KARAM ELAHI CHAUHAN, J.---In this case the assessee is Messrs Delhi Cloth General Mills Co. Ltd., Lyallpur. The books of account of the assesses show that it had to pay certain dues to certain creditors. However, as the following table shows the amounts indicated against each year respectively were written off and appropriated by the assessee ; Sr. Assessm ent yearAmount No. 1.1960-615.837 2.1961-624,263 8.1962-633,904 4.1963-643,579 5.1964-655,064 The Income-tax authorities held that as the aforesaid amounts were no longer outstanding against the assessee, inasmuch as, they had been apparently foregone or unclaimed by the concerned creditors and were rather appropriated by the assesses himself, therefore, they became part of his income and were liable to be included in his taxable income under section 10(2-A) of the Income- tax Act XI of 1922. Having exhausted all the departmental remedies, on the petition of the assessee, one combined reference being Reference No. 181 of 1971, has been filed in this Court to answer the question whether on the facts and in the circumstances of the case the Tribunal was right in holding that the amount of----(here should be read the relevant amount of each year)-was includable in the total income of the appellant by virtue of the provisions of section 10(2-A) of the Income-tax Act. We hove beard Khawaja Habib Ullah, learned Advocate for the petitioner, and Sheikh Abdul Hague, learned Advocate for the Department. The latter has pointed out that the Income-tax Appellate Tribunal on 17-3-1964 has already decided this question against the petitioner in his own earlier case reported in (1964) 10 Taxation (crib.) 55 in I. T. As. Nos. 186, 187 and 189 of 1961-62 (Assessm ent years 1956-57, 1957-58 and 1959-60), against which no action was taken by the assesses which according to Sh. Abdul Hague, meant that the assesses has accepted the inclusion of such income in his taxable income and as such cannot now challenge the same on principle in assessm ent of subsequent years. The factual position was accepted by the learned council for the petitioner but he submitted that mere non-challenge of an earlier order pertaining to a different assessm ent year did not mean that if, according to him, the same mistake was committed by the income-tax authorities in subsequent years or in subsequent assessments, the petitioners will be precluded from challenging its validity, inasmuch as, according to the learned counsel, there can be no estoppel against law or pleading law. That may be so, but it has not been shown to us as to how such appropriated amounts as were involved in this case, could not be included in the taxable income of the assesses in the face of the clear language of section 10(2-A) of the Income-tax Act. It may be mentioned that subsection (2-A) was added in section 10 of the Income-tax Act by the Finance Act XII of 1955. In its original form it read as follows :-- "(2-A) Where for the purpose 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, subsequently during any previous year, the assesses has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained soma benefit in respect of such trading liability by way of remission or cessation thereof, tire 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."
Later on the above Ordinance was repealed by the Finance Act XXX of 1956 which, however, retained insertion of subsection (2-A) in the above form. While giving a historical survey of the aforesaid subsection (2-A) S. M. Raza Naqvi in his "flee Law and practice of Income-tax in Pakistan"
(second volume) (1964 Edition) at pages 353--354 wrote under the heading "assess ability of debts foregone and unclaimed balances (subsection (2-A)) as follows; As this survey is quite comprehensive and instructive it is worthwhile to reproduce it. It states that "this subsection was added to section 10 by the Income-tax Ordinance, 1955. Where the mercantile system of accounting is adopters and a certain liability allowed as a permissible deduction and if subsequently that liability is discharged not by actual payment by the assesses but by remission of liability by the creditor, it has been heal that the remission of liability cannot be considered as income liable to tax (vide Mohsin Rehman Penker v. Commissioner of Income-tax, Bombay City ((1948) I T R 183). Again in Orient Corporation v. Commissioner of Income-tax. Bombay City ((1950) I T R 28), where the assessee, who kept his accounts on the mercantile basis, incurred a loss in forward share dealings which was allowed to be deducted from business receipts of that fear and in subsequent year the assessor, settled his liability by paying a certain sum and the creditor agreed to the forego his claim for the balance, it was held that it could Lot he said that tae sum remitted by the creditor had been received by the assessee as income and that it was not, therefore, liable to income-tax. The same principle of law is enunciated in British Petroleum Co. v. C.
I. R. (16 Tax Cas. 570) and Agarchand Chunilal v. Commissioner of income-tax, C. P. & Berar (16 I T R 431). Thus under the law, as it stood before amendment, debts foregone were not chargeable as income in the assessm ent of the debtor. Normally, the latter contingency does not arise as debts are foregone only where the financial condition of the debtor is bad and be is hardly likely to have any taxable income. It is, however, possible in certain circumstances to take advantage of the legal position as stated above. For example, a debt may be foregone (especially where the debtor and the creditor are inter-connected entities) in respect of a transaction which has already been allowed as an admissible deduction in the assessment of the debtor. The now subsection is intended to stop this kind of evasion. Debts of the type referred to above which are foregone will now be treated as income in the assessment of the debtor. Similar to foregone debts are unclaimed balances, i.e. Expenses which were allowed as deductions on mercantile basis of accounting but which wore not actually paid. This would cover wages which became due and were debited in the accounts but which were not claimed by the employees concerned for 3 years.
Such items also became taxable under the new subsection". By Finance Act XI of 1966 subsection (2-A) was recast and substituted so as to read as follows;-- "(2-A). Where for the purposes of computing profits or gains under this section, an allowance or deduction hag been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assesses, 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 of expenditure ;
(ii) the assesses, 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 bas 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 ire 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 fn clause (iii); Provided that where a beading liability referred to in clause (iii) or a portion thereof is paid in 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."
However, section 5 of the Finance Ordinance XXI of 1972 further amended the aforesaid subsection (2-A) and stated that "(a) in subsection (2-A) for the words, brackets and figures "the previous year, immediately following the expiry of the three years referred to clause (iii)" the words, commas, brackets and figures "any previous year commencing after the expiry of the three years referred to in clause (iii), and tie business, profession or vocation from the profits and gains of which such allowance or deduction was made shall, for the purposes of subsection (i) be deemed to be carried on by the assessee in the previous year in which such profits or gains are deemed to have accrued or arisen under this subsection shall be substituted and shall i.e deemed always to have been so substituted". Here it may be mentioned that prior to 1966 or other subsequent amendments, the view taken in certain cases was that subsection (2-A) created a liability to tax only in cases whereon allowances had already been granted. In other words, the Revenue authorities merely taxed as income what it had earlier allowed as a deduction. As regards trading liability it was only upon "remission or cessation" that this subsection came into operation. On this score the Indian High Courts and the Pakistan Appellate Tribunal held in a number of cases that "when a liability becomes barred by the law of Limitation there is neither remission nor cessation of the liability, the liability is not extinguished but only the creditor's remedy becomes time-barred.
Therefore, if the amount of a trading debt allowed is an expense to an assessee, the amount cannot be taxed under this subsection as the income of the year in which the debt due by the assessee becomes time-barred". A few of these cases are reported as Kohinoor Mills Co. Ltd. v. C. I.
T. ((1963) 49 I T R 578) arid (1964) 9 Taxation (Trib.)
99. It was to counteract these decisions that the later amendments hereinbefore mentioned were introduced. The latest position now is succinctly summed up in the "Tax Management Guide" titled as "Income-tax Law with Practical Problems, published by Accountancy and Taxation Services Institute (1974-75) Edition, at page 156, under the heading "Remission of Liability" where it is written that "if in any year any trading liability is remitted or ceased and thereby the assesses derived benefit, the value of this benefit shall be deemed to be profits accrued during previous year and is taxable. Similarly any deductions allowed is the past and recovered subsequently would also be taxable in the year of recovery. Any trading liability outstanding for more than three years will be treated as income and assessed to tax. It shall again be allowable in the year in which it is actually paid. The limitation on the amount being assessed only in the accounting year immediately following the expiry of the three years has now been removed, and the amendment introduced by the Finance Ordinance, 1972 provided that the liability may be assessed in any accounting year following the expiry of the three years. Moreover it is also provided that the business in respect of which the allowance or deduction for the loss, expenditure or liability was claimed shall be deemed to be carried on by the assesses in the year In which any amount is assessed to tax under subsection (2-A) of section 10 of the Act. Consequently even if the business has ceased to be carried on, the Income-tax Officer may make an assessment of a sum under the provisions of above section. The amendment has been made retrospectively".
The view taken by the Department in (1964) 10 Taxation 55 (Trib.) and followed in the instant case does not seem to suffer from any infirmity supported as it is by the relevant text and other references hereinbefore mentioned. However, if there is any dispute or new development due to the latest amendment of 1972, as regards the year in which the income or amounts are to be included, the same can be got set right from the Tribunal by the assessee if it is so interested to move in this matter. Subject to this caveat and on broad principles, however, in the face of what has been written above, our answer to the question under examination will be that on the facts and in the circumstances of these cases the Tribunal was right in holding that the amounts mentioned hereinbefore were includable to the total income of the applicant by virtue of the provisions of subsection (2-A) of section 10 of the Income-tax Act. We hold accordingly.
2. In the same assessm ent years the assesses had disposed of certain assets details whereof are noted below :--- Sr.Assessm ent yearAmount left with the No.Assessee in the form of difference between the writtendown value and the price received in the formof profit of sale of the unused assets.
1.1960-612,850 2.1961-622,30,876 3.1962-633,503 4.1963-6449,741 5.1964-652,915 The income-tax authorities have included the aforesaid amount in the taxable income of the assessee despite the fact that the concerned assets had not been used during the year under, consideration. For this purpose they have referred to Commissioner of Income-tax v. Messrs West Punjab Factories Ltd, Ckara (PLD 1966 Lah. 236) which authorises such an inclusion. In the present case the second question which has been referred to this Court is whether on the facts and circumstances of the case the Tribunal was justified in holding that (the relevant amount) being profit calculated under section 10(2)(vii) on the sale of old machinery was liable to tax under the provisions of section 10(2)(vii) of the Income-tax Act. We have heard the learned counsel for the parties. It may be mentioned that even though the Tribunal referred to and followed Commissioner of Income-tax v. Messrs West Punjab Factories Ltd., Okara but we have noticed that the said case was overruled by a Full Bench of the same High Court in Commissioner of Income-tax v. Messrs Philips Holzman A. G. Ameejee Valeejee & Sons, Karachi (PLD 1968 Kar. 95). Where it was held that in case the property m question was not used during the year under consideration, then the amount realised after its re-sale was not liable to taxation. The income tai authorities have been under a mistake to assume as if these were decisions of two different High Courts whereas the real position is that these were decisions of one and the same High Court as it then was viz., High Court of West Pakistan, though one was of Karachi Bench and the other of the Lahore where the main seat of that Court was located, The law declared by the Full Bench of West Pakistan High Court was binding on the income tax authorities and they appeared to have wrongly not followed it on the mistaken assumption hereinbefore mentioned. As the decision of Full Bench hereinbefore quoted already covers the present question we would, therefore, not dilate any further on it, though we may point out that a similar view to the one contained in Commissioner of Income-tax v. Messrs Philips Holzman A. G. Ameejee Veleejee & Sons, Karachi (PLD 1968 Kar. 95), was also enunciated by the Supreme Court of India to Liquidators of Pursa Ltd. v. Commissioner of Income-tax (AIR 1954 SC 253), Commissioner of Income-tax, Madras v. Express Newspapers Ltd. (AIR 1965 SC 33) and Income-tax Commissioner v. Ajax Products Ltd. (AIR 1965 SC 1358), where it was held that if the assets sold were not at all used for the purposes of the assessee's business at any time during the accounting year, neither clause (vii) nor the second proviso would come into operation and,therefore, the excess realised on such sale over the written down value would not be liable to tax Our answer to the 2nd question of reference, therefore, is that on the admitted facts and circumstances of the case, since the old machinery etc. Was not used in business during the years under consideration, therefore, tire Tribunal was not justified in holding that the amounts mentioned above, which were calculated as profits in the relevant year under section 10(2)(vii) were liable to tax under the proviso to the aforesaid provision of law, inasmuch as, they constituted obsolescence allowance as this term is known in law.
3. The two questions hereinbefore referred to are answered in the manner mentioned above. There shall be no order as to costs. .