MUNIB AKHT AR, J. --- These appeals arise under the Income Tax Ordinance, 1979 (1979 Ordinance"), and relate to assessment years 1991-92 and 1992-93. The question raised has been agitated before, including at least twice before this Court. It is this: was the interest earned by financial institutions on Government securities liable to be taxed on accrual or on receipt basis? The Department contends for the former , the respondent assessee for the latter , answer . The learned High Court in the impugned judgment answered in favour of the assesseebank, and leave was granted to the Department vide order dated 29.06.2010 to consider whether this was "in conformity with the relevant provisions of the Income Tax Ordinance or otherwise".
2. It is convenient to set out the, relevant statutory provisions at the outset:--- "17. Interest on securities.-- (1) The following income 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 assesse in any income year; and
(b) interest on debentures or other securities for money issued by, or on behalf of, a local authority or a Pakistani company receivable by an assessee in any income year .
32. Method of accounting.-- (1) Income, profits and gains except income from dividends, shall be computed for purposes of Sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee."
3. Learned counsel for the appellant-Department submitted that it was well-known that two methods of accounting were adopted in this country . One was the mercantile system, in which receipts (and expenses) were recorded as accrued. This was also known as the accrual basis of accounting. In terms of the other system receipts were recorded when actually received, and expenses when so incurred. This was the receipt basis of accounting.
Financial institutions including banks adopted the accrual basis of accounting. That was the method regularly employed by them, and hence their income and profits and gains for purposes of the 1979 Ordinance had to be computed on such basis. This was the proper interpretation and application of S. 32(1), which specifically referred to S. 17 as well. Thus, the interest on securities under the latter provision had to be recorded on accrual basis and reflected, and brought to tax, accordingly in the relevant-income and assessment years. The respondent however offered such interest to tax on receipt basis, and thus in relation to the income year in which actually received. This was contrary to the correct (accrual) basis, both in law and on the facts. The learned Appellate Tribunal had so held, dismissing (on this point) the respondent's appeal to that forum. However , the learned High Court, relying on an earlier decision of the same Court, had reversed. It was submitted that the High Court had made an error in law in doing so. Various cases were cited in this regard, which will be considered below . It was prayed that the appeals be allowed.
4. Learned' counsel for the respondent defended the impugned judgment and submitted that the correct result had been reached, both in law and on the facts. It was submitted that in addition to the accrual and receipt basis of accounting there was also a third method, known as the "hybrid" system. Learned counsel submitted that in terms of the latter system books of account were maintained partly on accrual basis and partly on receipt basis. Income was computed and offered to tax accordingly . It was submitted that there was nothing in S. 32 that prohibited an assessee from adopting such a "hybrid" system, which had been recognized in the case-law . Insofar as the respondent was concerned, its practice since long (and in line with that followed by other banks) was that while the accrual system was used generally , in relation to interest from Government securities it was the receipt system that was adopted. That was how income was computed and, thus, offered to tax. That was all that there was to it. It was emphasized that for a considerable period, and in relation to a great many assessm ent years, the Department had accepted income accounted for on the "hybrid" basis. However , the Appellate Tribunal had in-between suddenly changed course and denied that income of interest from securities could be so booked. This change was erroneous in law. It had led to considerable turmoil, reflected in the number of cases that resulted including matters that had travelled to this Court. It was submitted that the matter was finally resolv ed in this Court in 2014. In the case at hand the learned High. Court had reached the correct result and its decis ion ought to be upheld. Learned counsel also relied on the relevant case-law .
5. We have heard learned counsel as above, and considered the record and the case-law . The issue has been set out above. It will be convenient to straightaway go to the case-law . The first decision requiring consideration is a judgment of the Sindh High Court dated 18.09.2002. It was reported some years later as Pakistan Industrial Credit and Investment Corporation Ltd. v. Commissioner of Income Tax and others , being reported first at 2006 PTD 1400 and then subsequently also at (2008) 97 Tax 64. A number of assessment years (and thus tax references) were involved. Four questions of law were considered by the learned High Court of which the fourth is relevant for present purposes.