[The judgment of the Court was delivered by Abdul Hayee Kureshi, J],-The Commissioner of Income tax (West), Karachi has made the present application under Section 66(2) of the Income Tax Act (hereinafter referred to as "the Act") in the following circumstances:-
2. The respondent S. A. Rehman (hereinafter referred to as "the assessee") was liable to assessment for year 1961-62 by the Income Tax Officer (Investigation), Circle I, Karachi. The assessee mainly dealt in speculative business apart from being a partner in several firms and enjoying income from property, dividends, interests etc. The assessment order showed that he also acted as a surveyor and. Arbitrator. For the assessm ent year in question he declared a loss of Rs. 35,387 in his profit and loss account. The loss pertained to speculative transaction on account of the shares in Adamjee Cotton, Adamjee Jute and Karnaphulli Paper Mills Limited. For the purpose of this reference we are concerned with a limited point which arises out of old trading liabilities of the assessee which in accordance with Section 10(2-A) of the Act had been added as profits. In paragraph 12 of the assessm ent order passed by the Income Tax Officer 21 items showing liabilities outstanding!
Against the assessee have been detailed. The amounts shown against six of such liabilities exceed in the sum of Rs. 1,000 but in the remaining fifteen items the amounts are less than Rs. 1,000. Such liabilities shown in the books were at least three years old but some of these were even five years old. The Income Tax Officer on the premises of each of these liabilities came to the conclusion that the debts were time-barred and had given rise to cesses sion of the liability within the meaning of Section 10(2-A) of the Act. The assessee set up a case before the Income Tax Officer tha he had every intention of meeting this liability in accordance with the business ethics. To such extent the Income Tax Officer in the assessm ent order recorded as follows - "In his reply to notice under Section 23(3) the assessee argues that he has every intention of meeting this liability in future according to business ethics. This argument, apart from being irrelevant, is not correct. It will be seen that the above list includes quite a number of small amounts which could have been paid by him very easily. The fact that he has no intention of paying them even in future. I would, therefore, make an addition of Rs. 31,000 under this head."
The entire amount was thereafter credited to profit and loss amount of assessee and added as profit under Section 10(2-A) of the Act. The assessee thereafter filed an appeal before the Appellate Assistant Commissioner of Income-tax "D" Range, Karachi. The Appellate Assistant Commissioner of Income-tax took the view that the question of limitation as such does not always arise in the case of time-barred debt. He took the view following decisions of several High Courts of Indo-Pak sub-continent "that the time-barred debt is not necessarily bad so long there is a last ray of hope of realization of the same, which is possible in business tradition, routine and convention''. To such extent the Appellate Assistant Commissioner extended relief to the assessee. A further appeal was preferred by the Income Tax Officer before the Appellate Tribunal agreed with the Appellate Assistant Commissioner and recorded his conclusions in the following words:- "So far as the second issue is concerned, we agree with the Appellate Assistant Commissioner that although the outstanding credits were long over due and the creditors may have lost tagel remedies yet it is not for the Assessing Officer to take a decision on behalf of the respondent regarding their write off. The provisions of Section 10(2-A) did not authorise the Income Tax Officer to write off or extinguish a liability on his own. In this view of the matter we do not see any reasons to interfere with the order of the Appellate Assistant Commissioner."
In regard to some other matters relating to the assessment of the assessee the Tribunal had remitted the case to the Appellate Assistant Commissioner and we are not concerned with that aspect of the matter. How- ever, the Commissioner of Income-tax made an application before the Appellate Tribunal under Section 66(1) of the Ac seeking a reference to this Court on the following question:- "Whether on the facts and in the circumstances of the case the Income Tax Officer was not justified in treating credit balances as taxable income of the assessee under Section 10(2-A) which balances were not paid of for a very long time and had ceased to become effective liabilities and were thus benefits according to the assessee".
The question was not referred to High Court by the Tribunal on the ground that it was purely a finding of fact and the question was not a referable question. The Commissioner of Income tax has then made the present application under Section 66(2) of the Act.
2. At the time of hearing we pointed out to Mr. Mansoor Ahmad Khan, the learned Advocate for the Income Tax Department that the question as framed was not a question of law besides the answer itself being enveloped in the question. We wish to explain that what we mean by answer is such answer as the Commissioner would deem favourable to him. Mr. Mansoor Ahmad Khan then made a request that the question may be modified and such modified question which is before this Court reads as follows: "Whether on the facts and in the circumstances of the case the Income Tax Officer was not justified in treating credit balance as taxable income of the assessee under Section 10(2-A) of the Income Tax Act".
3. The assessee and his Advocate have remained absent. We have, however, heard Mr. Mansoor Ahmad Khan, Advocate for the Income Tax Department;
4. Section 10(2-A) of the Income Tax Act before its amendment in 1966 read as follows: "(2-A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cesses sion thereof, the amount received by him, or the value of the benefit accruing to him, shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arising during that previous year."
This subsection was substituted by Act XI of 1966 which reads as follows:- "(2-A) Where for the purposes of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and,-
(i) subsequently, during and previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure;
(ii) the assessee, during any previous year, has derived benefit in respect of such trading liability; or
(iii) such trading liability or a portion thereof has been paid within three years of the expiry of the previous year in which it was allowed, the amount received under clause (i) for the value of benefit obtained under clause (ii) or so much of the portion of trading liability as has not been paid under clause (iii) shall be deemed to be the profits or gains of business, profession or vocation and to have accrued or arisen during the previous year referred to in clause (i) and clause (ii) or, as the case may be, during the previous year immediately following the expiry of the three years referred to in clause (iii): Provided that where a trading liability referred to in clause (iii) or a portion thereof is paid in a subsequent year, a deduction of such amount as has been paid shall be made in computing the profits and gains under this section in respect of that year." Since the assessment year relating to the present case is 1961-62 the law applicable is as it stood before 1966 amendment was made. A significant departure in so far as is relevant to the present case has been made by insertion of clause (iii) in 1966 which clearly provides that trading liability or a portion thereof as had not been paid within three years of the expiry of previous year had to be added as profit for the purpose of computing the profits and losses in respect of the assessment year in question. To such extent the words "benefit in respect of such trading liability by way of remission or secession" in the original provisions is significant.
4. On a reading of the order of the Income Tax Officer we have been unable to escape a conclusion that while dealing with this case he has kept in mind a period of three years in order to come to the conclusion that the effect of remission or secession had been obtained by such offux of time. The assessm ent order was passed on 27-6-1966 and by then the Bill which resulted in the Amendment of 1966 must either have been passed or at least publicised. Possibly this argument by the Income Tax Officer may have found a place in the assessment order for such reason but it is not necessary for us to categorically give a finding as such. The question that arises is whether by reason of a trading liability becoming time barred the amount shown as such liability had to be added as profit
5. We would now proceed to examine some decided cases on the point. In the case of Morley v.
Tattersall [22 Tax case J], a decision of the King's Bench Division the facts were that the assessee firm held in its hands unclaimed balances of considerable sums that had mounted in course of time. At all times the assessee firm considered it as its liability to pay such balances as and when the claims were made. The Commissioners for Special purposes had added such amounts as profits for the purpose of assessm ent Lawrence, J. took the view that since such amounts had been disbursed by the assessee concern to the individual partners it had become a profit. Sir Wilfred Greene M.R. in that context took the opposite view and stated the case as follows:- "Now the learned Judge further treated the liability as a merely contingent liability which could be disregarded. I have difficulty in accepting that view, at any rate in the sense in which the learned Judge appears to have used it. This money, of course-using a colloquial and business expression rather than a legal expression-was never Messrs Tattersall's money; it was the customer's money; it remains the customer's money; the the customer can call for it at any moment, and the fact that a demand in writing has to be made before the liability to pay accrues, so as to make the Status of Limitations run, does not make the liability a mere contingent liability iii the sense in which the learned Judge appears to regard it."
In the case of Kohinoor Mills v. Commissioner of Income-tax, Bombay (1963) 49 ITR 578 from Bombay High Court, wages that were payable but were unclaimed, had become time-barred. The Judges of the Bombay High Court followed the decision of the Supreme Court of India in the case of Bombay Dyeing & Manufacturing Company v. State of Bombay 1958 SCR 1122 wherein the Supreme Court of India laid down that under the law a debt subsists notwithstanding that the recovery is barred by limitation. In another case from Indian jurisdiction namely Ambica Mills Limited, v. Commissioner of Income-tax (1964) 54 ITR 167, Gujrat High Court considered the ease of addition to profits by reason of Section 10 (2-A) of the Act for the liabilities becoming time-barred.
The learned Judges took the view that a debt shown in a balance-sheet is an acknowledgment within the meaning of Section 19 of the Limitation Act and in these circumstances such debt could not even be termed as time-barred. The addition of the liabilities was struck down. In another case from the Calcutta High Court namely Commissioner of Income-tax, West Bengal v. Sandors Sons & Morgans (1970) 75 ITR 433, the facts were that the assessee who were solicitors held unrounded moneys of their clients in their hands and such claim of the clients had become barred by limitation. Thereafter the assessee had transferred the amount of clients to their profit and loss account and even apportioned the same among the partners. The learned Judges took the view which may be reproduced in the original words:- "Since we are convinced that money received by the assessee from its clients were not trading receipts but were clients' money, to be held in a fiduciary capacity, we are of the opinion that the decision in Tattersall's case will apply to the facts of the instant case and should not be ignored as was contended by Mr. Pal."
In the case of Bhagawat Parsad & Co. v. Commissioner of Income-tax, Lucknow, (1975) 99 ITR 111, a Division Bench of Allahabad High Court was considering a situation when the assessee had received some advance from his customers and the goods had not been supplied, amount had not been refunded and claim for repayment had become barred by time.
The assessee had debited interest to the trading account of the creditor. The Allahabad High Court on interpretation of Section 10 (2-A) of the Act held the view that by the mere reason of liability becoming barred by the Law of Limitation, there is neither remission nor secession of liability; the liability is not extinguished, only the creditors remedy becomes barred.
6. On a consideration of the matter we are clear in our mind that; the mere fact of liability becoming barred by the Law of Limitation only the creditors' remedy may become barred but that will not ipso facto lead to the conclusion that the amount becomes a profit. In business traditions, routine and convention it is very often that even time-barred debts are paid. Even otherwise a time-barred debt is considered a good defence in suits that may be filed by the debtor against the creditor in order to extinguish the liability. What is more that the entries in regard to the trading liabilities may in given cases operate as acknowledgment of liability by reason of Section 19 of the Limitation Act; on proof of such acknowledgment of liabilities being in writing, signed by the party* who is liable, a fresh period of limitation starts running, provided that! the acknowledgment is written before the expiry of the initial period of limitation. In regard to the date of writing even oral evidence is admis-j sible. The explanation in Section 19 clearly states that a writing shall! be sufficient acknowledgement even though it omits to specify she exact! nature of property or right and signature on the writing may be made1 either personality or by the agent duly authorised. It would be seen! that if the books of account which are prepared in the handwriting of the assessee bear his signature, the writing acknowledging the liability would be itself be sufficient to extend the time of limitation so that the liability is not extinguished.
7. Mr. Mansoor Ahmed Khan has however, invited our attention to a Division Bench judgement of the Lahore High Court in the ease of Commissioner of Inocme-tax, Lahore v. Mrs. Mian Muhammad Allah Bux PLD 1973 Lah 381, In this case the same question arose as in the present case The learned Judges considered the original provisions of Section 10 (2-A) of the Act in juxtaposition with the amendment made in 1966. The learned Judges were conscious that Section 10 (2-A) as it originally stood did not expressly mention non-payment within three years but proceeded to record a conclusion that the intention of the Legislature even when the subsection had not been amended was to treat as profit the benefit accruing on account of the liability having become time-barred.
While dealing with this point the learned Judges further observed as follows: - "Since period of limitation for such recovery is three years, the Income tax Officer cannot be said to have applied the amended provision and not the earlier provision merely because of his mention that payment had not been made for over three years."
Further in the same judgment the learned judges made a reference to the case of Ashfaq-ur- Rehman Mohammad Afzal v. Chowdhry Mohammad Afzal PLD 1968 SC 230. This was a case under the West Pakistan Rent Restriction ordinance and Section 13 of such Ordinance refers to the words "ail th rent due". The leamed Judges relying on the interpretation of the above-quoted words in the dispute concerning landlord and tenant imported the same concept under Section 10 (2-A) of the Income-tax Act to come to the conclusion that just as rent for the period exceeding three years was not recoverable likewise trading liabilities also becoming barred by the Law of Limitation lapse or at least produce a result of remission or cession of liability. We, with all respects do not agree with that view. First of all the words "all the rent (liability) due" are foreign to the terminology employed under Section 10 (2-A) of Act. Nextly the West Pakistan Urban Rent Restriction Ordinance is a beneficial enactment for the protection of tenants who otherwise were liable to eviction under the transfer of Property Act. Such provisions in that Act have to be applied in the manner as should advance the objects of the legislation, viz. operate benoficially in favour of the tenants. The Income-tax Act, is a fiscal statute and while interpreting the same the rules of exactness have to be observed. On a reading of the case it appears to us that the learned Judges of the Lahore High Court became conscious of the fact that if once trading liability is held in suspense arter certain period the liability will stand terminated. No doubt this is a question that required consideration and the Legislature has in 1966 consciously; provided a period of three years for the carrying over such unsatisfied liability, after which period the same shall be added to profits. However, as the law stood before 1966 offux of time, to produce the result of liability being time-barred under the Limitation Act was never a consideration. There is a string of cases to that effect and some of these have been referred to in the earlier part of judgment.
8. The next argument of Mr. Mansoor Ahmed Khan is that Act KI of 1966 whereby Section 10 (2-A) was amended is a declaratory, or in any ease a creative enactment. He has stated that the amendment seeks] to define what is a bad or doubtfull debt, or in any case cures the existing provision by giving the words a purposeful and meaningful intent J Two questions arise namely whether the amendment is in the nature of declaratory enactment and if so, whether the same would be of retros-j sective application. A Declaratory Act generally takes a form by state-] ment "It is declared." Patently such words have not been used. In] Act XI of 1966. The second characteristic of a declaratory statute is] that it intends to remove doubts as to the meaning or effect of a statute] and if not expressly at least by implication the Legislature exhibits the! reason for passing a Declaratory Act Blackstone, J. in Nicol v. Verselet 1779 26 ER 751, stated "declaratory statues do not prove the law was"D otherwise before, but rather the reverse". Coleridge, C. J. in Jones v. Bennett (1890) 63 it 705, defined a Declaratory Act that 'means to declare the law, or to declare that which has always been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue what it then is." Such characteristics are also lacking in Act XI of 1966. Further it must be stated that our system of law abhors retrospective legislation but if ever a necessity has arisen to give retrospective effect, the statute generally expresses such intention. Act XI of 1966 can also not be called a procedural or adjective law because it is a statutory step in determination of rights of the Income-tax Officer as well as the assessee. The right is the retention of money on behalf of others. It also makes an assessee liable to taxation in respect of moneys notionally treated as bis profits while exposing! him to at least a risk of demand. According to us Act XI of 1966 was intended to provide a limit of time and avoid the lying of money in a] sort of suspense account for a period exceeding three years. New rights; and liabilities came into existence and new concepts of law were brought] into existence. This act cannot, therefore, be called a Declaratory Act Curative statutes are by their very nature intended to operate upon and: affect past transactions and are for such reason wholly retrospective.] These statutes are in the nature of validating statutes which operate on] conditions already existing and for such reason have retrospective operation. If the enactment in question is to be in the nature of a curative law the Legislature would have stated so unambiguously. We are of the view that the amending statute is not even curative in nature.
9. The next question is whether the Income-tax Officer correctly added the amount of trading liabilities to the profits of the assessee. On a reading of his order we find that he has been persuaded to take that view for the reason of age of liabilities and further for the reason that the liabilities include a number of small amounts which could have been paid by the assessee very easily. We are afraid we cannot take that view for the reason that the Law of Limitation does not apply and farther for the reason that some of the liabilities were of small amounts which could have been paid. The assessee bad taken the stand that he intended and wanted to pay these amounts, and there is nothing before us to show that the stand of the assessee was in violation of law.
10. For all the above reasons we answer the question in the affirmative.