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

‑‑‑‑S.25(c)‑‑‑Amounts subsequently recovered in respect of deductions etc.‑‑‑Terms "liability", "liable" "trading liability" and "trade creditor"‑‑‑Connotation‑"Liability" had not been defined anywhere in the Income Tax Ordinance; 1979 and the ordinary dictionary meaning of the word "liability" was the state of being liable‑‑‑"Liable" means "legally bound" ‑‑‑Whatever a trade owes and a person was legally bound to pay was a liability‑‑‑Rights to properties were divided into two principal heads: the rights of creditors and the rights of the owners‑‑‑Rights of the owners were called capital, share capital or owner's equity‑‑‑Rights of creditors represent debts of the business and were called "liabilities"‑‑‑Debts pertaining to goods and services were called "trading liabilities" and such creditors were known as "trade creditors"‑ Word "trading liabilities" connotes all the liabilities which the trade owes relating to the items charged to the trading account or to the profit and loss account.

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

‑‑Ss.25(c) & 23‑‑‑Amounts subsequently recovered in respect of deductions etc. ‑‑‑Additions‑‑‑Principles‑‑‑Section 25 of the Income Tax Ordinance, 1979 shows that additions under various clauses of S.25 could be made only of allowance or deduction that had been made in respect of these amounts under S.23 of the Income Tax Ordinance, 1979 for any year‑‑‑Deduction or allowance may be in respect of loss, bad debts, interest credited to suspense account, expenditure or trading liability‑‑‑Where the accounts were maintained on cash basis and no trading liability as such appeared in the accounts then any benefit received in cash or otherwise against the deduction or allowance allowed under S.23 of the Income Tax Ordinance, 1979 became income under cls. (a), (aa) or (ab) of S.25 of the Income Tax Ordinance, 1979‑‑‑Where accounts were maintained on mercantile basis and the payments had already been made in respect of allowances and deductions made under S.23 of the Income Tax Ordinance, 1979, the situation was similar to that when the cash system of accounting was employed‑‑‑Where, however, some liability in respect of deductions or allowances allowed under S.23 of the Income Tax Ordinance, 1979 remained payable, then that was the trading liability and any benefit derived in respect of the trading liability was to be taken as income under cl. (b) of S.25 of the Income Tax Ordinance, 1979‑‑‑Section 25(c) of the Income Tax Ordinance, 1979 would come into play if the trading liability on the basis of mercantile system of accounting remained unpaid for a period of three years‑‑‑Amount not so, paid although allowed under S.23 of the Income Tax Ordinance, 1979 in preceding years, was deemed to be income of the year in which such finding was made by the Assessing Officer‑‑‑Cumulative effect of the provision was thus that all the liabilities incurred and allowed under S.23 of the Income Tax Ordinance, 1979, if not paid in three years, were liable to be added as income under S.25(c) of the Income Tax Ordinance, 1979.

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

‑‑‑‑Ss. 25(c), 23 & 22‑‑‑Amounts subsequently recovered in respect of deductions etc. ‑‑‑Addition‑‑‑No business was done and return was filed showing loss pertaining to the financial expenses‑‑‑Assessing Officer disallowed the same which was confirmed by the First Appellate Authority as no business had admittedly been carried on‑‑‑" Liabilities not paid in previous three years" was added as income under S.25(c) of the Income Tax Ordinance, 1979 and for this purpose, the business was deemed to have been carried on ‑‑‑Assessee contended that liabilities not allowed as deduction in the preceding years were not liable to be added under S.25(c) of the Income Tax Ordinance, 1979‑‑‑First Appellate Authority directed the Assessing Officer that the amount falling in said category of liabilities not allowed previously be deleted from the deemed income and the remaining amount of liability under S.25(c) of the Income Tax Ordinance, 1979 was upheld‑‑‑Business loss of the preceding year was not allowed to be set off against the addition under S.25(c) of the Income Tax Ordinance, 1979 on the ground that since no business was carried the loss of the earlier years could not be brought forward and adjusted against the addition under S.25(c) of the Income Tax Ordinance, 1979‑‑‑Validity‑‑‑For the purpose of making such addition, it had been provided with reference to S.22 of the Income Tax Ordinance, 1979 that such business shall be deemed to have been carried on by the assessee in that year‑‑‑Held, First Appellate Authority was justified in deleting the liability incurred, but did not allow under S.23 of the Income Tax Ordinance, 1979, from the purview of the addition made under S.25(c) of the Income Tax Ordinance, 1979‑‑‑Appellate Authority was also justified in maintaining the 'balance addition relevant to the items allowed previously under S.23 of the Income Tax Ordinance, 1979 whether in the trading account or in the profit and loss account‑‑ Assessee candidly admitted that no business had been done‑‑‑Irresistible conclusion was that the assessee had discontinued the business and in these circumstances, Appellate Tribunal maintained that the administrative and financial charges were rightly not allowed by the Authorities below‑‑‑Appeal was dismissed by the Appellate Tribunal.

(d) Income Tax Ordinance, (XXXI of 1979)‑‑‑

‑‑‑S.25(c), 22 & 35‑‑‑Amounts subsequently recovered in respect of deduction etc. ‑‑‑Loss‑‑‑Set off‑‑‑Contention was that if the business was deemed to have been carried on for the purpose of S.22 of the Income Tax Ordinance, 1979, the business loss of the preceding years could be allowed to be brought forward and set off against the addition under S.25(c) of the Income Tax Ordinance, 1979‑‑‑Validity‑‑‑Provision of S.22(a) of the Income Tax Ordinance, 1979 provided that the profits and gains of any business or profession were chargeable under S.22 of the Income Tax Ordinance, 1979 if the business was carried on and similarly, the profits and gains were chargeable under S.22 of the Income Tax Ordinance, 1979 where the business was deemed to be carried on‑‑‑Income was to be computed under S.22 of the Income Tax Ordinance, 1979 in two situations i.e. where the business was (actually) carried on or where business was deemed to be carried on‑‑‑Under S.35 of the Income Tax Ordinance, 1979 a business loss could be carried forward and set off against income only, if such, business or profession continued to be carried on by the assessee which meant that where business was deemed to be carried on no adjustment of the available loss of the preceding year could be made‑‑‑Adjustment of loss, of the preceding year was permissible only when such business or profession continued to be carried on‑‑‑Business having pot actually been carried on in the year under appeal, the available loss of the preceding year was not permissible to be adjusted against the income in respect of business which was only deemed to be carried on.

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

‑‑‑S.25(c)‑‑‑Amounts subsequently recovered in respect of deductions etc. ‑‑‑Explanation‑‑‑If the available losses of the preceding year were allowed to be adjusted against the business deemed to be carried on that would be unjustified and unreasonable‑‑‑Any trading liability added under S.25(c) of the Income Tax Ordinance, 1979, if subsequently paid, will be allowed as deduction against income‑‑‑If the adjustment of available business loss was allowed, that would mean that the deemed income will be wiped off once by adjusting the loss and the assessee will again get benefit for the second time when the liability if discharged, will have to be allowed as provided in the proviso to S.25 of the Income Tax Ordinance, 1979.

M. Shakir, F.C.A. for Appellant.

Abdul Salam, D.R. for Respondent.

Date of hearing: 24th October. 2002.

ORDER

MUHAMMAD AKHTAR NAZAR MIAN (ACCOUNTANT MEMBER).‑‑‑The appellant a private limited company is aggrieved against the order by the learned CIT(A), dated 27‑12‑1996. Addition under section 25(c) of tire Income Tax Ordinance, 1979 (hereinafter called the Ordinance), non‑allowance of financial expenses and refusal to allow set off of the available business loss to be carried forward, are the issues agitated against this appeal. The learned representatives of both the parties have been heard and orders of the authorities below perused.

2. The facts so far as relevant for disposal of this appeal are that the appellant had not done any business in the income year relevant to the assessment year 1995‑96 but had filed return showing loss of Rs.239,023 pertaining to financial expenses which were disallowed by the Assessing Officer and so confirmed by the learned CIT(A), because no business had admittedly been carried on. The Assessing Officer, however, found that liabilities amounting to Rs.3,487,563 were not paid in three years and, therefore, this amount was liable to be added as income under section 25(c) of the Ordinance and for this purpose, the business was deemed to have been carried on. Before the learned CIT(A), it was agitated among others that liabilities amounting to Rs.626,635 which were not allowed as deduction in the preceding years were not to be added under section 25(c) of the Ordinance and this argument found favour with the learned First Appellate Authority who, therefore, directed that the amount of Rs.626,635 falling in this category of liabilities not allowed previously be deleted from the deemed income. The remaining amount of liability added by the Assessing Officer under section 25(c) of the Ordinance was upheld by the First Appellate Authority. The business loss of the preceding year was not allowed to be set off against the addition under section 25(c) of the Ordinance on the ground that since no business was carried on, the loss of the earlier years could not be brought forward and adjusted against the addition under section 25(c) of the Ordinance.

3. The first argument by the learned A.R. is that section 25(c) of the Ordinance refers to trading liability only and no expenditure already allowed could be added under section 25(c). According to him, the trading liability means liability pertaining to trading account only. When it has been discussed with the learned A.R. that the trading liability and liability of trading account are two separate things because whatever is liable to be paid by a trade is trading liability and whatever has been charged to the trading account but not so paid is liability of the trading account, the learned A.R. submits that, therefore, according to him, two meanings can possibly be given to the word "trading liability" and hence, the meaning favourable to the assessee should be given to the term "trading liability". In this regard, he has referred to numerous decisions of Superior Courts. We agree with the learned A.R. that if two meanings can possibly be assigned with equal emphasis to a term; then it has to be interpreted in a way which is favourable to the subject but the fact of the matter is that in the instant case two meanings cannot be assigned to the word "trading liability" for the reasons given below.

4. Liability has not been defined anywhere in the Ordinance and the ordinary dictionary meaning of the word "liability" is the state of being liable'. "Liable" Means "legally bound". So, whatever a trade owes and is legally bound to pay is a liability. In accounting terms. It is said that accounting deals with property and rights to property. The rights to properties are divided into two principal heads: the rights of creditors and the rights of the owners. The rights of the owners are called capital, share capital or owner's equity. The rights of creditors represent debts of the business and are called liabilities. The debts pertaining to goods and services are called trading liabilities and such creditors are known as Trade Creditors. In view of this position, we have no doubt in our minds that the word "trading liability" as used in section 25(c), refers to all the liabilities which the trade owes relating to the items charged to the trading account or the profit and loss account.

5. Let us also examine the terms "trading liability" from the angle as is desired by the learned A.R. i.e. in the restricted meanings as liabilities pertaining to Trading Account only. We feel that this would result into an absurd situation leading to discrimination between two assessees in the same business but maintaining their transactions in two different permissible ways of presentations, one in the form of Trading Account and Profit and Loss Account and the other in the form of income and Expenditure Statement. No addition under this section would be possible where instead of going for trading and profit and loss account, an assessee opts to prepare Income and Expenditure Statement. The law cannot be so absurd to discriminate between two similar taxpayers.

6. Before proceeding further, we would like to quote section 25 of the Ordinance:

25. Amounts subsequently recovered in respect of deductions, etc.‑‑ Notwithstanding anything contained in this Ordinance, where an allowance or deduction has been made under section 23 for any year in respect of any loss, bad debts, interest credited to suspense account, expenditure or trading liability incurred by the assessee, and subsequently,‑‑‑

(a) during any income years, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss of expenditure, the amount so received shall be deemed to be income from business or profession of that income year;

(aa) during any income year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such bad debt.‑‑‑

(i) where the said amount is greater than the difference between the whole of such bad debt and the amount of bad debt allowed as deduction under section 23, the excess shall be deemed to be income from business or profession of that income year; and

(ii) where the said amount is less than the difference between the whole of such bad debt and the amount of bad debt allowed as, deduction under section 23, the deficiency shall be deemed to be a business expense of that year;

(ab) during any income year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of a loan referred to in clause (xxi) of subsection (1) of section 23, the amount so received shall be deemed to be the income from business or profession of that income year, provided that such amount does not exceed the interest receivable in respect of the aforementioned loan:

(b) during any income year, the assessee has derived any benefit in respect of such trading liability, the value of such benefit shall be deemed to be income from business or profession of that income year;

(c) such trading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is made or any other year (not being a year commencing after the expiration of five years from the end of the said three years) as the Deputy Commissioner may think fit;

(d) where any amount accumulated in the participatory reserve of a company which has been allowed as a deduction under clause (xix) of subsection (1) of section 23 is applied by the company towards any purpose other than payment of share of profit on the participatory redeemable capital or towards any purpose not allowable for deduction of exemption under this Ordinance, the amount so applied shall be added to the income of the company in the income year during which, it is so applied.

and the business or profession in respect of which such allowance or deduction was made shall, for the purpose of section 22, be deemed to be carried on by the, assessee in that year:

Provided that where a trading liability referred to in clause (c) is paid in a subsequent year, the amount so paid shall be deducted in computing the income in respect of that year.

A plain reading of section 25 of the Ordinance shows that additions under‑various clauses of section 25 can be made only if the allowance or deduction had been made in respect of these amounts under section 23 for any year. This deduction or allowance may be in respect of loss, bad debts, interest credited to suspense account, expenditure or trading liability. Where the accounts are maintained on cash basis and, therefore, no trading liability as such appears in the accounts, then any benefit received in cash or otherwise against the deduction or allowance allowed under section 23 becomes income under clauses (a), (aa) or (ab) of section 25 of the Ordinance. Where accounts are maintained on mercantile‑basis and the payments have already been made in respect of allowances and deductions made under section 23, the situation is similar to that when the cash system of accounting is employed. But where some liability in respect of deductions or allowances allowed under section 23 remains payable, then that is the trading liability and any benefit derived in respect of the trading liability is to be taken as income under clause (b) of section 25. Clause (c) of section 25 comes into play if the trading liability on the basis of mercantile system of accounting remains unpaid for a period of three years. The amount not so paid, although allowed under section 23 in the preceding years, is deemed to be income of the year in which such finding is made as the Deputy Commissioner may think fit. The cumulative effect of the provision is thus that all the liabilities incurred and allowed under section 23, if not paid in three years, are liable to be added as income under section 25(c).

7. For the purpose of making this addition, it has been provided that with reference to section 22, such business shall be deemed to have been carried on by the assessee in that year. We, therefore, hold that whereas the learned CIT(A) was justified in deleting ‑the liability incurred, but not allowed ‑under section 23, from the purview of the addition made under section 25(c), he was also justified in maintaining the balance addition relevant to the items allowed previously under section 23 whether in the trading account or in the profit and loss account.

8. The next issue agitated by the learned A.R. pertains to non -allowance of set off of carried forward business loss of Rs.7,089,141 against the amount addition under section 25(c). It is argued by the learned A.R. that since the business is deemed to have been carried on for the purpose of section 22 of the Ordinance, the business loss of the preceding years may be allowed to be brought forward and set off against the said addition under section 25(c) of the Ordinance. We are afraid we cannot subscribe to this view of the learned A.R. In forming this opinion, we are guided by the language used in section 22 of the Ordinance. As per clause (a), the profits and gains of any business or profession are chargeable under section 22 if the business is carried out and similarly, the profits and gains are chargeable under section 22 where the business is deemed to be carried out. So, the income is to be computed under section 22 in two situations i.e. where the business is actually carried on or where business is deemed to be carried on. So, the addition under section 25(c) has been made because it has been provided under section 25 that for that purpose, the business is deemed to be carried on. Now under section 35, a business loss can be carried forward and set off against income only, if such business or profession continues to be carried on by the assessee. This means that where business is deemed to be carried on, no adjustment of the available loss of the preceding year can be made. The adjustment of loss of the preceding year is permissible only when such business or profession continues to be carried on. In the instant case, the business was not actually carried on in the year under appeal, therefore, the available loss of the preceding year was not permissible to be adjusted against the income in respect of business which is only deemed to be carried on.

9. When we discussed the case with the learned A.R. in the manner detailed in the foregoing paragraph, he argued that this would result into injustice to the assessee and no injustice can be done especially when the deeming provision is made use of against the assessee. What he means to say is that whereas tax is being charged on the basis of a deeming provision of law, the adjustment of loss which would have been available if the business had (actually) been carried on is being denied to the assessee. We feel that the law itself takes care of the situation‑‑‑rather if the available losses of the preceding year are allowed to be adjusted against the business deemed to be carried on, this would be unjustified and unreasonable. It may be noticed that it has been provided in section 25 that any trading liability added under section 25(c), if subsequently paid, will be allowed as deduction against income. If the adjustment of available business loss is allowed at this point of time, this would mean that the deemed income will be wiped off once by adjusting the loss and the assessee will again get benefit for the second time when the liability, if discharged, will have to be allowed as provided in the proviso to section 25.

10. We specifically asked the learned A.R. as to whether the business has been started even by now, the learned A.R. candidly admitted that no business has been done since assessment year 1993‑94. When these facts are properly weighed, the irresistible conclusion is that the company has discontinued the business and, therefore, in these circumstances, we maintain that the administrative and financial charges were rightly not allowed by the authorities below.

11. Consequently, the appeal fails on all grounds and is hereby dismissed.

C.M.A./576/Tax(Trib.)Appeal dismissed.