' NAIMUDDIN, J.-This is a reference unier section 66(1) of the Income-tax Act, 1922 (hereinafter called the Act) by the Commissioner of Income-tax (East Zone), Karachi, referring the following question of law said to arise out of the order dated 14-1-1974, passed by the Income-tax Appellate Tribunal, Karachi, in I. T. A. No, 1560 (VB) 71-72 :- "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the amount of Rs 76,308 could not be included in the total income of the assasee under the provisions of section 10(2-A) of the I.-T. Act, 1922 in respect of the charge year 1964-6D?"
2. The facts, as stated in the statement of facts are: that the respondent is a registered firm carrying on business of dismantling ships and selling scrap. In the assessment year 1964-65, the Income-tax Officer made add back of Rs, 76,308 on account of profit under section 10(2-A) of the Act,
3. Aggrieved by the aforesaid order the respondent filed an appeal before the Income-tax Appellate Tribunal wherein it was urged that the aforesaid add back could not have been made since subsection (2-A) of section 10 of the Act did not exist in the year 1964-65, and was in fact inserted in the year 1966 and that no retrospective effect could be given to the said provision. The Tribunal accepted the contention and deleted the amount added from the assessment, giving rise to the aforesaid question of law.
4. We have heard Mr. Shaikh Haider, learned counsel for the Department. The respondent however has remained absent.
5. In the order of assessm ent for the year 1964-65, the Income-tax Officer under section 10(2-A) of the Act simply added to the profit disclosed a sum of Rs, 76,308 out of the total amount of Rs, 5,31,101 lying to the credit of Sundry Creditors, detailed as follows : "(1) International Trading . 2,704
(2) Ismail Qasim Ali . 7,925
(3) Azizul Haq 2400
(4) Muhammad Jaffer & Sons Quettawala25,000
(5) Mulla Co . 960
(6) Karsaz Construction 1,396
(7) Haji Ibrahim G. Muhammad916
(8) Pakistan Modern Builders 27,754
(9) Mars Co 5,001
(10) Sind Iron & Steel Mill 520
(11) Karachi Foundry Co 1,732 = 76,308."
6. However, the Income-tax Appellate Tribunal deleted the amount. In doing so the Tribunal observed as follows :- "The add back of Rs, 76,308 was made out of Sundry Creditors by the Income-tax Officer under section 10(2-A) of the Income-tax Act. It is now contended by the counsel of the appellant that section 10(2-A) did not exist in the year 1964-65 and was in fact inserted in 1966 and no retrospective effect can be given to the section. Appellant's plea is correct. As section 10(2-A) was introduced in 1966, it cannot be applied in the assessment for 1964-65, as no retrospectivity had been provided for in the section. The addition made at Rs, 76,308 is therefore, knocked off."
7. The above observation of the Tribunal is based on misconception of law. Subsection (2-A) was not added in the year 1966, as observed, butlA was added in 1956, by section 11 of the Finance Act, 1956 (Act 30 of 1956), which reads as follows : "(2-A) Where for the purpose of computing profits or gains the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him, or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year."
' There is no doubt that this subsection was substituted by section 5 of the Finance Act, 1966 (Act XI of 1966) and reads as follows : "(2-A) Where for the purposes of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and,-
(i) subsequently, during any previous year, the assessee has received, whether in cash or in any other manner whatsoever ; any amount in respect of such loss or expenditure ;
(ii) the assessee, during any previous year, has derived some benefit in respect of such trading liability ; or
(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. The amount received under clause (i) or the value of benefit obtained under clause (ii) or so much of the portion of a trading liability as has not been paid under clause (iii) shall be deemed to be the profits or gains of business, profession or vocation and to have accrued or arisen during the previous year referred to in clause (i) and clause (ii) or, as the case may be, during the previous year immediately following the expiry of the three years referred to in clause (id): ' Provided that where a trading liability referred to in clause (iii) or a portion thereof is paid in a subsequent year, a deduction of such amount as has been paid shall be made in computing the profits and gains under this section in respect of that year."
8. It would, therefore, appear that the premises on which the Tribunal based its order is obviously wrong. However, that would not make any difference so far as the deletion of the amount of Rs, 76,308 is concerned for under section 10(2-A), as then existed an amount standing to the credit of a Sundry creditor, could not have been added back as it could not be B deemed to be profit thereunder even if remedy to recover it was barred due to efflux of time as under subsection (2-A), as then existing, no period of limitation was provided within which the amount could be treated as profit, and it was subsequently in 1966 that such provision was made by substituting subsection (2- A) of section 10 of the Act.
9. We would have discussed the provisions of section 10(2-A) of the Act in detail but we do not consider it necessary in view of the decision of this Court in Commissioner of Income-tax, Karachi (West), Karachi v. S. A. Rehman (1), wherein Abdul Hayee Kureshi, J. (as he then was) while delivering the opinion of the Division Bench in paragraph 6 of the judgment observed as follows :- "6.-On a consideration of the matter we are clear in our mind that the mere fact of liability becoming barred by the Law of Limitation only the creditors' remedy may become barred but that will not ipso facto lead to the conclusion that the amount becomes a profit. In business traditions, routine and convention it is very often that even time-barred debts are paid. Even otherwise a time-barred debt is considered a good defence in suits that may be filed by the debtor {{FOOT NOTE}}
(1) 1980FTD 314 {{FOOT NOTE}} against the creditor in order to extinguish the liability. What is more that the entries in regard to the trading liabilities may in given cases operate as acknowledgment of liability by reason of section 19 of the Limitation Act, on proof of such acknowledgment of liabilities, being in writing, signed by the party who is liable, a fresh period of limitation starts running, provided that the acknowledgment is written before the expiry of the initial period of limitation. In regard to the date of writing even oral evidence is admissible. The explanation in section 19 clearly states that a writing shall be sufficient acknowledgment even though it omits to specify the exact nature of property or right and signature on the handwriting of the assessee bear his signature, the writing acknowledging the liability would by itself be sufficient to extend the time of limitation so that the liability is not extinguished."
' In the aforesaid case, contrary view adopted by a Division Bench of Lahore High Court in the case of Commissioner of Income-tax, Lahore v. Messrs Mian Muhammad Allah Bux (1), relied upon by Mr. Shaikh Haider, Advocate, was dissented from for the reasons stated therein. We are in respectful agreement with the view adopted by the Division Bench of this Court in the aforesaid case Commissioner of Income-tax Karachi v. S. A Rehman that mere expiry of the period of limitation within which a creditor could sue, the assessee to recover his debt would not constitate cessation of the liability of the assessee as the expiry of the period of limitation does not extinguish the debtor's liability to pay the debt. Such view is reflected in the book titled as "The Law of Income-tax" by Sampath Iyengar, VII Edition, page 2052.
10. The decision in the aforesaid case, Commissioner of Income-tax, Karachi v. S. A. Rehman was followed by a Division Bench of this Court in the case of Commissioner of Income-tax (General)
Karachi v. Messrs Morris Jacob & Co. Karachi (2).
11. For the reasons recorded above, we do hold that the Income-tax Officer was not justified in adding back the sum of Rs, 76,308 from the Sunu,ry creditors on the ground that they had remained unpaid for the period of more than 3 years and the Income-tax Tribunal was justified in excluding that amount from the profits added by the Income-tax Officer and our answer to the question would be in the affirmative. {{FOOT NOTE}}
(1) PLD 1983 Lah. 381 (2) 1984 PTD 200 {{FOOT NOTE}} 5