The Lahore Bench of the Income-tax Appellate Tribunal, at the instance of the revenue, has framed following common question of law for our consideration and answer:-- "Whether on the facts and circumstances of the case, the Tribunal was justified in holding that in the case of an assessee carrying on the business of insurance, the Income-tax Officer is not empowered to interfere with any provisions of reserves?
2. According to the statement of the case, the assessee/respondent is a public limited Company and derives income from insurance business, life as well as general. In the assessment years under consideration viz 1976-77 to 1978-79 it claimed deduction of "provisions of taxation" and for "reserve for exceptional losses". The Assessing Officer disallowed the claim on account of their being inadmissible. The learned first appellate authority following an order of the Tribunal in the case of the assessee proceeded to direct deletion of the aforesaid additions. Earlier it was found that the provision was not an expenditure which could be disallowed under section 10. Further that under section 10(7) read with First Schedule to the Act the Income-tax Officer could disallow only an expenditure not admissible under the law but could not disallowed something which was not an expenditure at all The learned Tribunal maintained the order.
3. After hearing the learned counsel for the parties, we find that the legal position involved is not seriously challenged by any of the parties. It pertains to the interpretation of the subsections (2) and (7) of section 10 of the late Income-tax Act, 1922 read with the First Schedule, particularly rule 6 thereof. It is not denied that in terms of the aforesaid provisions of section 10 read with the First Schedule of the late Act, 1922 an Assessing Officer could disallow only that expenditure which was not admissible under subsection (2) of section 10 but he could not interfere with the other claims like 'provision' or 'reserves'. It is also an admitted position in the comparable provisions of the 4th Schedule the situation did not change till the year, 1980. In that year by way of section 2 of the Finance Ordinance, 1980 sub-clause (a) of rule 5 of the Fourth Schedule to the Ordinance was amended to include the words and phrases "or any reserve or provision for any expenditure or the amount of any tax deducted at source from any dividend or interest receipt".
4. It is a common ground that rule 5 of the 4th Schedule of the Income Tax Ordinance is identical to rule 6 of the First Schedule of the late Act, 1922. The diversity of opinion between the parties relates only to the effect the enforcement of the aforesaid clause and the words and phrases added and the year, 1980. According to the revenue after insertion of these words in sub-clause (a) of rule 5 of the 4th Schedule to the Ordinance the Assessing Officer acquired the authority to examine the admissibility of a "reserve" or a "provision" for any expenditure even in the cases of assessments preceding the year, 1980. On the other hand it is the case of the assessee that in the assessment years preceding the assessm ent years, 1980-81 the Assessing Officer had no jurisdiction to examine any reserves or provisions and that his power remained restricted to rule 6 of the First Schedule to the Income-tax Act, 1922 and since 1-7-1979 as to the original provision of rule 5 of 4th Schedule to the Income Tax Ordinance, 1979. The Tribunal appears to have adopted an interpretation which is legal and valid. They expressed the view that the aforesaid amendment brought about by section 2 of Finance Act, '
1980 was only prospective and that in case of pending assessments at the relevant time the Assessing Officer could not go beyond the provisions of rule 5 of the 4th Schedule as originally made. It was also made clear that in these years in cases covered by 4th Schedule only adjustments of certain expenditure or allowances could be made or the Assessing Officer could interfere with the amounts claimed written off or taken to reserve to meet depreciation or loss on realization of investment.
5. Learned counsel for the revenue has supported the view adopted by the Revenue Officer.
However, we are of the considered view that in absence of a clear provision making the aforesaid amendment to be retrospective the Assessing Officer cannot be held to have a power earlier to the date of amendment to examine, reserves or "provisions" for any expenditure etc. The principles with regard to the prospective or retrospective application of statutes particulary taxing statutes are quite established. The Supreme Court of Pakistan in re: Adnan Afzal v. Sher Afzal (PLD 1969 SC 187) examined general principles of retrospectivity of procedural provisions. The rule with regard to retrospectivity of remedial law was examined by the apex Court in re: CIT v. M/s. Shah Nawaz Ltd.
1993 SCM R 73. The effect of change in law or pending proceedings was also examined by the Hon'ble Supreme Court in re: Sardar Ali v. Muhammad Ali (PLD 1988 SC 287). In case of taxing statutes an assumption of retrospectivity is all the more forbidden. Though the power of legislature in that regard is never questioned, yet in absence of an express provision to that effect iii taxing statutes, retrospectivity of application cannot be accepted except in cases of remedial legislation or beneficial notifications as found by the Supreme Court of Pakistan in re: Messrs Army Welfare Sugar Mills Ltd. v. Federation of Pakistan (1992 SCM R 1652).
6. The amendment in question certainly clothed the Assessing Officer with a fresh power to examine certain kinds of reserves and provisions which he was not earlier empowered to do. The enhancement of scope of his interference with regard to reserves and provisions in process of an assessm ent for levy of tax cannot be taken as procedural in nature. The amendment represented vesting of a new jurisdiction in the "Revenue Collector which could not travel back to earlier assessm ent years merely for the reason that some of the assessments in these years were still pending.
7. That being so, said earlier, the learned Tribunal was justified in holding that till the introduction and enforcement of the aforesaid amendment-in sub-clause (a) of rule 5 of the 4th Schedule to the Income Tax Ordinance the Assessing Officer was not competent to interfere with a provision or a reserve as disclosed by an assessee carrying on the business of Insurance.
8. Answered in the affirmative. .