QADEERUDDIN AHMAD, J.-These applications have been made under subsection (2) of section 66 of the Income-tax Act, 1922, with the object of obtaining directions of this Court to the Income-tax Appellate Tribunal to refer the questions mentioned in the applications.
2. One question is common to all the eight applications. It is as follows :- "Whether on the facts and circumstances of the case, the Tribunal was justified in allowing bonus as an admissible deduction, when the conditions laid down in the proviso to section 10 (2)(x) of the Income-tax Act were not fulfilled."
The following question is contained in I. T. C. No. 24 of 1969, only: "Whether on the facts and in the circumstances of the case when the recovery proceedings had not reached the conclusive stage and the condition laid down under section 10 (2)(xi) were not fulfilled, the Tribunal was justified in the admission of the bad debts when considering the crucial facts."
The following question is included in I. T. Cs. Nos. 25, 26 and 27 of 1969 only "Whether on the facts and circumstances of the case, the unabsorbed depreciation could be adjusted in the sub--sequent years against any other different source of income in view of the provision of section 24 (2)."
3. The above questions have arisen from an order of an Income-tax Appellate Tribunal dated the 4th of November 1966, which was made on the appeals preferred by the United Com--mercial Bank Ltd.
4. The facts relevant to the first question are that the Head Office of the Bank, which is situated in India, declared bonus as payable to its employees. In pursuance of that decision, The Pakistan Branch of that bank in Karachi paid bonus to the employees. The Income-tax Officer declined to deduct the amounts paid, on the ground that the branch was running in loss; therefore, the condition laid down in clause (b) of the proviso to clause (x) of subsection (2) of section 10 of the Income-tax Act, 1922 was to be followed.
5. The relevant provision is as follows:- "(2) Subject to the provisions of this Act such profits or gains shall be computed after making the following allow--ances, namely:- (i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x) any sum paid to an employee as bonus of commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission: Provided that the amount of the bonus or commission is of a reasonable amount with reference to-
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business, profession or vocation for the year in question; and
(c) the general practice in similar businesses, professions or vocation s."
The argument which was used by the Income-tax Officer was that in this case there were no profits in the year in question so far as the Pakistan branch was concerned ; therefore, it was unreasonable to pay bonus.
6. The view of the Income-tax Officer was upheld by the Appellate Income-tax Commissioner, but the Income-tax Appellate Tribunal has accepted the appeal of the bank and held that the amount paid to the employees could be deducted as a legitimate expenditure incurred in terms of section 10 (2)(x) of the Income-tax Act, 1922.
7. There is no dispute that the payment falls within the definition of bonus, because it is a sum which was not payable as profits or dividends, and could be only paid as bonus or com--mission.
The point on which disagreement of views arose, is as to whether it was reasonable for the Pakistan branch to pay bonus when the branch was running in loss. According to the Income-tax Department, the payment should not have been made, because there a ere no profits of the business of the branch for the years 1955 to 1956 and 1962 to 1963 with respect to which the bonus was paid. The crux of the question is: whether the expression `profits' used in sub-clause (b) of the proviso reproduced above, refers to the profits of the branch or of the bank. The word `profits' has not been defined in the Income-tax Act, 1922 but counsel's argument is that income is taxable in Pakistan which accrues in this country. In support of this argument he relies on section 4(1)(c) of the Income-tax Act, which is as follows:- "Subject to the provision of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which- (a)
(b)
(c) if such person is not resident in Pakistan during such year, accrue or arise to him in Pakistan during such year."
Explanation 1 to the section is also relevant. It is as follows:- "Income, profits and gains accruing or arising without Pakistan shall not be deemed to be received in or brought into Pakistan within the meaning of this subsection by reason only of the fact that they are taken into account in a balance-sheet prepared in Pakistan."
The above provisions leave no doubt that the income, profits and gains which do not accrue or arise and are not deemed to accrue or arise within Pakistan are not subject to Income-tax in Pakistan. But the question which is to be decided is whether bonus paid by a branch in Pakistan of a non-resident company, which branch is running in loss in Pakistan, but which company is making profit outside Pakistan, should be allowed, for pur--poses of income-tax, as legitimate expenditure or not. It is true that if the meaning of assessable income only is kept in view, then bonus paid in such circumstances by such a Pakistani branch should not be considered to be a legitimate expenditure reducing the income of the branch. But clause (b) of the proviso refers to "the profits of the business," without restricting it to any branch. The word "business" is defined in section 2(4) of the Income-tax Act, 1922 as follows:- --- `business' includes any trade, commerce or manufac--ture or any adventure or concern in the nature of trade, commerce or manufacture.--- This definition does not restrict the business of any concern to the frontiers of Pakistan. Moreover, the definition of bonus contained in section 10 (2)(x), and reproduced above, does not change the substantially recognized meaning and character of bonus. That character relates to payability of bonus to the over all financial condition of a concern, and the decision to pay or not to pay bonus is taken by the central management of a company, and never by a branch. The Head Office of a company which may have many branches, decides whether bonus should be paid or not, and in accordance with this decision, payments are made even in those branches in which the business may not have been running with profit. A consequence of this character and nature of bonus is that the employees of a Pakistani branch become entitled to demand the payment of bonus if it is declared by the Head Office, in view of the over all financial condition of the company, irrespective of the loss which may be incurred in the Pakistani branch. There have been cases in which the Industrial Tribunals have ordered the Pakistani branches to pay bonus to their employees on the ground that bonus was allowed by the Head Office of those companies. (See paragraph 3 of judgment in I. T. A. No. 1688 of 1961-62, Llyods Bank Ltd., Karachi v. The-Income-tax Officer, Central Circle 11, Karachi).
8. It follows from the above discussion that the assessee was not only right, but even bound to pay bonus to its employees in Pakistan. In these circumstances, it will not be correct to say that the payment was unreasonable, particularly as explained 6 above, when the business relevant for purposes of deciding whether bonus should be paid or not, is the over-all business of a company which has got many branches, and not the business of a particular branch.
9. We, therefore, uphold the decision of the Income-tax Appellate Tribunal for not referring the first question to this Court.
10. The second question is as to whether the Appellate Income-tax Tribunal could decide that the debt was irrecoverable, although the Income-tax Officer had come to the conclusion that it was not a bad debt. The Tribunal has declined to refer this question to this Court on the ground that it is a question of fact. It is not denied that in terms of section 10(2)(xi) an "Income-tax Officer may estimate (a debt) to be irrecoverable". The Income-tax Officer estimated that it was premature to hold that it was irrecoverable, although 14 years efforts recover it had failed. The Income-tax Appellate Tribunal came to the conclusion that the debt was not recoverable. The Department's grievance is that it was premature for the Tribunal to make that decision. In other words, the Department insists that the Tribunal was bound to form the same opinion which c the Income-tax Officer formed on the facts that were on the record. The Tribunal has considered the facts and rightly refused to refer the question to this Court because it is a question of fact. We find the view to be justified, particularly because the Department has not questioned the power and juris--diction of the Tribunal to decide whether the debt was bad or not.
11. The third question has not been referred to this Court by the Income-tax Appellate Tribunal on the ground that it has given no direction to warrant the question. Mr. Nusrat says that it is true that the Tribunal has only directed that the unabsorbed de--preciation claimed by the assessee should be treated in accordance with the proviso to section 10 (2)(vi), but it has explained the meaning of the provision in the order, with the result that 'the Income-tax Department will be bound to act in accordance with that elucidation. This apprehension of counsel does not appear to be justified in view of the observation of the Tribunal made in its order of the 13th of August 1968, that it had no intention of giving any direction in this regard, Taking this view of the matter, we uphold the decision of the Income-tax Appellate Tribunal in refusing to refer the third question to this Court.
12. The above order disposes of I. T. Cs. Nos. 20 to 27 of 1969.