding the difference in the language between section 12(2) and section 10(2)(xvi) the scheme of the two provisions is the same, that is to permit deductions of expenditure incurred in connection with business, profession or vocation or with the object of making or earning income, profits or gain, even though the expenditure may not prove to be profit-able. The difference of language is attributable to the fact that section 10 deals with a specific source of profits, whereas section 12 is general and deals with all other sources of income, profits and gain which come under section 6(v) of the Income Tax Act. Hence, the necessity for using language in section 12(2) which is different from section 10(2)(xvi) of the Income Tax Act. Another aspect of the case is that in the instant case, the assessee had, in fact, received income from his investments in other sources. Even if we agree with the opinions of the Calcutta High Court [Madanlal Sohanlal v. Commissioner of Income Tax (1963) 47 ITR 1] and of the Patna High Court [Maharajdhiraj Sir Kameshwar Singh v. Commissioner of Income Tax (1957) 32 ITR 377], the assessee before us would be entitled to the deduction of interest paid by him on investment in the shares of Pakistan Welding Electrodes Ltd. The
1296 Section 31
Income Tax Digest.
view cannot reasonably be taken that if an assessee makes investments in different shares, then each set of shares should be treated as a separate business or source of income or a separate entity. The profits from investment in shares would be profit from one source, that is, investments in shares, even though the shares may be of different companies. Cases referred to: Mahanajdhiraj Sir Kameshwar Singh v. Commissioner of Income Tax (1957) 32 ITR 377; Madanlal Sohanlal v. Commissioner of Income Tax (1963) 47 ITR 1; John Moore (Surveyor of Taxes) v. Stewarts Lloyds Ltd. (1911-1915) 6 T.C. 505, 507; (Hughes inspector of Taxes) v. Bank of New Zealand (1938) 6 ITR 636; Usher‟s Wiltshire Brewery Ltd. v. Bruce (1915) A.C. 433; British Insulated and Helsby Cables Ltd. v. Atherton (1926) A.C. 205; Eastern Invesments Ltd. v. Commissioner of Income Tax (1951) 20 ITR 1; Ortnerads (Indian) Private Ltd. v. Commissioner of Income Tax (1959) 36 ITR 329; Chhail Behari Lal v. Commissioner of Income Tax (1960) 39 ITR 696; K. Appa Rao v. Commissioner of Income Tax (1962) 46 ITR 511 and P.V. Mohd. Ghause v. Commissioner of Income Tax (1963) 49 ITR 127. _______________
ANY OTHER EXPENDITURE, ETC., PAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR PURPOSE OF EARNING SUCH INCOME BASIC PRINCIPLES
Commissioner of Income Tax v. Basant Rai Takhat Singh – [1933] 1 ITR 197 (PC) 1750.
Capital expenditure incurred in earlier years cannot he spread over subsequent years and claimed as deduction from income.
The assessee had obtained a plot of land on lease for 30 years and was permitted to erect structures on it. On the expiry of lease the plot along with the structures was to be returned to the lessor. The question was whether the cost of construction of the structures could be allowed to be deducted from the rental income thereof at one thirtieth of the cost every year during the subsistence of the lease Held that the allowance for any expenditure incurred must be an allowance for expenditure incurred in the year in respect of which arise the income, profits and gains forming the basis of the assessment. Upon that footing, therefore, there can be no justification for deducting from the profits and gains something in respect of expenditure, whether it is regarded as capital expenditure or not,
1297 DEDUCTIONS
Section 31
which has occurred many years before. Thus, the impugned expenditure was not deductible. Note:
Section 35E of the 1961 Act permits amortisation of preliminary expenses in certain specified situations. _______________
INTEREST
Macnabb v. Commissioner of Income Tax – [19361 4 ITR 306 (Lahore) 1751.
Interest on money borrowed in British India for purchasing securities outside British India income from which is not taxable in India, is not deductible.
The assessee, whose main source of income was salary, borrowed a sum from a bank against fixed deposits and purchased shares in England with the borrowed money, dividends from which were payable in England and not taxable in India. The assessee claimed that he was entitled to set off the interest on his overdraft against the interest on his fixed deposits on which the bank had a lien in consequence of the overdraft granted to him. Held that all that the assessee did was to raise capital in British India to invest it outside British India and the interest he had to pay on the borrowed capital was an expense incurred in connection with his outside investment and had nothing to do with anything else. It was only in case he was carrying on business that such a deduction could be claimed. Even if it be presumed that he was engaged on a foreign business there the interest paid on sums borrowed in British India to purchase sterling securities, retaining those securities and the interest therefrom outside British India, had to be treated as a charge on the interest from those securities which were not liable to Indian Income Tax and was not deductible. Commissioner of Income Tax v. Raja Bahadur Dhakeswar Prasad Narain Singh – [1938] 6 ITR 476 (Pat.) 1752.
Element of notional interest taken into account to fix the period of termination of zarpeshgi lease, is not deductible expenditure.
The assessee obtained an assignment of an interest bearing decree held by another person and as consideration gave zarpeshgi thika lease of certain agricultural properties for 17 years to the assignor. This period was fixed so that the principal and interest due would be
1298 Section 31
Income Tax Digest.
wiped off at the end of that period by the enjoyment of rents and profits. The assessee claimed that the interest element in the lease should be set off against interest received under the decree. Held that the interest on the zarpeshgi amount was taken into account only for fixing the period of 17 years; in fact the assessee Was not legally liable to pay any interest and there was in fact no payment of interest. The substance of the transaction was that the assessee had exchanged an asset, whose income was not taxable, for an asset producing taxable income. Hence, the deduction claimed was not allowable under section 10(2)(ix) later 10(2)(xv) or under section 12(2) of the 1922 Act. Amulyadhan Addy, In re – [1936] 4 ITR 164 (Cal.) 1753.
In case of bustee lands interest on mortgage created for other purposes is not allowable.
In computing income from bustee lands, no deduction is allowable towards interest paid on the mortgages on those lands where the mortgages have been made for purposes unconnected with those lands. Commissioner of Income Tax v. Raja Sri Sri Kalyanl Prasad Deo – [1945] 13 ITR 17 (Pat.) 1754.
Revenue paid on lands bearing coal from which royalty income is derived, is deductible.
Where the assessee, a zamindar, had to pay annual jama (Government revenue) in respect of his zamindari, and had royalty income from coal-field, situated within the zamindari, it was held that the assessee was entitled to deduction of jama so paid. _______________
IN CASE OF COMPANY IN LIQUIDATION
Sachindra Mohan Ghosh v. Commissioner of Income Tax – 5 ITC 396 (Pat.) 1755.
Salary paid to receiver is deductible.
Salary paid to the receiver appointed by the Court for the management of an estate is an admissible deduction against income of the estate which is assessable under income from other sources. _______________
1299 DEDUCTIONS
Section 31
OTHERS
Sadhucharan Roy Chowdhry, In re – [1935] 3 ITR 114 (Cal.) 1756.
Unabsorbed depreciation in respect of assets used in business can be deducted from hire income from those assets which is subsequently taxed under head „Income from other sources‟.
Where mill is leased out, depreciation is allowable even though lease income is assessed under section 12 of 1922 Act. Note: Section 57(ii) of 1961 Act specifically authorises depreciation allowance even if income is assessed under the head „Other sources‟.
Executors of Sardar Narain Singh, In re – [1943] 11 ITR 478 (Lahore) 1757.
Payment made by a director of a company to settle a case of misfeasance against him.
Payment made by a director of a company to settle a case of misfeasance against him is not deductible.
1300 Section 32
Income Tax Digest.
Section 32* Method of accounting
PAGE NO
REJECTION / ACCEPTANCE OF METHOD OF ACCOUNTING
1758. Method by accounting cannot be rejected without any _ substantial material or cogent reasons. 1992 SCC 1000 = [1993] 68 TAX 41 (S.C.Pak.) _ 1759. Regular method cannot be accepted prima facie. 1992 SCC 1000 = [1993] 68 TAX 41 (S.C.Pak.)
1309 1309
1760. Rejecting of accounts on non-maintenance of stock register _ alone is not justified. 1980 SCC 487 = [1980] 42 TAX 119 (S.C.Pak.)
1309
1761. Tribunal was not justified in maintaining rejection of accounts without discharge of burden envisaged under _ section 32. [2001] 83 TAX 299 (H.C.Lah.) = 2001 PTD 406 = 2001 PTCL 305
1310
1762. Book version rejected on the plea that the sales declared were totally unvouched, held that obligation is cast on the Income Tax Authorities to establish by positive evidence that _ the assessee‟s accounts are unreliable. [1996] 74 TAX 227 (H.C.Lah) = 1997 PTD 76
1311
1763. Income Tax Appellate Tribunal failed to point out any specific defect in maintenance of accounts and failed to establish that correct profit was not deducible from the books of account. No material pointed out to show that wastage claimed by assessee was unjustified in any way held that Tribunal was bound to accept book version of _ assessee in circumstances of the case. [1986] 53 TAX 169 (H.C.Kar.)
1311
1764. Where income, gains and profits were not properly deducible from accounts maintained by assessee, book version is liable to be rejected but estimate of income in such circumstances should be on rational basis and not on irrelevant material. _ [1982] 45 TAX 21 (H.C.Lah.)
1313
*
Corresponding to section 13 of the 1922 Act.
1301 METHOD OF ACCOUNTING
Section 32 PAGE NO
1765. Failure to maintain stock register but declared gross profit rate was not ridiculously low rather an improvement over previous year, book version held not liable to be rejected. _ [1979] 40 TAX 32 (H.C.Kar.) = 1979 PLD 207
1314
1766. Sales were found to be fictitious and purchasers not established to be in existence held that book version was _ rightly rejected. [1979] 39 TAX 127 (H.C.Kar.)
1315
1767. Stock register was not maintained and stock inventory not _ quality-wise, rejection of book version held justified. [1979] 39 TAX 6 (H.C.Lah.)
1316
1768. Power of the Income Tax Officer to reject the book version can be equated with powers of a Civil Court white passing _ an exparte decree or an order. [1976] 34 TAX 31 (H.C.Lah.)
1317
1769. Rejection of accounts on the ground that the percentage of _ wastage not known is not sustainable. [1933] 57 TAX 134 (H.C.Kar.)
1318
1770. Book results could not be rejected merely on basis of _ presumption. [1988] 57 TAX 24 (H.C.Kar.)
1320
1771. Mere use of abstract expression was not sufficient to reject _ the books of accounts. [1986] 53 TAX 35 (H.C.Kar.)
1320
1772. Mere failure of assessee to furnish daily stock register or low gross profit rate could not be a ground for rejection of _ accounts. [1985] 52 TAX 115 (H.C.Kar.)
1322
1773. Rejection of method of accounting without any material _ evidence is not maintainable. [1984] 50 TAX 208 (H.C.Kar.)
1323
1774. Condition precedent for rejection of accounts vis-a-vis _ applicability of principle of natural justice. [1984] 50 TAX 115 (H.C.Kar.)
1324
1775. Rejection of accounts should be based on sound reasons. _ [1984] 49 TAX 34 (H.C.AJ&K)
1326
1776. Result of accounts cannot be rejected merely because rate of gross profit had gone down though a reasonable explanation _ for the same had been offered by assessee. [1984] 50 TAX 223 (H.C.Kar.)
1327
1777. Mere non-maintenance of day-to-day manufacture or production accounts and maintenance of accounts in the form prescribed by the Excise Department could not render
1302 Section 32
the accounts liable to be rejected. (H.C.Kar.)
Income Tax Digest.
_
PAGE NO
[1984] 49 TAX 18 1328
1778. Rejection of accounts held justified when:- (i) Stock register produced for one year only and that too not properly maintained; (ii) Sale vouchers issued without incorporating therein addressed of the parties; (iii) Gross profit rate low as compared to similar businesses; and (iv) Turnover not commensurate with available capital-credit facilities. _ [1978] 37 TAX 199 (Lah.)
1329
1779. Stock register and day-today manufacturing registers were not maintained as in the past, being neither feasible nor practicable, books could not be rejected on this ground also. _ [1974] 30 TAX 27 (H.C.Kar.)
1331
1780. Assessee was engaged in manufacturer of yarn and cloth. In the absence of spinning master‟s report and Gate pass register, held that accounts cannot be rejected on these grounds without specifically finding fault with the books of _ accounts produced. [1970] 22 TAX 163 (H.C.Kar.)
1332
1781. Accounts were not wholly unverifiable and declared profit was not too low, held that rejection of accounts was not _ justifiable. [1968] 18 TAX 2 (H.C.Dacca)
1334
1782. Stock data was not reliable and cash sales unverifiable, held _ that accounts were liable to be rejected. [1967] 15 TAX 94 (H.C.Kar.)
1335
1783. Accounts were regularly maintained by assessee on proper method of accounting. In the absence of manufacturing account giving proper quantitative reconciliation, held that _ account was liable to be rejected. [1967] 15 TAX 84 (H.C.Kar.)
1336
1784. Accounts cannot be rejected only because the method does _ not appeal to the Income Tax Officer. [1939] 7 ITR 76 (Mad.)
1337
METHOD OF ACCOUNTING AND CHARGEABILITY
1785. Method of accounting and chargeability in the case of cash _ accounting system. 1971 SCC 376 = [1971] 23 TAX 280 (S.C.Pak.)
1337
1786. „FOB‟ and „CIF‟ sales do not pertain to method of accounting; these are categories of shipping contracts _ Sections 32 & 136 of Income Tax Ordinance, 1979. [1999] 79 TAX 283 (H.C.Lah.)
1339
1303 METHOD OF ACCOUNTING
Section 32 PAGE NO
1787. In the absence of any omission, irregularity or other defect an the method of accounting or positive evidence to show that the accounts did not disclose, the whole income of the _ assessee, books of accounts could not be rejected. [1993] 68 TAX 193 (H.C.Kar.)
1339
1788. Income Tax Officer could not reject the accounts merely because either he had no time to go into details or he got _ upset by idea that others have shown better results. [1985] 51 TAX 71 (H.C.Kar.)
1340
1789. In the absence of any material fact, method of accounting _ cannot be rejected. [1985] 51 TAX 71 (H.C.Kar.)
1341
1790. Method of accounting employed by the assessee, was as in the past, accepted by assessing officer. Receipts were also accepted and purchases found fully vouched and verifiable. Addition made to the declared version on the ground that stock and consumption registers were not maintained held _ unjustified. [1984] 49 TAX 24 (H.C.Kar.)
1342
1791. Method of accounting adopted by assessee was not objected to by Department in previous years on any ground. Same method was employed in assessment year under dispute. Rejection of accounts and addition made to the declared _ gross profit, held unjustified. [1983] 47 TAX 148 (H.C.Kar.)
1343
1792. Book results are not liable to be rejected on mere ground of _ unvouched cash sales. [1974] 29 TAX 120 (H.C.Kar.)
1343
1793. Accounts were maintained in the same method as accepted in earlier year held that alone is no good ground for _ acceptance of the accounts in assessment year. [1967] 16 TAX 73 (H.C.Kar.)
1344
1794. “Method of accounting regularly employed”, meaning of. _ [1965] 11 TAX 176 (H.C.Dacca)
1345
SYSTEM OF ACCOUNTING
1795. On CIF sale value, the Department‟s action of calculating taxable income by deducting shipping and profit expenses _ held to incorrect. [1999] 79 TAX 283 (H.C.Lah.) _ 1796. Differenet system of accounting explained. [1933] 1 ITR 94 (PC) _ 1797. Basic requirements of a method of accounting. [1934] 2 ITR 417 (Rangoon)
1346 1347 1348
1304 Section 32
Income Tax Digest. PAGE NO
1798. Question as to type of method of accounting adopted _ by assessee, is a question of fact. [1945] 13 ITR 198 (Nag.)
1349
1799. In commercial sense profits include accrued interest, even _ _ though it is unrealised. [1936] 4 ITR 71 (Pat.); [1937] 5 ITR 261 (Bom.)
1349
1800. Interest / Commission, accrual under mercantile system of _ accounting. [1936] 4 ITR 71 (Pal.)
1349
1801. Finding that the assessee‟s accounts were kept on mercantile _ system is a finding of fact. 4 ITC 315 (Lahore)
1350
APPLICATION OF SUB-SECTION (3) AND PROVISO
1802. Application of section 32 vis-à-vis question of law. PTD 1174 (S.C.AJ&K)
_
2001 1350
1803. Accounts of assessee regularly kept, vouched and variable. Accounts were rejected on the ground that rate of gross profit shown in the books is very low without any evidence or material in support of the finding, held that proviso to _ section 13 of 1922 Act could not invoked. [1984] 50 TAX 183 (H.C.Kar.)
1351
1804. In the absence of stock register and other materials to corroborate the book version, Income Tax Officer justified to reject book version by application of proviso to section 32. _ [1980] 41 TAX 158 (H.C.Kar.) = 1980 PTD 1
1352
1805. Principles embodied is section 13 of the 1922 Act could be adopted in dealing with case failing under section 23(3) of _ the 1922 Act. [1960] 2-TAX (Suppl.-146) (H.C.Dacca) = 1960 PTD 280 = 1960 PLD 298
1353
1806. If income cannot be properly deduced from accounts of assessee, it is duty of Income Tax Officer to exercise his _ judgment; his power is not discretionary [1938] 6 ITR 36 (PC)
1354
1807. Income Tax Officer‟s method of accounting after rejecting _ assessee‟s method, is open to scrutiny in appeal. [1933] 1 ITR 94 (PC)
1355
1808. Proviso to section 13 of 1922 Act is not applicable if profits _ and gains can be deduced from accounts. [1934] 2 ITR 343 (Lahore)
1356
1809. Income Tax Officer is only proper person to decide whet her _ accounts are such as reflect true income of assessee. [1937] 5 ITR 464 (Lahore); [1934] 2 ITR 329 (Lahore)
1356
1305 METHOD OF ACCOUNTING
Section 32 PAGE NO
1810. Income Tax Officer may adopt a method of accounting which he prefers where the assessee has no regular or proper _ method, but he cannot reject assessee‟s books. [1939] 7 ITR 76 (Mad.)
1357
1811. Section 13 of the 1 992 Act cannot be divorced entirely from section 23(3) of 1922 Act because it is only in an enquiry under sub-section (3) of section 23 that section 13 can _ operate. [1940] 8 ITR 159 (Sind)
1357
1812. Section 13 of the 1922 Act adds nothing to and takes away nothing from section 23(3) and thus it does not have to be _ read in conjunction with section 23(3). [1939] 7 ITR 21 (Mad.)
1357
1813. While making assessment under section 23(3), Income Tax Officer can invoke proviso to section 13 of the 1922 Act. _ [1937] 5 ITR 464 (Lahore)
1358
1814. Where stock is undervalued proviso to section 13 and not _ section 23(3) will be invoked. [1938] 6 ITR 255 (Nag.)
1358
1815. Where Income Tax Officer has issued notice under section 23(2)/22(4) of the 1922 Act a further notice is not necessary _ while applying proviso to section 13 of the 1922 Act. [1941] 9 ITR 81 (All.)
1358
1816. Manner of computation of profits and gains under section 13 of the 1922 Act is entirely within the discretion of Income Tax Officer, and unless it is shown that the exercise of such discretion was illegal or arbitrary, no question of law will _ arise. 4 ITC 315 (Lahore)
1358
1817. Question as to whether Income Tax Officer was justified in proceeding under the proviso to section 13 of the 1922 Act and not under the first part of that section, is a question of _ law. [1933] 1 ITR 216 (Lahore)
1359
1818. No question of law arises from Income Tax Officer‟s order holding that accounts are not maintained in such a way as _ to indicate true income, profits or gains. [1934] 2 ITR 452 (Lahore); [1934] 2 ITR 382 (Lahore)
1359
1819. Question as to whether there is any evidence on which Income Tax Officer could have come to decision that method of accounting is such that gains could not be computed except by arbitrary method contemplated by proviso to _ section 13 of the 1922 Act, is a question of law. [1934] 2 ITR 305 (Lahore)
1359
1306 Section 32
Income Tax Digest. PAGE NO
1820. Where Income Tax Officer makes the best judgment assessment under proviso to section 13 of 1922 Act, it may be shown that he has proceeded on a wrong basis of law, but it cannot be said that in every case where Income Tax Officer proceeds under that proviso a question of law arises as to _ whether his assessment is legal or not. [1934] 2 ITR 486 (Bom.) _ 1821. Others. [1934] 2 ITR 305 (Lahore)
1360 1360
POWER OF ASSESSING OFFICER
1822. Assessing Officer‟s power under section 32(3) approved. _ [2001 PTD 1174 (S.C.AJ&K)
1361
1823. Income Tax Authorities cannot estimate sales and gross profit rejecting book results without bringing any material _ on record. [1984] 50 TAX 233 (H.C.Kar.)
1361
1824. Income Tax authorities can raise receipts on the ground that _ the details are not available. [1984] 51 TAX 11 (H.C.Kar.)
1362
1825. Accounts rejected on the ground that yield was low and percentage of gross wastage high held to be not sustainable _ in law. [1982] 45 TAX 140 (H.C.Kar.)
1363
1826. Declared version was found to be unreliable by the assessing officer held was competent to reject it without pointing out any defect or fault in the books produced by assessee. _ [1982] 45 TAX 47 (H.C.Lah.)
1364
1827. Where entries in the accounts book were not found reliable by the assessing officer, he is competent to reject the accounts even if he is unable to find any specific fault in the said _ accounts books. [1981] 43 TAX 149 (H.C.Lah.)
1364
1828. Expression “in the opinion of the Income Tax Officer”. _ [1980] 41 TAX 148 (H.C.Lah.)
1365
1829. After discarding account books, Income Tax Officer should _ evolve a reasonable basis fur making the estimate. [1980] 41 TAX 148 (H.C.Lah.)
1365
GENERAL
1830. Assessment made on net profit rate basis without allowing expenses and depreciation claimed held not valid in law. _ [1979] 39 TAX 176 (H.C.Lah.)
1366
1831. Computation of income should be strictly in accordance with method of accounting regularly employed by the assessee. _ [1966] 13 TAX 149 (H.C.Lah.)
1366
1307 METHOD OF ACCOUNTING
Section 32 PAGE NO
1832. Appellate Tribunal was held to be justified in taking into account profit rates of preceding years in determining the _ profit rate of the assessment year. [1966] 13 TAX 32 (H.C.Dacca)
1369
1833. Valuation of closing stock at market price at the end of every year as per practice. There was a change to valuation at cost price in accounting year relevant to assessment year which neither mala fide nor for a casual period held as _ permissible. [1965] 11 TAX 176 (H.C.Dacca)
1369
1834. Section 13 is not an assessment but a computation section. _ [1939] 7 ITR 613 (Nag.)
1370
1835. Method of accounting means accounting adopted for _ assessee‟s business and not for submitting return. [1938] 6 ITR 36 (PC)
1370
1836. What law requires Income Tax Officer to see is not a system of account to be kept by the assessee in respect of a _ particular loan but with respect of all loans. [1939] 7 ITR 522 (Pat.)
1371
CHOICE OF METHOD OF ACCOUNTING
1837. Assessee is at liberty to adopt any system of account, but _ it must be one regularly adopted. [1937] 5 ITR 279 (Labore)
1372
1838. If assessee himself has chosen mercantile basis, Income Tax Officer is bound to concede that basis, provided assessee‟s accounts afford a proper and sufficient means of deducing _ profits and loss. [1945] 13 ITR 224 (All.)
1372
1839. Income Tax authorities after having taxed the assessee on mercantile basis, cannot turn round and tax him on the _ basis of the income actually accrued. [1939] 7 ITR 522 (Pat.) _ 1840. Others. [1937] 5 ITR 721 (Nag.)
1372 1373
CHANGE OF METHOD OF ACCOUNTING
1841. Though the assessee may change the regular method of accounting he cannot change it for a particular half year _ alone. [1937] 5 ITR 261 (Bom.)
1374
1842. Change of method does not mean that assessee should start _ a new method merely for a causal period. [1936] 4 ITR 420 (Bom.)
1374
1308 Section 32
Income Tax Digest. PAGE NO
1843. Question as to whether regular method of accounting has _ been changed to a new system is a question of fact. [1936] 4 ITR 420 (Bom.)
1374
1844. Where the assessee, an architect, was regularly accounting his income on accrual basis, but claimed in one assessment year that a certain income, though earned, was not received _ by him during the relevant previous year. 3 ITC 435 (Rangoon)
1374
OTHERS
1845. Others.
_
[1939] 7 ITR 607 (All.);
_
14 ITR 534 (Bom.)
1375
1309 METHOD OF ACCOUNTING
Section 32
Section 32* Method of accounting
REJECTION / ACCEPTANCE OF METHOD OF ACCOUNTING
Commissioner of Income Tax Companies III, Karachi v. Krudd Sons Ltd. – 1992 SCC 1000 = [1993] 68 TAX 41 (S.C.Pak.) 1758.
Method by accounting cannot be rejected substantial material or cogent reasons.
without
any
The assessing officer is not empowered to reject the method of accounting regularly employed by the assessee unless he proves beyond any doubt that method is defective and unreliable because on the basis of such method income, profits and gains cannot be properly deduced. 1759.
Regular method cannot be accepted prima facie.
There can be no cavil that a regular method of accounting in the past cannot be accepted as a matter of routine without examining it and if the Assessing Authority comes to the conclusion that it is defective and true income, profits and gains cannot be deduced from it then he can reject it provided he discharges his onus properly. Commissioner of Income Tax, Lahore Zone, Lahore v. Choudhri Brothers – 1980 SCC 487 = [1980] 42 TAX 119 (S.C.Pak.) 1760.
Rejecting of accounts on non-maintenance of stock register alone is not justified.
After hearing the learned counsel and going through the order of the learned judges, we are of the view that this is not a fit case for grant of leave to appeal. The learned judges have noticed that perusal of the order of the Appellate Assistant Commissioner showed that the Income Tax Officer was not justified to reject the declared version with regard to the profit margin. It also observed that the said learned Officer had found that with the presentation of a further list of as many as 250 items comprising various types of goods, the number of items had become so exhausted that the list could not be ignored. So far as the lack of full particulars about the retail sales were concerned, *
Corresponding to section 13 of the 1922 Act.
1310 Section 32
Income Tax Digest.
the Appellate Assistant Commissioner found that it was not the practice amongst the dealers to maintain the sort of record that the Income Tax Officer expected. He was convinced of the bona fides of the assessee also because he found that the rate of profits had been varying properly from year to year. Despite having held at this, the learned Appellate Commissioner was not justified in making addition of Rs.10,000 against a sum of Rs.32,200. The Income Tax Tribunal had further held that the defect in the accounts was the non-maintenance of a stock register which was not sufficient ground for the Income Tax Officer in rejecting the assessee‟s accounts on this ground alone, unless the profit rate disclosed was ridiculously low but had, however, maintained the order of the Appellate Assistant Commissioner only on the ground that it had not been proved that the unverifiable cash sales in the current year comprised only the retail sales and not the wholesales although in the previous years it had been so established. The High Court in these circumstances observed that the above finding of Tribunal was not consistent with the other finding recorded by it. We are inclined to agree with this view of the High Court. Barry Brothers v. Commissioner of Income Tax – [2001] 83 TAX 299 (H.C.Lah.) = 2001 PTD 406 = 2001 PTCL 305 1761.
Tribunal was not justified in maintaining rejection of accounts without discharge of burden envisaged under section 32.
Unless the unverifiable portion of the cash sales was substantial and such proportion was sufficient to create doubts with regard to the genuineness of the assessee‟s account, these could not have been rejected out rightly. The assessing officer never confronted the assessee with the alleged incomplete address of the cash purchasers. Both the Commissioner of Income Tax (Appeals) as well as the learned Tribunal found the estimation made after rejection of the accounts to be on the higher side. None of them, it appears, gave a serious thought to the contention of the assessee that he was concerned more with the acceptance of the accounts rather than a decrease in the estimation of the sales. The case of the assessee also needed to be considered on the plane that in the earlier as well as in the subsequent years its declared results had adopted a different method of accounting during the three years involved or that it was so different from the earlier and subsequent method that profits and gains for the purpose of various provisions of the Ordinance could not be computed therefrom. Case referred to: Jessaram Fatehchand v. Commissioner of Income Tax, Bombay City-II [1974] 29 TAX 161, Commissioner of Income Tax (West Zone), Karachi v. Fateh Textile Mills Ltd. [1984] 50 TAX 223 (H.C.Kar.),
1311 METHOD OF ACCOUNTING
Section 32
Messrs Karachi Textile Dyeing and Printing Works Karachi v. Commissioner of Income Tax (Central) Karachi [1984] 49 TAX 18 (H.C.Kar.), S.M.Yousuf & Brothers v. Commissioner of Income Tax [1974] 29 TAX 120 (H.C.Lah.).
Amin Bricks Company. Faisalabad v. Commissioner of Income Tax (Pension) and Another – [1996] 74 TAX 227 (H.C.Lah.) = 1997 PTD 76 1762. Book version rejected on the plea that the sales declared were
totally unvouched, held that obligation is cast on the Income Tax Authorities to establish by positive evidence that the assessee‟s accounts are unreliable.
The contention of the learned counsel for the department that no obligation is cast on Income Tax authorities to establish by positive evidence that the assessee‟s accounts are unreliable, seems to be misconceived; the power of the assessing officer under the law is not a mere discretionary power but amounts to a statutory duty; it is not a purely subjective or arbitrary exercise of discretion and is required to be exercised judicially and adverse inference cannot be drawn unless the assessing officer is satisfied that the accounts have been suppressed by the assessee. In case in hand; neither the assessing officer nor the learned Commissioner of Income Tax (Revision) pointed out defects detected in account books nor finding has been given that the sales on cash system had not been properly maintained; the additions have been made without pointing out though the G.P. declared was accepted as reasonable. Under the circumstances, the order of learned Commissioner of Income Tax (Revision) is set aside and is directed to dispose of the revision after affording an opportunity to the petitioner to produce account books in support of his version, the petition is accepted to that extent and is disposed of accordingly. Star Vacuum Bottle Manufacturing Co., Ltd. v. Commissioner of Income Tax (Central), Karachi – [1986] 53 TAX 169 (H.C.Kar.) 1763.
Income Tax Appellate Tribunal failed to point out any specific defect in maintenance of accounts and failed to establish that correct profit was not deducible from the books of account. No material pointed out to show that wastage claimed by assessee was unjustified in any way held that Tribunal was bound to accept book version of assessee in circumstances of the case.
The applicants are manufacturers of Vacuum Flask. They had been manufacturing the same since 1966. They were exempt from tax for
1312 Section 32
Income Tax Digest.
the period up to the assessment year of 1969-70. However, the returns had been filed and the accounts had been accepted without any apparent scrutiny because of the exemption from tax. For the year 1970-71 the applicant had disclosed sales of Rs.15,06,937/- and showed a gross profit rate of 7.3% while for the year 1971-72 the sales of Ra.15,15,005/- and a gross profit of 1.2% were shown. The Income Tax Officer did not accept the rate of gross profit on the ground that in the previous year 23% of gross profit had been shown. He also asked for quantitative details of the opening stock, purchases, consumption, production, sales, wastage and closing stock but the same could not be furnished on the ground that the number of items dealt with by the assessee were numerous. In the second order or assessment the Income Tax Officer. has noted that the assessee has failed to maintain day to day stage-wise production register and hence there is no co-relation between consumption and the production. The applicant had given explanation of the fall in the rate of gross profit on account of imposition of excise duty, increase in wages, salary and cost of raw materials and packing charges but the same was not considered to be on sound footing. He did not rely on the consolidated statement of consumption and production for the whole year submitted by the assessee. He considered that the percentage of wastage of 20% claim in the first year and 27% claim in the next year was very high in that line of business. He looked into a parallel case where gross profit of about 11% had been declared for the same period. He, therefore, did not accept the accounts version of the applicant and fixed a gross profit rate of 15%. The applicant-assessee then moved two separate appeals before the Income Tax Appellate Tribunal both of which were dismissed by the same order as mentioned above. We have already held that the demand upon the stage-wise production register in respect of every item produced by a company is rather unreasonable. In any case, no such register is required to be maintained by the Income Tax Act and if the accounts books are otherwise reliable then they cannot be rejected merely because the day to day stage-wise production register has not been produced. Since the appellate Tribunal has not been able to point out any specific defect in the accounts maintained by the applicant and has not come to the conclusion that the profits and gains could not be deduced from the accounts books, therefore, it was bound to accept the book version of the applicant/assessee and it was not justified to rely upon a parallel case where the conditions of work may not be the same
1313 METHOD OF ACCOUNTING
Section 32
as in the case of the applicant. We are further of the view that the accounts cannot be rejected merely on account of the non-maintenance of the stage-wise day to day production register and that in the present case no material had been relied upon by the Tribunal to show that the wastage as claimed by the applicant-assessee for the year 1971-72 was in any case unjustified. Case relied on: Karachi Textile Dyeing and Printing Works Karachi v. Commissioner of Income Tax, (Central), Karachi (1984) 49 TAX 18. Case distinguished: Imperial Paints and Varnish Works v. Commissioner of Income Tax, (West), Karachi (1980) 41 TAX 51.
Mian Ghulam Murtaza v. Commissioner of Income Tax, Lahore Zone, Lahore – [1982] 45 TAX 21 (H.C.Lah.) 1764.
Where income, gains and profits were not properly deducible from accounts maintained by assessee, book version is liable to be rejected but estimate of income in such circumstances should be on rational basis and not on irrelevant material.
It is by now well settled, if the Income Tax Authorities find that income gains and profits cannot be properly adduced from the account version given by an assessee, his books of account can be rejected and they can compute his income on such basis and in such manner as determined by them. In making such assessment, they have to act on some rational basis, and cannot lay hand on irrelevant material. We find that the instant reference applications were filed directly in this Court, under section 66 of the Income Tax Act, 1922, as amended by the Finance Ordinance, 1971 and the facts stated by the assessee, in the application have not been controverted and reply thereof filed by the Department; In accordance with the averments made by the assessee in the “Statement of Facts” and as argued by his learned counsel, it would be legitimate to assume that in the charge years under consideration Messrs Naila Film besides “Saiqa” and “Dilbar Jani” exhibited two other films namely “Doosri Maan” and “Saalgirra”. This fact was, however, completely ignored by the Tribunal in computing the petitioner‟s income, by making an addition of Rs.90,000/- in his declared version, of each _of the two assessment years. In this view of the matter, these additions cannot be sustained and the Tribunal is required to make a fresh computation of the petitioner‟s income.
1314 Section 32
Income Tax Digest.
Commissioner of Income Tax (West), Karachi v. Jupiter Trading Corporation, Karachi – [1979] 40 TAX 32 (H.C.Kar.) = 1979 PLD 207 1765.
Failure to maintain stock register but declared gross profit rate was not ridiculously low rather an improvement over previous year, book version held not liable to be rejected.
Mr. Pasha also tried to distinguish this case on the ground that there was other material for rejection the accounts. We are inclined to agree that the absence of a stock register alone did not necessarily justify rejection of accounts in the absence of other defects. The business of the assessee was retail and, as observed by this High Court in Messrs S. M. Yousaf & Bros. v. Commissioner of Income Tax East, Karachi (1974 PTD 45) that unless. the proportion of unverified cash sales was substantial, which has not been shown in the present case, it would not ordinarily be proper to reject outright the results of the books of accounts with regard to them. Mr. Iqbal Naim Pasha submitted that as the assessee dealt in innumerable small items of hardware and tools, it was not feasible nor practicable in the line of business, in which the assessee was engaged, to maintain a regular stock register. In the latter years, the accounts were accepted in the absence of a stock register. It was also not shown that other persons engaged in the same business were maintaining stock registers and there was nothing to rebut the appellant‟s statement. In this connection he relied on the judgment of this High Court in Star Rolling Mills v. Commissioner of Income Tax (1974 P T D 200), Mr. Pasha submitted that the Income Tax Officer could have verified the correctness of the accounts with little effort in the absence of the stock register on the basis of inventories of closing stock produced by the assessee. The gross profit rate of 19.5% shown by the assessee was also not so ridiculously low as compared with the general rate applied in the earlier year and, in fact, there was an improvement over the previous year both in respect of turnover and the gross profit rate and that the Income Tax Officer acted arbitrarily in resorting to the proviso to section 13. Cases referred to: S.N. Namasivayam Chettiar v. Commissioner of Income Tax (1960) 38 ITR 579 = (1960) 2 TAX (II-277) (S.C.Ind.); Nasir Industries Karachi v. Commissioner of Income Tax, South Zone, West, Karachi (1967 PTD 205) = (1967) 15 TAX 84 and Star Rolling Mills v. Commissioner of Income Tax (1974) PTD 200) = (1974) 30 TAX 27.
1315 METHOD OF ACCOUNTING
Section 32
Ibrahim Sons v. Commissioner of Income Tax, Karachi West, Karachi – [1979] 39 TAX 127 (H.C.Kar.) 1766.
Sales were found to be fictitious and purchasers not established to be in existence held that book version was rightly rejected.
The above review of case law clearly indicates that the question whether the Departmental authorities were justified in rejecting the account of the assessee and invoking the powers of computation of the profits and gains on any other basis, is a question of law or fact depends upon the facts and circumstances of each individual case. No hard and fast rule can be laid down in this behalf. In the present case the Income Tax Officer had applied his mind to the question of sales and upon cogent reasons as mentioned in the foregoing part of this judgment, came to conclusion that sales were fictitious and that the purchasers were not established to be in existence. The whole question was once again reexamined in appeal by the Appellate Tribunal which also assigned good reasons for maintaining the findings of the Assessing Officer. It cannot, therefore, be contended that the additions made by the Department were arbitrary, capricious or ad hoc. The Appellate Tribunal has observed that the Assessing Officer was right in rejecting the sales shown in the account on account of the failure of the assessee to produce the purchaser and the fact that no evidence was forthcoming to even prove their existence. If upon enquiry the Assessing Officer found the sales to be fictitious, he was apparently justified in invoking the proviso to section 13 in order to determine the true profits and gains on the basis that the stocks shown to have been sold and not shown to have gone out of the factory premises, were really utilized in the manufacture of Vegetable Ghee by the assessee. This can by no means be challenged as arbitrary exercise of power. I find substance in the submission of the learned counsel for the Department that the first two questions framed by the assessee are vague and incapable of being answered. As far as the question No. 1 is concerned the substance seems to be to challenge the drawing of a presumption against the assessee from the fact that certain parties referred to. However, there is no question of the Tribunal having drawn a presumption against the assessee. The Tribunal has affirmed the findings of the Income Tax Officer on the assessment of the materials on record. The first question therefore is not referable to this High Court both as it is vague, as well as being a pure question of fact. Cases referred to : R.M. Jassaram Fatehchand v. Commissioner of Income Tax (1974) 29 TAX 161; S.M. Yausuf & Bros. v. Commissioner of Income Tax
1316 Section 32
Income Tax Digest.
(1974) 29 TAX 120; Arumugaswami Naear v. Commissioner of Income Tax (1961) 42 ITR 237; Angustiu G. Pau & Co. v. Commissioner of Income Tax (1967) 15 TAX 94; Nasir Industries v. Commissioner of Income Tax (1967) 15 TAX 84; Sultan Textile Mills Ltd. v. Commissioner of Income Tax (1970) 22 TAX 163; Star Helling Hills v. Commissioner of Income Tax 1974 PTD 200 and Rajput Metal Works Ltd. v. Commissioner of Income Tax (1969) 33 TAX 1.
Kashmir Cap. House, Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1979] 39 TAX 6 (H.C.Lah.) 1767.
Stock register was not maintained and stock inventory not quality-wise, rejection of book version held justified.
It is true that inventory basis is one of the recognised modest of preparation of final accounts but the inventory should be a completed and faithful record of the opening and closing stocks in hand which should be susceptible to audit check. Where, as in the present case, caps of various qualities varying widely in their prices are purchased and sold, the absence of quality wise details of opening and closing will make it well high impossible for the Income Tax Officer to check the variety of the accounted version. The position is still more aggravated if the purchases as well as sales, which we shall separately deal with, are also found to be unverifiable. Cash sales are a fact of life. There is no principle of accountancy or rule of law that an assessee must sell his goods either on credit basis or to verifiable parties only. The mere fact that a part of the sales were cash would not by itself be a ground for rejecting the book version Where cash sales are found to be verifiable no question of drawing an adverse inference would, admittedly arise. When the cash sales are verifiable as well as unverifiable, it would be open to the Income Tax Officer to scrutinise the unverifiable sales by comparison with the rates charged for verifiable cash sales or credit sales as the case may be. Where the prices charged for cash sales lower than the prices charged for credit sales or verifiable cash sales, the Income Tax Officer may legitimately draw the inference that the income, profits and gains have been minimised. It would still depend on the facts of each case whether or not the true profit can or cannot be properly deduced from the assessee‟s account. Where, however, the sales are made only on cash basis it is for the assessee to prove the bonafides of his sales price by producing additional evidence e.g. prevailing sales prices, indicated by quotations in trade journals market rates and even rates charged by local dealers of the locality on the relevant dates.
1317 METHOD OF ACCOUNTING
Section 32
Where, as in the present case, no such comparative date is available, the, possibility of profits being minimised cannot be ruled out. The absence of quality-wise quantitative data and the absence of qualitywise stock inventory would render the verification of the total quantum of the purchases and the sales and margin of profit as wholly impossible. Under such circumstances the Income Tax Authorities may justifiably state that the income profits and gains cannot properly be deducted from the accounts maintained by the assessee and produced in support of the accounted version. In the context of the circumstances of this case as discussed above we feel the Income Tax Authorities and the Tribunal were justified in rejecting the book-version. We would, therefore, answer question No. 3 in the affirmative. Cases distinguished: S.M. Yousuf and Brothers v. Commissioner of Income Tax (1973 PLJ 312) = (1974) 29 TAX 120.
Shahid Hameed, Gulberg, Lahore v. Income Tax Officer, Film Circle, Lahore and another – [1976] 34 TAX 31 (H.C.Lab.) 1768.
Power of the Income Tax Officer to reject the book version can be equated with powers of a Civil Court white passing an exparte decree or an order.
The power under section 23(4) has been equated with the powers of a Civil Court while passing an exparte decree or an order. A Civil Court must consider the evidence on record and can in no case ignore it. In order to absolve himself of any allegation of acting dishonestly, vindictively, capriciously or arbitrarily, and to show that his endeavour was to make a fair and proper estimate of assessee‟s income, the Income Tax Officer must consider the material on record and must give a valid reason for rejecting or ignoring it. He must consider the material before him or must be sure that there is no better material available to complete the assessment. In this view of the matter the production of the certificates by the assessee and his explanation that he was accepting all types of roles should not have been rejected just because the Income Tax Officer did not view it with favour. Cases referred to: Jambudas v. Income Tax Commissioner (AIR 1927 Nagpur 336) Muthukaruppan (Pr.Al.M.) Chettiar v. Commissioner of Income Tax (AIR 1939 Mad. 357); Chettiar (PKMPR) Firm v. Commissioner of Income Tax (AIR 1930 Rang. 33); Radhey LaI v. Commissioner of Income Tax (AIR 1931 All. 23); Jot Ram Sher Singh v. Commissioner of income Tax (AIR 1934 All. 559).
1318 Section 32
Income Tax Digest.
Kruddsons Limited, Karachi v. Commissioner of Income Tax „A‟ Zone, Karachi – [1933] 57 TAX 134 (H.C.Kar.) 1769.
Rejection of accounts on the ground that the percentage of wastage not known is not sustainable.
The Appellate Tribunal dismissed the reference applications filed by the assessee and while doing so, recorded a finding that it (Tribunal) had come to the conclusion that the book results shown in these two years were rightly rejected after detailed scrutiny and examination of facts and evidence obtaining on record and the Tribunal‟s order does not give rise to any question of law. It is to impugn the said refusal of the Tribunal to refer the above mentioned question to this court for opinion that the present applications have been filed with a prayer that the said common question is a question of law arising out of the order of the Tribunal under section 33 of the Act and it may be decided according to law. The learned Tribunal, however, seems to have been misled when it observed that “the assessee had said nothing as regards the circumstances, which rendered it difficult, for them to keep separate trading accounts”. The assessee‟s explanation, it may be observed even at the cost of repetition, was that expenses like fuel, consumption, labour, etc are common expenses and cannot be separated, as the same labour generally has to work on both sides of the production. This explanation has neither been held to be unsustainable or unacceptable by the Income Tax officer or by the tribunal. It clearly indicates that the tribunal did not appreciate the assessee‟s case in the right perspective. It has thus fallen into an error in completely ignoring the explanation of the assessee which had a direct bearing upon the reasonableness or otherwise of the ground for rejecting the assessee‟s trading results. It was also not the case of the department that in any of the earlier assessment years the assessee had maintained separate trading accounts in respect of different kinds of goods manufactured by it. The objection of the assessing officer, in the charge year 1971-72, that the decrease in sales was highly disproportionate to the reduction in manufacturing expenses and that it clearly indicated that the sales were not properly recorded in the accounts, is ill contrived rather illfounded. Truly speaking, it is wholly irrelevant if not absurd. The learned tribunal appears to have fallen into an error in not appreciating that the absence of co-relation of consumption and production was not a new phenomenon. It was always present in the earlier assessment years as well and yet the department feel satisfied
1319 METHOD OF ACCOUNTING
Section 32
to accept the book results of the earlier years there was obviously no good reason to hold otherwise in these two years when there had admittedly been no change whatsoever in the method of its accountancy. The observations of the learned tribunal to the effect that had assessee maintained proper manufacturing record it would not have been impossible for it to co-relate its production with the raw material consumed, without recording a definite finding that it was feasible to maintain separate manufacturing accounts of the different goods manufactured. by the assessee or that it was so done by other assessees engaged in this line of manufacturing business, could not justify the rejection of book version by, completely ignoring the history of the case as enunciated‟ above. Lastly, the only other factor that prevailed upon the learned Tribunal for upholding the rejection of book versions was the alleged failure of the assessee, to work out the percentage of wastage.. Here we find that in the‟ assessment orders the Income Tax Officer has not pointed out as to what was the position of the disclosed wastage and whether. it was excessive or unreasonably high as compared to the preceding years. Without so holding or otherwise, doing full exercise to make himself intelligible, the mere casual remark „that the assessee could not work out the percentage‟ or that the percentage of wastage is also not known‟ cannot, in our view, be justly made a ground,. for rejection of books of accounts. Since the history of the applicant assessee is that of acceptance of book results notwithstanding the constant fluctuation in disclosed G.P. rate ranging from 19% to 27% (approximately) and as there had been no change in the method of maintenance of its accounts for the years under reference viz-a-viz the earlier years, when its‟ books of accounts had been accepted, we are of the opinion that the decision of the Calcutta High Court in the case of Howrah Trading Company (Private) Limited (supra) cannot be held to be squarely applicable to the facts of the instant case. For the foregoing reasons we are of the opinion that the facts and circumstances of this case the order of the learned Appellate‟ Tribunal‟ upholding the rejection of book results cannot be sustained. The above question is, therefore, answered in the negative. Cases referred to : Star Re-rolling Mills v. Commissioner of Income Tax (1974) 30 Tax 27; New Snow-White Dry Cleaners v. Commissioner of Income Tax, East, Karachi (1984) 51 Tax 11 (H.C.Kar.); M.E.J. Hazari and Sons v. Commissioner of Income Tax, Karachi (1985) 52 Tax 115 (H.C.Kar.); Commissioner of Income Tax v. Sarangpur Cotton Manufacturing Co. (AIR 1983 PC 1); Nasir Industries Karachi v. Commissioner of Income Tax, South
1320 Section 32
Income Tax Digest.
Zone, West Pakistan, Karachi (1967) 15 Tax 84; and Commissioner of Income Tax, Central Zone v. Karachi Oil & Seed Industries Limited (1985) 52 Tax 153. Case not applicable : Howrah Trading Company Commissioner of Income Tax 67 ITR 582.
(Pvt.) Ltd. v.
CONFIRMED by Supreme Court of Pakistan in Commissioner of Income Tax, Companies III, Karachi v. Krudd Sons Ltd. [1993] 68 TAX 41 (S.C.Pak) = 1992 SCC 1000.
Simplex Rubber Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central Zone) – [1988] 57 TAX 24 (H.C.Kar.) 1770.
Book results could not be rejected merely on basis of presumption.
The book result of the applicant Company could have been rejected merely on the basis of presumption unless a finding of fact would have been recorded that on verification of the account books some defects of discrepancies unexplainable were discovered. We are, therefore, inclined to hold that there was no basis before the learned Income Tax Appellate Tribunal not to accept the trading result declared by the applicant Company which was better than the previous year in terms of the volume of sale as well as in percentage of gross profit. The increase in the gross profit by about 1-1/2 from the previous year in fact negates the presumption raised by the Income Tax Appellate Tribunal and prima facie accounts for the 4 months post devaluation period. Cases relied on : New Snow White Dry Cleaner, Karachi v. Commissioner of Income Tax, (East), Karachi (1984) 51 TAX 11 and Messrs Kruddsons Ltd. S.I.T.E. v. Commissioner of Income Tax „A‟ Zone, Karachi ITC Nos. 18 and 27 of 1978. Cases referred to : Commissioner of Income Tax, Pona v. Messrs Manna Ramji & Co. AIR 1973 SC 515; Messrs Ibrahim Sons v. Commissioner of Income Tax, Karachi (West), Karachi 1979 PTD 1 = [1979] 39 Tax 127; Miss Assia v. Income Tax Appellate Tribunal, etc. (PLD 1979 SC 949) and Haider Ali Rajab Ali & Co. v. Commissioner of Income Tax (1980 PTD 1) = [1980] 41 Tax 158 (H.C.Kar.).
Income Tax Assessment of Premier Tobacco Industries Ltd., in re – [1986] 53 TAX 35 (H.C.Kar.) 1771.
Mere use of abstract expression was not sufficient to reject the books of accounts.
The applicant is cigarette manufacturing company. They had shown the wastage of the goods in 1967-68 as 3.32% and in the next year as
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3.26% and still in the next year at 4.67%. The Income Tax Officer had not disputed the rest of the account of the Company but had merely challenged the wastage figures for these assessments because he had found a variation of wastage in tobacco whom in the tax holiday period up to 28.3.1967 and the period thereafter. In the tax holiday period the Company shown a variation of 0.93% but thereafter it had changed to 3.32%. The Company gave various explanations. Two important explanations were that the variation was not only due to wastage it manufacturing but also including storage and transit losses. That in the current year of assessment the Company had increased production of prestige brands and, therefore, in order to push the sales of the Company‟s superior quality brands the company had applied rigid quality control and thereby more cigarettes were rejected. The increase in wastage was due to manufacturing defect. The tobacco of the rejected cigarettes were sold out and the sale proceeds was credited to miscellaneous receipts account. In our view, the question of wastage of the tobacco was the only question involved between the Department and the assessee. The Department had never challenged the account books maintained by the assessee except the question of wastage of tobacco. Income Tax Officer was, otherwise justified in relying upon the notional standard of 2.5% wastage which had been devised by the company itself and the same must have been based on their experience and result obtained by them. But the notional standard is a matter of average and the average standard presupposes that there could be slight deviation one way of the other in the different period. It is, therefore, obvious that if there is a variation detected by the Income Tax Officer and the assessee is quite prepared to explain the cause of variation then it is necessary that the Income Tax Officer should take into consideration the explanation offered by the assessee. We however, find that both the Income Tax Officer as well as the Tribunal have rejected the books of accounts of the assessee in respect of the wastage of tobacco without taking into consideration the explanations offered by the assessee and particularly two explanations that the variations were due to losses of tobacco in storage and transit and the other explanation that the rejected tobacco had been sold in the market and the receipt of the same are shown in the account. It is pertinent to note here that both the Income Tax Officer and the Tribunal have noted the explanations offered by the applicant / assessee but they have failed to take the same into consideration. It is, therefore, obvious to us that the appellate Tribunal has failed to take into consideration that two material explanations offered by the applicant in respect of the
1322 Section 32
Income Tax Digest.
shortage and wastage in tobacco and, therefore, the finding of the Tribunal in rejecting the accounts are not justified and answers to the first question has to be in the negative, while the second question is answered that the Tribunal has erred. It is needless to point out that the explanations of the assessee in respect of the storage and transit losses in the sale of tobacco had been accepted by the Assistant Appellate Commissioner and, therefore, it was all the more necessary for the Tribunal to deal with these questions. In respect of the questions Not 3 and 4 we are of the view that they are really not material to the whole case but still we! do answer question No. 3 the affirmative and bold that the Tribunal did misconstrue the order of the A.A.C. because the A.A.C. had accepted the books version of the assessee. In respect of the question No. 4 we do not find any misreading of the Income Tax Officers order by the Tribunal because while dealing with the wastage of tobacco the Income Tax Officer has in fact held that it was not possible for him to correctly deduce the profits or gains in view of the uncertainty wastage of tobacco. In our view answer to question No. 5 is not really required in this case because of the fact that we are of the view that there has been material omission of the part of the Tribunal as well as the Income Tax Officer in considering the two important explanations tendered by the assessee in respect of the shortage of tobacco and, therefore, the proper basis for this question can only be reached after the material pointed out in respect of question No. 2 has been considered. We would however, observe that the specific deficiencies in accounts have to be pointed out and more use of the following abstract expression used by the Tribunal as well as the Income Tax Officer is not sufficient to reject the accounts. Cases referred to : Commissioner of Income Tax, Lahore Zone, Lahore v. Choudhry Brothers (1980) 42 TAX 119; (1984 PTD 218); (1984 PTD 150) and (AIR 1938 PC 1).
M.E.J. Hazari and Sons v. Commissioner of Income Tax, Karachi – [1985] 52 TAX 115 (H.C.Kar.) 1772.
Mere failure of assessee to furnish daily stock register or low gross profit rate could not be a ground for rejection of accounts.
In this case according to the Income Tax Tribunal all the purchases made by assessee during the years in question are properly vouched. As observed earlier, there is no dispute about the sales made by the assessee to the wholesalers. Further it is also apparent from the order of the Appellate Assistant Commissioner that about 87% of the total
1323 METHOD OF ACCOUNTING
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sales were made to the wholesalers and the cash sales to the retailers were 13% or even less. The only reasons given for rejection of the accounts are non-maintenance of daily stock register and decrease in the rate of profits as compared to previous years. It is not the complaint of the Department that proper books of account have not been maintained by the assessee. In the facts and circumstances of this case on merely recording that the profit had decreased and the daily stock register was not maintained, the accounts submitted by the assessee could not be rejected and the income computed under the first proviso to section 13 of the Income Tax Act. We answer the question in the negative as in our opinion the Income Tax Tribunal was not justified in law to uphold the rejection of the books results and computation of the assessee under the first proviso to section 13 of the Income Tat Act, 1912 for the years in question. Cases relied on : Attaullah Khan v. Commissioner of Income Tax (PLD 1968 Dacca 881) = (1968) 18 TAX 2; Commissioner of Income Tax v. Sarangpur Cotton Manufacturing Company Ltd. (1938) 6 ITR 36 and Pendit Brothers v. Commissioner of Income Tax (1954) 26 ITR 1959.
Commissioner of Income Tax, (Investigation), Lahore v. Ahmed Food Industries Ltd, Karachi – [1984] 50 TAX 208 (H.C.Kar.) 1773.
Rejection of method of accounting without any material evidence is not maintainable.
The Income Tax Officer has rejected the accounts on two grounds namely that the purchases made were not verifiable from the accounts books and further that the purchases of ghee were not verifiable as notices to sellers had returned unserved. These objections were raised before the learned Tribunal, who has given its finding in the following terms: The appellant‟s argument before us was that full details of these purchases were furnished and that the payments had been made through cheques. If the enquiry of the Income Tax Officer was inconclusive in some respects to trace the sellers and purchasers, the appellant was never informed of this position. Finally, it was argued that the disclosed results were always accepted in the past and the present results are not unsatisfactory in any manner. Here again the disclosed results are not unfavourable in any manner and the defects pointed out by the income Tax Officer do not exist. Thus, it is clear that after examining the record and on facts of the case, the learned Tribunal came to the conclusion that the purchases
1324 Section 32
Income Tax Digest.
were verifiable and the rejection by the income Tax Officer was not proper. Coronet Paints & Chemicals Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi – [1984] 50 TAX 115 (H.C.Kar.) 1774.
Condition precedent for rejection of accounts applicability of principle of natural justice.
vis-à-vis
It is an admitted position that there was absolutely no material either before the Income Tax Officer or before the Income Tax Appellate Tribunal to show that the rate at which the goods were sold to those six parties are not the same at which the goods have been sold to verifiable parties. It was contended that the retail sale prices of all the items produced by the applicant were fixed and advertised and excise duty was paid on those prices. The Income Tax Officer has not reached any finding about the quality of goods sold to the alleged unverifiable parties with the rate of sale and also the names of verifiable parties to whom also same goods were sold at the same rates. The Income Tax Officer shows that evidently he had no suspicion about the extra discount allowed to the agents as compared to the preceding years. The Income Tax Officer merely rejected the same due to unverifiable nature of those sales. The Tribunal, however, without material before it has reached a finding that similarly, it was the responsibility of the applicant to establish that in this year, extra discount had been paid to the selling agents, as compared to previous years. It is significant to note that the Tribunal has not indicated as to how it was possible for the assessee to establish that extra discount had been paid to the selling agents. It is manifest that the finding of the Tribunal that the onus could not be deemed to have been discharged merely by making entries in the books of account. The real ground for applying to proviso to section 13 was that the gross profits disclosed by the book results appeared low and compared unfavourably with those of others in the same line of business or of gross profits of preceding years were high. It is true that the gross profits disclosed by the applicants‟ accounts were low. That by itself was not enough to reject the system of accounts maintained by the assessee. Low gross profits should certainly put the department on enquiry to verify if the entries in the accounts books were spurious or to verify if the system of accounts itself was defective which made it impossible to accept the books results as disclosed the true profits of the applicant. In other words, on the only
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ground that the gross profits were low and compared unfavourable with preceding years and with those of other manufacturers, the system of accounting adopted by the applicant cannot be rejected. What the proviso to section 13 required is that the system of accounting adopted by the assessee is defective. The rejection of the results of the applicant‟s account books by the Income Tax Officer was not at all justified merely on the ground of the bulk of the sales is unverifiable and consequently, the finding is not acceptable. The Tribunal, it appears, has approached the matter on certain surmises and conjectures. The Tribunal observed that it would be repugnant to the ordinary standards of human behaviour, specially in these days, to say that, a manufacturer had spent more on producing an article but earned loss on its disposal. Now we will consider the point No. 2 that the principle of natural justice was violated as the Income Tax Officer and the tribunal relied upon the other manufacturers of Karachi without disclosing the names of these manufacturers, The Income Tax Officer and the Tribunal have placed reliance upon other paint manufacturers during the relevant period for the purpose of arriving at the findings that the gross profit rate was low. The names of the other paint manufacturers are not to be found either in the order of the Income Tax Officer or in the order of the Tribunal. The fact that the names of these paint manufacturers were not disclosed to the applicant at any stage is an admitted position, it has, therefore, been rightly contended on behalf of the assessee that the principle of natural justice has been violated in so far as reliance has been placed by the Income Tax Officer and the Tribunal on the gross profit rate of those manufacturers have been shown about 25% or above. Had the names of those manufacturers been able to show the reasons for the high percent of gross profit rate of those manufacturers have been disclosed to the applicant, it would have been able to show the reasons for the high percent of gross rate. It is well known that the quantity of paint even manufactured in the same area is not constant but are variable according to availability of raw materials and other factors. In our opinion the applicant has substantially prejudiced as the names of the paint manufacturers on whose gross profit rate was placed by the Income Tax Officer and the Tribunal were not disclosed to it. We, therefore, hold that the inference drawn by the Income Tax Authorities about the low percentage of the applicant on the basis of somewhat high gross profit rate of other manufacturers or in the preceding years was not a valid inference as such it is not sustainable.
1326 Section 32
Income Tax Digest.
The observation of the learned Tribunal in connection with the sales of the articles and extra payments of discounts had been quoted in earlier paragraphs. From this observation it appears that the Tribunal rejected books version because the sales and the extra discounts were not proved by the assessee, The Tribunal has treated the entries in the books of account as subsidiary. It is difficult to comprehend the reasoning of the learned Tribunal when actually the sales receipts and extra discount payment to the agents could not be primary evidence of the fact of actual sales and fact of actual extra discount payments by the assessee-company. Under the circumstance, if one wants to verify the sales to the customers and extra discount payments to the agents he should rely on the entries on the books of account and not on the vouchers. We are of the opinion that it was the duty of the Tribunal to examine each of the registers and accounts-books furnished by the assessee before rejecting them. The applicant‟s account books are to be accepted unless, on verification they disclosed any fault or defect, which cannot be reasonably and satisfactorily explained. All the other transactions were accepted except few unverifiable sales. The total sales alleged to be unverifiable came to only Rs.44,328/- against the total sales of Rs.18,42,288/. As to these transactions also the quantity of paints and varnish sold has riot been disputed. The rate at which, those articles were sold were not such as would excite suspicion by reason of being lower than the verifiable sales. The names of the customers are also entered in respect of the transaction. There are no circumstancesdisclosed in the case nor is there any evidence or materials on record on which would justify the rejection of book results. Cases referred to: S.M. Yousuf & Sons v. Commissioner of Income Tax, (East Karachi) (1974 PTD 43) = [1974] 29 TAX 120; Ibrahim & Sons v. Commissioner of Income Tax (1979 PTD) = [1979] 39 Tax 127; Miss Asiya v. Income Tax Appellate Tribunal Etc. [1980] 41 TAX 1.
United Builders Corporation, Mirpur v. Commissioner of Income Tax, Muzaffarbad – [1984] 49 TAX 34 (H.C.AJ&K) 1775.
Rejection of accounts should be based on sound reasons.
The rule of income tax is that when the accounts maintained by an assessee are rejected, the Income Tax Officer or assessing authority, is under an obligation to assign reasons for rejection of the accounts version of assessee. It is equally necessary that the finding of the Income Tax Officer or authority must be based on reasons. He is not allowed just to take leap in darkness and indulge
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in pure guess by making arbitrary and capricious additions, alternation or reductions in the expenditure or income of the assessee. He is under a duty to endeavour to the best of his ability to ascertain income, profits arid gains of the assessee, nearest to his true income, profits and gains, shown under the circumstances of that case. Such an obligation was protected by first proviso to section 13 of the Act. It was true that the onus was on an assessee to provide correct accounts but in a case where accounts of an assesses were rejected, in order to assess the tax, it was an equal duty of Income Tax Officer in fairness and to meet the ends of justice, to disclose to the assessee the formula, criterion and the material on which he based his estimate. In case his estimate was based on private inquiry, it was essential to communicate to the assessee the substance of information which he utilized, so as to enable the assessee to meet the case against him. Commissioner of Income Tax, (West Zone), Karachi v. Fateh Textile Mills Ltd., Hyderabad – [1984] 50 TAX 223 (H.C.Kar.) 1776.
Result of accounts cannot be rejected merely because rate of gross profit had gone down though a reasonable explanation for the same had been offered by assessee.
The accounts of the respondent for the previous years had been accepted and for the years in dispute the respondent had maintained the same type of accounts and had offered reasonable explanation for the fall in gross profits and there the accounts would have been accepted by the Income Tax Officer in any case there was enough material before the Tribunal for accepting the account books of the assessee as they had been mentioned on the same lines as the previous years. In fact the finding of the Income Tax Officer was merely based on the gross profit of comparable cases without giving any specific details of the same and thus it was an arbitrary decision. We further find that the provision under section 13 has given a discretion to the Income Tax Officer to make an estimate after rejecting the accounts. But after the Income Tax Officer had observed that accounts had been maintained on the same lines as discussed in the orders of early years and all necessary details had been obtained and examined, then he was not justified in rejecting the results of those accounts merely because rate of gross profit bad gone down and in spite of the fact that a reasonable explanation for the same had been offered by the
1328 Section 32
Income Tax Digest.
assessee. Discretion in rejection the accounts was not exercised in a correct manner. Case referred to: Roshan Cloth House v. Commissioner of Income Tax [1983] 47 TAX 148 = 1983 PTD 63
Karachi Textile Dyeing & Printing Works, Karachi v. Commissioner of Income Tax (Central) Karachi – [1984] 49 TAX 18 (H.C.Kar.) 1777.
Mere non-maintenance of day-to-day manufacture or production accounts and maintenance of accounts in the form prescribed by the Excise Department could not render the accounts liable to be rejected.
The admitted position is that the applicant has been maintaining accounts regularly in the registers as prescribed by the Excise Rules which showed the production, manufacture and consumption. For this purpose the method of accounting adopted by the applicant was in the form prescribed by the Excise Rules. The Department has approached the problem from a completely different angle. The learned Tribunal observed that the manufacturing and production account was not maintained as required for Income Tax purposes. The Department seems to be under the impression that some form for maintenance of account has been prescribed. This is not correct. The Income Tax Act does not provide any form or method for maintaining the accounts. The assessee is free to choose any method for maintaining accounts provided it is regularly maintained and from such accounts proper gains and profits can be deduced. If the accounts satisfy these ingredients, the assessing officer can reject it only if he is able to point out the falsities, discrepancies and faults, which may render such account untrue, and from which proper profits and gains cannot be deduced. In these circumstances the assessing officer can reject the accounts on the basis of definite finding to that effect and proceed to exercise his jurisdiction under the proviso to section 13. Before rejecting the accounts, the Income Tax Officer should have pinpointed the defects. Nothing has been done except an expression of opinion that the results disclosed cannot be verified. The purchases, opening stock, manufacturing expenses were neither attacked nor found to be inflated and underestimated. No convincing reasons with concrete examples have been given by the Department to justify the rejection of accounts. An opinion was formed by the assessing officer that the records maintained according to Excise Regulation do not satisfy the requirement of Income Tax. This
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cannot be the basis for rejections of accounts unless for cogent and convincing reasons the Assessing Officer comes to definite findings that from such accounts proper gains and profits cannot be deduced. Mere non-maintenance of day-to-day - production and consumption register by itself is no ground for rejection of accounts version. The Income Tax Officer can reject the account version for nonmaintenance of aforestated registers or stock register if after taking into account all the material including the absence of such register he comes to the conclusion that profits and gains cannot be properly ascertained. The applicants had maintained the accounts in similar manner during the preceding year and had shown losses, which was accepted by the Income Tax Officer. For the relevant year, the Department had relied on some cases of other art silk manufacturers and on that basis fixed the rate of profit at 25%. These comparable cases were not brought to the notice, of the applicant before relying upon it. The nature of business, the machinery employed, the location and all other factors governing the accounting, results were neither considered nor any opportunity was given to the applicant to examine and rebut them. Identical and comparable cases can be relied upon against the assessee only when all such material are disclosed to him and proper and fair opportunity is given to rebut it. No party can be condemned on basis of evidence or information adduced behind his back and without any notice to him. It is true that technicalities of Evidence Act cannot fetter the exercise of power of the Assessing authority but rule of justice demands that before any adverse order, penalty or liability is passed or imposed upon a party he should be afforded full opportunity to meet the case and rebut the evidence used against him. As such opportunity was not afforded to the applicant on the basis of such comparable cases the rate of profit claimed by the applicant cannot be rejected. Cases referred to: Commissioner of Income tax v. Sarangpur Cotton Manufacturing Co. [1938] 6 ITR 36; Star Rolling Mills v. Commissioner of Income Tax [1974] 30 Tax 27; 1974 PTD 200; Commissioner of Income Tax v. Jupiter Trading Corporation [1979] 40 Tax 32.
Nawaz Agencies, Lahore v. Income Tax Officer, M-Circle, Lahore – [1978] 37 TAX 199 (Lah.) 1778.
Rejection of accounts held justified when:- (i) Stock register produced for one year only and that too not properly maintained; (ii) Sale vouchers issued without incorporating therein addressed of the parties; (iii) Gross profit rate low as
1330 Section 32
Income Tax Digest.
compared to similar businesses; and (iv) Turnover not commensurate with available capital-credit facilities. The petitioner had produced stock register for one year. The books were maintained by a part-time Accountant who visited two or three times a week in the year 1970-71, after a week or so in the year 197172 and after a fortnight or so in the year 1972-73 The G.P. rate was low as compared to the similar business. The turnover was also not commensurate with the available capital-credit facilities. Turnover of the assessees in similar business was much higher. The available data was considered and compared. In view of the above, it cannot be successfully pleaded that the impugned decision was unlawful. There was sufficient material before the Tribunal for rejection of the book version and for making addition to the declared sales and enhancement of the gross profit rate. The learned counsel also submitted that a book version cannot be ignored or rejected simply for the reason that some of the sales are not verifiable. He argued that even a genuine sale may not be verifiable when a genuine purchaser gives a fictitious name or a wrong address. It is correct that a seller in not required to verify that antecedents of a prospective buyer and he has no means to check his particulars either. The argument as it is raised is thus valid and had it been the only reason to reject the stock register, we might have had a different opinion. The situation obtaining in the case is, however, entirely different. Firstly, as discussed above, the assessee produced his stock register only for one year and the argument could not hold good for other two years. Secondly, the objection of the Tribunal was not that fake or bogus particulars were given in the sale vouchers but that no addresses were given at all under those entries, it is imagined that in case of such whole-sale dealings a consciences seller who has to prepare his accounts for Income Tax purposes would not omit to incorporate the addresses, etc. in his accounts for the purpose of verification. That would show a bona fide attempt on the part of the assessees though he may not guarantee the correctness of those particulars. It appears to be from that point of view that the tribunal observed that in such wholesale dealings those particulars could not be dispensed with for the purpose of verification. The objection appears to be that the assessee had not attempted to maintain even apparently valid accounts. Case relied on : S.M. Youus & Bro. v. Commissioner of Income Tax (1974 PTD 45); (1974) 29 TAX 120.
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Star Rolling Mills v. Commissioner of Income Tax – [1974] 30 TAX 27 (H.C.Kar.) 1779.
Stock register and day-today manufacturing registers were not maintained as in the past, being neither feasible nor practicable, books could not be rejected on this ground also.
The assessee was engaged in the business of manufacturing bars, etc., from iron scraps and billets. In respect of the assessment year 1953-54 it filed return of income declaring total sales at Rs.12,22,486 and gross profit of Rs.1,08,935, yielding gross profit rate of 9.6 per cent as against, the gross profit of 15.6 per cent in the preceding year. The Income Tax Officer rejected the book version of the assessee and estimated the sales at Rs.13,00,000 and applied thereto gross profit rate of 15 per cent. He took the view that the method of accounting adopted by the assessee, although on the same lines as in the preceding year which was accepted by the department, was not such from which the profit rate could not be deduced properly. His opinion was based upon (1) the non-maintenance by the assessee of stock register and a manufacturing account, (2) the alleged discrepancies in the quantitative statements furnished by the assessee, and (3) the rather abnormal decrease in the rate of gross profit with reference to the previous year‟s rate: Held, that (i)
there is nothing to indicate either in the order of the assessing officer or the Tribunal that it is feasible and practicable in the line of business in which the assessee was engaged, to maintain a regular stock register or a manufacturing account, or that other persons engaged in such business were maintaining such accounts or registers. If, in the previous years the assessing authorities had accepted the method of accounting adopted by the assessee and had found that it was possible to deduce and determine the rate of profit of the assessee therefrom, there was no valid reason for them, in respect of the charge year in question, to reject the assessees method of accounting or to hold that it was not possible to deduce therefrom the assessee‟s rate of profit;
(ii)
so far as the discrepancies are concerned, which the Tribunal noticed in the quantitative statements furnished by the assessee to the assessing officer, the same have been fully explained in the order of the Appellate Assistant Commissioner; and
1332 Section 32
(iii)
Income Tax Digest.
although the rate of gross profit showing the assessee in its statement for the charge year in question was much lower than the rate of its gross profits for the previous year, the circumstances by itself was not a sufficient ground for the rejection of either of the said rate or of the method of accounting adopted by it, in view of the statement furnished by the assessee before the Appellate Assistant Commissioner which was based on account books and supported by vouchers, showing that though there had been an increase in the price of its furnished goods; on account of the abolition of O.G.D., the increase in the price, of raw material was abundantly higher than the increase in the price of the finished goods, thereby diminishing its profits.
The proviso to section 13 does not give any arbitrary, unguided, uncontrolled or naked power to the Assessing Officer. An opinion on the basis whereof a statutory authority is entitled or empowered to take any action or initiate any legal proceeding, may by accurate or erroneous, but it must be an honest opinion or conviction, based on. tangible material capable of sustaining such opinion, and not mala fide opinion or colourable exercise of statutory power. Cases referred to: Nasir Industries, Karachi v. Commissioner of income Tax, South Zone, West Pakistan, Karachi [1967] 15 TAX 84 and Pioneer Sports Ltd. v. Commissioner of Income Tax [1934] 2 ITR 305.
Sultan Textile Mills Limited v. Commissioner of Income Tax (Investigation), Karachi – [1970] 22 TAX 163 (H.C.Kar.) 1780. Assessee was engaged in manufacturer of yarn and cloth. In the absence of spinning master‟s report and Gate pass register, held that accounts cannot be rejected on these grounds without specifically finding fault with the books of accounts produced. The assessee was a manufacturer of yarn and cloth. For the charge year 1957-58 the assessee filed return showing a net loss of Rs.2,06,172. The Income Tax Officer rejected the account books produced by the assessee on the ground that the profits and gains could not be properly deduced in the absence of spinning master‟s report and the Gate pass register. He found that, yield of yarn was 85% as against 80.84% shown by the assessee and that there was an under-statement by Rs.1,80,000 in the accounts in respect of sales of cloth and yarn. He finally made assessment on an income of Rs.26,03,558. Against the order of assessment, the assessee went in
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direct appeal before the Tribunal. The Tribunal reduced the percentage of yield of yarn from cotton from 85% to 83% and estimate of sale of cloth from Rs.18,00,000 to Rs.10,00,000. He, however, maintained the order rejecting the books of accounts for the reasons given by the Income Tax Officer. Against this order the assessee filed application seeking reference on the questions as to whether there was any material on the record to hold that (i) the production as shown was low and the addition was justified and (ii) sale rates of yarn and cloth as shown were incorrect, Dismissing the application the High Court: Held, that (i)
in this case the Income Tax Officer as well as the Income Tax Appellate Tribunal have come to the conclusion that without the Spinning Master‟s reports and the Gate Pass register profits and gains could not be properly deduced. The absence of two important pieces of evidence made it unnecessary for the Appellate Tribunal to criticise the books of account which were produced. Thus the first part of the first question raises a question of fact and not of law and the second part being a corollary of the first part is of no greater legal significance; and
(ii)
the main object of the counsel has been to criticise the adequacy of the material rather than to support his contention that there was no material at all. The questions raised do not, in the circumstances, raise question of law.
The first proviso, however, indicates that it [method of accounting] can be rejected if in spite of its regular employment, the Income Tax Officer comes to the conclusion that the profits and gains cannot be properly deduced from it. In this case, the Income Tax Officer as well as the Income Tax Appellate Tribunal have come to the conclusion that without the Spinning Master‟s reports and the Gate Pass register profits and gains could not be properly deduced. It is no answer to this view of the Income Tax Officer and the Income Tax Appellate Tribunal that they have not found fault with the Account Books which were submitted by the applicant. If this argument were accepted then it would be enough for an assessee to neatly maintain a single exercise book and argue that since nobody can find fault with this exercise book, nobody has a right to say that profits and gains cannot be properly deduced. In fact, the authenticity of a system of accounting consists in the maintenance of all the connected hooks and registers so
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Income Tax Digest.
that a self-contained soundness of that system may be evidenced from it, The absence of two important pieces of evidence made it unnecessary for the Appellate Tribunal to criticise the books of account which were produced. Thus in so far as this case is concerned, we have no doubt that the first part of the first question raises a question of fact and not of law and that die second part being a corollary of the first part is of no greater legal significance. Cases referred to : Haroon Textile Mills Ltd. v. Commissioner of Income Tax (1966) 14 TAX 167 and Edwards (Inspector of Taxes) v. Baistow and another (1955) 28 ITR 579.
Ata Hussain Khan Limited v. Commissioner of Income Tax, Dacca – [1968] 18 TAX 2 (H.C.Dacca) 1781.
Accounts were not wholly unverifiable and declared profit was not too low, held that rejection of accounts was not justifiable.
The assessee, a private limited company, derived income from dealing in goods like paper board, glass and also from running photo offset and printing press which included printing On Containers, label printing, calendar printing on paper and also on tins. The Income Tax Officer rejected the book version of the assessee on the ground that the gross profits declared were too low, the stock register was not maintained and the loan from the mother of the managing director, as alleged, had not been satisfactorily explained. He accordingly raised the gross profit rate from 34 per cent to 43.6 per cent in respect of the assessment year 1956-57. In respect of the two subsequent assessment years 1957-58 and 1958-59 the declared gross profits were also raised by the Income Tax Officer on the same ground. The Appellate Assistant Commissioner, on appeal by the assessee confirmed the orders of assessment. When the matter reached the Tribunal it did not give any finding in regard to the loan which was treated by the Income Tax Officer as suppressed income. It, however, upheld the rejection of the books of account but fixed the profit rate for all these three years at 40 per cent, which was the rate adopted for the year 1955-56. On a reference: Held, that the rejection of the accounts as done under section 13 was not justified. Absence of the stock register was not a valid reason for not accepting the accounts. According to the Tribunal‟s own observations, the accounts were not wholly unverifiable. There was no basis for holding that the profits shown were indeed too low.
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Cases referred to : Pioneer Sports Ltd. Sialkot v. Commissioner of Income Tax (1934) 2 ITR 305; Bombay Cycle Stores Co. Ltd. v. Commissioner of Income Tax (1958) 33 ITR 13; S. Veerlah Reddiar v. Commissioner of Income Tax (1960) 2-TAX (III-130). Cases distinguished: Kale Khan Mohammad Hanif v. Commissioner of Income Tax (1963) 8 TAX 363 (S.C.); A. Govindarajulu Mudaliar v. Commissioner of Income Tax (1958) 34 ITR 807 (S.C.) and Lakhmichand Baijnath v. Commissioner of Income Tax (1959) 1-TAX (III-23).
Augustine C. Paul And Company, Karachi v. Commissioner of Income Tax, South Zone, (West Pakistan), Karachi – [1967] 15 TAX 94 (H.C.Kar.) 1782.
Stock data was not reliable and cash sales unverifiable, held that accounts were liable to be rejected.
The assessee carried on business in toys. The Income Tax Officer rejected the book version of the assessee on the ground that the stock data was not reliable and the cash sales were not verifiable. He estimated the sales and applied_ thereto profit-rate of 35 per cent. Appeals against the order of assessment having been dismissed by the Appellate authorities the assessee moved an application under section 66(1) of the Income Tax Act requiring the Appellate Tribunal to refer to the High Court the question whether the rejection of the books of account and the application of the proviso to section 13 of the Act was justified. The application was rejected by the Tribunal on the ground that no question of law arose out of its order. On further reference under section 66(2) of the Act the assessee contended before the High Court that the Income Tax Officer and the Appellate authorities were not justified on the facts and in the circumstances of the case in rejecting the books of account as these were kept properly and in the manner in which they had been kept before. _ Rejecting the application the High Court Held, that: (i)
the question raised by the assessee is purely a question of fact and not a question of Jaw; and
(ii)
the fact that the books of account were being maintained in the same manner in which they were previously done and that the hooks of account were accepted in the earlier year would be no justification for pressing into service an argument that the books of account for the accounting years under reference should also have. been accepted.
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Case distinguished: Haroon Textile Mills Ltd., v. Commissioner of Income Tax [1966] 14 TAX 167.
Nasir Industries, Karachi v. Commissioner of Income Tax, South Zone, West Pakistan, Karachi – [1967] 15 TAX 84 (H.C.Kar.) 1783.
Accounts were regularly maintained by assessee on proper method of accounting. In the absence of manufacturing account giving proper quantitative reconciliation, held that account was liable to be rejected.
The assessee, a manufacturer of plastic goods, filed return of income showing sales of finished goods at Rs.1,08,819 and of raw material at Rs.11,449 and an overall gross profit of 25.5 per cent. The Income Tax Officer rejected the book version of the assessee on the ground that all the sales were not vouched and the cash memos did not mention the names and other particulars of the purchasers. He estimated the total sales of finished goods at Rs.2,00,000 and of raw material at Rs.20,000 and, keeping in view the past history of the case and parallel cases, applied 60 per cent gross profit on the former and 40 per cent on the latter. In appeal the Appellate Assistant Commissioner upheld the rejection of the book result and the estimate of sales but reduced the gross profit rate to 55 per cent in the case of finished goods and 33-1/3 per cent on the raw materials. On further appeal the Appellate Tribunal did not agree with the grounds taken by the Income Tax Officer for rejection of the book version. It, however, maintained the rejection of the accounts and the estimate on the ground that “the real fact in this case is that there were no stock register maintained showing manufacturing account. We think that in a business of this kind no manufacturing account can be maintained giving proper quantitative reconciliation. It is clear that the profit rate of the business is to be determined on the basis of estimate.” In support of the reference application against the Tribunal‟s order the assessee‟s counsel contended before the High Court that on the basis of the finding of the Tribunal regarding impossibility of maintaining manufacturing account the Tribunal was not justified in either estimating the sales or in applying a fiat rate of gross profit. It was further argued that since the Income Tax Officer had not doubted the genuineness of the account books the proviso to section 13 of the Income Tax Act could not be made applicable. Held, that: (i)
the Income Tax Tribunal was clearly of the opinion that in the absence of manufacturing accounts giving quantitative reconciliation. The accounts though regularly maintained
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by the assessee, profits therefrom could not be properly deduced. On this finding it was open to the Tribunal to have resort to the proviso to section 13 of the Income Tax Act; and (ii)
even if the department comes to the conclusion that an assessee has employed a proper method of accounting regularly it is open to the Income Tax Officer to take resort to the proviso to section 13 if the method is such that the true profits cannot be correctly determined therefrom.
Cases relied on: Commissioner of Income Tax v. Sarangpur Cotton Manufacturing Co. Ltd., (AIR 1938 P.C. 1); S.N. Namasivayam Chettiar [1960] 2 TAX 277 (S.C.) and Punjab Trading Co. Ltd., v. Commissioner of Income Tax [1965] 11 TAX 81.
PR.AL.M. Mutbukaruppan Chettiar v. Commissioner of Income Tax – [1939] 7 ITR 76 (Mad.) 1784.
Accounts cannot be rejected only because the method does not appeal to the Income Tax Officer.
Section 13 of the 1922 Act relates only to the method of accounting, and the books cannot be rejected merely because the method of accounting does not appeal to the Income Tax Officer. The Income Tax Officer may adopt the method of accounting, which he prefers, but he cannot reject an assessee‟s book version by reason of the provisions of section 13. Where the accounts of the business in India, which was being assessed, were complete, but were rejected on the only ground that they did not record transactions relating to the assessee‟s foreign business, it was held that rejection was not justified. _______________
METHOD OF ACCOUNTING AND CHARGEABILITY
Commissioner of Income Tax, Sales Tax, North Zone, West Pakistan Lahore v. Manzur Qadir, Bar-at-law, Lahore – 1971 SCC 376 = [1971] 23 TAX 280 (S.C.Pak.) 1785.
Method of accounting and chargeability in the case of cash accounting system.
There is no dispute that the respondent-assessee maintained his accounts on the “cash system” or that the respondent had not concealed any material fact from the Tax Department. The contention of the respondent, however, was that since under the cash system he can only be taxed “on what he actually receives in the course of a given
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financial year” and “not on what he would receive in future in consequence of certain arrangements made” he could legitimately adopt such a scheme to reduce the burden of taxation. The respondent maintained that there was no legal bar to the making of such an arrangement with his clients to reduce the burden of his tax and that no just exception could be taken to the scheme evolved by him. In the present case, the annuity bond shows that the agreement, if any, was between the Assurance Company and the purchaser. The consideration for the contract moved from the purchaser and thereupon the company covenanted both with the purchaser “and also with the annuitant” to make payments during a period of 20 years of an annuity if he should survive the said period, but if he does not survive the said period then the balance of the payments would be made in the same annual amounts to his executors, administrators or assignors. The evidence also is that the purchaser paid the sum of Rs.30,000 by cheque drawn in favour of the Assurance Company. (We see no reason to doubt the certificates granted by the company or the purchaser, Malik Diesels). This does not show that the company, in any sense of the term, acted as the agent of the respondent or that it received the payment made by Malik Diesels on behalf of the respondent on account of his professional fees. Indeed, as pointed out by the Privy Council in the case of Commissioner of Income Tax, Bombay v. Bombay Trust Corp., the Assurance Company on the contrary covenanted to pay to the respondent, in consideration of the amount paid by the purchaser, certain annual payments. Thus if it acted as an agent for anyone it did so on behalf of the purchaser, i.e., the client. The true legal relationship between the Assurance Company and the respondent was, in our opinion, that of a trustee and a beneficiary. The obligation that was annexed to the ownership of the money paid by the purchaser for the annuity bond was in the nature of a trust accepted by the Assurance Company for the benefit of the annuitant or the beneficiary. This obligation the beneficiary could enforce either under section 56 or under section 61 of the Trusts Act, 1862. Be that as it may, since we have come to the conclusion that the money was neither received by the Prudential Assurance Company as an agent of respondent nor did the annuity bond represent the money‟s worth to the extent of the entire price of the bond, we think that the answers given by the High Court in the reference were correct and, accordingly dismiss this appeal, but make no order as to costs, since the device (I do not use this term in any sinister sense)
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evolved by the respondent himself was a novel one and did raise a difficult question of law. Commissioner of Income Tax v. Anwar Enterprises, Sialkot – [1999] 79 TAX 283 (H.C.Lah.) 1786.
„FOB‟ and „CIF‟ sales do not pertain to method of accounting; these are categories of shipping contracts - Sections 32 & 136 of Income Tax Ordinance, 1979.
It is crystal clear that FOB sales and CIF sales do not pertain to the method of accounting. These fall within the realm of international export trade. These are the two categories of shipping contracts. They determine and fix the duties and responsibilities of seller and buyer in a contract of exports. In the FOB contract, the seller receives the price of the exported goods without insurance and freight charges while in the latter contract, the seller receives from buyer the price of the goods plus insurance and freight charges. Pimpa (Pvt.) Ltd., Karachi v. Commissioner of Income Tax Companies-I, Karachi – [1993] 68 TAX 193 (H.C.Kar.) 1787.
In the absence of any omission, irregularity or other defect an the method of accounting or positive evidence to show that the accounts did not disclose, the whole income of the assessee, books of accounts could not be rejected.
We would like at the very outset to observe that mere nonmaintenance of consumption and production account or non-supply of full addresses of the persons from whom purchases have been made which are the sheet anchors of the orders of the Income Tax Authorities and that of the Appellate Tribunal could not be taken as indicative of suppression of the production and export of garments. We are inclined to hold that in the absence of any omission, irregularity or other defect in the method of maintaining the accounts or positive evidence to show that the accounts did not disclose the whole income of the assessee, his books of accounts cannot be rejected. The assessee had produced all his books of accounts before the Income Tax Officer which had been duly examined by him. The only two defects found by the Income Tax Officer for rejecting the book profits were that day to day consumption and production account had not been kept from non-keeping the consumption and production account he drew the inference that there is no co-relation between the
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consumed and the readymade garments manufactured. The other defect found by him is that the full addresses of the persons from whom purchases have been made, have not been supplied. No finding has been recorded by either of the authorities below as to the unacceptability of the method and irregularity of the account kept by the assessee. It is well settled that in the absence of such a finding recorded by the authorities, the book results cannot be ignored or brushed aside. For the foregoing reasons, we are of the opinion that in the facts and circumstances of the case, the finding of the Tribunal upholding the rejection of the book result cannot be sustained. The above question is, therefore, answered in the negative. Cases referred to: Commissioner of Income Tax, East Pakistan, Dacca v. Wahidduzaman (1965) 11 TAX 296 (S.C.Pak) = (1965 PTD 283); Commissioner of Income Tax, Central Zone „B‟, Karachi v. Farrokh Chemicals Indsutries (1992) 65 TAX 239 (S.C.Pak.); India Textile Mills Ltd. v. Commissioner of Income Tax (1989) 60 TAX 1 (H.C.Kar.) = (1989 PTD 567) and Commissioner of Income Tax v. Krud Sons Ltd. (1993) 68 TAX 41 (S.C.Pak.).
Commissioner Of Income Tax, (West Zone), Karachi v. Bhahawalpur Textile Mills Ltd., Hyderabad – [1985] 51 TAX 71 (H.C.Kar.) 1788.
Income Tax Officer held that Income Tax Officer could not reject the accounts merely because either he had no time to go into details or he got upset by the idea that others have shown better results.
The Appellate Tribunal found as a question of fact that the accounts had been maintained by the assessees as it had been maintained during the previous years and they were of the view that there was no justification to reject the results which had been obtained from the accounts which had been maintained like the previous year. The Appellate Tribunal observed that the Income Tax Officer had thrown out the accounts merely because either he had no time to go into the details or he was upset by the idea that the others have shown better results. The Appellate Tribunal noted that the explanation of the appellant assessees were not controverted by the Departmental Representative and they were of the opinion that but for the adverse circumstances explained the appellant‟s working results were in no manner low nor the accounts suffered from the defects attributed to them by the Income Tax Officer. The Appellate Tribunal was of the view that the accounts of the assessee would not be thrown out in the
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fashion as the Income Tax Officer had done, they referred (1961) 42 ITR 370 where it was observed that howsoever low the profits may be the accounts cannot be thrown out unless they suffer from material defects or do not enable the Income Tax Officer to compute the profits properly from those accounts. In the present case, we found that the Appellate Tribunal has assigned proper reasons for interfering with the orders of the Income Tax Officer. In fact it was for the Tribunal to accept the explanation of the assessee. If his explanations were found to be reasonable then the same should have been accepted. The Tribunal was quite right in its observation that even the Income Tax Officer had agreed with the respondents assessees that there was some justification to the extent of one per cent fall in the gross profits on account of the reasons given by the respondents. When the Income Tax Officer had accepted that explanations given by the respondents were not completely untrue or false then in that case there should have been some more explanation as to why those explanations were not accepted entirely particularly in view of the facts that the learned Income Tax Officer had not been able to find any defects in the accounts submitted by the assessees. Commissioner Of Income Tax, (West Zone), Karachi v. Bhahawalpur Textile Mills Ltd., Hyderabad – [1985] 51 TAX 71 (H.C.Kar.) 1789.
In the absene of any material fact, method of accounting cannot be rejected.
It is, therefore, apparent that if the Income Tax Officer wants to reject the accounts of an assessee then he has to find as a question of fact that the method of accounting of the respondent assessee in relevant year is not the same as regularly employed by the assessee during the previous year. In the present case before us there was no such finding by the Income Tax Officer that the method of accounting for the relevant years was not the same as employed by the respondent assessee during the previous years and in view of this failure of finding on the part of the Income Tax Officer the Appellate Tribunal was justified in entertaining the question of law that the account could not be rejected by the Income Tax Officer. Case relied on: Commissioner of Income Tax v. Fateh Textile Mills Ltd. (1984) 50 Tax 223
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Dr. Col. Said Amman, Karachi v. Commissioner of Income Tax (Central), Karachi – [1984] 49 TAX 24 (H.C.Kar.) 1790.
Method of accounting employed by the assessee, was as in the past, accepted by assessing officer. Receipts were also accepted and purchases found fully vouched and verifiable. Addition made to the declared version on the ground that stock and consumption registers were not maintained held unjustified.
In the present case, the method of accounting employed by the applicant was accepted in the past year, and it has not been rejected even this year. The Income Tax Officer was satisfied with the account except that the Stock register and consumption register for medicine used in the clinic were not maintained. Out of the entire purchases of Rs.53,684/- the medicine worth Rs.15,242/- used in the clinic is the bone of contention. Considering the nature of medicine and the manner it is used it may not be possible to maintain a consumption register. This has clearly been asserted in the statement of fact filed by the applicant and has been admitted by the respondent. In the face of this admitted position and as the purchases are verifiable it can be assumed that a record of such consumption could not possibly be maintained. In these circumstances when proper method of account has been employed by the applicant and the only defect pointed out is the register which cannot be maintained, can the Income Tax Officer disallow the medicine expenses. The Tribunal or the Assessing Officer has not held that the method of accounting though accepted for the previous year cannot be accepted for the subsequent year. It has not been pointed out in what manner the record of consumption of medicine used in the clinic could be maintained nor it has been stated that in other hospitals of similar nature record for consumption of medicine in clinic is maintained. The assessee is at liberty to choose the method of accounting and so long the income, profits and gains can properly be deduced therefrom, the Income Tax Officer can hardly reject it. However if the method of accounting regularly employed does not correctly show the profits the Income Tax Officer can discard it. Before embarking upon assessment under the proviso to section 13 the Income Tax Officer has to give definite finding about the defects, deficiencies; irregularities and falsities in the accounts. Where proper and regular account books have been maintained which are not found to be incorrect merely because stock register has not been maintained it would not be sufficient to justify action under the proviso to section 13.
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Cases referred to: Star Rolling Mills v. Commissioner of Income Tax [1974] 30 Tax 27 and Mohammadi Textile Mills Ltd., v. Commissioner of Income Tax (East), Karachi [1982] 45 TAX 140.
Roshan Cloth House v. Commissioner of Income Tax (East), Karachi – [1983] 47 TAX 148 (H.C.Kar.) 1791.
Method of accounting adopted by assessee was not objected to by Department in previous years on any ground. Same method was employed in assessment year under dispute. Rejection of accounts and addition made to the declared gross profit, held unjustified.
A bare reading of the above provision of law (section 13 of 1922 Act) shows that income, profits and gains are to. be computed for the purposes of section 10 and 12 of the Act in accordance with the method of accounting regularly employed by the assessee. The 1st. proviso to section 13, however, authorises the Income Tax Officer to make computation on such basis and in such manner as he may determine in cases where assessee has not employed any regular method of accounting or the method of accounting employed is such that the profits and gains cannot be properly deduced therefrom. In the case before us the admitted position on record is that the applicant were assessed to Income Tax for several years before the assessment year 1964-65 and the method of accounting employed by them was not objected to by the department on any ground. It is also not the case that for the assessment year 1964-65, the applicant bad used the method of accounting which was different from the previous years. The learned counsel for the applicant had sufficiently demonstrated that in the manufacturing process of silk fabrics from Silk yarn there is only one stage of weaving yarn into such cloth and, therefore, no question of maintaining stage-wise production account arises in this. The Department in its reply has not disputed this aspect but has only urged that this contention was not raised at the time of assessment. In view of the above position we are of the view that the addition of Rs.1,25,000 to the gross profit disclosed by the applicant for the year 1964-65 under section 13 of the Act was not justified in the circumstances of the case. S.M. Yousuf and Brothers v. Commissioner of Income Tax – [1974] 29 TAX 120 (H.C.Kar.) 1792.
Book results are not liable to be rejected on mere ground of unvouched cash sales.
The finding of the Tribunal would show that the Tribunal in fact accepted the method of accounting employed by the assessee and even
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the results shown by the assessee‟s books of accounts. But the Tribunal felt dissatisfied only with some of the cash sales which were not verifiable and some of the expenses which were either not vouched or not verifiable. But, nowhere either in the order of the assessing officer or in the order of the Appellate Tribunal, it has been found as to what is the proportion of the unvouched and unverifiable cash sales to the total cash sales or the proportion of unvouched or unverified expenses to the total expenses incurred by the assessee in the purchase of wool from various sources and in processing the wool for the purpose that it may be properly marketed, unless such proportion is substantial, that is, such proportion creates doubts with regard to the genuineness of the assessee‟s accounts, it may not ordinarily be proper to reject outright the results of the books of accounts with regard to unverified cash sales or unverified cash expenses. The Tribunal was therefore, not entitled to confirm the rejection of the book result of the assessee‟s Mithadar business. Cases referred to: Civil Reference No. 28 of 1960, decided on 28.2.1962 (Unreported); Dhakeshwari Cotton Mills Ltd., v. Commissioner of Income Tax [1954] 26 ITR 775.
Augustine C. Paul & Co., Karachi v. Commissioner of Income Tax, South Zone, West Pakistan, Karachi – [1967] 16 TAX 73 (H.C.Kar.) 1793.
Accounts were maintained in the same method as accepted in earlier year held that alone is no good ground for acceptance of the accounts in assessment year.
The assessee carried on business in toys. The Income Tax Officer rejecting the book version estimated the sales and applied thereto uniform profit rate of 35 percent. The assessee‟s appeals failed both before the Appellate Assistant Commissioner and the Appellate Tribunal. The Appellate Tribunal took the view that there being no reliable stock data and the cash sales being not verifiable the Income Tax Officer was right in rejecting the book version. The Tribunal also held that the rate of 35 percent gross profit adopted by the department was proper in the circumstances of the case on account of the stoppage of O.G.L. and utilization of the imported stock-in-trade for business. Against the Tribunal‟s order the assessee filed a reference application under section 66(l) of the Income Tax Act requiring the Tribunal to refer to the High Court the question whether the rejection of the books of account and the application of the proviso to section 13 of the Income Tax Act was justified. The Tribunal rejected the application holding that no question of law arose out of its order. On further
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reference under section 66(2) of the Act the assessee‟s counsel contended before the High Court that the Income Tax Officer and the appellate authorities were not justified on the facts and circumstances of the case in rejecting the books of account as according to him they were kept properly and in the manner in which they had been kept before. Held,
that the question raised by the counsel of the assessee is purely a question of fact and not a question of law. No question of law irises out of the order of the Income Tax Appellate Tribunal.
The rejection of the books of account depends upon numerous circumstances and the reasons for doing so vary with each other. The fact that the books of account were being maintained in the same manner in which they were previously done and that the books of account were accepted in the earlier years would be no justification for pressing into service the argument that the books of account for the accounting years under reference should also have been accepted. The position in law, therefore, is crystal clear that where the books of account have been maintained in a manner from which the entries in the books of account cannot be verified and there is no quantitative tally from the material purchased by the assessee it can be a good ground for not accepting the books of account. The Income Tax Officer under these-circumstances are within their legal bound to assess the income of the assessee by applying proviso to section 13 of the Income tax Act. Case distinguished: Horoon Textile Mills Ltd., v. Commissioner of Income Tax [1966] 14 TAX 167. Cases relied on: Pokhardas Dwarkadas, Karachi v. Commissioner of Income Tax [1960] 2-TAX (Suppl.-156); Veeriah Reddiar v. Commissioner of Income Tax [1960] 2 TAX 130 and S. N. Namasivayan v. Commissioner of Income Tax [1960] 2 TAX 277 (S.C.)
Rathna Tea Estate, Dacca v. Commissioner of Income Tax, Dacca – [1965] 11 TAX 176 (H.C.Dacca) 1794.
“Method of accounting regularly employed”, meaning of.
The word “regularly” (in section 13 of the Income Tax Act) has nowhere been explained. But certainly it is not synonymous with the words “perpetual” or “permanent”. In our view it seems the intention, underlying this expression is that if it appears that the assessee concerned means to adopt the changed method of accounting for the
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year under assessment as also for subsequent years at the relevant time then it cannot be contended that it would be a departure from the rule underlying the principal clause of section 13. The section does not indicate by an express language or by implication that the assessee is not permitted to adopt a changed method of‟ accounting provided he does not mean to adopt such a changed course only for a casual period and does not mean to evade collection of taxes. The proviso under section 13 is there to safeguard the interest of the department concerned. If by reason of such changed mode or method of accounting it becomes unintelligible to the Income Tax Officer and if in his opinion the income, profits and gains cannot properly. be deduced therefrom then it will be in his discretion to make the computation upon such basis and in such manner as the Income Tax Officer may determine. The department is bound by the choice of the assessee in the matter of changing the method of accounting subject to the conditions as indicated above. Cases relied on : Sarupchand v. Commissioner of Income Tax (1936) 4 ITR 420; Commissioner of Income Tax v. Sarangpur Cotton Manufacturing Co. Ltd. (1938) 6 ITR 36 and Dacca Picture Palace v. Commissioner of Income Tax (unreported). Cases distinguished : Commissioner of Income Tax v. Ahmadabad New Cotton Mills Co. Ltd. (57 l.A. 21) and Commissioner of Income Tax v. Maharajadhiraja Sir Kamtshwar Singh of Darbhanga (1942) 10 ITR 214. _______________
SYSTEM OF ACCOUNTING
Commissioner of Income Tax v. Anwar Enterprises, Sialkot – [1999] 79 TAX 283 (H.C. Lah.) 1795.
On CIF sale value, the Department‟s action of calculating taxable income by deducting shipping and profit expenses held to be incorrect.
Seen from the statutory scheme of computation of tax liability of assessee, it is very clear that the entries of income do not play any role. The Assessing Officer is to apply a comprehensive mechanism to determine the tax liability. What section 32 of the Ordinance enacts is simple that Assessing Officer has a discretion to reject the defective/discrepant accounts maintained by the assessee or the method of accounting and use a reasonable method to assess his liability. The power to do so is not contained in section 32 but is
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embodied in sections 60 to 65 of the Ordinance. We are accordingly clear in our mind that computation or profit and gains/taxable income in such eventualities is not done under section 32 but under sections 60 to 65 and any other enabling provision of the Ordinance. Our conclusion is fortified by the notes furnished by the learned counsel for both the sides. One thing clearly emerges from these notes that in case of CIF sale, the Income Tax Officer while calculating the taxable income of the assessee deducts the expenses incurred by the taxpayer on shipping and freight of export goods. Having regard to this scenario of the case we are absolutely clear in our mind that these tax references do not raise any question of law arising from the orders of the Income Tax Appellate Tribunal. Cases referred to: E. Clemens Horst Co. v. Biddell Bors. (1911) 1 KB 934; Dhakeshwar Prasead Narain Singh v. Commissioner of Income Tax, Bihar and Orissa (1936) 4 ITR 71; Commissioner of Income Tex Companies-III, Karachi v. Krudd Sons Ltd. (1994 SCMR 229); Star Re-roiling Mills v. Commissioner of Income Tax (1974) 30 TAX 27 (H.C.Kar.) = (1974 PTD 200); Prime Chemicals Limited v. Federation of Pakistan etc. (NLR 1995 TAX 51) and Samina Shaukat Ayub v. Commissioner of Income Tax, Rawalpindi [1981] 43 TAX 18 (S.C.Pak) = (PLD 1981 SC 85).
Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) 1796.
Different system of accounting explained.
The assessee was carrying on money-lending business. For recording the repayments from his borrowers, he maintained two registers. In the Deposit Register were recorded all receipts without making any allocation between interest and repayment of loan. Later, in subsequent years, he would make such allocation and record interest receipts in the interest register. The amount so recorded used to be returned as interest income and assessment was being made accordingly. In 1926-27, however, the Income Tax Officer not only assessed the income so returned, but also made an allocation towards interest out of the receipts recorded in the „deposit register‟ during the accounting year. The same approach was adopted in the next year. The question was whether in view of the method of accounting regularly adopted by the assessee, the action of the Income Tax Officer was justified. Held that where an assessee keeps his books on a cash basis disclosed to the revenue authorities and the officer accepts that basis, it is clear that the calculation must be based on actual receipts in the year of computation. Here, however, the assessee kept his books on a hybrid
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Income Tax Digest.
system and it was his practice to enter sums as he received them in a deposit register, without discriminating between interest and capital payments, and then subsequently to allocate and treat as income certain portions of these sums which he attributed to interest. What the Officer was to compute is not the assessee‟s receipts but the assessee‟s income and in dubio what the assessee himself chose to treat as income may well be taken to be income and to arise when he so chose to treat it. The sums which the officer had brought into account from the interest registered in so far as consisting of allocations from sums received in previous years had never borne tax and the assessee could not complain if the Officer agreed with the assessee in treating them as income of the year in which the assessee himself first thought fit to so regard them. There was nothing contrary to principle in the computation of an assessee‟s total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous years which had been held in suspense and no part of which had previously been returned as income. Thus, the Income Tax Officer was justified. Commissioner of Income Tax v. P.L.S.M. Concern – [1934] 2 ITR 417 (Rangoon) 1797.
Basic requirements of method of accounting
The intention of the Legislature in enacting section 13 of 1922 Act was that for Income Tax purposes the assessee should be entitled to make use of any method of accounting that he chooses to adopt, but (a) he must follow the selected method regularly, and is not to be allowed to change his system of book-keeping from year to year or so frequently as to prevent a fair estimate of his income, profits and gains de anno in annum from being ascertained; (b) if the method employed is such that in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine; (c) what the officer is directed to compute is not the assessee‟s receipts but the assessee‟s income, and in dubio what the assessee himself choose to treat as income may well be taken to be income and to arise when he so chooses to treat it; although book entries purporting to relate to the receipt of income are not necessarily conclusive as to the quantum of the income to which they purport to refer, for the real income, profits and gains that have accrued during each accounting year are in every case to be determined by the Income Tax Officer as a matter of fact; and (d) what are chargeable to Income
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Tax in respect of a business are the profits and gains of a year and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise one would not arrive at the true profits and gains. But the losses must be incurred in that year. When setting out to ascertain the profits and gains of one year, loss which had in fact been incurred before the commencement of that year cannot be deduced, since by doing so one would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant. Fatehchand Chhakodilal v. Commissioner of Income Tax – [1945] 13 ITR 198 (Nag.) 1798.
Question as to type of method of accounting adopted by assessee, is a question of fact.
Question as to type of method of accounting adopted by assessee, is a question of fact. Dbakesbwar Prasad Narain Singb v. Commissioner of Income Tax – [1936] 4 ITR 71 (Pat.) 1799.
In commercial sense profits include accrued interest, even though it is unrealised.
The assessee, a money-lender, maintained only personal accounts of debtors in which the interest which accrued from year to year was calculated and entered, and the amounts actually realised as interest were also entered, but did not maintain a separate interest account or ledger or a profit and loss account. When the Income Tax Officer adopted accrued interest as the income of the assessee, he contended that unrealised interest could not be taxed, and it was only the realised interest that could be taxed. Held that in view of the method of accounting adopted by the assessee, accrued interest though not realised, could be taxed. Ramkumar Kedarnath v. Commissioner of Income Tax – [1937] 5 ITR 261 (Bom.) 1800.
Interest / Commission, accrual under mercantile system of accounting.
In mercantile system of accounting, commission earned though not received in the year is income.
1350 Section 32
Income Tax Digest.
Dhakeshwar Prasad Narain Singh v. Commissioner of Income Tax – [1936] 4 ITR 71 (Pal.)
In case of a moneylender, it is open to Income Tax Officer to assessee either upon a cash basis or upon a mercantile basis but in later case accrued interest could only be dealt with if a profit and loss account was drawn up. Feroze Shah v. Commissioner of Income Tax – 4 ITC 315 (Lahore) 1801.
Finding that the assessee‟s accounts were kept on mercantile system is a finding of fact.
A finding that the assessee‟s accounts were kept on mercantile system is a finding of fact, even if the assessee has not maintained stock accounts or profit and loss accounts. _______________
APPLICATION OF SUB-SECTION (3) AND PROVISO
Ch.Karamat Hussain v. Commissioner of Income Tax, Azad Jammu and Kashmir Council, Muzaffarabad and another – 2001 PTD 1174 (S.C.AJ&K) 1802.
Application of section 32 vis-a-vis question of law.
The learned counsel has referred to a case reported as Messrs Mian Muhammad Sharif & Co. v. Commissioner of Income Tax (1987 SCMR 1254), wherein it has been held that the assessee has the option to choose any method of accounting but is bound to show that he has followed the method regularly, i.e., the method of accounting. However, when the Income Tax Officer is of the opinion that the income and gains cannot properly be deduced from the accounts, then he is clothed with the statutory authority to compute the income of an assessee upon such basis and in such manner as he may determine. Thus, it was held that the Income tax Authorities were justified in computing the gross profit under section 13 of the Income Tax Act, 1922. We have given due consideration to the arguments. The contention of the learned counsel for the respondents that the references filed by the appellant before the High Court were incompetent because no law point was involved, is not tenable at this stage because no such point appears to have been taken before the High Court and no cross appeals have been filed before this Court. Therefore, it is too late in the day for the respondents to contend that the points agitated by the appellant in the High Court were not law
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points and the reference were not competent under section 136 of the Income Tax Ordinance. Printers Combine (Mercantile) Ltd., Karachi v. Commissioner of Income Tax, Karachi (West), Karachi – [1984] 50 TAX 183 (H.C.Kar.) 1803.
Accounts of assessee regularly kept, vouched and variable. Accounts were rejected on the ground that rate of gross profit shown in the books is very low without any evidence or material in support of the finding, held that proviso to section 13 of 1922 Act could not invoked.
No doubt gives a discretion to Income Tax Officer to reject the accounts books of assessee provided assessee does not adhere to method of accounting regularly employed or if the method employed by assessee is such, that in the opinion of the Income Tax Officer the income, profit and gains cannot properly be worked out therefrom. In the present case we find, that neither Income Tax Officer in his impugned orders nor the Appellate Tribunal in its order, dated 17th July, 1972 have stated, that the method of accounting followed by the assessee was not regularly employed by him nor it is mentioned in the said orders, that the method employed / adopted by the assessee was such, that in the opinion of the Income Tax Officer the income, the profits and the gains cannot properly be worked out therefrom. There is nothing in the impugned orders to show, that there was any evidence on record, that the account books maintained by the assessee were manipulated in respect of the orders secured by the assessee, during the years in question. In the absence of such finding of fact supported by material on record, proviso 1 of section 13 of the Income Tax Act, 1922 could not be available to the Income Tax Officer for rejecting trading accounts of the assessee. In the present case we find, that neither Income Tax Officer nor Appellate Tribunal found any irregularity in the method of accounting employed by the assessee, which were regularly kept, were duly vouched and verifiable. The Income Tax Officer could not point out a single discrepancy in the said accounts nor he has mentioned any material on the basis of which he could have come to the conclusion, that the orders secured by the assessee during the years in question were far below the actual orders secured by them, during the years in question. The additions thus made by the Income Tax Officer and Tribunal over and above the income disclosed by the trading accounts of the assessee are without any basis and / or material on record and
1352 Section 32
Income Tax Digest.
cannot be sustained, under the proviso (1) to section 13 of the Income Tax Act, 1922, in our opinion. Cases referred to: Commissioner of Income Tax Lahore Zone, Lahore v. Choudhri Brothers [1980] 42 TAX 119 (S.C); Muhammadi Textile Mills Ltd. v. Commissioner of Income Tax (East), Karachi [1982] 45 TAX 140; S. M. Yousaf & Bros. v. Commissioner of Income Tax [1974] 29 TAX 120; Star Rolling Mills v. Commissioner of Income Tax [1974] 30 TAX 27; (1982 PTD 185); (PLD 1979 S.C. 949) and 87 ITR 370.
Haider Ali Rajab All & Company v. Commissioner of Income Tax – [1980] 41 TAX 158 (H.C.Kar.) = 1980 PTD 1 1804.
In the absence of stock register and other materials to corroborate the book version, Income Tax Officer justified to reject book version by application of proviso to section 32.
It is for the Income Tax Authroities to consider all the material which are placed before them and after taking into account in any case the absence of stock register and other materials they are of the opinion that correct profits and gains cannot be deduced from the accounts kept by the assessee then they would be justifed in applying the proviso to section 13. This is what happened in this case and on the materials before the Income Tax Officer he was clearly of the opinion that the method of accounting employed by the firm was such that in his opinion, the income, profits and gains could not be deduced therefrom as such computation was made by him upon such basis and in such a manner as he himself determined. The reasons advanced in the assessment order by Income Tax officer clearly show that the conclusion that he has reached was quite justified on his part. I, therefore, find that there was „sufficient material‟ not only „any material‟ before the Income Tax Tribunal to have come to the conclusion as is mentioned in the question referred to for our opinion. Cases referred to : G.I.M. Gregory & Co. [1937] 5 ITR 12; Pioneer Sports Ltd., Sialkot v. Commissioner of Income Tax, Punjab and NWFP [1934] 2 ITR 305; Pandit Bros. v. Commissioner of Income Tax, Delhi [1954] 26 ITR 159; S. Veerish Beediar v. Commissioner of Income Tax Travancore-Cochin, Banglore [1960] 38 ITR 152 = [1960] 2-TAX (III-130); A.S. Sivan Pillai v. Commissione rof Income Tax, Madras [1938] 34 ITR 328; Commissioner of Income Tax v. Rashid Textile Mills Ltd. Civil Reference No. 28 of 1960; Nasir Industries v. Commissioner of Income Tax, South Zone, Karachi (PLD 1967 Kar. 561) = [1967] 15 TAX 84; Commissioner of Income Tax v. Kassim Ali Ismail (PLD 1963 Kar. 382) and Punjab Trading Co. Ltd. v. Commissioner of Income Tax Simla [1964] 53 ITR 335.
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Muhammad Yousuff v. Commissioner of Income Tax, East Pakistan – [1960] 2-TAX (Suppl.-146) (H.C.Dacca) = 1960 PTD 280 = 1960 PLD 298 1805.
Principles embodied is section 13 of the 1922 Act could be adopted in dealing with case falling under section 23(3) of the 1922 Act.
The assessee supplied certain bullocks and heifers to the Commonwealth Relations Department at the prices fixed under the contract according to their sizes. The accounts being unverifiable were rejected by the Income Tax Officer who estimated the profit under sections 13, while making the assessment under section 23(3). On appeal the Appellate Assistant Commissioner upheld the estimate of income but allowed certain admissible expenses. On further appeal the Tribunal set aside the appeal with the directions that the matter might be reconsidered and such further sums as might be deemed necessary. The Appellate Assistant Commissioner adopted a rough and ready method and estimated the profits of the assessee by taking the average rate of the contract rates and average of the market rates and a rough average for the cost of the dead animals. The Tribunal confirmed the order of the Appellate Assistant Commissioner. Assessee‟s application under section 66(1) having been refused by the Tribunal he made an application under section 66(2) to the High Court praying that the Tribunal be directed to state the case and refer to the High Court the question of law formulated by him. The High Court accepted the application and directed the Tribunal to refer the question of law on the issue of the standard rate applied in the case. In the course of the judgment their Lordships observed that: “It is true that where the accounts kept by the assessee are in such a form that the income, gains and profits could not - be deduced therefrom, the proviso to section 13 is applicable and the Income Tax Officer is bound to make a computation on such basis and in such manner as he might determine and the High Court has no authority over him and is not, in a sense of the word, a court of appeal but the Income Tax Officer must exercise his judgment and must act justly. The question whether the Income Tax Officer committed any mistake in applying the standard and whether the - standard adopted would lead to a fair justice is a question of law which justifies a reference to the High Court.”
1354 Section 32
Income Tax Digest.
Cases relied: Gurmukh Singh v. Commissioner of Income Tax, Lahore (AIR 1944 Lah. 353); and Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal (AIR 1955 S.C. 65). Cases referred to : R.B.L. Panna Lal v. Commissioner of Income Tax, Punjab (AIR 1927 Lah. 691); Commissioner of Income Tax, U. P. and C.P. v. Badridas Ramrai Shop, Akola, Onwer Laxminarayan Badridas Sharwagi (AIR 1937 P.C. 133); Abdul Bari Chaudhuri v. Commissioner of Income Tax, Burma (AIR 1931 Rang. 194); Ganga Ram Balmokand v. Commissioner of Income Tax (AIR 1931 Lah. 432); and Prem Sagar v. Commissioner of Income Tax (AIR 1932 Lah. 178). Judicial analyses : It is true that where accounts kept by the assessee are in such a form that the income, gains and profits could not be deduced therefrom, the proviso to section 13 of 1922 Act is applicable. But it has been established by the judicial decisions that the Income Tax Officer must exercise his judgement, and that he must act justly.
Commissioner of Income Tax v. Sarangpur Cotton Mfg. Co. Ltd. – [1938] 6 ITR 36 (PC) 1806.
If income cannot be properly deduced from accounts of assessee, it is duty of Income Tax Officer to exercise his judgment; his power is not discretionary
Section 13 of the 1922 Act relates to a method of accounting regularly employed by the assessee for his own purposes - in this case for the purposes of the company‟s business and does not relate to a method of making up the statutory return for assessment to Income Tax. Section 13 of the 1922 Act clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that though the profits brought out in the accounts is not the true figure for Income Tax purposes, the true figure can be accurately deduced therefrom. The simplest case would be where it appears on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which, nevertheless, it is possible to deduce the true profits from the accounts, and the judgment of the Income Tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income Tax Officer as a discretionary power. The view that the Income Tax Officer is prima facie entitled to accept the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee, is not a correct view. It is the duty of the Income Tax Officer, where there is such a method of
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accounting to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. The assessee-company had been preparing its accounts adopting a certain price to value the closing stock. In the assessment for 1927 28 the revenue authorities revalued the closing stock as they found it to be grossly undervalued. For the next three years the closing stock was similarly revalued and the figure of revalued, closing stock was adopted as the value of opening stock for the succeeding years. For the assessment year 1931-32 the company prepared its accounts on the old basis as usual but an accompanying letter explained the adjustments to be made on the basis of the revalued stock and submitted the return accordingly. The Income Tax Officer, however, ignored the adjustments and adopted only those figures as disclosed by the assessee‟s printed accounts on the ground that he was bound by the method of accounting regularly employed by the company. The question was whether the Income Tax Officer‟s approach was correct. Held that, in the instant case, it was the duty of the Income Tax Officer to consider whether, in his judgment, the income, profits and gains for the purpose of section 10 of the 1922 Act could be properly deduced from the accounts. He never applied his mind to this question, but held himself entitled-to hold the assessee to the figures of profit brought out in these accounts. If the Income Tax Officer had exercised his judgement he would not reasonably have come to any other opinion that the profit shown in the profit and loss account could not be the true figure for Income Tax purposes. The undervaluation in the 1930 accounts was of the same nature and on the same basis as that in previous accounts, which was treated as gross undervaluation. The Income Tax Officer could not reasonably conclude that the true profits could be properly deduced from a gross undervaluation. Commissioner of Income Tax v. MaharaJadhlraja Kameshwar Singh of Darbhanga – [1933] 1 ITR 94 (PC) 1807.
Income Tax Officer‟s method of accounting after rejecting assessee‟s method is open to scrutiny in appeal.
The fact that the Income Tax Officer has justifiably proceeded on a basis and in a manner of his own in computing the assessee‟s income, profits and gains does not, of course exempt his computation from examination on appeal and if it appears that he has adopted a wrong
1356 Section 32
Income Tax Digest.
method, the assessment may be set aside. The Income Tax Officer is 1not entitled to make a guess without evidence; where an estimate has been made, it is for the assessee to displace it. Jewan Shah Maya Shah v. Commissioner of Income Tax – [1934] 2 ITR 343 (Lahore) 1808.
Proviso to section 13 of 1922 Act is not applicable if profits and gains can be deduced from accounts.
The department cannot be heard to complain that if a particular method of accounting had been employed, there was possibility of the assessee earning more income, profits and gains. That is a matter entirely for the assessee. It may be that the method of accounting employed by the assessee would give him benefit in certain years. The existence or the sufficiency of the material on which an Income Tax Officer has come to the conclusion that the method of accounting employed is not such as to disclose the true income, profits and gains is undoubtedly open to review by the appellate authorities. The opinion of the Income Tax Officer on that question should be based on good grounds. His conclusion in that regard can be challenged before the appellate authorities. The assessee, a rural moneylender, was following a method of accounting under which all repayments were taken to the creditors‟ accounts and no apportionment between principal and interest was made. It was only when the debtor came for settlement that adjustments were made towards interest. As found by the Tribunal it was however possible to deduce profits and gains from the accounts which had been regularly kept under this method over a long period. Held that application of the proviso to section 13 in such a case was not justified. Ganga Ram Balmokand v. Commissioner of Income Tax – [1937] 5 ITR 464 (Lahore); Rulla Mal Raunak Ram v. Commissioner of Income Tax – [1934] 2 ITR 329 (Lahore) 1809.
Income Tax Officer is the only proper person to decide whether accounts are such as reflect true income of assessee.
Under the terms of the proviso to section 13 of the 1922 Act the Income Tax Officer is the only proper person to decide whether the accounts are such as reflect the true income of the assessee, and if he holds the contrary, he is at liberty to compute the taxable income of the assessee upon such basis and in such manner as he may determine.
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PR.AL. M. Muthukaruppan Chettiar v. Commissioner of Income Tax – [1939] 7 ITR 76 (Mad.) 1810.
Income Tax Officer may adopt a method of accounting which he prefers where the assessee has no regular or proper method, but he cannot reject assessee‟s books.
Section 13 of the 1922 Act relates only to the method of accounting, and the books cannot be rejected merely because the method of accounting does not appeal to the Income Tax Officer. The Income Tax Officer may adopt the method of accounting which he prefers but he cannot reject the assessee‟s books by reason of the provisions of section 13. Nor has the Income Tax Officer the right to reject the books in question because they did not relate to the foreign business. Commissioner of Income Tax v. Khemchand Ramdas – [1940] 8 ITR 159 (Sind) 1811.
Section 13 of the 1992 Act cannot be divorced entirely from section 23(3) of 1922 Act because it is only in an enquiry under sub-section (3) of section 23 that section 13 can operate.
No conflict exists between section 23(3) and section 13. In proper cases the sections work together. But the proviso to section 13 does not have reference to the manner in which information is obtained either by private enquiries or otherwise. It relates to the manner in which material before an Income Tax Officer shall be used. Section 13 cannot be divorced entirely from section 23(3) of the 1922 Act because it is only in an enquiry under sub-section (3) of section 23 that section 13 can operate. Gunda Subbayya v. Commissioner of Income Tax – [1939] 7 ITR 21 (Mad.) 1812.
Section 13 of the 1922 Act adds nothing to and takes away nothing from section 23(3) and thus it does not have to be read in conjunction with section 23(3).
All that section 13 of 1922 Act really says is that, if the method of accounting employed by the assessee is a method which does not properly disclose the income, profits and gains of the assessee, the Income Tax Officer can adopt his own method. But in doing so he must have reference to the accounts before him as section 13 does not contemplate the rejection of the accounts. Section 13 adds nothing to and takes nothing away from section 23(3) of the 1992 Act.
1358 Section 32
Income Tax Digest.
Ganga Ram Balmokand v. Commissioner of Income Tax – [1937] 5 ITR 464 (Lahore) 1813.
While making assessment under section 23(3), Income Tax Officer can invoke proviso to section 13 of the 1922 Act.
While making assessment under section 23(3), Income Tax Officer can invoke proviso to section 13 of the 1922 Act. Commissioner of Income Tax v. Achrulal – [1938] 6 ITR 255 (Nag.) 1814.
Where stock is undervalued proviso to section 13 and not section 23(3) will be invoked.
A mode of accounting might be perfectly regular in the sense that it follows one of standard methods and yet not be the one regularly employed by the assessee, and that is what one has to see under section 13. If the Income Tax Officer noticed that the assessee had undervalued his closing stock, the proper course would be to invoke the provisions of the proviso to section 13 and not to make a flat rate assessment under section 23(3) of the 1922 Act. Section 23 deals with matters of assessment and not with the „computation of the income, profits and gains for the purposes of sections 10, 11 and 12‟. It deals with the „return‟ and not primarily with the accounts. Ganeshi LaI Chhappan LaI v. Commissioner of Income Tax – [1941] 9 ITR 81 (All.) 1815.
Where Income Tax Officer has issued notice under section 23(2)/22(4) of the 1922 Act a further notice is not necessary while applying proviso to section 13 of the 1922 Act.
Where the Income Tax Officer has issued notice under section 23(2), 22(4) of the 1922 Act, a further notice is not necessary while applying proviso to section 13. Feroze Shah v. Commissioner of Income Tax – 4 ITC 315 (Lahore) 1816. Manner of computation of profits and gains under section 13 of the 1922 Act is entirely within the discretion of Income Tax Officer, and unless it is shown that the exercise of such discretion was illegal or arbitrary, no question of law will arise. The manner of computation of profits and gains under section 13 of the 1922 Act is entirely within the discretion of the Income Tax Officer, and unless it is shown that the exercise of such discretion was illegal or arbitrary, no question of law will arise.
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Pioneer Sports Ltd. v. Commissioner of Income Tax – [1933] 1 ITR 216 (Lahore) 1817.
Question as to whether Income Tax Officer was justified in proceeding under the proviso to section 13 of the 1922 Act and not under the first part of that section, is a question of law.
The assessee‟s account books showed that it charged lesser price from a particular customer than that charged from other customers and that though the turnover for the year of assessment of the assessee was practically the same yet the net profits were much lower than those of previous years, and the assessee was assessed under the proviso to section 13 of the 1922 Act. Held that the case involved a question of law as to whether the Income Tax Officer was justified in proceeding under the proviso to section 13 and not under the first part of that section. Haji All Jan v. Commissioner of Income Tax [1934] 2 ITR 452 (Lahore); Diwan Chand v. Commissioner of Income Tax – [1934] 2 ITR 382 (Lahore) 1818.
No question of law arises from Income Tax Officer‟s order holding that accounts are not maintained in such a way as to indicate true income, profits or gains
Under the proviso to section 13 of the 1922 Act the Income Tax Officer is the sole arbiter on the question of the possibility of deducing the income, profits and gains of the assessee from the method of accounting employed by him, and no question of law arises from his order where assessment is based on evidence. Pioneer Sports Ltd. v. Commissioner of Income Tax – [1934] 2 ITR 305 (Lahore) 1819.
Question as to whether there is any evidence on which Income Tax Officer could have come to decision that method of accounting is such that gains could not be computed except by arbitrary method contemplated by proviso to section 13 of the 1922 Act, is a question of law.
It is true that the Income Tax Officer is the sole arbiter for determining under the proviso to section 13 of the 1922 Act as to how the profits are to be computed. But the question as to whether there is any evidence on which the Income Tax Officer could come to the decision that the method of accounting is such that the gains could not be computed except by the arbitrary method contemplated by the proviso, is a question of law.
1360 Section 32
Income Tax Digest.
Narayan Atmaram Patkar v. Commissioner of Income Tax – [1934] 2 ITR 486 (Bom.) 1820.
Where Income Tax Officer makes the best judgment assessment under proviso to section 13 of 1922 Act, it may be shown that he has proceeded on a wrong basis of law, but it cannot be said that in every case where Income Tax Officer proceeds under that proviso a question of law arises as to whether his assessment is legal or not.
Where the income tax authorities are of opinion that no regular method of accounting has been employed by the assessee or that the method employed is such that the income, profits and gains could not properly be deduced therefrom, this is a decision on a question of fact binding on the High Court. The only question that can arise in such a case is whether the method adopted by the income tax officer of assessing the assessee was a legal method, and, though it can be shown that the income tax officer has proceeded on a wrong basis of law, yet it cannot be laid down that in every case where an Income Tax Officer proceeds under the proviso to section 13 a question of law arises as to whether the assessment is legal or not. Where the Income Tax Officer, having found that the books of the assessee, who was a money-lender, were not such as to enable the income to be deduced therefrom, took the capital as shown in the books subject to a deduction in respect of part of that capital which the assessee alleged to have lost, and on that balance of capital the Income Tax Officer charged the assessee what he considered a fair rate of interest, it was held that no question of law arose. Pioneer Sports Ltd. v. Commissioner of Income Tax – [1934] 2 ITR 305 (Lahore) 1821.
Others.
Where company never used to keep a stock register and refusal of Income Tax Officer to accept accounts was not due to any error in method of accounting but because he considered rate of profits shown to be unreasonably low, Income Tax Officer was not justified in making an assessment under proviso to section 13 of 1922 Act. _______________
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POWER OF ASSESSING OFFICER
Ch.Karamat Hussain v. Commissioner of Income Tax, Azad Jammu and Kashmir Council, Muzaffarabad and another – [2001 PTD 1174 (S.C.AJ&K) 1822.
Assessing Officer‟s power under section 32(3) approved.
A mode of calculation of income or profits by an Income Tax Officer may not be according to the wishes of an assessee but all the same any mode of calculation of profits etc. which does not contravene any rule of law or is not patently perverse, cannot be dubbed as illegal, especially so when the Income-tax Officer has been authorized to compute the income, profit and gains „on such basis and in such manner as he thinks fit‟. It may be further observed that the orders of the Income-tax Officer in other cases, referred to above, wherein the gross profit was calculated on purchase price are not relevant, especially so when the same pertain to tobacco business and not the timber business. It may be observed that while adopting the method of calculation of gross profit or income, the nature of business and assessment years are important factors in view of the fluctuations of profit in a particular business. Thus, it cannot be said that identical formula should necessarily be applied for the calculation of the profits in all kinds of business ventures while exercising discretionary powers under section 32(3) of the Ordinance or such powers are to be exercised irrespective of the period of assessment by applying a uniform formula. Zafar Saleem Bros. Ltd., Karachi v. Commissioner of Income Tax, (Central), Karachi – [1984] 50 TAX 233 (H.C.Kar.) 1823.
Income Tax Authorities cannot estimate sales and gross profit rejecting book results without bringing any material on record.
If the assessee had employed a regular method of accounting and the accounts were maintained regularly, the Income Tax Officer was not entitled to reject the book results without finding any flaw, defect or discrepancy in the accounts. It was further held that even in cases where the accounts or the methods employed were rejected as being such that true income could not be deduced from it, the Income Tax Officer could not merely adopt a flat rate or make addition in the income arbitrarily and that he is required to base such additions on material or evidence of which due notice must be given to the assessee. Case referred to: Muhammadi Textile Mills Ltd. v. Commissioner of Income Tax, (East), Karachi [1982] 45 TAX 140.
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Income Tax Digest.
In the light of the above observations made from time to time by the High Courts in respect of the proviso to section 13 of the Act, it is to be seen whether the Income Tax Authorities in the present cases have acted properly. Reference has already been made to the assessment order for the year 1964-65 and the order of the Tribunal in respect of the same year in which it was held that this very assessee had been employing regular method of accounting. It also transpires from the order pertaining to the preceding year that the gross profit rate of 15% was arbitrary and not justified. It has not been held by the. Income Tax Officer or the learned Tribunal in the impugned orders that the assessee had not been employing regular method of accounting during the assessment years under consideration. From the impugned orders it further transpires that no rational basis has been adopted either by the Income Tax Officer or by the learned Tribunal in fixing the amount of gross sales and employing profit rate of 15%. Moreover, expenses in respect of Bardana and Railway Freights which were deleted in the assessment year 1964-65 were disallowed during the assessment years under consideration without any cogent reasons. Even parallel cases cited by the assessee were not considered. Cases referred to: Roshan Cloth House v. Commissioner of Income Tax, (East), Karachi [1983] 47 TAX 148 = 1983 PTD 63 : Mian Ghulam Murtaza v. Commissioner of Income Tax, Lahore [1982] 45 TAX 21 = 1981 PTD 180.
New Snow White Dry Cleaners, Karachi v. Commissioner of Income Tax (East), Karachi – [1984] 51 TAX 11 (H.C.Kar.) 1824.
Income Tax authorities can raise receipts on the ground that the details are not available.
That a new dry-cleaning plant was installed in 1971-72. This finding of the Income Tax Tribunal seems to be contrary to the finding of the Income Tax Officer recorded in the assessment order dated 15-6.1973 for the assessment year 1972-73 in which it has been observed that the second brand new plant went into operation some three years ago. However, in the assessment order of the assessment year 1971-72 it has been stated that the above new plant went into operation during the assessment year. Be that as it may, in the absence of any material to conclude that factually the applicant‟s out-put was more than, disclosed in the book results the simplicitor fact of installing a new plant does not justify the inference that the book results are not reliable. The applicant could not have proved in the negative except by producing the books of accounts. We are inclined to hold that the book results cannot be rejected merely on the basis of suspicion unless a finding of fact is recorded that on
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verification the account books disclose some defect or discrepancy which cannot reasonably be explained. We are also inclined to hold that the Income Tax Authorities once accept a particular method of accounting system adopted by an assessee and find it possible to determine profits on the basis of such accounting system, cannot reject the book results on the ground that the accounting system is defective in the absence of any glaring defect or discrepancy. We are also of the view that the proviso to section 13 cannot be pressed into service without recording a finding that the accounts are defective and the determination of profits on their basis is not possible. The rejection of the account books for the assessment years in question on the grounds referred to hereinabove by the Income Tax Officer and by the learned Income Tax Tribunal was not warranted by law and the rejection is based on surmises and conjectures. Mohammadi Textile Mills Ltd. v. Commissioner of Income Tax (East), Karachi – [1982] 45 TAX 140 (H.C.Kar.) 1825.
Accounts rejected on the ground that yield was low and percentage of gross wastage high held to be not sustainable in law.
If the assessee had employed a regular method of accounting and the accounts were maintained regularly the Income Tax Officer was not entitled to reject the book results without finding any flaw, defect or discrepancy in the accounts; and even in cases where the accounts or the method employed was rejected as being such that true income could not be deduced from it, the Income Tax Officer could not merely adopt a flat rate or make addition in the income arbitrarily. He is required to base such additions on material or evidence of which due notice must be given to the assessee. In the present case no irregularity was found in the method of accounting employed by the assessee company. The accounts had been regularly kept, they were vouched and were verifiable. The Income Tax Officer could not point out a single discrepancy nor did he have any material to suggest that the sale price, etc. were not according to the market reports. The Income Tax Officer found the yield to be low and the percentage of wastage to be high, as compared to the other mills similarly placed. But he gave no names of such mills, nor did he give any figures relating to yield and wastage given by such mills. In the present case any excess in invisible wastage would not warrant wholesale rejection of accounts and substitution of a flat rate of 20% as gross profits in the absence of any evidence or material in support.
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Income Tax Digest.
The additions thus made by the Income Tax Officer and the Tribunal over and above the income are without any basis and cannot be sustained under the proviso to section 13 of the Act. Cases referred to : Punjab Trading Co. Limited v. Commissioner of Income Tax (1965) TAX Vol. II-81; Seth Gurmuk Singh v. Commissioner of Income Tax Punjab (1944) 12 ITR 393; Dhiraj Lal Girdhari Lal v. Commissioner of Income Tax (1954) 26 ITR 736; Nugulakonda Venkata Subba Rao. v. Commissioner of Income Tax (1937) 31 ITR 781; Swami Brothers v. Commissioner of Income Tax; Travancore Cochin (1958) 34 ITR 123; RMP. Perianna Pilli & Co. v. Commissioner of Income Tax (1961) 4 TAX 230; Rajput Metal Works Limited v. Commissioner of Income Tax, Rawalpinidi (1976 PTD 119) = [1976] 33 TAX 1 (H.C.Lah.); S.M. Yousaf and Brothers v. Commissioner of Income Tax [1974] 29 TAX 120.
Crescent Textile Mills Ltd. v. Commissioner of Income Tax, Lahore – [1982] 45 TAX 47 (H.C.Lah.) 1826.
Declared version was found to be unreliable by the assessing officer. Held he was competent to reject it without pointing out any defect or fault in the books produced by assessee.
After the Income Tax Officer had found that the declared version of the production was unreliable he was competent to reject it even though he did not point out any defect or fault in the books produced by the assessee and that he was justified in taking resort to the first proviso to section 13 of the Income Tax Act for making a reasonably accurate estimate of the production. The basis which evolved in making his estimate has already been explained and we do not find that it was not reasonable. Mian Abdul Qayyum v. Commissioner of Rawalpindi Zone – [1981] 43 TAX 149 (H.C.Lah.) 1827.
Income
Tax,
Where entries in the account books were not found reliable by the assessing officer, he is competent to reject the accounts even if he is unable to find any specific fault in the said accounts books.
It is contended on behalf of the assessee that be had placed all his, relevant books of accounts before the Income tax authorities but they had not found any fault in them. Consequently, they were not competent to reject the same. We are unable to accept this contention for even if the Income Tax authorities arc unable to find any specific fault in the books of accounts they are competent to reject them if from the ambient circumstances it appears to them that the entries made therein are not reliable.
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As already pointed out while computing the income of the assessee the Income Tax authorities had taken the income of the assessee in the immediately preceding year into account. This was a relevant consideration as will appear from the observations made by the Privy Council in Commissioner of Income Tax v. Shop Badridas Ram Rat (AIR 1937 PC 133). We cannot, therefore, hold that in computing the income of the assessee the income tax authorities had acted arbitrarily or capriciously. Cases referred to: Miss Assia v. Income Tax Appellate Tribunal [PLD 1979 SC 949] = (1980) 41 TAX 1 and Sultan Textile Mills Ltd. v. Commissijner of Income Tax [1970 PTD 878] = (1970) 22 Tax 163 (H.C.Kar.). Cases distinguished : Rajput Metal Works v. Commissioner of Income tax [PLD 1976 Lah. 223] = (1976) 33 Tax 1 (H.C.Lah.) and Brush Ware, Lahore v. Commissioner of Income Tax (T.R. No. 112 of 1972).
Megna Industries Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi – [1980] 41 TAX 148 (H.C.Lah.) 1828.
Expression “in the opinion of the Income Tax Officer”.
The provision of section 13 give certain latitude to the assessing officer in employing the words “in the opinion of the Income Tax Officer”. The opinion of the Income Tax Officer has, therefore, to be given due weight unless it is shown that he acted in an arbitrary or capricious manner. If there is material on record to justify the exercise of the opinion formed by the Officer, the same cannot be questioned under section 66 of the Act. Cases referred to : Miss Asia v. Income Tax Appellate Tribunal (PLD 1979 SC 949) = (1980) 41 TAX 1 (S.C.Pak) and Ganga Ram Balmokand v. Commissioner of Income Tax (1937) ITR 464.
Megna Industries Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi – [1980] 41 TAX 148 (H.C.Lah.) 1829.
After discarding account books, Income Tax Officer should evolve a reasonable basis fur making the estimate.
Once the accounts have been rejected, then under section 13 of the Act, a computation has to be made “upon such basis and in such manner as the Income Tax Officer may determine”. Where the assessing officer discards the account books, he has to evolve a reasonable basis for making the estimate and he has to disclose that basis. Case referred to : Rajput Metal Works Ltd., Gujanwala v. Commissioner of Income Tax Rawalpindi [1976] 33 TAX 1.
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Income Tax Digest.
Case not approved : Commissioner of Income Tax v. Baijunath Prasad Mahadeo Prasad (1963) 7 TAX 10. _______________
GENERAL
M.S. Hameed Masood and Associates, Multan v. Commissioner of Income Tax, Lahore – [1979] 39 TAX 176 (H.C.Lah.) 1830.
Assessment made on net profit rate basis without allowing expenses and depreciation claimed held not valid in law.
There is, however, merit in the argument of the petitioner‟s learned counsel that the provisions of section 10 are mandatory. Obviously therefore, if the petitioner, on the facts of the case, qualified for the grant of overhead expenses and the depreciation claimed by him. The Tribunal‟s order in this respect does not satisfy requirements of law. No doubt the assessment order mentioned that 15 per cent net profit was inclusive of the expenses and depreciation claimed by the petitioner, but mere sweeping observations of the assessing officer, without passing a speaking order, in this respect is not the proper compliance with section 10 of the Act. In view of the facts and circumstances of the case, we are unable to uphold the applicability of the net profit rate without allowing the depreciation and other expenses claimed by the assessee. Cases referred to : (1964) 4 TAX 106 (Trib); Allahabad Glass Works v. Commissioner of Income Tax (1961) 42 ITR 439; Seth Nathuram Munnalal (1954) 25 ITR 216; Noor Muhammad Muhammad Saeed v. Commissioner of Income Tax, Lahore [1976] 33 TAX 243 and Commissioner of Income Tax v. S.M. Chitnavis (AIR 1932 PC 178).
Commissioner of Income Tax, South Zone, (West Pakistan), Karachi v. Manzur Qadir, Barrister-at-Law – [1966] 13 TAX 149 (H.C.Lah.) 1831.
Computation of income should be strictly in accordance with method of accounting regularly employed by the assessee.
During the material time the assessee was a practising Barrister enrolled as an advocate of the High Court of West Pakistan and a senior advocate of the Supreme Court of Pakistan. In the financial year 1957-58, relevant to the assessment year 1958-59, the assessee‟s account, which was maintained on „cash system‟ disclosed gross receipts of Rs.1,13,100. This sum excluded total the amount of Rs.1,16,000 due from certain clients who had agreed to pay the amounts as fees for the professional services rendered to them by the
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assessee. In respect of this total amount of Rs.1,16,000 the assessee entered into an arrangement with the respective clients to the effect that “instead of „his‟ receiving the amount of fees in cash in the relevant year of account he would accept an annuity bond from an Assurance Company ensuring annual payments spread over twenty years.” The assessee accordingly informed the Income Tax Officer in writing that under the arrangement the amount in question had been turned over by the clients to the Prudential Assurance Company for the purchase of annuities in his favour claiming that only so much of the amount out of the total sum of Rs.1,16,000 as received in the shape of annuities from the Assurance Company would be taxable in each year. The Income Tax Officer rejected the claim and added to the total income the entire sum of Rs.1,16,000 on the ground that “the moment a policy was purchased the amount which was paid for it became a „receipt‟ in his hands and that the mere fact that he will recover it in 20 installments does not in any way alter its nature”. The assessee unsuccessfully appealed to the Appellate Assistant Commissioner against the order of the Income Tax Officer. The Appellate Assistant Commissioner affirming the order of the Income Tax Officer held that what the assessee had achieved could easily be regarded first as receipt of professional fees and then any thing else although its present form was that of investment and the same money was locked up in it which was returnable only in a period of twenty years. The Appellate Tribunal, on further appeal by the assessee, reversed the decision of the Appellate Assistant Commissioner on the ground that “there was no receipt of income in the relevant year of account and, therefore, no part of the disputed amount was assessable in his (assessee‟s) hands in the relevant assessment year”. At the instance of the department the Appellate Tribunal referred the matter to the High Court. In the statement of the case, the Appellate Tribunal mentioned that “the annuity bonds granted by Prudential Assurance Company Ltd., are not negotiable or redeemable or saleable and are irrevocable; they are not refundable as they have no surrender value and they cannot be used for raising any loan and cannot be subjected to any commercial transactions”. The Tribunal further enclosed with the statement of the case a copy of certain letter from she Prudential Assurance Co. Ltd. addressed to the assessee for consideration of the court in deciding the issue involved. The High Court affirming the order of the Tribunal and applying certain tests laid down by Courts of Law:
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Income Tax Digest.
Held, that: (i)
there is no denial of the fact that the amount of money due to the assessee was not paid to him (the assessee) directly in that year and that the same was turned over to the Prudential Assurance Company for the purchase of annuities. It can, therefore not be said that the money had been received directly by the assessee;
(ii)
the payment of the money to the Assurance Company could not have the effect of payment to the assessee in so far as the Assurance Company did not receive the money as the agent of the assessee;
(iii)
as found by the Appellate Tribunal the bonds are not capable of being turned into money. The only amount that the assessee is entitled to in any year is the amount of the annuity and it would, therefore, not be incorrect to say that the money‟s worth of the bonds in any particular year is equivalent to the amount payable as annuity in that year; and
(iii)
this court cannot take into consideration facts which were not before the Tribunal when it passed the appellate order. Even if the letters made part of the paper-book are taken into consideration it would not alter the conclusions because the determination has to be based on the terms and conditions of the annuity bonds.
[Per MUHAMMAD YAQUB ALI J.]. - The answer given by us is confined to the particular facts of the case and no generalised conclusions can be drawn from it. Indeed, I would have found a little difficult to arrive at the conclusions that the amounts paid by the clients of the assessee to the Insurance Company for purchasing annuities for him was not money‟s worth but for the statement in the appellate order of the Tribunal that in the event of liquidation of the company the unpaid amounts will be refunded to the purchasers and will not pass on to the annuitant. In other words, the purchasers of the annuities had not completely parted with dominion over the amounts paid by them to the Insurance Company. Cases referred to: Commissioner of Income Tax v. Bombay Trust Corporation [1930] AIR 54 (P.C.); Commissioner of Income Tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (P.C.); Raja Raghunandan Prasad and another v. Commissioner of Income Tax [1933] 1 ITR 113 (P.C.); Gresham Life Assurance Society Ltd., v. Bishop
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[1903] 4 Tax Cases 464; Maharaja Kamakhaya Narain Singh v. Commissioner of Income Tax [1942] 10 ITR 177 and Alexander Tennant v. Robert Sinclair Smith [1892] A.C. 150. CONFIRMED by the honourable Supreme Court of Pakistan in 1971 SCC 376 = [1971] 23 TAX 280 (S.C.Pak.).
Haji Thread Manufacturing Co. Ltd., Korbaniganj, Chittagong v. Commissioner of Income Tax, East Pakistan, Dacca – [1966] 13 TAX 32 (H.C.Dacca) 1832.
Appellate Tribunal was held to be justified in taking into account profit rates of preceding years in determining the profit rate of the assessment year.
The assessee, a limited company, was dealing in sewing machine and thread and was also manufacturing the same. For the charge year 1957-58 the assessee declared gross profit rate of 5.3 per cent. The Income Tax Officer taking the view that the gross profit was abnormally low for this line of business raised the same to 24 per cent. The Appellate Assistant Commissioner setting aside the order of the Income Tax Officer accepted the rate as declared by the assessee. On further appeal, at the instance of the department, the Appellate Tribunal restored the rate adopted by the Income Tax Officer. In doing so the Tribunal took into account the profit rates applied in the preceding years‟ assessments. Before the High Court the question for decision was whether the Tribunal was justified in law in taking into account the rates of gross profit adopted in previous years. Held,
that in the circumstances of the case, the Tribunal was justified in law in taking into consideration matters of separate proceedings relating to earlier assessment years, that is, the rates of gross profit adopted in the previous years.
Rathna Tea Estate, Dacca v. Commissioner of Income Tax, Dacca – [1965] 11 TAX 176 (H.C.Dacca) 1833.
Valuation of closing stock at market price at the end of every year as per practice. There was a change to valuation at cost price in accounting year relevant to assessment year which is neither mala fide nor for a casual period held as permissible.
In making the assessment for the charge year 1960-61 the Income Tax Officer found that the assessee had valued the closing stock at cost price as against its valuation at the market rate which had been done in the previous years. He took the view that the value of the closing stock for this year also should have been shown at the market rate as
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Income Tax Digest.
before and upon that consideration he raised the value of the closing stock from Rs.2,87,191 to Rs.8,03,259 showing thereby a margin of Rs 5,15,468. The Income Tax Officer further disallowed a sum of Rs.1,643 claimed on account of legal expenses in defending the suit filed on behalf of the children of one M, son-in-law of one of the partners of the assessee tea estate, who was previously managing the said tea estate. The Appellate Tribunal affirmed the order of the Income Tax Officer holding that (i) “the modification now wanted by the assessee would be a departure from the method of accounting and cannot be permitted under section 13 of the Income Tax Act”, and (ii) the suit was an offshoot of family dissension which had no bearing with the carrying on of the business of the tea estate. On a reference: Held, that (i)
the only test which would make a change in the method of accounting permissible is that it should be a bonafide, not intended to evade taxes and that it should be intended to be employed regularly and not for a casual period. Neither the Income Tax Officer nor the Tribunal has found that the change in the method of accounting by showing the closing stock at cost price instead of at the market rate was in any way wanting in bona fides or that it was a mere casual change to evade collection of taxes; and
(ii)
in view of the finding of the Tribunal that the suit was an offshoot of family dissension which had no bearing with the carrying on of business of the tea estate the legal costs cannot be said to be an expenditure wholly and exclusively for the purpose of business of the tea estate within the meaning of section 10(2)(xvi) of the Income Tax Act.
Commissioner of Income Tax v. Badridas Ramrai Shop – [1939] 7 ITR 613 (Nag.) 1834.
Section 13 is not an assessment but a computation section.
Section 13 is not an assessment but a computation section. Commissioner of Income Tax v. Sarangpur Cotton Mfg. Co. Ltd. – [1938] 6 ITR 36 (PC) 1835.
Method of accounting means accounting adopted for assessee‟s business and not for submitting return.
The assessee-company had been preparing its accounts adopting a certain price to value the closing stock. In the assessment for 1927-28 the revenue authorities revalued the closing stock as they found it to
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be grossly undervalued. For the next three years the closing stock was similarly revalued and the figure of revalued closing stock was adopted as the value of opening stock for the succeeding years. For the assessment year 1931-32 the company prepared its accounts on the old basis as usual but in an accompanying letter explained the adjustments to be made on the basis of the revalued stock, and submitted the return accordingly. The Income Tax Officer, however, ignored the adjustments and adopted only those figures as disclosed by the assessee‟s printed accounts on the ground that he was bound by the method of accounting regularly employed by the company. The company‟s contention was that the accompanying letter and the revaluation was part of the method regularly adopted by it and could not be ignored. The question was whether the company‟s contention was acceptable. Held that section 13 of the 1922 Act relates to a method of accounting regularly employed by the assessee for his own purposes - in this case for the purposes of the company‟s business - and does not relate to a method of making up the statutory return for assessment to Income Tax. The section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deducted therefrom. The adjustments were not, therefore, part of the method of accounting regularly employed. Case review: Decision of the Bombay High Court reversed on this point.
Commissioner of Income Tax v. Jug Sah Muni Lal Sah – [1939] 7 ITR 522 (Pat.) 1836.
What law requires Income Tax Officer to see is not a system of account to be kept by the assessee in respect of a particular loan but with respect to all loans
What the law requires the Income Tax Officer to see is not a system of account to be kept by the assessee in respect of a particular loan which may have been omitted in that account, but the system of accounting which the assessee regularly employs for his own purposes with respect to all the loans which he discloses. If any loans are deliberately left out from the account kept regularly by the assessee, then it is open to the Income Tax Department to disbelieve the accounts and to proceed in any way they choose by acting under the proviso to section 145(1). _______________
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Income Tax Digest.
CHOICE OF METHOD OF ACCOUNTING
B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore) 1837.
Assessee is at liberty to adopt any system of account, but it must be one regularly adopted.
The assessee who maintained accounts on mercantile system did not show an item of accrued interest, but carried it to suspense account on the ground that he was not hopeful of recovering it. He justified the variation from mercantile system of accounting on the ground that he had similarly showed the item in an earlier year‟s account and the Income Tax Officer had not objected, and, therefore, it was the method of accounting regularly adopted in respect of this item of interest. On the question whether this could amount to method regularly adopted. Held that the earlier solitary instance was not enough to establish that the exclusion of that item was based on any system adopted by the assessee or that system was regular. Commissioner of Income Tax v. Smt. Singari Bai – [1945] 13 ITR 224 (All.) 1838.
If assessee himself has chosen mercantile basis, Income Tax Officer is bound to concede that basis, provided assessee‟s accounts afford a proper and sufficient means of deducing profits and loss.
The assessee is given a choice of the manner in which the calculation of his profits and gains shall be made by reference to the system of accounting which he has himself adopted for the purpose of his own business. Where the assessee has himself chosen the mercantile basis, then the Income Tax Officer is bound to concede that basis to the assessee, provided the assessee‟s accounts, regularly kept on that basis, afford a proper and sufficient means of deducing what the profits or gains on that basis have been. Commissioner of Income Tax v. Jug Sah Muni Lal Sah – [1939] 7 ITR 522 (Pat.) 1839.
Income Tax authorities after having taxed the assessee on mercantile basis, cannot turn around and tax him on the basis of the income actually accrued
The Income Tax authorities cannot when they have taxed the assessee so far on what they call mercantile basis turn around and tax him on the basis of the income actually accrued.
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The assessee had advanced a sum or mortgage in 1915. The Income Tax Officer came to know of it in 1924 and taxed the interest for the year 1924 onwards on accrual basis. The department however, did not then take any proceedings to tax the accrued interest from 1925-24. Later the assessee realised a certain sum by the sale under a decree in 1935. Thereupon, in 1936 the department sought to bring to tax the sum realised by the assessee towards interest minus the sum already assessed to tax on accrual basis from 1924-25 onwards. Held that section 13 was not applicable to the case. Having assessed interest on the amount of loan on accrual basis from 1924-25 to 1935 they could not tax interest for the period from 1915 to 1924-25 on realisation basis in 1936-35 as to get over the period of limitation under section 34 of the 1922 Act. Accordingly, the department had to deduct the entire accrued interest from 1915 to 1935 from the sum realised by the assessee on sale under the decree and only the remainder of such sum could be brought to tax under section 34 of the 1922 Act. Amrit Waman v. Commissioner of Income Tax – [1937] 5 ITR 721 (Nag.) 1840.
Others.
Under the mercantile system of accounting followed by him, the assessee, a moneylender, was showing income from interest both on cash basis, and on constructive basis whenever the accounts of a debtor were settled by execution of fresh promissory notes. Though the entire income as declared was assessed to tax for a few years, pursuant to a High Court decision income by way of consecutive receipt was not assessed for about five years. Thereafter, when the assessee requested the Income Tax Officer to assess him on mercantile basis and not on cash basis, the Income Tax Officer agreed to the change, subject to the condition that the assessee should agree for the reopening of the assessments of the previous five years. The assessee gave a conditional agreement to the effect that he should be permitted to pay the tax due, in installments. However, the Income Tax Officer assessed the entire interest that had escaped according to him during the previous five years, as the income of the sixth year. Held that the Income Tax Officer was not justified in ignoring the aforesaid High Court ruling, and he had no jurisdiction to reopen the past five years‟ accounts in the proceedings for the sixth year, and to treat the escaped income as the income of that year. _______________
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Income Tax Digest.
CHANGE OF METHOD OF ACCOUNTING
Ramkumar Kedarnalh v. Commissioner of Income Tax – [1937] 5 ITR 261 (Bom.) 1841.
Though the assessee may change the regular method of accounting he cannot change it for a particular half year alone.
Although it is open to an assessee to change the regular basis on which he keeps accounts, still if he seeks to do that he must satisfy the Commissioner on proper evidence that he has in fact changed the regular basis of accounting. The basis of accounting cannot be changed for a particular half year alone. Sarupchand v. Commissioner of Income Tax – [1936] 4 ITR 420 (Bom.) 1842.
Change of method does not mean that assessee should start a new method merely for a casual period.
An assessee is at liberty to alter the regular method which he has once employed. What he must alter, however, is his regular method, that is to say, he must abandon what, up to that time, has been his regular method, and start a new regular method and not merely a new method for a casual period. Sarupchand v. Commissioner of Income Tax – [1936] 4 ITR 420 (Bom.) 1843.
Question as to whether regular method of accounting has been changed to a new system is a question of fact.
The question as to whether the regular method of accounting has been changed to a new system is a question of fact. T.O. Foster v. Commissioner of Income Tax – 3 ITC 435 (Rangoon) 1844.
Where the assessee, an architect, was regularly accounting his income on accrual basis, but claimed in one assessment year that a certain income, though earned, was not received by him during the relevant previous year.
Where the assessee, an architect, was regularly accounting his income on accrual basis but claimed in one assessment year that a certain income, though earned, was not received by him during the relevant previous year, it was held that the assessee‟s claim was not allowable, since he was not entitled to alter the system regularly followed by him. _______________
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OTHERS
Ram Khelawan & Sahu Thakur Das, In re – [1939] 7 ITR 607 (All.) 1845.
Others.
An assessment based solely on local reputation and conditions of business during the year is not in accordance with provisions of section 13 of the 1922 Act. Motichand & Devidas, In re – [1946] 14 ITR 534 (Bom.)
Assessment on basis of drawings is not assessment on a regular method of accounting. Rajput Metal Works Ltd., Gujranwala v. Commissioner of Income Tax, Rawalpindi – [1976] 33 TAX 1 (H.C.Lah.) = PTD 1976 Lah. 223
See case no. 1498 at page 1096.
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Income Tax Digest.
Section 34* Set-off of losses
PAGE NO
GENERAL PRINCIPLES
1846. Set-off of losses - general principles. [1987] 55 TAX 1 (S.C.Pak.)
_
1986 SCC 641 = 1377
1847. Forward sale of bonus vouchers is not covered in the _ exception contained in Explanation of section 24. [1987] 56 TAX 98 (H.C.Kar.)
1377
1848. Where firm was not registered in first year but registered in second year on the same constitution and suffered loss on account of unabsorbed depreciation as unregistered firm, held that carry forward of the loss and set off against the income of next year as registered firm is permissible. _ [1985] 51 TAX 109 (H.C.Kar.)
1378
1849. Loss of discontinued business cannot be set off against _ profits of other businesses. [1968] 17 TAX 214 (H.C.Dacca)
1379
BUSINESS LOSS COULD NOT BE ADJUSTED AGAINST FREE RESERVE
1850. Business loss could not be adjusted against free reserve. _ [1985] 51 TAX 222 (H.C.Kar.)
1380
LOSSES IN CASE OF RESIDENT AND ORDINARILY RESIDENT
1851. Bank was assessed to tax for 1955-56 in the status of resident and ordinarily resident and in the status of nonresident for 1956-57 and 1957-58, held that foreign losses incurred in 1955-56 were rightly disallowed against income _ for the year 1956-57. [1983] 47 TAX 39 (H.C.Kar.)
*
Corresponding to section 24 of the 1922 Act.
1381
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Section 34
Section 34* Set-off of losses
GENERAL PRINCIPLES
Commissioner of Income Tax, East Zone, Karachi v. Iqbal Engineering Works and Haji Feroz-ud-Din – 1986 SCC 641 = [1987] 55 TAX 1 (S.C.Pak.) 1846.
Set-off of losses - general principles.
In the case of an unregistered firm any loss of that firm under one head must be set off against its income, profits and gains under another head and not against the income, profit and gains of any of its partners. But in the case of an individual assessee if a loss is incurred in respect of any source of income, it must be set off against profits from the same source before the income for that source can be arrived at. Such set off may more appropriately be called “deduction”. It is allowed on ordinary commercial principles of computing profits. Sadiq Traders Limited v. Commissioner of Income Tax – [1987] 56 TAX 98 (H.C.Kar.) 1847.
Forward sale of bonus vouchers is not covered in the exception contained in Explanation of section 24.
In these circumstances, it cannot be held that the applicant‟s dealing in bonus voucher was in the nature of the business. The dealings in bonus voucher were incidental to the business of the applicant, The earning of bonus voucher was co-related to the export and its sale could not be avoided by the applicant. The dealings in bonus voucher was naturally attached to the business and has become its concomitant. Section 24, provides that where any assessee sustains any loss of profit, or gain in any year “he shall be entitled to have the amount of loss set off against his income, profit, or gain under any other head in that year”. The first proviso to this section has been held to be an *
Corresponding to section 24 of the 1922 Act.
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Income Tax Digest.
independent provision which provides that where the assessee is engaged in speculative transaction which are in the nature of business such transaction shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee and any loss sustained by him in such business shall be set off only against the income profit and gains of that business. Therefore, if speculative transactions are not in the nature of business, loss sustained in such dealing shall be set off from the income profit and gain under any other head. The word speculative business has been defined in Explanation-I to section 24. However for arguments sake if it is accepted that the dealing in bonus voucher is in the nature of speculative transaction then the first proviso to section 24 will be applicable if it is further established that such speculative transaction is in the nature of the business of the assessee. Unless it is established the first proviso to section 24 will not apply. If the assessee carries on speculative transactions and dealings which are in the nature of his business then loss resulting from such speculative business dealing will be set off against speculative income and gains. But where the speculative transactions are incidental to the regular business of the assessee and not in the nature of business he will be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. In these premises, the argument whether the bonus voucher dealing come within the meaning of Explanation to section 24(2) is not relevant as the loss was not sustained in speculative transactions which are in the nature of business of the applicant. Commissioner of Income Tax (Central), Karachi v. Khayam Theatre Karachi – [1985] 51 TAX 109 (H.C.Kar.) 1848.
Where firm was not registered in first year but registered in second year on the same constitution and suffered loss on account of unabsorbed depreciation as unregistered firm, held that carry forward of the loss and set off against the income of next year as registered firm is permissible.
The claim for registration was not allowed as the application was found to be barred by time. For the year under dispute viz. 1960-61 on the basis of this very deed of partnership registration was allowed to the firm “and it was assessed as a registered firm. It will be pertinent to point out here that the constitution of the firm remained the same for both the years. For the first year the applicant had suffered certain losses on account of unabsorbed depreciation and wanted to set off the same during the charge year 1960-61 but as at the time when the
1379 SET-OFF OF LOSSES
Section 34
losses were suffered the assessee‟s status was held to be that of an unregistered firm, the Income Tax Officer refused to set-off the losses against the changed status of a registered firm. The unregistered firm became registered in the same year or the following year, there being no change in its legal entity as the assessee, its entitlement to the benefits under section 24 could not be taken away. In the instant case it is an admitted position that the constitution of the firm remained the same for both the years and no change had taken place. Mr. Nasrullah Awan was not able to point out any other decision of any superior Court of Pakistan which has taken a different view than that taken in the aforesaid judgment. We see no reason to take a different view and respectfully adopt the view taken therein. Case followed: Commissioner of Income Tax v. Yousuf & Co. 1967 PTD 161.
Pioneer Bank Ltd. (In Liquidation), Dacca [Official Liquidator, Stale Bank of Pakistan, Dacca] v. Commissioner of Income Tax, East Pakistan, Dacca – [1968] 17 TAX 214 (H.C.Dacca) 1849.
Loss of discontinued business cannot be set off against profits of other businesses.
The assessee, a bank, derived income from banking business, house properties and interest on securities. Under the High Court‟s order the banking business was wound up and the State Bank of Pakistan was appointed as an Official Liquidator. The Official Liquidator filed returns of income showing profits in one year and losses in subsequent years. The profits and losses were worked out by deducting from the income from properties and interest on securities the loss sustained by the bank on account of liquidation. The Income Tax Officer rejected the assessee‟s claim that the loss incurred by the bank in liquidation should be set off against income from properties and interest on securities. This treatment was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. On a reference: Held, that the Tribunal‟s finding indicates that so far as the banking business is concerned it is at an end. The expenses incurred for earning income on securities and also the property from which rent had been earned would be deducted as permissible under the provisions of sections 8 and 9 of the Income Tax Act, but a set off cannot be claimed for the non-existent business. Cases referred to: In re. Hulasilal Ramdayal (1941) 9 ITR 635 and B.C.G.A. (Punjab) Ltd., v. Commissioner of Income Tax (I.L.R. 18 Lahore 306). _______________
1380 Section 34
Income Tax Digest.
BUSINESS LOSS COULD NOT BE ADJUSTED AGAINST FREE RESERVE
Commissioner of Income Tax v. Dadabhoy Silk Mills Ltd., Karachi – [1985] 51 TAX 222 (H.C.Kar.) 1850.
Business loss could not be adjusted against free reserve.
The assessee is a private limited company which had suffered a business loss. It had also Free Reserves as defined under section 2(6BB) of the Income Tax Act. The original assessment for the relevant year was completed on 7.4.1970 but later on notice was issued under section 35 of the Income Tax Act, for rectifying the mistake committed by the Income Tax Officer. Consequently the business loss of the assessee of Rs.3,04,300 was adjusted against Free Reserves of Rs.12,21,275 and taxable Free Reserves were taxed at 10%. The perusal of section 24 makes it clear that it is the entitlement of the assessee to have his loss of profits or gains in any year under any item mentioned in section 6 to be set off against his income, profits or gains under any other bead in that year. The words used are “shall be entitled” and they seem to be giving to assessee an absolute right of having the loss set off against any other item under section 6. But if he does not avail of that entitlement or right, then he loses the general right of getting the loss set off against all the items mentioned in section 6 for the next or succeeding year and thereafter be has the limited right given under section 24(2) of Income Tax Act of getting his loss set off under income from the same head and from no other bead. We cannot allow a right given under sub-section (I) of section 24 to be converted into a liability. In the present case the free reserves have been taxed and, therefore, the effect of setting off the loss against the free reserve is that the assessee gets a benefit of only 10% of the tax whereas if it had been allowed to carry on the loss to the next year then it could have not a set off against this loss towards an income from business or profession which would have been otherwise taxable at 50%. The net result, therefore, is that the assessee has in the total effect suffered the loss of saving 40% of his future tax. We are afraid that the same is against the spirit as well as the clear words of section 24 of the Income Tax Act. We cannot lose sight of the fact that the revenue laws are to be interpreted in a manner beneficial to the assessee and not otherwise. Consequently we are of the view that the ultimate order of the Appellate Tribunal could be sustained on the above-discussed
1381 SET-OFF OF LOSSES
Section 34
interpretation of section 24(1) and (2) of Income Tax Act, 1922, and the reference, is, therefore, answered in the affirmative. _______________
LOSSES IN CASE OF RESIDENT AND ORDINARY RESIDENT
Grindlays Bank Ltd. v. Commissioner Of Income Tax (Central), Karachi – [1983] 47 TAX 39 (H.C.Kar.) 1851.
Bank was assessed to tax for 1955-56 in the status of resident and ordinarily resident and in the status of non-resident for 1956-57 and 1957-58, held that foreign losses incurred in 195556 were rightly disallowed against income for the year 1956-57.
On the reassessment made pursuant to the orders dated 19.6.1962 for assessment years 1955-56 and 1956-57, for the reasons that status of applicant was determined as resident and ordinary resident for the year 1955-56 and as that of non-resident for 1956-57, the mentioned losses which were left to be carried as claimed were ignored from consideration against income determined for the year 1956-57. For the assessment year 1957-58, for the same reasons the above mentioned foreign losses were again ignored while determining the taxable income under the Act and were not allowed to be set off against income accruing in Pakistan. In the light of the above provisions of law, we find that in case of residents and ordinary residents “world income” is to be determined while in case of non-residents it is confined to “total income” consequently on the change of status from resident and ordinary resident (1955-56) to non-resident (in 1956-57 and 1957-58, the “income” which falls outside the purview of section 4(1)(a) and 4(1)(b), the provisions of section 24(1) would not be applicable and thus the benefit of losses left to be carried forward under section 24(2) would also not be permissible, as its applicability depends upon the applicability of section 24(1). Cases referred to: Malwa United Mills v. Commissioner of Income Tax 45 ITR 210; 1972 PTD (Trib.) 42; I.T.A. No. 241 of 1961-62; I.T.A. No. 7456 of 1970-71.
1382 Section 35
Income Tax Digest.
Section 35* Carry forward of business losses
PAGE NO
WORDS “IN ANY OTHER BUSINESS”, “SUCH BUSINESS”, MEANING OF
1852. Words “in any other business”, “such business”, meaning of. _ [1982] 45 TAX 9 (H.C.Lah.)
1385
SAME BUSINESS - GENERAL TESTS
1853. Two businesses not interlaced or inter-connected and closure of one business not affecting the other but unity of control _ between them constitutes the “same business”. [1979] 40 TAX 109 (H.C.Kar.) _ 1854. Several businesses constitute the “same business”. [1974] 30 TAX 34 (H.C.Kar.) 1855. „Same business‟ in sub-section (2) of section 24 does not mean „same head‟ or any of the heads under section 6. _ [1970] 22 TAX 157 (H.C.Dacca) 1856. Jute brokerage and plying of vessel do not constitute the _ same business. [1969] 20 TAX 21 (H.C.Dacca) _ 1857. „Same business‟. 1963 PTD 410 = 1963 PLD 496 1858. Where Hindu Undivided Family had shares in another concern, an Association of Persons held that brought forward loss of the Hindu Undivided Family cannot be set _ off against the profits of the Association of Persons. [1960] 2-TAX (Suppl.-118) (H.C.Lah.) = 1951 PLD 311 1859. Basic features to determine whether two businesses _ constitute same business. [1927] 13 Tax Cas 83 _ 1860. „Same‟ business means identical business. [1944] 12 ITR 21 (Nag.) 1861. Question as to whether different ventures carried on by an assessee form the same business, is a mixed question of law
*
Corresponding to section 24(2)(i) of the 1922 Act.
1386 1386
1388 1390 1391
1391 1392 1392
1383 CARRY FORWARD OF BUSINESS LOSSES
_
and fact. [1935] 3 ITR 11 (Mad.); [1943] 11 ITR 128 (Bom.); [1944] 12 ITR 21 (Nag.)
Section 35 PAGE NO
1393
IN ANY OTHER BUSINESS - GENERAL TESTS
1862. Where loss in partnership business and profits in individual business, assessee is entitled to set off apportioned carried forward loss in partnership business against profits in individual business as it falls “in any other business”. _ [1979] 40 TAX 116 (H.C.Kar.) = PLD 1979 591
1393
INTRA BUSINESS ADJUSTMENT
1863. Loss sustained in jute business can be carried forward and _ set off against profits from insurance business. [1969] 19 TAX 103 (H.C.Dacca)
1395
OPERATION OF PROVISION
1864. Business loss cannot be set off against fictional income. _ [1985] 52 TAX 98 (H.C.Kar.) = 1985 PTD 389
1396
1865. Loss sustained in banking business in the assessment year 1962-63 can be set off against income from interest on securities and dividends for the assessment year 1963-64. _ [1982] 46 TAX 56 (H.C.Kar.)
1397
1866. Share of loss in one firm can be set off against his share of _ profit from other firm. [1975] 32 TAX 22 (H.C.Lah.)
1398
1867. Loss sustained by Ayurvedic physician in maintenance of dramatic troupe could be set off against his business income. _ [1940] 8 ITR 628 (Mad.)
1399
WHEN LOSS ARISES
1868. Where the assessee, carrying on money-lending business, took over lands in settlement of debts due and, by merely _ revaluing the lands, claimed loss. 9 ITC 82 (Rangoon)
1399
1869. If a business is closed down during relevant year, its loss can be set off against profits of other business for that year. _ [1941] 9 ITR 635 (All.)
1400
1870. Losses of discontinued business cannot be set off against _ current business [1937] 5 ITR 279 (Lahore); [1935] 3 ITR 11 (Mad.) _ _ 1871. Others. 9 ITC 282 (PC); 6 ITC 354 (Sind) LOSSES OF ILLEGAL BUSINESS
1400 1400
1384 Section 35
Income Tax Digest. PAGE NO
1872. Since tax is levied on actual income of previous year, facts _ must be taken as they existed during previous year. [1940] 8 ITR 1 (Bom.)
1401
INCOME AGAINST WHICH CARRIED FORWARD LOSS CAN BE SET OFF
1873. Where after close of relevant previous year assessee had transferred all but one of businesses and in such businesses it had suffered loss, losses could be set off against its other _ income. [1938] 6 ITR 395 (Cal.)
1401
LOSSES OF UNREGISTERED FIRM
1874. Where Registered firm was treated as unregistered firm, loss suffered by unregistered firm can be carried forward and set off against profits of registered firm in assessment year. _ [1967] 15 TAX 62 (H.C.Kar.) _ 1875. Losses of unregistered firm. [1936] 4 ITR 173 (PC) ILLUSTRATIONS
1876. Principles of set-off of losses. (H.C.Lah.) = 1951 PLD 311
_
1402 1403
[1960] 2-TAX (Suppl.-118)
1877. Cloth business and speculation business. 764 (Bom.)
_
1403 [1946] 14 ITR
1878. Where a business carried on in a foreign branch and in _ India, was held to be the same business. [1945] 13 ITR 177 (Mad.)
1403
1404
1385 CARRY FORWARD OF BUSINESS LOSSES
Section 35
Section 35* Carry forward of business losses
WORDS “IN ANY OTHER BUSINESS”, “SUCH BUSINESS”, MEANING OF
Rais Ghazi Muhammad Khan v. Commissioner of Income Tax, Lahore – [1982] 45 TAX 9 (H.C.Lah.) 1852.
Words “in any other business”, “such business”, meaning of.
A question, therefore., arises whether the words “any other business” read with the words “such business” occurring twice in clause (ii) are to be given a restricted interpretation to mean that the set off is to be allowed only against the profits and gains of the same very business, profession or vocation in. which the loss had originally occurred and not of any other business, profession or vocation which the assessee has been and is carrying on. “Any other business.....” undoubtedly means every business other than speculative and the word „such‟ occurring in clause (ii) refers to such non-speculative business, profession or vocation. The set off, therefore, can be claimed against the income and gains derived from any non-speculative business, profession, or vocation not necessarily being the same business, profession, or vocation from which the loss had arisen. On the facts and circumstances of this case, the Tribunal was not justified in upholding the decision of the officers below that the share of losses from Fiaz Jillani & Co., Karachi, incurred and allocated in previous years, could not be given set off against share, profits of the firm Shabbir Cotton Factory. Walhar, received during the same assessment year under section 24(2)(ii) of the Income Tax Act, 1922. Case relied on : Rais Pir Ahmad Khan v. Commissioner of Income Tax, Lahore (1975) 32 TAX 22 (H.C.Lah.). Cases referred to: Produce Exchange Corporation Ltd. v. Commissioner of Income Tax (1971) 24 TAX 1); Sainrapt & Et. Brice, Karachi v. Commissioner of Income Tax West Karachi PLD 1979 591 = (1979) 40 TAX 116 (H.C.Kar.) and Abdul Aziz and another v. Muhammad Ibrahim (PTD 1977 S.C. 442). _______________
*
Corresponding to section 24(2)(i) of the 1922 Act.
1386 Section 35
Income Tax Digest.
SAME BUSINESS
_
GENERAL TESTS
Pheroz Ali v. Commissioner of Income Tax (West), Karachi – [1979] 40 TAX 109 (H.C.Kar.) 1853.
Two businesses not interlaced or inter-connected and closure of one business not affecting the other but unity of control between them constitutes the “same business”.
The Appellate Tribunal erred in applying the test of inter-connection only without regard to the test of unity of control of the various activities of the firm. The Appellate Tribunal had held that there was no inter-connection between the barter and cotton businesses and this was attributed by the Appellate Tribunal to the fact that purchase and sale transactions in the cotton department were not interlaced with or had any connection with the purchase and sale transaction of rice in the barter department and, therefore, the one was not dependent on the other, so much so that the closure of the barter business would not, in the fact, lead to he closure of the cotton business. The test of closure of the business as not affecting the other, is not a valid test as was observed in the case of Wallem & Co. (Pak) Ltd. The Appellate The Tribunal did not, however, pay regard to the admitted facts that there was common control of the various activities of the firm, which were being carried on in the same premises, with common management common staff and common administrative and financing control....... For the foregoing reasons, the cotton business and the barter business constituted the same business within the meaning of section 24(2) of the Act. Cases referred to : Scales v. George Thompson & Co. Ltd. [(1927-28) 13 Tax Car 83]; Wollem & Co. (Pak.) Ltd., Karachi v. Commissioner of Income Tax (1974) 30 TAX 34; Produce Exchaage Corporation Ltd. v. Commissioner of Income Tax [(1970) 77 ITR 73].
Wallem & Co. (Pak.) Ltd., Karachi v. Commissioner of Income Tax – [1974] 30 TAX 34 (H.C.Kar.) 1854.
Several businesses constitute the “same business”.
The assessee, a limited company, carried on business in several lines, namely, aviation agency, shipping agency and trade. In respect of the assessment year 1954-55 the assessee declared loss of Rs.1,41,873 and in the subsequent year a profit of Rs.10,732 was shown. The profit was set off against the loss of the earlier year. In the third year a profit of Rs.22,929 was declared and its set off was claimed against the loss of the year 1954-55. The Income Tax Officer refused this claim on two
1387 CARRY FORWARD OF BUSINESS LOSSES
Section 35
grounds, namely, (1) that the aviation agency business, in which the loss had occurred, had stopped during the year under consideration and (ii) the aviation agency business was distinct and separate from the other two businesses of the assessee. In effect the dispute was whether aviation agency business was distinct from the shipping agency business: Held,
that the several lines of business in which the assessee was engaged constituted the “same business”. There was no material before the assessing officer and the Appellate Tribunal to arrive at the finding that the assessee‟s several lines of business, particularly aviation agency business and shipping agency business were not the “same business.”
The test to determine whether two or several lines of activities constitute the same business are (i) whether the several lines of business show a combination of interest, (ii) whether there is unity of control, (iii) whether the profits or losses of these activities are brought in the final balance sheet of the company and (iv) whether the capital of one business activity can be employed for or is available to the other business activity. In the present case the several lines of business, including the businesses of aviation and shipping agencies, were carried on by one and the same company, a limited company incorporated under the Companies Act, and at the same premises, though in different sections. These several lines of business of the company were conducted under the control of its Board of Directors. It may be that each section of the company maintained separate sectional or departmental account, but ultimately the profits and losses were brought in the company‟s books of account and its balance-sheet. Moreover, both the businesses of aviation agency as well as that of shipping agency partake of the same character. Thus under the business of shipping agency, the assessee carried out several jobs, like handling and clearing of vessels, supply of provisions to the ships, loading and unloading of cargo, chartering of vessels, booking of cargo and passengers, etc. More or less identical functions were carried out by the assessee under the business of aviation agency. Thus not only these two businesses were of the same character - that is, rendering of services to carriers, whether by sea or by air, but also there was unity of control and a combination of interest and the receipts and payments under these various lines of business were brought in the sum total of the assessee‟s receipts and payments. In the final analysis it would appear that only one set of accounts was maintained by the assessee for all its businesses. Further, there is no finding of the Assessing
1388 Section 35
Income Tax Digest.
Officer or of the Appellate Authorities that the capital employed by the assessee for its various businesses was not the same, and that the receipts of one line of business were not in fact utilised for the purpose of the other businesses. In the absence of these findings it is not possible to reach to the conclusion that the several lines of the assessee‟s business were distinct and separate in the sense that they were independent businesses, and the fund of one business could not be used for the other business, or the receipts and payments of various businesses were not brought in the sum of the assessee‟s receipts and payments, or that the staff employed by the assessee for its businesses was not interchangeable. Cases referred to: H. M. Inspector of Taxes v. George Thompson & Company Limited (1927-28) 13 Tax Cas. 83; In re: Messrs Hiralal and another [(1943) 11 ITR 128]; Banka Mal Niranjan Das v. Commissioner of Income Tax, Punjab (1951) 20 ITR 536; Haji Abdul Qayum v. Commissioner of Income Tax (PLD 1963 Kar. 496); Seth Ismail Jamal Budhani v. Commissioner of Income Tax Karachi PLD 1963 Kar. 499; [1963] 7 TAX 209; The Commissioner of Income Tax v. Pakistan Refrigeration Ltd., Pesh. PLD (1966) Lah. 513 = [1966] 13 TAX 218; The Commissioner of Income Tax, Daeca Zone, Daeca v. Amin Jute Baling Company, Dacca PLD 1969 Dacca 687; S.N.A. Al-Chidambaram v. Commissioner of Income Tax, Madras [1945] 13 ITR 177; Rekhabchand Sarogi and others v. Commissioner of Income Tax, Bihar and Orissa [1947] 15 ITR 465; K. S. S. Soundrapandia Nadar & Bros. v. Commissioner of Income Tax, Madras [1950] 11 ITR 163; The Howden Boiler & Armaments Company Limited v. Stewart (H.M. Inspector of Taxes) (1923-25) T.C. 205 and The Liverpool and London and Globe Insurance Company v. Benett (Surveyor of Taxes) (1911-15) 6 Tax Cas. 327.
Helal Jute Press Limited v. Commissioner of Income Tax, Dacca Zone, Dacca and another – [1970] 22 TAX 157 (H.C.Dacca) 1855.
„Same business‟ in sub-section (2) of section 24 does not mean „same head‟ or any of the heads under section 6.
The assessee-company was dealing both in jute baling and jute trading business, in the accounting year relevant to the assessment year 1958-59. In the subsequent year the jute trading business was discontinued. In making the assessment for the assessment year 195859 the Income Tax Officer determined net loss in jute trading business at Rs.2,49,538 and in the jute baling business profits before deduction of depreciation allowance were determined at Rs.1,95,449. After deduction of depreciation allowance amounting to Rs.46,941 the net profit in jute baling business were determined at Rs.1,48,508 and after setting off the net loss of Rs.2,49,538 in the jute trading business, he carried forward a net loss of Rs.1,01,030 in respect of jute trading business. The Income Tax Officer treated these two businesses as
1389 CARRY FORWARD OF BUSINESS LOSSES
Section 35
separate and distinct from each other and as aforesaid the assessee had discontinued its jute trading business in the subsequent year. The appellate authorities, on appeals by the assessee, rejected the assessee‟s contention that jute trading and jute baling businesses were one and the same business. Thereupon, the assessee made an application before the Income Tax Officer under section 35 of the Income Tax Act for rectification of the original assessment by setting off the profits from jute baling business before deduction of depreciation from the net loss in the jute trading business and thus carrying forward the depreciation allowance for the year 1958-59 as unabsorbed depreciation and also carrying forward the resultant loss in jute trading business. The Income Tax Officer rejected the application and further revision petition under section 33A(2) of the Act before the Commissioner of Income Tax met the same fate. On a reference the High Court: Held, that (i)
there was a conclusive finding that jute baling and jute trading business of the petitioner were separate and distinct and so the Income Tax Officer was correct in allowing set off for that year even though they were two separate business but in carrying forward the petitioner is only entitled to set off the loss or depreciation from the income of the same business; and
(ii)
the alleged rectification of mistake will require more than elucidation, of argument or debate as the rectification cannot be done without setting aside the finding confined up to appellate stage that jute baling and jute trading businesses of the petitioner are distinct and separate businesses. Reversing of this finding will amount to not only reviewing the case but a de nevo assessment of the whole case. This is beyond the scope of the provision of section 35 of the Act.
In the case of carrying forward of loss or depreciation for future years for set off the requirement is that in future years, the set off can only be allowed from the income of the same business, profession, or vocation and in sub-section (2) of section 24 the Legislature has not used the words “any of the heads” under section 6 as has been used in sub-section (1) of section 24 of the Income Tax Act, 1922, and the words “same business” etc. in sub-section (2) of section 24 of the Income Tax Act, 1922, cannot be construed as “same head” or any of the heads under section 6. Legislature has used different languages in
1390 Section 35
Income Tax Digest.
sub sections (1) and (2) of section 24 of the Income Tax Act, 1922 to convey different-meanings. So in sub-section (1) the assessee can set off loss of one head of income under section 6 against any other head of income as contemplated in the said section 6, for that year, but for the purpose of carrying forward the loss in future years the language used is that income must arise from the same business. Cases relied on : Haji Abdul Qayum v. Commissioner of Income Tax (PLD 1963 Kar. 496) and Banka Mal-Narain Das v. Commissioner of Income Tax, Punjab (PLD 1951 Lah. 311); Sh. Mohammad Iftikharul Haq v. Income Tax Officer, Bahawalpur (1966) 13 TAX 203 (S.C.) and Sidhramappa Andannappa Manri v. Commissioner of Income Tax, Bombay (1952) 21 ITR 333.
Ludlow Pakistan Co. Ltd., Dacca v. Commissioner of Income Tax, Dacca – [1969] 20 TAX 21 (H.C.Dacca) 1856.
Jute brokerage and plying of vessel do not constitute the same business.
Originally the assessee was doing business in jute brokerage and jute baling. Subsequently, the assessee discontinued its jute baling operations and purchased a vessel. The vessel carried jute and other cargo of different shippers including the assessee‟s principals who utilised the vessel for jute brooked by the assessee. The operation of the vessel as a cargo carrier consistently resulted in losses and finally the vessel was sold by the assessee. In its assessment the assessee claimed carry forward and set off of the losses sustained in vessel operations against the profits from the jute brokerage business. The Income Tax Officer disallowed the claim on the ground that the two lines of the ventures were “two different businesses for the purposes of section 24 of the Income Tax Act”. On appeal the Appellate Assistant Commissioner confirmed the order of assessment on the main ground that the nature of the brokerage business was quite different from vessel operations and that the vessel could be stopped without affecting the structure of the brokerage business. This treatment was confirmed, on further appeal, by the Appellate Tribunal. It observed that the two ventures were not the same business. The assessee company owned a cargo vessel which earned freight and it also carried on the business of jute brokerage. Both had something to do with jute. That is all that can be said about the assessee‟s two ventures. The assessee could very easily stop one without affecting the other. In fact, cargo carrying was given up later without affecting the jute brokerage business in any matter. On a reference by the assessee the High Court:
1391 CARRY FORWARD OF BUSINESS LOSSES
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Held, that maintaining a vessel was a different venture altogether. No dovetailing or interlacing between maintaining a vessel and the jute brokerage business can be discerned. The Tribunal, has, therefore rightly held that these were two separate and distinct businesses. Case confirmed : (1964) 10 TAX 43 (Trib). Cases referred to : Govindram Bros. Ltd. v. Commissioner of Income Tax (1946) 14 ITR 764; Soundrapandia (K.S.S.) Nadar and Bros. v. Commissioner of Income Tax (1950) 18 ITR 163; Edwards (Inspector of Taxes) and Bairstow and another (3 W.L.R. 410); Chidambaram (S.N.A.A.L) Chettiar v. Commissioner of Income Tax (1945) 13 ITR 177; Rekhabchand Sarogi and others v. Commissioner of Income Tax (1947) 15 ITR 465; Commissioner of Income Tax v. International Industries Ltd. (1952) 22 ITR 44; Setabganj Sugar Mills Ltd. v. Commissioner of Income Tax (1961) 41 ITR 272; Scales v. George Thompson & Co. Ltd (1927) 13 Tax Case 83, 89; Lakshmi Industries (Private) Ltd v. Commissioner of Income Tax (1961) 41 ITR 645; Prithvi Insurance Co. Ltd. v. Commissioner of Income Tax (1964) 52 ITR 238; Commissioner of Income Tax v. Amin Jute Baling Co. Ltd. (20 D.L.R. 1165).
Haji Abdul Qayum v. Commissioner of Income Tax – 1963 PTD 410 = 1963 PLD 496 1857.
„Same business‟.
Loss incurred from business of buying and selling wholesale textile goods such a loss held to be inadmissible against profit from textile „industry‟. On facts, it is held that both the activities do not constitute the same. Banka Mal Niranjan Das v. Commissioner of Income Tax, Punjab and N.W.F.P. – [1960] 2-TAX (Suppl.-118) (H.C.Lah.) = 1951 PLD 311 1858.
Where Hindu Undivided Family had shares in another concern, an Association of Persons held that brought forward loss of the Hindu Undivided Family cannot be set off against the profits of the Association of Persons.
The assessee, a Hindu Undivided Family, was carrying on its business at its head office at Kaithal. It had 7/9 share in another firm styled Banka Mal Lajja Ram & Co. at Kaithal, which was assessed as an “Association of Persons”. in 1941-42 assessment year the assessee suffered a loss of Rs.35,471 in its own business (Hindu Undivided Family) which was set off against „the profits of Banka Mal Lajja Ram & Co. (Association of Persons). The unabsorbed loss and depreciation was carried forward to the subsequent year 1942-43, which in that year was set off against the total income of the assessee from its
1392 Section 35
Income Tax Digest.
family business and Banka Mal Lajja Ram & Co. The assessee contended that the loss brought forward from the preceding year could only have been set off against the income from its family business and not against the income of the Association of Persons, i.e., of Banka Mal Lajja Ram & Co., on the principle of sameness of business as envisaged under sub-section (2) of section 24. It was held that the two business could not be described as the same businesses and the profits or losses of the Hindu Undivided Family were not the profits or losses of the Association of Persons or all of the persons who constituted that Association of Persons. On the question as to whether assessee‟s income arising as his share in the Association of Persons separately assessed to tax was an income falling under one of the heads under section 6 of the Act it was held: “It is immaterial whether the assessee‟s share in the profits of Banka Mal Lajja Ram & Co. is profits and gains of business under clause (iv) of section 6 or income from other sources under clause (v) of that section, whether it is one or the other, it is still a regularly recurring revenue receipt and therefore income in every sense of the term.” Scates v. George Thompson & Co. Ltd. – [1927] 13 Tax Cas 83 Basic features to determine whether two businesses constitute same business.
1859.
The following features would establish the unity of business: o
unity of control and management;
o
conduct of business through the same agency;
o
the inter-relation of the business;
o
the employment of the same capital;
o
the maintenance of common books of account;
o
employment of the same staff to run the business;
o
the nature of different transactions; and
o
the possibility of one being closed without affecting the texture of the other; and so forth.
Commissioner of Income Tax v. Seth Rarnaktishna Rarnnath – [1944] 12 ITR 21 (Nag.) 1860.
„Same‟ business means identical business.
The loss can only be carried forward and set off against profits and gains, if any, arising from the identical business. Whether a business is one or several businesses is a question of fact.
1393 CARRY FORWARD OF BUSINESS LOSSES
Section 35
South Indian Industrials Ltd. v. Commissioner of Income Tax – [1935] 3 ITR 11 (Mad.); Hiralal Kalyanmal, In re – [1943] 11 ITR 128 (Bom.); Commissioner of Income Tax v. Seth Rarnakrisbna Ramnath – [1944] 12 ITR 21 (Nag.) 1861.
Question as to whether different ventures carried on by an assessee form the same business, is a mixed question of law and fact.
The question whether different ventures carried on by an individual or a company form the same business is a mixed question of law and fact. Certain principles are applied to determine whether on the facts found, a legal inference can be drawn that the different ventures constitute separate businesses is or viewed together, can be said to constitute the same business. These principles have to be applied to the facts, before a legal inference can be drawn that a particular business is composed of separate businesses, and is not the same one. No doubt, findings of fact are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the interrelation of the businesses, the employment of same capital, the maintenance of common books of account, employment of same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth. When however, the true facts have been determined, the ultimate conclusion is a legal inference from proved facts, and it is one of mixed law and fact, on which depends the application of section 24(2) of the 1922 Act. Case review: Decision of the Calcutta High Court reversed. _______________
IN ANY OTHER BUSINESS - GENERAL TESTS
Sainrapt & Et. Brice, Karachi v. Commissioner of Income Tax (West), Karachi – [1979] 40 TAX 116 (H.C.Kar.) = PLD 1979 591 1862.
Where loss in partnership business and profits in individual business, assessee is entitled to set off apportioned carried forward loss in partnership business against profits in individual business as it falls “in any other business”.
It will, therefore, be seen that as far as set-off or carried-forward losses in business is concerned, the object of the amendment was, to treat a business in speculative transactions separately and in contrast
1394 Section 35
Income Tax Digest.
with any other business. Clauses (i) and (ii) must therefore be read together and in juxta-position with each other as deals with two distinct and contrasting categories or businesses, i e. speculative business and any other business. Clause (ii) with which we are concerned, deals with a case where the loss was sustained by the assessee in any other business which must be interpreted to mean any business other than a speculative business mentioned in clause (i) and therefore the words “such business” occurring twice in this clause refer to the business other than speculative business which forms exclusively the subject matter of clause (i). It would not be correct to say, as held by the Tribunal, that the words “such business” refer to the same and very business in which the loss was sustained. In our opinion, the words “such business,” are not controlled or qualified by the word “loss” but they refer to and qualify the words “in any other business”. It is well established that in the interpretation of statutes, the meaning of the words should be considered in the light of history of the legislation and the state of the law at the time the statute was passed, in order to consider whether the statute was intended to alter the law or to leave it exactly where it stood before. As observed by Maxwell on “Interpretation of Statutes” (12th Edition page 47), the Court is not to be, oblivious of the history of law and legislation and the Court has to say what is the object of the legislation in amending the law. Craies on “Statute Law” (7th Edition at page 126) observes that the cause and necessity of the Act may be discovered by considering the state of the law at the time when the Act was passed and in innumerable cases the Courts with a view to construing an Act have considered the existing law and reviewed the history of legislation upon the subject. Mr. Mansoor Ahmed Khan, learned counsel for the Commissioner while supporting the interpretation put by the Tribunal on the words “such business” in clause (ii), submitted that the word “such” must be read as referring back to the last antecedent, namely the business in which the loss was sustained. He referred to interpretation by the Supreme Court of the word “such” appearing in section 13(3)(a)(ii)(b) of the West Pakistan Urban Rent Restriction Ordinance, 1959 in Abdul Aziz and another v. Muhammad Ibrahim (PLD 1977 SC 442) and Stroud‟s, Judicial Dictionary, 4th Edition, Vol. 5, page 2662 as generally referring to the last antecedent. Moreover, he submitted that the words “such business” appearing in clause (ii) when they occur second time refer to the losing business since set-off of losses of a losing business is permissible only if the losing business is continued
1395 CARRY FORWARD OF BUSINESS LOSSES
Section 35
to be carried on in that year. Therefore, he submitted that if “such business” occurring at the second time in clause (ii) refers to the losing business, the words “such business” when they occur first time, must refer to the losing business as well. This argument prevailed with the Appellate Tribunal. We have considered these submissions but we are not impressed with the same. As observed earlier by us, the words “such business” refer to non-speculative business. Of course, the word “such business” when they occur second time must refer to the losing business, that is to the losing business as a non-speculative business. The interpretation put forward by Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner, in our opinion, must give way as they lead to violation of the clear intention of the Legislature in amending the law. _______________
INTRA BUSINESS ADJUSTMENT
Commissioner of Income Tax, Dacca Zone, Dacca v. Amin Jute Bailing Company, Dacca – [1969] 19 TAX 103 (H.C.Dacca) 1863.
Loss sustained in jute business can be carried forward and set off against profits from insurance business.
The assessee, a private limited company, was dealing in jute business. Subsequently it became an agent of an insurance company and got its own jute business insured. It did not insure the jute of any other firm or any one else. In respect of the assessment year 1959-60 the Income Tax Officer determined the profit from jute business at Rs.19,25,978 and the net income from the insurance agency business at Rs.57,213. The loss in jute business amounting to Rs.39,40,083 carried forward from the preceding year was set off against the income of Rs.19,25,978 from the jute business and thebalance of Rs.20,14,105 was ordered to be carried forward to the following year. Thus the Income Tax Officer charged to tax the profits of Rs.57,213 from insurance agency business. The assessee‟s contention that the income derived from its insurance business should be set off against the loss in jute business carried forward from the previous year was rejected by the Income Tax Officer. The Appellate Assistant Commissioner, on appeal by the assessee, accepted the assessee‟s contention and held that the insurance agency undertaken by the assessee was only for the furtherance of its own jute business and as such it was the same business within the meaning of section 24(2) of the Income Tax Act. On further
1396 Section 35
Income Tax Digest.
appeal, at the instance of the department, the Appellate Tribunal upheld the order of the Appellate Assistant Commissioner. On a reference, the High Court, affirming the order of the Tribunal: Held, that (i)
in the facts and circumstances of the case there was definitely interconnection and inter-dependence between the insurance agency and the jute business; and
(ii)
on the facts found by the Tribunal the insurance agency comes within the meaning of the expression “same business” occurring in sub-section (2) of section 24 of the Income Tax Act.
In the case before us it will be seen that the assessee has not insured the jute or any other goods or any one else; it has merely insured its own jute. The agency has been undertaken by the same management and it is being carried on clearly for the purpose of its own jute business. If, however, the assessee undertakes, as suggested by learned Advocate for the Commissioner, insurance of goods of other agency in that case would definitely change and it would in that case be separate and distinct business. But on the find no reason whatsoever to interfere with Cases relied on by learned Advocate for the persons the character of the and it would in that case be facts found by the Tribunal, we the conclusion reached by it. Cases relief on : Govindram Bros. Ltd. v. Commissioner of Income Tax (1946) 14 ITR 764; K.S.S. Soundrapandia Nadar and Bros. v. Commissioner of Income Tax (1950) 18 ITR 163 and Commissioner of Income Tax v. Coconada Radhaswami Bank Ltd. (1966) AIR 47 (S.C.). Cases distinguished: Seth Ismail Jamal Bhudani v. Commissioner of Income Tax (1963) 7 TAX 209 and Haji Abdul Quayyum v. Commissioner of Income Tax (PLD 1963 Karachi 496). _______________
OPERATION OF PROVISION
Commissioner of Income Tax (Central Zone), Karachi v. Karachi Electric Supply Corporation Limited – [1985] 52 TAX 98 (H.C.Kar.) = 1985 PTD 389 1864.
Business loss cannot be set off against fictional income.
The language used in the proviso appears to us to indicate that section 24(2) is a provision which deals with carried forward losses while carried forward depreciation does not come within section 24(2), but
1397 CARRY FORWARD OF BUSINESS LOSSES
Section 35
flows through an entirely different channel which is provided under section 10(2)(vi), proviso (b). The subject of depreciation allowance has been dealt with in section 10(2)(vi). The provision permitting it to be carried forward and the consequence of it being carried forward is also contained in section 10(2)(vi) proviso (b). It is only because both the carried forward losses under section 24(2) as well as carried forward depreciation allowance under section 10(2)(vi) proviso (b) are capable of being adjusted against the profits and gains of business of the year to which they are carried forward that a provision has been made fixing the order in which they will be absorbed. The fixing of the priority also does not appear to be without purpose. The carried forward losses are, under section 24(2) capable of being adjusted up to a maximum of six year. The depreciation allowance, which is permitted to be carried forward, is, however, allowed to be carried forward without any time limit until it is totally absorbed. After giving our thoughtful consideration to the entire matter, we are of the view that losses amounting to Rs.52,04,540 could not be adjusted against the fiction income and the respondent / assessee is entitled to its carrying forward and set-off in the subsequent years. The net result, therefore, is that the respondent / assessee has in the total effect suffered the loss of saving 60% of his future tax. We are afraid that the same is against the spirit as well as clear words of section 10(2)(vi) – proviso of the Act. Commissioner of Income Tax v. Eastern Bank Ltd. – [1982] 46 TAX 56 (H.C.Kar.) 1865.
Loss sustained in banking business in the assessment year 1962-63 can be set off against income from interest on securities and dividends for the assessment year 1963-64.
The finding of the Tribunal is that the securities and shares were held by the respondent as its trading assets and therefore, in our view income from them would form part of income of assessee. We are fortified in our decision from Indian jurisdiction, namely, Western State Trading Company Ltd. v. Commissioner of Income Tax Central, Calcutta [1971] 80 ITR 21) wherein it was held by the Supreme Court of India that if shares are held by an assessee as part of its trading assets, the dividends of those shares would form part of the income from the business of the assessee and the assessee will, therefore, be entitled under section 24(2) of the Act to claim set off of losses from its business carried forward from earlier year against the dividends of the current year. Case referred to: Rais Pir Ahmad Khan v. Commissioner of Income Tax, Lahore Zone, Lahore [1975] 32 TAX 22 and Sainrapt & Et. Brice, Karachi v.
1398 Section 35
Income Tax Digest.
Commissioner of Income Tax (West) Karachi (PLD 1979 Karachi 591) = [1979] 40 TAX 116 (H.C.Kar.)
Rais Pir Ahmad Khan (Partner of Shabbir Cotton Factory Walhar, Tehsil Sadiqabad) v. Commissioner of Income Tax, Lahore Zone, Lahore – [1975] 32 TAX 22 (H.C.Lah.) 1866.
Share of loss in one firm can be set off against his share of profit from other firm.
Section 6 of the Act classifies income under six heads. The income tax is only one tax levied on the sum total of the income classified under the various heads and it is not a collection of distinct taxes levied separately on each head of income. It is, therefore, that in this connection subsection (1) of section 24 expressly lays down that where any assessee sustains a loss of profits or gain in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the losses/set off against his income, profits or gains under any other head in that year. In this connection subsection (2) of this section further lays down that where any assessee sustains a loss of profits or gains in any year, under the head “profits and gains of the business, profession or vocation”, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following year. But in this connection clause (i) of sub-section (2) of section 24 provides that where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of the business in speculative transaction carried on by him in that year. However, clause (ii) of sub-section (2) of section 24 lays down that where the loss was sustained by him in any other business, profession or vocation it shall be set off against the profits and gains, if any, of such business, profession or vocation if such business, profession or vocation continued to be carried on by him in that year. Reading clauses (i) and (ii) of sub-section (2) of section 24 in juxta position with each other, it is evident that the business is divided into two categories. Clause (i) deals with losses sustained by an assessee in a business consisting of speculative transactions while clause (ii) deals with losses sustained by him in any other business. In the context the term “such business” occurring twice in clause (ii) of sub-section (2) of section 24 has reference to business other than the speculative business which forms the subject matter of clause (i) above. In this connection we have no hesitation in agreeing with the interpretation
1399 CARRY FORWARD OF BUSINESS LOSSES
Section 35
placed by the Appellate Assistant Commissioner, and we are unable to accept the interpretation by the Tribunal which is unwarranted and far fetched. The Tribunal was not justified in vacating the order passed by the Appellate Assistant Commissioner of Income Tax and holding that share of losses from Faiz Jillani & Co., Karachi incurred and allocated in the previous years, could not be given set off against the share profit of the firm Shabbir Cotton Factory, Walhar received during the same assessment year under section 24(2)(ii) of the Income Tax Act, 1922. Cases referred to : [1969] 20 TAX 1 (Trib).
P.S. Varier v. Commissioner of Income Tax – [1940] 8 ITR 628 (Mad.) 1867.
Loss sustained by Ayurvedic physician in maintenance of dramatic troupe could be set off against his business income.
The assessee was an Ayurvedic physician. One of his other activities was the maintaining of a dramatic troupe, which gave public performances. For the relevant assessment year the assessee sought to deduct a sum as loss incurred by him in that year in the maintenance of the dramatic troupe. The Income Tax Officer refused to allow the deduction. The ground for refusal was that the maintenance of this dramatic troupe really amounted to a hobby of the assessee and therefore could not be classified as a business. Held that there was no material on the record to support the finding that the assessee‟s dramatic troupe was maintained by him as a hobby. It might not be a „business‟, but it certainly must be classified as a source, or possible source, of income. Therefore the assessee was entitled to set off the loss so claimed. _______________
WHEN LOSS ARISES
P.L.S.M. Chettyar Concern v. Commissioner of Income Tax – 9 ITC 82 (Rangoon) 1868.
Where the assessee, carrying on money-lending business, took over lands in settlement of debts due and, by merely revaluing the lands, claimed loss.
Where the assessees, carrying on money-lending business, took over lands in settlement of debts due and, by merely revaluing the lands,
1400 Section 35
Income Tax Digest.
claimed loss, but the department took the view that loss could arise only when the lands were sold, it was held that under the method of accounting adopted in the business, the assessees were not entitled to have the value of the lands reassessed in any other accounting year except that in which the lands were sold by them, and until the sale took place, the final adjustment of the loss, if any, must necessarily remain in suspense. Hulasilal Ramdayal, In re – [1941] 9 ITR 635 (All.) 1869.
If a business is closed down during relevant year, its loss can be set off against profits of other business for that year
Where the assessee, carrying on business in three shops, discontinued business in one shop within two months from the commencement of the accounting year, and claimed set off of loss in the discontinued shop against the profits of the other two shops, it was held that the set off was allowable. B.C.G.A. (Punjab) Ltd. v. Commissioner of Income Tax – [1937] 5 ITR 279 (Lahore); Soutb Indian Industrials Ltd. v. Commissioner of Income Tax [1935] 3 ITR 11 (Mad.) 1870.
Losses of discontinued business cannot be set off against current business
Where a person carries on two different trades, he is entitled to set off for purposes of Income Tax the loss incurred by him in respect of one against the profit made by him in the other. But for this principle to apply the condition precedent is that both businesses should be alive during the current year. A dead business‟s loss cannot be set off against a live business‟s gains. RM.AR.AR.RM. Arunachalam Chettiar v. Commissioner of Income Tax – 9 ITC 282 (PC) 1871.
Others.
The assessee, carrying on sole proprietary money-lending business, was also a partner with one P in a cotton business. The cotton business was discontinued and, for his share in the loss, P gave a pronote to the assessee. The assessee transferred this debt to his money-lending business and wrote off the balance due after one year as a bad debt, and claimed that the loss should be set off against his profits in money-lending business. Held that the claim for set off was not allowable.
1401 CARRY FORWARD OF BUSINESS LOSSES
Section 35
Hemraj Kanji v. Commissioner of Income Tax – 6 ITC 354 (Sind)
Where the assessee, who was not a dealer in land, claimed the set off under section 24 of the 1922 Act of the loss incurred by him on the sale of a property obtained by him in family partition, it was held that the assessee‟s claim could not be allowed. _______________
LOSSES OF ILLEGAL BUSINESS
Rawji Dhanji & Co., In re – [1940] 8 ITR 1 (Bom.) 1872.
Since tax is levied on actual income of previous year, facts must be taken as they existed during previous year.
As tax has to be imposed for the year of assessment on the actual income of the previous year, it seems plain that one must take the facts as they existed during that previous year; otherwise one is not ascertaining the actual income of the previous year, and is only ascertaining what would have been the income of the previous year, if the facts had been as they existed in a subsequent year. Thus, where certain area was part of India during relevant previous year, losses incurred in that area must be deemed to have been incurred although that area might have ceased to be part of India in the assessment year or later. _______________
INCOME AGAINST WHICH CARRIED FORWARD LOSS CAN BE SET OFF
B.K. Paul & Co., In re – [1938] 6 ITR 395 (Cal.) 1873.
Where after close of relevant previous year assessee had transferred all but one of businesses and in such businesses it had suffered loss, losses could be set off against its other income.
The assessee-HUF owned 17 businesses and real property, shares and securities. During the accounting year 1932-33, it had income from property, securities, and shares but suffered losses in the businesses. Owing to some delay on the part of the department, the assessee was not assessed during the year 1933-34. In the meantime, 16 of the 17 businesses were transferred to four companies on 14.4.1934. While completing the assessments on 28.9.1934, the Income Tax Officer took
1402 Section 35
Income Tax Digest.
the view that, in view of section 26(2) of the 1922 Act, only the successor-companies could be assessed in respect of these businesses and that, consequently, the losses in the businesses could not be set off against the assessee‟s other income. Held that, as section 24(1) specifically states, the assessee who sustains a loss in any year is entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. Here the assessee was assessed on 28.9.1934, in respect of his income, profits or gains from real property, interest on Government securities and dividends from (old) companies during the accounting year ending 13.4.1933. The assessee undoubtedly owned the 16 losing businesses throughout the whole of the same accounting year and therefore sustained a loss during that same year. Thus, the assessee came precisely within the words of section 24(1), and, therefore, section 26(2) was not applicable and the assessee was entitled under section 24(1) to have the losses in respect of these businesses set off against his other income. _______________
LOSSES OF UNREGISTERED FIRM
Commissioner of Income Tax v. Tayab Moosa And Company – [1967] 15 TAX 62 (H.C.Kar.) 1874.
Where registered firm was treated as unregistered firm, loss suffered by unregistered firm can be carried forward and set off against profits of registered firm in assessment year.
In the assessment year 1953-54 the assessee, a dealer in piece-goods, was charged to tax on a total income of Rs.54,471, in the status of a registered firm. In the immediately preceding year, namely 1952-53, assessment was made in the status of an unregistered firm and a loss of Rs.27,700 was worked out by the Income Tax Officer. The assessee‟s claim that the loss sustained in the preceding year should be set off against the profits of the assessment year 1953-54 under section 24(2) of the Income Tax Act was rejected by the Income Tax Officer on the ground that the legal entities of the firms were different in the respective two years. On appeal, the Appellate Assistant Commissioner took a different view of the matter and held that the unit of assessment was the firm and not the individual partner of the business and, therefore the assessee was entitled to adjust the earlier loss of the assessment year 1952-53 from the profits earned in the subsequent assessment year 1953-54. On further appeal by the department the Appellate Tribunal concurred in the view taken by the
1403 CARRY FORWARD OF BUSINESS LOSSES
Section 35
Appellate Assistant Commissioner. The High Court, relying on its previous judgment in Commissioner of Income Tax v. Yousuf & Co.: Held,
that the assessee was entitled to set off the loss of Rs.27,700 in the assessment year 1953-54.
Case relied on: Commissioner of Income Tax v. Yousuf & Co., [1967] 15 TAX 4.
RM.AR.AR.RM Arunachalam Chettiar v. Commissioner of Income Tax – [1936] 4 ITR 173 (PC) 1875.
Losses of unregistered firm.
Position prior to 1.4.Z939. An assessee, being a partner in an unregistered firm, is entitled in his individual assessment to adjust his share of loss in an unregistered firm against his profits under the same head or a different head. Case review: Decision of the Madras High Court in Commissioner of Income Tax v. RM.AR.RM. Arunachalam Cheitiar & Son [1934] 2 ITR 401 affirmed. _______________
ILLUSTRATIONS
Banka Mal Niranjan Das v. Commissioner of Income Tax, Punjab and N.W.F.P. – [1960] 2-TAX (Suppl.-118) (H.C.Lah.) = 1951 PLD 311 1876. Principles of set-off of losses. Assessee sustaining loss under any of heads mentioned in section 15 can set-off loss against income under any head in that year. But brought forward losses cannot be set off against income from any other source or business. Govindram Bros. Ltd. v. Commissioner of Income Tax – [1946] 14 ITR 764 (Bom.) 1877. Cloth business and speculation business. Business in speculation in cotton and speculation in silver constitutes same business. Per Court: There can be no reason why a person, provided he conducts himself in a lawful manner, should not carry on the business of speculating in futures. The fact that in a particular year the assessee company as a speculator did not happen to speculate in a particular commodity or in a particular market did not make them carry on a separate or a new business when they recommenced to deal in that commodity or in that market. Speculation by itself is not a nexus that connects the silver business with the cotton business. What would make those businesses into one
1404 Section 35
Income Tax Digest.
business is not the factor of speculation or the fact that the assessee does not take delivery of those commodities but does forward business, but some other inter-connection or a nexus which has got to be found independently of the speculative character of those businesses. Judicial analysis: EXPLAINED IN: Manilal Dahyabhai v. Commissioner of Income Tax [1959] 37 ITR 398 (Bom.) with the following observations: “ . . . . . Delivering the supplementary judgment of the court, Mr. Justice Chagla, as he then was, observed that speculation by itself was not a nexus that connected the silver business with the cotton business conducted by the assessee and that what would make these businesses into one business was not the factor of speculation or the fact that the assessee did not take delivery of those commodities but did forward business, but some other inter-connection or a nexus which had to be found independently of the speculative character of those businesses. It appears that the learned Judge, though with some reluctance, agreed on the facts with the view taken by Sir Leonard Stone, Chief Justice, that the business in speculation in cotton and speculation in silver conducted by the assessee was the same business. This case is evidently no authority for the proposition that certain facts found proved must inevitably lead to the inference that two sets of business conducted by an assessee are or are not the same business.”
S.N.A.AL.CT. Chidarnbaram Chettiar v. Commissioner of Income Tax – [1945] 13 ITR 177 (Mad.) 1878. Where a business carried on in a foreign branch and in India, was held to be the same business The assessee was carrying on banking and money-lending business in British India as well as in Federated Malay States. Its business abroad was conducted by agents appointed for fixed period and a separate set of accounts was kept there. There was frequent correspondence between the agent and the assessee who asked for particulars and explanations and issued instructions regarding the conduct of the business. There was a flow of remittances both ways according to the needs of the business and the final trading result was brought into the accounts in British India at the end of the year. On the question whether the two businesses of the assessee constituted the same business so as to entitle the assessee to set off its carried forward losses against its foreign profits: Held that the assessee‟s business operations in British India and in Federated Malay States constituted one and the same business, and therefore it was entitled to set off of its carried forward losses against profits of its foreign business.
1405 SPECULATION LOSSES
Section 36
Section 36* Speculation losses
PAGE NO
SPECULATION LOSSES ARE TO KEPT DISTINCT
1879. Speculation losses are to kept distinct. (H.C.Kar)
_
[1987] 56 TAX 98 1406
1880. Net loss suffered in speculation business instead of being distributed among partners should be carried forward and set off against income from the same business in subsequent _ years. [1983] 47 TAX 222 (H.C.Kar.)
1406
1881. Loss sustained in speculative business can be adjusted or set _ off only against profits of speculative business. [1978] 38 TAX 1 (H.C.Kar.) = PLD 1978 Kar. 414
1407
*
Corresponding to section 24(2)(ii) of the 1922 Act.
1406 Section 36
Income Tax Digest.
Section 36* Speculation losses
SPECULATION LOSSES ARE TO BE KEPT DISTINCT
Sadiq Traders Ltd. v. Commissioner of Income Tax – [1987] 56 TAX 98 (H.C.Kar.) 1879.
Speculation losses are to be kept distinct.
Section 24 of 1922 Act, provides that where any assessee sustains any loss of profit or gain in any year „he shall be entitled to have the amount of loss set off against his income, profit, or gain under any other head in that year‟. The first proviso to this section has been held to be an independent provision which provides that where the assessee is engaged in speculative transactions which are in the nature of business such transaction shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee and any loss sustained by him in such business shall be set off only against the income profit and gains of the business. Therefore, if speculative transactions are not in the nature of business loss sustained in such dealing shall be set off from the income profit and gain under any other head. Commissioner of Income Tax v. Haji Gulzar & Sons. – [1983] 47 TAX 222 (H.C.Kar.) 1880.
Net loss suffered in speculation business instead of being distributed among partners should be carried forward and set off against income from the same business in subsequent years.
The above case decided by the Karachi Bench of the then High Court of West Pakistan was quoted with approval by a Bench of this Court in the case of Haji Mushtaq Ahmad v. Commissioner of Income Tax (PLD 1978 Kar. 414). In the above-referred decisions, the Court took the view that the first proviso to section 24(1) is in the nature of an independent provision of law and is not controlled by the second proviso to section 24(1) of the Act. We are in respectful agreement with the views expressed in the above *
Corresponding to section 24(2)(ii) of the 1922 Act.
1407 1407 SPECULATION LOSSES
Section 36
decision and the learned counsel for the Department was unable to advance any argument to persuade use to take a contrary view. We accordingly answer the reference in the affirmative but there will be no order as to costs. Cases relied on: Commissioner of Income Tax, Gujrat v. Kanti Lal Nathuchand Saint [1967] 63 ITR 318; Commissioner of Income Tax v. Haji Ferozzuddin (PLD 1967 Kar.) 812 = [1967] 16 TAX 26 (H.C.Kar.) and Haji Mushtaq Ahmad v. Commissioner of Income Tax (PLD 1978 Kar. 414) = [1978] 38 TAX 1 (H.C.Kar.)
Haji Mushtaq Ahmad v. Commissioner of Income Tax – [1978] 38 TAX 1 (H.C.Kar.) = PLD 1978 Kar. 414 1881.
Loss sustained in speculative business can be adjusted or set off only against profits of speculative business.
An overriding provision is a provision, which prevails despite any law to the contrary, as if it impliedly repealed what has been stated before. The proviso [to section 24(1)] states that where the assessee is engaged in a business in speculative transaction, that business shall, notwithstanding any provision of law to the contrary, be deemed o constitute a distinct and separate business from any other business carried on by him and the losses sustained by him in such speculative business shall be set off only against the profits earned from the speculative business. But for this proviso the assessee would have been entitled to claim adjustment or set off of his losses in speculative business against profits from any other business in computing the aggregate total income of the assessee under section 10 of the Act. After the proviso was enacted, the speculative losses can no longer be adjusted or set off except against the profits of the speculative business. therefore, in effect, the proviso had modified the speculative business. Therefore, in effect, the proviso has modified the method of computing profits and losses of multiple business, including speculative business, carried on by the assessee and, in this way, it qualifies or governs section 10 of the Act. The subject matter of the proviso goes beyond the field and scope covered by the main section 24(1) which relates to the setting off of losses sustained under one head in year against the profits earned under any other head in that year. Although it is worded in the form of a proviso, its plain and clear language leaves us in no doubt that it is a substantive enactment. At the same time the proviso also acts as an exception to the main section by restricting the setting off of the speculative losses against the profits of the same speculative business, thereby prohibiting by implication the setting off of the losses against profits earned under any other head of income, which is permitted under the main section
1408 Section 36
Income Tax Digest.
24(1). The object of enacting the proviso seems to be to avoid the mischief of assessee who carries on business, purchasing speculative losses in order to reduce their profits. Cases referred to: Commissioner of Income Tax v. Haji Ferozuddin (1967 PLD Kar. 812) and Commissioner of Income Tax v. Jaganath Mahadeo Prasad (I969) 71 ITR 296.
1409 LIMITATION AS TO SET-OFF AND CARRY FORWARD OF LOSSES IN THE CASE OF FIRMS, PARTNERS, ETC.
Section 38
Section 38* Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.
PAGE NO
UNABSORBED DEPRECIATION
1882. RF is not entitled to take benefit of unabsorbed depreciation _ of its predecessor tax entity. 1971 SCC 388 = [1975] 31 TAX 55 (S.C.Pak.)
1411
DEPRECIATION ALLOWANCE CAN BE CARRIED FORWARD WITHOUT ANY TIME LIMIT
1883. Depreciation allowance can be carried forward without any _ time limit. [1992] 65 TAX 277 (H.C.Kar)
1412
1884. No return filed for the year of loss and in consequence no loss determined, assessee is entitled to have the loss determined, carry forward and set off against profit of _ subsequent year. [1962] 6 TAX 75 (H.C.Lah.) = 1962 PTD 683 = 1962 PLD 870
1412
DISSOLUTION OF REGISTERED FIRM
1885. Dissolution of registered firm, partner continuing the business as sole proprietor in the same name and in the same premises is entitled to set-off his share of loss in registered firm against profits earned as sole proprietor. _ [1967] 16 TAX 51 (H.C.Kar.)
1414
UNREGISTERED FIRM CONVERTED INTO REGISTERED
1886. Unregistered firm converted into registered firm is entitled to the benefits of carrying forward and set off of loss _ sustained by unregistered firm. [1967] 15 TAX 4 (H.C.Kar.) = 1967 PTD 161 = 1967 PLD 363
*
Corresponding to section 24(2) of the 1922 Act.
1414
1410 Section 38
Income Tax Digest. PAGE NO
SHARE OF LOSS
1887. Share of loss in unregistered firm can be set off against share of profits in registered firm for the same charge year. _ [1967] 16 TAX 26 (H.C.Kar.)
1416
1888. Share of loss from one firm cannot be carried forward and _ set off against the profits from another firm. [1963] 7 TAX 209 (H.C.Kar)=1963 PTD 413 = 1963 PLD 499
1418
1411 LIMITATION AS TO SET-OFF AND CARRY FORWARD OF LOSSES IN THE CASE OF FIRMS, PARTNERS, ETC.
Section 38
Section 38* Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.
UNABSORBED DEPRECIATION
Rivoli Theatres, Karachi v. Commissioner of Income Tax, South Zone, Karachi and another – 1971 SCC 388 = [1975] 31 TAX 55 (S.C.Pak.) 1882.
RF is not entitled to take benefit of unabsorbed depreciation of its predecessor tax entity.
We appreciate and agree with the reasons that led to the decisions in the aforesaid three cases. We accordingly hold that the registered firm created on 22nd July, 1960 is an entirely different assessable entity, and as such not entitled to avail of the unabsorbed depreciation of the previous year which accrued to a different person. Having regard to our findings we are not called upon to express any opinion on the contention that even if it was a case of successions to a new business, the stocks taken over by the new business had to be valued after taking into account any depreciation not allowed during the previous year inasmuch as section 10(5)(b) of the Income Tax Act speaks about “depreciation actually allowed” to an assessee under the Act. This appeal is accordingly, partly allowed. We direct that so far as the period from 27th June, 1960 to 21st July, 1960 is concerned, the original firm of partnership is entitled to the unabsorbed depreciation for previous year, and such depreciation shall, accordingly, be allowed to the firm. As regards the rest of the claim of the appellants, the appeal is dismissed. There will be no order as to costs. _______________
*
Corresponding to section 24(2) of the 1922 Act.
1412 Section 38
Income Tax Digest.
DEPRECIATION ALLOWANCE CAN BE CARRIED FORWARD WITHOUT ANY TIME LIMIT
Commissioner of Income Tax v. Anwar Textile Mills Ltd. – [1992] 65 TAX 277 (H.C.Kar.) 1883.
Depreciation allowance can be carried forward without any time limit.
The language used in the proviso appears to us to indicate that section 24(2) of 1922 Act is a provision which deals with carried forward losses while carried forward depreciation does not come within section 24(2), but flows through an entirely different channel which is provided under section 10(2)(vi) proviso (b) of 1922 Act. The subject of depreciation allowance has been dealt with in section 10(2)(vi). The provision permitting it to be carried forward losses under section 24(2) as well as carried forward depreciation allowance under section 10(2)(vi) proviso (b) are capable of being adjusted against the profits and gains of business of the year to which they are carried forward that a provision has been made fixing the order in which they will be absorbed. The fixing of the priority also does not appear to be without purpose. The carried forward losses are, under section 24(2) capable of being adjusted up to a maximum of six years. The depreciation allowance which is permitted to be carried forward is, however, allowed to be carried forward without any time limit until it is totally absorbed. Commissioner of Income Tax, North Zone (West Pakistan), Lahore. v. Sheikco Ltd., Ismailabad, Multan – [1962] 6 TAX 75 (H.C.Lah.) = 1962 PTD 683 = 1962 PLD 870 1884.
No return filed for the year of loss and in consequence no loss determined, assessee is entitled to have the loss determined, carry forward and set off against profit of subsequent year.
The assessee, a private limited company, carried on - business of commission agency. It suffered losses in the assessment years 1947-48 and 1948-49 but did not file any return for these years. Consequently no assessment for these years was made in respect of the assessment year - 1949-50 the assessee filed a voluntary return claiming a set off of the losses of the preceding years. Likewise for the assessment years 1950-51 and 1951-52, in respect of which proceedings under section 34 were started, the assessee claimed a similar set off. The trading result as determined for the assessment years 1949-50 and 1950-51 was a loss, and therefore, no question of any set-off of previous losses arose in so far as these years were concerned. Before the Income Tax Officer
1413 LIMITATION AS TO SET-OFF AND CARRY FORWARD OF LOSSES IN THE CASE OF FIRMS, PARTNERS, ETC.
Section 38
the assessee claimed a set off of his losses in the assessment years 1947-48 and 1948-49 against the profits in the assessment year 195152, but the Income Tax Officer turned down the claim on the ground that the assessee, not having filed a return, the losses had not been determined. The Income Tax Officer, however, allowed carry forward and set off of the losses, determined in the assessment years 1949-50 and 1950-51 against the profits of the assessment year 1951-52. Being unsuccessful before the Appellate Assistant Commissioner the assessee agitated the matter before the Tribunal. The Tribunal allowed carry forward and set off of the losses incurred during the assessment years 1947-48 and 1948-49 against the profits of the assessment year 1951-52, on the ground that “the right to claim the relief only arose to the assessee in the assessment year 1951-52, when the assessee had made profits and had sought a set off of the losses incurred during the previous years against such profits, and that the fact that the Income Tax Officer had not, for any reason, (may be that he was not aware of such losses as the assessee had not filed any return) computed the losses of the earlier years could have no bearing on the right of the assessee which arose in the year 1951-52.” On a reference by the Department: Held, that, (i)
the assessee not - having filed any return in respect of the years 1947-48 and 1948-49 and in consequence there having been no determination of the loss under sub-section (3), the loss could not have been carried forward under subsection (2) of section 24 of the Act; and
(ii)
the assessee is entitled to have his losses in a year set off against his gains and profits in the year of assessment, but it is depended upon the loss having been ascertained, which could only be done, if a return has been filed and a regular assessment made by the Income Tax Officer, in which case, a duty is cast upon the Income Tax Officer to notify the determined loss. If, therefore, no return has been filed and the loss has not been determined, sub-section (2) of section 24 cannot be availed of. Sub-sections (1), (2) and (3) are intended to apply to an assessment in the same year and an interpretation to the contrary is not tenable.
Cases distinguished: Commissioner of Income Tax v. Khushal Chand Dagga [1961] 4 TAX 64]. _______________
1414 Section 38
Income Tax Digest.
DISSOLUTION OF REGISTERED FIRM
Commissioner of Income Tax v. Muhammad Aqeel And Company – [1967] 16 TAX 51 (H.C.Kar.) 1885.
Dissolution of registered firm, partner continuing the business as sole proprietor in the same name and in the same premises is entitled to set-off his share of loss in registered firm against profits earned as sole proprietor.
The assessee was one of the partners of a registered firm carrying on business in textile goods. The registered firm which was working at a loss was dissolved and the assessee continued the business under the same name and in the same premises, as sole proprietor. In making the assessment the Income Tax Officer refused to carry forward and set off the assessee‟s share of loss in the registered firm against his profits earned in his individual capacity on the ground that the firm having discontinued the unabsorbed loss became capitalised. The Appellate Tribunal allowed set off of the loss holding that the business activity unquestionably remained the saint and as such the amount of unabsorbed loss should have been adjusted against the income of the assessee. On a reference under section 66(1) of the Income Tax Act: Held, that the business carried on by the assessee was the same as was carried on by the dissolved firm. In view of the fact that the business of the dissolved firm was continued by the assessee we have no hesitation in coming to the conclusion that the assessee would be entitled to the benefit contained in section 24(2) of the Income Tax Act. Case relied on: Ismail Jama v. Commissioner of Income Tax (PLD 1963 Karachi 499). Cases referred to: Sitaram Motiram Jain v. Commissioner of Income Tax [1962] 5 TAX 77. _______________
UNREGISTERED FIRM CONVERTED INTO REGISTERED
Commissioner of Income Tax v. Yousuf & Company – [1967] 15 TAX 4 (H.C.Kar.) = 1967 PTD 161 = 1967 PLD 363 1886.
Unregistered firm converted into registered firm is entitled to the benefits of carrying forward and set-off of loss sustained by unregistered firm.
The assessee carried on business in textile goods and karyana. In the assessment year 1953-54 assessment was made in the status of an
1415 LIMITATION AS TO SET-OFF AND CARRY FORWARD OF LOSSES IN THE CASE OF FIRMS, PARTNERS, ETC.
Section 38
unregistered firm and a loss of Rs.34,024 was determined. In the subsequent year 1954-55 the Income Tax Officer made assessment in the status af a registered firm determining profits at Rs.1,24,270, Against the profits the assessee sought to set off the loss sustained in the preceding year, under the provisions of section 24(2) of the Income Tax Act. The Income Tax Officer refused this benefit on the ground that the legal entity in the two respective years were not the same. When the matter went up to the Appellate Tribunal it disagreed with the view taken by the Income Tax Officer and held that the firm was clearly entitled to the relief under section 24(2) of the Act, as it remained the same and continued to be the same unit of assessment, notwithstanding the change in its status during the two assessment years. Affirming the order of the Appellate Tribunal the High Court: Held,
that the mere fact that the registered in the same or the change in its legal entity, entitlement to the benefits therefore, taken away.
unregistered firm became following year, there is no as the assessee, and its under section 24 is not,
Registration under the Income Tax Act does not affect or bring about any change in the firm, as a unit of assessment. It continues to remain the same “legal entity” or “assessee” for the purposes of the computation of profits earned by it. The registration of the firm has nothing to do with its being a unit of assessment. The firm, whether it is registered or unregistered is a legal entity in its own status. Undoubtedly, therefore, the registration of the firm in the following year, in the above situation, would not make any difference for the purpose of its claim to the benefits of section 24, as it remains the same legal entity, the same unit of assessment and the same assessee, in the two respective years. Case relied on: Commissioner of Income Tax v. Jagannath Narsidas [1965] 11 TAX 200. Cases distinguished: Seth Ismail Jamal Rudhani v. Commissioner of Income Tax [1963] 7 TAX 209 and Commissioner of Income Tax v. Jadavji Narsidas & Co., [1963] 7 TAX 237 (S.C.). Judicial analysis : The position in section 24 of the repealed Income Tax Act, 1922 to which this case relates is identical to section 38(4). The principle laid down by the Honourable Sind High Court according to Tax Department is now not valid in view of specific section 38(5)(c) of the Ordinance, which says:-
1416 Section 38
Income Tax Digest.
“Nothing contained in section 34, 35, 36 and 37 and sub-section (1), (2), (3) and (4) of this section shall entitle (a)
............
(b)
............
(c)
any person who had succeeded, in such capacity, any other person, carrying on any business or profession, otherwise than by inheritance, to carry forward and set off against his income any loss sustained by such other person.”
The principle laid down by the Honourale Sind High Court may still prevail as change of status from URF to RF is not strictly speaking amounts to succession as the legal entitly or the assessee (as held in the decision) is the same. _______________
SHARE OF LOSS
Commissioner of Income Tax, South Zone, v. Haji Ferozuddin – [1967] 16 TAX 26 (H.C.Kar.) 1887.
Share of loss in unregistered firm can be set off against share of profits in registered firm for the same charge year.
The assessee was a partner in an unregistered and a registered firm. In the assessment year 1952-53 the assessee disclosed profit of Rs.50,568 in the registered firm and loss amounting to Rs.60,812 in the unregistered firm claimed adjustment of his loss in the unregistered partnership against his profits in the registered partnership firm. The Income Tax Officer rejected the claim on the ground that the assessee was not entitled to do so under the second proviso to section 24(1) of the Income Tax Act. Having failed in his appeal before the Appellate Assistant Commissioner the assessee went in further appeal to the Appellate Tribunal. The Tribunal held that the assessee was entitled to set off his loss from the unregistered firm against his income from the registered firm. On a reference under section 66(1) of the Act it was contended before the High Court on behalf of the department that under the second proviso to section 24(1) if the profits of an unregistered firm are not assessed under the provisions of clause (b) of sub-section (5) of section 23 in the manner applicable to a registered firm its loss can be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of its partners. It was contended that the second proviso of the aforementioned section 24(1) being an independent provision would also be taken into consideration in
1417 LIMITATION AS TO SET-OFF AND CARRY FORWARD OF LOSSES IN THE CASE OF FIRMS, PARTNERS, ETC.
Section 38
computing the income an assessee under section 10 of the Act. On behalf of the assessee it was contended that the share of a partner in the income of a firm falls under the head profits and gains of business provided in section 10 of the Act and his total income from this source ought to be computed under the head “business” under section 10 unless a contrary intention appears in any other part of the enactment. It was urged that the treatment of losses under section 24 is only for the purposes of setting off losses under different heads and when section 16(1)(b) refers to section 24(1) it refers only to those cases where a set off is claimed under different heads and that if an assessee claims set off under the same head section 24 has no application to such cases: Held,
that whether a firm is registered or unregistered partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share in the firm, when the set off be against other profits under the same head of income, as in the present case, within the meaning of section 6 of the Act.
Wherever the partner of an unregistered firm claims a set off of his losses under one head against profits of another head he will be governed by section 24 and consequently subject to the second proviso attached to it; and if the assessment has not been made against unregistered firm under section 23(5)(b) of the Income Tax Act his losses of that business cannot be adjusted against his income under any other head. But if the adjustment is claimed in respect of his income under the same head, as in the present case, from other sources under the head “business” there is nothing in the second proviso to section 24(1) read with the proviso to section 16(1)(b) of the Act which should prevent him from claiming it as a set off under section 10 of the Income Tax Act. Cases relied on: Arunachalam Chettiar v. Commissioner of Income Tax [AIR (1936) P.C. 133] and Southern Marhatta Railway v. Bezwada Municipality [1945] 47 L.R. Bomb. 587. Cases distinguished: Commissioner of Income Tax v. Jadavji Narsidas & Co., [1963] 7 TAX 237 (S.C.). Case referred to: Commissioner of Income Tax v. Arunachalam Chettiar (47 Madras 660); Commissioner of Income Tax v. Jagannath Narsidas [1965] 11 TAX 200.
1418 Section 38
Income Tax Digest.
Seth Ismail Jamal Budhani v. Commissioner of Income Tax, Karachi – [1963] 7 TAX 209 (H.C.Kar.) = 1963 PTD 413 = 1963 PLD 499 1888.
Share of loss from one firm cannot be carried forward and set off against the profits from another firm.
The assessee, besides doing individual business in textile goods on a wholesale basis, held 5/29 share in the firm known as Haji Abdul Karim & Co. The business suffered a loss in the assessment year 1952-53 (relevant to the calendar year ending 31st December 1951) and the share of the assessee came to Rs.73,907. The assessee ceased to be a shareholder in the said firm from the 1 st January 1952. In the assessment year 1953-54 be became a shareholder in the firm known as Ismail Jamal & Company. This company earned a profit and assessee‟s share for the assessment year 1953-54 came to Rs.44,477. The Income Tax Officer did not carry forward the loss suffered by the assessee in Haji Abdul Karim & Co. in the year 1952-53 with the result that the profit earned by the assessee in the firm Ismail Jamal & Co. was subjected to tax without any set off for the said loss. Both the Appellate Assistant Commissioner and the Appellate Tribunal confirmed the order of the Income Tax Officer. The Tribunal took the view that the assessee though he was a partner in two firms in the two years and carrying on the business in the same commodity he could not be said to be carrying on the same business. He might have been carrying on trade in the same commodity but the business could not be said to be the same in the two years. On a reference, the High Court affirming the order of the Tribunal: Held, that the business of Haji Abdul Karim & Co. cannot be said to be the business of the firm styled Haji Ismail Jamal & Co. In the first place if the business of Haji Abdul Karim & Co. had ceased to exist it would have no possible effect on the business of Haji Ismail Jamal & Co. It cannot, therefore, be said that the two‟ businesses are the same. In the second place, the persons composing the two companies are not the same. One company may take to other businesses without affecting the business of the other. In short, these two businesses cannot be said to be interlaced or interdependent. Cases referred to: Scales v. George Thompson & Co. (13 Tax Cases 83); Manual Dayabhai v. Commissioner of Income Tax (1960) 2-TAX (III-13) and Sitaram Motiram Jam v. Commissioner of Income Tax [1962] 5 TAX 77.
1419 ALLOWANCE FOR INVESTMENT IN DEFENCE SAVINGS AND NIT CERTIFICATES, ETC.
Section 41
Section 41* Allowance for investment in Defence Savings and NIT Certificates, etc.
PAGE NO
DEDUCTION OR REBATE, MEANING OF
1889. Assessee invested a sum towards purchase of Defence Saving Certificates and claimed it as a straight deduction from the income of the assessee, held that the Tribunal was justified in allowing rebate on investment instead of straight _ deduction. [1996] 73 TAX 247 (H.C.Lah.)
1420
1890. Assessee a non-resident claimed investment allowance which the Income Tax Officer disallowed on the ground that there is no difference between taxable income and total income returned held that Tribunal rightly directed to allow the _ claim. [1992] 66 TAX 163 (H.C.Kar.)
1421
1891. Purchase of Defence Saving Certificates after the end of the previous year is not admissible deduction in the relevant _ assessment year. [1976] 33 TAX 209 (H.C.Lah.)
1421
1892. Registered firm liable to pay super-tax only is entitled to _ exemption of investment envisaged in section 15AA. [1968] 17 TAX 116 (H.C.Dacca)
1422
*
Corresponding to section 15AA of the 1922 Act.
1420 Section 41
Income Tax Digest.
Section 41* Allowance for investment in Defence Savings and NIT Certificates, etc.
DEDUCTION OR REBATE, MEANING OF
Mirza Book Agency v. Commissioner Of Income Tax, Zone-B, Lahore – [1996] 73 TAX 247 (H.C.Lah.) 1889.
Assessee invested a sum towards purchase of Defence Saving Certificates and claimed it as a straight deduction from the income of the assessee, held that the Tribunal was justified in allowing rebate on investment instead of straight deduction.
We have carefully considered section 15AA and section 16(1) of the Income Tax Act 1922. The contention of the appellant that the amount invested for the purchase of postal certificates as well as other certificates including Defence Saving Certificate as mentioned in section 15AA of the Act; a straight deduction would be available for the said amount is misconceived; as the concept of “Taxable Income” was neither available under the Income Tax Act, 1922 nor in the Ordinance 1979; but is always available in the Finance Act/Ordinance for each year for a limited purpose. The First Schedule of the Finance Act, 1976, defined the expression “Taxable Income” for the purpose of levying tax and sub-para (b) of explanation to the First Schedule laid down:(b)
In any other case, the total income of an assessee as diminished by the allowance admissible under the first and third provisos to sub-section (1) of section 7, section 15, section 15A, section 15AA, section 15C, section 15CC, section 15CCC, section 15D, section 15F, section 15H, section 15HH, section 58F and section 58W of the Income Tax Act, 1922 (XI of 1922)”
Clearly envisages that the appellant firm was entitled to a rebate and not to a deduction from the taxable income. The learned Tribunal
*
Corresponding to section 15AA of the 1922 Act.
1421 ALLOWANCE FOR INVESTMENT IN DEFENCE SAVINGS AND NIT CERTIFICATES, ETC.
Section 41
rightly observed that only rebate was allowed according to section 15AA of the Income Tax Act 1922. Commissioner of Income Tax, South Zone, Karachi v. Noor Jehan S. All Bhai – [1992] 66 TAX 163 (H.C.Kar.) 1890.
Assessee a non-resident claimed investment allowance which the Income Tax Officer disallowed on the ground that there is no difference between taxable income and total income returned held that Tribunal rightly directed to allow the claim.
The assessee in the relevant years had claimed personal allowance under section 15H, investment allowance under section 15C and relief on account of donation under section 15D of the repealed Income Tax Act, 1922 as non-resident which has been challenged by the Department. The Appellate Assistant Commissioner, as well as the Income Tax Appellate Tribunal did not agree with the Department and placed reliance in the decision of this Court in Commissioner of Income Tax v. R. C. Chapman [1980] 41 TAX 73 (H.C.Kar.) = (1979 PTD 484) where it was held that a non-resident assessee is entitled to unearned relief under section 15A of the Income Tax Act in spite of the provisions of section 16(1) thereof. We are also in respectful agreement with the above decision of the Division Bench of this Court and would, therefore, answer question (b) in the affirmative and find that the Income Tax Appellate Tribunal was justified in holding that the respondent, who is non-resident, was entitled to rebate in respect of investment allowance under section 15D, 15C and 15H of the repealed Act. Case relied on: Commissioner of Income Tax v. R.C. Chapman [1980] 41 TAX 73 (H.C.Kar.) = (1979 PTD 484).
Hamiduddin Samiuddin v. Commissioner of Income Tax – [1976] 33 TAX 209 (H.C.Lah.) 1891.
Purchase of Defence Saving Certificates after the end of the previous year is not admissible deduction in the relevant assessment year.
The Tribunal was justified in holding that the investment of Rs.17,500 made by the assessee in the purchase of Defence Saving Certificates on the 20th of June, 1970, after the end of the previous year relevant to the assessment year 1970-71 in question, could not be allowed as an admissible deduction in that assessment year.
1422 Section 41
Income Tax Digest.
Cases referred to : Lupaard‟s Vlet Estate & Gold Mining Co. Ltd. v. Commissioners of Inland Revenue (15 Tax Cas. 573); Commissioner of Income Tax v. S. M. Chitnavis (AIR 1932 P.C. 178); Commissioner of Income Tax v. Basant Rai Takhat Singh (1933) ITR 197 and Sir Kikabhai Premchend v. Commissioner of Income Tax [1953] 24 ITR 506.
Perfume Supply Co., Mitford, Dacca v. Commissioner of Income Tax, Dacca – [1968] 17 TAX 116 (H.C.Dacca) 1892.
Registered firm liable to pay super tax only is entitled to exemption of investment envisaged in section 15AA.
The assessee was a registered firm. It purchased postal savings certificates of the value of Rs.12,000 and in its assessment claimed the benefit of exemption under section 15AA of the Income Tax Act. The Income Tax Officer levied super tax on the firm and disallowed the claim on the ground that the deduction claimed was not permissible in respect of super tax. He took the view that “this claim is not admissible as super tax on firm is levied on total income and not on taxable income”. The Income Tax Officer, however, allowed rebate on account of donation for charitable purposes, under section 15D of the Act. Both the Appellate Assistant Commissioner and the Appellate Tribunal concurred in the view taken by the Income Tax Officer. The High Court reversing the order of the Tribunal: Held, that (i)
section 15AA also applied to super tax. The assessee, a, registered firm is entitled to exemption as envisaged in section 15AA to super tax; and
(ii)
the amount of Rs.12,000 is to be deducted from, the total income of the assessee.
1423 ALLOWANCE FOR PURCHASE OF BOOKS
Section 42
Section 42* Allowance for purchase of books
PAGE NO
EXEMPTION CLAIMED ON ACCOUNT OF EDUCATIONAL EXPENSES OF CHILDREN OF HUF
1893. Portion of income expended on account of educational expenses of children of members of Hindu undivided family held as exempt in the hands of Hindu undivided family. _ [1968] 18 TAX 11 (H.C.Dacca)
*
Corresponding to section 15E of the 1922 Act.
1424
1424 ALLOWANCE FOR PURCHASE OF BOOKS
Section 42
Section 42* Allowance for purchase of books
EXEMPTION CLAIMED ON ACCOUNT OF EDUCATIONAL EXPENSES OF CHILDREN OF HUF
Commissioner of Income Tax, Chittagong Zone, Chittagong v. Jagabandhu Saha and others – [1968] 18 TAX 11 (H.C.Dacca) 1893.
Portion of income expended on account of educational expenses of children of members of Hindu Undivided Family held as exempt in the hands of Hindu undivided family.
The assessee, a Hindu Undivided Family, in its assessment claimed exemption on account of educational expenses of the children of the members of the family, under section 15E of the Income Tax Act. The Income Tax Officer rejected the claim holding that a Hindu Undivided Family could not have any children of its own. On appeal the Appellate Assistant Commissioner allowed the claim on the ground that “the Hindu Undivided Family is a composite body made up of its individual members and the words „his children‟ used in this connection could be referred to the Hindu Undivided Family” This view was accepted by the Appellate Tribunal. On a reference: Held, that on a reading of section 15E, we cannot attribute such a discriminatory intention to the Legislature that a Hindu undivided family would not be entitled to claim such exemption under section 15E of the Act as will be available to others for educational expenses of the children. Exemption can be claimed by assessee on ground that there are children who are wholly dependent upon this Hindu undivided family.
*
Corresponding to section 15E of the 1922 Act.
1425 ALLOWANCE FOR DONATIONS FOR CHARITABLE PURPOSES
Section 47
Section 47* Allowance for donations for charitable purposes
PAGE NO
GENERAL
1894. Option lies with the assessee to allocate this donation to any _ income he chooses. [1985] 51 TAX 20 (H.C.Kar.)
1426
EXPRESSION “ANY SUM PAID”
1895. Donation to approved institution or fund is confined to cash _ payment, expression “sum paid”. [1968] 18 TAX 8 (H.C.Dacca)
*
Corresponding to section 15D of the 1922 Act.
1427
1426 Section 47
Income Tax Digest.
Section 47* Allowance for donations for charitable purposes
GENERAL
Commissioner of Income Tax v. Guest Keen & Nettles Fold (Pak.) Ltd. – [1985] 51 TAX 20 (H.C.Kar.) 1894.
Option lies with the assessee to allocate this donation to any income he chooses.
The learned counsel for the respondent has contended that as the donation was paid from the common fund without specifying from which division it was paid, the option lay with the respondent to claim in respect of income from any division. The admitted position is that respondent was carrying on business in two different divisions, one called the manufacturing division and the other agency division. The manufacturing division enjoyed tax holiday under section 15BB of the Act. The respondent made contribution out of the common fund. The fact that he had claimed the entire amount from the agency business proves that he had paid it from that income. In these circumstances question arises whether the Income Tax Officer had the authority to apportion the donation in two portions. The learned counsel for the Department has not been able to point out to any provision authorising the Income Tax Officer to make such apportionment. Nor any provision has been referred which restricts the assessee from allocating such donations to any division of his income. Section 15D provides that the tax shall not be payable by any assessee in respect of any sums paid by him as donation‟. Such donation can be paid out of the taxable income or exempted income. The sole discretion to decide apportionment is entirely with the assessee and not the Assessing Officer. The assessee is free to manage his own affairs according to his own wishes. It is thus well settled that where the assessee has paid any donation for which be is entitled to claim exemption or rebate, out of the common fund of exempted income and taxable income, the option lies *
Corresponding to section 15D of the 1922 Act.
1427 ALLOWANCE FOR DONATIONS FOR CHARITABLE PURPOSES
Section 47
with the assessee to allocate this donation to any income he chooses. The Department cannot split the donation or apportion it proportionately or entirely to any of the specified income. _______________
EXPRESSION “ANY SUM PAID”
Commissioner of Income Tax, East Pakistan, Dacca v. A. Khaleque (c/o Amin Agencies Ltd., Chittagong) – [1968] 18 TAX 8 (H.C.Dacca) 1895.
Donation to approved institution or fund is confined to cash payment, expression “sum paid”.
In respect of the assessment years 1960-61 and 1961-62, the assessee claimed rebate under section 15D of the Income Tax Act on donation made to GMD Foundation, approved by the Central Board of Revenue. The donations represented transfer of shares of the value of Rs.1,10,000 and Rs.1,17,170 for the years 1960-61 and 1961-62, respectively. The Income Tax Officer rejected the claim on the ground that the transfer of shares would not be “sums paid” within the meaning of section 15D of the Income Tax Act. The Appellate Assistant Commissioner, however, took the contrary view and held that section 15D does not contemplate donation in cash only but it includes donation in kind as well. This view was upheld by the Appellate Tribunal. On a reference: Held, that the expression “sum paid” occurring in section I5D means a particular amount of money paid in cash. That being so, we do not consider that the Tribunal was justified in holding that transfer of shares would also come within the expression “any sum paid” occurring in section 15D.
1428 Section 48
Income Tax Digest.
Section 48* Exemption from tax of newly established industrial undertakings
PAGE NO
CAPITAL EMPLOYED
_ 1896. “Capital employed” - Scope of. 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828
1429
1897. Amount deposited by shareholder is proper share capital and is “capital employed” for the purposes of computation of capital _ under section 15B of the 1922 Act. [1974] 29 TAX 242
1429
1898. Borrowed money is also “capital employed” in industrial _ undertaking and is exempt from tax. [1970] 22 TAX 170 (H.C.Lah.) _ 1899. Computation of „Capital‟. 1963 PTD 271 (H.C.Kar) = 1963 PLD 385
1430 1431
PROVISIONS OF SECTION FOR THE PURPOSE OF DETERMINATION OF TOTAL INCOME
1900. Provisions of section 16 of 1922 Act dealing with exemptions, exclusions and inclusions for the purpose of determination of total income whereas sub-section (4) providing such exemptions, etc., incorporated in section 15 of 1922 Act, held does not render the provision of this sub_ section inoperative. [1974] 30 TAX 203 (H.C.Kar.)
1432
1901. Weaving machinery plant was installed in the same premises where spinning plant was working held to be independent, separate and different industrial undertaking and is entitled to exemption independent of spinning section. _ [1974] 29 TAX 123 (H.C.Kar.)
1432
1902. Where assessee entitled to relief under section 15B of 1922 Act but did not claim it in the return of income, Assessing _ Officer was not bound to grant relief. [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554
1433
*
Corresponding to section 15B(i), (3) of the 1922 Act.
1429 EXEMPTION FROM TAX OF NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS
Section 48
Section 48* Exemption from tax of newly established industrial undertakings
CAPITAL EMPLOYED
Muhammadi Steamship Company Ltd. v. Commissioner of Income Tax, (Central) Karachi – 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.) = PLD 1966 S.C. 828 1896.
“Capital employed” - Scope of.
The whole scheme of the section is to exempt so much of the profits and gains derived from any industrial undertaking as do not exceed an amount computed with reference to capital employed. If no capital is employed or used in the undertaking there is no question of any profits or gains arising therefrom and therefore, in determining the quantum of profits and gains which is to be exempted, the computation of any such capital does not come in the picture at all. There can be no manner of doubt that for the purpose of exemption under this section the capital must be one which is actively employed. It is well-established rule of interpretation of statute that no words in a statute are to be treated as surplusage or redundant. The words “such capital being computed in accordance with the rules made by the Central Board of Revenue” could not be read as surplusage or redundant. Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Crescent Textile Mills Ltd., Lahore – [1974] 29 TAX 242 1897.
Amount deposited by shareholder is proper share capital and is “capital employed” for the purposes of computation of capital under section 15B of the 1922 Act.
The Company admittedly made an offer to sell the shares in dispute by a resolution passed by the Board of Directors on the 28th February, *
Corresponding to section 15B(i), (3) of the 1922 Act.
1430 Section 48
Income Tax Digest.
1958. By this resolution new shares were offered to the existing shareholders and this resolution was put into effect so far that even the price aggregating Rs. 71,86,800 for the acquisition of these shares was duly deposited in the coffers of the Company by the existing shareholders and the payment of the consideration to the Company for the purchase of the shares. All formalities of a contract as envisaged under section 5 of the Sale of Goods Act were, therefore, complete and the goods being existing goods stood transferred to the shareholders to whom they were allotted as from the date that the shareholders accepted the offer made to them. A share certificate is nothing more than the documentary evidence of the sales and the share. But there is no provision in any law which makes the transfer of the share or the property in it subject to the issuance of a share certificate. Commissioner of Income Tax, North Zone (West Pakistan), Lahore v. Colony Textile Mills Limited – [1970] 22 TAX 170 (H.C.Lah.) 1898.
Borrowed money is also “capital employed” in industrial undertaking and is exempt from tax.
The assessee, a public limited company, carried on business of manufacture and sale of yarn and cloth. The assessee was incorporated on the 24th August, 1946 and the commencement certificate was issued on the 29th November, 1946. Subsequently, the assessee set up a new industrial undertaking, namely, a textile mill, and commenced its business in Pakistan between the 15th August, 1947 to the 31st March, 1951. In the assessments for the charge years 1953-54 and 1954-55 the assessee claimed exemption from Income Tax in terms of section 158 of the Income Tax Act but it was disallowed by the Income Tax Officer on the ground that five years period of exemption had already expired. The Appellate Assistant Commissioner, on appeal by the assessee, held that the five years period had not expired but allowed exemption with respect to that part of the capital which was not borrowed. Against this decision both the department and the assessee went in appeal to the Appellate Tribunal. On behalf of the department the order was challenged on the ground that the period of five years had already expired whereas the stand of the assessee company was that the exemption was applicable with respect to the assets of the company – whether the capital employed was borrowed or not. The Appellate Tribunal dismissed the department‟s appeal and allowing the assessee‟s appeal held that “a borrowed capital is as much capital as the assessee‟s own
1431 EXEMPTION FROM TAX OF NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS
Section 48
money and unless there is any specific provision in the Act or the Rules which exclude such borrowed capital for purposes of computation, the assessee was entitled to claim which is allowed to him under rules 4 and 5. Since the assessee‟s case is covered by rules 4 and 5 and not rule 7 it is entitled to include the borrowed money in computation of capital employed in the undertaking”. The High Court affirming the order of the Tribunal: Held, that it is plain from the language of rule 7 itself that it contains provisions relating to “capital outlay other than that provided for” in rules 4, 5 and 6. This means that rules 4, 5 and 6 also deal with capital outlay, but of different kind and nature from the capital outlay with which rule 7 deals. Therefore, the distinction which has been pressed is not supported by the language of the section and that of the rules. Sub-section (1) of section 15B of the Income Tax Act, 1922 does not speak of “capital alone”, it speaks of “capital employed in the undertaking”. Rule 4 also deals with “capital employed” and so do rules 5 and 6. Rule 7 is a residuary provision, which was made to cover those cases which may not fall within the provisions of rules 4, 5 and 6. The instant case rightly falls within the purview of rules 4, 5 and 6 as is proved by the order of the Income Tax Officer who has worked out the amounts with respect to which the respondent is entitled to get exemption under the order of the Income Tax Appellate Tribunal. Cases distinguished: Muhammad Steam Co. Ltd. v. Commissioner of Income Tax (Central), Karachi (1966) 14 TAX 281 (S.C.).
Muhammadi Steamship Company v. Commissioner of Income Tax – 1963 PTD 271 (H.C.Kar.) = 1963 PLD 385 1899.
Computation of „Capital‟.
Amount comprising „fixed deposits‟ is not covered by expression „capital employed‟. Exemption was held to be available only on capital used in undertaking. Judicial review: - CONFIRMED BY - The Supreme Court of Pakistan in Muhammadi Steamship Company Limited v. Commissioner of Income Tax (Central), Karachi 1966 SCC 266 = [1966] 14 TAX 281 (S.C.Pak.). Their Lordship observed: “. . . . . we are unable to agree that the mere intention to use a capital fund for future development or to meet future
1432 Section 48
Income Tax Digest.
commitments will be sufficient to treat that capital fund as capital employed in the business or put into business. In the present case admitted position is that the fixed deposits were not earmarked for any purpose and were indeed not utilised for any purpose during the relevant accounting period and, therefore, for the purpose of the exemption they were not capital employed in the undertaking . . . . .” _______________
PROVISIONS OF SECTION FOR THE PURPOSE OF DETERMINATION OF TOTAL INCOME
Hasan Ali Karabhai v. Commissioner of Income Tax – [1974] 30 TAX 203 (H.C.Kar.) 1900.
Provisions of section 16 of 1922 Act dealing with exemptions, exclusions and inclusions for the purpose of determination of total income whereas sub-section (4) providing such exemptions, etc., incorporated in section 15 of 1922 Act, held does not render the provision of this sub-section inoperative.
No doubt, it would have been preferable and more appropriate to incorporate this provision [section 15B(4)] in section 16, which provides for exemptions, exclusions and inclusions for the purpose of determination of the total income. But there is no substance in the argument that no effect should be given to section 15B(4), merely because the draftsman made provision for inclusion in the assessment of the exempted profits and gains in the total income of an assessee in section 15B itself, and not in section 16. We must confess that we have not been able to appreciate the assessee‟s contention that the provision contained in section 15B(4) should not be given effect to, because the appropriate place for it was section 16 of the Income Tax Act, and not section 15B. Case referred to: Commissioner of Income Tax v. Adam Limited [1970] 21 TAX 137.
Commissioner of Income Tax v. Dawood Cotton Mills Limited – [1974] 29 TAX 123 (H.C.Kar.) 1901.
Weaving machinery plant was installed in the same premises where spinning plant was working held to be independent, separate and different industrial undertaking and is entitled to exemption independent of spinning section.
The assessee was engaged in the manufacture and sale of textile goods. Spinning mill was firstly set up for the manufacture of cotton
1433 EXEMPTION FROM TAX OF NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS
Section 48
yarn. Subsequently, a weaving plant was set up by the assessee in the same premises for the manufacture of cloth from cotton yarn. The question for determination was whether the assessee was entitled to relief under section 15B of the Income Tax Act, with respect of the weaving section: Held,
that the assessee was entitled to relief under section 15B of the Income Tax Act. Merely because the assessee decided to instal weaving machinery plant in the same premises where its spinning mill was working should not deprive the assessee of the benefit of section 15B of the Act.
Singer Sewing Machine Co. v. Commissioner of Income Tax and others – [1964] 9 TAX 273 (H.C.Kar.) = 1964 PTD 554 1902.
Where assessee entitled to relief under section 15B of 1922 Act but did not claim it in the return of income, Assessing Officer was not bound to grant relief.
The assessee, an importer of Singer Sewing Machine, changed the method of its business in 1956 by importing the parts of the machine and assembling them in Pakistan. The Income Tax assessments for the charge years 1957-58 to 1960-61 was, however, made on the assessee as an „importer‟ and not as a „manufacturer‟. After the limitation for appeals and revision had expired it occurred to the assessee that it was entitled to exemption under section 15B of the Income-Act as a “newly established industrial undertaking”. Accordingly revision petitions were filed by the assessee before the Commissioner requesting for condonation of the delay and for exemption under the said section. The Commissioner condoned the delay in filing the petitions but refused to allow the concession on the ground that no such claim having been made in the return and the Income Tax Officer having not passed any order refusing to grant such relief the request was outside the scope of section 33A(2) of the Act The assessee filed a writ petition in the High Court challenging the Commissioner‟s order on the ground that (i) the view of the Commissioner as to the scope of the revision was legally untenable, and (ii) there being no adequate remedy the Court should allow the concession under section 15B of the Act. Dismissing the petition the High Court Held, that: (i)
the necessary information attracting the exemption was never supplied in the returns and the Commissioner could take notice of the fact that the request made to him by the
1434 Section 48
Income Tax Digest.
assessee could not be reconciled with the records and in this sense it was outside the scope of the enquiry. The Commissioner did not exercise his discretion illegally or improperly; (ii)
exemptions being departures from the generality of taxation they are to be claimed and proved by the assessee before these are allowed by the assessing authorities; and
(iii)
in exercise of the extraordinary jurisdiction the functions and jurisdiction of the Income Tax authorities cannot be assumed by the High Court.
Cases relied on: Commissioner of Income Tax v. Tribune Trust [1960] 2TAX (Suppl.-250) (P.C.); Commissioner of Income Tax v. Maharaja Viseswar Singh [1935] 3 ITR 216 and Paul Courer v. M.G. Shapiro [1948] AIR 192 (P.C.) Judicial review : The Honourable Supreme Court in 1965 SCC 234 = [1965] 11 TAX 364 (S.C.Pak) held that the order of the Commissioner of Income Tax under section 136 was not legally sustainable. The order was quashed and remitted back to Commissioner of Income Tax.
1435 DEDUCTION OF TAX AT SOURCE
Section 50(1)
Section 50(1)* Deduction of tax at source
PAGE NO
AMENDED LAW AND SCOPE OF
1903. Amended law and scope of its application explained. _ [2000] 81 TAX 390 (H.C.Lah.)
1436
CREDIT FOR TAX DEDUCTED AT SOURCE
1904. Where income from which tax was deducted at source was not included in total income, credit for deduction at source _ was not admissible. [1938] 6 ITR 206 (PC) _ 1905. Position under 1922 Act. [1937] 5 ITR 349 (Cal.)
*
Corresponding to section 18(2) of the 1922 Act.
1436 1437
1436 Section 50(1)
Income Tax Digest.
Section 50(1)* Deduction of tax at source
AMENDED LAW AND SCOPE OF
Bank of Punjab v. Federation of Pakistan – [2000] 81 TAX 390 (H.C.Lah.) 1903.
Amended law and scope of its application explained.
“......the fact that the law has been amended subsequently clearly supports the contention that the law as it existed at the relevant time provided that while computing advance payment of tax, the deduction made under section 50 of the Income Tax Ordinance has to be excluded. _______________
CREDIT FOR TAX DEDUCTED AT SOURCE
P.C. Mullick v. Commissioner of Income Tax – [1938] 6 ITR 206 (PC) 1904.
Where income from which tax was deducted at source was not included in total income, credit for deduction at source was not admissible.
Where tax had been deducted at source from dividends and interest on securities, but the dividends and interest had not been included in the assessee‟s income, it was held that the credit for tax deducted at source was not admissible. Had the assessees been in fact charged with any tax deducted at source, they would have been entitled to credit for that amount; but in fact the whole of the sum in respect of interest on securities and dividends which were brought in as gross for the purpose of ascertaining the total income, was deducted for the purpose of fixing the income on which tax was to be charged; they had not been charged with any tax deducted at source and, therefore, no credit was to be given.
*
Corresponding to section 18(2) of the 1922 Act.
1437 DEDUCTION OF TAX AT SOURCE
Section 50(1)
North British & Mercantile Insurance Co., In re – [1937] 5 ITR 349 (Cal.) 1905.
Position under 1922 Act.
Where Income Tax is charged in respect of the income, profits and gains of a life insurance company computed in the manner prescribed by rules 25 and 35 of the 1922 Rules, the company can claim credit under section 18(5) of the 1922 Act, for any deductions of tax made at the source.
1438 Section 50(2A)
Income Tax Digest.
Section 50(2A) Deduction of tax at source – Interest / profit on deposit / account
PAGE NO
PAKISTANI BANKS HAVING BRANCHES IN THE TRIBAL AREAS
1906. Deduction of withholding tax by Pakistani banks having branches in the Tribal areas is against the constitution and _ without lawful authority. [1997] 75 TAX 298 (H.C.Pesh.) = 1997 PTD 849
1439
1439 DEDUCTION OF TAX AT SOURCE INTEREST/PROFIT ON DEPOSIT/ACCOUNT
Section 50(2A)
Section 50(2A) Deduction of tax at source – Interest / profit on deposit / account
PAKISTANI BANKS HAVING BRANCHES IN THE TRIBAL AREAS
Ghilaf Gul v. Commissioner of Income Tax/Wealth Tax, Zone-B, Peshawar & 4 Others – [1997] 75 TAX 298 (H.C.Pesh.) = 1997 PTD 849 1906.
Deduction of withholding tax by Pakistani banks having branches in the Tribal areas is against the constitution and without lawful authority.
We allow the writ petition and declare the impugned deduction as against the provisions of the constitution and being without lawful authority would have no effect. Moreover, Mr. Samiullah Jan, Advocate representing respondents 3 to 5 also produced a letter which is marked 3 and is dated 1.12.1996 wherein he has been directed by the National Bank of Pakistan, Zonal Office, Peshawar to inform the Court that the entries of all the deduction of withholding tax were reversed and the amount so far, deducted has been credited into the account of Mr. Ghilaf Gul.
1440 Section 50(2B)
Income Tax Digest.
Section 50(2B) Deduction of tax at source – certain banking instruments
PAGE NO
SPECIAL DEPOSIT RECEIPTS
1907. Withholding tax can be deducted only where transfer of money takes place under the special deposit receipts. _ [1998] 77 TAX 79 (H.C.Lah)
1441
1908. Section 50(2B) is applicable to instruments by which money _ is transferred from one person to another. [1997] 75 TAX 1 (H.C.Lah.) = 1997 PTD 605 = PTCL 1997 CL. 29]
1442
1441 DEDUCTION OF TAX AT SOURCE „CERTAIN BANKING INSTRUMENTS‟
Section 50(2B)
Section 50(2B) Deduction of tax at source – certain banking instruments
SPECIAL DEPOSIT RECEIPTS
M.C.B. v. Federation of Pakistan – [1998] 77 TAX 79 (H.C. Lah.) 1907.
Withholding tax can be deducted only where transfer of money takes place under the special deposit receipts.
As is obvious from the above the controversy before this Court is limited to the question as to whether any withholding tax is to be deducted by the petitioners on the Call Deposit Receipts, Term Deposit Receipts and Short Notice Deposit Receipts issued by them at the behest of their customers. Having considered the arguments of the learned counsel for the parties the answer to this question has to be in the negative. On its plain reading section 50(2B) of the Income Tax Ordinance, 1979 applies to those instruments by virtue of which transfer of money takes place from one person to another and not to the transaction involving no such transfer. This interpretation is borne out not only from the language of the provision in question but also by circular issued by Central Board of Revenue on 24.7.1994 clarifying that it is only where transfer of money takes place under the special deposit receipts that withholding tax may be deducted by the Bank. Learned counsel for the respondents has, however, submitted that a further clarification was issued by the Central Board of Revenue on 17.4.1995 according to which the Banks were liable to deduct withholding tax on special deposit receipts irrespective whether there was any transfer of money or not. The subsequent clarification is not only contradictory to the earlier press release but is also contrary to the provision itself which if read as a whole leaves no room for doubt that the words special deposit receipts must be interpreted ejusdem generis and must take colour from the preceding and subsequent words.
1442 Section 50(2B)
Income Tax Digest.
In view of the above, all these petitions are allowed and it is held that no deduction on account of withholding tax could be made in respect of Call Deposit Receipts, Term Deposit Receipts and Short Notice Deposit Receipts issued by the Bank prior to the amendment of section 50(2B) of Income Tax Ordinance, 1979 by Finance Act, 1996. Cases referred to: K. G. Old Principal Christian Technical Training Centre, Gujranwala v. Presiding Officer Punlab Lahore Court, Northern Zone and others (PLD 1997 Lah. 1097).
Prime Commercial Bank and others v. Assistant Commissioner of Income Tax – [1997] 75 TAX 1 (H.C.Lah.) = 1997 PTD 605 = PTCL 1997 CL. 29] 1908.
Section 50(2B) is applicable to instruments by which money is transferred from one person to another.
The question as to whether any withholding tax is to be deducted by the petitioners on the call deposit receipt issued by them at the behest of their customers. Having considered the arguments of the learned counsel for the parties the answer to this question has to be in the negative. On its plain reading section 50(2B) of the Income Tax Ordinance, 1979 applies to those instruments by virtue of which transfer of money takes place from one person to another and not to the transaction involving no such transfer. This interpretation is borne out not only from the language of the provision in question but also by the circular issued by the Central Board of Revenue on 24.7.1994, clarifying that it is only where transfer of money takes place under the special deposit receipts that withholding tax may be deducted by the Bank. Learned counsel for the respondents has however, submitted that a further clarification was issued by the Central Board of Revenue on 17.4.1995 according to which the Banks were liable to deduct withholding tax on special deposit receipts irrespective whether there was any transfer of money or not. The subsequent clarification is not only contradictory to the earlier press release but is not borne out by the language of the provision itself which if read as a whole leaves no room to hold that the words (special deposit receipt) must be interpreted ejusdem generis and must take colour from the preceding and subsequent words. In view of the above, all these petitions are allowed and it is held that no deduction on account of withholding tax could be made in respect of call deposit receipt issued by the Bank prior to the amendment of section 50(2B) of Income Tax Ordinance, 1979 by Finance Act, 1996.
1443 DEDUCTION OF TAX AT SOURCE „CERTAIN BANKING INSTRUMENTS‟
Section 50(2B)
Case referred to: K. G. Old Principal Christian Technical Training Centre Gujranwala v. Presiding Officer Punjab Labour Court, Northern Zone and 6 others PLD 1976 Lah. 1097.
1444 Section 50(3)
Income Tax Digest.
Section 50(3)* Deduction of tax at source – certain payments to non-residents
PAGE NO
“ASSESSEE IN DEFAULT”
1909. The word „liable‟ used in section 50(3) - Scope and _ importance of. 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
1445
1910. Where assessee is liable to pay tax as an agent for the foreign supplier, he is not liable to deduct tax under section 50(3). _ 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
1445
1911. Expression “unless he is himself liable to pay any income tax and super-tax thereon as an agent” - Meaning and scope of. _ 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
1445
1912. It is duty of the assessing officer to frame assessment on chargeable income of non-residents or their agent rather _ than penalising them for default of deduction of tax. 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.)
1447
1913. Agent personally liable to pay the tax due from the nonresident only after the assessment is completed in his name _ as an agent. [1975] 32 TAX 273 (H.C.Lah.)
1447
1914. Section 50(3) applies on interest payments to head office. _ [1960] 2-TAX (Suppl.-139) (H.C.Kar) = 1960 PTD 758 = 1957 PLD 167
1449
*
Corresponding to section 18(3B) & 18(7) of the 1922 Act.
1445 DEDUCTION OF TAX AT SOURCE „CERTAIN PAYMENT TO NON-RESIDENTS‟
Section 50(3)
Section 50(3)* Deduction of tax at source – certain payments to non-residents
“ASSESSEE IN DEFAULT”
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) 1909.
The word „liable‟ used in section 50(3) - Scope and importance of.
The word „liable‟ inter alia carries the meaning as „subject to an obligation‟, „that for which one is liable‟, „a debt‟, „bound or obliged in law or equity‟, „responsible‟, „chargeable‟, „answerable‟, „legally subject or amenable to‟, „compellable to make satisfaction, compensation or restitution‟. It is also evident that the meaning of the word “liable” is not restricted to denote an absolute and fixed liability, but has the meaning expressed by phrase „with the range of possibility‟. Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) 1910.
Where assessee is liable to pay tax as an agent for the foreign supplier, he is not liable to deduct tax under section 50(3).
Where the assessee is liable to pay taxes as an agent for the foreign supplies, he is not obliged to deduct tax under section 50(3), therefore, any action under section 52 or 86 for imposing additional tax or treating him as assessee in default cannot be taken. Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) 1911.
*
Expression “unless he is himself liable to pay any income tax and super tax thereon as an agent” - Meaning and scope of.
Corresponding to section 18(3B) & 18(7) of the 1922 Act.
1446 Section 50(3)
Income Tax Digest.
“. . . . . it is evident that any person dealing with a non-resident is liable to deduct income tax and super tax etc. at the time of making payment “unless he is himself liable to pay any income tax and super tax thereon as an agent”. The High Court in the instant case while construing the above expression „unless he is himself liable to pay any income tax and super tax thereon as an agent‟ employed in above quoted sub-section (3B) of section 18 has held that “his liability to himself and personally pay the tax due from the non-resident arises only after the assessment has been completed in his name as an agent and he is relegated to the position of an assessee in his own name in respect of the tax due from the non-resident”. In our opinion until the completion of this assessment in the name of the agent, he is charged with a continuing duty enjoined upon him under subsection (3B) of section 18 of the Act to deduct the tax at the source from the payments due to the person who is not resident in Pakistan. The crux of the matter is that, whether the High Court has placed proper construction on the word „„liable‟‟ used in subsection (3B) of section 18. Though the High Court has referred in its judgment the following two cases of English jurisdiction but distinguished the same on the ground that while construing particular statute the definitions given in the other statutes cannot be imported. In our view, the above two cases are directly applicable to the present case. They do not deal with the definitions of the word “liable” given in the statutes which were the subject matter of construction in the above two cases but they deal with the ordinary meaning of the above word. At this juncture it may be pertinent to refer to the above cases, namely:(i)
Littlewood v. George Wimpey & Co., Ltd. British Overseas Airways Corporation [1953](2) All England Law Reports 915; In the above-cited case the sub-section (1) of section 6 of Law Reforms (Married Women and Tortfeasors) Act, 1935, which reads as follows was the subject matter of the interpretation: “Where damage is suffered by any person as a result of a ... (c) any tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tortfeasor or otherwise, so however, that no person shall be entitled to recover
1447 DEDUCTION OF TAX AT SOURCE „CERTAIN PAYMENT TO NON-RESIDENTS‟
Section 50(3)
contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought.” Denning, L.J. while construing the word “liable” used in the above quoted section has observed as follows:What is the meaning of the word “liable”? There are two rival views. One is that “liable” means “held liable”. According to this view a person is not liable for the damage unless and until he has had judgment entered against him. The other view is that “liable” means “responsible in law”. According to this view, a person may be liable for the damage even though he has not been sued to judgment. In my opinion, the ordinary meaning of the word “liable” in a legal context is to denote the fact that a person is responsible at law. Thus, when it is said [as Lord Chelmsford, L.C., once said 3 Macq. 306] in a leading case, Bartonshill Coal Co. v. McGuire (7) that a master is liable for the wrongdoing of his servant, that means that he is responsible for it in court of law. It does not mean that he has actually been sued for it. Furthermore, a man may be “liable” in this sense even though the remedy against him is suspended or barred for some reason or other”. (ii)
Roberts v. Roberts. [1962](2) All England Law Reports 967.”
Noon Sugar Mills Ltd. v. Commissioner of Income Tax, Rawalpindi – 1990 SCC 759 = [1990] 62 TAX 74 (S.C.Pak.) 1912. It is duty of the assessing officer to frame assessment on chargeable income of non-residents or their agent rather than penalising them for default of deduction of tax. Instead of framing assessment orders for the relevant assessment years in the name of appellant as the agent of the foreign supplies, the appellant was penalised under sections where payer is not required to deduct tax on any sum chargeable under the provision of the Ordinance to a non-resident where he “is himself liable to pay tax thereon as an agent.” Commissioner of Income Tax, Rawalpindi v. Noon Sugar Mills – [1975] 32 TAX 273 (H.C.Lah.) 1913. Agent personally liable to pay the tax due from the non-resident only after the assessment is completed in his name as an agent.
1448 Section 50(3)
Income Tax Digest.
A person is said to be „himself liable to pay‟ income tax or super tax „as an agent‟ within the meanings of sub-section (3B) of section 18 of the Act only after the agent for the non-resident has been assessed in his own name in accordance with the provisions contained in section 42 of the Act. After assessment is made in the name of the agent, he becomes the assessee for all the purposes of the Act for the tax that was due from the non-resident. This is the only rational interpretation in keeping with the scheme of things under the Act. The mere fact, the Income Tax Officer has appointed a statutory agent in Pakistan of a person resident outside it in accordance with section 43 of the Act does not necessarily mean that agent is “himself” liable to pay any income tax due from the non-resident. His liability to himself and to personally pay the tax due from the nonresident arises only after the assessment has been completed in his name as an agent and he is relegated to the petition of an assessee in his own name in respect of the tax due from the non-resident. Until the completion of this assessment in the name of the agent, he is charged with a continuing duty enjoined upon him under sub-section (3B) of section 18 of the Act to deduct the tax at the source from the payments due to the person who is not resident in Pakistan. If he fails to do so, he shall, without prejudice to any other consequence, be deemed to be an assessee in default in respect, of the tax as laid down in sub-section (7) of section 18 of the Act. in addition to the tax he is also liable to pay an amount at the rate of 2% per month of such tax. In the instant case the Income Tax Officer by his repeated letters addressed to the respondent had sufficiently indicated his intention of treating the respondent as the agent of the non-resident company in accordance with the requirements of section 43 of the Act. There can be no escape from the proposition that the respondent was appointed and must be deemed to be the statutory agent of the non-resident company for the purposes of the Act. The word “liable” is susceptible of two interpretations. In a wider and a broader sense it means answerable or responsible in law. In narrow and stricter sense it only connotes held liable, after the liability has been fixed on him by adjudication. Case reviewed: The judgement of the honourable apex Court at Sr. No. 1 on appeal from this order elaborates in detail the scope of section 50(3), the liability of an agent of non-resident and duty of the assessing officer‟s to pass order on the non-residents or their agents.
1449 DEDUCTION OF TAX AT SOURCE „CERTAIN PAYMENT TO NON-RESIDENTS‟
Section 50(3)
Commissioner of Income Tax, Karachi, Sind and Baluchistan v. The Netherlands Trading Society, Karachi – [1960] 2-TAX (Suppl.-139) (H.C.West Pakistan, Karachi Bench) = 1960 PTD 758 = 1957 PLD 167 1914.
Section 50(3) applies on interest payments to head office.
The interest paid by the branches, in Pakistan to the head office in foreign country upon sums advanced to the branches by the head office was disallowed under proviso to section 10(2)(iii) read with section 18(3A) of the Income Tax Act. On a reference, the High Court confirmed the disallowance. Judicial analyses : Pension fund was maintained in foreign country for foreign employees and payable in foreign country after retirement. Since the payments were not taxable in Pakistan, no effective arrangement were made to deduct tax at source. Held that amount of fund was rightly allowed on the principle of cessante ratione legis, ipsa lex cessat (the reason of the law ceasing, the law itself ceases).
1450 Income Tax Digest.
Section 50(4)
Section 50(4)* Deduction of tax at source – payments on supply of goods / services / contracts
PAGE NO
BANKS HAVE NO RIGHT TO CLAIM OR CHARGE ANY COMMISSION OR SERVICE CHARGE FROM WAPDA
1915. Section 50(4) vis-a-vis services charges from WAPDA held _ not applicable. [2000] 82 TAX 127 (H.C.Lah.)
1451
EXPRESSION “SUPPLIES” INCLUDES SALES IN SECTION 50(4)
1916. Expression “supplies” includes sales in section 50(4). _ [1999] 80 TAX 282 (H.C.Lah.)
1452
“GOODS” DO NOT INCLUDE IMMOVABLE PROPERTY
1917. “Goods” do not include immovable property. TAX 262 (H.C.Lah.)
_
[1999] 80 1453
SALE OF LAND, BUILDING AND OTHER FIXED ASSETS
1918. Section 50(4) is not attracted to sale of land, building and _ other fixed assets. [1999] 80 TAX 262 (H.C.Lah.)
*
Corresponding to section 18(3BB) of the 1922 Act.
1454
1451 DEDUCTION OF TAX SOURCE - PAYMENTS ON SUPPLY OF GOODS/SERVICES/ CONTRACTS
Section 50(4)
Section 50(4)* Deduction of tax at source – payments on supply of goods / services / contracts
BANKS HAVE NO RIGHT TO CLAIM OR CHARGE ANY COMMISSION OR SERVICE CHARGE FROM WAPDA
Director Finance, Wapda v. Commissioner of Income Tax – [2000] 82 TAX 127 (H.C.Lah.) 1915.
Section 50(4) vis-a-vis services charges from WAPDA held not applicable.
It is, therefore, obvious that the Banks have no right to claim or charge any commission or service charge from WAPDA. The petitioners have also placed on record a letter addressed to the General Manager/Chief Executive of all the Banks dated 23.1.1990 in which it has been stated that WAPDA is not paying collection charge of Rs.2/- per bill to the respondents and the Wafaqi Mohtasib had directed that so far as the collection during evening hours was concerned the welfare charge of Rs.1.01 per bill be paid to the bank. However, on appeal filed by the Pakistan Banking Council, Islamabad the President has stayed the implementation of the aforesaid order and as such even recovery of Rs.1.01 was not being enforced. The letter further went on to state that if any amount has been charged by the Banks it may be refunded to the Bank. In none of the orders passed by the respondents this aspect of the matter has been adverted to which has vitiated these orders. It may also be noted that section 50(4) starts with the words any person responsible for making payment. The respondents have not been able to show that WAPDA is responsible for making any payment to the Banks and therefore, so far as the petitioners are concerned they were not obliged to deduct the advance tax. _______________
*
Corresponding to section 18(3BB) of the 1922 Act.
1452 Section 50(4)
Income Tax Digest.
EXPRESSION “SUPPLIES” INCLUDES SALES IN SECTION 50(4)
Commissioner of Income Tax / Wealth Tax v. Prime Dairies Ice Cream Limited – [1999] 80 TAX 282 (H.C.Lah.) 1916.
Expression “supplies” includes sales in section 50(4).
[As Per Mian Allah Nawaz, J.] - Expression “supplies” is of wide amplitude. Manifestly, “sale‟ means transfer of sold or agreed to be sold property from seller to buyer in future for payment of price. Such transfer is for a consideration/payment of money or promise thereto by the buyer. Necessarily, it so means a transfer of title in property from seller to buyer. Briefly, sale and purchase are two phases of transaction of sale. The supply on the other hand is expression of general nature. It connotes the availability of aggregate of things needed or demanded for a given use of purpose. Consequently, the supply may include sale but this cannot be synonymous with the aforesaid expression. It is settled that statutes are to be construed with reference to plain language of such statutes and Courts are not required to add or omit to clear the language of such statute. Tested on the above touchstones, we are, in no manner, of doubt that the word “supplies” is general in nature and Is Inclusive of sale when the seller supplies his goods in lieu of their price to buyer. The expression “supplies” as embodied in section 50(4) of Income Tax Ordinance (XXXI of 1979) does include “sales” and so the view taken by learned Income Tax Appellate Tribunal is wholly illegal, erroneous on the face of record and so is hereby set aside. [As Per Nasim Sikandar J.] - The word “purchase” as used by the assessing officer in his notice served upon the assessee under section 52 of the Ordinance was picked up out of context to hold that these did not include supplies and that section 50(4) contemplated only supplies made to the appellant/assessee. As synonymous. A bare reading of the contents of the notice as reproduced in the order of the Commissioner of Income Tax(Appeals) supports my view that the word “purchase” as used in the notice was picked up in isolation to justify a conclusion. The assessing officer was not at default by taking all the purchases as supplies inasmuch as the respondent avoided placing before him all its cards. Once the assessee had declared purchases of a certain volume then it was for him to explain and deny if all or any of them were not of the kind contemplated in section 50(4) of the Ordinance. The
1453 DEDUCTION OF TAX SOURCE - PAYMENTS ON SUPPLY OF GOODS/SERVICES/ CONTRACTS
Section 50(4)
learned Tribunal also ignored that the word „supply‟ is not a phrase common to balance sheets and therefore the assessing officer had to point out the “purchases” mentioned by the assessee in the balance sheet. The assessee having failed to make any explanation, the justification for default made before the first appellate Authority and break-up of various purchases given was quite late in the day to forestall an adverse inference against it. The order of the Commissioner of Income Tax (Appeals), as observed earlier was perfectly in accordance with law as the determination of liability of the assessee with reference to section 50(4) of the Ordinance could not have been made without examining the accounts maintained by the assessee, considering the volume of imports, tax deducted at source, the certificates allegedly submitted by the sellers under section 50(4)(b) of the Ordinance, the element of continuity of purchases from a single seller and their volume etc. In ordinary circumstances at best the Tribunal ought to have directed the disposal of the appeal by the Commissioner of Income Tax (Appeals) himself if it disapproved the remand order. Instead it took upon itself the job of deciding the matter between the. parties by assuming facts as cited by the assessee before the Commissioner of Income Tax (Appeals) to be correct. These facts, as noted by the Commissioner of Income Tax Appeals) needed to be probed into. Therefore, the result arrived at by the Tribunal in para-14 of the impugned order dated 9.9.1997 that payments made in respect of purchases fell outside the ambit of section 50(4) of the Ordinance though academically correct could not be sustained. Cases referred to: Hirijin Salt Chemicals (Pak.) Ltd. v. Union Council and others (PLJ 1982 SC 295); Abdul Hameed v. Secretary Govt. of Balochistan, Local Government, Rural Development and Agrovilles Department, Civil Secretariat Quetta (PLD 1996 Quetta 21). _______________
“GOODS” DO NOT INCLUDE IMMOVABLE PROPERTY
Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Gujranwala – [1999] 80 TAX 262 (H.C.Lah.) 1917.
“Goods” do not include immovable property.
The interpretation of word „Goods‟ as adopted by the Assessing Officer does not find support either from the Income Tax Ordinance or for that matter from any other law. The consistent view of the Superior Courts in Pakistan that in cases of fiscal statutes only the letter of law
1454 Section 50(4)
Income Tax Digest.
should be seen has sufficiently been highlighted in re: Collector of Customs v. S.M. Ahmad & Company (supra) and re: Muhammad Younis v. C.B.R. (supra). It is also an accepted proposition that the words used in a statute if not defined therein should be assigned their ordinary dictionary meaning. Reference to the aforesaid two dictionaries supports the contention of the learned counsel. The sale of immovable property including land and building along with machinery installed therein could by no imagination be treated as supply of goods or services rendered. _______________
SALE OF LAND, BUILDING AND OTHER FIXED ASSETS
Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Gujranwala – [1999] 80 TAX 262 (H.C.Lah.) 1918.
Section 50(4) is not attracted to sale of land, building and other fixed assets.
It is concluded that the provisions of section 50(4) of the Ordinance were not attracted to the transaction evidencing the sale of land, building and the fixed plant and machinery sold as part of the factory. There was neither a “supply” nor its subject matter was “goods”. The transaction of sale otherwise being not liable to any incidence of income tax under any of the heads given in section 15 of the Ordinance the question of deduction of advance tax did not arise at all. Accordingly the order of the Assessing Officer dated 19.6.1999 holding the petitioner as an assessee in default under section 52 was totally beyond jurisdiction.
1455 COLLECTION OF TAX AT SOURCE - „IMPORTS‟
Section 50(5)
Section 50(5)* Collection of tax at source – imports
PAGE NO
TESTS FOR QUESTION OF LAW
1919. Leave to appeal granted to examine the taxability of raw material for factories situated in non-taxable territories. _ [2001] 83 TAX 544 (S.C.Pak.) = 2001 PTD 778
1456
1920. Demand of enhanced advance tax under section 50(5) tax is _ held not to be violative of fundamental rights. [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892; [2000] 82 TAX 518 ((S.C.AJ&K.)
1457
1921. Condition imposed in the exemption certificate issued by the Department under section 50(5) for specific post held illegal _ and unlawful. [1997] 75 TAX 192 (H.C.Lah.)
1458
TAX ON IMPORTS
1922. Correct interpretation of section 50(5)(a)(b). 49 (H.C.Qta.)
_
[1999] 80 TAX
1923. Assessee imported vessel which arrived at Karachi on 9.6.1988 and bill of entry was filed on 23.6.1988, exemption of advance tax granted by the Income Tax Authorities from _ 1.7.1988 which held to be not available. [1990] 61 TAX 12 (H.C.Quetta.)
1458
1459
CALCULATION OF DUTIES & OCTROI
1924. Section 50(5) vis-à-vis calculation of duties & octroi. _ [1998] 78 TAX 334 (H.C.Qta.) = PCTLR (Qta) 1361
1460
WORDS, “SAME MANNER” AND “AT THE SAME TIME‟, MEANING OF
1925. Words, “same manner” and “at the same time‟, meaning of. _ [1996] 73 TAX 203 (H.C.Quetta)
*
Corresponding to section 18(3CC) of the 1922 Act.
1461
1456 Section 50(5)
Income Tax Digest.
Section 50(5)* Collection of tax at source – imports
TESTS FOR QUESTION OF LAW
Commissioner of Income Tax, Peshawar v. Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd. and others – [2001] 83 TAX 544 (S.C.Pak.) = 2001 PTD 778 1919.
Leave to appeal granted to examine the taxability of raw material for factories situated in non-taxable territories.
We have heard learned counsel for the parties as well as learned Dy. A.G. In our opinion, the instant case involved following questions of consideration:(i)
As to whether respondent No. 1 is not entitled for exemption of advance income tax under section 50(5) of the Ordinance on the raw material which is imported from foreign country for the purposes of manufacturing cooking oil and vegetable ghee in the factory situated in Tribal area where admittedly the Ordinance has not been made applicable within the purview of Article 247 of the Constitution of Islamic Republic of Pakistan?
(ii)
As to whether the income arising out of the products of the respondent is not taxable if the finished product is sold by it in the open market where the Ordinance is applicable?
(iii)
As to whether certificates issued in favour of the respondent by the Income-tax Authorities exempting it from the payment of the tax were not in consonance with the provisions of SRO 593(I)/91, dated 30th June, 1991?
Thus, inter alia to consider the above points leave to appeal is granted.
*
Corresponding to section 18(3CC) of the 1922 Act.
1457 COLLECTION OF TAX AT SOURCE - „IMPORTS‟
Section 50(5)
Commissioner of Income Tax (AJ&K Council), Muzaffarabad and another v. Asian D. Enterprises through Eijaz Qureshi, Managing Director and 5 others, Commissioner of Income Tax (AJ&K Council), - Commissioner of Income Tax (AJ&K Council) - Muzaffarabad and 2 others v. Messrs Cade Creets Associates through Managing Partner, Diwan Ali Khan Chughtai and another [2000] 81 TAX 371 (S.C.AJ&K.) = 2000 PTD SC 892; Commissioner of Income Tax AJK and another v. Asian D. Enterprises and other [2000] 82 TAX 518 ((S.C.AJ&K.) 1920.
Demand of enhanced advance tax under section 50(5) tax is held not to be violative of fundamental rights.
It is evidence from the case law, referred to by the learned counsel for the appellants, that there is no proposition in support of the view that a fiscal law cannot be made operative retrospectively. Obviously, when there is no such embargo imposed upon the Legislature by the Interim Constitution Act, how such a restriction can be assumed. Thus, the very basis on which the findings of the High Court rest is without any legal substance. Even if it is assumed for the sake of argument that demand of additional Income Tax is „deprivation‟ of the „property‟ of the respondents within the meanings of paragraph I, that has been done in pursuance of law, i.e., the Income Tax Ordinance, 1979 and the Finance Act, 1995 and, thus, the tax demanded could not be held violative of the Fundamental Right No. 14 according to which a person can be deprived of his property according to law. Needless to say, as has been indicated above, the demand of additional advance Income Tax from the respondents was made in pursuance of the aforesaid statutes which have been validly adapted in the State. However, the fact of the matter is that by the impugned provision of law, the rate of Income Tax has not been retrospectively increased; only the rate of deduction of advance tax has been increased. The deduction of advance tax is only a tentative deduction which has to be adjusted when the final assessment of Income Tax to be paid by the respondent-Companies is made. Thus, the findings of the High Court that demand of additional advance Income Tax is violative of Fundamental Right No. 14 guaranteed by the Interim Constitution Act, are devoid of any force and are not sustainable. In the light of what has been stated above, we accept the above entitled appeals, set aside the impugned judgements of the High Court and hold that additional advance income tax was rightly demanded from the respondent-petitioners. Consequently, the writ petitions filed by the respondents are hereby dismissed.
1458 Section 50(5)
Income Tax Digest.
Mehran Flex International Industries (Pvt.) Ltd. v. Federation of Pakistan through Secretary Finance, Islamabad and 3 Others – [1997] 75 TAX 192 (H.C.Lah.) 1921.
Condition imposed in the exemption certificate issued by the Department under section 50(5) for specific post held illegal and unlawful.
In view of above these petitions are allowed and it is declared that the imposition of condition in the exemption certificate that it would be applicable only in respect of goods cleared from the nearest customs port without any lawful authority and of no legal effect. It shall, however, be open to the respondents to take such measures as may be permissible under the law including inspection of the promises in order to ensure that no evasion of tax takes place. Case referred: Wali Oil Mills Ltd. v. Federation of Pakistan (Un-reported). _______________
TAX ON IMPORTS
Abdul Sattar Noor Muhammad & Co. v. Government of Pakistan, etc. – [1999] 80 TAX 49 (H.C.Qta) 1922.
Correct interpretation of section 50(5)(a)(b).
The liability for payment of advance income tax under the Ordinance is to be calculated under sub-clause (a) to clause (5) of section 50 of the Ordinance which provided that 2% advance tax is to be collected by computing the same on the value of the import of goods by adding to it the amount of customs duty and sales tax payable on it. However, recovery of the advance income tax so determined under sub-clause (a) to clause (5) of section 50 of the Ordinance is to be done as provided in sub-clause (b) of clause (5) of section 50 of the Ordinance in accordance with the provisions of Customs Act 1969 applicable to the recovery of customs duty. It is, therefore, quite clear that in so far the assessment of the amount of advance income tax was concerned, it is to be done in accordance with the provisions of sub-clause (a) of clause (5) of section 50 of the Ordinance and only to the recovery of the amount of tax so determined that the provisions of the Customs Act 1969 applied. Under section 3 of the Customs Act, the rate of customs duty applicable is that which is prevailing on the date of presentation of bill of entry to the customs authority. We are, therefore, of the view that if the appellants had deposited before 1.7.1995 advance tax at the rate of 2% as calculated in terms of sub-clause (a) to clause (5) of section 50 of
1459 COLLECTION OF TAX AT SOURCE - „IMPORTS‟
Section 50(5)
the Ordinance which was the prevailing rate on the date of such deposit, their liability for the advance income tax stood discharged completely and the subsequent amendment in the rate which was effective from 1.7.1995 did not apply to them. Mere fact that whole of the customs duty was not paid by the appellants before 30.6.1995 because they had availed of the benefit of payment of customs duty in installments under the Rules, could not change their liability in respect of advance tax under the Ordinance which they paid in full before 30.6.1995. We are unable to accept the contention of the learned Deputy Attorney General that as the appellants availed of the benefit of deferment of customs duty under the Rules, they could not deposit the advance income tax in full with the 1st installment of customs duty. No such interpretation arises either from the language of section 50(5)(a)/(b) of the Ordinance or from the provisions of the Rules. Mahmeed (Private) Ltd. v. Collector of Customs, Quetta and Another – [1990] 61 TAX 12 (H.C.Quetta) 1923.
Assessee imported vessel which arrived at Karachi on 9.6.1988 and bill of entry was filed on 23.6.1988, exemption of advance tax granted by the Income Tax Authorities from 1.7.1988 which was held to be not available.
Petitioner vehemently urged that, Collectorate of Customs was merely concerned with collection of „advance income tax‟ on behalf of Income Tax Department under section 53 of the Income Tax Ordinance, 1979. Since section 50(5) of the „Income Tax, Ordinance‟ clearly envisages procedure for granting exemption to class of persons who furnish certificate of the „Commissioner Income Tax, therefore, on supplying requisite certificate, Customs Authorities could not cause deduction of the advance tax. He further maintained that determining factor about date of recovery of advance Income Tax would be regulated from delivery of goods to the petitioner, and not the date of import or submission of bill of entry. It may be noted that ultimate relief sought in the petition aims at exemption of Income Tax but concerned department is not impleaded in petition. Besides, it is not mentioned whether income pertaining to imported vessel was shown in the returns of financial year 1987/1988 or would be shown in the year commencing from 1st of July, 1989. Customs authorities are bound to adopt uniform procedure for deducting the Income Tax. Since from its nature, deduction of Income Tax is „advance‟ therefore prima facie recovery of dues had to co-relate
1460 Section 50(5)
Income Tax Digest.
with date of its import at best on furnishing bill of entry. In our view it is further supplemented by the fact that notification issued by Income Tax Department dated 26.6.1988 introducing Clause (ix) of section 50(5) of Income Tax Ordinance 1979, referred to above, contains facility of exemption for advance deduction during financial year in which goods are imported. In the circumstances possibly benefit of the exemption clause can be suitably obtained by the petitioner, of imports only during the year when goods are factually imported. Besides aforesaid notification has been made effective prospectively from 1st day of July, 1988; whereas admittedly the vessel in question was received during June, 1988, therefore, in our opinion benefit of exemption clause on the basis of certificate of Commissioner Income Tax could be availed only during the year that goods were imported accordingly we are persuaded to hold that deduction was rightly ordered to be made by the respondent. _______________
CALCULATION OF DUTIES & OCTROI
Ahmed Steel (Pvt.) Ltd. v. Government of Balochistan, etc. – [1998] 78 TAX 334 (H.C.Qta.) = PCTLR (Qta) 1361 1924.
Section 50(5) vis-à-vis calculation of duties & octroi.
Taking into consideration the provisions of section 50(5)(a)(b) it can safely be held that advance income tax is recovered over the value of imported goods and for the purpose of collecting customs duty advance income tax is not added considering it to be one of the components of the value like others namely, surcharge, regulatory duty etc. This provision also clarifies that advance payment of income tax at specified rate has to be credited in the count of the taxpayers in any financial year. However, subject to different provisions of the Income Tax Ordinance, 1979 adjustment where of course will take place at the time of final determinate of the income by the concerned Department, therefore, so being the position so for the purpose of assessing ad valorem cost for charging octroi advance paid income tax cannot be deemed to be one of the components of the value because this amount in fact is to be retained by the Income Tax Department till final adjustment of the Income Tax Account of the importer subject to filling of statement of income tax by importer indicating profits, losses etc., on the end of the financial year. It is true that in the judgment referred by the learned counsel the excise duty was considered to be a tax which can be added for
1461 COLLECTION OF TAX AT SOURCE - „IMPORTS‟
Section 50(5)
determining ad valorem cost, but distinction is that the Central Excise Duty is charged on exciseable goods specification whereof has been given in the First Schedule annexed with the Central Excises Act, 1944 and it also includes goods manufactured or produced in non tariff area and brought for consummation to tariff area; whereas income tax is not to be charged on the goods but from the personal income of the importer who makes profit or loss, therefore, income tax cannot be brought within the compass of taxes mentioned in para 2 of the notification dated 8.4.1992. As far as objection raised by the respondents counsel on the non maintainability of the petition due to non-availing alternate remedy of appeal is concerned in this behalf it is suffice to observe that under Rules 48 & 216 of the West Pakistan Octroi Rules, 1964, appeals, are competent when the department or its staff is collecting the octroi, but when contract has been given for the collection of the octroi to a Contractor then both these provisions would not applicable as it has been provided under rule 226. Clause (d)(1) therefore, we are of the considered opinion that petitioner had no alternate remedy except by filing instant petition. For the foregoing reasons petition is allowed declaring that respondent No. 3 Contractor is not authorised/entitled under the law to add the advance paid income tax being one of the components to determine ad valorem cost of the goods/ships for the purpose of charging octroi. Cases referred to: AI-Hamza Ship Breaking Company and 12 other v. Government of Pakistan through Secrerafy Finance & Economic Affairs (PLJ 1996 Quetta 79); (AIR 1977 SC 965); (AIR 1965 SC 1107) and (AIR 1968 SC 1232). _______________
WORDS, “SAME MANNER” AND “AT THE SAME TIME‟, MEANING OF
Al-Hamza Ship Breaking Co. and Others v. Government of Pakistan through Secretary, Finance and Economic Affairs, Islamabad and Others – [1996] 73 TAX 203 (H.C.Quetta) 1925.
Words, “same manner” and “at the same time‟, meaning of.
The above meanings persuaded us to hold that the Collector shall compute Advance Income Tax during same period and the same moment, neither before nor after, in the identical method; in which customs duty and sales tax was collected. It is to be seen that relevant parts of statute relating to collection of tax should be interpreted in
1462 Section 50(5)
Income Tax Digest.
such a manner so that taxes are recovered without any complication, and while charging the tax there should not be any doubt concerning method adopted to achieve the object. Additionally tax can only be exacted against the taxpayer on notifying the amount of tax levied against him, on the basis of data, so placed before the concerned authority. As such, we are persuaded to hold that Advance Income Tax is to be charged on the basis of value of imported goods increased by Customs Duty and Sales Tax, worked out by the Customs Department at the rate which was prevailing at the time of allowing permission to importer under rule 2(c) of the Inspection Valuation Assessment Rules, 1994, to make the payment in public exchequer. In the rejoinders filed to counter affidavits of Customs Department Petitioners had not controverted to above factual position. Thus it is decided that petitioners without making full payment of first installment i.e. 34% of the Import Duty had no authority to deposit without permission of Collector, 2% Advance Income Tax on the valuation of customs duty which they worked out themselves. As payment of customs duty sales tax under Deferment Scheme is relatable to the computing and collecting of Advance Income Tax, therefore petitioners are liable to pay such tax at the rate which will be prevailing when remaining amount of the duty shall be paid by them. In view of above discussion it is held that Advance Income Tax shall be computed according to the method, prescribed under section 50(5)(a)(b) of the Ordinance of 1979 and collection of the tax-shall be made on the amount of duty which actually had been paid by Importer under the sanction of Tax Levying Authority i.e. Collector Customs at the rate prevailing at the time when such amount is paid and there is no concept of self-execution of above provisions. Under the circumstances, official respondents were within their lawful right to demand Advance Income Tax, at the rate of difference of 2% from petitioners after 1st July, 1995, on promulgation of Finance Act, 1995. Because petitioners have not fully discharged the liability to pay Advance Income Tax under the provisions of section 50(5)(a)(b) of the Ordinance of 1979, therefore, no vested right had accrued to them, and the judgments cited at Bar on behalf of petitioners are of no help to them. Cases referred to: Al-Samrez Enterprise v. The Federation of Pakistan (1986 SCMR 1917; Molasses Trading and Export (Pvt) Ltd. v. Federation of Pakistan and others (1993 SCME 1905); Abbas Steel Industries Ltd. v.
1463 COLLECTION OF TAX AT SOURCE - „IMPORTS‟
Section 50(5)
Collector of Customs (Appraisement) Customs House, Karachi and 3 others (1989 CLR 1463); Crescent Pak Industries (Pvt.) Ltd. v. Government of Pakistan and others (PTCL 1990 CL 457) and Gays Prasad Pandey and another v. State of Bihar and others (AIR 1969 PaL 311).
1464 Section 50(5A)
Income Tax Digest.
Section 50(5A) Deduction of tax at source – export proceeds
PAGE NO
EXPORT OF COTTON YARN
1926. Cotton yarn exported was not liable to deduction of tax at _ source @ 1% under the law. [1999] 80 TAX 217 (H.C.Lah.)
1465
1465 DEDUCTION OF TAX AT SOURCE - „EXPORT PROCEEDS‟
Section 50(5A)
Section 50(5A) Deduction of tax at source – export proceeds
EXPORT OF COTTON YARN
Asim Textile Mills Limited v. Central Board of Revenue & others – [1999] 80 TAX 217 (H.C.Lah.) 1926.
Cotton yarn exported was not liable to deduction of tax at source @ 1% under the law.
To place cotton yarn in Part-III which is meant for the “goods not covered by Part-I and II, the revenue had to establish that the item cotton yarn was not “goods” manufactured in Pakistan. It is also not the case of the Revenue that the C.B.R. in exercise of the powers vested in it at serial No. 3 of Part-III of the Eighth Schedule had notified cotton yarn as an item to be taken under Part-III of the said Schedule. The term manufacturing as a general rule is applied to conversion or process of a material or materials into refiner forms of the raw material or the making of an altogether different thing. Another principle applied in this regard is the change in nature and use of the item which had travelled from one stage of the material to another or stood converted even by simple flux of time and preservation with or without making of any human effort to affect the change. The situation thus calls for employing at least two general principles. First that where an article or income can equally be placed under two heads of income or tariff then the one favourable to the taxpayer should be adopted. Second, where an item of income etc. expressly falls into one clause then its placing into another clause would be unjustified. All the more so, when the other clause is subject to a higher rate of tax. All the relevant provisions namely section 50, (5A) opening words of Part-I of the First Schedule, para FF of the same schedule and the three parts of the Eighth Schedule when read together do not create even a reasonable doubt against the submissions made at the bar for the petitioner. The aforesaid C.B.R. Circular also lends no support to
1466 Section 50(5A)
Income Tax Digest.
the case of the Revenue that the item in question is covered only under part-Ill of the Eighth Schedule and therefore liable to deduction of tax at source at the rate of 1%. Without any contention to the contrary and an assertion against cotton yarn being “goods manufactured”, I will hold that the action on the part of the respondents No. 1 to 4 asking the bankers to make deduction at the rate of 1% of export proceeds of cotton yarn is against law. Cases referred to: Collector of Customs Karachi and others v. Messrs Abdul Majeed Khan and others 1977 SCMR 371; Commissioner of Income Tax EastPakistan v. Messrs Hossen Kasam Dada Karachi and others (1960) 2-TAX (III-374) = PLD 1961 S.C. 375; Mehran Associates Limited v. Commissioner of Income Tax, Karachi (1992) 66 TAX 246; Abdul Rehman v. Inspector General of Police, Punjab, Lahore and others (PLD 1995 S.C. 546).
1467 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
Section 50(7A) Deduction of tax at source – sale of certain properties, octroi right, toll, fee etc.
PAGE NO
SCOPE OF SECTION 50(7A)
1927. Tax is always on income and not on investment or expenditure. The lease money being not income as such 5% advance tax as envisaged under sub-section (7A) of section _ 50 of the Income Tax Ordinance, 1979. [2001] 83 TAX 397 (H.C.Lah.) 1928. Sale of property under section 50(7A) includes octori duties, _ tolls, fees and other levies. [2000] 81 TAX 60 (H.C.Lah.) _ 1929. Scope of section 50(7A) vis-à-vis value of contract. [1997] 75 TAX 109 (H.C.Lah) = 1997 PTD 747 SECTION 50(7A) IS HELD TO BE VALID LAW
1930. Section 50(7A) is held to be valid law. (H.C.Lah.)
_
1468 1469 1469
[2000] 81 TAX 60
1931. Petitioner, a statutory constituted trust, appointed auctioneers to sell certain properties on commission. Held that department was not justified to demand tax under _ section 50(7A) from the trust on sale price. [1990] 61 TAX 30 (H.C.Kar.)
1470
1470
WORDS, „SALE‟, „PROPERTY‟, EXPLAINED
1932. Words, „sale‟, „property‟, explained. Lah.)
_
[1986] 53 TAX 93 (H.C 1474
AUCTION OF THE RIGHT TO COLLECT EXPORT TAX IS NOT A SALE
1933. Auction of the right to collect Export Tax is not a sale. _ [1985] 52 TAX 169 (H.C.Kar.) = 1985 PLD 787
1478
1468 Section 50(7A)
Income Tax Digest.
Section 50(7A) Deduction of tax at source – sale of certain properties, octroi right, toll, fee etc.
SCOPE OF SECTION 50(7A)
Amir Nawaz Khan, etc. v. Government of Pakistan, through Secretary Finance, Islamabad, etc. – [2001] 83 TAX 397 (H.C.Lah.) 1927.
Tax is always on income and not on investment or expenditure. The lease money being not income as such 5% advance tax as envisaged under sub-section (7A) of section 50 of the Income Tax Ordinance, 1979.
Mr. Maqbool Elahi Malik, Advocate for the petitioner contended that the lease money being not income as such 5% advance tax as envisaged under sub-section (7A) of section 50 of the Income Tax Ordinance, 1979, cannot be claimed from the petitioner. In support of his contention, learned counsel has placed reliance upon the interim order passed by the Honorable Supreme Court on 10.5.1999 in similar circumstances in Civil Petition No. 533-L/99. Learned counsel for the petitioner urged that section 50(7A) of Income Tax Ordinance, 1979 was added through an Ordinance on 25.6.1981 when the Article 89 was held in abeyance by virtue of article 2 of PCO, 1981 which was promulgated on 24.3.1981. The aforesaid addition of sub-section (7A) of section 50 of Income Tax Ordinance, 1979 excluded the petitioner. Therefore, action of the respondent is without lawful authority. He further urged that the petitioner has only the right to collect Goods Exit Tax in terms of the agreement executed between the petitioner and respondent No.5 Daily collection is deposited with the respondent No.5 after one month and the said collection is deposited with the respondent No.5 after one month and the said collection is not income of the petitioner. He further urged that tax is always on income and not on investment or expenditure. He further urged that action of the respondent is in violation of Article 3, 4, 18, 24 and 25 of the Constitution of Islamic Republic of Pakistan and the law laid down by
1469 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
this Court in Zia Ullah Khan‟s case (PLD 989 Lahore 554). In support of his contention learned counsel has placed reliance upon an interim order passed by the Honorable Supreme Court on 10.5.1999 in similar circumstances in civil petition No. 532-L and 533-L/99. Muhammad Ansar etc. v. Administrator Town Committee Kabirwala District Khanewal and 4 others – [2000] 81 TAX 60 (H.C.Lah.) 1928.
Sale of property under section 50(7A) includes octroi duties, tolls, fees and other levies.
It is pertinent to mention here that Bismillah and Companies case [(1997) 75 Tax 109 (H.C.Lah.) = (1997) PTD 747] was considered and approved by the division Bench of this Court consisting of my learned brothers Ihsan-ul-Haq Chaudhry, J., and Najam-ul-Hassan Kazmi, J. in W.P. No. 16358/97/My learned brother Malik Muhammad Qayyum, J. in Bismillah and Companies case (1997 PTD 747 at 749) considered the contention of the petitioners and observed as follows: Explanation being clear and explicit does not leave any room for duty that so far as section 50(7A), the sale of property would include lease for collection of octroi duties, tolls, fees and other levies. I am also fortified by the following judgements: (i)
(1985) 52 Tax 169 (H.C.Kar.) = 1985 PTD 7897 (Rehman Corporations case);
(ii)
(1990) 61 Tax 30 (H.C.Kar.) = 1989 PTD 1048 (Trustees of the Port of Karachi‟s case);
(iii)
NLR 1995 Tax (Lah.) 51;
(iv)
PLD 1984 Lah. 345 (Muhammad Younis case);
(v)
1997 PCTLR (SC) Pak. 512.”
Bismillah and Co. v. Secretary, Government of The Punjab, Etc. – [1997] 75 TAX 109 (H.C.Lah.) = 1997 PTD 747 1929.
Scope of section 50(7A) vis-à-vis value of contract.
The agreement between the Contractor and the Local Council, the tax has to be collected by the Local Council itself which is later on passed on to the Contractor and as such, this argument on the face of it, is fallacious and misconceived. The manner of collection of tax has no significance. What is important is to see as to whether the petitioners have been granted right to retain the proceeds collected on account of taxes, octroi etc. A perusal of the agreements and the contents of the
1470 Section 50(7A)
Income Tax Digest.
petitioners clearly show that the petitioners have been granted that right. Even though it is true that the entire amount for which the lease has been obtained by the petitioners may not constitute their income but section 50(7A) only provides a mode for recovery of tax in advance and in anticipation of assessment which has to be made in due course. Any deduction made as advance tax is subject to adjustment. After the liability of the petitioners has been ascertained and quantified by assessment, if the tax assessed is more than the advance tax recovered, the assessee shall be liable to pay the difference. Similarly, if the liability is less than the advance tax, the excess amount shall have to be refunded. It cannot, therefore be said that the petitioners are being asked to pay tax on something other than their income. _______________
SECTION 50(7A) IS HELD TO BE VALID LAW
Muhammad Ansar etc. v. Administrator Town Committee Kabirwala District Khanewal and 4 others – [2000] 81 TAX 60 (H.C.Lah.) 1930.
Section 50(7A) is held to be valid law.
The contention of learned counsel for the petitioner that section 50(7A) is ultra vires of the Constitution has no force. The laws framed in question was protected and validated by virtue of Article 270-A of the Constitution. I am fortified by the judgement of Hon‟ble Supreme Court in Mrs. Benazir Bhutto‟s case (P.L.D. 1988 S.C. 416) and Ghulam Mustafa Khar‟s case (P.L.D. 1989 SC 26). Trustees of the Port of Karachi v. Central Board of Revenue and another – [1990] 61 TAX 30 (H.C.Kar.) 1931.
Petitioner, a statutory constituted trust, appointed auctioneers to sell certain properties on commission. Held that department was not justified to demand tax under section 50(7A) from the trust on sale price.
[Per Abdul Qadeer Chaudhry, J.] - The petitioner is a statutory trust responsible for managing the affairs of Karachi Port. The petitioner was constituted under Karachi Port Trust Act, 1886. The petitioner frequently has to get hold unserviceable and surplus stores belonging to it disposed of. For this purpose the petitioner appoints auctioneers under contracts who sell the goods by public auction. During the period from 1.7.1981 to 30.6.1983 articles and goods
1471 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
belonging to the petitioner were sold by the auctioneers engaged by the petitioner. According to the petitioner the auctioneers paid to the petitioner the sale price of the goods sold by them after deducting their commission. At the instance of the Respondent No. 2 the petitioner submitted a list of auctioneers to the respondent. The Respondent No. 2 by letter dated 22.11.1983 required the petitioner to deposit the tax under section 50(7A) of the Income Tax Ordinance 1979 (hereinafter referred to as the Ordinance) calculated at 3% of the amounts of sale price of the goods belonging to the petitioner which were auctioned by the auctioneers after 1.7.1981. The case of the petitioner is that the auctions were held by the auctioneers and not by the petitioner and the responsibility for collecting the tax under section 50(7A) of the Ordinance lay on the auctioneers and not on the petitioner. The Respondent No. 2 did not accept this contention of the petitioner and the petitioner had to make a representation to the Respondent No. 1 who also rejected the representation of the petitioner on the ground that the legal obligation to deduct and deposit taxes remains on the petitioner. The reasonable conclusion would be that the principal would deduct the advance tax and he would be liable if his agent has not deducted the amount. Auctioneers were appointed by the petitioner company. They were agents of the company and therefore if their agents have not deducted the amount then they would be liable for the payment of the same. They cannot escape the liability because the Income Tax Act itself provides to collect the income tax and make all possible means to recover the income tax which has escaped their notice or an assessee has failed to make the payment. The provisions of the Ordinance cannot be furnished by shifting the burden on the agent if the principal has failed to perform his legal duties. Even in this petition the petitioner has not named its agents who had auctioned the goods. It was the duty of the petitioner to instruct the auctioneers to collect the advance tax so that the mechanism of taxation could be workable. The petitioner who was the principal cannot be permitted to defeat the provisions of law. As stated above the petitioner was duty bound to instruct his agent to deduct the tax in advance and if the auctioneers have not deducted the advance tax, the petitioner would be liable. [Per Mamoon Kazi, J. (Contra.)] - A plain reading of subsection (7A) makes it clear that this subsection refers to three persons, namely (i) the person making sale by public auction, (ii) the person to whom the goods auctioned belong and (iii) the person to whom the
1472 Section 50(7A)
Income Tax Digest.
gods have been sold. The liability to pay tax is on the purchaser of the goods and the responsibility of collecting such tax has been placed clearly on the person who makes a sale by public auction and not on the person to whom the goods belong. Besides subsection (7A) of section 50 section 52 of the Ordinance is also relevant as according to this section “where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax.” A perusal of section 52 shows that section 52 cannot be read in isolation but it has to be read together with section 50 of the Ordinance which is clear even from the language used in section 52. The language used by the Legislature clearly suggests that the liability under section 52 has been placed on the person who fails to deduct or collect tax, or having deducted or collected, fails to pay the same as required by section 50. Now, referring again to section 50, subsection (7A) thereof, which alone is relevant here, shows, that the person required to collect, deduct or pay tax is the person making sale by public auction. Such person, according to section 52 of the Ordinance, shall be deemed to be an assessee in default in respect of such tax. Although there cannot be any cavil with the contention raised by Mr. Shaikh Haider, but the intention of the Legislature is always gathered from the language it uses in the enactment, whatever be the consequences which may cause. As I have already said, according to the language used in subsection (7A) of section 50, the responsibility to collect advance tax is on the person making sale by public auction and not on the person to whom the auctioned goods belong, it, therefore, cannot be understood as to how the language of subsection (7A) can be stretched so as to make the petitioner liable. With utmost respect it may be said, that “person” no doubt, includes an individual, a firm, an association of persons, a company, etc. but clause (32) when read with sub-section (7A) makes only such person responsible for collection or deduction of advance tax, who makes sale by public auction of any property belonging to another person. The former may be an individual, a firm, a company, etc., therefore, in my view, the definition of “person” does hardly make any difference vis-à-vis the responsibility fixed by the Legislature to collect or deduct tax under sub-section (7A) of section 50. Such responsibility has clearly been placed on the person making sale by public auction of property belonging to another. Such person, therefore, cannot be the petitioner.
1473 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
Case referred to: Johan Patterson and Co., (Ind.) Ltd. v. Income Tax Officer, 36 ITR 449; Escorts Ltd. v. Income Tax Officer, Lahore [1975] 31 TAX 164 (H.C.Lah.) = (1975 PTD 50) and Rehman Corporation v. Income Tax Officer, Circle A, Mirpurkhas and another [1985] 52 TAX 169 (H.C.Kar.)
[Per Saleem, Akhtar, J. (Concld.)] - A perusal of section 50 (7A) makes it clear that its object is to ensure recovery of Income Tax in respect of sale of property by public auction which belongs to the Government, local authority, a public company, a foreign association or consortium. This provision indicates that the property should have been sold by public auction belonging to the aforestated specified persons and that the duty of collecting advance Income Tax is on the person make the sale. Mr. Shaikh Haider the learned counsel for the respondent has contended that as section 50 (7A) is not a charging but machinery provision it should be liberally interpreted to ensure that recovery of tax is made and no part of it escapes. It is true that the machinery provision of a fiscal statute should be interpreted in such a manner that recovery is not frustrated or adversely affected. But it does not mean that to achieve this object one can travel beyond the realm of law and do violence to language and intention of the statute. The machinery can be extended only to the extent it is permissible under law. In this attempt, one cannot override the rights of other parties only because a recovery has to be made. Such provision have their own limitations and they are to be found within the statute itself. In my humble view due consideration to facts of the case which will determine the applicability of section 50 (7A) has not been given. From the correspondence filed on behalf the respondents with their counteraffidavit it is clear that respondent No. 2 was asking for particulars of sale by public auction and public tender. A public auction can be held through an auctioneer or by calling public tender. If sale by public auction or public tender was carried out by the officers or employees of KPT then it is the responsibility of KPT to collect advance tax. But where public auction was held by the auctioneer appointed by KPT, the auctioneer is responsible to collect the tax. Since the factual position has not been determined which seems to be confusing and disputed we declare the impugned action of respondent No. 2 as without lawful authority and direct respondent No. 2 to hold inquiry whether the sale was by public auction or public tender and was it conducted by the petitioner itself or the auctioneer independently who was responsible for sale and collection of the sale price. These facts should first be determined upon which depends the liability for
1474 Section 50(7A)
Income Tax Digest.
payment of advance Income Tax. This inquiry is necessary as the letters of the petitioner filed by the respondents give a contradictory and confusing picture. After ascertaining these facts the liability for payment of advance tax may be determined in the light of the above observation. Case referred to: West Punjab Province v. K. B. Amiruddin and others PLD 1953 Lah. 433; K.B. Amiruddin v. West Punjab Province PLD 1956 F.C. 220 and Lt. Col. Nawabzada Muhammad Amir Khan v. Controller of Estate Duty and others [1961] 3 TAX 165 (S.C.Pak.) = (PLD 1961 S.C. 119). _______________
WORDS, „SALE‟, „PROPERTY‟, EXPLAINED
Mohammad Younas v. Chairman Sahiwal – [1986] 53 TAX 93 (H.C Lah.) 1932.
Municipal
Committee,
Words, „sale‟, „property‟, explained.
These constitution petitions raise a common question of law, „whether the contractors who have been leased out by public auction the collection of proceeds of octroi duty, toll tax and fees levied by local Council or Cantonment Board under the Punjab Local Government Ordinance, 1979, or the Cantonment Act, 1924, are liable to pay advance income tax under section 50(7A) of the Income Tax Ordinance, 1979‟. According to the Income Tax Authorities, any person making sale by public auction of any property belonging to Government or a local Authority, is required under section 50(7A) of the Ordinance, to collect advance tax computed on the basis of sale price of such property from the person to whom such property is sold, and in view of the definition of term „property‟ adopted by the Supreme Court of Pakistan in the case of Hamdard Dawakhana v. Commissioner of Income Tax (PLD 1980 S.C. 84) = [1980] 42 TAX 1 (S.C.). Octroi / Toll contracts are covered by the said provision. Mr. Imtiaz Javed, Advocate, appearing for the petitioners argued that the mode of collection of a tax does not change the character of the amount collected. The amount collected by the contractors under the arrangement of lease is revenue of the Local Authority and is part of the local fund and, as such, it cannot be termed as a “Property” belonging to local authority. Malik Muhammad Nawaz, Advocate, appearing for the petitioners drew attention to the various rules framed under the Local
1475 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
Government Laws dealing with the “properties” held by the local bodies. Both the learned counsel referring to the rules framed under the Local Government Laws enforced from time to time argued that in these cases the contractors have been authorised to collect tax and fees on behalf of the local bodies and such an arrangement cannot be treated a “sale transaction” as one of the essential ingredients of sale is that the property or the interest sold passes to the buyer completely and absolutely which according to them is not the position obtaining in the present lease contracts granted in exercise of statutory powers. Mr. Ijaz Hussain Batalvi appearing for the contractors argued that under the contracts granted to the highest bidders, these bidders undertake a liability to pay irrespective of the fact that they make out a profit ultimately or run into a loss. Mr. Muhammad Amin Butt, amicus curiae, analysing section 50(7A) of the Ordinance argued that to attract the provisions of this subsection, there has to be (i) sale by auction (ii) of property (iii) belonging to local bodies and if these three things co-exit then advance tax on bails of sale of such peoperty is recoverable from the person to whom such property was sold. The matter does not end here because even by giving the term its comprehensive meaning, can it be said that the revenue or the local fund of the local bodies is a property or an interest belonging to or a business of a local body and whether granting of the right to collect taxes and fees imposed by it amounts to sale. To my mind, the answer to be returned to this question must be in the negative. A tax is a compulsory extraction or a contribution imposed by a sovereign authority or required by the general body of the subjects or citizens. The power to levy a tax has to be founded in a statute whereby authority is given to levy and collect the compulsory contribution in the good of the citizens or for running the administration. Such a compulsory contribution in the modern times has to be distinguished from the extraction realisation of valuable property or money from the subjects by the despots far running the administration or prepetuating their rules or spending the same at their whim or pleasure treating the valuables recovered as their absolute property. The power to impose taxes or fees, a sovereign attribute has been delegated to the local bodies under the Local Government Laws enforced from time to time and the rules framed thereunder.
1476 Section 50(7A)
Income Tax Digest.
For instance octroi duty levied and realised is covered by West Pakistan Municipal Committees Octroi Rules, 1964. Cattle Market Fee is dealt with by the Cattle Market Rules, 1969. Likewise, cantonment board levies taxes under the authority of Cantonment Act, 1924, and the leasing out of the collection of any octroi, terminal tax, toll tax etc. is permitted by section 83 of the Act. The property of the local bodies is dealt with by section 134 of the Local Government Ordinance. Separate rules have been framed for dealing with the properties of the local bodies. Reference may be made to West Pakistan Local Councils (Property) Rules, 1962 and West Pakistan Municipal Committees (Property) Rules, 1962. The scheme of the local government laws enforced from time to time and the Local Government Ordinance, 1979, clearly spell out that the source of revenue constituting local fund cannot be confused with the properties held and owned by the local bodies. To my mind, the power and the right to impose tax duty or fee and its collection cannot be termed as a property or a beneficial interest belonging to or vesting in a local body. It is pertinent to notice that local bodies have the legal authority to collect taxes, fees imposed and levied under the law. These bodies can collect and recover these taxes by themselves and instead of collecting the same directly through their own arrangements, law permits the making of the other arrangement i.e. collection through its appointed agents. The method of appointing the agents is through public auction to the highest bidder. Would this arrangement change the nature of the amount to be collected? Can the revenues, source of local fund be termed as “property”. To my mind, in substance what is being assigned is the power to collect the tax imposed or the fee levied, on behalf of the local body. The substance of what is received is the present value of the presently assessed amount of the taxes payable which the contractor would otherwise obtain in the future. In short, consideration is paid for the right to receive future income. In other words, by entering into the arrangement of lease, a contractor is involved in an activity yielding income. The arrangement of collection of taxes awarded to the contractors is specifically termed “lease”. The word “lease” has been used, as rightly pointed out by Mr. Muhammad Amin Butt Advocate, because the ports, the market or the place where the revenue is to, be collected arc to be handed over to the successful bidder. The so-called beneficial interest and the power to collect taxes does not stand, transferred to the contractors as they can neither increase the rate, of tax nor can use the posts, the markets or the place handed over in the manner
1477 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
which they think, more beneficial or property for realisation of the taxes and fees. The activity undertaken by a contractor is kept under complete control as‟ is apparent from the rules on the subject. In view of these rules, it cannot be said that the power or the authority to collect taxes stands fully transferred to the buyer so as to bring into existence the relationship of a seller and a buyer. If the arrangement contemplated by the rules for the collection of taxes and fees through lease arrangement is treated as a sale transaction, that would be violative of the scheme contemplated in the rules and will result in putting the contractor out of the control of the local bodies. The net result of the above discussion is that the leases awarded, for the collection of octroi duty, tolls and fees do not amount to “sale” and, as such, provisions of section 50(7A) of the Income Tax Ordinance have no application to these contracts. The demand of advance income tax made and sought to be enforced by the Income Tax Authorities in each of these cases is, therefore, held to be without lawful authority and of no legal effect. Cases referred to: Hamdard Dawakhana v. Commissioner of Income Tax [1980] 42 TAX 1 (S.C.) = (PLD 1980 S.C. 84); Walter M. Hort v. Commissioner of Internal Revenue [313 US 28 (1940)]; Commissioner of Internal Revenue v. P.G. Lake [356 US 260 (1958)]; Commissioner of Income Tax v. Currimbhoy Ebrahim & Sons Ltd. [1933 (1) ITR 341]; Muhammad Amir Khan v. Controller of Estate Duty (PLD 1962 S.C. 335); Whitey v. Commissioner of Inland Revenue [10 Tax Cases 88 (H.L.)]; Brandy Syndicate v. Inland Revenue Commissioner [(1921) 1 KB 64]; McKenna v. Eaton Turner [(1936) 1 KB 1]; Lacman Dass Naraindass (AIR 1925 All. 115); Commissioner of Income Tax v. Thevara patasala (AIR 1926 Mad. 949); Trustees of Tribune Press Lahore v. Commissioner of Income Tax (AIR 1939 P.C. 208); All India Spinner‟s Assocation v. Commissioner of Income Tax (AIR 1944 P.C. 88); King v. England [(1864) 33 L.J. Bom. 257]; Nagina Silk Mills v. Income Tax Officer (PLD 1963 S.C. 322) = [(1963) 7 TAX 442 (S.C.)]; Premier Cloth Mills v. STO [(1972) SCMR 257] = [1979] 29 TAX 199; The Murree Brewerry Co. v. Pakistan (PLD 1972 SC 279); S.A. Haroon v. Collector of Customs Karachi (PLD 1959 SC 177) and Hydri Ship Breaking Industries Ltd. v. Sind Government and other (NLR 1982 TAX 65). _______________
1478 Section 50(7A)
Income Tax Digest.
AUCTION OF THE RIGHT TO COLLECT EXPORT TAX IS NOT A SALE
Rehman Corporation v. Income Tax Officer, Circle „A‟, Mirpurkhas & another – [1985] 52 TAX 169 (H.C.Kar.) = 1985 PLD 787 1933.
Auction of the right to collect Export Tax is not a sale.
Respondent 2 sent a letter dated 21.4.1984, to the petitioner informing him that the Income Tax Officer Circle “A”, Mirpurkhas, respondent 1, has issued a notice to it under section 92 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) for recovery of a sum of Rs.3,42,000/- by way of deduction under section 50(7A) of the said Ordinance and requiring the petitioner to pay the same amount to the Income Tax Officer and further informing him that failing which it would make payment on behalf of the petitioner by deducting the same amount from the amount of security deposited by him and lying with it. It is clear from the judgment relied upon by the learned Counsel for the petitioner that the contention that right to collect octroi was not property, was not accepted by the learned Judge. We have therefore, no doubt that the right to collect export tax is „property‟. It may be explained that a declaratory Act is described in Craies Statutes as an Act to remove doubts as to the meaning or effect of a statute, and it is also stated that the usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judical error. However, it is contended by Mr. A. S. Waswani that the provisions added by way of explanation have enlarged the scope of main provision and therefore, they would not apply retrospectively but we do not agree for, as stated earlier, the necessity seems to have arisen because of the judgment of Lahore High Court wherein the learned Judge held that the right to collect octroi was in the nature of lease and not in the nature of sale. Accordingly, in our view the explanation would apply retrospectively. In view of the Explanation added we are of the view that the Lahore High Court‟s decision in Muhammad Younas v. Chairman Municipal Committee Sahiwal and others case has lost its efficacy and the demand made by the Income Tax Department is valid and unexceptional. Accordingly, we find no force in this constitutional petition and dismiss it but leave the parties to bear their own costs for this constitution petition was filed before the amendment was made.
1479 DEDUCTION OF TAX AT SOURCE - SALE OF CERTAIN PROPERTIES, OCTRIO RIGHT, TOLL FEE ETC.
Section 50(7A)
Cases referred to : Muhammad Younas v. The Chairman, Municipal Committee, Sahiwal and other (PLD 1984 Lah. 345); Hamdard Dawakhana v. Commissioner of Income Tax, Karachi (PLD 1980 S.C. 84) = (1980) 42 TAX 1 (S.C.); Dharama Pijaya Agency v. Commissioner of Income Tax (1960) 38 ITR 392; J.K. Trust v. Commissioner of Income Tax (1957) 32 ITR 535; Langdate M.. R. Jones v. Skinner (5 L.J. Ch. 90); Adnan Afzal v. Capt. Sher Afzal (PLD 1969 S.C. 187); Nabi Ahmad and another v. Home Secretary, Govt. of West Pakistan, Lahore and 4 others (PLD 1969 S.C. 599); Arshad Ahram & Co., and 8 others v. Divisional Superintendent, Pakistan Railways, Rawalpindi & 5 others (PLD 1982 Lah. 109); Colonial Sugar Refining Co., Ltd. v. Irving (1905 A.C. 369) and Mohammadi Bibi v. Kashi Upadhya and others (AIR 1926 All 725).
1480 Section 50(7BB)
Income Tax Digest.
Section 50(7BB)* Deduction of tax at source – cost of commercial buildings
PAGE NO
GENERAL
1934. CBR is directed to issue reasonable notifications _ not penalizing the poor citizens. [2001] 83 TAX 1 (H.C.Lah.)
*
1481
Sub-section (7BB) omitted by Finance Ordinance, 2000. Earlier it was inserted by Finance Act, 1993 w.e.f. July 1, 1993.
1481 DEDUCTION OF TAX AT SOURCE COST OF COMMERCIAL BUILDINGS
Section 50(7BB)
Section 50(7BB)* Deduction of tax at source – cost of commercial buildings
GENERAL
Leather Connections (Pvt.) Ltd. v. Central Board of Revenue, Islamabad – [2001] 83 TAX 1 (H.C.Lah.) 1934.
CBR is directed to issue reasonable notifications not penalizing the poor citizens.
Anyhow the letter issued by respondent No.2 to respondent No.3 on 16.5.1996 by fixing cost of construction at the rate of Rs.400 per sq. ft is not borne out and is not in accordance with notification issued by C.B.R., dated 18.7.1993 under the aforesaid section 50(7BB). The letter does not contain any comparative rates of the other departments, therefore, same is not sustainable in the eyes of law. The Notification of C.B.R. is misconstrued by the subordinate functionaries of C.B.R. In view of these circumstances, let a copy of this order / judgment be sent to Chairman, C.B.R., Islamabad, who is directed to issue general instructions to all the functionaries to issue letters to the Administrative Officer concerned in accordance with law and Notification dated 18.7.1993, after comparison of the rates mentioned by different departments in the Notification or the Chairman, C.B.R. must issue a notification and fix rate either yearly basis for each area 2/3 years so that poor citizen should not be penalized.
*
Sub-section (7BB) omitted by Finance Ordinance, 2000. Earlier it was inserted by Finance Act, 1993
w.e.f. July 1, 1993.
1482 Section 52
Income Tax Digest.
Section 52* Liability of persons failing to deduct or pay tax
PAGE NO
ASSESSEE IN DEFAULT CANNOT BE A PERSON WHO WAS NOT COMPETENT TO DEDUCT TAX
1935. Assessee in default cannot be a person who was not _ competent to deduct tax. [2001] 83 TAX 8 (H.C.Lah.)
1483
PROCEEDING UNDER SECTION 52 HELD NOT MAINTAINABLE
1936. Proceeding under section 52 held not maintainable. 82 TAX 127 (H.C.Lah.)
_
[2000]
1937. Where no deductions was required holding the petitioner as an assessee in default under section 52 by the Assessing Officer was totally beyond jurisdictional competence. _ [1999] 80 TAX 262 (H.C.Lah.) _ 1938. Plea of guilty held valid and effective for conviction. [1982] 45 TAX 52 (H.C.Kar.) 1939. Prosecution for abetment without obtaining prior approval of Commissioner of Income Tax is not maintainable. _ [1978] 38 TAX 191 (H.C.Kar.)
*
Corresponding to section 18(7) of the 1922 Act.
1484
1484 1485
1486
1483 LIABILITY OF PERSONS FAILING TO DEDUCT OR PAY TAX
Section 52
Section 52* Liability of persons failing to deduct or pay tax
ASSESSEE IN DEFAULT CANNOT BE A PERSON WHO WAS NOT COMPETENT TO DEDUCT TAX
Director Finance, WAPDA, Gujranwala & another v. Commissioner of Income Tax, Gujranwala & another – [2001] 83 TAX 8 (H.C.Lah.) 1935.
Assessee in default cannot be a person who was not competent to deduct tax.
Perusal of the procedure laid down for collection of payment of electricity bill effective from 1st of July, 1993 copy of which has been appended with this petition as Annexure-A clearly postulates that no commission or any other charge shall be paid by the WAPDA to the Banks. Section 50(4) starts with the words any person responsible for making payment. The respondents have not been able to show that WAPDA is responsible for making any payment to the Banks, and therefore, so far as the petitioners are concerned they were not obliged to deduct the advance tax. Admittedly petitioner No.2 is a company formed under a statute and is deemed to be a company within the meaning of the Income Tax Ordinance, 1979. The Principal Officer has been defined in section 2(34) as meaning Managing Director, Secretary, Treasurer, Manager, Agent or Accountant, by whatever designation known, of the authority, company or association; and any person connected with the management or administration of the local authority, company, or association upon whom the Deputy Commissioner has served a notice of his extension of treating him as the Principal Officer thereof. The Director Finance, Area Electricity Board, Gujranwala does not fall in any of the categories in clause (a) of section 34, and therefore, if he was to be treated as Principal Officer by the Department notice should have been served upon him in terms of section 2(34) of the Ordinance. It follows from the above that the action of the respondents in treating *
Corresponding to section 18(7) of the 1922 Act.
1484 Section 52
Income Tax Digest.
petitioner No. 1 as an assessee in default and demand for payment of Rs.10,34,620 as also the order passed in this behalf by respondents Nos. 1 and 2 are not sustainable. _______________
PROCEEDING UNDER SECTION 52 HELD NOT MAINTAINABLE
Director Finance, WAPDA v. Commissioner of Income Tax – [2000] 82 TAX 127 (H.C.Lah.) 1936.
Proceeding under section 52 held not maintainable.
There is also force in the contention of the learned counsel that petitioner No. 1 who is the Director Finance area Electricity Board of Water and Power Development Authority could not have been treated as assessee in default as according to the wording of section 50(2) read with section 2(32) and section 2(34) of the Income Tax Ordinance, 1979. Admittedly, petitioner No. 2 is a company formed under a statute and is deemed to be a company within the meaning of the Income Tax Ordinance, 1979. The Principal Officer has been defined in section 2(34) as meaning Managing Director, Secretary, treasurer, manager, agent or accountant, by whatever designation known, of the authority company or association; and any person connected with the management or administration of the local authority, company, or association upon whom the Deputy Commissioner has served a notice of his intention of treating him as the principal officer thereof. The Director Finance, Area Electricity Board, Gujranwala does not fall in any of the categories in clause (a) of Section 34 and therefore, if he was to be treated as Principal Officer by the Department notice should have been served upon him in terms of section 2(34-b) of the Ordinance, It follows from the above that the action of the respondents in treating petitioner No. 1 as an assessee in default and demand for payment of Rs.10,34,620/- as also the orders passed in this behalf by respondents No. 1 and 2 are not sustainable. Kawther Grain (Pvt.) Ltd. v. Deputy Commissioner of Income Tax Gujranwala – [1999] 80 TAX 262 (H.C. Lah.) 1937.
Where no deduction was required holding the petitioner as an assessee in default under section 52 by the Assessing Officer was totally beyond jurisdictional competence.
A plain reading of the provisions as contained in section 50(4) of the Ordinance makes it absolutely clear that a payer is required to deduct advance tax at the time of making payment on account of supply of goods or for services rendered or execution of a contract with various
1485 LIABILITY OF PERSONS FAILING TO DEDUCT OR PAY TAX
Section 52
categories of persons mentioned in the clause. The Assessing Officer in this case invoked the provisions on account of his view that the transaction in question pertained to supply of goads. Nothing could be more fallacious. It was simply a sale of factory land, building and machinery installed therein. The interpretation of word „goods‟ as adopted by the Assessing Officer does not find support either from the Income Tax Ordinance or for that matter from any other law. The consistent view of the Superior Courts in Pakistan that in cases of fiscal statutes only the letter of law should be seen has sufficiently been highlighted In re: Collector of Customs v. S.M. Ahmad & Company (supra) and re: Muhammad Younis v. CBR (supra). It is also an accepted proposition that the words used in a statute if not defined therein should be assigned their ordinary dictionary meaning. Reference to the aforesaid two dictionaries supports the contention of the learned counsel. The sale of immovable property including land and building along with machinery installed therein could by no imagination be treated as supply goods or services rendered. It is concluded that the provisions of section 50(4) of the Ordinance were not attracted to the transaction evidencing the sale of land, building and the fixed plant and machinery sold as part of the factory. There was neither a “supply” nor its subject matter was “goods” The transaction of sale otherwise being not liable to any incidence of income tax under any of the heads given in section 15 of the Ordinance the question of deduction of advance tax did not arise at all. Accordingly, the order of the Assessing Officer dated 19.6.1999 holding the petitioner as an assessee in default under section 52 was totally beyond jurisdiction. Nazar Muhammad v. The State – [1982] 45 TAX 52 (H.C.Kar.) 1938.
Plea of guilty held valid and effective for conviction.
In respect of offence under section 52 of the Income Tax Act, I find that since the appellant had given figures of purchases in his statement of income and had verified the same and the same has been found to be false and the appellant had sufficient notice of the same in the substance of accusation and had pleaded guilty to the same, therefore, the plea of guilty in this case was valid and effective and the conviction under section 52 of the Income Tax Act was quite legal and justified and in view of the provision of section 412, Cr. P.C. no appeal could be filed in respect of conviction under section 52 of the Income Tax Act.
1486 Section 52
Income Tax Digest.
The State v. Amir Ali – [1978] 38 TAX 191 (H.C.Kar.) 1939.
Prosecution for abetment without obtaining prior approval of Commissioner of Income Tax is not maintainable.
The legal position appears to be, that the accused cannot be prosecuted under section 51(2) and 52 because he himself did not file or sign the income tax return or its verification and he cannot be prosecuted under section 52A, because the Commissioner of Income Tax has not accorded the approval for his prosecution.
1487 ADVANCE PAYMENT OF TAX
Section 53
Section 53* Advance payment of tax
PAGE NO
ADVANCE TAX
_
GENERAL
1940. Advance tax is not a “tax” but merely a provisional payment _ towards expected tax liability. 1992 SCC 904 = [1993] 67 TAX 174 (S.C.Pak.) 1941. Advance tax under section 53 of the Ordinance cannot be treated as component of cost of goods for collecting octroi. _ [1999] 79 TAX 93 (H.C.Quetta) = 1998 PTD 3468 = PTCL 1999 CL. 252 _ 1942. Scope of advance tax. [1993] 67 TAX 70 (H.C.Kar.) = 1993 PTD 46
1489
1489 1490
1943. Where assessee-company paid advance tax in East Pakistan and also purchased refundable Income Tax Bonds and both the amounts were claimed as current assets in the _ assessment, held to be justified. [1989] 60 TAX 24 (H.C.Kar.)
1490
1944. Where advance tax is not paid, additional tax is to be _ computed from the first of July of the relevant year. [1984] 50 TAX 69 (H.C.Kar.)
1491
1945. Assessee a managing agent maintaining mercantile system of accounting held that system is not material for purposes of determining the date to which payment of advance-tax _ may be deferred. [1980] 41 TAX 40 (H.C.Kar.)
1492
1946. Where prior to execution of the sale-deed but subsequent to the agreement for sale the seller was making payment of advance-tax for and on behalf of the petitioner held that buyer was not liable to penal action for failure to pay _ advance tax. [1980] 41 TAX 25 (H.C.Kar.) = 1979 PTD 461
1493
SCOPE OF “RETAINED INCOME”
1947. Income tax liability payable for the relevant assessment year in the account books can legitimately be categorised as *
Corresponding to section 18A of the 1922 Act.
1488 Section 53
“retained income”. (S.C.Pak.)
Income Tax Digest.
_
PAGE NO
1992 SCC 904 = [1993] 67 TAX 174 1494
CONSTITUTIONAL AND LEGAL ISSUES RELATING TO ADVANCE TAX
1948. Order under section 53 is ab inito void. (S.C.Pak.)
_
[2001] 83 TAX 119
1949. Order under section 53 cannot be passsed, the only remedy _ is to charge additional tax under section 87. [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061
1494
1494
RECOVERY NOTICE AFTER CASE HAS BEEN SET ASIDE IS ILLEGAL
1950. Recovery notice after case has been set aside is illegal. _ [2001] 83 TAX 500 (H.C.Lah.) = 2001 PTD 812
1496
ASSESSEE IN DEFAULT
1951. Where the assessee did not commit any default, action for _ default of section 53 held improper. [1985] 52 TAX 107 (H.C.Kar.)
1496
1952. The dates for payment of advance tax were already passed when Finance Ordinance, 1972 was promulgated making the assessee liable to tax, held that no default was _ committed. [1981] 44 TAX 93 (H.C.Kar.)
1497
1953. Where assessment order saying “assessed as per IT-30” and without any specific verdict in assessment order in regard to imposition of penal interest, held that requirements of law stands fulfilled by Income Tax Officer by applying his mind to default in payment of tax and calculation of penal _ interest. [1977] 35 TAX 15 (H.C.Lah.) = 1976 PTD 361
1498
CBR‟S CIRCULAR HELD VIOLATIVE OF THE PROVISIONS OF SECTION 53
1954. Circular No. 13 of 1997 issued by the C.B.R. held violative _ of the provisions of section 53. [1998] 77 TAX 127 (H.C.Lah.)
1498
LEVY OF ADDITIONAL TAX
1955. Levy of additional tax on the basis of provisional assessment _ justified. [1981] 43 TAX 1 (H.C.Lah.)
1500
1489 ADVANCE PAYMENT OF TAX
Section 53
Section 53* Advance payment of tax
ADVANCE TAX
_
GENERAL
Commissioner of Income Tax v. Asbestos Cement Industries Ltd. & Others – 1992 SCC 904 = [1993] 66 TAX 140 (S.C.Pak.) 1940.
Advance tax is not a “tax” but merely a provisional payment towards expected tax liability.
Tax payable under section 53 is not a tax but merely a provisional payment of an amount towards the tax due. The said amount does not become the property of the Government but remain vested in the assessee. Since tax becomes due on regular assessment, therefore, any excess payment under section 53 shall have to be returned. Accordingly, in our opinion, any amount paid under section 53 is not a payment of the “income tax” in advance but merely the credit of an amount with the Government, which can be utilised and adjusted to the extent necessary towards the ultimate liability of income tax due after it has been determined. Abdul Sattar Noon Muhammad and others v. The Government of Balochistan – [1999] 79 TAX 93 (H.C.Quetta) = 1998 PTD 3468 = PTCL 1999 CL. 252 1941.
Advance tax under section 53 of the Ordinance cannot be treated as component of cost of goods for collecting octroi.
It is not necessary that the amount of Advance Income Tax temporarily recovered by the Customs Collector, shall be finally deducted, because if on filing the returns. Importer makes out a case that Income Tax cannot be recovered from him, for any lawful reasons then already temporarily deducted amount is to be returned by the department, therefore, such tax, whose fate is yet to be determined in subsequent proceedings by the Income Tax Department, cannot be considered to be the payment of final tax, as it has been mentioned in para 2 of the Notification dated 8th April, 1982.
*
Corresponding to section 18A of the 1922 Act.
1490 Section 53
Income Tax Digest.
Thus, we are inclined to conclude that Advance Income Tax paid by the Importer on the value of goods calculated by the Customs Collector, subject to final adjustment of the Income Tax by the concerned department, cannot be considered, one of the components of value or ad volerem cost, in the notification, for the purpose of recovery of octroi. Thus, for the foregoing reasons, petitions are allowed, declaring that respondent No. 3 had no lawful authority to treat the advance Income Tax to be one of the component of the value of imported goods, in terms of Notification dated 8th April, 1982, issued by the Government of Balochistan for collecting the octroi. As a consequence, directions are issued to octroi contractor-respondent No. 3, to refund the proportionate amount of octroi charged from petitioners respectively by adding the amount of advance Income Tax, in the value of imported goods from time to time. Case referred to: Ahmad Steel (Pvt.) Limited v. Government of Balochistan and others [1998] 78 TAX 334 (H.C.Qta); (PLD 1995 SC 423); (1997 MLD 3142).
Commissioner of Income Tax, Central Zone „B‟, Karachi v. Mackinnon Mackenzie & Co. of Pakistan (Pvt.) Ltd., Karachi – [1993] 67 TAX 70 (H.C.Kar.) = 1993 PTD 46 1942.
Scope of advance tax.
The provisions of sections 21, 22, 22A, 23 and 23B clearly indicate that any amount of tax payable under section 18A remains on account of payment till the time the assessment order for the relevant year is passed by the Income Tax Officer and the tax liability is adjusted partly or wholly against the amount of income tax paid in advance. It may also be pointed out that sub-section (9A) of section 18A of 1922 Act gives as option to an assessee, who does not pay on the specified date any installment of tax which he is required to pay under subsection (1) to file an estimate or revised estimate of the tax payable by him. This provision also reinforces the conclusion that any amount payable under section 18A on account of payment and for the purpose of account this is to be shown as such. Case referred to: Commissioner of Income Tax v. Pakistan Tobacco Co. Ltd. (1988 PTD 66).
Commissioner of Income Tax Central Zone (A), Karachi v. Razak Ltd. – [1989] 60 TAX 24 (H.C.Kar.) 1943.
Where assessee-company paid advance tax in East Pakistan and also purchased refundable Income Tax Bonds and both the
1491 ADVANCE PAYMENT OF TAX
Section 53
amounts were claimed as current assets in the assessment, held to be justified. The respondent paid Rs.41820 as advance tax under section 18A of the Income Tax Act in East Pakistan to which no credit was allowed to it. The respondent while filing its return for the assessment year 1972-73 claimed this amount as a current asset. Without doubting the correctness of payment of Rs.41,820 or the fact that no credit was given to it for the said amount the Income Tax Officer refused to allow it as a current loss. In appeal the plea raised by the respondent was accepted by the Appellate Assistant Income Tax Commissioner. The Department agitated it before the Tribunal without any success. Likewise the respondent had purchased Refundable Income Tax Bonds worth Rs.12,650 which was refundable after five years. The Income Tax Officer did not allow it also as current loss but in appeal the respondent succeeded which was confirmed by the Tribunal. From the aforesaid observations it can be seen that the aggregate of available property, or cash belonging to a person can be treated as an asset. In the present case the amount paid as Advance Tax remains deposited with the Government for the purposes of adjustment and is not straightaway treated as a tax which is payable like a tax payable after assessment. It is a deposit set out for adjustment of a future liability. By mere fact that it has become obligatory to make payment, the Advance Tax cannot be converted into liability but is a deposit to meet a future liability. In our view therefore the view taken by the learned Tribunal is correct. The Refundable Income Tax Bonds were admittedly for the purpose of repayment to the respondent after 5 years. They have not been paid. Applying the principles set out above there can be no doubt about the character and nature of this amount as a current asset. We therefore answer the question in the affirmative. Cases referred to: Haji Ismail Dossa v. Monopoly Control Authority (PLD 1984 Kar. 315) and Sanaullah Woollen Mills Ltd. and another v. Monopoly Control Authority (PLD 1987 S.C. 202)
Commissioner of Income Tax (West Zone), Karachi v. Associated Products of Pakistan, Karachi – [1984] 50 TAX 69 (H.C.Kar.) 1944.
Where advance tax is not paid, additional tax is to be computed from the first of July of the relevant year.
A perusal of third proviso to sub-section (6) of section 18A would show that where a business, profession or vocation is newly set up and is assessable on the income, profits and gains of its first previous year in
1492 Section 53
Income Tax Digest.
the year following that in which it is set up, the additional tax payable shall be computed from the first day of July of the said year. It will thus be seen that in this case, the income of first previous year was assessable and was in fact assessed in the year following that in which business was set up. Therefore, additional tax for non-paying the advance tax as provided in section 18A(1) was to be calculated from the first day of July of the year in which tax was assessable. Therefore, Income Tax Appellate Tribunal was manifestly in error when it accepted the contention of the assessee that the date from which interest could have been charged was indeterminable. It may however, be mentioned that the Income Tax Officer erred in directing the calculation of additional tax from first day of April, 1967, although, according to the provisions of the third proviso to sub-section (6) of section 18A of the Income Tax Act, 1922, he should have directed the calculation of additional tax from first day of July, 1967. The error, it was explained, occurred due to the fact that in the relevant rule first day of April, is mentioned, but it was conceded that the provisions of the Act shall prevail. The error could be rectified. Case distinguished: [1965] 11 TAX 39 (Trib.).
Al-Hilal Agencies Ltd. v. Income Tax Officer, Karachi and another – [1980] 41 TAX 40 (H.C.Kar.) 1945.
Assessee a managing agent maintaining mercantile system of accounting held that system is not material for purposes of determining the date to which payment of advance tax may be deferred.
We have considered this submission and are inclined to agree with the submission of Mr. Ali Athar that the question of the system of accounting is immaterial for the purpose of determining the date to which payment of advance tax may be deferred under section 18A(4)1 of the Act. It is true that actual receipt of income is not material in mercantile system of accounting. But, sub-section (4) of section 18A deals with a different subject, that is of date for making deferred payment of advance tax and the word “received” must be given its ordinary meaning of actual receipt. It is well known and indeed the Commissioner has candidly not denied, that some time is taken to finalise the accounts after the close of the accounting year. The accounts of the manage company for the year ending 31st December 1967 were not issued to the share-holders until some six months later and were not adopted until 20th July 1967
1493 ADVANCE PAYMENT OF TAX
Section 53
at the annual general meeting. The respondent has not shown, and there is no evidence, that the account of commission was mutually settled and adjusted between the parties on 31 st December 1967. In the circumstances, it cannot be said that the mere crediting of the commission amount of the petitioner in the balance sheet amounts to adjustment. For the foregoing reasons, we declare that the imposition of the penal interest of Rs.14,465/- on the petitioner for the assessment year 196869 is without lawful authority and of no legal effect. The petition is accordingly allowed with no order as to costs. Eruch Maneckji and others v. Income Tax Officer, Central Circle III, Karachi – [1980] 41 TAX 25 (H.C.Kar.) = 1979 PTD 461 1946.
Where prior to execution of the sale-deed but subsequnt to the agreement for sale the seller was making payment of advance tax for and on behalf of the petitioner held that buyer was not liable to penal action for failure to pay advance tax.
Mr. Khalid Anwar listed as many as five grounds in support of his first contention that the payment of Rs.14,40,071 made by Dalmia was on account of the petitioners towards their advance tax liability and these are: (i)
That during the year in question Dalmia was running the cement factories on behalf of the petitioners and for the benefit of the petitioners.
(ii)
That the profits during the year in question were taxed in the hands of the petitioners.
(iii)
That the said payments were made in response to an express demand for advance tax on income on the basis of the previous year‟s profits.
(iv)
That it was the case of Dalmia that the said payments were made on behalf of the petitioners.
(v)
That all other payments made by Dalmia were accepted on behalf of the petitioners in arriving at taxable income of the petitioners.
The cumulative effect of the aforesaid grounds to my minds is the conclusion that there is no room for the argument that the said payments made under section 18A as advance tax for the year ending 30.9.1963 were not paid on behalf of petitioners by Dalmia. _______________
1494 Section 53
Income Tax Digest.
SCOPE OF “RETAINED INCOME”
Commissioner of Income Tax v. Asbestos Cement Industries Ltd. & Others – 1992 SCC 904 = [1993] 67 TAX 174 (S.C.Pak.) 1947.
Income tax liability payable for the relevant assessment year in the account books can legitimately be categorised as “retained income”.
The amount retained to meet the income tax liability payable for the relevant assessment year in the account books can legitimately be categorised as “retained income”. _______________
CONSTITUTIONAL AND LEGAL ISSUES RELATING TO ADVANCE TAX
Chairman, Central Board of Revenue v. Pak-Saudi Fertilizer Ltd. – [2001] 83 TAX 119 (S.C.Pak.) 1948.
Order under section 53 is ab inito void.
There is nothing in section 53 of the Ordinance, 1979 where under the Assessing Officer/Deputy Commissioner of Income Tax has any authority to frame assessment under section 53 of the said Ordinance and to insist upon demand of advance income tax in case advance income tax is not paid by assessee in time. Admittedly, the impugned order of demand was without jurisdiction and unlawful, consequently there would be no bar to the filing of Constitutional petition under Article 199 of the Constitution of Islamic Republic of Pakistan considering also that section 53 of said Ordinance is not mentioned in section 129 of the said Ordinance as appeal would lie only against the order passed under the provision of law mentioned in section 129 of Ordinance, 1979. Pak-Saudi Fertilizer Ltd. through Managing Director v. Federation of Pakistan through Secretary Finance, Islamabad and 4 others – [2000] 81 TAX 119 (H.C.Kar.) = 1999 PTD 4061 1949.
Order under section 53 cannot be passsed, the only remedy is to charge additional tax under section 87.
The position in Pakistan, thus, is completely different from the predicament prevalent in India. In Pakistan the Assessing Officer bears no powers to insist upon the defaulted payment of section 53 or frame any order to raise such demand. All that he can do is to impose
1495 ADVANCE PAYMENT OF TAX
Section 53
additional tax under section 87. In view of such position we hold that in the present case the exercise of power by the Assessing Officer raising a demand for the alleged defaulted amount under section 53 and framing an assessment order in this regard are completely without jurisdiction, unlawful, void ab initio, of no legal effect, being completely extraneous to the scheme and powers under the 1979 Ordinance. It is correct that section 129 does not specify section 53, however, the underlined portion of the said section 129 (as above) would read to the effect that “Any assessee objecting to an order made by a Deputy Commissioner ....... Having the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the assessee may appeal to the Appellate Additional Commissioner against such order.” Surely, an order under section 53 demanding defaulted payment thereunder amounts to either enhancing the assessment or reducing the refund or otherwise increasing the liability of the assessee. In particular the omnibus clause in section 129 “or otherwise increasing the liability of the assessee” is of wide import and there is nothing in the context to give it a restrictive interpretation. The term “otherwise” in the said section 129 covers all eventualities of increase of liability and is not necessarily to be interpreted as ejusdem generis with the preceding clauses. The above discussion would amply confirm that the omnibus clause in section 129 i.e. “or otherwise increasing the liability of the assessee” covers every possible eventuality where the tax liability or obligation to pay Income Tax is increased or refunds reduced, making such orders appealable under section 129. We accordingly hold that the impugned order in this case i.e. the order under section 53 would be appealable under section 129 and to this extent the contention of Mr. Athar Saeed is not correct. We take this opportunity to further clarify that the judgement of the Honourable Supreme Court in Income Tax Officer v. Eruck Maneckji 1991 PTD 663 is distinguishable in the present context. In that case the Income Tax Officer had passed an order under section 18A of the 1922 Act, and it was observed that no appeal lay against such order, though a revision was competent. The law as it was under the 1922 Act pertaining to first appeals was contained in section 30 thereof which did not contain any omnibus clause analogous to the one as identified in section 129 of the 1979 Ordinance. The present law as contained in section 129 of the 1979 Ordinance has accordingly completely transformed the ability of assessees to prefer appeals as compared to the law as it was under the
1496 Section 53
Income Tax Digest.
1922 Act. The case of Eruck Maneckji and the principle of law evolved therein would have no application under the 1979 Ordinance. _______________
RECOVERY NOTICE AFTER CASE HAS BEEN SET ASIDE IS ILLEGAL
F.M.C. United (Pvt.) Limited, Lahore v. The Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 2 others – [2001] 83 TAX 500 (H.C.Lah.) = 2001 PTD 812 1950.
Recovery notice after case has been set aside is illegal.
I have given my anxious consideration to the contentions of the learned counsel of the parties and perused the record myself. The recovery notices were issued to the petitioner on the basis of the assessment order, dated 30.6.1999 which was set aside by the first appellate Court, therefore, the basis on which the impugned notices were issued to the petitioner is not in the field, therefore, action of the respondents is not sustainable in the eyes of law. In view of what has been discussed above this writ petition is accepted. Consequently, the notices issued by the respondent are also set aside. _______________
ASSESSEE IN DEFAULT
Commissioner of Income Tax (Central Zone), Karachi v. Shahsons Fisheries Limited – [1985] 52 TAX 107 (H.C.Kar.) 1951.
Where the assessee did not commit any default, action for default of section 53 held improper.
The respondent was assessed under section 23(4) of the Act for the assessment year 1971-72, on an income of Rs.1,87,656/- on 23.11.1971. Accordingly, the respondent was liable to pay advance tax under section 18A(l) of the Act for the assessment year 1973-74, but he filed estimates of total income on 14.9.1972, and 14.12.1972, disclosing his income to be below Rs.25,000/-. He again filed an estimate of income on 13.3.1973, showing a loss of about 1,00,000/-. He ultimately on 15.7.1973, filed a regular return under section 22(1) of the Act, showing a loss of Rs.94.895/-. The Income Tax Appellate Tribunal which accepted the same by holding that as the assessee had filed his own estimates of income under section 18A(2) of the Act and he was not covered by section 18A(1) of the Act and, he therefore, could not be held to be a defaulter.
1497 ADVANCE PAYMENT OF TAX
Section 53
It is not disputed before us by Mr. Shaikh Haider that the provisions of section 18A(1) and 18A(2) of the Act are independent of each other as held by the Tribunal. Accordingly, if the applicant sent his estimate under section 18A(2) of the Act that his income was below Rs. 25,000/- he was not required to pay any advance tax under section 18A(1) and if the respondents‟ income was below Rs.25,000/he, by filing his estimate of quarterly income by due date, in our opinion, substantially complied with the provisions of section 18A(2) of the Act. Hussain Sugar Mills v. Islamic Republic of Pakistan and others – [1981] 44 TAX 93 (H.C.Kar.) 1952.
The dates for payment of advance tax were already passed when Finance Ordinance, 1972 was promulgated making the assessee liable to tax, held that no default was committed.
The petitioners have not challenged any of the propositions laid down by these authorities but their mere contention before us, is, that on 15 th September, 1971, 15th December, 1971, 15th March, 1972 and 15 th June, 1972. Since the petitioners were not liable to payment of income tax on account of the tax-holiday enjoyed by them, they were not obliged to pay advance tax on these dates for their income of the assessment year 1972-73, which was fully exempt from payment of Income Tax on account of the tax holiday. The legislation, by which this tax holiday was taken away with retrospective effect, was promulgated on 17th June, 1972, only and consequently it cannot be presumed, that petitioners had legal obligation under section 18A for the said assessment year to pay advance tax under section 18A and consequently the impugned order by which additional tax under section 18A has been levied on them for non-payment of advance tax for the above mentioned four dates is not at all legally justified and consequently the said order, in view of the facts of this case is without jurisdiction and not in accordance with the law in force on the said dates. in our opinion, the contentions raised and urged before us, by the learned advocate for the petitioners, have great force and we are of the opinion that since the above mentioned four relevant dates had already passed, before the promulgation of Finance Ordinance, 1972, the petitioners committed no breach of section 18A so as to attract provisions of section 18A(8) for levying additional tax. Cases referred to: Sh. Aminullah v. Pannu Ram (PLD 1967 SC 289); Haider Automobiles Ltd. v. Pakistan (PLD 1967 S.C. 623), Commissioner of Sale Tax v. Kruddsons Ltd. (PLD 1974 S.C. 180) = (1974) 29 TAX 203 (S.C.) and
1498 Section 53
Income Tax Digest.
Highway Petroleum Service (Regd.) Ltd. v. Islamic Republic of Pakistan and another (PLD 1977 Lah. 797) = (1977) 36 TAX 8 (Lah.).
Schazoo Laboratories Ltd. v. Commissioner of Income Tax, Lahore – [1977] 35 TAX 15 (H.C.Lah.) = 1976 PTD 361 1953.
Where assessment order saying “assessed as per IT-30” and without any specific verdict in assessment order in regard to imposition of penal interest, held that requirements of law stand fulfilled by Income Tax Officer by applying his mind to default in payment of tax and calculation of penal interest.
It is admitted that the order imposing penalty need mention no other reasons if the default is admitted. The default in the case in hand is not denied, A reference to the order of the Income Tax Officer saying “assessed as per I.T-30”, does show that he instead of giving a specific verdict in the assessment order incorporated therein by reference the contents of I.T-30 which was contemporaneously compiled by him. So the requirements of law laid down by the Supreme Court in Gouranga Mohan Sikdar v. Controller of Imports and Exports and 2 others [PLD 1970 (S.C.) 158] are fulfilled and the order of the Income Tax Officer does show his application of mind to the default in payment of advance tax and calculation of the penal interest in the I.T-30 instead of in the order itself, by making a specific reference to it. Thus an order imposing penal interest did exist and hence the question is misconceived. _______________
CBR‟S CIRCULAR HELD VIOLATIVE OF THE PROVISIONS OF SECTION 53
Union Bank Ltd. v. Federation of Pakistan – [1998] 77 TAX 127 (H.C.Lah.) 1954.
Circular No. 13 of 1997 issued by the C.B.R. held violative of the provisions of section 53.
It is not necessary to state the facts in view of the limited nature of the controversy before this Court. Suffice it to stay that according to the petitioner‟s learned counsel under section 53 of the Income Tax Ordinance, 1979 the liability of the assessee to pay advance tax has to be worked out after giving due allowance for the tax already paid under section 50 of the Income Tax Ordinance, 1979 as mentioned in clause (b) of sub section (1) of section 53 itself but the Central Board of Revenue while interpreting the above section in the impugned circular has opined in para-2 of the circular that the tax withheld under
1499 ADVANCE PAYMENT OF TAX
Section 53
section 50 shall neither be included in the amount of tax assessed nor shall such tax be accounted for as payment of quarterly advance tax installments. According to the learned counsel the direction of Central Board of Revenue that the tax withheld under section 50 be not accounted for as payment of quarterly advance tax installment is violative of section 53 itself and cannot be given effect to. Relying upon pronouncement of the Supreme Court of Pakistan in Messrs Central Insurance Co. v. The C.B.R. and others (1993 SCMR 1232), learned counsel for the petitioner has contended that authority of the Central Board of Revenue to issue Circular No. 13 of 1997 is barred as under section 8 of Income Tax Ordinance, 1979 the jurisdiction of Central Board of Revenue for issuing instructions is confined only to administrative matters. It may be stated that prima facie this contention appears to have merit in as much as according to the wording of section 53(1)(b) the liability of the assessee is to pay the advance tax minus the tax already paid under section 50. Further discussion in this behalf is unnecessary as Mr. M. Ilyas Khan, Advocate has conceded before this court that Circular No. 13 of 1997 dated 29.9.1997 issued by the Central Board of Revenue has no binding force. He further says that neither any assessing officer nor any appellate authority under the Income Tax Ordinance has therefore adopted the said circular. Learned counsel has assured that the authorities concerned shall interpret section 53 of the Income Tax Ordinance, 1979 irrespective of the view taken by the Central Board of Revenue. It is a matter of some regret that the Central Board of Revenue while issuing the circulars does not follow the law declared by the Supreme Court of Pakistan which under Article 189 is binding on all authorities which are required to act in aid of Supreme Court of Pakistan. The law on the subject was clearly enunciated in Central Insurance co.‟s case supra relied upon by the petitioner‟s learned counsel in which it was held that Central Board of Revenue is not one of the authorities in the hierarchy of officers which has jurisdiction to interpret any provision of the Ordinance. That being so, the Central Board of Revenue would be well advised to desist from issuing any such circular which influences the decision of the adjudicating authorities. Case referred to: Central Insurance Co. and other v. C.B.R. and others (1993) 68 TAX 86 (S.C.Pak.) = (1993 SCMR 1232). _______________
1500 Section 53
Income Tax Digest.
LEVY OF ADDITIONAL TAX
Crescent Sugar Mills and Distillery Ltd., Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1981] 43 TAX 1 (H.C.Lah.) 1955.
Levy of additional tax on the basis of provisional assessment justified.
The petitioner‟s learned counsel assailed the levy of additional tax on the ground that for the purposes of section 18A(1), the „income of the latest previous year‟ was income computed under section 23, for the assessment year 1964-65 and not the income calculated by the Income Tax Officer for 1969-70 through a provisional assessment. Upon the language of sub-section (1) of section 18A it is quite clear that when the assessment for the latest previous year has not been made, the liability to pay advance tax can be founded on the assessment under section 23B for the latest previous year.
1501 PAYMENT OF TAX WITH RETURN OF INCOME
Section 54
Section 54* Payment of tax with return of income
PAGE NO
FULL PAYMENT OF TAX WITH RETURN
1956. Full payment of tax due under section 54 was precondition and mandatory to qualify for immunity from detailed _ scrutiny for the assessment year 1993-94. [1995] 71 TAX 209 (H.C.Lah.)
*
Corresponding to section 22A of the 1922 Act.
1502
1502 Section 54
Income Tax Digest.
Section 54* Payment of tax with return of income
FULL PAYMENT OF TAX WITH RETURN
Aziz Book Depot, Lahore v. Inspecting Additional Commissioner of Income Tax, Lahore and another – [1995] 71 TAX 209 (H.C.Lah.) 1956.
Full payment of tax due under section 54 was precondition and mandatory to qualify for immunity from detailed scrutiny for the assessment year 1993-94.
I am of the opinion that prima facie in the light of the above observation had qualifications laid down by Circular No. 9 for acceptance of a return for the year 1993-94 under the Self-Assessment Scheme; it is precondition and is mandatory to pay the total tax according to the declared income under section 54 of the Ordinance. In the present case, the petitioner has not fulfilled the mandatory provisions of Self-Assessment Scheme by depositing amount under section 54 of the Ordinance and the Scheme does not allow to claim adjustment of earlier years‟ refund while submitting the returns under the Self Assessment Scheme. Cases referred to: Shoaib Bilal Corporation, Faisalabad v. Commissioner of Income Tax, Faisalabad and another [l993] 67 TAX 233 (H.C.Lah.) = [1993 PTD 332].
*
Corresponding to section 22A of the 1922 Act.
1503 RETURN OF TOTAL INCOME
Section 55
Section 55* Return of total income
PAGE NO
RETURN FILED VOLUNTARILY, ATFER SERVICE OF NOTICE, POSITION PRIOR TO INCOME TAX ORDINANCE, 1979
1957. Assessee filed return declaring income and claiming exemption in respect of capital gains and subsequently filed revised return of same income contending that figure of capital gains was to be reflected/mentioned in column of return for claiming exemption. Return cannot be subjected to detailed assessment without order containing valid and _ plausible reasons. [2001] 83 TAX 353 (H.C.Kar.)
1505
1958. Submitting return under section 22(3) after service of notice under section 22(4) is held filed voluntarily position prior to _ Income Tax Ordinance, 1979]. [1976] 34 TAX 85 (H.C.Lah.)
1506
CONSTITUTIONAL VALIDITY
1959. Foundation for assessment proceedings is charging provision, section 22 of 1922 Act etc., are machinery sections _ to determine amount of tax. [1947] 15 ITR 302 (PC)
1507
1960. Liability to pay Income Tax and jurisdiction to assess to Income Tax are not conditional on the validity of the notices _ issued under section 22 of the 1922 Act. [1947] 15 ITR 302 (PC)
1507
PERSON LIABLE TO FURNISH RETURN
1961. Liquidator of company-in-liquidation can be asked to file _ return. [1934] 2 ITR 79 (All.)
1507
VALIDITY OF RETURN
1962. A return duly signed and verified is valid even if it gives no _ figures. [1942] 10 ITR 370 (All.)
*
Corresponding to section 22(1) of the 1922 Act.
1508
1504 Section 55
Income Tax Digest. PAGE NO
EXTENSION OF TIME
_ _ 1963. Extension of time. [1936] 4 ITR 111 (Lahore); [1946] 14 _ _ ITR 695 (Pat.); [1943] 11 ITR 202 (Bom.); [1945] 13 ITR _ _ 154 (Bom.); [1947] 15 ITR 132 (Bom.); [1942] 10 ITR 131 (All.)
1508
RETURN UNDER 1922 ACT
1964. A return filed prior to service of demand notice under section 29 of the 1922 Act but after completion of assessment is not _ a valid return. [1936] 4 ITR 113 (Lahore)
1509
1965. If assessee simply indicates that there was an omission in his return it does not amount to filing of a revised return. _ [1941] 9 ITR 130 (All.)
1509
DEFECTIVE RETURN
1966. Where exact income is not given nor is period to which income relates stated, return is not valid and assessment _ under section 21(4) will be justified. [1934] 2 ITR 358 (Lahore) SIGNING OF RETURN
1967. An unsigned return is not a valid return at all. ITR 377 (All.)
_
1510
[1934] 2 1510
1968. An agent appointed by the assessee or a power of attorney _ holder can sign and file the return. [1941] 9 ITR 604 (Mad.)
1510
1969. Where the mukhtar of assessee verified, signed and filed a return on behalf of the assessee the question was whether _ such return was binding on the assessee. 8 ITC 210 (Lucknow)
1511
1505 RETURN OF TOTAL INCOME
Section 55
Section 55* Return of total income
RETURN FILED VOLUNTARILY, AFTER SERVICE OF NOTICE, POSITION PRIOR TO INCOME TAX ORDINANCE, 1979
Commissioner of Income Tax v. Kamruddin Fakhruddin – [2001] 83 TAX 353 (H.C.Kar.) 1957.
Assessee filed return declaring income and claiming exemption in respect of capital gains and subsequently filed revised return of same income contending that figure of capital gains was to be reflected/mentioned in column of return for claiming exemption. Return cannot be subjected to detailed assessment without order containing valid and plausible reasons.
It is an admitted fact that the return was initially submitted by the respondent/assessee under section 55 of the Income Tax Ordinance, but as there was some mistake/discrepancy in not reflecting/mentioning figure of capital gains, in respect of which he claimed exemption, in the relevant column of return a revised return was filed under section 57 of the Income Tax Ordinance. Such return of income could not be construed or deemed to be a return under section 57 of the Income Tax Ordinance. It is also pertinent to note that section 57 in itself provides that the furnishing of a revised return at any time before the assessment is made under section 59 of the Income Tax Ordinance is without prejudice to any liability to which he may be subjected to under the provisions of the Income Tax Ordinance. Thus, the provisions of section 57 of the Income Tax Ordinance provide a punishment and make an assessee revise a return under section 57 of the Income Tax Ordinance initially filed under section 55 of the Income Tax Ordinance to punitive action. Such an assessee, in our view could not be subjected to any further penalty of liability by way of withdrawal of the immunity from self-assessment scheme and *
Corresponding to section 22(1) of the 1922 Act.
1506 Section 55
Income Tax Digest.
subjecting the return to detail assessment without an order containing valid and plausible reasons. Appellate Tribunal did not commit any illegality in allowing the issue relating to the authority / power of the Income Tax Officer to finalize the assessment by way of detailed scrutiny to be raised before it and considering the same. Cases referred to : Rashid Ahmad v. The State [PLD 1972 SC 271], Metro Cooperating Housing Society Ltd. v. Bonenza Garments Industries Ltd. 1996 MLD 593, Shagufta Begum v. Income Tax Officer, Circle-XI, Zone-B, Lahore [1989] 60 TAX 83 (S.C.Pak) = PLD 1989 SC 360.
Commissioner of Income Tax v. Imam Bux Allah Dewaya, Leiah – [1976] 34 TAX 85 (H.C.Lah.) 1958.
Submitting return under section 22(3) after service of notice under section 22(4) is held filed voluntarily position prior to Income Tax Ordinance, 1979.
An assessee is at liberty to file his return in pursuance to the provisions contained in subsection (1) of section 22 of the Income Tax Act, 1922 or in accordance with the notices issued to him during the course of the assessment year under subsection (2) of section 22 of the Act. In case, however, the Income Tax Officer has failed to issue any such notice to the assessee under section 22(2) of the Act it is nevertheless open to the assessee to file his return at any time before the assessment is actually completed against him for the relevant assessment year. Any return thus filed by the assessee under section 22(3) of the Act cannot be held as involuntary return obtained from him under any coercive process issued by Income Tax Officer. In finalising the assessment in pursuance to the return filed by the assessee under section 22(3) it was not necessary to have recourse to the proceedings laid down in section 34 of the Act. Cases referred to: C.V. Govindarajulu Iyer v. Commissioner of Income Tax, Madras (1948 ITR 391) Harakchand & Co. v. Commissioner of Income Tax, Bombay City (1948) 16 ITR 119; Ranchhoddas Karsondas v. Commisstoner of Income tax, Bombay City (1954) 26 ITR 105; Commissioner of Agricultural Income tax v. Sultan Ali Charami (1951) 20 ITR 432; Commissioner of Income tax, Bombay City II v. Ranchhod Das Karsondas (1959) 1 TAX 38; Chatturam and others v. Commissioner of Incometax, Bihar (1947) 15 ITR 302; Re: Bihar Mica Concern Ltd. (1951) 19 ITR 553 and Jitan Ram Nirmal Ram v. Commissioner of Income tax, Bihar & Orissa (1951) 19 ITR 476. _______________
1507 RETURN OF TOTAL INCOME
Section 55
CONSTITUTIONAL VALIDITY
Chatturarn v. Commissioner of Income Tax – [1947] 15 ITR 302 (PC) 1959.
Foundation for assessment proceedings is charging provision, section 22 of 1922 Act etc., are machinery sections to determine amount of tax.
The Income Tax assessment proceedings commence with the issue of a notice. The issue or receipt of a notice is not, however, the foundation of the jurisdiction of the Income Tax Officer to make the assessment or of the liability of the assessee to pay the tax. It may be urged that the issue and service of a notice under section 22(1) or (2) of the 1922 Act may affect the liability under the penal clauses, which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice. Suppose a person, even before a notice is published in the papers under section 22(1), or before he receives a notice under section 22(2), gets a form of return from the Income Tax Officer and submits his return, it will be futile to contend that the Income Tax Officer is not entitled to assess the party or that the party is not liable to pay any tax because a notice has not been issued to him. The liability to pay the tax is founded on sections 3 and 4 of the 1922 Act, which are the charging sections. Section 22, etc., are the machinery sections to determine the amount of tax. Cbatturarn v. Commissioner of Income Tax – [1947] 15 ITR 302 (PC) 1960.
Liability to pay Income Tax and jurisdiction to assess to Income Tax are not conditional on the validity of the notices issued under section 22 of the 1922 Act.
The liability to pay Income Tax and the jurisdiction to assess to Income Tax are not conditional on the validity of the notices issued under section 22 of the 1922 Act. _______________
PERSON LIABLE TO FURNISH RETURN
Commissioner of Income Tax v. Official Liquidator of the Agra Spg. & Wvg. Mills Co. Ltd. – [1934] 2 ITR 79 (All.) 1961.
Liquidator of company-in-liquidation can be asked to file return.
1508 Section 55
Income Tax Digest.
Liquidator is not exempt from making an Income Tax return on business managed by him for the beneficial winding-up of the company. _______________
VALIDITY OF RETURN
L.PitarnberPrasad, In re – [1942] 10 ITR 370 (All.) 1962.
A return duly signed and verified is valid even if it gives no figures.
The Act is a highly technical one, and Income Tax Officers would be well advised when they send a notice under section 34 read with section 22 of the 1922 Act to emphasise the fact that a return duly setting forth the total income is required and a mere reference to the former return would not be treated as valid. Where in response to a notice under section 34 (section 147) read with section 22(2) of the 1922 Act the assessee filed a blank return duly signed and verified giving no figures in the column meant for showing the total income, but gave the remarks „no income escaped assessment‟, it was held that the return was a valid one; and was a sufficient compliance with section 22(2) as the obvious intention of the assessee was to proclaim that he had already filed a return giving all the particulars of his income and that no other income had been derived by the assessee which could be said to have escaped assessment so far as the assessment year in question was concerned. _______________
EXTENSION OF TIME
Vir Bhan Bansi Lal v. Commissioner of Income Tax – [1936] 4 ITR 111 (Lahore) 1963.
Extension of time.
It was not necessary to issue a separate notice under section 22(2) where a notice under section 34 has already been issued. Chatturam v. Commissioner of Income Tax – [1946] 14 ITR 695 (Pat.)
If assessment is made on a return filed in response to notice under section 22(2), it cannot be questioned on ground that public notice was irregular.
1509 RETURN OF TOTAL INCOME
Section 55
Maharaja of Patiala v. Commissioner of Income Tax – [1943] 11 ITR 202 (Bom.)
An out of time notice under section 139(2) cannot be treated as good notice under section 147 merely because it is in time for that section. Commissioner of Income Tax v. Ekbal & Co. – [1945] 13 ITR 154 (Bom.)
An assessee could not be asked to send a return „within 30 days‟. Habib & Sons v. Commissioner of Income Tax – [1947] 15 ITR 132 (Bom.)
Where a High Court held that notice to furnish return within thirty days is invalid, Governor-General in exercise of his emergency powers was competent to issue Ordinance providing that such notices should be deemed to be valid. Radhey Lal Balmukand, In re – [1942] 10 ITR 131 (All.)
Notice may not specify the capacity (individual/firm/HUF, etc.) in which return of income is required to be filed. _______________
RETURN UNDER 1922 ACT
Dhaniram Dbarampal v. Commissioner of Income Tax – [1936] 4 ITR 113 (Lahore) 1964. A return filed prior to service of demand notice under section 29 of the 1922 Act but after completion of assessment is not a valid return. Where the return was not made until after the assessment order was made, but was made before the notice of the demand specified by section 29 was served upon the assessee by the Income Tax Officer, it was held that the return furnished after the assessment order was made but before the service of the demand notice was not a valid return. Gopaldas Purushottamdas v. Commissioner of Income Tax – [1941] 9 ITR 130 (All.) 1965. If assessee simply indicates that there was an omission in his return it does not amount to filing of a revised return. Where, after filing his return and after receiving notice for production of accounts the assessee sent an application to the Income Tax Officer
1510 Section 55
Income Tax Digest.
stating that a further income was required to be added to the declared income, it was held that it would not amount to filing of a revised return. _______________
DEFECTIVE RETURN
Lal Mohammed Sardar Mohammad v. Commissioner of Income Tax – [1934] 2 ITR 358 (Lahore) 1966.
Where exact income is not given nor is period to which income relates stated, return is not valid and assessment under section 21(4) will be justified.
Where, in response to a notice under section 22(2), the assessee filed a return in which (i) the income figures were given approximately and not exactly; (ii) the period to which the income related was not furnished in the verification report; and (iii) the prescribed particulars required to be furnished under the mercantile system followed by the assessee were not furnished, it was held that the return was not a valid return and the Income Tax Officer was justified in making an assessment under section 23(4). _______________
SIGNING OF RETURN
Behari Lal Chatterji v. Commissioner of Income Tax – [1934] 2 ITR 377 (All.) 1967.
An unsigned return is not a valid return at all.
The word „incomplete‟ in section 23(2) of 1922 Act cannot cover a case where the return was not signed and verified. Inspecting Additional Commissioner v. Chotabhai Javerbhai – [1941] 9 ITR 604 (Mad.) 1968.
An agent appointed by the assessee or a power of attorney holder can sign and file the return
There seems to be nothing in the Income Tax Act which suggests that it is essential that the act of sending in an Income Tax return should be done only by an assessee. It can be done not only equally well by the person in charge of the business, but very much better. There is no cogent reason why, if an assessee can present a return, his agent cannot do it for him.
1511 RETURN OF TOTAL INCOME
Section 55
Syed Mohainmad Mehdi v. Commissioner of Income Tax – 8 ITC 210 (Lucknow) 1969.
Where the mukhtar of assessee verified, signed and filed a return on behalf of the assessee and the question was whether such return was binding on the assessee.
Where the mukhtar of assessee verified, signed and filed a return on behalf of the assessee and the question was whether such return was binding on the assessee: Held the mukhtarnama under which mukhtar was appointed did not contemplate his signing and verifying the return and, hence, the said return was not binding on the assessee.
1512 Section 56
Income Tax Digest.
Section 56* Notice for furnishing return of total income
PAGE NO
WORDS „DURING THE PREVIOUS YEAR‟ AND „ANY‟ - MEANING OF
1970. Words „during the previous year‟ and „any‟ - Meaning of. [Position prior to amendment in section 56 by Finance _ Act, 2000]. 1974 SCC 407 = [1974] 30 TAX 91 (S.C.Pak.) NOTICE CAN BE GIVEN FOR ANY YEAR
1971. Notice can be given for any year. (H.C.Quetta)
_
1513
[1998] 78 TAX 299
1972. Where two companies merged by the order of the High Court with effect from 1.7.1981, held that Income Tax Officer could not issue notice to defunct company for filing return. _ [1985] 51 TAX 237 (H.C.Lah.)
1514
1515
ITO CAN CURTAIL THE PERIOD FOR FILING OF RETURN
1973. Income Tax Officer can curtail the period for filing of return. _ [1990] 61 TAX 71 (H.C.Lah.)
1516
PROFIT AND LOSS ACCOUNT
1974. Return filed was not accompanied by profit and loss account and balance sheet, held that return was not invalid but _ incomplete. [1960] 2-TAX (III-474) (H.C.Dacca) = 1960 PTD 727 = 1960 PLD 535
1517
1975. Return not accompanied by Profit and Loss account held as _ return in the eye of law. [1960] 2-TAX (Suppl.-174) (H.C.Dacca) = 1960 PTD 1079
1518
*
Corresponding to section 22(2) of the 1922 Act.
1513 NOTICE FOR FURNISHING RETURN OF TOTAL INCOME
Section 56
Section 56* Notice for furnishing return of total income
WORDS „DURING THE PREVIOUS YEAR‟ AND „ANY‟ - MEANING OF
Dada Limited & Muhammad Ibrahim & Co. v. Commissioner of Income Tax – 1974 SCC 407 = [1974] 30 TAX 91 (S.C.Pak.) 1970.
Words „during the previous year‟ and „any‟ - Meaning of. [Position prior to amendment in section 56 by Finance Act, 2000].
The words “the previous year” as used in section 22(2) of the Income Tax Act, 1922 restrict the period to one year next after the accounting year. As against this restriction, the language of section 11 of the Business Profit Tax Act, 1947 has been widened by the addition of the word “any” used before the words “chargeable accounting period”. We are, therefore, of the opinion that no period of time has been fixed by the legislation by using the word “any” and that analogy of sub-section (2) of section 22 of the Income Tax Act, 1922 is not correct. However, a notice should be issued within a reasonable time after termination of the accounting chargeable year and this reasonable period should not extend beyond the period specified in section 34 of the Income Tax Act. It is not necessary that the notice should be issued within the chargeable accounting period and that on failure to do so, proceedings under section 34 of the Income Tax Act should be initiated. Judicial analyses : Section 56 has been amended by way of insertion of an Explanation which says that for the removal of doubt it is declared that notice under this section may be issued in respect of any assessment year including the current assessment year and any preceding assessment year. This Explanation under the established rules of interpretation will be construed to have a retrospective effect. This amendment is made to defeat the cases decided by the learned ITAT that notice under section 56 cannot be issued for earlier years. This amendment has nullified these orders. In view of this amendment, notice under section 56 can be issued for as early as assessment year 1979-80 which will obviously violate the basic concept of reasonable time limitation for *
Corresponding to section 22(2) of the 1922 Act.
1514 Section 56
Income Tax Digest.
finalisation of one‟s tax liability in the fiscal laws. There will be no time limit for tax proceedings in the case of a new taxpayer who can be asked to file returns for the last twenty years. This unwise and harsh amendment will increase the discretionary and bargaining powers of the tax officials. They will be in a position to blackmail almost every citizen by calling returns for the last twenty years and more. There is no such provision in any other tax law of a country. If tax machinery is inefficient or corrupt, the punishment should not be given to the taxpayers. The five-year limitation as provided in section 65 is very reasonable. _______________
NOTICE CAN BE GIVEN FOR ANY YEAR
Memoona Ahmad v. Assistant Commissioner of Income Tax – [1998] 78 TAX 299 (H.C.Quetta) 1971.
Notice can be given for any year.
In the light of analysis of the provision as contained in sections 56 and 61 of the Ordinance, as made herein above it can be inferred safely that the issuance of notice under section 61 of the Ordinance, would not be illegal where no response has been shown by the person concerned after issuance of notice under section 56 of the Ordinance, it does not depend upon the whims and wishes to furnish reply wherever so desired and Income Tax Authorities cannot be kept waiting for an indefinite period. In such circumstances where a notice has been served under section 56 of the Ordinance, and in the absence of response for doing the needful a subsequent notice can be issued under section 61 of the Ordinance, and it cannot be equated to that of issuance of simultaneous notices under sections 56 and 61 of the Ordinance. It is admitted fact that in spite of various opportunities the petitioner failed to portray her plea in a convincing manner. At the first instance, the petitioner avoided to attend the proceedings initiated by Assessing Officer and subsequently explanation without any documentary evidence was furnished and documentary evidence was produced before Appellate Forum which was not competent to receive it at appellate stage as it was violative of the provisions as contained in section 131(4) of the Ordinance. There is no denial that documentary evidence was produced at first instance before the Appellate forum, which was erroneously received and error so committed has rightly been rectified by the learned Tribunal. Absolutely no question of law is involved and, therefore, we
1515 NOTICE FOR FURNISHING RETURN OF TOTAL INCOME
Section 56
are, not inclined to exercise our Advisory jurisdiction and accordingly the application is dismissed. Cases referred to: Star Roiling Mills v. Commissioner of Income Tax (1974) 30 Tax 27 (H.C.Kar.) = (1974 PTD 200); Dhanarjamal Menumal & Sons v. Commissioner of Income Tax [1985] 52 TAX 77 (H.C.Kar.) = (1985 PTD 33); Bean H.M. Inspector of Taxes v. Doncaster Amalgamated Colling Ltd. [1946] 27 TC 296; Indusrial Management Limited, Karachi v. Commissioner of Income Tax [1978] 38 TAX 5 (H.C.Kar.) = (PLD 1978 Kar. 673); Sultan Textile Mills Limited v. Commissioner of Income Tax (1990 PTD 241) and Yasmeen Lari v. Registrar, Income Tax Appellate Tribunal (1990 PTD 967).
Ujala Cotton Mills Ltd. v. Income Tax Officer etc. – [1985] 51 TAX 237 (H.C.Lah.) 1972.
Where two companies merged by the order of the High Court with effect from 1.7.1981, held that Income Tax Officer could not issue notice to defunct company for filing return.
This merger was claimed to have been accepted by the then Income Tax Officer, but subsequently due to some administrative change the petitioner was served with a notice dated 4.7.1983 issued by respondent No. 3 purporting to fall under section 56 of the Income Tax Ordinance, 1979, calling upon them to file a return for the assessment year 1982-83. The writ petition impugns it to be illegal chiefly because it seems to override the order of the High Court in not accepting the merger from the retrospective date viz. 30.6.1981. The contention was that the petitioner-Company stood dissolved with effect from 1.7.1981 and that it could not be asked to file any return for the income year 1981-82 or for that matter the assessment year 1982-83 when it no more existed. It was the petitioner‟s case that after the merger, the liabilities and benefits relatable to it had passed on the transfereecompany which had filed the necessary returns and in fact those having been accepted by the then Income Tax Officer could not be reopened much less on any administrative change. There can be no two opinions about it. The order of the High Court on the point was final. It held clearly that the merger shall be effective from 30.6.1981. The necessary consequence was that the petitioner having lost its existence as from that date was obviously not under any liability as a non-existent person to file any return for the income year 1981-82 (assessment year 1982-83). The contention that the Income Tax Department was not a party to those proceedings cannot be heard. There is no such provision to imply them as a party and hence for all purposes any order in this behalf made by the High Court
1516 Section 56
Income Tax Digest.
shall be binding on them otherwise no sanctity could be attached to it and for that purpose the whole exercise in obtaining it will be quite an otiose act. The order by its very nature determines the vesting of assets and incurring of liabilities. It goes without saying that payment of tax is a liability and the same passes on to the transferee-Company as from that date. The Income Tax Department seems to have no locus standi to insist that the Company existed even after it was declared to be non-existent by the High Court. The proposition if accepted is wrought with dangerous consequences. Section 56 of the Income Tax Ordinance, 1979, invoked here, does not override the provisions of section 153 or 153A of the Companies Act, 1913. Case referred to : Usmania Glass Sheet Factory v. Sales Tax Officer (PLD 1971 S.C. 205); Crescent Sugar Mills Ltd. v. Commissioner of Income Tax (PKP. No. 2320 of 1984 unreported); Reghubar Dayal v. The Bank of Upper India Ltd. (AIR 1919 P.C. 9); Badarganj Loan Office Ltd. v. Shahar CJddin Shah (ILR 1938 1 Cal.) and Commissioner of Income Tax, Zone I v. Swastik Rubber Products Ltd. (1983) ITR 304. _______________
ITO CAN CURTAIL THE PERIOD FOR FILING OF RETURN
Nirala and Co. v. Commissioner of Income Tax – [1990] 61 TAX 71 (H.C.Lah.) 1973.
Income Tax Officer can curtail the period for filing of return.
The petitioner is a registered firm and inter alia carries on the business of sale of sweet-meats. On information received by the Income Tax Officer from Packages Limited, the suppliers of cartons to the assessee-petitioner which indicated that the purchase of package material did not tally with the packing expenses shown by assessee firm, the Income Tax Officer issued to it notices dated 31.3.1986 and 6.4.1986 under section 65 of the Income Tax Ordinance, 1979, calling upon the assessee to file returns for the years 1984-85 and 1985-86 in the prescribed form respectively by 15.4.1986 and 20.4.1986. The returns, however, were filed by the assessee after 30 days of the notices aforementioned. A plain reading of the above quoted provision, shows that the period prescribed for the notice for filing of return under the statute is “within 30 days” and the said period can be curtailed or increased as may be deemed fit in the circumstances of the case by the Income Tax Officer. The notices under section 65 calling upon the petitioner to file the return within a period less than 35 days as given in clause (d) of
1517 NOTICE FOR FURNISHING RETURN OF TOTAL INCOME
Section 56
Circular No. 10 of 1975 issued by the Central Board of Revenue being, in accord with the statutory provision of law cannot, be held to be invalid or suffering from a legal infirmity as the intent of law had been complied with and the violation, if any, of a circular which itself goes beyond the scope of the basic statute, would not render the same illegal, especially when no prejudice of any nature whatsoever, what to say of material nature, is shown to have been caused to the petitioner by giving a period of 15 days for filing of the return; it being the admitted position throughout that the returns were filed by the petitioner after 30 days of the receipt of the notice and, therefore, the substantial compliance of the circular referred to above had also been made. From a perusal of the above tabulation, it would be clearly seen that the functionaries below have fully applied their mind to the controversy involved and on the basis of the available record determined the question of fact about the assessment of sales. We do not think we need detain ourselves more on this aspect of the matter and would suffice by referring to a portion of the order of the learned Income Tax Appellate Tribunal dated 14th June, 1987, whereby the appeals of the assessee and the Department were disposed of. A bare reading of the above para of the judgment of the Appellate Tribunal shows full application of mind and we are unable to understand in the attendant circumstances of this case, as to how the sale assessment determination could be challenged as a question of law in a reference application before this Court under section 136(2) of Income Tax Ordinance, 1979. The second contention of the learned counsel for the petitioner also, therefore, fails. _______________
PROFIT AND LOSS ACCOUNT
Commissioner of Income Tax, East Pakistan v. Aizuddin Gazi and others – [1960] 2-TAX (III-474) (H.C.Dacca) = 1960 PTD 727 = 1960 PLD 535 1974.
Return filed was not accompanied by profit and loss account and balance sheet, held that return was not invalid but incomplete.
The return filed by the assessee was not accompanied by copies of profit and loss account and the balance sheet. The Income Tax Officer pointed out this omission but the assessee took no steps to rectify it.
1518 Section 56
Income Tax Digest.
Thereafter the Income Tax Officer issued notice under section 22(4) for production of the accounts but this direction was also not complied with. The Income Tax Officer, therefore, made a best judgment assessment under section 23(4). Notice under section 23(2) was, however, not issued during the assessment proceedings. On appeal both the Appellate Assistant Commissioner and the Tribunal upheld the assessment order. Held, that (i)
the return filed was incomplete and as such it was the duty of the Income Tax Officer to serve a notice under section 23(2) upon the assessee. In the absence of such a notice the Income Tax Officer was not entitled to exercise summary power under section 23(4) because the assessee did not comply with the notice under section 22(4)
(ii)
the statute intends that when a person submits a return with which the Income Tax Officer is not satisfied he is bound to serve a notice under section 23(2); and
(iii)
an Act ought to be so construed that no part of it becomes superfluous, void or insignificant. It must be construed as a whole and the duty of the Court must be, as far as possible, to reconcile the various provisions of the statute. The obligation is all the greater in a taxing statute.
Case relied on: Gopinath Biswambar Roy v. Commissioner of Income Tax, East Bengal [(1960) 2 Tax (Supple-174)]. Cases distinguished: Ram Khelawan Ugam Lal v. Commissioner of Income Tax (ILR 7 Pat. 852); R.M.S.R.M. Ramaswami Chettiar and others v. Commissioner of Income Tax (ILR 52 Mad. 194) and In the matter of Messrs. Harmukhrai Dulichand (32 CWN 710). Case referred to: Queen v. The Bishop of Oxford (1879) 4 QBD 245.
Gopinath Biswambar Roy v. Commissioner of Income Tax, Dacca – [1960] 2-TAX (Suppl.-174) (H.C.Dacca) = 1960 PTD 1079 1975.
Return not accompanied by Profit and Loss account held as return in the eye of law.
Notice under section 22(2) was issued requiring the assessee to file return of his income by certain specified date. Before the return was filed the Income Tax Officer issued another notice under section 22(4) for production of the accounts by a certain date. The assessee filed the return but it was not accompanied by copies of profit and loss account and the balance sheet. By a letter the Income Tax Officer pointed out this omission to the assessee but no step was taken by him (assessee)
1519 NOTICE FOR FURNISHING RETURN OF TOTAL INCOME
Section 56
to rectify it, appointment for production of the accounts were allowed from time to time but after giving a last warning further adjournment was refused and the Income Tax Officer made a best judgment assessment under section 23(4). The Income Tax Officer, however, did not issue any notice under section 23(2) during the assessment proceedings. On appeal, the Appellate Assistant Commissioner upheld the assessment. Before the Tribunal, the assessee took the stand that the assessment was illegal because (i) the return filed under section 22(2) was valid, and (ii) non-issue of notice under section 21(2) constituted “sufficient cause” preventing the assessee from producing the accounts called for under section 22(4). The Tribunal upheld the assessment holding that the return filed being invalid the best judgment assessment was correctly made. On a reference it was held that: (i)
where a return of income filed by an assessee substantially complied with the requirements of Rule 19 of the Income Tax Rules, 1922, but it was not accompanied by copies of profit and loss account and balance sheet, it could not be said that the return, was no return in the eye of law. The Income Tax Officer in such a case should issue a notice under section 23(2) giving an opportunity to the assessee to complete the return. If no notice under section 23(2) was issued he would not be justified in making assessment under section 23(4) on the ground that the assessee had failed to make a return;
(ii)
Under section 23(4) failure to comply with all the terms of a notice under section 22(4) is an independent default and the Income Tax Officer was entitled to make an assessment section 23 (4) for default of notice under section 22 (4); and
(iii)
the function of the High Court in cases referred to it is advisory and is confined to considering and answering the actual question referred to it. Unless and until a question is duly referred to it, under the provisions of section 66, the High Court is not competent to raise any question of its own accord.
Cases referred to : Abhey Ram Chunni Lal, In re (1933) 1 ITR 126; (AIR 1933 All. 197); Behari Lal Chatterji v. Commissioner of Income Tax [(1934) ILR 56 All. 418]; (2 ITR 371); (AIR 1934 All. 930); (151 I.C. 251); Commissioner of Income Tax, Bengal v. Shaw Wallace & Co. [(1932) (ILR 59
1520 Section 56
Income Tax Digest.
Cal. 1343); (L.R. 59 I.A. 206); 136 I.C. 742); (34 Bom. L.R. 1033); (AIR 1932 P.C. 138); Commissioner of Income Tax v. A.R. AN Chettiar Firm (AIR 1928 Rang. 108); (110 I.C. 29); (6 Rang 21 ITC 477); Commissioner of Income Tax v. Lal Mohammad Sardar Mohammad [(1934) 2 ITR 358]; (AIR 1935 Lah. 858); Gurmukh Singh v. Commissioner of Income Tax, Lahore [1944 12 ITR 393; (AIR 1944 Lah. 353); ILR 1945 Lah. 173); (220 IC 339); Harmukhrai Dulichand, In re. [1928] 32 CWN 710; (56 Cal. 39); (AIR 1928 Cal. 587); (3 ITC 198); Ramaswami Chettiar, R.M.S.R.M. v Commissioner of Income Tax [1929] ILR 52 Mad. 194; (AIR 199 Mad. 60); (56MLJ 141); (116 I.C. 556); (3 ITC 290); Ram Khelawan Ugam Lal. v. Commissioner of Income Tax [(1928) 1 ILR 7 Pat. 852]; ((114 IC 211); (AIR 1928 Pat. 59); (3 ITC 25); Sir Rajendra Narayan v. Commissioner of Income Tax, BIhar & Orissa [(1940) 8 ITR 495]; (AIR 1940 P.C. 158); [190 IC 1]; (42 Bom. LR. 1182); 52 I.W. 406).
1521 REVISED RETURNS OF TOTAL INCOME
Section 57
Section 57* Revised returns of total income
PAGE NO
REMANDING OF CASE HELD ILLEGAL
1976. Remanding of case held illegal.
_
2001 PTD 1371
1522
REVISED RETURN FILED BEFORE ISSUANCE OF NOTICE
1977. Revised return filed before issuance of notice under section 22(4) and 23(2) so as to cover omission of entries, omission of entries committed held as bona fide mistake and that assessee was entitled to file a revised return in the _ circumstances of the case. [1985] 52 TAX 110 (H.C.Kar.) = 1985 PTD 498
*
Corresponding to section 22(3) & 29 of the 1922 Act.
1523
1522 Section 57
Income Tax Digest.
Section 57* Revised returns of total income
REMANDING OF CASE HELD ILLEGAL
Commissioner of Income Tax, Multan Zone, Multan v. Messrs Muhammad Saleem Muhammad Arif Contractors, Multan – 2001 PTD 1371 1976.
Remanding of case held illegal.
In the present case the said provision of the Ordinance was interpreted by the Revenue in the light of para 5 of Circular No. 11 of 1981, dated 6.8.1981 through which the self-assessment scheme for the year, 198182 was notified. In that para, it was clearly provided that “cases selected for detailed scrutiny will not be taken out of this list on the basis of revision upwards of income.” It hardly needs emphasis that acceptance of return under section 59 of the Income Tax Ordinance is qualified by the provisions of the scheme notified for such purpose in respect of a particular assessment year. The provisions of section 59 clearly laid down that return will be accepted only if it qualified for acceptance in accordance with the provisions of a scheme of selfassessment made by the Central Board of Revenue for that year. After the assessee had been appraised of the selection of his case for detailed scrutiny, his revision of the return already filed clearly disentitled him to the benefit of the scheme in the light of the said Circular No. 11 of 1981. Therefore, the learned Member of the Tribunal was not justified in holding that revised return under section 57 could be deemed to be an amendment of the return earlier filed under section 55. Particularly in view of the aforesaid para of the Circular notifying self-assessment scheme for the year under consideration. The findings earlier recorded by the Assessing Officer while rejecting the claim for immunity being fully supported by the aforesaid para. of the self-assessment scheme the learned Member was also not justified in setting aside the assessment order directing for re-examination of the case if it qualified for acceptance under section 59 of the Income Tax Ordinance. The remand order was accordingly illegal and unjustified.
*
Corresponding to section 22(3) & 29 of the 1922 Act.
1523 REVISED RETURNS OF TOTAL INCOME
Section 57
_______________
REVISED RETURN FILED BEFORE ISSUANCE OF NOTICE
Commissioner of Income Tax (Central) Zone, Karachi v. Shahnawaz Ltd. – [1985] 52 TAX 110 (H.C.Kar.) = 1985 PTD 498 1977.
Revised return filed before issuance of notice under section 22(4) and 23(2) so as to cover omission of entries, omission of entries committed held as bona fide mistake and that assessee was entitled to file a revised return in the circumstances of the case.
In the instant case, admittedly the respondent assessee filed the revised returns even before the issuance of notice by the Income Tax Officer for making assessment of years in questions. In this view of the matter, a revised return could have been filed in the terms of the above sub-section (3) of section 22. In our view, the question whether there was a bone fide mistake or was it a deliberate act, was a question of fact within the competency of the learned Income Tax Tribunal and this Court cannot sit as a Court or appeal to reverse the finding on the above question of fact. Case referred to : India Cements Ltd. v. Commissioner of Income Tax 60 ITR 50.
1524 Section 58
Income Tax Digest.
Section 58* Wealth statement
PAGE NO
STATEMENT OF ASSETS AND LIABILITIES
1978. Assesses filed returns for the assessment years 1991-92, 1992-93 and 1993-94 under Self Assessment Scheme, which were completed. After some time, assessing officer issued notice under section 65 and assessee filed revision petition before the Commissioner of Income Tax(A). Assessing officer issued notices under section 58(1), 61, which were challenged to be ab-initio illegal and beyond jurisdiction. _ Held that notice are legal. [1996] 73 TAX 106 (H.C.Lah.)
1525
1979. Notice to file statement of assets and liabilities can be issued _ during reassessment proceedings. [1976] 34 TAX 92 (H.C.Lah.) = PLD 1976 Lah. 1147
1525
*
Corresponding to section 29 of the 1922 Act.
1525 WEALTH STATEMENT
Section 58
Section 58* Wealth statement
STATEMENT OF ASSETS AND LIABILITIES
Sameer Electronics v. Assistant Commissioner of Income Tax, Circle-B, Zone „A‟ Lahore – [1996] 73 TAX 106 (H.C.Lah.) 1978.
Assesses filed returns for the assessment years 1991-92, 1992-93 and 1993-94 under Self Assessment Scheme, which were completed. After some time assessing officer issued notice under section 65 and assessee filed revision petition before the Commissioner of Income Tax(A). Assessing officer issued notices under section 58(1), 61, which were challenged to be ab-initio illegal and beyond jurisdiction. Held that notice are legal.
In view of the above discussion without pre-judging the issues on facts, the petitioner is advised to comply with the notices and seek his remedy in accordance with law as provided in the Income Tax Ordinance. I have no doubt that the notices respectively served upon the petitioner under the said provisions of law are valid and do not suffer from any infirmity. Paramount Electric Company, Lahore v. Commissioner of Income Tax, Lahore Zone, Lahore – [1976] 34 TAX 92 (H.C.Lah.) = PLD 1976 Lah. 1147 1979.
Notice to file statement of assets and liabilities can be issued during reassessment proceedings.
We are of opinion that in the context, the term „assessment‟ has not been used in the narrower sense and it also includes reassessment. In A.N. Lakshman Shenoy v. Income Tax Officer, Eranakulam and another [1958] 34 ITR 275 the Supreme Court of India held that the three expressions „levy‟, „assessment‟ and „collection‟ are of the widest significance and embrace in their broad sweep all such proceedings for raising money by the exercise of the power of taxation, and the word „assessment‟ is capable of bearing the comprehensive meaning to *
Corresponding to section 29 of the 1922 Act.
1526 Section 58
Income Tax Digest.
include re-assessment. In another case in the Commissioner of Income Tax, Madras/Bombay v. Express Newspapers Ltd. [1960] 40 ITR 38 the term assessment was constructed in the wider sense to mean not only the computation of income but the entire process of computation of income and tax payable including the re-assessment under section 34. In our opinion, therefore, on the facts and circumstances of the case the notice under section 22(4A) was validly issued by the Income Tax Officer requiring the petitioner assessee to file a statement of assets and liabilities as on 1st of April, 1948 and as on 30th of September, 1967.
1527 SELF-ASSESSMENT SCHEME
Section 59
Section 59 Self-Assessment Scheme
PAGE NO
_ SELF-ASSESSMENT SCHEME SECTION 59 READ WITH _ SECTION 65* OF THE ORDINANCE GENERAL
1980. Non-filing of documents within prescribed time does not totally deprive the assessee from the benefit of Self_ Assessment Scheme. 1991 SCC 819 = [1991] 64 TAX 86 (S.C.Pak.)
1530
1981. Income Tax Officer did not pass any order upto 30.6.1988 on the return for the assessment year 1987-88 and failed to comply with the provisions, held that ITO could not pass any order on the return after 30.6.1988 and assessee could not be deprived of benefit of Self Assessment Scheme. _ [1993] 67 TAX 233 (H.C.Lah.)
1530
CONDITIONS FOR REOPENING OF SAS CASES
1982. Cases accepted under SAS cannot be reopened unless “definite information” is available with the Department. _ 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.)
1531
1983. Onus lies with Department to establish sufficient grounds to _ reopen SAS cases. 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.)
1531
1984. Expression “definite information” - How to be interpreted. _ 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.) _ 1985. Difference of opinion is not definite information. 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.)
1531 1532
1986. Assessee received a notice informing that its case was selected for detailed scrutiny. Definite information based on material evidence was not disclosed held that assessee rightly contended that the impugned action is arbitrary and _ invalid. [1994] 70 TAX 204 (H.C.Kar.)
1532
1987. SAS cases can be reopened under section 65 on fulfillment of _ legal provisions. [1992] 65 TAX 153 (H.C.Kar.)
1532
1528 Section 59
Income Tax Digest. PAGE NO
REGISTERED FIRMS NOT MAINTAINING _ ACCOUNTS SAS WAS NOT APPLICABLE
1988. Self-Assessment scheme for assessment year 1982-83 was not available to registered firms that were not maintaining the _ accounts. 1991 SCC 823 = [1991] 64 TAX 91 (S.C.Pak.)
1534
PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO SAS CASES
1989. Principle of res judicata does not apply to Self Assessment _ Scheme cases. 1965 SCC 212 = [1965] 11 TAX 296 (S.C.Pak.)
1534
SCOPE OF ADDITIONS UNDER SAS
1990. Scope of addition(s) under section 59(3) of the 1979 _ Ordinance. [1990] 80 TAX 112 (H.C.Kar.)
1534
1991. Assessing officer is not competent to make any addition to return version where assessment was made under section _ 23(1) of the repealed Act. [1979] 39 TAX 1 (H.C.Lah.)
1535
SELECTION FOR TOTAL AUDIT
1992. Selection of cases in violation of SAS held without lawful _ authority. [1998] 78 TAX 173 (H.C.Lah.)
1535
1993. Immunity could not be denied for failure to pay the exact amount of tax due as no such provision existed in SAS. _ [1993] 67 TAX 233 (H.C.Lah.)
1536
1994. Selection of case for total audit is justified where _ no violation of law existed. [1993] 67 TAX 208 (H.C.Lah.)
1537
1995. Case filed under SAS could be earmarked for balloting for _ next two years. [1992] 66 TAX 85 (H.C.Lah.)
1538
CASES SELECTED FOR DETAILED SCRUTINY
1996. Selection for detailed scrutiny without disclosing the information based on material evidence and without opportunity of hearing had been afforded to the assessee before issuance of notice held arbitrary and discriminatory _ in nature hence illegal. [1993] 67 TAX 311 (H.C.Kar.) = [1993 PTD 804]
1539
ENHANCEMENT OF INCOME VIS-A-VIS SAS
1997. Assessing officer held not empowered to enhance income _ filed under SAS. [1984] 50 TAX 61 (H.C.Kar.)
1540
1529 SELF-ASSESSMENT SCHEME
Section 59 PAGE NO
1998. Return filed by assessee fulfilling all requirements of self assessment scheme could not be rejected by Income Tax Officer on the sole ground that assessee had not maintained _ any books of accounts. [1984] 49 TAX 1 (H.C.Kar.)
1541
CLAIM FOR IMMUNITY
1999. Assessee filed returns before the Income Tax officer in the normal course and declared certain income, on the basis of which profits and sales were determined claiming immunity _ held that assessee was entitled for the same. [1990] 61 TAX 76 (H.C.Kar.)
1542
COMPARISON OF INCOME WHERE LOSS ASSESSED
2000. Loss assessed in any of the three preceding years should be ignored far calculation of average of the assessed income of _ the three preceding years. [1985] 51 TAX 114 (H.C.Kar.) = 1985 PLD 572
1543
ASSESSEE CAN FILE A REVISED RETURN FOR AVAILING THE BENEFIT OF SELF ASSESSMENT SCHEME
2001. CBR cannot exclude any case from the purview of self assessment scheme merely on the ground that revised return _ was filed. [1985] 51 TAX 114 (H.C.Kar.) = 1985 PLD 572
1544
SECTION 59 VIS-A-VIS WRIT PETITION
2002. Section 59(1) of the Income Tax Ordinance, 1979, vis-a-vis writ under Article 199 of the Constitution of Pakistan. _ [1997] 76 TAX 138 (H.C.Pesh) = 1997 PTD 1805
1546
2003. Where a new interpretation was made in respect of Self _ Assessment Scheme by the CBR. [1995] 71 TAX 282 (H.C.Lah.)
1546
2004. Notice to exclude case from Self Assessment Scheme on mere _ surmises declared unlawful. [1990] 61 TAX 57 (H.C.Kar.)
1547
2005. Service of notice on the counsel of the petitioner for short _ documents held legal. [1989] 60 TAX 88 (H.C.Lah.) = 1989 PTD 843
1548
2006. Assessee cannot claim immunity from detailed scrutiny _ under writ jurisdiction. [1986] 53 Tax 109 (H.C.Lah.)
1549
1530 Section 59
Income Tax Digest.
Section 59 Self-Assessment Scheme
SELF-ASSESSMENT SCHEME - SECTION 59 READ WITH _ SECTION 65 OF THE ORDINANCE GENERAL
Novitas International v. Income Tax Officer and others – 1991 SCC 819 = [1991] 64 TAX 86 (S.C.Pak.) 1980.
Non-filing of documents within prescribed time does not totally deprive the assessee from the benefit of Self-Assessment Scheme.
Under Self Assessment Scheme 1984-85 [(Paragraph 5(b)] the failure on the part of assessee to submit document within prescribed period of one month when he was prevented by circumstances beyond his control does not totally deprive him from the benefit of the SelfAssessment Scheme. Under such circumstances, the assessing officer has the discretion to condone the delay if sufficient grounds exist. Without considering the assessee‟s plea he could not take the case out of Self-Assessment Scheme. Shoaib Bilal Corporation, Faisalabad v. Commissioner of Income Tax, Faisalabad and anohter – [1993] 67 TAX 233 (H.C.Lah.) 1981.
Income Tax Officer did not pass any order up to 30.6.1988 on the return for the assessment year 1987-88 and failed to comply with the provisions, held that Income Tax Officer could not pass any order on the return after 30.6.1988 and assessee could not be deprived of benefit of Self Assessment Scheme.
However, the third contention of learned counsel for the petitioner is equally well-merited. It is obvious from the bare reading of section 59(4) of the Income Tax Ordinance, 1979, that the Income Tax Officer is required to pass any order on the return submitted by the assessee before 30.6.1988, where after no order in terms of section 59(1) of the Ordinance can be passed. Sub-section (4) of section 59 of the Ordinance is couched in negative language and is, therefore, according to the well-accepted principles of interpretation to be construed as mandatory.
1531 SELF ASSESSMENT SCHEME
Section 59
I am not persuaded to agree with the learned counsel for the respondents that the only effect of an order not having been passed on the return of the assessment could not be made under the SelfAssessment Scheme but the respondents were free to proceed under the normal law. To accept such a contention would amount to allowing premium to the respondents for their neglect and inaction to the prejudice of the assessee. It is axiomatic that no one can be allowed to benefit from its own wrongs and defaults. It will be incongruous to hold that on account of failure of respondents to comply with the provisions of section 59(4) by the Income Tax Authorities, the petitioner has been deprived of the benefit conferred upon it by the law of being assessed under the Self-Assessment Scheme and immunity from total audit under the normal law. On no reasonable basis, can such an interpretation be accepted. The consequence of the failure to pass order in terms of section 59(4) of the Ordinance, would be that the respondents cannot pass any order subsequently. Cases referred to: Atta Muhammad Qureshi v. The Settlement Commissioner, Lahore and 2 others (PLD 1971 SC 61) and Nagina Silk Mill, Lyallpur v. Income Tax Officer, A-Ward, Lyallpur and another [1963] 7 TAX 442 (S.C.Pak.) = (PLD 1963 SC 322). _______________
CONDITIONS FOR REOPENING OF SAS CASES
Income Tax Officer & another v. Chappal Builders – 1993 SCC 1026 = [1993] 68 TAX 1 (S.C.Pak.) 1982.
Cases accepted under SAS cannot be reopened unless “definite information” is available with the Department.
Unless there is definite direct information and there is no further need to put the said definite information to trial for acquiring further supporting material the cases of self-assessment could not be reopened. 1983.
Onus lies with Department to establish sufficient grounds to reopen SAS cases.
It is the duty of the department before reopening a case qualifying for self-assessment to be in possession of definite information regarding the departments‟ assertion against the assessee. 1984.
Expression “definite information” - How to be interpreted.
„Definite information‟ and similar other expressions used in para 9 of self assessment scheme (for assessment year 1984-85) and section 65 or other related provisions certainly mean much more than mere
1532 Section 59
Income Tax Digest.
material so as to constitute a reasonable belief of even such evidence which might lead to a definite belief. 1985.
Difference of opinion is not definite information.
The honourable Supreme Court agreed with the findings of the learned judges of the High Court that definite information in the context of sections 59 and 65 could not mean mere difference of opinion or further reasoning, or exercise of logic or even drawing of conclusion. Muhammadi Oil Trading Co. through Partner, Karachi v. Regional Commissioner of Income Tax, Southern Region, Karachi and Other – [1994] 70 TAX 204 (H.C.Kar.) 1986.
Assessee received a notice informing that its case was selected for detailed scrutiny. Definite information based on material evidence was not disclosed held that assessee rightly contended that the impugned action is arbitrary and invalid.
The mere fact that there was definite material available with the respondent No. 2 by itself is not sufficient to permit dispensation with the requirements laid down by the Division Bench. The observations reproduced above hardly leave any doubt, in this regard. Since admittedly such material has not been disclosed to the petitioners it is clearly obvious that action has not been taken in the present case by the respondents strictly in accordance with the rule laid down in the judgment of the Division Bench. In the result, we accept this petition and quash the said notice. The respondents would however, be at liberty to take action against the petitioners If there Is any evidence of understatement of income but action, if any, must be taken strictly in accordance with the rule laid down in the said judgment. Case relied on: Pakistan Educational Society v. The Government of Pakistan [1993] 67 TAX 311 (H.C.Kar.) = [1993 PTD 804]. Case referred to: E.P. Royappa v. State of Tamil Nadu (AIR 1974 SC 555).
Haji Ismail Ibrahim v. Incons Tax Officer, Circle W-II, West Zone, Karachi and 2 others – [1992] 65 TAX 153 (H.C.Kar.) 1987.
SAS cases can be reopened under section 65 on fulfillment of legal provisions.
These observations fully apply to the facts of the case as from the return and the assessment order it is clear that the Income Tax Officer has not applied his mind and had passed the order in a routine and mechanical manner. Therefore, on this ground, the jurisdiction of the respondent cannot be challenged.
1533 SELF ASSESSMENT SCHEME
Section 59
Then para 2 of the scheme prescribed the requirements of the return which were to be mentioned or filed alongwith it. So far business income is concerned it is covered by para 2D(a) according to which where no accounts were maintained the trading and profit and loss account on estimate basis could be filed. The evidence of investment allowance and payment of tax under section 54 was also to be furnished. Under para 5, the selection of cases for total audit was to be made on the basis of random sample through the computer. Para 6 gives a list of categories of cases which shell be exempt from selection for total audit subject to fulfillment of the conditions mentioned therein. The petitioner did qualify for total exemption as income declared for the assessment year 1986-87 was higher by 20% as compared to the last assessed income and the tax payable for the income declared for the 1986-87 was not less than the tax payable on the last income. It is true that protection has been given to the persons who qualify for self assessment, but it does not mean that the operation of section 65 is suspended or it is not applicable to such cases. In fact section 65 specifically provides for reopening of cases assessed under section 59(1). Sub-section (4) of section 65 bars the applicability of sub-section (2) in respect of cases to which clause (c) of sub-section (1) applies as specified by the Central Board of Revenue. In Circular No. 13 the Central Board of Revenue has taken the view that sub-section (4) is applicable to cases which have been selected for total audit. The effect of this sub-section is that cases which qualify for self-assessment but have been selected for total audit and assessment has been made, can be reopened under section 65. However, in such cases while reopening the case the precondition imposed by sub-section (2) of section 65 will not be applicable. In view of this legal position, in the facts and circumstances of the case as petitioner‟s case has been selected for total audit the preconditions imposed under sub-section (2) cannot be pressed in service for vitiating the impugned action. Cases referred to: Edulji Dinshaw Ltd. v. Income Tax Officer (1990) 61 Tax 105 (S. C. Fak.) = (PLD 1990 SC 399); Arafat Woollen Mills Ltd. v. Income Tax Officer (1990) 61 Tax 46 (S.C.Pak.) = (PLD 1990 SC 390); Republic Motors Ltd. v. Income Tax Officer (1990) 62 Tax 8 (H.C.Kar.) = (1990 PTD 889); H. M. Abdullah v. Income Tax Officer (1991) 63 Tax 113 (H.C.Kar.) = (1991 PTD 217) and Ramzan Sons v. Income Tax Officer (1991 PTD 503). _______________
1534 Section 59
Income Tax Digest.
REGISTERED FIRMS NOT MAINTAINING _ ACCOUNTS SAS WAS NOT APPLICABLE
Income Tax Officer & two others v. Shaikh Ghulam Shah – 1991 SCC 823 = [1991] 64 TAX 91 (S.C.Pak.) 1988.
Self-Assessment scheme for assessment year 1982-83 was not available to registered firms that were not maintaining the accounts.
One of the essential requirements of the Self-Assessment Scheme for assessment year 1982-83 in the case of registered firms was to file copies of Balance Sheet and Profit and Loss account since the registered firm failed to provide this despite notice, its return could not be accepted under section 59(1). In other words for registered firms not maintaining accounts the SAS was not applicable. _______________
PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO SAS CASES
Commissioner of Income Tax East Pakistan, Dacca v. Wahiduzzaman – 1965 SCC 212 = [1965] 11 TAX 296 (S.C.Pak.) 1989.
Principle of res judicata does not apply to Self Assessment Scheme cases.
Where there is no statutory provision barring re-opening of a matter the applicability of the principle of res judicata depends on the necessity of giving finality to litigation and the injustice of vexing a person twice in respect of the same matter and these being only general considerations relating to administration of justice with no technical and defined limits the applicability of res judicata in such cases will be governed by considerations arising with respect to the particular statute under which a matter has been determined the dominant consideration always being that the cause of justice be advanced. _______________
SCOPE OF ADDITIONS UNDER SAS
Commissioner of Income Tax v. Messrs Sadiq Traders – [1990] 80 TAX 112 (H.C.Kar.) 1990.
Scope of addition(s) under section 59(3) of the 1979 Ordinance.
Any Income Tax Officer while exercising powers under section 59 of the Ordinance cannot add or include any amount which comes within
1535 SELF ASSESSMENT SCHEME
Section 59
the definition of income as defined in section 12 of the Ordinance including deemed Interest income to the declared income of an assessee and has to restrict himself to adjustments like enhancement, reduction, regulation and alteration of the amount claimed as allowable expenses/deductions under the various sections and other provisions of the Ordinance as enumerated in section 59(3) of the Ordinance. If according to the Income Tax Officer, the assessee had failed to disclose any income which was assessable under section 12(7) of the Ordinance, he should have first completed the assessment under section 59(1) and thereafter, taken requisite action under section 65 of the Ordinance, if he deemed it necessary. Mian Aziz Ahmad, Lahore v. Commissiiner of Income Tax, Lahore – [1979] 39 TAX 1 (H.C.Lah.) 1991.
Assessing officer is not competent to make any addition to return version where assessment was made under section 23(1) of the repealed Act.
The provision of section 23(1) do not enable the Income Tax Officer to add even a penny to the returned version. For, it cannot be contended that although the return filed by an assessee is correct and complete the Income Tax Officer is still entitled to make an addition to the returned version. The specific machinery of section 23(1) is available only to accept the returned version wherever the Income Tax Officer finds that such version is correct and complete. There is nothing in the Income Tax Act, 1922 which could have prevented the Income Tax Officer proceeding to complete the normal assessment under section 23(3) after examination of evidence and grant of opportunity to the assessee envisaged by section 22(4) and 23(2) of the Act, respectively. But once he has chosen the alternate course of a summary assessment without notice to the party, such an assessment does not and cannot permit rejection of returned version and substitution thereof by different or estimated figures. _______________
SELECTION FOR TOTAL AUDIT
Millat Bottles Store, Faisalabad v. Assistant Commissioner of Income Tax – [1998] 78 TAX 173 (H.C.Lah.) 1992.
Selection of cases in violation of SAS held without lawful authority.
The contention raised by the learned counsel for the respondent ignores the fact that the petitioner, having acted upon, the terms and
1536 Section 59
Income Tax Digest.
conditions of circular No. 9 of 1993 by filing returns under the selfassessment scheme for the year 1993-94, had earned a vested right of being exempt from total audit for a period of two years as provided in the scheme itself any subsequent change in the policy could not destroy that right nor can the petitioner be deprived of the benefit of the earlier scheme. The theory of vested right as well as promissory estoppel has been applied by the Courts of this country since long. It is unnecessary to burden this judgment by mention of all cases as reference to Messrs Army Welfare Sugar Mills Ltd. etc. v. Federation of Pakistan and others 1992 SCMR 1652 and Al-Samrez Enterprises v. The Federation of Pakistan and others 1966 SCMR 1917 would suffice. Another aspect of the matter which is to be noted is that under Islamic dispensation of justice the parties including State should be bound down to the terms of the contract arrived at between them and they must be made to adhere to their promises. In view of Article 2-A of the Constitution and promulgation of Shariat (Application) Ordinance, 1990, Islamic principles of interpretation of statutes are to be kept in view by the Court. It follows, therefore, that the respondents cannot be allowed to wriggle out of the clear promises which they made while promulgating self-assessment scheme for the year 1993-94. Cases referred to: Army Welfare Sugar Mills Ltd. etc. v. Federation of Paksitan and others 1992 SCMR 1652; Al-Samrez Enterprises v. the Federation of Pakistan 1966 SCMR 1917 and Mian Aziz A. Sheikh v. Commissioner Income Tax (1989) 60 TAX 106 (S.C.Pak.) = (PLD 1989 SC 613) = (1989 PTD 984).
Shoaib Bilal Corporation, Faisalabad v. Commissioner of Income Tax, Faisalabad and anohter – [1993] 67 TAX 233 (H.C.Lah.) 1993.
Immunity could not be denied for failure to pay the exact amount of tax due as no such provision existed in SAS.
From the record, it appears that the Income Tax Officer realising that he had, contrary to section 59(4) of the Ordinance, failed to pass any order in respect of the return of the petitioner before 30.4.1988 tried to invoke the provisions of normal law, so as to cover his default. The first notice was issued by respondent No.2 in this behalf on 9.4.1990 in which the petitioner was asked to furnish certain information and to appear along with the books of account as maintained by him. No reason was mentioned either in the notice or in the letter as to why the case was not processed under the Self Assessment Scheme. When this fact was pointed out to the Income Tax Officer, he on 5.5.1990,
1537 SELF ASSESSMENT SCHEME
Section 59
wrote that as the tax paid by the petitioner along with the return was less by Rs.8,825, he could not claim immunity from assessment under the Self Assessment Scheme. The petitioner was called upon to give his explanation on this point. This payment was duly made by the petitioner and a copy of the challan showing this payment was sent to the Income Tax Officer. At that time, there was neither any allegation nor any dispute that the petitioner had concealed his income. It is to be noticed that there was no provision in the Self Assessment Scheme for the year 1987-88, providing for the loss of immunity from the total audit in case of failure to pay the exact amount of tax due, although such a provision did exist in the Scheme for subsequent years. Consequently, the mere fact that the petitioner had not paid the total amount of tax, did not entitle the respondent to deny the immunity to the petitioner, especially on being pointed out that the petitioner duly paid the remaining amount of tax. In view of this authoritative pronouncement even if it be assumed that the tax paid by the petitioner at the time of submitting his return under the Self Assessment Scheme was short by Rs.8,825, as the denial of immunity was discretionary with the Income Tax Officer, he could not arbitrarily refuse to extend the benefit of the Scheme to the petitioner on such a ground. Cases referred to: Novitas International v. Income Tax Officer and others (1991 164 TAX 86 (S.C.Pak.) = (1991 PTD 968); Chapal Builders v. Income Tax Officer and another [1990] 61 TAX 57 (H.C.Kar.) = (1990 PTD 62); Hamdard Dattakhana (Waqf) Pakistan v. Commissioner of Income Tax, Central Zone „B‟ Karachi [1990] 62 TAX 98 (H.C.Kar.) = (1990 PTD 955) and Edulji Dinshaw Ltd. v. Income Tax Officer [1990] 61 TAX 105 (S.C.Pak.) = (PLD 1990 SC 399).
Dawn Sports v. Income Tax Officer – [1993] 67 TAX 208 (H.C.Lah.) 1994.
Selection of case for total audit is justified where no violation of law existed.
This being the position, it is apparent that the suspicion entertained as to gross under-statement of income is based not only on definite information but is well-based and it is now for the petitioner assessee to produce evidence to show that their accounts reflected the true trade position. At this juncture, it is pertinent to note that the respondent department through its counsel undertook to examine on merits the explanation of the petitioner assessee and it was represented that if the said explanation is found to be factual and genuine then the necessary relief will be afforded as the department is
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interested only in securing the tax which is genuinely payable by the petitioner. It will, therefore, be seen that the position taken by the department sufficiently secures the interest of the petitioner which would now produce the evidence in its possession to substantiate the aforenoted plea. In the facts and circumstances noted above, selection of the case of the petitioner for total audit cannot be considered to be illegal, arbitrary or without lawful authority. Shafqat Rasool v. Islamic Republic of Pakistan through Secretary Finance, Islamabad and others – [1992] 66 TAX 85 (H.C.Lah.) 1995.
Case filed under SAS could be earmarked for balloting for next two years.
The note in question, as on the face of it, has no application to the case of the petitioner, for it applies only. where a case had been selected through computer balloting obviously under para. 4(i) of the circular and not when the selection for total audit is under para 4(ii), with the approval of the Regional Commissioner of Income Tax, on the ground of gross understatement of income. This contention of the learned counsel is devoid of any force. It is well settled and needs no gainsaying that Article 25 of the Constitution does not, prohibit reasonable classification based upon intelligible differentia. In the present case, the import of para 4(i) and para 4(ii) are totally different. In the former case, the selection for total audit is made by the computer in the random balloting conducted without there being any fault On the. part of the assessee, while in the cases covered by para 4(ii) the total audit is ordered on account of gross understatement of income. The two situations are therefore; not parallel or similar. The underlying rationale in confining the applicability of the note granting immunity for two years to cases falling under sub-para (ii) of para. 4 is not difficult to see. Total audit in such a case, as already observed, is not on account of any fault on the part of the assessee while in the cases covered by sub-para (ii) the total audit takes place due to the misstatement made by him and therefore, in view of his past conduct, he cannot be granted any immunity. _______________
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CASES SELECTED FOR DETAILED SCRUTINY
Pakistan Educational Society, Karachi v. Government of Pakistan, through Chairman & Secretary, Revenue Division, Islamabad and others – [1993] 67 TAX 311 (H.C.Kar.) = [1993 PTD 804] 1996.
Selection for detailed scrutiny without disclosing the information based on material evidence and without opportunity of hearing had been afforded to the assessee before issuance of notice held arbitrary and discriminatory in nature hence illegal.
It now remains to be considered whether the Income Tax Officer concerned was bound to disclose the material upon which action was taken by him under the said circular. Although sub-section (1-A) of section 59 itself fails to make any classification in regular to persons or class of persons to whom or cases or class of cases to which the said provisions shall apply, but it leaves the same to the discretion of the Board. But the validity of Circular No. 22 has not been attacked for such reasons. The Board has framed a policy, complete in all respects in regard to the classification of persons and the criterion for selection of cases which may be excluded from the benefit of the self-assessment scheme under the said Circular. However, as is clear from the Circular itself, it was never intended to clothe the Income Tax Officer or any other functionary of the department with any arbitrary powers. The said functionaries are obliged to exercise power under the said circular justly, honestly and strictly within the parameters laid down by the circular itself. The validity of the exercise of power by the concerned Income Tax Officer or the fact that such action has been taken by him in good faith, would always be open to question unless the material upon which such action has been taken is disclosed to the assessee. Failure to disclose such material to the assessee would render such action completely arbitrary and discriminatory because conclusions would be drawn by the respondent Income Tax Officer or the Regional Commissioner of Income Tax, himself without being supported by any evidence. The contention that enquiry is to be conducted by the Income Tax Officer cannot by itself clothe such action with validity. Even in the counter-affidavits filed on behalf of the respondents, although, it has been stated that action has been taken only in such cases where definite information had been received in regard to the inaccuracy of the returns „respectively‟ filed by the petitioners in each
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case, but again, it is only a general assertion not supported by any material. It would, therefore, be dangerous to proceed on mere assertion where as pointed out earlier, conclusions have been drawn by the respondents themselves and are not supported by any evidence which can be contested by the petitioners in the Court. The respondents have, therefore, failed to discharge the burden which was heavily placed on them to show that the action against the respondents had been taken purely within the conditions laid down by the said circular or that the same was not taken on account of any extraneous considerations. Such an action, in our judgment, is, therefor; arbitrary and discriminatory, and any illegal, irrational or arbitrary action or decision whether in. the nature of legislative, administrative or quasi-judicial exercise of power is liable to be quashed as such. In the result, we allow these petitions and quash the respective notices issued to the petitioners. However, this does not mean that the petitioners should succeed in evading such action even in cases where the action is warranted by law, simply on account of the failure of the respondents to furnish evident in this regard or to establish a prima fade case. Under the circumstances, we leave it to the concerned functionaries of the Income Tax Department to reopen any case, provided action is taken fairly and squarely within the power respectively vesting in them under the Statute or the said Circular, in the light of the observations made in this judgment. Cases referred to: Cannon Products Ltd. v. Income Tax Officer (1985) 51 TAX 114; Commissioner of Income Tax v. Jagan Nath AIR 1957 Punj. 226; Commissioner of Income Tax v. A. Roman AIR 1968 SC 49; Commissioner of Income Tax v. Mahaliaram Ramjidas (1940 8 ITR 442; Burhan Engineering Co. Ltd. v. Income Tax Officer, Companies Circle-II, Karachi (1985) 52 TAX 55 (H.C.Kar.) = (1985 PTD 465) and Muhammad Asghar v. C.B.R. (1986) 53 TAX 109. _______________
ENHANCEMENT OF INCOME VIS-A-VIS SELF ASSESSMENT SCHEME
Ameer Bux Badruddin, Sarraf, Hyderabad v. Commissioner of Income Tax, Karachi (West), Karachi – [1984] 50 TAX 61 (H.C.Kar.) 1997.
Assessing officer held not empowered to enhance income filed under SAS.
The Income Tax Officer as well as the Income Tax Appellate Tribunal have proceeded on the assumption as if the applicant assessee had
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filed a normal return and not a return under the self-assessment scheme. The Self-assessment scheme covers even those cases where the assessees have not maintained proper books of account. The factum that in the books of account, the applicant assessee had disclosed a profit of Rs.3917/-, whereas in the return filed under the self-assessment they have disclosed profit of Rs.16,000/- in itself could not have been sufficient reason for rejecting the return under the selfassessment scheme. There should have been some material before the Income Tax Officer to support the conclusion that the profit disclosed on the various items referred to hereinabove were not normal or that the total sale disclosed could not have been the normal sale, particularly in view of the fact that for a number of years up to the assessment year in question the Income Tax Department accepted the applicant assessee‟s return under the self-assessment scheme without any objection. Cases referred to: Commissioner of Income Tax, Karachi v. Mr. Abdullah Habib (ITC No. 139 of 1973) dated 30.11.1983; Commissioner of Income Tax, Dacca Zone, Dacca v. Allauddin and Brothers (1982 PTD 35) = [1982] 45 TAX 35 (S.C.B.D.); Commissioner of Income Tax & United Provinces v. Lakshtni Naraindas [1957] 5 ITR 170 and Commissioner of Income Tax v. S. Zoraster & Co. (1982 PTD 339) = [1982] 46 TAX 94.
Commissioner of Income Tax, Karachi (West), Karachi v. Manzoor Hussain Abdul Karim – [1984] 49 TAX 1 (H.C.Kar.) 1998.
Return filed by assessee fulfilling all requirements of self assessment scheme could not be rejected by Income Tax Officer on the sole ground that assessee had not maintained any books of accounts.
The return of the assessee/respondent was rejected by the Income Tax Officer under the self-assessment scheme on the sole ground that he had not maintained any books of accounts. The Income Tax Appellate Tribunal, however, reversed the decision of Income Tax Officer and directed that the return filed by the respondent may be decided in accordance with the self-assessment scheme as it fulfilled all the requirements of that scheme. We considered similar question referred by the Department in the case of Commissioner of Income Tax v. Khushi Muhammad ITR No. 314 of 1972, decided on 31.3.1983 and after examining in detail the provisions of the scheme and the power of the Income Tax Officer under rule 46 of the Income Tax Rules, held that if the Income Tax return filed by an assessee fulfilled all the requirements of the scheme then unless it is found by the Income Tax Officer that the return filed
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by assessee did not disclose the correct income it could not reject the same and proceed to decide the same in accordance with the normal procedure prescribed under the Act. The learned counsel for the Department, who also appeared before us in the above case is unable to draw any distinction between that case and the present case. We, accordingly answer the questions referred to above in the affirmative but would make no order as to costs. Case relied on: Commissioner of Income Tax v. Khushi Muhammad (ITR 314 of 1972). _______________
CLAIM FOR IMMUNITY
Saifuddin Ghulam Ali and Sons v. Commissioner of Income Tax – [1990] 61 TAX 76 (H.C.Kar.) 1999.
Assessee filed returns before the Income Tax officer in the normal course and declared certain income, on the basis of which profits and sales were determined claiming immunity held that assessee was entitled for the same.
The applicant has stated that it has made a declaration of his undisclosed income in terms of section 3C and the Fifth Schedule and, therefore it is entitled to the immunity. From the assessment order passed by the Sales Tax Officer it is clear that the applicant had filed its returns before the Income Tax Officer and declared certain income on the basis of which the returns filed under the Sales Tax Act were verified and the profits and sales determined by the income Tax Officer. Therefore, the entire sales tax proceedings and the tax imposed was based on the income, which was disclosed by the applicant while filing income tax returns, in the normal course and not under section 3C. The immunity is available only in respect of income declared by the assessee, which it had not disclosed earlier. This immunity cannot be extended to such assessment, which has been made on the basis of income already declared in the normal course and in normal manner. It is available only in respect of the income declared under section 3C and the Schedule. The Sales Tax Officer has not imposed any tax on the basis of the declaration made under section 3C. Therefore, in our view immunity under Rule 6 cannot be made available to the applicant. We accordingly answer this question in the negative. _______________
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COMPARISON OF INCOME WHERE LOSS ASSESSED
Cannon Products Ltd., and others v. Income Tax Officer and others – [1985] 51 TAX 114 (H.C.Kar.) = 1985 PLD 572 2000.
Loss assessed in any of the three preceding years should be ignored far calculation of average of the assessed income of the three preceding years.
The petitioner for the income tax assessment year 1981-82 declared loss of Rs.46,897 and was assessed at a loss of Rs.34,230/-. In the year 1982-83 the petitioner declared income as Rs.54,224/- and was assessed at the same figure. In the assessment year 1983-84 the petitioner filed return showing an income of Rs.76,273/-. It is the case of the petitioner that it received a letter dated 13.8.1983 from the Income Tax Officer stating therein, that the income tax return for the assessment year 1983-84 is under process for finalisation under the Scheme and in this respect it was asked for submission of certain details which were submitted through their counsel‟s letter dated 17.8.1983, but the petitioner was surprised to receive an order dated 30.11.1983 stating therein, that their case has been selected for detailed scrutiny for the assessment year 1983-84. The above selection has been made as for the assessment year 1982-83 instead of taking assessed figure of Rs. 54,2241- has taken declared profit of Rs. 88,454/- for comparing the income for the assessment year 196384. The petitioner for the year 198 1-82 declared loss of Rs.31,742 but were assessed loss at Rs.25,408/-. For the year 1982.83 the petitioner declared loss of Rs.2,52,079/- but assessed at Rs.1,88,235/- as loss. For the year 1983-84 the petitioner filed declaration under the Scheme and declared income of Rs.19,933 but respondent No. 1 through its letter dated 26.1.1984 informed the petitioner that they did not qualify under immunity clause of Scheme 1983-84. In spite of the efforts on the part of the petitioner, the Respondents adhered to the above stand. We are inclined to hold that question. whether an assessee scheme, the assessed income for sub-paras a, b and c of para 6 is not declared income. Factually, assessed income.
for the purpose of deciding the is qualified for self assessment the preceding years referred to in to be taken into consideration and it is taxable income which is the
If we were to take the petitioner‟s losses assessed in the assessment years 1981-82 and 1982-83 as income in terms of clause (24) of section
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2 of the Ordinance, the petitioner‟s declared income Rs.19,933/- for the assessment year 1983-84 will be admittedly more than 20% as compared with the last assessed income in any of the three preceding years. Since under the scheme no definition of the term “income” has been given, the definition of the above word provided for in clause 24 of section 2 of the Ordinance shall be applicable. We are inclined to hold that aforesaid note 6 to the Scheme is applicable where the average of the assessed income of the preceding three years is to be worked out. It has been provided that in case loss was assessed in any or the three immediately preceding years, such year in which loss was assessed shall be ignored for calculation of average of the assessed income of the three preceding years, and that the average etc. of the assessed income shall be calculated for such lesser period of years in which the assessment resulted income. The above note 6 is apparently relatable to above sub-clause (a) and (b) of para 6 of the Scheme and not to sub-clause (c) of the above para which does not speak of working out average. We are, therefore, further inclined to hold that petitioner in the above petition was qualified for the scheme in terms of sub-clause (c) of para 6. Even otherwise any scheme contrary to the provisions of the Act may be ultra vires of the power of the authority entrusted with the power of framing of the scheme. Cases referred to: Commissioner of Income Tax, East Pakistan v. Hossan Kasam Dada, Karachi (PLD 1961 S.C. 375); Dreamland Cinema, Multan v. Commissioner of Income Tax., Lahore (PLD 1977 Lah 292) and Income Tax Officer v. Mani Ram and others (AIR 1969 S.C. 543). _______________
ASSESSEE CAN FILE A REVISED RETURN FOR AVAILING THE BENEFIT OF SELF ASSESSMENT SCHEME
Cannon Products Ltd., and others v. Incomu Tax Officer and others – [1985] 51 TAX 114 (H.C.Kar.) = 1985 PLD 572 2001.
CBR cannot exclude any case from the purview of selfassessment scheme merely on the ground that revised return was filed.
The petitioner is also a partner of Anchor Associates. She filed her income tax return on 10.10.1983 declaring her income as Rs.34,828. She filed revised return on 1.11.1983 declaring a total income of Rs.41,447/- against the assessed income for the year 1982-83 amounting to Rs.33,242/. The petitioner received a letter dated 1.12.1983 from Respondent No. 3 i.e. the Income Tax Officer informing
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her that the Respondent No.1 i.e. the Board had been pleased to exclude the petitioner‟s case from the purview of the Scheme and selected the same for detailed scrutiny. We are inclined to hold that since the scheme has been framed under the Ordinance and as there is no provision in the scheme contrary to section 57 of the Ordinance, a revised return can be filed by an assessee in terms of section 57 at any time before the assessment is made even for the purpose of the scheme so long as the assessee concerned qualifies in terms of the scheme. In this view of the matter, above para 6 of Circular No. 14 of 1983 is ultra vires of the power of the Board, whereas paras 1 to 5 of Circular No. 14 are intra vires of the power of the Board. The Board being at the epic or hierarchy provided for in the Ordinance, it can provide that no case will be selected for detailed scrutiny without its approval or approval of any other person specified in the Scheme but it cannot assume the power to select itself an individual case as it will not be covered under clause (a) of sub-section (2) of section 165 which empowers the Board to prescribe the manner in and procedure by which the income, profits and gains liable to tax and the tax liabilities under the Ordinance shall be determined. We allow Constitutional Petitions Nos. D-35 of 1984, D-345 of 1984 and D-674 of 1984 with no order as to costs and declare that the petitioners‟ cases are covered by the Scheme for the reasons already discussed hereinahove in paras (I)(iv), (6), (7), (8) and (11) and, therefore, they are liable to be assessed without any detailed scrutiny unless their cases fall under paras 1 to 5 of above Circular No. 14 of 1983. We also declare that para 6 of above Circular No. 14 of 1983 is ultra vires of the power of the Board. Cases referred to : North British and Mercantile Insurance Co. [1937] 5 ITR 349; Mehreen Zaibun Nisa v. Land Commissioner, Multan (PLD 1975 S.C. 397); Firdous Spinning and Weaving Mills Ltd. v. Federation of Pakistan (PLD 1984 Kar. 522); Saleh Mohammad v. Traffic Manager, Port Trust, Karachi (PLD 1961 Kar. 349); Zaintan Textile Mills Ltd. v. CBR (PLD 1971 Kar. 333); Krusa v. Jhonson [1898] (2QB) 91; Sh. Naseem Anwar v. Income Tax Officer, (Investigation) Circle III, Dacca [1963] 7 TAX 358; Income Tax Officer v. Sh. Nasim Anwar and other [1966] 14 TAX 1; Rao Bahadur Ravulu Subba Rao v. Commissioner of Income Tax 30 ITR 163; Commissioner of Income Tax v. Mahaliram Ramjidas [1940] 8 ITR 442; Gurshai Saigal v. Commissioner of Income Tax [1963] 48 ITR 1; Escorts Ltd. v. Income Tax Officer, Lahore (1975 PTD 50) and Burhan Engineering Company Ltd. v. Income Tax Officer and other (Unreported) (H.C.Kar.) _______________
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SECTION 59 VIS-A-VIS WRIT PETITION
Rehmania Hospital v. Government of Pakistan through Ministry of Finance, etc. – [1997] 76 TAX 138 (H.C.Pesh) = 1997 PTD 1805 2002.
Section 59(1) of the Income Tax Ordinance, 1979, vis-a-vis writ under Article 199 of the Constitution of Pakistan.
While examining the above quoted judgments, it seems that the preponderance and the recent trend of the judgments of the Superior Courts favouring the respondents on the view point i.e. that in the presence of statutory remedy under the Income Tax Ordinance approach to the High Court through a writ petition has been disapproved. Cases referred to: Spiceco International v. Regional Commissioner of Income Tax, Southern Region, Karachi and another 1993 PTD 1007; Muhamrnadi Oil Trading Co. v. Regional Commissioner of Income Tax, Southern Region, Karachi and another 1994 PTD 494; Kamran Industries v. Collector of Customs (Exports), Karachi and 4 others PLD 1996 Kar. 68; Commissioner of Income Tax v. N.V. Philip‟s Gloeilampenfabriaken NLR 1993 TAX 174; Income Tax Officer and another v. Chappal Builders 1993 SCMR 1108; Grays of Cambridge (Pak.) Ltd., Sialkot v. D.C. of Income Tax and another (Unreported); Sameer Electronics v. A.C. of Income Tax 1996 PTD 36.
Faisal Plaza v. Central Board of Revenue – [1995] 71 TAX 282 (H.C.Lah.) 2003.
Where a new interpretation was made in respect of SelfAssessment Scheme by the CBR.
In case in hand, the circular dated 26.1.1995 is basically addressed to the Government functionaries in the interest of taxpayers at large who filed returns within the extended time allowed by Deputy Commissioner of Income Tax and has created a right in favour of such taxpayers for the assessment year 1994-95 without any restriction. I am of the view that the writ petition under Article 199 of the Constitution is maintainable due to issuance of circular dated 26.1.1995 by the respondent No. 1 in supersession of circular dated 11.7.1994 aforementioned in exercise of powers conferred upon the Central Board of Revenue by the Ordinance, which has no doubt, created a vested right in favour of the taxpayers including the petitioner.
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It may be observed that nothing has been brought on the record by the official respondents to indicate that the circular was not issued to have retrospective effect to the assessment if any made prior to the issuance of the aforementioned circular. The circular has been gazetted in the official gazette, it has the effect as it was included in the circular No. 9 of 1994 on the very first day i.e. 11.7.1994 when it was issued by the Central Board of Revenue. The outcome of the above discussion is that what is excluded by express words cannot be included on any principle of interpretation, therefore, the aforementioned circular is presumed to be in existence since 11.7.1994 which is effective for the assessment year 1994-95 subject to the condition laid in the circular No. 9 of 1994 regarding Self Assessment Scheme; hence created a vested right in favour of the petitioner. Resultantly, the assessment order made by the respondent No. 2 is set-aside being without lawful authority and ab initio beyond jurisdiction as of no legal effect. The respondent No. 2 is directed to reexamine the case afresh in the light of the above discussion. Cases referred to: Federation of Pakistan v. lbrahim Textile Mills Ltd. (1992 SCMR 1898); Liaqat Ali and 11 others v. The State (1992 SCMR 372); Abdul Qayyum and another v. Niaz Muhammad and another (1992 SCMR 613); A & B Food Industries Ltd. v. Commissioner of Income Tax Karachi (1992 SCMR 663); Miran Associates v. Commissioner of Income Tax., Karachi (1993 SCMR 274); Mehr-un-Nisa v. Land Commissioner, Multan (PLD 1975 SC 397); Mollases Trading and Export Pvt. Ltd. v. Federation of Pakistan and others (1993 SCMR 1905) and Army Welfare Sugar Mills Ltd. v. Federation of Pakistan and others (1992 SCMR 1652).
Chapal Builders v. Income Tax Officer and another – [1990] 61 TAX 57 (H.C.Kar.) 2004.
Notice to exclude case from Self Assessment Scheme on mere surmises declared unlawful.
The controversy in the case started with a notice from the respondent No. 1 to the petitioners, dated 10.4.1988, wherein, in relation to petitioners, income tax return under the Self Assessment Scheme, for the assessment year 1987-88, by way of discrepancies, it was pointed out that payment of Rs.57,00,000/-, towards purchase of plot was shown to have been made up to 30.6.1987, whereas commencement of construction of the project, to be raised on such plot, in the name and style of “C...... P......” could only be taken in hand, after obtaining the “No Objection” certificate from the Building Control Authority, which came about on 24.12.1987, thereby rendering the expenditure inadmissible not being relatable to an ongoing project and, besides,
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“Electric Estimate” to the tune of Rs.14,73,999/- also remained to be explained. Explanation was sought by 18.4.1988. Such explanation was rendered through letter dated 16.4.1988 from the petitioner‟s learned counsel. It was, inter alia, explained that the petitioner did not submit any “trading Account” but only a “receipt and expenditure statement” in consonance with CBR Circular No. 9 of 1987, dated 26.10.1987, (Self Assessment Scheme of Income Tax 1987-88) that the sum of Rs.57,00,000/- was correctly shown on the debit side of the “receipt and expenditure account” in consonance with the practice of the assessee since the year 1984-85, regarding which no objection was ever raised. Keeping in view all the above factors and circumstances we do think that the notice order dated 26.5.1988 was wanting in pre-requisites but, at the same time, are with the department in holding that the explanations were required from the assessee, which was its obligation to provide but, which it failed so to provide on an erroneous impression as to its rights. Therefore, while notice order dated 26.5.1988 is found to be without lawful authority and is quashed, the earlier action(s) on the part of the respondent No. 1, as represented by the correspondence on the subject, is / are maintained and the department would be free to see that proper accounting procedures are followed and the income is duly assessed in accordance therewith. Further if the case, on due examination, is found to present evidence of concealment the same, on due recording of such a finding, can also be kept apart for total audit. Case referred to: Frontier Sugar Mills (PLD 1975 S.C. 244)
Friends Construction Company v. Commissioner of Income Tax and Others – [1989] 60 TAX 88 (H.C.Lah.) = 1989 PTD 843 2005.
Service of notice on the counsel of the petitioner for short documents held legal.
Petitioner wants this Court to declare the decision of Income Tax Officer, Circle no. 29, Bahawalpur, respondent No. 2, which was subsequently approved by the Commissioner of Income Tax Multan Zone, Multan, respondent No. 1, in taking out the case of the petitioner from immunity law of self-assessment to the normal law of assessment by the department, to be illegal and without lawful authority. I have considered the submissions made by the learned counsel with care. I have not been able to persuade myself to agree with him. I find that the notice dated 22.12.1987 issued by Income Tax Officer Circle29, Bahawalpur for the supply of short documents was physically
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served on the counsel of the petitioner-firm, who had filed return of income for the assessment year 1987-88; that the petitioner-firm in the power of attorney executed by it had authorised its counsel to do such other acts as may be necessary in regard to the income tax proceedings; that the service upon the counsel is service of his client in the eye of law; that in notice dated 22.12.1987, it was made clear to the petitioner-firm that non-production of short documents within 30 days will lead to his case being excluded from the purview of selfassessments scheme automatically; that the short documents were not supplied to Income Tax Officer, Circle-29, Bahawalpur, within 30 days & as such no exception can be taken to the decision of respondent No. 1 for taking out the case of the petitioner-firm from immunity law of self-assessment to the normal law of assessment by the department. Learned counsel has not been able to point out any illegality or jurisdictional defect in the impugned orders. The respondents have not flouted the provisions of relevant law. Mohammad Asghar, etc. v. Central Board of Revenue, etc. – [1986] 53 Tax 109 (H.C.Lah.) 2006.
Assessee cannot claim immunity from detailed scrutiny under writ jurisdiction.
The petitioners in these writ petitions filed returns under the respective Self Assessment Scheme framed for these years. Their cases were picked up for detailed scrutiny and- they received notices from the Income Tax Officers concerned in this regard. They have challenged the legality of these notices and the selection of their cases for detailed scrutiny. The schemes framed before the amendment of section 59(1) had limited application inasmuch as only certain class or category of assessees could take advantage of them but the schemes prepared subsequent to the amendment had a much larger scope for they were extended to all assessees provided they fulfilled certain conditions and did not incur the disqualifications laid down therein. The competence of the Central Board of Revenue to pick out cases or classes of cases for detailed scrutiny was considered by the Sind High Court in Cannon Products Limited v. Income Tax Officer (1955) 51 TAX 114. It was held that the Board had no such power. Now with the introduction of sub-section (1A) in section 59 the Legislature has expressly authorised inter-alia the Board to exercise this power. Thus the defect to which the learned Judges of the Sind High Court referred stands removed.
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It is true that neither sub-section (1) nor sub-section (1A) lays down any guideline or principle for selecting cases or classes of cases for the purpose of detailed scrutiny. On the other hand the question of prescribing qualifications (which expression for obvious reason includes disqualifications as well) has been left entirely to the Central Board of Revenue but this by itself is not sufficient to describe this to be a case of excessive delegation. The test to be applied is whether the omission of the Legislature in not prescribing the qualifications makes the legislation incomplete in the sense that prescribing the qualifications or disqualifications would have by compulsion to be treated as an act of legislature itself. We do not think so. As already noticed section 59(1) does not say that all returns filed by an assessee under section 59 should automatically be processed under the scheme of self-assessment; on the other hand, it merely states that only such returns as prescribed the qualifications laid down in the scheme should be entitled to this benefit. Now what should be the qualifications or disqualifications is essentially a matter of policy and require expert knowledge of the field of income tax which admittedly is a highly specialized one where the ingenuity of the taxpayer is constantly at work to devise means, both legitimate and illegitimate, to lessen his burden. Therefore, if in the circumstances, the Legislature has left the task of laying down the qualifications to a body which possesses expert knowledge in the field it can hardly be said to have abdicated its legislative functions in favour of that body. Another limb of the same contention is that the scheme as well as subsection (1A) of section 59 of the Ordinance enable the Central Board of Revenue to discriminate between the assessees and for that reason too they are bad in law. This argument too is devoid of merit. At present, when no writ for enforcement of fundamental right can issue, the right of equality before law cannot be enforced through the Court. Just as the schemes are not intended as traps for the taxpayer, they are also not an invitation to the taxpayer to commit fraud upon the revenue. Therefore, the schemes have of necessity to make provision to guard against these two extremes. As already noticed, the Legislature has left the task of framing and operating the schemes to the Central Board of Revenue in view of the expert knowledge it possesses. That being so, all that has to be seen is whether in selecting cases or classes of cases the Board has been discriminating between the assessees. In this regard it may at once be stated that the petitioners have not been able to point out how in picking up their cases the Board had exercised its power discriminately or unfairly. On the contrary we were informed on
1551 SELF ASSESSMENT SCHEME
Section 59
behalf of the Board without any contradiction by the petitioners that only such trades, professions and industries were chosen where according to its past experience there had been a large scale evasion of Income Tax. As regards selection of individual cases for detailed scrutiny only those were picked up in which the returns prima facie appeared to be of doubtful accuracy. The next argument on behalf of the petitioners is that the selection of their cases for purposes of detailed scrutiny was illegal inasmuch as they were not given any opportunity of being beard before the selection was made. Thus they had been deprived of the valuable right to getting their returns accepted without examination. This constituted a violation of the principle of natural justice which principle was ordinarily to be read as part of every statute and statutory scheme dealing with the rights of citizens. On the face of it, this contention appears to be very attractive. Admittedly, the schemes have been of great benefit and convenience to the taxpayer inasmuch as they relieve him of the worry of getting his affairs probed into and save him from repeated visits to the office of the Income Tax authorities with his books of accounts and other related papers, which necessarily involve wastage of time. To deprive him of the benefit of the schemes and to subject him to the ordeal which assessment proceedings ordinarily entail without giving him an opportunity of being heard would ex-facie seem to be unfair and a violation of the principle of natural justice that „no one should be condemned without being heard‟. But then there is the other side of the picture as well. We were informed on behalf of the Board that a list of returns which prima facie raise suspicion with regard to their accuracy is prepared at the level of the Commissioners of Income Tax. This list is then sent to the Regional Commissioner who scrutinizes it and reduces the number of cases which may be picked up for detailed scrutiny. The list thus reduced is once again examined by him in collaboration with the Chief of Taxes, a senior official of the Central Board of Revenue, and a further reduction in the number of cases to be picked up is made, it is then sent to the Board for approval. Consequent upon this detailed and meticulous procedure not more than 5% of the total returns are picked up for detailed scrutiny. In fact, in some of the years under consideration the percentage of cases picked up was as low as 2%. Admittedly, more than a hundred thousand returns are filed each year under the schemes. If 5% of the cases are selected for detailed scrutiny and this does not appear to be an unduly large number if the tax evasion that is ripe is taken into consideration, there will be finally upward of 5000 such cases.
1552 Section 59
Income Tax Digest.
Under Paragraph 6 of the self-assessment schemes several categories of cases have been granted immunity for detailed scrutiny. It was contended on behalf of some of the assessees that their cases were covered by this immunity. It is to be noticed that certain facts must exist before immunity can be claimed. It is not appropriate for us to determine whether those facts exist or not. It will be in the fitness of things if the petitioners who seek immunity should appear before the Income Tax Officer concerned to canvass their claim. No doubt the Income Tax Officer will hold an inquiry to find out whether the condition necessary for claiming immunity are notified in their cases or not. In case the petitioners are dissatisfied with the findings of the Income Tax Officer in this regard they will have departmental remedies available to them. We are, therefore, not prepared to comment upon the claim of the petitioners or record any finding thereon even before the Income Tax Officer concerned have had the opportunity to examine them. Cases referred to : Cannon Products Limited v. Income Tax Officer (1985) 51 TAX 114; Warts Meah v. State (PLD 1957 H.C. 157); Mehreen Zaibun Nisa v. Land Commissioner (PLD 1975 S.C. 397); Naseer Ahmad Khan v. Province of West Pakistan (PLD 1980 Lhr 684); Sohbat Khan v. State (PLD 1966 Pesh. 210); Muhammad Umar Khan v. Pakistan (PLD 1982 Pesh. 1); Saleh Muhammad v. Traffic Manager Port Trust, Karachi (PLD 1961 Kar. 349); Commissioner of Income Tax v. Fazlur Rahman (1964) 10 TAX 49 (S.C.) = (PLD 1964 S.C. 410) and Commissioner of Income Tax v. Hajveri Agencies (1984) 50 TAX 141.
1553 ASSESSMENT UNDER THE SIMPLIFIED PROCEDURE FOR ASSESSMENT
Section 59B
Section 59B Assessment under the simplified procedure for assessment
PAGE NO
ASSESSEE CHALLENGED THE LEGALITY OF NOTICE THROUGH WRIT JURISDICTION
2007. Return filed under Simplified Procedure Scheme beyond the prescribed date held rightly assessed under normal law. _ [1992] 66 TAX 226 (H.C.AJ&K)
1554
1554 Section 59B
Income Tax Digest.
Section 59B Assessment under the simplified procedure for assessment
ASSESSEE CHALLENGED THE LEGALITY OF NOTICE THROUGH WRIT JURISDICTION
Muhammad Ismail v. Income Tax Officer, Mirpur and 2 others – [1992] 66 TAX 226 (H.C.AJ&K) 2007.
Return filed under Simplified Procedure Scheme beyond the prescribed date held rightly assessed under normal law.
Therefore, the petitioner, who admittedly filed the Income Tax return after the period of limitation, could not claim, as a right, that the return filed by him should have been presumed as correct and the Income Tax Officer was not legally competent to amend the same. As said in the early part of this order, the condition laid down under the Simplified Procedure Scheme to the extent of limitation, was violated by the petitioner while filing his return for the assessment year 198889. Therefore, the Income Tax Officer, under sections 65 and 66A of the Income Tax Ordinance, 1979, was justified to assess the income of the petitioner, in whose estimation, the petitioner had intentionally suppressed his true income. The demand notice was issued in the light of this assessment order of the Income tax Officer. Therefore, no fault was committed while issuing the demand notice to the petitioner. The writ petition, in the light of the above-mentioned observations, has been filed without any legal jurisdiction.
1555 TAX ON UNDISCLOSED INCOME
Section 59D
Section 59D Tax on undisclosed income
PAGE NO
DECLARATION OF UNDISCLOSED INCOME
2008. Assessed income plus the undisclosed income constitute income chargeable for the relevant year and deduction under section 59D could not be dislodged on flimsy grounds. _ [1978] 38 TAX 117 (H.C.Kar)
1556
1556 Section 59D
Income Tax Digest.
Section 59D Tax on undisclosed income
DECLARATION OF UNDISCLOSED INCOME
Rahmat Jan Muhammad Haji Dossal & Sons v. Assistant Income Tax Officer, Mirpurkhas and 3 others – [1978] 38 TAX 117 (H.C.Kar.) 2008.
Assessed income plus the undisclosed income constitute income chargeable for the relevant year and deduction under section 59D could not be dislodged on flimsy grounds.
A plain reading of rule 3 of the Circular [Circular C.No.63(211)-ITIV/76, dated 14.7.1976] makes it absolutely clear that after an assessment was finalised the income of that year plus the undisclosed income was to constitute the income chargeable for that year. The very scheme of calling for declaration of undisclosed income in respect of any previous year or years ending before the 1st day of July, 1975 makes it plain that income tax assessment of all the previous years were not to be reopened for the purpose of declaration and the income declared was to be in addition to the income already assessed. It is part of the same logic that all pending appeals against orders of assessment which were filed by the assessees or by the Department, except on points of law, were to be withdrawn with a view to give finality to the assessments which stood finalised before the filing of declarations.
1557 PROVISIONAL ASSESSMENT
Section 60
Section 60* Provisional assessment
PAGE NO
GENERAL
2009. Protective assessment on more than one person to determine the liability of the person who had actually received _ the payment held permissible. [1984] 49 TAX 169 (H.C.Kar.)
*
Corresponding to section 23B(1) of the 1922 Act.
1558
1558 Section 60
Income Tax Digest.
Section 60* Provisional assessment
GENERAL
Commissioner of Income Tax, Karachi v. Pakistan Petroleum Ltd. – [1984] 49 TAX 169 (H.C.Kar.) 2009.
Protective assessment on more than one person to determine the liability of the person who had actually received the payment held permissible.
The protective assessment is usually made in a case where the payments are clear but the person who has received those payments denies to have received the same and in those cases the department has the choice of proceeding against both the persons about whom they have the information that either of them had received the payment and they can determine in that case the liability of the person who had actually received the payment or at least the Appellate Tribunal could finally determine that liability.
*
Corresponding to section 23B(1) of the 1922 Act.
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