' GUL MUHAMMAD KHAN, J.-The petitioner commenced its business as an unregistered firm with three partners on 1st of March, 1956. On the completion of its assessment for the year 1963-64, the Income-tax Officer verified that the firm had sustained a loss of Rs, 22,503. In the assessment year 1964-65 the firm was registered under section 26-A of the Income-tax Act and it was found to have earned a net income of Rs, 76,504. Consequently the petitioner claimed that the loss incurred by it in the assessm ent year 1963-64 be carried forward and set-off against the profits of the year 1964- 65 as provided under section 24 of the Income-tax Act. The plea of the petitioner, however, did not find favour with the Income-tax Officer, who on 7th October, 1966, refused to allow set-off for the reason that the loss of an unregistered firm could not be set-off against the profits and gains of a registered firm. An appeal, however, succeeded before the Appellate Assistant Commissioner who, on 23rd May, 1969, allowed set-off to the extent of Rs, 16,467. This attracted an appeal by the Department. It was accepted by the Tribunal on 19th October, 1970, with a finding that the explanation 2 added to section 24 in the Finance Act, 1967, applied to take away retrospectively, the right of the petitioner to claim set-off. It is with respect to this order that the Tribunal has referred to us, under section 66(1) of the Income-tax Act, the following question of law, for our opinion:- "Whether on the facts and in the circumstances of the case the Tribunal correctly interpreted that the language used by the Legislature is declaratory and gives retrospective effect to the explanation (2) to section 24(2)?"
2. The point involved in the case is governei by section 24 of the Income-tax Act. The loss in the first year had been assessed and there is no dispute about it. As the assessee was an unregistered firm in the first year, its loss could be set off only against the profits and gains of the firm and not of its partners as specifically provided in the proviso to section 24(1).
' This was duly done and the final loss determined. Under section 24(2) any loss under the head 'profits and gains' of business, profession or vocation, ascertained in the first year, which had not been set off in that year under section 24(1), has to be carried forward to the following year. This loss is then to be treated in accordance with sections 24(1) and 24(2)(ii) which read as under:- "24.-(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year : ' Provided ' Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of subsection (5) of section 23 in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm; and where the assessee is a registered firm, any loss which cannot be set-off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section.
(2) Where any assessee sustains a loss of profits or gains in any year and the loss cannot be wholly set off under subsection (1),so much of the loss as is not so set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following year, and
(i) ..
(ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of such business, profession or vocation if such business, profession or vocation continued to be carried on by him in that year; and if the loss, in either case, cannot be wholly so set off, the amount of the loss not so set off shall be carried forward to the next year and so on but no loss shall be carried forward for more than six years: ' Provided that
3. According to section 2(2) of the Income-tax Act an 'assessee' includes every person who is required to file a return of income under section 22.
'Firm' is defined in section 2(6-b). A firm is an entity under the Income-tax Act and is assessed as such as provided in section 26. According to section 23(5) it is the total income of the firm which is assessed though a different treatment is provided for the partners of a registered firm. So the assessee for the purpose of section 24 is the firm. A perusal of the above provisions would show that the pronoun 'him' in clause (ii) refers to the 'assessee' in subsection (2). Therefore, the loss of an assessee in the last year, which has been carried forward, can be set off against his profits and gains, if any, of such business, profession or vocation if the came had not been discontinued. It is not denied that the assessee in the last year is the same who made profit in the following year. The only distinction being drawn is that as the assessee in the last year was an unregistered firm while assessee in the following year had been registered, they became two distinct entities in the eye of law and the loss of one could not be set off against the profits and gains of the other.
4. The Appellate Assistant Commissioner had relied on C.
1.. T. v. Yousuf & Company (1) in coming to the conclusion that the entity of the firm would not change by registration and that in case it had incurred a loss as an unregistered firm in the last year, it would be entitled to get the same set-off, against the profits in the following year even though it had subsequently been registered. As that view was beneficial to the assessee, his learned counsel disagreed with the converse view expressed by the Tribunal, The Tribunal based its judgment on its previous decision in 1. T. A. 332 of 1968 which was incorrectly based on a judgment of Indian jurisdiction. The erstwhile High Court of West Pakistan took the view in C. I. T. v. Yousuf & Co. And C. I. T. v. Tayab Moosa & Co. (2) that an unregistered firm does not lose its entity on being registered. The same view was expressed by this Court in C. I. T. v. Pakistan Standard Oil & Ginning Mills, Multan T R 61 of 1967 as reported in September, 1973 issue of Finance Exchange and Taxation Journal.
5. The situation that far is not at all difficult, It is the import of the subsequent amendment, by addition of Explanation 2 to section 24 by virtue of the Finance Act, 1967 (PLD 1967 Statute 231) that requires consideration. This amendment appears to have been brought about afte the two judgments referred to at the end of para. 4 above had been given on 10th October, 1966, and reads as follows:- "Explanation 2. -For the avoidance of doubt it is hereby declared that--
(a) No loss of an unregistered firm shall be carried forward and set-off under this section, under any circumstances against its income. Profits and gains of the subsequent year if is registered in that ,ear under section 26-A or is treated as a registered firm in such year under clause (b) of subsection (5) of section and ' The learned counsel for the petitioner does not deny its purpose and import but submits that it could not have been made retrospective in its application. It was contended that if a right to claim set-off had already accrued to the petitioner it could have been taken away only by an express provision and necessary intendment in the amendment, He relied on a paragraph at page 746 of the Taxation Special by Rau Naqvi, to say that even the Government
(1) (19(.7) 15 Taxation 4 (2) 1967 PTD 264 in those instructions did not contemplate its retrospective application. The learned counsel also referred to the views of various text-book writers on the point to plead that addition of an explanation to a provision would not make it applicable in the absence of an express or clear intention. In his view the petitioner was seized of a vested right which could not be destroyed unless the Legislature had so intended cleary. Relying on Young v. Adams (I) it was urged that the Tribunal erroneously relied on its previous judgment as the view taken therein was based on an overruled case. This contention, however, is not correct as will he discussed presently.
6. The learned counsel for the respondent submitted that the amendment had been brought about only to avoid any doubt and that its import had in effect been always there. He further submitted that an explanation does not amount to a fresh enactment but is only clarificatory and definitive in nature to explain the intent of the Act as it had always been there. He relied on Muhammad Amir Khan v. Controller of Estate Duty (2) and the case of Muhammad' Steamship Company (3) in support of his proposition. The second case has no bearing on the present case. In the first case their Lordships created a distinction in the interpretation of the provisions providing for the imposition of tax and those for its recovery and held that strict construction was necessary in the first type of the provisions only.
There is no dispute about the proposition that equitable construction of a fiscal statute is not permitted. A person must be taxed only if he comes within the letter of law, otherwise he is free even though his Lase falls within the spirit of law as held in Hira Chand v. Emperor (4). In C. I. T. v.
Ectis C. Reid (5) their Lordships observed that interpreting a Taxing Statute the language should not be strained to hold subject liable to tax. The judicial committee of the Privy Council approved the following passage in Bank of Chittinad v. Income-tax Officer, Madras (6) : "If the person sought to be taxed comes within the letter of law he must be taxed, however, great hardship may appear to be. On the other hand, if the Crown, seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law, the case might otherwise appear to be."
Where two equally reasonable constructions are possible, one strict and the other beneficial to the assessee, the latter should be preferred in a taxing statute in view of the rule laid down in C. I. T. v.
Hossen Kasam Dada (7),
7. The amendment under review is, however, of explanatory type state to have been introduced 'for the avoidance of doubt'. The rule about c interpretation of such statute is distinct though the principles of interpretation of taxing statutes would apply if attracted to the situation. According to Crawford in 'The Construction of Statutes', para 7l, page 107, the declaratory statutes declaring the meaning of an existing law 'are to be construed as intended to lay down a rule for future cases, and to act retrospectively. They closely resemble in interpretation clauses and their paramount purpose is to remove doubt as to the meaning of existing law,
(1) 1898 A C 469 (2) PLD 1961 SC 119
(3) PLD 196 6 SC 828 (4) AIR 1931 Lah. 572 4(5) AIR 1951 Born. 333 (6) AIR 1940 P C 183
(7) PLD 1961 SC 375 Or to correct a construction considered erroneous by the Legislature'. A passage from 'Craies on Statute Law' 7th Edition, pages 58-59 reads as follows:- "For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usefully held to be retrospective.
' The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word 'declared' as well as the word 'enacted'. Thus, in Price v. Bradley (1835) 16 Q B i3 148) the Court decided eels to be freshwater fish within the Freshwater Fisheries Act, 1878. This decision was regarded by Parliament as a scientific error, and by the Freshwater Fisheries Act, 1886 it was declared that freshwater fish in the first mentioned Act did not include eels. A salient instance of a declaratory Act is the Territorial Waters Jurisdiction Act, 1878, passed in order to overrule the opinion of the majority of the judges in the r'ranconia's case as to the limits of British territorial waters. The preamble asserts, in defiance of the judicial majority, that the rightful jurisdiction of Her Majesty, her heirs and successors, extends and has always extended over the open seas adjacent to the coasts of the United Kingdom and of all other parts of Her Majesty's dominions to such a distance as is necessary for the defence and security el such dominions.' The opinion of the majority in Franconia's case has been therefore not merely enacted, but is declared to have been always the law."
' Another portion at page 395 may also be usefully reproduced:- "Where a statute is passed for the purpose of supplying an obvious omission in a former statute, or, as Parke, J. (afterwards Baron Parke) said in R. v. Dursley (1832) 3 B & Ad. 465(469), `to 'explain' a former statute,' the subsequent statute has relation back to the time when the prior Aet was passed.
' Where an Act is in its nature declaratory the presumption against construing it retrospectively is inapplicable. In Attorney-General v. Theobald 0890) 24 Q B D 557), section 11 of the Customs and Inland Revenue Act, 1889, as to the liability of voluntary settlements to stamp duty, was held retrospective, although the litigation in which its terms were involved had commenced before it was passed. Acts of this kind, like judgments, decide similar cases pending when the judgments are given, but do not reopen decided cases. In Young v. Adams (1898) A C 469 (476), Lord Wats on held that Attorney-General v. Theobald and R. v. Dursley dealt with enactments having no analogy with the statute then before the Committee."
' Maxwell on 'The Interpretation of Statutes', 12th Edition, pages 224-225 dealt with the subject as under :se "If a statute is in its nature a declaratory Act, the argument that it is not be construed so as to take away previously vested rights is inapplicable Section 11 of the Customs and Inland Revenue Act, 1889 declared that the provisions of the Customs and Inland Revenue Act, 1881, section 38, with regard to the imposition of stamp duties upon personal property passing under 'voluntary settlements' should be construed as if that expression included any trust in favour of a volunteer. It was held that section 11 was retrospective, and that the construction provided by it must be applied even though the property sought to be taxed had passed to the beneficiaries and proceedings to recover the duty bad been taken before the 1489 Act came into force.
' Similarly, section 6 of the Finance Act, 1898 provided, for the removal of doubt, that the definition of 'conveyance on sale' in the Stamp Act, 1891 included an order for foreclosure. It was held that section 6 was declaratory and therefore retrospective, so that an order of 1896 foreclosing a legal mortgage required stamping as a conveyance on sale."
All the above writers are unanimous in their views that the declaratory statutes apply retrospectively. A reading of the explanation would show that the intention of the Legislature was to remove a doubt and explain the intended import of the original provision.
8. According to consistent judicial interpretation, the declaratory, statutes generally operate retrospectively. Blackstone, J. In Nicol v. Verelet (DIE said 'declaratory statutes do not prove the law was otherwise before, but rather the reverse; A declaratory Act, said Coleridge, C. J. In Jones v.
Bonnet (2) means to declare the law or to declare that which has alwa)s been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue what it then is. In Muhammadi Bibi v. Kashi Upadhya (3) it was held that a declaratory Act is an Act to remove doubts existing as to the meanings or effect of statutes and the individual reason for passing a declaratory Act is to set aside what the Legislative Body deems to have a judicial error. A declaratory Act like judgments decides cases pending when the judgments are given but do not reopen decided cases. In Joni Ram Khan v.Lonaki Nath Jhosi (4) it was held that the provision of section 3 of the Bengal Tenancy Amendment Act, 1907, cannot be given a retrospective operation as the Act is not a declaratory one, but has effected the fundamental alteration in the law. The Lahore High Court in Mst. Rashid Bibi v. Tujail Muhammad (5) observed that the general rule is that retrospective effect is not given to a statute but in a case of declaratory Act, there is no such presumption. If the meanings of the words used indicate an intention and the Act is to have retrospective operation then no matter what the consequences, this operation must be given to the provision. A Division Bench of the Madras High Cour in Bappu Ayyar v. Ranganayaki
(6) held that if a statute is in its nature a declamatory Act, the argument that it must not be construed to as to take away previous right is not applicable. In Varalakhmi v. Viramulu (7), an Indian Court held that the sole accepted principle and cannon of construction is that no Act shall be given retrospective effect unless there are words to that effect or such a retrospective effect is to be given by necessary implication. But where the statute and its intendment partake of the characteristic of a declaratory Law, then it would be considered to have retrospective effect. Large number
(1) (1779) 26 E R 751 (2) (1890) 63 L T 705
(3) AIR 1926 All. 725 (4) 33 I C 54
(5) AIR 1941 Lab. 291 (6) AIR 1955 Mad. 394
(7) AIR 1956 Hyd. 75 of judgments were considered by the learned Judges in this case. A Karachi Bench of the then High Court of West Pakistan in Abdul Hamid v. The State (1) observed that the Notification of 20th of November, 1962, appears to be in the nature of declaratory notification intended for the same purpose and made to perform the same service as an explanatory or declaratory Act, meant to remove existing doubts and to set aside a judicial error whether in the statement of common law or in the interpretation of the statutes. Reference be also made to the case of Pennirselvem v.
Veeriah Vendayar (2) in which it was held that when the object of a declaratory enactment was to explain certain words or clauses in a prior enactment it would be very easy to infer that the intention of the Legislature was to make operative the new enactment retrospectively.
9. The learned counsel for the petitioner had relied on Young v. Adams (3) to plead that the use of words 'it is declared' in a statute does not necessarily import that the statute is merely declaratory of existing law and, therefore, retrospective; and that the use of the expression 'it is declared to introduce new rules of law' is not correct and is far from uncommon. The following passage from that judgment delivered by Lord Watson of the Judicial Committee, which is relevant to this case, would show that it does not help the petitioner in the facts of this case :- "It does not seem to me probably that the Legislature should intend to extinguish by means of retrospective enactment, rights and interests which might have already vested in a very limited class of persons, consisting so far as appears of one individual, namely the respondent. In such cases their Lordships are of the opinion that the rule laid down by Erle, C. J. In Midland Railway Company v. Pye (1961) 30 L J C 314 ought to apply. They think that in a case like the present the learned C. J. Was right in saying that a retrospective operation ought not to be given to the statute unless the intention of the Legislature that it should be so construed is expressed in plain and unambiguous language, because it manifestly shocks one's sense of justice that an act legal at the time of doing it should be made unlawful by some new enactment. It will serve no useful purpose to refer to other cases cited before us in this connection because here we are able, as we shall presently proceed to show, to distinguish upon the words of the Act itself, the language of the Act in that respect being plain and unambiguous, which of its provisions are retrospective and which prospective and we have not to rely upon any presumption as to intent relating to its operation to be inferred from the character of the Act being declaratory or otherwise."
(The underlining is by us)
The note of caution struck in the portion underlined* can hardly be disputed. Undoubtedly we have to find out the intent of the Legislature and should not be swayed merely by the use of word 'declaratory' or otherwise. If, therefore, the object of the statute is to explain the previous provisions or to remove a doubt, the law would apply retrospectively, as held in other judgments referred to before.
(1) PLD 1963 Kar. 373 (2) AIR 1931 Mad. 83
(3) 1898 A C 469 'There in italics]
10. The learned counsel next submitted that the transaction was past and closed and the same could not be dealt with under the newly added provisions but the same is not correct. This case had not yet been finalized when Explanation 2 was added. The amendment came in when the appeal filed by the petitioner against refusal to allow set-off was yet awaiting decision before the Appellate Assistant Commissioner. So no order in favour of the petitioner had been passed till then and the matter lay open. This situation is governed by the second passage taken from Craies and reproduced in para. 7 above. The Allahabad case of Muhammad Bibi would also apply as the case in hand had not attained finality, In C. S. T. v. Kruddsons Ltd. (1) their Lordships of the Supreme Court also considered the effect of an amendment, made during the pendency of litigation. In that case section 30A had been added to Sales Tax Act during the pendency of an appeal filed by the Department. It was held as follows :- "The effect of 'final determination' of the rights of parties to a litigation was considered by the Privy Council in John Lemm v. Thomas Alexender Mitchell (1912) A C 400) and the principle laid down was that the effect of the judgment which in the 'absence of appeal (operates) as afinal determination of the rights of the parties' rests on the general principle that a man is not to be vexed twice for the same cause of action unless, it is 'excluded by the Legislature in explicit and unmistakable terms'. In the instant case, the pendency of the certificated appeal in this Court had destroyed the finality of the High Court's order dated 11-10-1966, and therefore, was hit by the new dispensation in section 30-A of the Act."
The upshot of the whole discussion is that the addition of Explanation 2 to section 24(2) was with the object of removing a doubt (probably created by the two judgments of the West Pakistan High Court) referred to in para. 4 above. The enactment was expressly explanatory in nature. We are therefore, of the view that it had to apply retrospectively to all the relevant cases pending at that time.
' Our answer to the question referred to us is, therefore, in the affirmative. The petitioner shall pay the costs.
(1) PLD 1974 SC 180