(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.65 & 5(i)(c)(cc)‑‑‑Re‑opening of assessment‑‑‑Statutory approval‑‑ Principles‑‑‑ Application of S.5(1)(c)(cc), Income Tax Ordinance, 1979‑‑ Extent‑‑‑Powers and jurisdiction of D.C.I.T. and I.A.C.‑‑‑Nature‑‑ Provision of S.5(1)(c) & (cc), Income Tax Ordinance, 1979 are applicable when the proceedings are conducted under the said provisions only and not otherwise‑‑‑Re‑opening of assessment without mandatory previous approval of I. A. C. would be illegal and without jurisdiction.

Under para. (c) of subsection (1) of section 5 of the Income Tax Ordinance, 1979 the Commissioner may, with prior approval of Central Board of Revenue or the Regional Commissioner of Income‑tax, as the case may be, direct that the power conferred on the D.C.I.T. and I.A.C. by or under the Ordinance shall, in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by the Inspecting Additional Commissioner and Commissioner respectively and for the purpose of any proceedings in respect of such cases or persons, references in this Ordinance or in any rules made thereunder to D.C.I.T. and I.A.C. shall be deemed to be the references to I.A.C. and C.I.T. respectively. Likewise under para. (cc) of subsection (1) of section 5, if the C.I.T. directs that all or any of the powers conferred on the D.C.I.T, and the I.A.C. shall in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by Income Tax Panel and the Commissioner respectively and for the purposes of any proceedings in respect of such cases or persons, reference in this Ordinance or in any rules made thereunder to D.C.I.T. and I.A.C., shall be deemed to be references to the Income Tax Panel andCommissioner respectively. Provision of law is very clear and admits of no ambiguity. The powers and jurisdiction of D.C.I.T. and I.A.C. of Income tax are clearly specified in the various provisions of the Income Tax Ordinance. The provisions contained in section 5(1)(c) and (cc) are in the nature of special provision and shall be applicable and operative so long the powers conferred on D.C.I.T. and I.A.C. are exercised by the I.A.C. and C.I.T. respectively under clause (c) or by Income Tax Panel and Commissioner under clause (cc) respectively. The special provisions contained in clauses (c) and (cc) of subsection (1) of section 5 of the Income Tax Ordinance, 1979 are applicable so long there is deviation from the normal and general provisions of law contained in the Income Tax Ordinance, 1979. As soon as the deviation from the normal law comes to end, the operation of special law shall be ceased. The reason being that the normal powers and jurisdiction conferred under the law on D.C.I.T. and I.A.C. or Commissioner become inoperative when there is deviation from the general law and the recourse is made to the special law, but as soon as the deviation from general law ends, provision contained in general law becomes operative with the result that the original powers conferred on the Income‑tax Authorities under the Income Tax Ordinance are revived automatically. In the definition of Deputy Commissioner, under clause (17)(a) of section 2 of the Income Tax Ordinance a Special Officer is also included and if an I.A.C. is appointed as Special Officer to act as Deputy Commissioner, he shall obtain statutory approval from I.A.C. and not from Commissioner.

The provision contained in clauses (c) and (cc) of subsection (1) of section 5 of the Income Tax Ordinance shall be applicable when the proceedings are conducted under those provisions only and not otherwise. In the present case the original assessment was completed by the Income Tax Panel and so long the panel acted as D.C.I.T., the statutory approvals were to be taken from C.I.T. instead of I.A.C. However, the assessment was reopened by issuance of notice under section 65, D.C.I.T., and the assessment order was completed by the D.C.I.T., and, therefore, he was exercising jurisdiction under the normal and general provision contained in .the Income Tax Ordinance, 1979. In these circumstances the normal provision for obtaining of statutory approval shall be applicable and as' such the Assessing Officer ought to have obtained previous approval from I.A.C. and not from the Commissioner as done in the present case. The concerned C.I.T., while according approval, did not apply his mind to the facts and law. As the previous approval was being sought by D.C.I.T. and not by I.A.C. or Chairman, Panel, the concerned C.I.T. ought to have considered if the approval was to be accorded by him or by the I.A.C. The Commissioners of Income‑tax being senior officers in the hierarchy of department are supposed to provide guidelines to the subordinate officials but it is observed that the Commissioners of Income‑tax do not apply their mind to the facts and law seriously and act in a mechanical manner while according statutory approval. Such lack of interest on the part of C.I.T., some times, causes heavy loss to the revenue, because lapse on their part causes jurisdictional disabilities which fall in the category illegally and lack of jurisdiction which defect is not curable. The Commissioners of Income Tax as well as Inspecting Additional Commissioners while according statutory approval have to realise that the Legislature has reposed confidence in them with the expectation they being senior officers, having more experience and superior knowledge of law, shall provide proper guidelines to the subordinate officers and shall protect the interest of assessees, as well as revenue, keeping in view the established principles of law and norms of justice.

The reopening of assessment without mandatory previous approval of I.A.C. was illegal and without jurisdiction.

It is an established principle of law that the things should be done as they are required to be done in law or not at all, and that a power conferred on a particular State functionary is to be exercised by him only and not by any other officer or State functionary howsoeverhigh he may be. The power, authority and jurisdiction vested in a particular State functionary and required to be exercised by him under the statute, is to be exercised by him only with due application of mind and if it is not done, it would always be deemed to be an illegality and not mere irregularity and as such would not be held to be curable. The re‑opening of assessment under section 65 and completion of assessment order in pursuance thereof was offered to be quashed.

1994 PTD (Trib.) 1051 and Letter of Regional Commissioner of Income‑tax Central Region, dated 14‑7‑1988 ref.

(b) Income‑tax‑‑‑

‑‑‑‑Interest‑‑‑Income from interest or securities and debentures has to be taxed on accrual basis.

1994 PTD (Trib.) 1051 and (1945) 13 ITR 224 rel.

(1952) 22 ITR 13 and 1962 Tax (Supp.) 121 distinguished.

(c) Income‑tax‑‑‑‑

‑‑‑‑Mercantile system of accounting‑‑‑Definition.

Under mercantile system of accountancy the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due 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.

(1945) 13 ITR 224; (1953) 24 ITR 524 and (1971) 82 ITR 835 rel.

1994 PTD (Trib.) 1051 fol.

(d) Income‑tax‑‑‑

‑‑‑‑Accrual of income‑‑‑Concept.

Income accrues when it 'falls due' i.e. to say, when it becomes legally recoverable whether it is actually received or not. Accrued income' is that income which the assessee has a legal right to receive.

(1945) 13 ITR 224; (1953) 24 ITR 524 and (1971) 82 ITR 835 ref.

1994 PTD (Trib.) 1051 fol.

(e) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.164‑‑‑Constitution of Pakistan (1973), Art. 1 ‑‑‑ Unilateral relief ‑‑‑ Azad Jammu & Kashmir being a country outside Pakistan, provision of 5.164, Income Tax Ordinance, 1979 is applicable.

The Azad Kashmir territory which does not constitute a part of the Republic of Pakistan as defined in the Constitution of Pakistan is a foreign territory. Nevertheless for all practical purposes, it has all the Constitutional features of a Government. It has got its own Constitution, its own High Court and Supreme Court and, therefore, it is a Government for all practical purposes; and it matters little as to whether this Government is recognized by the Government of Pakistan or not.

The Azad Jammu and Kashmir is a country outside Pakistan, and thus, section 164 of the Income Tax Ordinance, 1979 is applicable.

The Azad Jammu and Kashmir is a country outside Pakistan and, therefore, section 164 of the Income Tax Ordinance, 1979 has rightly been invoked by the Assessing Officer to which no exception can be taken.

Noor Hussain v. Estate PLD 1966 SC 88 and CIT, AJ&K v. M/s. Ali Khan & Company PLD 1985 SC (AJ&K) 62 fol.

(f) Income‑tax‑‑‑

‑‑‑‑Bad debts ‑‑‑Addition‑‑‑Assessee, a Bank‑‑‑Assessing Officer had allowed the bad debts as certified by the State Bank of Pakistan and disallowed the remaining claim‑‑‑Addition of disallowed bad debts was not interfered with by the Tribunal in circumstances.

(g) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.17 & 22‑‑‑Assessee, a Bank‑‑‑Interest income on securities being not business income could not be taxed under S.22, Income Tax Ordinance, 1979 but was assessable under S.17 of the Ordinance.

(h) Income‑tax‑‑‑

‑‑‑‑Interest‑‑‑Assessee, a Bank‑‑‑Levy of tax was justified on the interest in the suspense account in respect of principal amount which had not become irrecoverable but was extremely doubtful of being recovered.

(1986) 158 ITR 102 fol.

(i) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.23(1)(x)‑‑‑Deduction‑‑‑Bad debt‑‑‑When a bad debt is matured and evidence satisfying the requirement of S.23(1)(x) of the Income Tax Ordinance, 1979 is available in the subsequent years, such bad debt can be allowed.

(j) Income‑tax‑‑‑

‑‑‑‑Revenue income‑‑‑Profit on sale of securities by Bank is revenue income.

1995 PTD (Trib.) 807 fol.

(k) Income‑tax‑‑‑

‑‑‑‑Salary‑‑‑Overtime, dearness allowance and leave allowance are part of salary.

(1) Income‑tax‑‑‑

‑‑‑‑Addition‑‑‑No specific reason was assigned disallowing expenses and making of addition‑‑‑Such addition was ordered to be deleted.

Siraj‑ul‑Haque and Tayyab G. Adeeb, F.C.A. for Appellant (in I.T.As. Nos. 443/KB, 444/KB of 1995‑96, 1226/KB of 1994‑95, 1560/KB of 1996‑97, 445/KB, 1286/KB, 446/KB of 1995‑96, 1561/KB to 1563/KB of 1996‑97 and 1040/KB of 1997‑98).

Muhammad Majid, D.R. for Respondent (in I.T.As. Nos. 443/KB, 444/KB of 1995‑96, 1226/KB of 1994‑95, 1560/KB of 1996‑97, 445/KB, 1286/KB, 446/KB of 1995‑96, 1561/KB to 1563/KB of 1996‑97 and 1040/KB of 199.7‑98).

Muhammad Majid, D.R. for Appellant (in I.T.As. Nos.3325/KB of 1993‑94, 1334/KB of 1994‑95, 1299/KB and 1300/KB of 1997‑98).

Siraj‑ul‑Haque and Tayyab G. Adeeb, F.C.A. for Respondent (in I.T.As. Nos. 3325/KB of 1993‑94, 1334/KB of 1994‑95, 1299/KB and 1300/KB of 1997‑98).

Date of hearing: 10th February, 1998.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).‑‑‑The above cross appeals have been preferred at the instance of assessee and department.

2. Heard Mr. Sirajul Haque, Advocate and Mr. Tayyab G. Adeeb, F.C.A., learned representatives for the assessee and Mr. Muhammad Majid, learned representative for the department.

3. We will decide appeal for each assessment year separately.

Assessment Year 1988‑89:

4. The first objection raised on behalf of appellant/assessee in the assessment year 1988‑89 in I.T.A. No.443/KB of 1995‑96 is to the reopening of assessment and framing of order under section 65/63. Mr. Sirajul Haque, learned counsel for the appellant has candidly conceded to the effect that in view of Tribunal's judgment reported as (1994) 69 Tax 192 (Trib.) holding that interest on securities is to be charged on accrual basis, there was definate information in possession of the Assessing Officer for reopening of assessment. He has, however, submitted that the second condition of prior approval from I.A.C. for the reopening of assessment has not been fulfilled. He has submitted that according to assessment order the assessing officer obtained approval for reopening of assessment from Commissioner of Income‑tax instead of I.A.C. as required under the law. In support of his contention he has placed reliance on the provision contained in section 65 subsection (2) which provided that, "no proceedings under subsection (1) shall be initiated unless definite information has come in his possession and he has obtained previous approval of the I.A.C. in writing to do so". Mr. Sirajul Haque has further submitted that the original assessment order was made by the Income‑tax Panel headed by an I.A.C. to which reference has been made by the Assessing Officer. He has submitted that notwithstanding, the fact that the original assessment order was made by I.A.C. as Chairman, Income‑tax Penal, a notice for reopening of assessment under section 65 was issued by the D.C.I.T. and he had the jurisdiction and seisin over the matter when the re‑assessment proceedings were initiated and completed, therefore, the previous approval required under subsection (2) of section 65 ought to have obtained from I.A.C. of Income Tax and not from the C.I.T. Mr. Sirajul Haque has, therefore, submitted that the notice under section 65 was issued without compliance of mandatory provisions of law and as such the notice itself, assumption of jurisdiction in persuance thereof and the entire proceedings culminating in the making of assessment order are liable to be quashed.

5. On the other hand the learned D.R. has submitted that the original assessment was made by the Income‑tax Penal headed by I.A.C., and, therefore, by virtue of the provision contained in section 5(1)(c) and (cc) the previous approval for reopening of assessing has been rightly obtained from C. I. T.

6. We have given anxious consideration to the contention raised at the Bar and have carefully considered the relevant provisions of law which read as follows:‑‑

"(c)the Inspecting Additional Commissioners and Deputy Commissioner shall perform their functions in respect of such persons or classes of person or such areas as the Commissioners, to whom they are subordinate, may direct; and (the Commissioner may, with the prior approval of the Central Board of Revenue or, if the Central Board of Revenue so‑directs, of the Regional Commissioner), by general or special order in writing direct that the powers conferred on the Deputy Commissioner and the Inspecting Additional Commissioner by or under this Ordinance shall, in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by the Inspecting Additional Commissioner and the Commissioner, respectively, and, for the purposes of any proceedings in respect of such case or persons references in this Ordinance or in any rules made thereunder to 'Deputy Commissioner' and 'Inspecting Additional Commissioner' shall be deemed to be references to 'Inspecting Additional Commissioner' and 'Commissioner' respectively (**)

(cc) Notwithstanding anything contained in clause (c) the Commissioner may by general or special order in writing, direct that all or any of the powers conferred on the Deputy Commissioner and the Inspecting Additional Commissioner shall, in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by the Income Tax Panel and the Commissioner, respectively, and, for the purposes of any proceedings in respect of such cases or persons, references in this Ordinance or in any rules made thereunder to Deputy Commissioner' and 'Inspecting Additional Commissioner' shall be deemed to be reference to 'Income Tax Panel' and

'Commissioner' respectively:

Provided that, any function performed by the Deputy Commissioners as members of the Income Tax Panel, on the directions of the said Inspecting Additional Commissioner, shall be deemed to have been performed in exercise of the powers conferred on the Income‑tax Panel.

Provided further that an order made by the Income‑tax Panel under any provision of this Ordinance shall be made only by the said Inspecting Additional Commissioner;

Provided further that, if any one member of the Income Tax Panel, other than the Chairman, is absent from any sitting of the Income Tax Panel, the proceedings of the Panel may continue, and no Act, proceedings or order of the Panel shall be invalid or be called in question merely on the ground of such absence."

7. A perusal of above provision of law shows that under para. (c) of subsection (1) of section 5 of the Income Tax Ordinance, the Commissioner may, with the prior approval of Central Board of Revenue or the Regional Commissioner of Income‑tax, as the case may be, direct that the power conferred on the D.C.I.T. and I.A.C. by or under the Ordinance shall, in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by the Inspecting Additional Commissioner and Commissioner respectively and for the purpose of any proceedings in respect of such cases or persons, references in this Ordinance or in any rules made thereunder to D.C.I.T. and I.A.C. shall be deemed to be the references to I.A.C. and C.I.T. respectively. Likewise under para. (cc) of subsection (1) of section 5, if the C.I.T. directs that all or any of the powers conferred on the D.C.I.T. and the I.A.C. shall in respect of all or any proceedings relating to specified cases or classes of cases or specified persons or classes of persons, be exercised by Income Tax Panel and the Commissioner respectively and for the purposes of any proceedings in respect of such cases or persons, reference in this Ordinance or in any rules made thereunder to D.C.I.T. and I.A.C., shall be deemed to be references to the Income Tax Panel and Commissioner respectively. We are of the considered opinion that the provision of law is very clear and admits of no ambiguity. The powers and jurisdiction of D.C.I.T. and I.A.C. of income‑tax are clearly specified in the various provisions of the Income Tax Ordinance. The provisions contained in section 5(1)(c) and (cc) are in the nature of special provision and shall be applicable and operative so long the powers conferred on D.C.I.T. and I.A.C. are exercised by the I.A.C. and C.I.T. respectively under clause (c) or by Income Tax Panel and Commissioner under clause (cc) respectively. The special provisions contained in clauses (c) and (cc) of subsection (1) of section 5 of the Income Tax Ordinance, 1979 are applicable so long there is deviation from the normal and general provisions of law contained in the Income Tax Ordinance, 1979. As soon as the deviation from the normal law comes to end, the operation of special law shall be ceased. The reason being that the normal powers and jurisdiction conferred under the law on D.C.I.T. and I.A.C. or. Commissioner become inoperative when there is deviation from the general law and the recourse is made to the special law, but as soon as the deviation from general law ends, provision contained in general law becomes operative with the result that the original powers conferred on the Income‑tax Authorities under the Income Tax Ordinance are revived automatically. We are fortified in our views from the fact that in the definition of Deputy Commissioner, under clause (17)(a) of section 2 of the Income Tax Ordinance a Special Officer is also included and if an I.A.C. is appointed as Special Officer to act as Deputy Commissioner, he shall obtain statutory approval from I.A.C. and not from Commissioner. This view has been taken by the department also which is contained in the letter of Regional Commissioner of Income‑tax, Central Region dated 14‑7‑1988 which read, as follows:‑‑‑

"A number of Assistant Commissioners have been appointed by the Central Board of Revenue as 'Special Officers' for disposal of assessment work. A question has been raised about the I.A.C. in respect of these Special Officers who will be authorised to grant statutory approvals.

Legally, a Special Officer is included in the definition of the Income‑tax Officer under section 2(25) of the Income Tax Ordinance, 1979. There is no qualification about the status of the person appointed as Special Officer. Therefore, whatever the status of the person, he will be subordinate to an I.A.C. The Commissioners should, therefore, assign cases to the Special Officer and place him under the supervision of an I.A.C. who will be granting all the statutory approvals required in respect of those cases.

The position of an I.A.C. acting as Income‑tax Officer under the provisions of section 5(1)(c) is totally different. In their case the Ordinance specifically requires that the Commissioner shall act as I.A.C. There is no such provision in the case of the Special Officer. "

8. The above view of Regional Commissioner of Income Tax, Central Region has not been disapproved or overruled by the C.B.R. so far, which means that the C.B.R. has also accepted the view that the provisions contained in clauses (c) and (cc) of subsection (1) of section 5 of the Income Tax Ordinance shall be applicable when the proceedings are conducted under those provisions only and not otherwise. Now coming to the facts of the present case we find that the original assessment was completed by the Income Tax Panel and so long the Panel acted as D.C.I.T., The statutory approvals were to be taken from CIT instead of I.A.C. However, the assessment was reopened by issuance of notice under section 65 D.C.I.T., and the assessment order was completed by the D.C.I.T., Circle C‑4, Companies‑I, Karachi and, therefore, he was exercising jurisdiction under the normal and general provision contained in the Income Tax Ordinance, 1979. In these circumstances the normal provisions for obtaining of statutory approval shall be applicable and as such the assessing officer ought to have obtained previous approval from I.A.C. and not from the Commissioner as done in the present case. It is unfortunate that the concern CIT while according approval did not apply his mind to the facts and law. As the previous approval was being sought by D.C.I.T and not by I.A.C. or Chairman Panel, the concerned CIT ought to have considered if the approval was to be accorded by him or by the I.A.C. The Commissioners of Income -tax being senior officers in the hierarchy of department are supposed to provide guidelines to the subordinate officials but we have observed that the Commissioners of Income‑tax do not apply their mind to the facts and law seriously and act in a mechanical manner while according statutory approval. Such lack of interest on the part of CIT some times cause heavy loss to the revenue, because lapse on their part causes jurisdictional disabilities which fall in the category illegally and lack of jurisdiction which defect is not curable. We expect that the Commissioners of Income Tax as well as Inspecting Additional Commissioners while according Statutory approval will realise that the Legislature has reposed confidence in them with the expectation they being senior officers having more experience and superior knowledge of law, shall provide proper guidelines to the Sub‑ordinate officers and shall protect the interest of assessees, as well as the revenue, keeping in view the established principles of law and norms of justice. For the foregoing reasons we are persuaded to agree with the submission of Mr. Sirajul Haque that the reopening of assessment without mandatory previous approval of I.A.C. was illegal and without jurisdiction.

9. Before parting with our finding on this issue we would like to observe that it is an established principle of law that the things should be done as they are required to be done in law or not at all, and that a power conferred on a particular State function is to be exercised by him only and not by any other officer or state functionary howsoeverhigh he may be. The power, authority and jurisdiction vested in a particular State functionary and required to be exercised by him under the statute, is to be exercised by him only with due application of mind and if it is not done, it would always be deemed in to be illegality and not mere irregularity and as such would not be held to be curable. Consequent to above findings the reopening of assessment under section 65 and completion of assessment order in pursuance thereof is hereby quashed and, therefore, no finding is required on merits. The appeal for the assessment year 1988‑89 at the instance of assessee is allowed accordingly. .

Assessment Year 1989‑90

10. The facts and circumstances in the assessment year 1989‑90 arc similar to the facts and circumstances in assessment year 1988‑89 and therefore, the reopening of assessment and the consequent assessment order in the assessment year 1989‑90 also stands quashed.

11. The department has also preferred appeal being I.T.A. No.3325/KB of 1993‑94 in respect of assessment year 1989‑90 which arises out of order under section 62/132. The sole objection raised on behalf of department is that the learned CIT(A) was not justified in deleting the disallowance of provision for bad‑debts amounting to Rs.1,19,60,546. A perusal of record shows that the assessing officer while making order under section 62/132 disallowed bad‑debts at Rs.1,19,60,546 for the reason that it was provision for diminution of investment. The assessee assailed the treatment before the learned CIT(A) contending that the assessing officer failed to appreciate the proper facts. It was submitted that the amount in question represented bad debts incurred by the appellant on account of loans and advances given on the security of debentures and the interest accrued thereon. It was further submitted that the loans and financial accommodation allowed against debentures cannot be treated as investment in shares and securities as debenture were not investible commercial security. It was further submitted that the claim was admissible in the light of CBR Circular NO.C.1(48)IT‑1/82, dated 8‑8‑1983 and the order of Tribunal in I.T.A. Nos.4506/LB of 1985‑86 and 5179/KB of 1986‑87 reported in Tax Observer Vol. 8 No. 12 page 31. The learned CIT(A) without examining the facts and discussing the CBR Circular as well as the judgments of Tribunal directed to allow the provisions for bad debts. The learned D.R. has submitted that firstly, the facts as alleged required detailed examination and secondly, the CBR circular dated 8‑8‑1983 contains directions for allowing bad debts the banks certified? by the State Bank of Pakistan but in support of the claim disallowed, No certificate from the State Bank of Pakistan was produced. With the consent of learned representatives for the parties the issue relating to the disallowance of bad debts at Rs.1,19,60,546 is hereby set aside with the direction that it may be considered afresh. The assessee is directed to furnish entire facts supported with necessary evidence for the examination of assessing officer and to produce the State Bank of Pakistan certificate failing which the amount under consideration shall not be allowed as bad debts. If the necessary facts are placed before the assessing officer supported with the evidence or the certificate from State Bank of Pakistan is produced the issue may be decided on merits. The appeal at the instance of department is allowed as above.

Assessment Year 1991‑92

12. The first appeal at the instance of assessee relating to the assessment year 1991‑92 is I.T.A. No.1226/KB of 1994‑95 which arises out of order under section 62.

13. The sole objection raised on behalf of appellant/assessee is that the learned CIT(A) was not justified in upholding the order of DCIT subjecting to tax the interest income on accrual basis at Rs.1,10,61,55,422 against income of Rs.41,08,49,649 actually received during the year and shown in the computation of income submitting alongwith the return of income in terms of Circular No. 15 of 1954. Mr. Sirajui Haque, learned counsel for the appellant has submitted that the point in issue already stands decided against the appellant by a Division Bench of this Tribunal vide judgment reported as 1994 PTD (Trib.) 1051 but according to him the judgment requires reconsideration. In support of his contention he had placed reliance on the judgment of Bombay High Court reported as (1952) 22‑ITR‑13 and the Lahore High Court reported as (1962) Tax (Supp.) 121. We are not persuaded to agree with the submission of Mr. Sirajul Haque because the facts in the judgment relied upon were different and distinguishable from the facts of the present case. In the two cases on which the reliance was placed by Mr. Sirajul Haque the income has not accrued as yet and, therefore, it was held that the same cannot be treated as income liable to the levy of Income‑tax. We asked learned representatives for the assessee to produce specimen of the securities, the accrued interest whereon, had been treated as income on accrual basis, in order to ascertain whether the interest had become payable or not. One of the security being Federal Investment Bond reads as follows:

"I hereby certify that Fidelity Investment Bank Limited is/are the Registered Proprietor(s) of Rupees Fifty Million only. Government Stock of the ten years Federal Investment Bond 1993 which bears return at 15 % per cent. per annum, payable half‑yearly from the 14‑2‑1993.

Governor, State Bank of

Pakistan.

14. The other security reads as follow:

15. The above securities clearly state that the interest is payable half- yearly from the dates shown therein and as such we are of the considered opinion that the learned Members of Division Bench sitting at Lahore rightly held that the income from interest on securities and debentures should be taxed on accrual basis. The ratio of above judgment is fully applicable to the facts of the present case and requires no re‑consideration. The appellant is employing mercantile accountancy system which has been defined in very clear vivid terms by Sir Iqbal Ahmed, CJ in the case, CIT v. Shrimati Singari Bai reported as (1945)‑13‑ITR 224 (Allahabad High Court) as follows:

"Under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due 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."

16. The Supreme Court of India has explained the system in two other cases, (1)(1953)‑24‑ITR‑524 and (2) (1971) 82 ITR 835 to the effect, that income accrues when it 'falls due' i.e. to say, when it becomes legally receivable whether it is actually received or not, Accrued income' is that income which the assessee has a legal right to receive.

17. For the foregoing reasons it is held that the learned two officers below have rightly decided the issue which already stands decided against the assessee by a Division Bench of this Tribunal reported as (1994) 69 tax 192 (Trib.) which is respectfully followed by us. The objection raised on behalf of appellant is, therefore, repelled and the appeal stands dismissed.

18. The second appeal at the instance of assessee for the assessment year 1991‑92 is I.T.A. No.1560/KB of 1996‑97 and arises out of order under section 156. The relevant facts given arise to this appeal are that after completion of assessment the assessing officer found that a mistake apparent on record was committed whereby double Income‑tax relief was allowed to the assessee, in the form of direct tax deduction from the computed gross tax liability for the year, instead of on the basis of application of the lower of the average rate of tax as applicable in Pakistan and Azad Kashmir. The assessing officer, therefore, issued notice under section 156 calling upon to show as to why the mistake may not be rectified. It was contended on behalf of assessee that Azad Jammu and Kashamir was not independent country hence section 164 of the Income‑tax Ordinance, 1979 was not applicable. For the sake of convenience section 164 is reproduced below:

"164. Unilateral relief: If any person who is resident is Pakistan in any year proves to the satisfaction of the Deputy Commissioner that, in respect of any income which has accrued or arisen to him during that year outside Pakistan, he has paid income‑tax, by deduction or otherwise in any country (including a country with which there is an agreement under section 163 for the avoidance of double taxation), the Deputy Commissioner may, subject to such rules as may be made in this behalf, deduct from the tax payable by him under this Ordinance a sum equal to the tax calculated on such doubly‑taxed income at the average rate of tax of Pakistan or the average rate of tax of the said country, whichever is the lower."

19. The assessing officer did not accept the plea that Azad Jammu and Kashmir is not a country outside Pakistan and further observed that the assessee was itself claiming and getting credit of the tax paid in Azad Kashmir under section 164 and now he was trying to wriggle out of section 164, which tantamount to blowing hot and cold in the same breath.

20. The assessing officer thus held that the double income‑tax relief was wrongly allowed to the assessee as direct tax deduction instead on the basis of the lower of the two average rates as applicable in Pakistan and in other countries (including Azad Kashmir, and thus, rectified the mistake. The assessee assailed above finding for the reason that the Azad Jammu and Kashmir is not an independent country hence section 164 is not applicable. The learned CIT(A) did not accept the contention and upheld the view taken by the assessee. The assessee/appellant still feeling dissatisfied has preferred this second appeal. Mr. Sirajul Haque, learned counsel for the appellant has submitted that Azad Jammu and Kashmir is not an independent state and, therefore, it is not a country outside Pakistan. We are not persuaded to agree with the submission of Mr. Sirajul Haque. In fact the point in issue already stands decided by the Honourable Supreme Court of Pakistan in the case of Noor Hussain v. State reported as PLD 1965 SC 88. The Bench of Honourable Supreme Court of Pakistan comprise the great Judge like A.R. Cornelius, C.J., S.A. Rehman, Fazle‑Akbar, B.Z. Kaikaus and Hamoodur Rehman, JJ. A plea was taken before the Honourable Supreme Court of Pakistan that the State of Jammu and Kashmir is not a foreign territory. The objection was ultimately not pressed. The Honourable Supreme Court of Pakistan observed as follows:

"Learned counsel has not pressed the contention that the State of Jammu and Kashmir is not a foreign territory. This was a wholly misconceived argument. As was pointed out by the learned Sessions Judge, any territory which does not constitute part of the Republic of Pakistan, and as defined in the Constitution of 1962, is a foreign territory. "

21. At the time of above decision the 1962 Constitution was in force in Pakistan. In the 1973 Constitution of the Islamic Republic of Pakistan the Republic and its territories" are given in Article 1 of the Constitution which reads as follows:

1. The Republic and its territories. ‑‑‑(1) Pakistan shall be a Federal Republic to be known as the Islamic Republic of Pakistan hereinafter referred to as Pakistan. 0

(2)The territories of Pakistan shall comprise‑‑‑

(a)the Provinces of Baluschistan, the North‑West Frontier, the Punjab and Sindh;

(b)the Islamabad Capital Territory, hereinafter referred to as the Federal Capital;

(c)the Federally Administered Tribal Areas;

(d)such States and territories as are or may be included in Pakistan,whether by accession or otherwise.

(3)Majlis‑e‑Shoora (Parliament) may by law admit into the Federation new States or areas on such terms and condition as it thinks fit. "

22. The above Article show's that Azad Jammu and Kashmir is not included in the territories comprising in Pakistan and, therefore, the learned two officers below have rightly held that the Azad Jammu and Kashmir is a country outside Pakistan and thus section 164 of the Income Tax Ordinance, 1979 is applicable. The point in issue already stands decided against the assessee by Supreme Court of Azad Jammu and Kashmir also in the case of CIT, AM v. M/s. Ali Khan and Company reported as PLD 1985 Supreme Court (AJ & K) 62. In the said judgment sections 49‑AA and 49‑D of the Income‑tax Act. 1922 were under consideration. Section 49‑AA of the Repealed Income‑tax Act, 1922 was analogous to section 163 of the Income Tax Ordinance, 1979 which deals with the avoidance of double taxation of prevention of fiscal avasion, while section 49‑D was equivalent to section 164 of the Income Tax Ordinance, 1979 which is under consideration to the present appeal. It was held by the Supreme Court of Azad Jammu and Kashmir as follows:

"It is correct as held by Justice Hamoodur Rehman, J. (as he than was) in Noor Hussain v. The State PLD 1966 SC 88, that the Azad Kashmir territory which does not constitute a part of the Republic of Pakistan as defined in the Constitution of Pakistan is a foreign territory. Nevertheless for all particular purposes, it has all the Constitutional features of a Government. It has got its own Constitution, its own High Court and Supreme Court and, therefore, it is a Government for all practical purposes; and it matters little as to whether this Government is recognized by the Government of Pakistan or not. Besides both the agreements referred to above were made by the representatives of the Government of Pakistan and the Government of Azad Kashmir. They specifically enters so. Therefore, both the Governments or their representatives cannot wriggle out the agreements to avoid them. The principle of estoppel operates with full force against them."

23. Mr. Sirajul Haque contended before us that notwithstanding the fact that the Azad Jammu and Kashmir has its own Constitution, Legislative Assembly, High Court and Supreme Court and its defined territory as well as its own Election Commission and all the attributes of sovereignty are available but there are certain arrangements under which the AJ&K is controlled by the Government of Pakistan, therefore, Azad Jammu and Kashmir should not be treated as foreign country though it tray be foreign territory. This point was also taken care of in the above judgment and it was held as follows:

"It is significant that certain subjects under the provisions of section 31 of the Azad Jammu and Kashmir Constitution Act, 1974, are exclusively dealt with by the Azad Jammu and Kashmir Council under the Chairmanship of the President of Pakistan who holds this Constitutional post by virtue of his office. The relevant part of this section reads:

(2)Subject to subsection (3):

(a)the Council shall have exclusive power to make laws with respect to any matter in the Council Legislative list set out in the Third Schedule, hereinafter referred to as the Council legislative list; and

(b)the Assembly shall and the Council shall not have power to make laws with respect to any matter not enumerated in the Council Legislative list.

It is, thus, manifest that for compelling reasons both the Governments in their action even recognize the status of each other for smooth functioning of the administration till the fate of Azad Jammu and Kashmir State is decided on the basis of UNCIF Resolution."

24. For the foregoing reasons it is held that the Azad Jammu and Kashmir is a country out side Pakistan and, therefore, section 164 of the Income Tax Ordinance, 1979 has rightly been invoked by the assessing officer to which no exception can be taken. The appeal at the instance of assessee stands dismissed accordingly.

25. The third appeal for the assessment year 1991‑92 is I.T.A No. 1334/KB of 1994‑95 and has been preferred at the instance of department. The sole objection raised on behalf of department is that the learned CIT(A) was not justified in deleting the disallowance on proportionate interest expenses amounting to Rs.65,170. A perusal of the first appellate order shows that the issue already stands decided against the department in the case of present assessee in I.T.As. Nos.3012 to 3014/KB 1987‑88, I.T.A. No.3485/KB of 1987‑88, I.T.A. No.1759/HQ of 1989‑90 and I.T.A. No.308/HQ of 1990‑91. Since the issue already stands decided against the department and this admitted by learned representatives for the parties that the facts and circumstances are similarly, therefore, the appeal at the instance of department stands dismissed.

Assessment Year 1992‑93

26. The first appeal in the assessment year 1992‑93 at the instance of assessee is I.T.A. No.445/KB of 1995‑96 and arises out of order under section 62. The first objection is that the learned CIT(A) was not justified in upholding the order of learned DCIT subjecting to tax interest on securities on accrual basis. The point in issue already stands decided against the assessee in the appeal pertaining to the assessment year 1991‑92 and consequently the objection is overruled and the findings of learned two officers below are hereby maintained. The second objection raised on behalf of assessee is to the disallowing of bad debts at Rs.36,86,556. A perusal of the assessment order shows that the assessing officer allowed the bad debts as certified by the State Bank of Pakistan and disallowed the remaining claim. The learned CIT(A) maintained the treatment. The learned counsel for the appellant has not advanced any reason warranting interference on our part and consequently the addition is hereby uphold. The appeal at the instance of assessee stands dismissed.

27. The second appeal for the assessment year 1992‑93 at the instance of assessee is I.T.A. No. 1286/KB of 1995‑96 and arises out of order under section 66‑A. The learned counsel for the appellant has not pressed the appeal which stands dismissed accordingly.

28. The third appeal for the assessment year 1992‑93 is I.T.A. No. 1299/KB of 1997‑98 at the instance of department and arises out of order under section 62/138. The objection raised on behalf of the department is as follows: ‑‑

"That the learned Commissioner of Income‑tax (Appeal) has erred in directing to allow the relief of Rs.2,94,74, 675 because DITR was allowed according to section 164 of the Income Tax Ordinance, 1979 as well as CIT(A)'s decision vide Appeal Order No.293 294/A‑VI dated 29‑10‑1996." '

29. The issue under consideration already stands decided against the assessee while deciding appeal for the assessment year 1991‑92 wherein the order of learned CIT(A) dated 29‑10‑1996 in I.T.A. No.293‑294/A‑VI has been maintained. The direction of learned CIT(A) to the contrary is hereby vacated and the treatment given by the assessing officer is hereby restored. The appeal at the instance of department is allowed accordingly.

Assessment Year 1993‑94

30 The first appeal in the assessment year 1993‑94 at the instance of assessee is I.T.A. No.446/KB of 1995‑96 and arises out of order under section 62. The first objection raised on behalf of the assessee is that the learned CIT(A) was not justified in upholding that order of the learned CIT(A) subjecting to tax the interest on securities on accrual basis. The issue already stands decided against the assessee and, therefore, the findings of learned two officers below are hereby maintained.

31. The second objection on behalf of assessee is to the direction of learned CIT(A) for treating the interest on securities as business income assessable under section 22 of the Income Tax Ordinance, 1979 instead of treating the interest on securities as separate block of income under section 17 of the Income Tax Ordinance, 1979. The learned D.R. has conceded that the interest on securities is chargeable under section 17 of the Income Tax Ordinance, 1979. The assessing officer is, therefore, directed to treat the interest on securities as separate block of income under section 17. The appeal stands disposed of as above.

32. The second appeal for the assessment year 1993‑94 at the instance of the assessee is I.T.A. No. 156/KB of 1996‑97 and arises out of order under section 156. The only issue is in respect of status of Azad Jammu and Kashmir with reference to section 164 of the Income Tax Ordinance, 1979. The issue already stands decided against the assessee and consequently the appeal stands dismissed.

Assessment Year 1994‑95

33. In the assessment year 1994‑95 there is one appeal only at the instance of assessee being LT.A: No. 156/KB of 1996‑97. The appeals arises out of order under section 62.

34. The first objection raised on behalf of assessee is to the charging of interest on securities on accrual basis. The point in issue already stands decided against the assessee. The findings of learned two officers below on this issue are, therefore, maintained. The second objection is to the treating of income from interest on securities as business income instead of treating as separate block of income under section 17 of the Income Tax Ordinance, 1979. The issue already stands decided in favour of assessee and consequently the assessing officer is directed to treat the income from interest on securities as separate block of income under section 17 of the Income Tax Ordinance, 1979.

35. The third objection is to the setting aside of addition of Rs.11,80,63,000 being penal interest paid to the State Bank of Pakistan instead of deleting the same. Mr. Sirajul Haq has submitted that the Honourable High Court has already decided the issue in favour of assessee and consequently the learned CIT(A) ought to have deleted the addition. We are persuaded to agree with the submission of Mr. Sirajul Haque. The point in issue already stands decided by the Honourable Sindh High Court vide judgment reported as 1994 PTD 1271 and consequently the order of learned CIT(A) is hereby modified and the addition stands deleted. The last objection is to the setting aside of addition at Rs.30,00,00,000 being interest on suspense account. The contention of Mr. Sirajul Haque is that the addition ought to have been deleted, as interest on the bad debts which has not been declared as bad debts, as yet but there is no likelihood of recovery of the same, is recorded in the suspense account in persuance of the Regulation 8 by the State Bank of Pakistan and, therefore, it is not real income but is recorded for the purpose of record only and in order to keep the account alive. Mr. Sirajul Haque has addressed lengthy arguments on the point explaining the nature of entries with reference, to the concept of real income and hypothetical income. The point in issue came for consideration before Supreme Court of India in the case of State of Travancore v. Commissioner of Income‑tax reported as (1986) 158‑ITR 102. The facts and circumstances in the present case are similar, rather they are on all fours to the facts and circumstances in the cited case. With the majority opinion it was held that the taxing authorities were justified in levying tax on the interest in the suspense account in respect of the principle amount which had not become irrecoverable but extremely doubtful of being recovered. We respectfully agree with the judgment of Supreme Court of India and for the reasons stated therein by the majority hereby held that the assessing officer has rightly charged to tax the interest transferred to the suspense account. The appeal stands disposed of as above.

Assessment Year 1995‑96

36. In the assessment year 1995‑96 there is one appeal being I.T.A. No. 1563/KB of 1996‑97 at the instance of assessee and rises out of order under section 62. The objections raised in this appeal are to the charging of interest on securities on accrual basis, computing the interest on securities as business income under section 22 instead of taking the same as separate block of income under section 17, setting aside of the addition under the head penal interest instead of deleting the same and setting aside of addition under the head interest on suspense account instead of deleting the same. These issues are common to the issues decided in the assessment year 1994‑95 and stand disposed of in same terms as directed while deciding appeal for the assessment year 1994‑95. The last objection is to the setting aside of addition at Rs.6,50,00,000 on account of excess perquisites and not deleting the same. During the course of arguments before us the learned representative for the appellant have submitted that they have no objections to the de novo consideration of the issues provided reasonable opportunity of being heard is allowed to the assessee. The direction of learned CIT(A) is, therefore, maintained with direction that the issue should be decided after confronting the assessee and considering the material produced before the assessing officer. The appeal stands disposed of as above.

Assessment year 1996‑97

37. The first appeal at the instance of assessee in the assessment year 1996‑97 is I.T.A. No.1040/KB of 1997‑98 and arises out of order under section 62. The first objection raised on behalf of assessee is to the charging of tax on the interest on securities on accrual basis. For the reasons assigned while deciding appeals for the earlier years. The treatment given by the assessing officer is hereby maintained.

38. The second objection is to the treating of interest on securities as business income instead of charging the same as interest on securities as a separate block of income under section 17 of the Income Tax Ordinance, 1979. The assessing officer is directed to treat the interest on separate block of income chargeable under section 17 of the Income Tax Ordinance, 1979. The appeal stands disposed of as above.

39. The second appeal for the assessment year 1996‑97 is I.T.A. No.1300/KB of 1997‑98 at the instance of department. The first objection raised on behalf of the department is to the direction of learned CIT(A) for allowing the bad debts when it is mature and when evidence satisfying requirements in section 23(1)(x) are produced in the subsequent years. The learned D.R. has conceded that there is no cause of greivance to the department. The objection is, therefore, overruled.

40. The second objection raised on behalf of the department is that the learned CIT(A) was not justified in holding that Azad jammu and Kashmir is not a country out side Pakistan as envisaged under section 164 of the Income Tax Ordinance, 1979. The issue already stands decided in favour of department, therefore, the impugned finding of learned CIT(A) is hereby vacated and the treatment given by the assessing officer is hereby restored. The next objection is to the direction of learned CIT(A) for treating gain on sales of Government securities held for required period of one year and more as capital gain. It is, further stated in the grounds of appeal that in the assessment year 1996‑97 no such surplus has been declared and, therefore, the direction was not justified. The direction given by the learned CIT(A) is acadamic in nature and, therefore, there should be no cause of greivance on the part of department. However, we would like to clarify that the finding of learned CIT(A) is not sustainable as it has been held by a Division Bench of this Tribunal that profit on sale of securities by Bank is revenue income, vide judgment reported as 1995 PTD (Trib.) 807.

41. The department .has further objected to the deletion of addition on account of excess perquisites. It is contended that the addition on account of excess perquisites was made according to section 24(i) of the Income Tax Ordinance, 1979 and Circular No. 16 of 1990. A perusal of the assessment order shows that the assessing officer excluded dearness allowance/CLA and special duty allowance (which is allowance for over time) from salary. The learned CIT(A) directed to include the same in the salary for the purpose of working out excess perquisites. The learned D.R. has frankly conceded that the issue already stands decided against the department and CBR has also directed to include over‑time in the salary. Dearness allowance and leave allowance are also considered to be part of salary. The impugned finding of learned CIT(A) is, therefore, maintained. The next objection raised on behalf of department' is that the learned CIT(A) was not justified in deleting the disallowance on account of other expenses. A perusal of assessment order shows that the assessing officer disallow an amount of Rs.10 millions simply for the reason that the claim was increased. Facts were not examined and no specific reason was assigned for making disallowance. The learned CIT(A) therefore, deleted the addition to which no exception can be taken.

42. The department has next objected to the direction for allowing penal interest on credit ceiling. The issue already stands decided against the department by the Sindh Court and consequently the impugned direction of learned CIT(A) in which the reliance has been placed on the judgment of Honourable Sindh High Court is hereby maintained.

43. The last objection raised on behalf of department is that the learned CIT(A) was not justified in deleting the addition under the head interest in suspense account. The point in issue already stands decided in favour of the department and consequently the impugned direction of learned CIT(A) is hereby vacated and the addition as made by the assessing officer is hereby restored. The appeal stands disposed of as above.

M.B.A./520/Trib. Order accordingly.