This Income Tax Reference under section 133(4) of the Income Tax Ordinance, 2001 ("the Ordinance ") is filed by the Applicant, being dissatisfied by the order passed by the Income Tax Appellate Tribunal, Lahore Bench, Lahore ("Appellate T ribunal ") in R.A.No.542/LB/2003 (Assessment Year 1998-1999) dated 12.12.2003.
2. This reference application is being decided along with connected references, a list of which is given as Annex-A to this order . The reference applications are being dealt with and decided together as a common question of law arises for an opinion of this Court. The only difference is in the dates of the orders which are also specified in Annex-A. All the impugned orders follow a single pattern and are premised on the same source and authority .
3. Following questions of law are pressed for our opinion in all the Reference Applications, which are asserted to have arisen out of orders:- i. Whether on the facts and in the circumstances of the case, the Learned Tribunal was justified to hold that interest on securities should be taxed on receipt basis instead of accrual basis. ii. Whether under the facts and in the circumstances of the case the learned Tribunal was justified to hold that interest credited to loans transferred to suspense account by the bank is not liable to tax. iii. Whether the learned Tribunal was justified to hold that the amounts transferred to bad debts account by the bank should have been disallowed. iv. Whether the learned Tribunal was justified to cancel the order of the IAC in totality without adjudicating the issue of taxation of income from Mirpur Azad Jammu and Kashmir branch".
4. It is not necessary to narrate the facts of each individual reference application since a common question of law is being decided, which should determine the outcome of the reference applications.
5. Learned counsel for the Applicant submitted that the impugned order is illegal and contrary to the law and facts of the case; that Inspecting Additional Commissioner (IAC) has rightly modified order as per provision of Income Tax Law; that the impugned order passed by Appellate Tribunal is arbitrary and against the provisions of law hence liable to be declared null and void.
6. On the other side, learned counsel for the Respondent submitted that the impugned order has been passed strictly in accordance with law and does not require any interference by this Court. He further submitted that controversy in hand relates to interpretation of sections 17 and 32 of the repealed Ordinance. He also prayed for dismissal of Reference Application.
7. We have heard the arguments of learned counsel for the parties and perused the record.
8. The relevant/operative part of learned Appellate Tribunal order is reproduced hereunder:- "At the time of hearing, the learned counsel for the assessee pleaded that similar questions raised by the department in the assessment for the assessment year 1996-97 were rejected by this Tribunal vide order dated 08.05.2003 passed in R.A. No.43/LB/2003 (assessment year 1996-97) as the questions do no give rise to any proposition of law. The learned counsel also furnished a copy of the Tribunal's order dated 30.10.2002 passed in R.As. Nos. 525 to 535/KB/2001 (assessment years 1989-90 to 1997-98) whereby the similar questions raised by the department were rejected by the Karachi Bench of this Tribunal. Considering this position the reference applications filed by the department are dismissed being devoid of force".
9. Coming to question No.2, it is observe d that this question has already been dealt with by the Hon'ble Supreme Court of Pakistan in terms of order dated 21.02.2017 passed in Civil Appeal No.8 of 2017; operative part of that order is reproduced hereunder: "3. Be that as it may, on the basis of letter/instructions dated 23.11.2005, we dispos e of this appeal as having been withdrawn but if the present case is not covered by the said letter/instructions, the appellant department may seek resurrection of this appeal within one month".
10. With regard to question No.3, Hon'ble Supreme Court while deciding Civil Appeal No.156 of 2009 dated 01.10.2018 observed as under:- "We find that the leave granting order dated 17.02.2009 was passed on some misconceived ground, therefore, the said order is hereby withdrawn. Resultantly , this appeal stands dismissed".
11. So far as question No.4 is concerned, we have gone through the impugned order passed by the Appellate Tribunal and find that no question of law arose in the instant Appeal/Reference as well as connected references.
The question of law that has been framed in the Reference do not arise any substantive question of law arising out of the order of the Appellate Tribunal. In advisory jurisdiction, this Court can only answer questions of law. Reliance is placed on "Messrs F.M.Y. Industries (Pvt.) Ltd. v. Deputy Commissioner of Income Tax and others" (2014 SCMR 907 ). We, therefore, decline to answer question No.4.
12. Though, this Court on 12.10.2006 framed above-mentioned questions of law arising out of instant tax reference as well as connected references yet the primary and foremost question to be determined by us, as observed by this Court on 09.10.2019, is the interpretation of section 17(1)(a) of the Ordinance which relates to interest earned by bank on government securities whether on accrual basis or on actual receipt basis. It is pertinent to mention here that interpretation of section 17(1)(a) of the Ordinance has categorically been discussed in detail by the Hon'ble Supreme Court of Pakistan in "Commissioner Income Tax v. Habib Bank Limited and ANZ Grindlays Bank PLC" (2014 SCMR 1557 ) wherein it has held as under: "4(sic.) Considering the provisions of sections 17 and 32 of the Ordinance, reproduced above, we cannot help but notice that section 32 provides an exception to the computation of income set out in section 17, which obviously includes section 17(I)(a). In these circumstances, the impugned judgments rendered by the High Court have in our opinion correctly held that the respondent-Banks were justified in adopting the method of accounting which was hybrid and had been consistently used by the respondent-Banks since long".
13. In addition to above, the crux of entire controversy i.e. interest earned by Bank of Government securities whether under accrual basis or on actual receipt basis, related to this tax reference as well as connected references, has recently been settled, in categorical terms, by Hon'ble Supreme Court in "Deputy Commissioner of Income Tax, Circle C-4, Karachi v. National Bank of Pakistan, Karachi" (2019 SCMR 1011), relevant part thereof is reproduced hereunder:- "12. Having considered the case law, in our view two broad propositions emerge in relation to the 1979 Ordinance (with which alone we are here concerned). Firstly , as a matter of law, an assessee was not limited to using either the accrual or the receipt basis of accounting. It was, in law, permissible to use the "hybrid" system of accounting by mixing and merging elements from the other two systems. This was a question of law, and must be regarded as having been answered and settled accordingly .
13. Secondly , if such question arose, then it had to be shown as a matter of fact in respect of the income year corresponding to the given assessment year that the assessee had, in fact, regularly employed the "hybrid" system of accounting. That is what was required by section 32 of the 1979 Ordinance. This was a question of fact, and therefore had to be dealt with and answered accordingly . However , for purposes of these appeals, what has just been said remains subject to consider ation of an additional submission made by learned counsel for the respondent, to which we now turn.
14. As noted above, learned counsel had submitted that for many years preceding the assessment years in question interest income on Government securities was offered to tax on receipt basis. This had been accepted as such by the Department, and assessments framed accordingly . Attention was drawn to the plea specifically taken in this regard by the respondent, as noted in the assessment order itself. From the record as available, it appears that this plea was not accepted only because of a change in view by the Appellate Tribunal (in some other case).
Learned counsel for the respondent subm itted that the past practice could not be so upset. As we understood it, what was in effect contended was that regardless of whether , in fact, the respondent was regularly employing the "hybrid" system, the practice adopted by the respondent and accepted by the Department precluded the latter from rejecting it in respect of the assessment years in question. We have considered this submission. It will be noted from the passage from the MCB case cited above that the learned High Court had, as a matter of fact in relation to the assessment years before it, expressed an inability to make a determination whether the "hybrid" system was being actually applied. However , the learned High Court had emphatically accepted the argument that there was an established past practice of accepting interest income being offered to tax on receipt basis. In this Court, in the Habib Bank case (which can, as explained, be regarded as a decision in appeal against the MCB case) it was accepted that the accounts were in fact being maintained by applying the "hybrid" system. In our view, it is not necessary for us to determine whether , in the income years corresponding to the assessment years in question, the present respondent did, in fact, maintain its books in terms of the "hybrid" system. It suffices to accept that there was a past practice that interest income offered on receipt basis was accepted as such by the Department. We may note that learned counsel for the appellant placed before us the assessment order (dated 14.03.1995) in respect of the respondent for the assessment year 1993- 94. This was to show that there was no settled practice as claimed. With respect, this assessment order is of no relevance as it relates to an assessment year after the ones in contention. The position in the years prior to the ones at hand had to be shown, if at all the Department wished to rebut the submission made by learned counsel for the respondent. Such record was not, however , produced. No reason was given by the Department to depart from the stated practice, other than the change in view of the Appellate Tribunal. However , that change in view was patently incorrect since we have held that it has long been accepted, and also stands affirmed by this Court, that as a matter of law the "hybrid" system of accounting could be adopted under the 1979 Ordinance. The approach taken by the High Court in the MCB case, in the passage cited above, in relation to the past practice was correct and is hereby endorsed. It follows that the Department was wrong in refusing the accept interest income offered on receipt basis in respect of the assessment years at hand, and the learned Appellate Tribunal erred materially in dismissing the respondent's appeals in this regard. In our view, the learned High Court reached the correct conclusion in law in allowing the tax references filed by the respondent".
14. Keeping in view the dictum laid down by Hon'ble Supreme Court of Pakistan in case of "Deputy Commissioner of Income Tax, Circle C-4, Karachi v. National Bank of Pakistan, Karachi" (2019 SCMR 1011), mentioned supra, instant tax reference and connected tax references are dismissed on the same terms settled therein.
15. Office shall send copy of this order under the seal of the Court to the learned Appellate Tribunal as per section 133(5) of the Ordinance, 2001.