AJMAL MIAN, J. -The above two Income-tax references have raised, the common points of law and, therefore, we intend to dispose of the same by this common judgment.
The brief facts leading to the filing of the above references are that the respondent was a joint venture of the foreign contractors (hereinafter referred to as the Joint Venture) for constructing Terbela Dam, the value of which ran into crores of rupees. The Income-tax officer while making assessm ent for the year 1965-66 disallowed 4 items referred in the 4 questions framed in I. T. C. No. 517/72, namely,-
(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing a sum of Rs. 17,86.093 as 'Stock depreciation' in the absence of stock cards or any other evidence thereof?
(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing a sum of Rs. 1,76,164 as `termina--tion payment' in the light of the facts that a sum of Rs. 1,14,385 on account of `Indemnity and termination' was separately claimed and allowed?
(3) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the contribution to the Social Benefits Scheme for which no effective arrangement for deduction of tax from payment out of it were made as required under section 10(4) (c) of the Income-tax Act?
(4) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing commission at 1% on the amount of Surety paid to Non-resident without deduction of tax as required under section 10(4) (bb) of the Income-tax Act ?
It further seems that for the year 1966-67 the Income-tax Officer disallowed two items, which are reflected in the two questions framed in I. T. C. No. 716/72, which are as follows: - "(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the sum of Rs. 90,320 as Stock depreciation in the absence of stock cards or any other evidence?
(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the contribution to the Social Benefit Scheme for which no effective arrangement for deduction of tax from payment out of it were made as required under section 10(4) (c) of the Income-tax Act?"
The Joint Venture went in appeals before the Income-tax Appellate Tribunal, which by its order, dated 11-2-1972 allowed the same thereupon, the applicant filed the present two references.
2. (a) In support of the above references, Mr. Shaikh Haider, learned counsel for the application has urged as follows :-
(i) that since there was no stock register or stock cards or any other evidence no depreciation on the stock could have been allowed ;
(ii) that no amount could have been allowed on account of payment on termination of services ;
(iii) that since there was no deduction of Income-tax from payments towards the benefit scheme as required under section 10(4)(c), no amount was admissible ; and
(iv) that since no deduction was made under section 10(4) (bb) from the payment of commission on the amount of surety to the non--residents, no amount could have been allowed on that account.
(b) On the other hand Mr. Mansoor Ahmed Khan, learned counsel for the respondent has contended as follows: -
(i) that allowing of an item of Rs. 17,86,093 for the year 1965-66 and a sum of Rs. 90,320 in the year 1966-67 on account of the deprecia--tion of the value of the stocks by the tribunal is in accordance with the law.
(ii) that the payments on account of salary or otherwise on termination of services of the respondents' employees is a running business expenditure admissible.
(iii) that since the labour force involved in the execution of the Terbela Dam was over 20,000 the expenditure on the Social Scheme in the two years is nominal as compared to the total value of the contract ; and
(iv) that there was no legal requirement to deduct Income-tax for the payments of commission for the performance bond/bank guarantee and that it is also a business expenditure admissible under the Income-tax Act.
3. From the order of the tribunal, it seems that the respondent had claimed the above two items amounting to Rs. 17,86,093 and Rs. 90,320 on account of stock depreciation for the two years in question. The above figures indicate that the same were worked out on same basis as they were not round figures. The tribunal has accepted the same by holding that the above items were claimed by the respondent in consonance with the account system adopted by them. Mr. Shaikh Haider was unable to cited any case law in support of his con--tention that absence of maintenance of a stock register or stock cards by the respondent was fatal to their claim for the above two items. On the other hand contrary view found favour with the many superior Courts. In this regard reference may be made to the case of Pandit Bros. v. Commissioner of Income-tax, Delhi (1954) 26 I T R 159, and the case of Vijaya Traders v. Commissioner of Income-tax, Mysore (1959) 74 I T R 279. In the first case a Division Bench of the High Court of Punjab and in the second case a Division Bench of the Mysore High Court held that the Income-tax Officer under section 13 of the Indian Income-tax Act, 1922 could make assessment of the profits on the basis of the other material available on record in the absence of maintenance of a stock register by the assessee.
The basic question is, whether any accounting system admits the annual valuation of stock and claim of loss on that account on the basis of an assessee assessment. In this connection, it may be pertinent to quote hereinbelow a passage from the celebrated book, namely, Kanga and Pulklivala's Income-tax, 7th Ed. p. 877-78, which reads as follows: - "Valuation of trading stock in hand at cost or market value-Whatever may be the method of accounting, whether cash or mercantile, it would be impossible to assess the true profits without taxing into account the value of the stock-in-trade at the beginning and at the end of the year. The value of the unsold stock-in-trade in hand is an essential item in the computation of the profits or losses for a period. The reason is that profits may exist in Kind as well as in cash and realisation may be only the conversion of profits in kind into profits in cash. But, as the Supreme Court pointed out in Chainrup Sampatram v. C. I. T., it is a misconception to think that any profit arises out of the valuation of the closing stock as the `source' of the profit or that the situs of its arising or accrual is where the valuation is made. Stock which the assessee has contracted to purchase and which might have been appropriated to the contract but the property in which has not passed to the assessee, cannot be regarded as the assessee's trading stock `in hand' and should not, as a general rule, be valued in the accounts as such.
The basis on which stock in hand is valued is part of the method of accounting. It is well- established, both in England and in India, that, on general principles of commercial accounting, in the profits and loss account of a merchant's or manufacturer's business, the values of the trading stock in hand at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower, the market value being ascertained as at the close of the accounting year and not as at any intermediate date between the commencement and the close of the year, and the cost being either the actual cost of the closing stock or the average cost of the stocks purchased. This rule is obviously intended to be in favour of the trader and enables him to distribute his loss more evenly. It is to be observed that allowing the assessee to write down the stock when market value is lower than cost is in effect the allowance of a reserve for future unrealized loss and as such is an exception to the general rule that a precautionary reserve for anticipated loss is not allowable and no unrealized loss can be set off against the profits of the accounting period. But whereas the assessee can thus get an allowance in respect of future unrealized loss, the Department is not entitled, by putting on the stock the market value where it exceeds cost, to bring in and charge the unrealized notional profit, unless the assessee's regular basis of valuation is market rate throughout. If there is no demand in local or foreign markets for certain goods, the assessee may be justified in valuing them at `nil".'
It may be observed that the basis on which stock in hand is valued is part of the method of accounting. The market value is assessed as at the close of accounting year and not in the mid of the year. It is either base on the actual cost of the closing stock or the average cost of the stock purchased. The above rule of accounting allows an assessee to write down the stock when market value is less than its cost. This in fact permits an allowance for future unrealized loss. This is an exception to the general rule that a precautionary loss for anticipated loss is not allowable. The Tribunal's decision in the instant cases on the point in issue seems to be in consonance with the above-accepted accounting system. The question whether the above two figures were properly worked out, was a question of fact within the competency of the tribunal and, therefore, cannot be disturbed by this Court in the above references. Though the questions as framed proceed on the assumption that there was no evidence before the tribunal, but this is not factually correct. The above .Two items were claimed on the basis of account books etc. In this regard reference may be made to the case of The Commissioner of Income-tax v. Messrs Eastern Services Ltd., Karachi 1984 PTD 11.
4. Mr. Sheikh Hyder was unable: to point out any illegality in allowing the two payments referred try in question No. 2 in I. T. C. No. 715/72 to the employees of the respondent on account of salary or indemnity. The above payments are normal business expenditure in terms of section 10(2) (xvi) of the Income-tax Act, which have been rightly allowed by the Tribunal.
5. As regards the payments, to the Social Benefit Schemes, it may be observed that Mr. Shaikh Hyder has relied upon section 10(4)(c) of the Income-tax Act, which provides that in order to claim any allowance in respect of a payment to provident and or other fund established for the benefit of an employee, unless the employer has made effective arrangement to secure that tax is deducted at source from any payments made from the funds which are taxable under head salaries. In our view, the above provision has no application to the item in issue as the amount in question was not paid towards any provident fund or for the fund established for the benefit of the employees. The Tribunal has pointed out that the same item was allowed in the previous year by the Appellate Assistant Commis--sioner. In our view, the question whether a particular amount spent the welfare of the labour force should -tie allowed or should not be allowed as a business expenditure was a question of fact within the competency o the Tribunal in the absence of any express prohibition by law.
6. Referring to the last contention of Mr. Shaikh Hyder, it may be mentioned that he has referred to section 10(4)(66) of the Income-tax Act, which also requires income-tax deduction at source in order to claim as an item of expenditures for the payment of any allowance in respect of any payment by way of brokerage or commission made to a person not resident in Pakistan. The payment of charges on the bank guarantee or a performance bond cannot be equated with a payment of brokeage or commission referred to in the above provision of the Act. The payment of charges for the bank guarantee or performance bond are normal business expenditure, in case of building contract, and, therefore the tribunal was justified in allowing the same.
7. For the aforesaid reasons the questions referred to hereinabove in para. 1 are answered in the affirmative.