I.T.As. Nos.1066/IB to 1073/IB and I.T.As. Nos.1084/IB to 1091/IB of 2004, decided on 22nd December, 2004. VS I.T.As. Nos.1066/IB to 1073/IB and I.T.As. Nos.1084/IB to 1091/IB of 2004, decided on 22nd December, 2004., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 356 (2004)

(a) Income-tax---

----Remand---Power to remand is discretionary in nature but such discretion is to be exercised reasonably and fairly indicating the reasons for remand.

1996 PTD (Trib.) 388; 1996 SCMR 230; and Ch. Muhammad Sadiq v. Income Tax Officer and others 1988 PTD 1014 rel.

(b) Income-tax---

----Remand---Remand order would have meant that the assessee would have been subjected to another round of cumbersome proceedings which is deprecated in law and such order should not be passed in a routine manner to allow a party to improve his case or to fill in the lacuna.

Ayesbee (Pvt.) Ltd. v. Income Tax Appellate Tribunal and others 2002 PTD 407 rel.

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

----S.23(1)(x)---Deductions---Disallowance of written off of the bad debts---Issue was set aside by the First Appellate Authority---Validity---Setting aside was not the answer---Ratio decidendi of the judgment was binding and the First Appellate Authority would have accepted the same in its true spirit---Remand by the First Appellate Authority was highly unjustified---Assessing Officer was directed to accept the aSsessee's claim of writing off of the bad debts.

1996 PTD (Trib.) 388; 1996 SCMR 230; Ch. Muhammad Sadiq v. Income Tax Officer and others 1988 PTD 1014; Ayesbee (Pvt.) Ltd. v. Income Tax Appellate Tribunal and others 2002 PTD 407; 2002 PTD (Trib.) 1898; (2002) 85 Tax 245 (Trib.); 2003 PTD (Trib.) 1189 and R.A. No.349/LB of 2002 ref.

C.I.T. v. National Bank of Pakistan (1967) 34 Tax 158 and 1992 PTD 39 rel.

(d) Income Tax Ordinance (XXXI of 1979)-----

--S.23(1)(x)---Deductions---Bad debts taxed in earlier year---Validity---Bad debts of earlier years could be allowed even if claimed in a subsequent year---First Appellate Authority was under legal obligation to follow the judgment of Appellate Tribunal and to allow the bad debts of earlier years in the years where the assessee-Bank claimed the same.

?

2002 PTD 1872; Karamsey Govindji v. C.I.T. (1957) 31 ITR 953; Hindustan Commercial Bank Ltd., (1980) 122 ITR 645; C.I.T. v. National Bank of Pakistan 1976 PTD 237; C.I.T: v. Grindlays Bank Ltd. 1991 PTD 569; 2002 PTD 1898; 2000 PTD 874 and 2002 PTD 1998 ref.

Central Insurance Co. Ltd. v. C.I.T. 1997 PTD 71 rel.

(e) State Bank of Pakistan Act (XXXIII of 1956)---

----S.54-A---Income Tax Ordinance (XXXI of 1979), Preamble---Provisions to override other law---Non-obstante provision in terms of S.54-A of the State Bank of Pakistan Act, 1956 was applicable on instructions by authorities that deal with administrative working of the banks---Instructions were not in respect of charge of income tax or calculation of the income under the Income Tax Ordinance, 1979 or any tax like sales tax, customs, excise duty etc.---Same was to regulate the financial institution and it deals with the policies, regulations and directives for the purpose of financial control and protection of the rights of the account holders.

(f) State Bank of Pakistan Act (XXXIII of 1956)---

----S.46-B---Income Tax Ordinance (XXXI of 1979), Preamble---Inconsistent directives not to be issued---Section 46-B of the State Bank of Pakistan Act, 1956 overrides those directives or policies that regulate the working administration and policy of the running of the institution and not charge of tax or for that matter in other similar provision.

(g) Income-tax---

----Loss---Diminution in value of investment was not to be allowed as a loss for the purpose of corresponding reduction in income.

Investment Ltd. v. C.I.T. Calcutta (1970) 77 ITR 533 and (2002) 85 Tax 245 (Trib.) rel.

(h) Income Tax Ordinance (XXXI of 1979)-----

--S. 9---Income and profit---Special law---Income tax law in itself is a special law and had its own provisions to regulate the charge of income tax with reference to its calculation etc.---No other law could be invoked to define the term "income" and "profit" for the purpose of charging income tax---Income tax law had its own history and development of various provisions had progressed with the changing circumstances---Income tax is charged on the incomes, profits and gains and the same could only be defined and brought under tax under the provisions thereof.

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

----S.23(1)(x)---Deductions---Provision for diminution in value of investment---Diminution in the value of stocks and shares could not be allowed as a tool for reducing the income for the purpose of calculation of the taxable profits.

C.I.T. Companies III, Karachi v. Krudd Sons Ltd. 1994 PTD 174; UCO Bank v. C.I.T. (1999) 106 Taxman 601 and Investment Ltd. v. C.I.T. Calcutta (1970) 77 ITR 533 relevant.

(j) Income Tax Ordinance (XXXI of 1979)---

----Ss.23 & 25(a)---Deductions---Amounts subsequently recovered in respect of deductions, etc.---Ascertainable accrued liability---Any ascertainable accrued liability is deductible under the mercantile system of accounting---Even disputed liabilities are allowable under mercantile system of accounting---Legislature clearly provided that any subsequent recovery would be automatically offered for tax as per S.25(a) of the Income Tax Ordinance, 1979---In case of banks, the accounts are maintained on accrual basis---Even if the hybrid system is adopted it had to be taken in its actual spirit---If the amounts are ascertainable and have actually accrued same would have been allowed.

2001 PTD 1427; 2001 PTD 744 and 2001 PTD 3326 rel.

(k) Income Tax Ordinance (XXXI of 1979)---

---S. 24(i)--Deductions not admissible---Concessionary loans---Addition---Validity---Held, it is always better to earn little than to keep the money dormant without any income---No one can be asked to do business on the dictates of the others---Actual income is taxed not what one could earn and there was no question of application of S.24(i) of the Income Tax Ordinance, 1979 as this was neither perquisite nor profit in lieu of salary or any other such amenity---Application of S.24(i) of the Income Tax Ordinance, 1979 was disapproved and claim was allowed by the Appellate Tribunal.

2001 PTD 946 and C.I.T. v. Wazir Sultan Tobacco Co. Ltd. (1988) 173 ITR 290 (AP) rel.

(l) Income Tax Ordinance (XXXI of 1979)---

----S.23(1)(xviii)---C.B.R. Circular Letter No. IT.T-3 (40)/85 dated 9-9-1985---Deductions---Staff welfare fund expenses---Disallowance of staff welfare fund expense by placing reliance on Circular Letter No.IT.T-3(40)/85 dated 9-9-1985---Validity---Circular letter endorsed deduction of such expense being wholly and exclusively for the business of banks---Circular letter did not say that it was a special concession in the case of nationalized bank and it had been reaffirmed that establishment of Staff Welfare Fund and contribution in it by the employer bank will be a business expense---Assessing Officer had misinterpreted the circular letter misconstruing as if it bestowed upon nationalized banks some special relief---Fact was that the Central Board of Revenue only clarified that such an expense being wholly and exclusively for business was an allowable deduction---Even otherwise any interpretation of law by Central Board of Revenue was not binding on the taxpayers and the Court if it goes against the statute---Expenditure claimed was of revenue nature for the welfare of employees and was allowable in the light of well-established position of law---Central Board of Revenue did not speak of the nationalized banks but they did not impose any restriction on others; it, in fact, granted exemption to all banks without exception.

Income Tax Manual at page 177 rel.

(m) Income-tax---

----Apportionment of expenses---Apportionment of expenses is not permissible between exempt capital gains and income earned from other operations.

(n) Income Tax Ordinance (XXXI of 1979)---

----S.23---Deductions---Bad debts written off during the year were an allowable expense in profit and loss account and if claimed by the bank should be allowed without exception---Similar situation applies if the same were in respect of an earlier year but were claimed in a subsequent year.

(o) Income-tax---

----Apportionment of expenses---Income from capital gain being a separate block of income and being similar in its charge to property income having restrictive allowance of expenditure, could not be quantified for prorating the expenses claimed otherwise.

I.T.A. No.106/LB of 2000; I.T.A. No.1658/LB of 2003 and 2005 PTD (Trib.) 344 rel.

2001 PTD 476 distinguished.

(p) Income-tax---

----Apportionment of expenses---Where the assessee had different source of income and allocation of expenses under normal circumstances did not have any doubts in view of the legal position, there was no question of proration of the expenses in respect thereof---Proration could only be made where under different heads the expenses otherwise were relatable but had not been quantified while prorating of accounts by the taxpayer---Since this situation did not exist in the present case the capital gain could be identified as a separate block and its expenditure also could be specified---Proration to said head was an incorrect application of law.

I.T.A. No.106/LB of 2000; I.T.A. No.1658/LB of 2003 and 2005 PTD (Trib.) 344 rel.

2001 PTD 476 distinguished.

Dr. Ikram-ul-Haq for Appellant/Assessee.

Arif Khan, D.R. for Respondent.

Date of hearing: 7th December, 2004.

ORDER

KHAWAJA FAROOQ SAEED (CHAIRPERSON)---In these cross-appeals filed by the assessee as well as the department, the points agitated are mostly common, hence, the same arc discussed and decided in the following manner:--

Provision for bad debts

2. The first line of argument of learned AR was with regard to the action of set aside. His main thrust was on the argument that the issue in hand has already been authoritatively decided by this Honourable Tribunal in a number of cases. Therefore, the learned C.I.T. (A) was not justified to set it aside. He said that judgments passed by this Honourable Tribunal were binding on C.I.T. (A) as elaborated in 1996 PTD (Trib.) 388. It is a cardinal principle. The learned AR added that remand of case is not a routine matter nor it should be adopted as a tool to allow a party or an authority to fill in the lacuna or to improve the case, re: 1996 SCMR 230. Further, the Honourable Lahore High Court in Ch. Muhammad Sadiq v. Income Tax Officer and others 1988 PTD 1014, also strongly disapproved setting aside of cases in a cursory manner in the following words:--

"The power to remand is discretionary in nature. But such discretion is to be exercised reasonably and fairly indicating the reasons for remand. The impugned order does not satisfy this test. Upon the facts obtaining on record, there was no valid ground to send back the case to the Income-tax Officer for fresh assessment. The direction given by the Tribunal in this respect is wholly illegal and most likely shall expose the petitioner to another round of cumbersome proceedings and unnecessary harassment. Such a direction is liable to be struck down in exercise of constitutional jurisdiction of this Court."

Still further, the Honourable Sindh High Court in Ayesbee (Pvt.) Ltd. v. Income Tax Appellate Tribunal and others 2002 PTD 407 expressed it in the following words:--

"A remand order would have meant that the assessee would have been subjected to another round of cumbersome proceedings which is deprecated in law and such order should not be passed in a routine manner to allow a party to improve his case or to fill in the lacuna."

After arguing that set aside is no remedy for appellant, the AR said that in view of the fact that a number of binding precedents were available, the C.I.T. (A) was not justified to set aside the case. It was incumbent upon him to decide the matter in the light of case-law cited. The Honourable ITAT in the following cases has already adjudicated the matter in favour of banks:--

2002 PTD (Trib.) 1898

"The bank itself is the best judge to determine as to what part of its bad debts requires writing off. Under no stretch of imagination a businessman of an ordinary prudence specially a bank would write off a debt only to save the taxes as this way he loses more than what he appears to gain. Further the other provision of law protects it in a very rightful manner i.e. if such written off bad debts are subsequently received they can be added in income and are taxable. As a result of above discussion we hold that the action of the I.T.O. as well as of the C.I.T. (A) is not based upon correct appreciation of the facts and law. The same, therefore, is disapproved. This obviously concludes that the bad debts claim of the assessee shall be allowed."

2002 PTD 1872

"We have already held that it is but the Bank who can decide as to what part of its loan have become bad and under what circumstance he has to write it off. This shall obviously be in compliance to the instructions contained in Prudential Regulations by the State Bank of Pakistan. The first judgment in this regard was in the case of Union Bank, which has since been followed by this Tribunal and other authorities. In fact, even in this case this Tribunal has allowed bad debts and its provision for the other years after discussing in detail that this in fact is not a provision but actually writing off as per law. The assessee's case, therefore, is decided in his favour and the department is instructed to allow this provision for bad debts by considering it as actual written off on the basis of instructions contained in earlier judgment."

2003 PTD (Trib.) 1189

While deciding this issue in the case of Union Bank Ltd. the Tribunal found that this provision of bad debts is, in fact, not a provision. It is an actual write off, however, the Bank under law is not supposed to completely ignore this amount as the ray of hope remain and for that purpose it is kept in suspense account. This Tribunal, therefore, following the direction of the Honourable High Court Sindh has held that the day a bank believes that a part of its loan has become bad and charges it in its profit and loss account it becomes an allowable expense. The Tribunal also felt that a banking company could never declare its loans to be as bad just to save the taxes as in this way the company loses more than the apparent gains."

"Here, again we are convinced that provision for bad and doubtful debts having been made by the bank after being convinced that it is not recoverable under this own method of accounts and Prudential Regulations under which the Bank is operating itself was not to be disallowed."

R.A. No.349/LB of 2002

The Department proposed following question of Jaw in Reference Application under section 136(1):---

"Whether on the facts and circumstances of the case, the learned ITAT was justified to hold that "provision for bad debts" is synonymous with actually written off and therefore, allowable under section 23(1)(x) of the Income Tax Ordinance, 1979 without being determined irrecoverable."

The Tribunal rejected the Reference Application with the following observations:--

"We have gone through the relevant record with the help of learned AR as well as D.R. The Assessing Officer has considered this claim to be a provision, which has accordingly been treated by the C.I.T. (A). The Tribunal, however, found that both the officers below were not justified in holding that this was a provision. This was an actual written off and in this regard the reliance of the Tribunal was on the judgment reported as (1967) 34 Tax 158 authored by learned Mr. Justice Durab Patel as he their, was of Sindh High Court."

3. The D.R. opposed the arguments by remarking that in fact it is the department which is at loss. The assessee has not actually written off these debts. It has only created a provision hence assessing officer was fully justified. Moreover, the department has filed reference before High Court hence it cannot concede as it would like to retain its claim before superior Courts.

4. Incidentally all the three judgments referred by learned AR have been authored by one of us. The matter has been thrashed out in detail and reference has been made to many earlier judgments from Pakistan and India. In this regard, the main judgment was of Sindh High Court, i.e. (1967) 34 Tax 158. At no stage during the previous judgments or hearing of this case any order supporting the view of the department has been produced. On the other hand, our view now has been followed in dozens of judgments even if the department's view was to be projected, the set aside was not the answer. Even otherwise, the ratio decidendi of the judgment was binding and the C.I.T. (A) should have accepted the C same in its actual spirit. Our finding have further support from another judgment of the Sindh High Court reported as 1992 PTD 39 in the case of C.I.T. Central Zone (C ) Karachi v. ADBP which has also given similar view. There is, therefore, no reason to agree with DR. The remand by the C.I.T. (A) is highly unjustified. The assessing officer is directed to accept the assessee claim of write off of the bad debts. This would obviously mean that assessee appeal succeeds and departmental appeal stands rejected.

Bad Debts Taxed in Earlier years

5. The AR has rightly remarked that this issue has also already been decided in favour of banks by the learned I.T.A. in (2002) 85 Tax 245 (Trib.). It is also pertinent to mention that this issue came under discussion in India in Karamsey Govindji v. C.I.T. (1957) 31 ITR 953. The case revolved around section 10(2)(xi) of the 1922 Act [the provision is pari materia to section 23(1)(x) of the 1979 Ordinance.] Chief Justice Chagla speaking from the Bench held:

"Therefore, if the debt was not allowed to the assessee in the year account, there is no reason why the department should not consider allowing it in the next year when the debt remained irrecoverable, although the assessee may not have written it off in that year".

In Hindustan Commercial Bank Ltd., (1980) 122 ITR 645, it was held that bad debts related to earlier years could be claimed subsequently without any further conditionality on the part of tax authorities. In fact in the said case bad debts were allowed by the ITAT itself, although the Bank did not claim the same before the assessing authorities/appellate stage or even in the original grounds of Appeal before the ITAT. The same were claimed vide amendment in the Grounds of appeal before the ITAT. The High Court upheld the allowance of bad debts by the ITAT under such circumstances. In India, a number of cases decided by the Courts in the case of banks as well as other assessees have held that the Assessing Officers could not insist for infallible or demonstrative evidence that the bad debts had finally become irrecoverable. The Courts have held that mere debit to profit and loss account of debts by banks is prima facie evidence that the same are allowable expenditure. A number of Indian cases cited by the learned AR though have only persuasive value but these have been mentioned by him to counter the reliance on some Indian case law by the DCIT in his orders to show that he intentionally overlooked these and picked up those having no bearing on the appellant's case. In any case, the following two cases of Sindh High Court at Karachi have a. binding force under Article 201 of the Constitution of Pakistan.

(a) C.I.T. v. National Bank of Pakistan 1976 PTD 237;

(b) C.I.T. v. Grindlays Bank Ltd. 1991 PTD 569.

These two cases have been followed by the learned ITAT in the Union Bank case 2002 PTD 1898. The Department, in this case, later on filed Miscellaneous Application that there were other conflicting judgments of ITAT which was rejected by the learned ITAT with the remarks that since reliance in 2002 PTD 1898 is made on the binding judgment of High Court the conflicting judgments of ITAT have no bearing. The Department was unable to show any contrary judgment of High Court. The decision of learned ITAT in 2002 PTD 1898 still holds the field as no contrary judgment from any High Court of Pakistan is available. Nor the said judgment has been overruled by the Honourable Lahore High Court till today. It is of relevance to mention that the Department did not file any appeal against the orders of the Sindh High Court in the cases of National Bank and Grindlays Bank before the Supreme Court and thus these decisions have attained finality and are a binding force under Article 201 of the Constitutional of Pakistan. The Central Board of Revenue itself while issuing instructions relating to write off of-bad debts in the case of banking companies in C. No.13(26) IT-1/74 dated July 2, 1975 [quoted in 2002 PTD 1898] directed that following the judgment in the case of National Bank of Pakistan reference applications might be withdrawn if necessary. The Honourable Sindh and Peshawar High Courts and the ITAT (in its recent judgment 2000 PTD 874 have held that the assessing officers are bound to follow instructions issued by the C.B.R. We have already mentioned that the Tribunal in the case of Union Bank Ltd. in I.T,.A. No.2449/LB of 1999 [reported as 2002 PTD 1998] after elaborate discussion of available case-law and legal position have held that in the case of banks provision for bad debt is sufficient compliance of section 23(1)(x) of the Ordinance. The said judgment squarely applies in the case of appellant.

6. The outcome of the discussion is obvious. Having once held in unequivocal terms that bad debts of earlier years can be allowed even if claimed in subsequent year, we cannot now deviate unless there is some valid argument for the same. The issue has attained finality so far ITAT of Pakistan is concerned. The C.I.T. (A) therefore, was under a legal obligation to follow the same and allow the bad debts of earlier years in D the years where the assessee-Bank claims the same. In this regard, we are further guided by the judgment of the Supreme Court of Pakistan in the case of Central Insurance Co. Ltd. v. C.I.T. 1997 PTD 71.

7. The C.I.T. (A) order, therefore, disapproved and the claim is allowed in full. This obviously decides assessee and departmental appeals, both on the issue.

Provision for diminution in value of investment

8. The assessee claim is that these provisions were made as per Prudential Regulations of State Bank of Pakistan which override Income Tax Law vide section 91-A read with section 35 of Banking Companies Ordinance, 1962 and sections 46-B and 54-A of State Bank of Pakistan Act, 1956. The AR says that the Prudential Regulations are issued by the State Bank of Pakistan in pursuance of powers vested in it under a special law. Sections 46-B and 54-A of State Bank of Pakistan Act, 1956 and section 91-A of Banking Companies Ordinance, 1962 read with section 35 of the said Act as under:

"Section 46-B of State Bank of Pakistan Act, 1956

46-B. Inconsistent directives not be issued.---No Government or quasi-governmental body or agency shall issue any directive, directly or indirectly, to any banking company or any other financial institution regulated by the Bank which is inconsistent with the policies, regulations and directives issued by the Bank pursuant to this Act, the Banking Companies, Ordinance, 1962 (LVII of 1962) or any other law in force.

Section 54-A of State Bank of Pakistan Act, 1956

54-A. Provisions to override other law. This Act shall have effect notwithstanding anything contained in any other law for the time being in force or any agreement, contract, Memorandum or Articles of Association.

Section 91-A of Banking Companies Ordinance, 1962

91-A. Application of other laws barred. The provisions of clauses (dd), (ee) and (gg) of sections 5, 13, 15-A, 15-B, 15-C, 21, 24, 25, 25-A, 25-B, 26-A, 27-A, 35, 41, 41-A, 41-B, 41-C, 42, 43-AA, 43-B, 43-C, 43-D, 43-E, 43-F and 84 shall have effect notwithstanding anything contained ix any other provision of this Ordinance except section 91 or in any other law for the time being in force or in any contract, agreement award, memorandum or articles of association or other instructions.

Section 35 of the Banking Companies Ordinance, 1962

35. Audit.---(1) The balance-sheet and profit and loss account prepared in accordance with section 34 shall be audited by a person who is duly qualified, under the Chartered Accountants Ordinance, 1961 (X of 1961), or any other law for the time being in force, to be an auditor of companies and is borne on the panel of auditors maintained by the State Bank for the purposes of audit of banking companies.

(2)??????..

(3) The State Bank may, from time to time lay down guidelines for the audit of banking companies and the auditors shall be bound to follow these guidelines.

The A.R. says that a cumulative reading of above sections shows that they override any conflicting provision of the Income Tax Ordinance, 1979, The banks are bound to prepare their accounts according to International Accounting Standards and Regulations issued by the S.B.P. These accounts represent their regularly employed method of accounting as envisaged in section 32 of the Income Tax Ordinance, 1979. The DCIT could not reject this method as elaborated in C.I.T. Companies III, Karachi v. Krudd Sons Ltd. 1994 PTD 174. The DCIT did not show any flaw in this method of accounting. There is no prohibition income tax law not to record closing stock at lower of cost or market price. In order to arrive at correct income; the taxpayer as per established accounting principles (IAS-2) is to record correct value of closing stock on cost price or market value whichever is lower. The principle has been elaborated in the following cases:---

(i) In UCO Bank v. C.I.T. (1999) 106 Taxman 601, the following question of law was referred to Supreme Court of India:--

"Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the notional loss in the investment trading (India) to the extent of Rs.7,45,35,029 by working out a difference between the book value of shares as shown in the final account and their market price as on the last date of the accounts, is admissible to be deducted from the book profits of the assessee-Bank?

The Supreme Court of India answered this question in affirmative with the following observations:--

"In our view, as stated above consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance sheet, and for the income tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the department and there was no justifiable reason for not accepting the same. Preparation of the balance sheet in accordance with statutory provision would not disentitle the assessee in submitting income tax return on the real taxable income in accordance with a method of accounting adopted by assessee consistently and regularly. That cannot be disregarded by the departmental authorities on the ground that the assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare balance sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deducted on the basis of the accounting system regularly maintained by the assessee and that was,.. done by the assessee in the present case.

(ii) In Investment Ltd. v. C.I.T. Calcutta (1970) 77 ITR 533, following question of law was referred to Supreme Court of India:--

"Whether, on the facts and circumstances proved in the case, the inference that the securities in question were held by the assessee as an investment and not asa stock-in-trade and that the loss incurred thereon was capital loss, is, in law, justified?

The Supreme Court of India answered this question in negative with the following observation:--

"In the balance sheet, it is true, the securities and shares are valued at cost, but no firm conclusion can be drawn from the method of keeping accounts. A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deducted therefrom. Valuation of stock at cost is one of the recognized methods. No inference may, therefore, arise from the employment by the company of the method of valuing stock at cost, that the stock, valued was not stock-in-stock. Nor is the description of stock in the balance sheet as "investment" decisive."

The AR says that the above position of law was not brought to the knowledge of this Honourable Tribunal when the issue of provision of diminution in value of investment was decided in (2002) 85 Tax 245 (Trib.).

9. We are not persuaded to agree with the learned AR that the provisions now referred by him from the State Bank of Pakistan Act vis-a-vis Banking Companies Ordinance, 1962 are of any help to the assessee. We have held in a number of cases that while making assessment of income tax, one is guided by law, rules and precedents under the said Ordinance. The non-obstante provision in terms of section 54-A is applicable on similar instructions by authorities that deal with administrative working of the banks. These are not in respect of charge of income tax or calculation of the income under the Income Tax Ordinance or any tax like sales tax, customs, excise duty etc. It is to regulate the financial institution and it deals with the policies, regulations and directives for the purpose of financial control and protection of the rights of the account holders. Section 46-B of State Bank of Pakistan Act, 1956 overrides those directives or policies that regulate the working administration and policy of the running of the institution and not charge F of tax or for that matter in other similar provision. Similarly, the international accounting standards guide for preparation of a balance sheet and profit and loss account and it only governs the accounts in the normal business parlance. In income tax, there are certain provisions of Income Tax Ordinance which do not require any placing in the accounts of the assessee but they still may turn into an income. For example, charges covered under deemed income provisions. Moreover, there are certain exemptions in the Second Schedule which for the purpose of income tax shall not be taxable while they shall definitely find place in the accounts as income. In this regard, therefore, our earlier view in the above judgment still holds good. The diminution in value of investment is not to be allowed as a loss for the purpose of corresponding reduction in income. Not only we have disapproved this proposition in the judgment referred above but the same have subsequently been followed in a number of other cases also. Recently while deciding a case on the issue of section 12(9A) namely Crescent Textile in R.A. No.228-229/LB of 2004, the Tribunal has confirmed disallowance of a similar proposition. The assessee claim therein was that the diminution in the value of stocks (shares) was not to be allowed for calculating income of the year vis-a-vis distribution of dividend as per the provisions of section 12(9A) read with other allied provisions of the 1979 Ordinance. Another argument in the referred judgment which also applies on full force on the issue in hand was that the income tax law in itself is a special law. It has its own provisions to regulate the charge of income tax with reference to its calculation etc. No other law can be invoked to define the term "income" and "profit" for the purpose of charging H income-tax. The law in hand has its own history and development of various provisions has progressed with the changing circumstances. Income tax is charged on the incomes, profits and gains and the same can only be defined and brought under tax under the provisions thereof. It is correct that method of accounts maintained by the assessee can only be rejected if actual income cannot be deduced from the same. The principle squarely applies on the facts under discussion. The assessee is trying to reduce its income under the garb of the reduction of the value of stocks (Share). He takes advantage of the language of the judgments that say that the value of stock-in-trade should either be at cost or market price, on the method of account adopted regularly and constantly. Even if we go by the preposition, the assessee had been declaring its value of shares at cost in the earlier years. There is, therefore, no consistency in maintenance of accounts. The Assessing Officer, therefore, rightly discarded the same up to this extent. Furthermore, it in the years under discussion, the value of stocks have increased will it be offered for taxation without selling the said stock? The answer again shall be an empathetically `No'. The judgments referred, therefore, are not of any help to the assesses.

10. We, therefore, reiterate that the diminution in the value of stocks and shares cannot be allowed as a tool for reducing the income for I the purpose of calculation of the taxable profits. On this issue, the assessee's point of view is disapproved.

Other provisions

(i) Revaluation of Foreign currency transactions (1999-2000 and 2000-2001).

(ii) Remittance to Iraq (Blocked account) (2000-2001).

(iii) Investment in Pakistan Emerging Ventures Ltd. (2001-2002 and 2002-2003).

The claim is that the provisions were made as per Prudential Regulations of State Bank of Pakistan which override Income Tax law vide section 91-A read with section 35 of Banking Companies Ordinance, 1962 and sections 46-B and 54-A of State-Bank of Pakistan Act, 1956 as discussed at Sr. No.3. These are ascertainable liabilities and not mere provisions. It is the substance that matters and not the mere nomenclature given to any transaction. There is authentic case-law on the subject providing that any ascertainable accrued liability is deductible under the mercantile system of account re: 2001 PTD 1427 and 2001 PTD 744. Even disputed liabilities are allowable under mercantile system of accounting as held in 2001 PTD 3326. The legislature's intention is also very clear as it has provided that any subsequent recovery thereof would be automatically offered for tax as per section 25(a) of the Income Tax Ordinance, 1979. In the case of banks, the accounts are maintained on accrual basis. However, even if the hybrid system is adopted it has to be taken in its actual spirit. If the amounts are ascertainable and have actually accrued this would have been allowed. However, since we do not have actual facts before us, we leave this claim for the assessing officer. He shall see the facts in the light of above discussion.

Concessionary loans

11. The assessee's, view is that section 24(i) becomes applicable where any expenditure on salary is incurred. In case of concessional loans to employees, the bank is earning some income from the employee therefore, the very application of this section is wrong and against the explicit language of law. The issue has been elaborated in the following cases.

In 2001 PTD 946 the following question of law was referred to Supreme Court of India for adjudication:--

"Where, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that non-charging of interest on the debit balance in the running account of the Directors would not constitute a perquisite?

The Indian Supreme Court answered the question in affirmative i.e. in favour of the assessee:--

"A loan granted to an employee who is a Director or who has a substantial interest in the company without charging any interest or at a concesssional rate of interest did not amount to benefit or amenity falling within clause (b)(iii) of Explanation 2 to section 40A(5) of the Act."

The issue also came up for adjudication in another case C.I.T. v. Vazir Sultan Tobacco Co. Ltd. (1988) 173 ITR 290 (AP) wherein following question of law was referred to High Court Andhra Pradesh for adjudication: -

"5. Whether, on the facts and in the circumstances of the case, the difference between the concessional rate of interest and the prevailing market rate of interest on the loans advanced to the employees was not a perquisite under section 40A(5)?"

The High Court answered the question in affirmative i.e. in favour of the assessee with the following observations:--

"It would be evident from a perusal of subsection (5) that it contemplates disallowance of certain expenditure incurred by the assessee which it claims as a deduction. Certain ceilings are fixed in the case of such expenditure. The assessee's contention is that it has not incurred any expenditure by giving the loans to its employees at a concessional rate of interest and, therefore, the said provision has no application. On the other hand, learned standing counsel for the Revenue says that if this money had not been lent to the employees at a concessional rate of interest, it would have earned interest at a higher rate had it been put in fixed deposit in a bank. But, this argument involves importing a fiction into subsection (5) of section 40-A of the Act. We must assume that this money, if not lent to the employees, would have been put in a fixed deposit or would have been invested in some other profitable manner and then say that the difference in amount should be disallowed. We do not think that the language of subsection (5) of section 40-A of the Act provides for or permits such a course. Subsection (5) applies where an assessee claims a certain deduction saying that he has spent that money in providing, directly or indirectly, either as salary to an employee or in the provision of perquisite to an employee. Only then do the ceilings prescribed in the said subsection come into play. It is true that in some cases this facility may be abused. We know public corporations like banks lending money to their own employees at practically no interest, say for example, one or two per cent interest per annum, whereas those very banks lend to people at rates of interest ranging from 13% to 19% per annum grit the remedy for that must lie elsewhere, either in the proper control of the public corporations or in the amendment of the Income-tax Act, as the case may be. As the provision of law in section 40-A(5) of the Act now stands, it is not possible to answer the said question in the manner suggested by the Department. Accordingly, we answer question No.5 in the affirmative, i.e. in favour of the assessee and against the Revenue."

The finding in above judgment is very clear. The department is no one to advise the prudence of business to the bank. Not only this is a normal practice but even otherwise good for business expediency. It is always better to earn little than to keep the money dormant without any income. Moreover, no one can be asked to do the business on the dictates of the others. It is the actual income which is taxed not what one could earn. There is no question of application of section 24(i) on the issue in hand. This is neither perquisite nor profit in lieu of salary or any other such amenity. The application of section 24(i), therefore, is disapproved. The claim is hereby allowed.

Staff Welfare Fund Expense

12. For disallowance of this expense, the DCIT has placed reliance on Circular Letter No.IT.T-3(40)/85 dated 9-9-1985 which reads as under:---

"The new charter for the nationalized banks requires each bank to establish at Staff Welfare Fund to which a specified percentage of profit before tax would be contributed for being used for the welfare of the staff and the officers. Since the contribution would represent an expenditure laid out wholly and exclusively for the purpose of the business of such banks, it would qualify as an admissible deduction under clause (xviii) of subsection (1) of section 23 of the Income Tax Ordinance, 1979."

This circular letter endorses deduction of such expense being wholly and exclusively for the business of banks. The circular letter does not say that it is a special concession in the case of nationalized bank. In fact it has been reaffirmed that establishment of Staff Welfare Fund and contribution in it by the employer bank will be a business expense. The DCIT has misinterpreted the said circular letter misconstruing as if it bestows upon nationalized banks some special relief. The fact is that the M C.B.R. only clarified that such an expense being wholly and exclusively for business is an allowable deduction. Even otherwise any interpretation of law by C.B.R. is not binding on the taxpayers and the Court if it goes against the statute. The following instructions and case-law support allowability of this expense:--

(i) In Income Tax Manual at page 177, while explaining

admissibility of certain deductions, the C.B.R. explained:---

"(d) Bona fide expenditure of a Revenue character for the welfare of employees is allowable, but in no case is any capital expenditure allowable. If expenditure on labour welfare is made in any year out of reserves which have not previously been allowed as a deduction, such expenditure would he allowed as a deduction in the year in which it is incurred. Expenditure on labour welfare actually incurred would be allowed in its entirety as a deduction irrespective of the lowness of profits in any particular year."

The expenditure claimed by the appellant is of revenue nature for the welfare of employees and therefore, is allowable in the light of well-established position of law as also admitted by the C.B.R. in above referred circular letter which the DCIT has either misinterpreted or overlooked.

13. The Circular of C.B.R. does speak of the nationalized banks but they do not impose any restriction on others. It in fact grants exemption to all banks without exception. The explanation in Income Tax Manual given above support this position full. The finding of the C.I.T. (A) on this issue is maintained.

Allocation of Expenses to Exempt Income

14. The AR says that besides decision in I.T.A. No.106/LB of 2000 and ITA No.1658/LB of 2003 in favour of banks, this issue has authoritatively been decided in 2005 PTD (Trib.) 344 with the following observations:

"The proration of expenses between exempt income as well as non-exempt income is not permissible because the legislature has never directed the ascertainment of the purpose of an expenditure and, therefore, the law is not concerned to find out whether the expenditure has produced or will produce taxable income. Thus, Tribunal as well as the Honourable Superior Courts of Pakistan in many judgments have disapproved the hypothetical formula method of proration between exempt income and taxable income."

"In such circumstances, there is no legal or factual justification to prorate expenses between exempt capital gain and income earned from other operation."

The department has referred to 2001 PTD 476, wherein following two questions were answered in affirmative:--

(a) "Whether in the facts and circumstances of the case the Tribunal was justified in disallowing the proportionate interest relating to borrowed capital.

(b) Whether the second proviso to section 10(2)(iii) of the Income-tax Act as introduced by the Finance Act, 1967 with effect from 1st of July, 1967 is applicable to the interest payable on borrowings made by the applicant before 1st of July, 1967?

This case is distinguishable for the following reasons:----

(i) In that case expenses were disallowed under second proviso to section 10(2)(iii) of Income Tax Act, 1922 whereas there is no provision in the Income Tax Ordinance, 1979 or any rule prescribed thereunder regarding proration of administrative/ selling and general expenses between the operational taxable income and exempt capital gain.

(ii) In the case referred by the Department, interest expenses were, otherwise, allowable but in case of capital gain no expense except cost of acquisition and expenditure incurred in connection with the transfer thereof are admissible. The proration was designed to pass on some of the administrative and general expense to capital gain. When these expenses are not allowable deductions under section 28 how can the same be apportioned vis-a-vis any other head of income? Even otherwise, no part of the administrative and general expenses has been proved by the Assessing Officer to have been incurred by the appellant in earning exempt capital income."

The above case-law relied upon by the ITAT elaborates in details that apportionment of expenses is not permissible between exempt capital gains and income earned from other operations.

15. The upshot of above discussion is that bad debts written off during the year are an allowable expense in profit and loss account and if claimed by the bank should be allowed without exception. Similar situation applies if the same are in respect of an earlier year but are P claimed in a subsequent year. With regard to other issues, we have given our finding while discussing them separately in the paras., supra and except in the case of diminution of the value of shares where we have rejected assessee appeal and in the case of other provisions which we have set aside, all of other. issues, the assessee appeal is allowed.

It may, however, be further added that the income from capital gain being a separate block of income and being similar in its charge to property income having restrictive allowance of expenditure cannot be quantified for prorating the expenses claimed otherwise. The ratio of the judgments referred by the AR is quite relevant to the facts in hand. Where the assessees have different sources of income and allocation of expenses under normal circumstances does not have any doubts in view of the legal position, there is no question of proration of the expenses in respect thereof. The proration can only be made where under different heads the expenses otherwise are relatable but have not been quantified while proration accounts by the taxpayer. However, since this situation does not exist in the cases in hand and the capital gain can be identified as a separate block and its expenditure also being specific, we hold that the proration to said head is an incorrect application of law.

17. As a result, all the appeals stand decided in the manner and to the extent mentioned hereinbefore.

C.M.A./503/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Order accordingly.