COMMISSIONER LEGAL DIVISION VS CIVIL AVIATION AUTHORITY
2008 P T D 647
[Karachi High Court]
Before Athar Saeed and Anwar Zaheer Jamali, JJ
COMMISSIONER LEGAL DIVISION
Versus
CIVIL AVIATION AUTHORITY
I.T.R.A. No.584 of 2006, heard on 02/07/2007.
Income Tax Ordinance (XLIX of 2001)---
----Ss. 12, 25, & 133---Reference to High Court---Allowable expense---Determination of---Commissioner of Income Tax in his reference, had sought opinion of the High Court regarding question, `whether Appellate Tribunal was justified in law to hold that provision made in the books of accounts of compensated absences was allowable expenses, even though it was not based on the demands in that regard'---Main contention of counsel for department was that expenditure claimed in respect of compensated absences was not an allowable expense as same was merely a provision and had not been paid---Validity---If the taxpayer followed the mercantile system of accountancy, then he was entitled to the deduction of the bonus provided during the year despite the fact that it was not paid during the year---Provision for gratuity being an ascertained liability was an allowable expense, even though not actually paid during the year---Judgment of the Income Tax Appellate Tribunal, was upheld.
Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. K.K. & Co. Ltd. Peshawar 1980 PTD 210 and 1990 PTD 248 ref.
Aqeel Ahmed Abbasi for Appellant.
ORDER
This Income Tax Reference application has been filed by the Commissioner of Income Tax under section 133 of the Income Tax Ordinance, 2001, seeking the opinion of this Court on the following proposed question:
"Whether on the facts and in the circumstances of the case, the learned ITAT was justified in law to hold that provision made in the books of account of compensated absences was allowable expenses even though it was not based on the demand in this regards?"
2. Heard Mr. Aqeel Ahmad Abbasi, learned counsel for the applicant.
3. The main contention of the learned counsel is that the expenditure claimed in respect of compensated absences was not an allowable expense as the same was merely a provision and had not been paid. In this connection he relied on a judgment of the Peshawar High Court in Commissioner of Income Tax, Rawalpindi Zone, Rawalpindi v. K.K. and Co. Ltd. Peshawar 1980 PTD 210.
4. We have examined the proposed question in the light of the arguments of the learned counsel and the judgments relied on by the learned counsel and the Tribunal in support of their order. We find that the Tribunal had relied on their order dated 29-10-2005 for the assessment year 2001-2002 in which relying on the judgment of this Court reported in 1990 PTD 248 Karachi, they had held that the provision in the books of accounts under mercantile basis of account is an allowable deduction. The learned counsel has been unable to say with certainty if a reference has been filed for the previous assessment year. However despite this lack of assistance we decided to examine the question independently of the Tribunal's order for the previous year.
5. On an examination of the judgment relied on by the learned counsel we find that in this case the Honourable Peshawar High Court has held that word `paid' used in context of Bonus in section 10(2)(x) could not be extended to cover any provision of payment of sum at the end of year unless the actual payment of the sum involved is made during the accounting year.
6. The perusal of the judgment of the Sindh High Court relied on by the Tribunal also relates to Income Tax Act, 1922, but in this case this Court has analyzed section 10(2)(x) in the light of section 10(2)(v) which reads as under:---
"10(2)(v).---In subsection "(2)" paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section."
7. On the basis of interpretation of this section, this Court has held that if the taxpayer followed the mercantile basis of accounting then he is entitled to the deduction of the bonus provided during the year despite the fact that it was not paid during the year. We have also examined the judgment of the Honourable apex Court reported in the case of Commissioner of Income Tax v. Oriental Dyes and Chemical Co. Ltd. reported in 1992 SCMR 763 in which the Honourable Apex Court had held that the provision for gratuity being an ascertained liability is an allowable expenses even, though not actually paid during the year.
8. With great respect to their Lordships of the Peshawar High Court we would like to observe that the judgment of the Honourable apex Court and this Court are the correct interpretation of law as the implication of section 10(2)(v) has not been considered by their Lordships of the Peshawar High Court.. Respectfully following the above judgments we uphold the judgment of the Income Tax Appellate Tribunal and since the matter has already been adjudicated by the Honourable apex Court, we refuse to answer the proposed question.
H.B.T./C-26/KOrder accordingly.