IRFAN SAADA T KHAN, J.----This Income Tax Reference (ITR) was forwarded by the Income Tax Appellate Tribunal (Pakistan), Karachi (IT AT), by raising two questions of law:- i. "Whether under section 25(c) of the Income Tax Ordinance, 1979 "liabilities" allowed in the assessment year 1983-84 could be deemed to be the income of the applicant company of the assessment year 1986-87, being the third year of the expiration of assessment year 1983-84? ii. Whether the learned Appellate Tribuna l misdirected itself in law by restoring the order of the Income Tax Officer whereby "liabilities" allowed in the assessment year 1983-84 were deemed to be the income of the applicant company of the assessment year 1986-87?"
2. At the very outset, the learned counsel appearing for the applicant does not press the Question No.1 and stated that he will argue this matter only to the extent of Question No.2.
3. Briefly stated, the facts of the case are that the assessee/ applicant is a public limited company deriving income from hotel and restaurant business under the name and style of "Pearl Continental". The return of income for the year under consideration was filed by showing a total income of 1,57,10,000/-. The assessment was made under the provisions of Section 62 of the Income Tax Ordinance, 1979 (the Repealed Ordinance) on 18.6.1987. The Income Tax Officer (ITO) while assessing the income found out that an amount of 10,84,000/- being an unpaid trading liability was to be added under the Provisions of section 25(c) of the Repealed Ordinance, as the same had remained unpaid since the last three years. An appeal thereafter was preferred before the Commissioner of Income Tax (Appeals), who vide order dated 23.8.1987 deleted the said addition. Being aggrieved with the said order an appeal thereafter was filed by the department and the ITAT affirmed the addition by holding that the said addition was rightly made by the ITO. The assessee then moved an application under Section 136(1) of the Repealed Ordinance and thereafter the IT AT referred the above mentioned questions to this Court for its opinion.
4. Mr. Iqbal Salman Pasha Advocate has appeared on behalf of the assessee/applicant and stated that as per the provisions of section 25(c) of the Repealed Ordinance any unpaid trading liability is to be taxed after the expiration of three years of the income year in which it was allowed and since the trading liability was, firstly, allowed in the assessment year 1983-84, it could only be added on the assessment year 1987-88 and not in the assessment year 1986-87. He stated that the provisions of Section 25(c) of the Repealed Ordinance are in pari-materia to the provisions of Section 10(2A)(iii) of the Repealed Income Tax Act, 1922 (also repealed) and Section 34(5) of Income Tax Ordinance, 2001, which is in vogue and any unpaid trading liability could only be added after expiry of the three years of the income year, in which it was first allowed. He stated that in the instant matter the income year was 1982-83 the assessment year of which was 1983-84 and, hence, the three years period would expire after the said income year, which would be assessment year 1987-88. Therefore, the addition if any could only have been made in the year assessment year 1987-88 and not in the assessment year 1986-87, as done by the ITO and incorrectly affirmed by the ITAT. He also invited our attention to Circular 12 of 1962 and various other circulars issued from time to time by the Central Board of Revenue (CBR) now Federal Board of Revenue (FBR).
In support of his contention the learned counsel has also placed reliance on a decision given by the ITAT reported as 1996 PTD (Trib.)
100. He stated that, though, this is an order by the ITAT but while deciding the instant matter a reference can be taken from this judgment.
5. Mr. 'Mohsin Imam Wasti Advocate has appeared on behalf of the department/respondent and has stated that as per the interpretation of the department the addition of any unpaid trading liability under the provisions of Section 25(c) of the Repealed Ordinance was to be made in the third year and, hence, supported the stance of the ITO and ITAT and has requested that the answer to the question may be given in negative. He also relied upon the decision given in the case of CEBEE Industries (Pvt.) Ltd. Lahore v. Income Tax Appellate Tribunal and others (2006 PTD 348).
6. We have heard both the learned counsel at considerable length and have perused the record and the decisions relied upon by them.
7. Before proceeding any further , we deem it appropriate to reproduce hereinbelow the relevant provisions of the law relied upon by the learned counsel and considered necessary by us:- SUBSECTION (26) OF SECTION 2 OF THE REPEALED ORDINANCE, 1979.
"(26) "Income year", in relation to any assessment year (hereafter in this clause, referred to as 'the said assessment year'), means-
(a) the financial year next preceding the said assessment year; or
(b) (Omitted by Finance Act, 1995)
(c) such period as the Central Board of Revenue may, in the case of any person or class of persons or any source of income, specified by notification in the official gazette. and includes any period which, under any provision of this Ordinance, is deemed to be an income year, or in respect of which a return of total income is required to be furnished, or any income is liable to be determined or assessed, or any tax is payable.
Explanation,--(a) Where, in any case,-
(i) Omitted by Finance Act, 1995
(ii) Omitted by Finance Act, 1995.
(iii) Both sub-clause (a) and sub-clause (c) apply , the income year as specified under clause (c) shall be deemed to be the income year of the assessee in respect of his income from all sources; and
(iv) The sources of income of an assessee include two or more sources in respect of which income years have been specified under clause (c), the income year of the aid income years ending last shall be deemed to be the income year of the assessee in respect of his income from all sources except the sources to which clause (c) applies; and
(b) as used in sub-clause (c), "period" means any period of twelve months, or any period of more or less than twelve months, and includes any such period as may commence from, or end on, any date, including a date falling before the commencement, or after the end, as the case may be, of the financi al year next preceding the said assessment year ."
SUBSECTION (8) OF SECTION 2 OF REPEALED ORDINANCE, 1979.
"(8) "assessment year" means the period of twelve months beginning on the first day of July next following the income year and includes any such period which is deemed, under any provision of this Ordinance, to be the assessment year in respect of any income or any income year"
SECTION 25(c) OF THE REPEALED ORDINANCE, 1979.
(c) such trading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is made or any other year (not being a year commencing after the expiration of five years from the end of the said three years) as the Deputy Commissioner may think fit"
SECTION 34(5) OF THE INCOME TAX ORDINANCE, 2001.
(5) where a person has been allowed a deduction for any expenditure incurred in deriving income chargeable to tax under the head "Income from Business" and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head "Income from Business" in the first tax year following the end of the three years.
SECTION 10(2A)(iii) OF THE INCOME T AX ACT, 1922 repealed).
"(iii) such trading liability or a portion thereof has not been paid within three years of the expiry of the previous year in which it was allowed"
8. Perusal of the record clearly reveals that the unpaid trading liability pertained to the income year 1982-1983, which is assessment year 1983-84. The term "income year" has been defined under subsection (26) of Section 2 of the Repealed Ordinance as per which income year means the financial year next preceding the assessment year.
Meaning thereby that for income year 1982-83 the assessment year would be 1983-84. As per the provisions of Section 25(c) of the Repealed Ordinan ce, if the trading liability has not been paid within three years of the expiration of the income year in which it was allowed such liability would be deemed to be the assessment of the assessee. This clearly connotes that the income year in which it was firstly allowed was 1982-83 i.e. assessment year 1983-84. The first income year would be 1983-84, which is assessment year 1984-85. The second income year would be 1984-85, which is assessment year 1985-86 and the third income year would be 1985-86, which is assessment year 1986-87. The third income year would end on 30.6.1986 and the addition could only be made under the provisions of Section 25(c) of the Repealed Ordinance on 1.7.1986, which would be income year 1986- 87 i.e. assessment year 1987-88 and not the assessment year 1986-87. Hence, in our view, the default, if any, in discharge of the unpaid trading liability would only take place after the expiry of the income year ending on 30.6.1986 i.e. on 1.7.1987, which is assessment year 1987-88 and not 1986-87 as opined by the ITO and affirmed by IT AT.
9. We would not comment on the issue that whether the provisions of Section 10(2A )(iii) of the Repealed Act, 1922, and Section 34(5) of the present Ordinance, 2001 are in pari-materia to the provisions of Section 25(c) of the Repealed Ordinance, 1979, or not. The decision of the Lahore High Court is found to be distinguishable from the facts obtaining in the instant matter as the Lahore High Court has simply opined with regard to making addition of an unpaid trading liability upon which there could be no two opinions that if an unpaid trading liability remained unpaid for three years the same has to be added to the income of the assessee.
10 We, therefore, under the circumstances are of the view that the addition of Rs.10,84,000/- made by the ITO in the income of the assessee in the assessment year 1986-87 was, in fact, to be made in the assessment year 1987-88 and not in that year. We, therefore, answer the question proposed before us in affirmative i.e. in favour of the assessee and against the department.
11. Let a copy of this order be sent to the Registrar , Income Tax Appellate Tribunal, for doing the needful in accordance with law .
12. Above are the reasons of our short order passed on 17.10.2019.