HABIB BANK LTD., KARACHI VS COMMISSIONER OF INCOME TAX, KARACHI

2009 P T D 443

[Karachi High Court]

Before Muhammad Athar Saeed and Arshad Noor Khan, JJ

Messrs HABIB BANK LTD., KARACHI

Versus

COMMISSIONER OF INCOME TAX, KARACHI

I.T.A. No.882 of 1999, decided on 19/12/2008.

(a) Public Debts Act (XVIII of 1944)---

----S. 17(2)(a)---Notification S.R.O. 745(I)/89, dated 11-7-1989--Government Security---Scope---WAPDA Bonds (Second Issue) are government securities in view of notification S.R.O. 745(I)/89, dated 11-7-1989.

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

----S. 17(2)(a)---Notification S.R.O. 745(I)/89, dated 11-7-1989---WAPDA Bonds (Second Issue), interest on---Exemption---Return on investment made by individuals and bodies corporate in WAPDA Bonds (Second Issue) is exempted from payment of tax.

(c) Interpretation of statute---

----Principal statute and Schedule---Conflict---If there is conflict between principal statute and schedule, the principal statute prevails.

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

----Ss.17(2)(a), 136 & Second Sched. Serial Nos.79-A & 79-B---Notification S.R.O. 745(I)/89, dated 11-7-1989---Government security---Levy of tax---Exemption---Assessee was aggrieved of the decision of Income Tax Appellate Tribunal, whereby assessee was denied exemption on interest earned on WAPDA Bonds (Second Issue)---Validity---Provisions of S.17(2)(a) of Income Tax Ordinance, 1979, would prevail over the provision of Serial Nos.79-A and 79-B of Second Schedule to Income Tax Ordinance, 1979, if there was any conflict between the two statutes---No conflict existed between the two and Notification S.R.O. 745(I)/89, dated 11-7-1989, being later in time had enlarged scope of exemption in accordance with the provisions of S.17(2)(a) of Income Tax Ordinance, 1979---Tribunal was not justified in denying exemption to assessee on interest earned on WAPDA Bonds (Second Issue)---When the Bonds were purchased then in the Bond itself dates had been mentioned when profit / interest on the Bonds would become due to be receivable by purchaser---As the Bonds could not be encashed before maturity and interest was payable on fixed dates, therefore, no interest had become due to be recoverable by purchaser at any time before due dates---Interest on time bond securities, which was not payable before fixed dates accrued on the date those had become due and were receivable---Reference was allowed accordingly.

Molla Ejhar Ali v. C.I.T. PLD 1970 SC 173; C.I.T. v. Sindh Engineering (Pvt.) Limited, Karachi 2002 PTD 419 = 2002 SCMR 527; Commissioner of Income Tax v. Vali Bhai Kamruddin (Sindh) Limited 1973 PTD 410; Seth Lalbahi Dalpatbhai v. Commissioner of Income Tax Bombay North 22 ITR 13; Commissioner of Income Tax v. Eastern Investments Ltd. 1997 PTD 724 and Civil Appeals Nos. 1158-1159 of 2007 ref.

Ikramul-Haq for Appellant.

Muhammad Farid for Respondent.

Date of hearing: 20th November, 2008.

JUDGMENT

MUHAMMAD ATHAR SAEED, J.---This Income Tax appeal was admitted for regular hearing by this Court vide order dated 26-4-2007 to answer the questions proposed in this Income Tax Appeal, which are reproduced as under:--

(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law to confirm disallowance of expenditure under investment loss and fraud and forgeries without considering and discussing any arguments.

(2) Whether on the facts and circumstances of the case, the Tribunal was right to deny exemption in respect of income from WAPDA Bonds (Second Issue) under section 17(2). read with S.R.O. 745(I)/89 dated 11th July 1989.

(3) Whether on the facts and circumstances of the case, the Tribunal was right to hold that income under the head interest on securities and under section 17 of the Income Tax Ordinance 1979 is chargeable to tax on accrual basis.

(4) Whether on the facts and the circumstances of the case the Tribunal was right to hold the credit of taxes paid in other countries was correctly disallowed under sections 163 & 164 of the Income Tax Ordinance, 1979.

2. These questions are said to have arisen from the order of the Income Tax Appellate Tribunal dated 19-7-1999 in I.T.A. No.1913/KB of 1998-99 whereby the Income Tax Appellate Tribunal had confirmed the addition of Rs.27.1 Million for provision of fraud and forgeries had confirmed that no exemption was available to the applicant in respect of income from WAPDA bonds (second issue) had held that interest on securities assessable under section 17 was chargeable to tax on accrual basis and had also upheld the order of the Income Tax Officer for disallowing the credit for taxes paid in other countries.

3. We have heard Dr. Ikram-ul-Haq learned counsel for the appellant and Mr. Muhammad Farid learned counsel for the respondent.

4. On question No.1 the learned counsel drew our attention to para.6 of the impugned order of the Tribunal wherein the Tribunal disallowed the provision for fraud and forgeries in the following manner: --

"Mr. Ikramul Haque could not make out any good case for our interfering in respect of additions on account of provisions of investment loss and for fraud and forgeries."

5. The learned counsel argued that the Tribunal has without recording his arguments and giving a finding on it as to why they were not acceptable to the Tribunal upheld the disallowance of this expense. He further argued that superior Courts have held in a number of judgments that where the Court does not give reasons for its decision on any point and passes a non-speaking order on that point then the case should be remanded back to that forum for passing a speaking, order and giving cogent reasons for such disallowance.

6. In support of his contention the learned counsel relied on the following case laws:---

(1) Molla Ejhar Ali v. CIT reported in PLD 1970 SC 173.

(2) CIT v. Sindh Engineering (Pvt.) Limited Karachi reported in 2002 PTD 419 = 2002 SCMR 527.

7. The learned counsel also argued that despite the fact that the expenses have been claimed under the head provision for fraud and forgeries but in reality these losses represent ascertained liability that is allowable as an expense and on this point he relied on a number of judgments from the Indian Jurisdiction.

8. Presenting his arguments on question No.2 the learned counsel submitted that Wapda Bonds (Second Issue) were purchased by the appellant and he had claimed exemption in respect of income/interest on these bonds in accordance with the provision of section 17(2) (a) read with S.R.O. 745(I)/89 dated 11th July 1989. However, the Income Tax officer did not allow this exemption because according to him under clauses (79-A) and (79-B) of part-1 of second schedule to the Income Tax Ordinance, 1979 this exemption has been denied to the banks and is only available to individuals. The learned counsel read out the provisions of 17(2)(a) which provides that where any security of the Federal Government is issued with the condition that interest thereon shall not be liable to tax interest receivable on such security shall be exempt to tax in accordance with such condition.

9. The learned counsel then drew our attention to para.6 of S.R.O. No.745(I)/89 dated 11th July 1989, which has been issued in connection with the second issue of the Wapda Bonds and pointed out that in paragraph-6 it has been provided that return on Wapda Bonds held by individuals and bodies corporate shall be exempt from Income Tax and it also excludes Development Finance Institution and Insurance company from entitlement to such exemption.

10. The learned counsel pointed out that he had purchase the Wapda Bonds on the assurance given in paragraph-6 that these will be exempt and' since subsection 2(a) of section 17 has already provided that if any government security is issued with the-condition that income on such security shall be exempt from tax therefore he was not required to fall within the ambit of clauses (79-A) and (79-B) for the purpose of claim of exemption and the finding given by the Tribunal on this issue is invalid and illegal against the relevant statute. He therefore prayed that he may be allowed exemption on the returns on the Wapda Bonds (second issue).

11. Coming to question No.3 the learned counsel submitted that the government securities purchased by him are time bound which means that return on such securities are only receivable by the appellant or even other owners of such securities on the date of their maturity. He submitted that under International Accounting Standards 90 he has to calculate the profit which has accrued to him on these securities till the last day of the accounting year and declare it as the accrued income in the account but the real fact of the matter is that no interest accrues before the last date of the maturity of their income and this interest is only receivable by him on the date of maturity and according to him he cannot encash these securities before the date of maturity and can only sell such security in the market and the resultant income will be assessable under the head of `income of business and profession' or `capital gains' dependent upon the facts of the case. In this connection the learned counsel has furnished a copy of the State Bank Rules and a certificate to this effect from State Bank of Pakistan. The learned counsel then read out sections 17 and 32 of the Income Tax Ordinance, 1979. He laid great stress on the word `receivable' appearing in clause 1(a) of section 17 and stated that such securities are taxable only' when they are receivable by an assessee in an income year and again stated that these time bound securities are not receivable in the year in which the accrual has been shown. He also laid great stress on the provisions of section 32 wherein section 17 has been included in subsection (1) of this section which provides that income profits and gains under various heads shall be computed in accordance with the method of accounting regularly employed by the assessee. He conceded that he is main taining accounts on accrual basis but stated that for the interest on securities to be taxed on accrual basis it will first have to be proved that such interest had accrued to him during the assessment in question for the purposes of levying tax on it. He also read out the provisions of section 50(8) of the Income Tax ordinance 1979 and subsection (34) of the Income Tax Ordinance 2001 to further substantiate his above contention.

12. The learned counsel also relied on an unreported judgment of the Hon'ble Supreme Court of Pakistan dated 19-10-2007 wherein the Hon'ble Supreme Court of Pakistan has given an obiter dicta that section 17 is the charging section. On the basis of this judgment he argued that since section 17 is a charging section therefore it can be safely assumed that it provides that only that interest is chargeable in a year, which is receivable by the appellant during that year and that interest is not chargeable which though deemed to have accrued is not receivable by the appellant during that year.

13. As far as the question No.4 is concerned the learned counsel did not press it after reading the findings of the Tribunal on this point wherein the Tribunal has held that the applicant will be free to seek rectification of any miscalculation or in view of changed position of the assessee bank's tax liabilities in some country or a number of such countries due to decision of the tax authorities about the matter.

14. The learned counsel for the respondent strongly opposed the contention made by the learned counsel for the appellant. As far as the question No. 1 is concerned the learned counsel argued that the above expense was a provision and not an ascertained liability and it has been held in a number of cases that provisions are not allowed as deduction. Although he conceded that the tribunal has not given any finding on this point but he stated that both the Income Tax Officer and the CIT(Appeals) have given exhaustive findings and the Tribunal had just adopted those findings.

15. Coming to question No.2 the learned counsel submitted that under the Income Tax Ordinance exemptions are provided in the second schedule and if an exemption is not provided in the second schedule but in some S.R.O. the same will not be allowable to assessee. He also argued that since the applicant has specifically been excluded from the exemption provided in clauses (79-A) and (79-B) they being a part of the Ordinance shall prevail over the S.R.O. and they being special laws shall prevail over provision of general law i.e. section 17(2) (a).

16. Coming to question No.3 the learned counsel pointed out that by including section 17 in subsection (1) of section 32 the legislature has indicated that the interest on securities will be assessable in accordance with the method of accounting regularly maintained by the assessee and since admittedly the appellant is maintaining its accounts on accrual basis therefore the forum below had rightly taxed the interest of securities on accrual basis and not on cash basis as declared by the assessee. The learned counsel also submitted that vires of a statute can only be challenged in a writ petition and not in a Reference Application.

17. The learned counsel also submitted that the judgment of the Hon'ble Supreme Court of Pakistan relied on by the learned counsel for appellant is not applicable to the facts of the case and relied on a judgment of this Court dated 2-6-2006 in ITC No. 71 of 1993 which according to him is the relevant case on the subject matter of this controversy.

18. We have examined the case in the light of the arguments of the learned counsel and carefully perused the record of the case including the assessment orders, the impugned order of the Tribunal and the other orders and perused the law on the subject and the judgments relied on by the learned counsel.

19. Before dilating on the issues in hand it will be relevant to reproduce the findings of the Tribunal on the three questions, which have been contested before us.

Question No.1

"Next grievance of the assessee bank is regarding CIT(A) confirmation of disallowances made by the DCIT at Rs.36 M for provision for investment loss, 2701 M for provision for fraud and forgeries and Rs. 27.78 M for 5% out of other expenses. Mr. Ikramul Haque could not make out any good case for interfering in respect of additions on account of provision of investment loss and for fraud and forgeries."

Question No.2

"As per ground No.6 assessee bank challenged CIT (A) maintaining assessing officer's decision of rejecting its claim of exemption in respect of income of Rs.80,937,500 from WAPDA Bonds (Second Issue).

Under S.R.O. 745(I)/89 dated 11th July, 1989. The Assessing Officer had disallowed claim in view of the clear and unambiguous provisions of clauses (79-A) and (79-B) the Part-1 of Second Schedule to the Income Tax Ordinance, 1979. As per clause (79-A) incomes of persons other than a bank, a banking company, a financial institution, a development finance institution or a company engaged in the business of insurance by way of return on bearer bond issued by the WAPDA are exempt from tax. Similarly under clause (79-B) of this schedule the exemption to return on WAPDA Bonds (second schedule 1989) is restricted to individuals only. In either case no exemption is available to returns on bonds issued on or after 1st July, 1991. Mr. Ikramul Haque argued that exemption was not claimed under these clauses but under section 17(2)(a) and under S.R.O. 745(I)/89 dated 11th July, 1989. He however, could not put any plausible arguments in support of his claim. If exemption was available to these returns under section 17(2)(a) there was obviously no need to insert these clauses in the Second Schedule specifying the persons in-whose hands only such income was to be exempt. Clauses (79A) and (79B) of the Second Schedule cannot be deemed to have been inserted without any purpose in case the income of these bonds was already exempt under section 17(2)(a). Dr. Tariq Masood argued that S.R.O. referred to by the assessee's A.R. could not possibly have overriding effect over specific and unambiguous wording of the statute. If the assessee bank had bought the bonds under a bona fide belief in view of the S.R.O. 745(I)/89 dated 11th July 1989 that such income is exempt from tax in its hands it should have taken up the matter with concerned authorities for proper clarification of the matter, which it has not obviously done. Moreover, clause (79B) was inserted vide S.R.O. 603(I)/89 on June 6, 1989 which clearly laid down that exemption of return on WAPDA bonds will be restricted to individuals only. In these circumstances, we find no reason to interfere with orders of officers below which are accordingly confirmed."

Question No.3.

"As per ground No.8 the assessee bank challenge the taxing of assessee's income/gains on securities and debentures on accrual basis instead of actual receipt basis by the assessing officer and confirmation thereof by the CIT(A) Mr. Ikranful Haque however, could not make any good case for our interfering into the matter since it has of late been the consistent view of this Tribunal that in view of the changed position of law as per section 32 of the Income Tax Ordinance vis-a-vis section of the repealed Act 1922, the interest income in case of banks is taxable on accrual basis and not actual receipt basis as was the view in respect of the provisions of section 8 read with section 13 of the repealed Act of 1922. The plea of the assessee is therefore, rejected."

20. From a perusal on the finding of the Tribunal given on the proposed question No. 1 we are inclined to agree with the contention of the learned counsel for the applicant that the Tribunal has without recording and rebutting the arguments of the learned counsel disallowed the provision for fraud and forgeries. The learned counsel had stated in his arguments that the above deduction was not in the nature of provision but was an ascertained liability, which was allowable as a business deduction.

21. The learned counsel for the respondent in his arguments has rebutted this argument by stating that cogent reasons for treating the above deduction as a provision given in the' assessment order by the assessing officer and by the CIT (Appeals) in his order and the Tribunal had just adopted the finding of the two authorities below and upheld the addition.

22. In order to ascertain the factual position we have examined the contents of the assessment order and the appellate order passed by the CIT (Appeals) on this point.

23. The extract from these two orders on this point are reproduced below:

Assessment order

(1) Investment Loss & Fraud and forgeries:

Addition of Rs.63.1(M) is made in respect of investment loss and for fraud and forgeries, the provision for investment fraud and forgeries is disallowed, being merely provision. Moreover, assessee bank failed to substantiate claim by any details. The above treatment was upheld by CIT(A) except the policy decision of the C.B.R. and the M.O.F. priority on the basis of circular letter vide appeal order Nos. 215 to 217 dated 16-5-1998.

Appellate Order

(2) Provision for investment loss and fraud/forgeries loss:

The AR submits that the assessing officer had disallowed loss on investment and fraud/forgeries amounting to Rs.36,000,000 and Rs.27,100,000 respectively by ignoring the fact that the provisions for fraud and forgeries were incidental to business in the case of banks and were legitimate deductions within the meaning of section 23 of the Income Tax Ordinance, 1979. Money being the stock in trade of a bank would, if lost through fraud, forgery or embezzlement, be business loss and ought to be allowed, unless the claim was found to be false. However, since these were mere provisions and in view of the observations made by my learned predecessor on these disallowances vide Order Nos. 215 to 217/V dated 16th May 1998, I decline to interfere on this issue.

24. From a perusal of the above extracts it is seen that these two authorities have also treated the above deduction claimed in the account as a provision without giving any reasons for such treatment and therefore it is clear that no cogent reasons substantiated with evidence have been given by any of the authorities below for treating the above deduction as a provision.

25. We are therefore of the considered opinion that it will be in the interest of justice if the addition on account of deduction for fraud and forgeries is remanded back to the Tribunal to decide de novo after giving both the parties an opportunity of being heard recording the arguments of the applicant's counsel and if they are not satisfied with the arguments then they may reject the same by giving cogent reasons.

26. Coming to question No.2 from a perusal of the extract on the finding of the Tribunal on this question it is clear that although the Tribunal has referred to section 17(2) (a) of the Income Tax Ordinance 1979 clauses 79-A and 79-B of part-1 of the second schedule to the Income Tax Ordinance 1979 and S.R.O. No. 745(I)/89 dated 11th June 1989 but they have failed to analyze the cumulative effect of examination of all these provisos in juxtaposition.

27. For the sake of convenience the relevant section 17(2)(a) Clauses (79-A) and (79-B) and the relevant extracts from S.R.O. 745 are reproduced below:---

Section 17(2)(a)

Interest on securities:---

(2) Notwithstanding anything contained in subsection (1)---

(a) Where any security of the Federal Government or a Provincial Government is issued with the condition that the interest thereon shall not be liable to [tax] the interest receivable on such security shall be exempt from tax in accordance with such condition.

(79-A) Any income derived by any person, not being a bank, a banking company, a financial institution, a development financing institution or a company engaged in the business of insurance, by way of return on bearer bonds issued by the Pakistan Water and Power Development Authority established under the Pakistan Water and Power Development Authority Act, 1958 (West Pakistan Act No. XXXI of 1958).

(79-B) Any income derived by any person, being an individual, by way of return on bearer or registered bonds (Second Issue, 1989) issued by the Pakistan Water and- Power Development Authority, established under the Pakistan Water and power Authority Act 1958 (West Pakistan Act No. XXXI of 1958).

WAPDA BONDS (SECOND ISSUE) REGULATIONS 1989.

S.R.O.745(I)/89, dated 11th July 1989.---The Federal Government is pleased to make the' following regulations, namely:

(1) These Regulations shall apply to all bonds issued by the Pakistan Water and Power Development Authority as from the date specified in regulation.

(2) The Bonds shall carry a minimum return of 13.5 per cent per annum, payable half-yearly from the date of issue. In case the return on capital employed by WAPDA exceeds 13.5 per cent in any year, WAPDA shall also pay the same to the holders of the bonds: The return shall cease to accrue after the date of maturity. The return on WAPDA Bonds held by individuals and bodies corporate shall be exempt from income tax. The return on bonds purchased by Development Finance Institutions and Insurance Companies shall, however, be subject to income tax.

28. From a perusal of the S.R.O. it is seen that the Federal Government had issued the WAPDA bonds subject to the condition that the return on such WAPDA bonds (second issue) held by individuals and bodies corporate should be exempt from income tax on 11th June 1979. Government security has been defined under the public Debt. Act 1944 as under:---

"Government Security" means---

(a) A security, created and issued, whether before or after the commencement of this Act, by the Government for the purpose of raising a public loan, and having one of the following forms, namely: --

(i) Stock transferable by registration in the books of the Bank; or

(ii) a promissory note payable to order; or

(iii) a bearer bond payable to bearer; or

(iv) a form prescribed in this behalf; or notified by Government from time to time.

29. When we examine the nature of WAPDA bonds (second issue) issued under the above S.R.O. in the light of the definition of Government security it is clear that WAPDA bonds (second issue) are Government securities.

30. After reaching this conclusion when we examine section 17(2)(a) we see that it has specifically been provided in this section that where any security of the Federal Government is issued with the condition that the interest thereon shall not be liable to tax, the interest receivable on such security shall be exempt from tax in accordance with such condition. So when paragraph-6 of S.R.O. 745 is read together with section 17(2) (a) of the Income Tax Ordinance 1979 the only conclusion which can be drawn is that as far as interest on WAPDA Bonds (second issue) invested by individuals and bodies corporate is concerned it is the intention of the legislature and the Federal Government that return on such investment is exempted from payment of tax.

31. Now coming to the reason given by the Tribunal in its finding on this question for non-allowability of this exemption that is that if exemption was already available to these returns under section 17(2)(a) there was no need to insert clauses (79-A) and (79-B) of Part-1 of the Second Schedule and they cannot be deemed to have been inserted without any purpose in case the income/bonds was already exempt under section 17(2)(a).

32. What the Tribunal has failed to note is that clauses (79-A) and (79-B) have been inserted in the second schedule on 4th October, 1987 and (79-B) on 6th June, 1989, whereas S.R.O. in question was issued on 11th July, 1989. Perhaps when the above clauses were inserted in the second schedule the decision of the Federal Government to provide any exemption in the S.R.O. may not have been finalized and therefore exemption was provided under the second schedule but when the S.R.O. was issued the decision must have been taken to provide exemption to corporate bodies also and therefore, the exemption was provided under para.6 of this S.R.O.

33. The learned Tribunal has also recorded the arguments of the representative of the present respondent that the S.R.O. could not possibly have overriding effect over the specific and unambiguous wording of the statute.

34. The Tribunal has again failed to visualize that it was not a question of S.R.O. having overriding effect over the statute but the question was whether a statute in the main Act overrides the schedule or not and it is a settled law that if there is a conflict between the principal statute and a schedule the principal statute will prevail and in this case in our considered opinion the provisions of section 17(2)(a) of the Income Tax Ordinance will prevail over the provision of sections 79-A and 79-B of the second schedule if there is any conflict between the two statutes without prejudice to our opinion that there is no conflict between these statutes and S.R.O. 745 being later in time has enlarged the scope of exemption in accordance with the provisions of section 17(2)(a).

35. We are therefore of the considered opinion that the Tribunal was not justified in denying exemption to the applicant on interest earned on the WAPDA bonds (second issue). On the basis of this opinion we will answer the proposed question No.2 in negative in favour of the applicant and against the respondent.

Before we examine question No.3 it will be relevant to reproduce the provisions of sections 17(1)(a) and 32(1) of the Income Tax Ordinance, 1979:

Section 17(1)(a) of the Income Tax Ordinance, 1979.

Interestsecurities:---(1) The following incomes shall be chargeable under the head "Interest on securities" namely:---

(a) Interest on any securities of the Federal Government or a Provincial Government receivable by an assessee in any income years; and

Section 32 (1)

Method of accounting.---(1) Income, profits and gains shall be computed for the purposes of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee.

37. It is clear from a bare reading of section 17(1) (a) that returns on any securities of the Federal Government or Provincial Government "receivable" by a taxpayer in any income year is chargeable under the head `interest on securities'. In our opinion the word "receivable" is the important word in this subsection and as we understand it such income can only be charged under the head interest of securities in the income year in which it is receivable by an assessee.

38. In the light of the above observation we have examined the S.R.O. 735(I)/2000 dated 12th September 2000 issued by the Ministry of Finance and Economic Affairs called Pakistan Investment Bonds Rules, 2000. Clauses (4), (6), (7) and (11) of the S.R.O. are reproduced below for the sake of convenience:---

S.R.O. 735(I)/2000.---In the exercise of the powers conferred by section 28 of the Public Debt Act, 1944 (XVIII of 1944), the Federal Government is pleased to make the following rules, the same having been previously published, as required by sub-section (1) of the said section namely:---

1. --------------------------

2. --------------------------

3. --------------------------

4. The maturity period of the Bonds shall be three, five and ten years.

5. --------------------------

6. The profit on the Bonds shall be paid semi-annually.

7. The Bonds shall not be redeemable before maturity.

8. --------------------------

9. --------------------------

10. --------------------------

11. The Bonds shall be scriptious and managed through clients, Subsidiary General Ledger Accounts with banks.

12. --------------------------

13. --------------------------

39. From a cumulative reading of these clauses it is seen that the maturity period of the bond shall be 3,' 5 and 10 years, the profit shall be paid semi-annually and the bonds shall not be redeemable before maturity but may be sold in the crucial market.

40. It is therefore apparent that when the Bonds are purchased then in the bond itself dates will be mentioned when the profit/interest on these bonds will become due to be receivable by the purchaser. However since the bonds cannot be encashed before maturity and the interest is payable on fixed dates therefore, no interest becomes due to be receivable by the purchaser at any time before the due dates.

41. From a perusal of section 32 it is clear that income under section 17 has to be computed in accordance with the system of accounting maintained by the taxpayers and since it is an admitted fact that the applicant is maintaining his accounts on the basis of mercantile system therefore income under section 17 has also been computed on the basis of accrual. The next question, which arises, is to determine when the interest on these investments is deemed to accrue. Does it accrue on day-to-day basis or does it accrue on dates when it has become due to be receivable? We therefore resorted to read sections 17 and 32 together in the light of the judgment relied on by the learned counsel and a couple of decisions of the Indian Courts on which we managed to lay our hands on.

42. The learned counsel for the applicant relied on the judgments of this Court in the case of Commissioner of Income Tax v. Vali Bhai Kamruddin (Sindh) Limited 1973 PTD 410.

43. In this case Mr. Justice Noorul Arfin as he then was held as under: ---

"Turning to the case before us it has been found by the Income Tax Appellate Tribunal that under the managing agency agreements the end of each relevant accounting year. Therefore as far as managing agency commission is concerned it cannot be said to have accrued until the end of the accounting year in question. But for each such accounting year, the assesses passed a resolution foregoing the commission receivable by them which resolutions were accepted by the managed companies. Therefore, no income whatsoever resulted to the assessee with regard to these commissions which cannot be said to have accrued due to them at all for any of the accounting or assessment years in -dispute before us."

44. Another judgment relied on by the learned counsel is the judgment of the Bombay High Court in case of Seth Lalbahi Dalpatbhai 'v. Commissioner of Income Tax Bombay North reported in 22 ITR 13. In this case the Bombay High Court observed as under:---

"Interest on securities accrues or arises to the assessee at the date when interest become payable and is liable to tax under section 4(1)(b)."

45. We have also examined the judgment of the Calcutta High Court in the case of Commissioner of Income Tax v. Eastern Investments Ltd. reported in 1997 PTD 724. In this judgments the Calcutta High Court followed the judgment of the Supreme Court of India. The following relevant extract of the judgment is being reproduced:---

"In order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise. But he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words, a debitum in praesenti, solvendum in futureo it cannot be said that any income has accrued to him."

46. The High Court went to hold as under:---

That income accrues only where a right to receive arises; alternatively a debt becomes due to the assessee as re-emphasised by the Supreme Court in the further observations at page 52 of the Reports 26 ITR:

"They had no doubt rendered services as managing agents of the companies for the broken period. But unless and until they completed their performance viz the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could, therefore, be said to have accrued to them."

47. In the light of these reported judgments and the unreported judgment of the Supreme Court in Civil Appeals Nos.1158-1159 of 2007 in which the Hon'ble Supreme Court has held that charging section for interest on securities is section 17, we have once again read the provisions of section 17 (1) (a) of the Income Tax Ordinance 1979. On this reading the only conclusion, which we have been able to draw, is that the interest on security is only chargeable to tax in the income year it is receivable.

48. We have also seen that the Bonds are not encashable/redeemable before the maturity date and there is no way that interest can become due to the purchaser on any day before the date fixed for payment of this interest. The only way the purchaser can perhaps retrieve this interest is selling this bonds at a premium but then the profit on such tax will either be taxed as capital gains or as income for business and profession depending on the facts of each case and not as interest income. It therefore follows that there is no way the applicant can receive the return on such securities before the date fixed for the payment and in our opinion income only accrues when it has become due and therefore the interest on Government securities purchased under Pakistan Investment Bonds Rules 2000 accrues on the date on which such interest becomes due and is receivable and not on day to day basis.

50(sic). On the basis of our above observation we have examined question No. 3. As far as the facts of this case are concerned the question has not been correctly worded because the only answer to the proposed question under the provisions of section 32 which we can give is in affirmative because the income is chargeable on accrual basis. Therefore in order to resolve the controversy in this reference application it will be necessary to reframe this question. We would therefore reframe the question No. 3 to read as under:---

Whether on the facts and in the circumstances of this case the tribunal was justified to hold that the return on investment and securities accrues on day to day basis and not on the date the interest becomes actually due and receivable.

51. We would answer this reframed question in negative and hold that interest on time bond securities which is not payable before fixed dates accrue on the date they become due and are receivable.

52. The learned counsel has already conceded that he will not press question No. 4 and therefore, this question is not required to be answered by us.

53. This reference application is disposed of in the above manner.

54. A copy of this order under the signature of the Registrar and seal of this Court be remitted to the Income Tax Appellate Tribunal for passing of order in conformity with this order.

M.H./H-1/KOrder accordingly.