NEW HAMPSHIRE INSURANCE COMPANY, PAKISTAN BRANCH VS COMMISSIONER OF INLAND REVENUE-E, 2017 PTD-KARACHI-HIGH-COURT-SINDH 851 (2016)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 32 (2), 34, 122(5A) & 133---Security and Exchange Commission (Insurance) Rules, 2002, Annexure, II, Part-B, Para-6, cl. (2)---Reference---"Incurred But Not Reported" claims---Insurance company was aggrieved of disallowing claim of provision against "Incurred But Not Reported" claim (IBNR)---Validity---Fact that no notice received by insurer in respect of (IBNR) claim did not stand in the way of such claim being deductible for income tax purposes---Claim could be considered to be incurred under Annexure, II, Part-B, Para-6, cl. (2) of Security and Exchange Commission (Insurance) Rules, 2002, at the time of incident giving rise to the claim---All events that determined liability for the purposes of S. 34(3) of Income Tax Ordinance, 2001, would have occurred on such date---High Court declined to accept contrary view suggested for such provision by authorities and decided the question in favour of taxpayer and modified the order passed by the Appellate Tribunal---Reference was allowed accordingly.

Federal Commissioner of Taxation v. Mercantile Mutual Insurance (Workers Compensation) Ltd. [1999] FCA 351; (1999) 162 ALR 130; Fiji Southern Pacific Insurance Co (Fiji) Ltd. v. Commissioner of Inland Revenue [1986] UKPC 14; [1986] STC 178; New Zealand Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. [1995] UKPC 38 and [1995] 3 NZLR 513 ref.

Ijaz Ahmed for Applicant.

Sarfraz Metlo for Respondent.

Dates of hearing: 29th January and 16th May, 2016.

ORDER

MUNIB AKHTAR, J.---This income tax reference relates to the tax year 2004 and challenges the order of the learned Appellate Tribunal dated 08.11.2013. The following questions of law have been proposed by the Applicant as being the questions that arise out of the impugned order:

1.Whether, in the facts and circumstances of the case, the Tribunal was justified in upholding the finding of the Respondent disallowing the claim of provision against Claims Incurred But Not Reported (IBNR) of Rs. 3,126,000?

2.Whether the claim for provision against IBNR is governed by Rule 5(a) or 5(c) of the Fourth Schedule to the Income Tax Ordinance, 2001?

3.Whether the Additional Commissioner could assume jurisdiction under section 122(5A) of the Income Tax Ordinance, 2001 to pass an amended assessment order under the said section?

4.Whether the Additional Commissioner could invoke the provisions of section 122(5A) without establishing that the assessment order under section 120 was erroneous insofar as it was prejudicial to the interest of the revenue?

2.The Applicant is the Pakistani branch of a foreign insurance company, which is assessed as an entity in its own right under the Income Tax Ordinance, 2001 ("2001 Ordinance"). It is engaged in general insurance (i.e., non-life) business under the Insurance Ordinance, 2000 ("Insurance Ordinance"). It is pertinent to note that the Applicant maintains its books of account on the accrual basis of accounting as required by section 32(2) of the 2001 Ordinance, which means that section 34 thereof applies to it.

3.The Applicant filed its tax return for the tax year 2004 and, in terms of section 120, it was treated as a deemed assessment order. Since the Applicant is an insurance company, section 99 read with the Fourth Schedule to the 2001 Ordinance applies to it. The concerned officer of Inland Revenue took issue with certain aspects of the Applicant's return (i.e., deemed assessment order) and initiated proceedings to amend the same under section 122(5A). Of the points so taken in issue, only one is relevant for present purposes. The Applicant, on the basis as explained below, sought to expense by way of deduction certain claims known as "incurred but not reported" (or IBNR claims for short). According to the Additional Commissioner such claims could not be deducted from the Applicant's income and, amending the deemed assessment, he made an add-back to the Applicant's taxable income. We may note that the Applicant had declared a taxable income of Rs. 132,266,197/- and the IBNR claims (as per the Department) came to around Rs. 10,162,000/-, although as per the Applicant's case, they amounted to Rs. 3,126,000/-. Being aggrieved by this amendment (and others, which, as noted, are not presently relevant) the Applicant filed an appeal. (There were also certain rectification proceedings, which need not be referred to.) The appeal on the point in issue was dismissed by the Commissioner (Appeals). A further appeal to the learned Appellate Tribunal also failed, and the Applicant is now before us in the present reference application.

4.Learned counsel for the Applicant, referring to section 99 and Rule 5 of the Fourth Schedule submitted that, as set out in the latter provision, the Applicant was to be taxed on the basis of "the balance of the profits disclosed by the annual accounts required under the Insurance Ordinance... to be furnished to the Securities and Exchange Commission of Pakistan". The main part of Rule 5 is subject to certain "adjustments", as stated in various clauses thereof. In respect to the IBNR claims, the Department's position was that the "balance of the profits disclosed" (i.e., Rs. 132,266,197/-) was liable to be adjusted by an add-back of the IBNR claims in terms of clause (a). The Applicant's case was that that clause did not apply and if at all, it was only clause (c) that was applicable. The latter clause however did not require any add-back of the IBNR claims. As to the basis of the IBNR claims, learned counsel referred to the Insurance Ordinance. Sections 45 and 46 deal with the books and records of, and preparation of accounts by, an insurer. Learned counsel referred in particular to section 46(1)(b), which applies to a "non-life" insurer such as the Applicant. This lists the various statements of account required of the insurer, each to be "in such form as may be prescribed by the Commission and prepared in accordance with such regulations as are issued by the Commission from time to time in this behalf". Learned counsel referred to the Securities and Exchange Commission (Insurance) Rules, 2002 notified vide S.R.O. 938(I)/2002 dated 12.12.2002 ("2002 Rules"). Rule 16 of the 2002 Rules provides that for the purposes of subsections (1) and (2) of section 46, the statements as set out in Annexure II of the said Rules are to be furnished. Referring to Annexure II, learned counsel drew attention to Part B, which sets out the accounting regulations for non-life insurance. Reliance was placed in particular on paragraph 6 of Part B, which deals with "claims" and is in the following terms:--

"6. Claims

(1)A liability for outstanding claims shall be recognised in respect of all claims incurred to balance date, and must be measured at the undiscounted value of expected future payments.

(2)A claim shall be considered to be incurred at the time of the incident giving rise to the claim, except as otherwise expressly indicated in a contract of insurance.

(3)The claims liability must include amounts in relation to unpaid reported claims, claims incurred but not reported, and expected claims settlement costs." [Emphasis supplied]

5.Referring to clause (3) of the aforesaid paragraph 6, learned counsel submitted that it was a mandatory requirement that the IBNR claims had to be part of the claims liability, and insurers had to draw up their account statements accordingly. Thus, in making the IBNR claims, the Applicant was doing nothing else but complying with the requirements of the Insurance Ordinance. Since it was to be taxed under the 2001 Ordinance on the basis of the profits disclosed in the accounts so drawn up (as per Rule 5 of the Fourth Schedule), the deduction by way of IBNR claims was fully justified and lawful. Learned counsel submitted that clause (a) of Rule 5 had no application, either in law or on the facts and circumstances of the Applicant's case. If at all any clause could apply, that would be clause (c), but that did not in any manner disallow deduction in terms of the IBNR claims. Learned counsel also referred to section 34(3) to submit that the IBNR claims were permissible as a deduction in terms of the accrual basis of accounting. Submissions were also made with reference to the jurisdictional objections taken. It was prayed that the questions be answered in favour of the Applicant and against the Department.

6.Learned counsel for the Department opposed the case sought to be made out by the Applicant. It was submitted that Rule 5(a) of the Fourth Schedule had been properly invoked against the Applicant. That provision, according to learned counsel (to be read, in fact, with section 34(3)), required that an "adjustment" be made to the disclosed "balance of the profits" by an exclusion of the IBNR claims from the permissible deductions, i.e., for the amount as per the said claims to be added back. The Departmental authorities had therefore properly appreciated and applied the law, and the Appellate Tribunal had correctly affirmed their decisions. As regards the provisions of the Insurance Ordinance relied upon, learned counsel submitted that paragraph 6 of Part B of Annexure II of the 2002 Rules was only relevant for reporting purposes and did not constitute part of the financial statements and, in particular, did not go towards ascertaining the "balance of the profits" of the insurer. Learned counsel submitted that the reason why IBNR claims were to be reported was only to gauge the future financial health of the insurer. It was emphasized that the IBNR claims were, in the very nature of things, not actually paid out during the relevant period and were in fact not even known with specificity and hence could not be calculated to any degree that was reasonably certain, let alone being an actual liability. It was therefore a deduction that fell squarely within the scope of clause (a) of Rule 5 and hence had to be excluded by way of an appropriate "adjustment". That was what had been done in terms of the amended assessment order, which had been rightly upheld by the appellate forums below. Rule 5(c) relied upon by learned counsel for the Applicant had no application in the present facts and circumstances. It was submitted that the amended assessment order was well within the jurisdiction of the concerned officer. It was prayed that the reference application be dismissed.

7.At the conclusion of the hearing, we had allowed learned counsel to file written synopses. Both did so and referred to certain case law to support their respective submissions.

8.We have heard learned counsel as above, examined the record and considered the case law relied upon. In our view, the substantive issue involved is raised in terms of Question No. 1. It is worded rather broadly. Be that as it may, in our view the question includes the point whether, if the issue were to be viewed in terms of the general provisions of the 2001 Ordinance relating to the determination of profits and gains from insurance business under the head "Income from Business", a deduction by way of an IBNR claim would be permissible. In other words, Question No. 1 includes consideration of whether, quite independently of section 99 read with the Fourth Schedule, IBNR claims would be a permissible deduction/expense in the carrying on of insurance business. If Question No. 1 is so understood and considered, and the answer is found to be in favour of the Applicant, it will in our view obviate the need to address the other questions. The reason is that Questions Nos. 3 and 4 constitute a jurisdictional challenge. If the substantive issue is decided in favour of the taxpayer there will be no need to consider any jurisdictional objection raised by it. Question No.2 will also not need to be answered. The reason is that the Department's case---that Rule 5(a) is applicable---is premised on precisely that basis which would then have been decided against it, and in favour of the Applicant.

9.We therefore turn to consider Question No. 1, as understood in terms as just stated. Before we do so however, it will be appropriate to say a few words as to the meaning of an IBNR claim. The relevant entry in Wikipedia gives a good working description of the term (emphasis in original):--

"In insurance, incurred but not reported (IBNR) claims refers to the amount owed by an insurer to all valid claimants who have had a covered loss but have not yet reported it. Since the insurer knows neither how many of these losses have occurred, nor the severity of each loss, IBNR is necessarily an estimate. The sum of IBNR losses plus reported losses yields an estimate of the total eventual liabilities the insurer will cover, known as ultimate losses."

The layman, unversed in the whys and wherefores of the insurance world, may legitimately ask as to how an insurer can take into consideration a claim that may have been incurred but has not yet been reported (i.e., claimed) by the insured. That this can be so can be explained by two examples. Firstly, consider the situations when natural disasters (such as hurricanes, typhoons or earthquakes) occur. There can be no doubt that insurers will be faced with claims even though they may not be reported during the relevant (tax) period. However, it is possible to make reasonably accurate actuarial estimates of the damage to infrastructure, etc., and therefore of the insurance claims that can be anticipated on such basis. It will be noted that in this example, the occurrence of the event leading to the anticipated claims (i.e., the natural disaster) is not known let alone certain. But once that event has come to pass, then there can be certainty that claims will be made even though not yet reported. The second example can be taken from certain types of insurance business, e.g., motor car insurance. In such situations, it is virtually certain that during the course of any given (tax) period the event(s) insured against (accident, damage, etc.) will occur many times. The insurer's experience and/or actuarial exercises carried out by it or on its behalf can provide a reasonable estimate of the anticipated claims that will be made even if they have not all been reported. It will be noted that in this example, which essentially relates to certain classes of insurance policies, there is certainty that the insured event will have occurred multiple times during the relevant (tax) period, even though all such events have not been reported. These are the types of situations (by no means exhaustive) which can result in IBNR claims. Of course, the moot point is whether insurers can succeed in deducting such claims from their income over the relevant tax period.

10.It appears that the question now before us, i.e., whether in terms of general taxation principles applicable to the determination of profits and gains from insurance business IBNR claims can be validly deducted, has not been considered before by Courts in this country. Certainly, no case law specifically on the point was referred to by either of the learned counsel. However, the point has arisen in other jurisdictions, and in our view, those cases can and ought to be taken into account. It has been considered more than once in Australia, and it will be convenient to refer to the decision of the Federal Court in Federal Commissioner of Taxation v. Mercantile Mutual Insurance (Workers Compensation) Ltd. [1999] FCA 351, (1999) 162 ALR 130, where the earlier case law is reviewed. The following extracts from the judgment are relevant (pp. 132-5; emphasis supplied):--

"[51 The present appeal concerns two classes of case. The first is where the event insured against occurs in the year of income, is reported in that year but is not settled before the end of the year of income. That class of case is referred to as claims reported but not settled. The second class of case concerns claims where the event insured against occurs in the year of income but is not reported in that year and comes to be settled after the year of income. That class of case is referred to as claims incurred but not reported (IBNR). Both classes of cases raise the same question. It is not in dispute that in each case the insurer has incurred a liability entitling it to a deduction under section 51(1) of the Income Tax Assessment Act, 1936 (Cth) (the Act). What is in dispute is the manner in which that liability should be calculated.

[11] The question whether claims incurred but not reported gave rise to an allowable deduction was not agitated in Australia until RACV Insurance Ply Ltd. v. FCT [1975] VR 1. Accountants had, in that case, given evidence that it was necessary in drawing up accounts to bring to account in the same year as the revenue from a particular transaction the expenditure or anticipated losses "directly related to that revenue". Menhennitt J of the Supreme Court of Victoria, discussed the evidence of one expert accountant, Mr. Buckley, in the following passage (at 14):

... applying that principle he believes that it is proper and necessary to bring to account by way of debit to the profit and loss account in the year in which you bring a certain premium income resulting from contracts of the kind of compulsory third-party insurance estimates of the amounts likely to have to be paid out on account of claims which have been notified and also the best estimate that can be made of claims that have not yet been notified so that they will be matching the claim against the revenue.

His Honour continued:

In my view not only is this in accordance with accepted accountancy principles, but it is also what section 51(1) of the Income Tax Assessment Act contemplates.

[12] Hence in RACV it was held that an insurer was entitled to claim a loss or outgoing as having been incurred when the event occurred which imposed upon the insurer a liability to indemnify the policy holder. The fact that no notice had been received of the claim was held to be irrelevant. On the question of the quantum of the deduction, Menhennitt J said (at 17):

In its annual accounts the taxpayer included a statistical estimate of $1,320,000 upon the basis I have referred to. Mr Sawkins the actuary said that in his opinion this was a reasonable estimate in the circumstances of the taxpayer at that time. By the time it lodged its return the taxpayer had made estimates case by case of the claims by then reported and arising out of events happening in the year ended 28 February 1971 and this is the amount it claimed in its return, namely $1,420,424. I am satisfied on the evidence that this amount represented the total of reasonable estimates of the taxpayer's liability in respect of claims of which it in fact had notice by that date.

[13] Although the RACV case had held that IBNR claims gave rise to a deduction thrown against the earned premiums for the year, a deduction for an estimate of such claims was disallowed by the Commissioner to Commercial Union Assurance Co. of Australia Ltd. on the basis that the policies required notice of the occurrence of the event to be given either forthwith or as soon as possible, and accordingly the insurer had no legal liability to policy holders who did not comply with the condition. The evidence was that the invariable practice was to pay claims in full notwithstanding non-compliance with the condition. It was held in Commercial Union Assurance Co. of Australia Ltd. v. FCT (1977) 14 ALR 651; 32 FLR 32 that the taxpayer was entitled to the deduction claimed. It was not a prerequisite to deductibility that the insurer be under a legal obligation to pay enforceable by law. It sufficed that the taxpayer had in the year of income been subjected to the liability and had thus incurred it....

[14] In passing it may be noted---it is relevant to a submission made by the Commissioner in the present appeals -- that Newton J of the Supreme Court of Victoria said (at ALR 662; FLR 43), dealing with the argument that the non-fulfilment of the condition requiring notice led to the conclusion that no amount had been incurred at the time the event insured against occurred:

It would, in my opinion, be wrong to regard them as contracts to pay money to the insured, or for his benefit, upon the reporting to the insurer within a specified time of the occurrence of an event. On the contrary they were insurance contracts subject to a condition precedent as to notice, and since: it was certain that the condition as to notice would never be relied on by the insurer, the liability of the insurer was "incurred" within the meaning of section 51 upon the happening of the event insured against.

[15] Of greater importance to the Commercial Union decision and the present appeals, however, is that in holding the amount claimed by the insurer to be deductible his Honour spoke of treating the deduction as being thrown against the premiums of the year.

[16] The judgment makes it clear that, in principle, there is no difference between claims reported but not settled and claims incurred but not reported in both cases the insurer has incurred expenditure which is an allowable deduction....

[17] The judgment of Newton J in Commercial Union has been referred to with approval in the High Court in Nilsen Development Laboratories Pvt. Ltd. v. FCT (1981) 144 CLR 616; 33 ALR 161 and Coles Myer Finance Ltd. v. FCT (1993) 176 CLR 640; 112 ALR 322."

11.The Privy Council has expressed a similar view in an appeal from Fiji, Southern Pacific Insurance Co. (Fiji) Ltd. v. Commissioner of Inland Revenue [1986] UKPC 14, [1986] STC 178. Although the questions raised in the appeal were different from the issue before us, the following extracts from the judgment are relevant (pp. 179 and 181; emphasis supplied):

"The appellant company, Southern Pacific Insurance Company (Fiji) Ltd., was incorporated in Fiji and since 1 July 1974 has been engaged in the business of underwriting general insurance, including the provision of compulsory third party motor insurance policies. The accounts of the company run from 1 July to 30 June in every year.

Their Lordships agree with the Court of Appeal of Fiji that the company was entitled in calculating its profits for the purposes of the Income Tax Act, Cap 201, of the Laws of Fiji, to deduct from the aggregate premiums attributable to the risks insured in each year, the aggregate liability of the company for insured accidents and events which occurred during that year. By the end of each year of account, the company will only receive notice of some claims for accidents which have occurred in that year. There will be a large number of accidents which are not reported to the company until after the end of the year of the accident. Their Lordships also agree with the Court of Appeal that the principles enunciated in Southern Railway of Peru Limited v. Owen [1957] AC 334, 36 TC 602 are applicable to the laws of Fiji. In relation to accidents which occur in an accounting year, but are not reported to the company during that year, so that the company is for the time being ignorant of the obligations which will or may arise as a result of those accidents then, in the words of Lord Radcliffe ([1957] AC 334 at 357, 36 TC 602 at 644):

'... their proper treatment in annual statements of profit depends not upon the legal form but upon the trader's answers to two separate questions. The first is: Have I adequately stated my profits for the year if I do not include some figure in respect of these obligations? The second is: Do the circumstances of the case, which include the techniques of established accounting practice, make it possible to supply a figure reliable enough for the purpose?'

In its accounts and tax returns for the year ended 30 June 1979 the company deducted $85,000 for claims incurred but not reported, known as IBNR claims, of that year. The commissioner disallowed the deduction. The Court of Review dismissed an appeal by the company on the grounds that on the evidence 17.94% of claims were unsuccessful because the third party claimants could not prove negligence on the part of the insured driver. The company appealed to the Supreme Court and Madhoji J allowed the deduction to the extent of 82.06% of $85,000, the company accepting the reduction of 17.94% for unsuccessful claims. The commissioner appealed to the Court of Appeal which disallowed the deduction....

In the present case, the amount of the liability of the company for accidents which occurred but were not reported in a particular year, is part of the expense of the company in carrying on its insurance business during that year and must be deducted in arriving at the total income of the company for that year....

Their Lordships will therefore humbly advise Her Majesty that the appeal should be allowed that the order of Madhoji J should be restored...."

12.Reference can also be made to another Privy Council decision, on an appeal from New Zealand, Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. [1995] UKPC 38, [1995] 3 NZLR 513. The Privy Council cited with approval two of the Australian cases noted above in the following terms (pg. 518; emphasis supplied):--

"... although the jurisprudential approach prevents one from treating an aggregate of contingent liabilities as a statistical certainty, it does not rule out statistical estimation of facts which have happened but are unknown. Thus in RACY Insurance Pty Ltd v Commissioner of Taxation [1975] VR 1 an insurance company carrying on accident business was allowed to make a deduction from its premium income of an estimated sum to represent its liabilities "incurred but not reported". These liabilities were not in law contingent. The accidents which gave rise to the company's liability had happened but the company did not know about them. A similar decision was reached in Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation (1977) 14 ALR 651."

The "jurisprudential approach" referred to would correspond to what, in our tax jurisprudence, would be regarded as the "strict construction" or "literal" approach. The Privy Council was not concerned with IBNR claims in this decision, but did have to consider the meaning of the term "incurred" us used in the New Zealand income tax legislation, in a section that is analogous to section 20(1) of the 2001 Ordinance. (The Kiwi provision, section 104, provided in material part as follows: "In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it ... is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred".) It is interesting to note that after this decision, the New Zealand Inland Revenue Department issued an "interpretation statement", titled "Meaning of "incurred"-the Privy Council decision in the Mitsubishi case" (available at: http://www.ird.govt.nz/technical-tax/interpretations/2003-1998/interpretations 1998-is3533.html). In this statement, the Department did consider the position as regards IBNR claims, and expressed the following views:--

"The approach taken in the insurance industry in relation to expenditure which has been "incurred but not reported" (IBNR) reporting is accepted as a workable treatment for accounting for estimated future expenditure for which deductions are available in accordance with Mitsubishi. In changing to such a method, it is acceptable to take a deduction in the first year of adjustment of all estimated future expenditure for which a deduction is available on the basis of the reasoning in Mitsubishi." [pg. 2]

"As seen above, the Privy Council decision refers to the taxation treatment of the general insurance industry; in particular, the judicial acceptance that reasonably estimated provisions for "incurred but not reported" (IBNR) claims are deductible. Inland Revenue currently permits general insurance companies to take a deduction for IBNR reserves. A deduction is permitted for estimated IBNR claims as at the end of the relevant income year. However, the taxpayer must add back as income the value of claims settled during the income year for IBNR claims for previous income years. There is no statutory authority for this treatment. However, there is judicial support for this approach indirectly in RACV Insurance and more explicitly in the Commercial Union decision." [pg. 21; emphasis supplied]

13.We are in respectful agreement with the approach taken by the Privy Council in the appeal from Fiji and, in general, in the Australian cases. In our view, the acceptance by the New Zealand Inland Revenue Department that the term "incurred" is applicable to IBNR claims in light of the Privy Council decision in the appeal from New Zealand accords with this approach. In our view the term "incurred" as used in section 20(1) should therefore be interpreted and applied similarly. We may note that there is nothing in the 2001 Ordinance, and in particular in section 21, that expressly excludes the deduction of IBNR claims.

14.We are, with respect, unable to agree with the submission by learned counsel for the Department that paragraph 6 of Part B of Annexure II of the 2002 Rules is relevant only for reporting purposes and does not constitute part of the financial statements of insurers. Rule 16 clearly relates Annexure II to section 46, and subsection (1)(b) of the latter relates clearly to financial statements. Furthermore, it is clear that paragraph 6 has to be lead and applied as an integrated whole. The paragraph first makes clear that liability in respect of "all claims incurred to balance date" (emphasis supplied) is to be recognized, and how such liability is to be measured is also indicated. The next clause then specifies the date on which is to be regarded as having been "incurred". Finally, the claims that must be shown as liabilities are categorized. It is to be noted that the last clause of the paragraph is not limited to IBNR claims. It relates also to "unpaid reported claims" and "expected claims settlement costs". These are outgoings which without doubt can be deducted for purposes of determining profits and gains from insurance business. On the submission made by learned counsel for the Department however, paragraph 6 would have to be artificially bifurcated into liabilities deductible and non-deductible, which, with respect, is an untenable conclusion.

15.In our view, the fact that the Applicant's accounts are maintained on an accrual basis of accounting also does not stand in the way of IBNR claims being given due recognition. Learned counsel for the Applicant rightly placed reliance on subsection (3) of section 34, which is as follows:--

"Subject to this Ordinance; an amount shall be payable by a person when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy."

As the case law cited above makes clear, the fact that no notice has been received by the insurer in respect of an IBNR claim does not stand in the way of such a claim being a deductible for income tax purposes. Clause (2) of paragraph 6 of Part B of Annexure II of the 2002 Rules provides that (subject to the exception therein stated), a "claim shall be considered to be incurred at the time of the incident giving rise to the claim". On such date "all the events that determine liability" for purposes of section 34(3) in the present context would have occurred. The contrary view suggested for this provision by learned counsel for the Department, for purposes of the facts and circumstances of the present case, cannot, with respect, be accepted.

16.In light of the foregoing discussion and analysis, we are of the view that Question No. 1, when understood and considered in the terms as set out in para 8 herein above, must be answered in favour of the Applicant and against the Respondent Department. The said Question is hereby so answered. In view of this answer and for reasons already stated it is not necessary to consider the remaining Question Nos. 2 to 4, and we do not therefore answer them.

17.The impugned order of the teamed Appellate Tribunal stands modified accordingly in terms of the last preceding para. The Office is directed to send a copy of this judgment under the seal of this Court to the Appellate Tribunal pursuant to section 133(5).

MH/N-6/Sindh Order accordingly.